A STUDY ON EQUITY & EQUITY DERIVATIVE - INDIAN SECURITIES MARKET

“A STUDY ON EQUITY & EQUITY DERIVATIVE - INDIAN
SECURITIES MARKET”
IN
PARTIAL FULFILLMENT
OF
POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM)
BY
YASHMIN REVAWALA
(143236)
July, 2015
VIGNANA JYOTHI INSTITUTE OF MANAGEMENT
HYDERABAD

DECLARATION
I hereby declare that this Project Report titled _”A STUDY ON EQUITY & EQUITY
DERIVATIVE - INDIAN SECURITIES MARKET”_ submitted by me is a bonafide work
undertaken by me and it is not submitted to any other Institution or university for the award of any
degree/diploma certificate or published any time before.
Name of the Student
Yashmin Revawala Signature of the Student

CERTIFICATE
This is to certify that the Project Report titled _”A STUDY ON EQUITY & EQUITY
DERIVATIVE - INDIAN SECURITIES MARKET”_ being submitted to Vignana Jyothi Institute
of Management is a bonafide work done by _YASHMIN DEVENDRA REVAWALA_, bearing
Roll no. _143236_, under my guidance.
Date: Signature of the Guide
Name: Mrs. D. Srijanani

I
ACKNOWLEDGEMENT
I would like to express my gratitude to all those who gave me the possibility to complete this
project. I want to thank Vignana Jyohi Institute of Management for providing me such an
opportunity to work with corporate people and get a lifetime experience.
I would like to thank Mr. B. Srinivas Rao, the Branch Manager of Karvy Stock Broking Limited,
Dilsukhnagar branch for being a support throughout my Project work. Mr. B. Srinivas Rao has
always encouraged me to stay focused towards my project no matter what the conditions are. I
have furthermore to thank my respected Project Guide Mrs. D Srijanani, who gave and confirmed
this permission and encouraged me to go ahead with my Project. She always guided me in the right
direction whenever I asked her for help.
I would also like to thank God for giving me the patience throughout my project and my parents
who supported me and helped me in all ways. Without all, I could not have successfully completed
my project properly in time with adequate data and relevant substance in it.
Thanking you,
YASHMIN REVAWALA

II
EXECUTIVE SUMMARY
The Indian security market has a very old and interesting history. It all began during the 18th
century when the East India Company used to transact loan securities. In the 1830s, trading on
corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the trading
was broad but the brokers were hardly half dozen during 1840 and 1850. In 1956, the Government
of India recognized the Bombay Stock Exchange as the first stock exchange in the country under
the Securities Contracts (Regulation) Act. Later on due to manipulations in market, National Stock
Exchange was started on 4th
November, 1994, which brought a revolution in the stock market by
providing an electronic marketplace. Within less than a year, NSE turnover exceeded the BSE and
till today it remains the same.
Presently the Indian Security market is classified into primary market and secondary market. The
primary market consists of Initial Public Offering (IPO) whereas the secondary market consists of
equity market, debt market and derivatives market.
In this report, we are going to find the relation (if exists) between equity market and derivative
market and their effect on each other.
To understand the equity market, I have taken the stocks that makes CNX NIFTY and on the basis
of some factors like annual profit, Return on net worth, operating margin, D/E Ratio, PBV ,
dividend yield and few more have filtered out the stocks that can give good returns in long term.
I have also compared the return on investment on CNX Nifty and 11 selected stocks for 5 years
i.e. FY 2010-15. The comparison of ROI results in higher returns on investment in 11 stocks. The
returns calculated of 11 stocks is higher but there is not much difference in their return. To further
increase the returns, I took the analysis to the next level and applied a simple strategy of switching
the stocks that were not performing well enough. The returns on applying this simple strategy
resulted in a huge difference on returns, thus archiving some of the objective of this report but still
there was a long way to go.

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One of the most significant events in the securities markets has been the development and
expansion of financial derivatives. Derivative products like futures and options on Indian stock
markets have become important instruments of price discovery, portfolio diversification and risk
hedging in recent times.
To achieve the objective of impact of derivative market effect in cash market segment, it is
important to identify the link between them and then to compare them. This is the exact thing
which I have done. I have compared the settlement price of FUTIDX NIFTY with the underlying
price of CNX NIFTY.
The result of the comparison was that the settlement price was in and around underlying prices of
FUTIDX, thus showing a relation between the two markets. In the comparison of settlement price
with underlying price it showed that they accompanied each other but when similar comparison
was done for the turnover of FUTIDX NIFTY and CNX NIFTY for the period of 3 months, the
result was completely different. The turnover of CNX NIFTY in the beginning of the 3 months
was high compared to the FUTIDX NIFTY but in the last month before expiry date the turnover
of the FUTIDX NIFTY was greater than CNX NIFTY. The reason for the higher turnover in the
last month was decrease in the margin that is required for the day-to-day settlement of the futures.
We often hear market analysts or experienced traders talking about an equity price nearing a
certain support or resistance level, each of which is important because it represents a point at which
a major price movement is expected to occur. But how do these analysts and professional traders
come up with these so-called levels? One of the most common methods is using pivot points.
There are several different methods for calculating pivot points, the most common of which is the
five-point system which I have used for the predicting the settlement price for next day for
FUTIDX NIFTY. The pivot point along with it also has 2 resistance level and 2 Support level
which helps the investor in comparing the open price take the correct decision. The calculated
pivot point when compared with the open price for the day, 91% of the prediction were correct.
Thus proving pivot point is an important tool which can be used for prediction of prices in the
stock market.

IV
TABLE OF CONTENTS
ACKNOWLEDGEMENT...............................................................................................................I
EXECUTIVE SUMMARY ............................................................................................................II
1. INTRODUCTION................................................................................................................... 1
1.1. An overview of the Indian securities market ................................................................... 2
1.2. Key Indicators of Securities Market................................................................................. 3
1.3. Products and Participants ................................................................................................. 4
1.4. Market Segments and their Products................................................................................ 5
1.5. Reforms in Indian Securities Markets.............................................................................. 6
1.6. Objectives of the Study .................................................................................................... 9
1.7. Scope of the study .......................................................................................................... 10
1.8. Methodology .................................................................................................................. 10
2. LITERATURE REVIEW...................................................................................................... 12
3. KARVY STOCK BROKING LIMITED .............................................................................. 15
3.1. COMPANY OVERVIEW.............................................................................................. 15
4. EQUITY MARKET .............................................................................................................. 23
4.1. Identification of stocks for investment from CNX NIFTY Index:................................. 24
4.2. Return on investment in CNX NIFTY index and the identified stocks ......................... 37
4.3. Return on investment using portfolio management techniques ..................................... 39
5. EQUITY DERIVATIVE MARKET ..................................................................................... 41

V
5.1. Derivative markets ......................................................................................................... 42
5.2. The Need for a Derivatives market ................................................................................ 43
5.3. Functions of derivative market....................................................................................... 43
5.4. The Economic Role of Derivatives ................................................................................ 44
5.5. The Participants in a Derivatives market ....................................................................... 45
5.6. Factors driving the growth of financial derivatives ....................................................... 45
5.7. Types of Derivatives ...................................................................................................... 46
5.8. Equity Derivatives in India ............................................................................................ 47
5.8.1. Impact of cash market segment on derivative market ................................................ 48
5.8.2. Prediction of future values for derivative instruments ............................................... 57
6. FINDINGS............................................................................................................................. 62
7. CONCLUSION...................................................................................................................... 64
APPENDICES
APPENDIX A
APPENDIX B
BIBILOGRAPHY

VI
TABLE OF FIGURES
Figure 1: Market Segments in India .......................................................................................................5
Figure 2: Subsidiaries of Karvy Group .............................................................................................16
Figure 3: 5 years Annual Net Profit of Yes Bank ...........................................................................26
Figure 4: 5 years Annual Net Profit of BPCL .................................................................................27
Figure 5: 5 years Annual Net Profit of Infosys Ltd. ........................................................................28
Figure 6:5 years Annual Net Profit of HCL Tech. Ltd. ..................................................................29
Figure 7: 5 years Annual Net Profit of ITC Limited ......................................................................30
Figure 8:5 years Annual Net Profit of L&T Ltd. .............................................................................31
Figure 9:5 years Annual Net Profit of GAIL India Ltd. ................................................................33
Figure 10: 5 years Annual Net Profit of Wipro Ltd. ......................................................................34
Figure 11: Performance of CNX Nifty & Other Scripts ................................................................36
Figure 12: Movement of Underlying Value & Settlement price of FUTIDX Nifty ...................................49
Figure 13: Volatility in CNX Nifty Futures ...................................................................................51
Figure 14: Price comparison of FUTIDX & CNX Nifty ...............................................................52
Figure 15: Turnover comparison of FUTIDX & CNX Nifty ........................................................52
Figure 16: Spread in FUTIDX NIFTY .............................................................................................53
Figure 17: Spread in CNX NIFTY ...................................................................................................54
Figure 18: Options CE closing price for different strike prices ...................................................55
Figure 19: Options PE closing price for different strike prices ....................................................56
Figure 20: Trend Analysis of FUTIDX from 1st
June, 2015 to 15th
June, 2015..........................................60
Figure 21: Trend Analysis of FUTIDX.......................................................................................................61

VII
LIST OF TABLES
Table 1: Selected Companies from CNX Nifty ..........................................................................................25
Table 2: Investment in Nifty BeES & other selected stocks.......................................................................37
Table 3: Return on Investment in Nifty BeES & other stocks....................................................................38
Table 4: Difference in gain in Nifty BeES & other stocks……….. ...........................................................38
Table 5: Portfolio Management ..................................................................................................................39
Table 6: Returns for Equity Portfolio Management....................................................................................40
Table 7: Details of NIFTY Futures along with the Settlement prices & underlying prices........................49
Table 8: Day-to-day movement of CNX NIFTY........................................................................................50
Table 9: Day-to-day prices of FUTIDX NIFTY.........................................................................................58
Table 10: Pivot Points for different FUTIDX prices ..................................................................................59
Table 11: Comparison of Pivot points & closing prices of FUTIDX .........................................................60

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1. INTRODUCTION
Indian stock market marks to be one of the oldest stock market in Asia. It dates back to the close
of 18th century when the East India Company used to transact loan securities. In the 1830s, trading
on corporate stocks and shares in Bank and Cotton presses took place in Bombay. Though the
trading was broad but the brokers were hardly half dozen during 1840 and 1850.
An informal group of 22 stockbrokers began trading under a banyan tree opposite the Town Hall
of Bombay from the mid-1850s, each investing a (then) princely amount of Rupee 1. This informal
group of stockbrokers organized themselves as the Native Share and Stockbrokers Association
which, in 1875, was formally organized as the Bombay Stock Exchange (BSE).
In 1956, the Government of India recognized the Bombay Stock Exchange as the first stock
exchange in the country under the Securities Contracts (Regulation) Act. The most decisive period
in the history of the BSE took place after 1992. In the aftermath of a major scandal with market
manipulation involving a BSE member named Harshad Mehta, BSE responded to calls for reform
with intransigence. The foot-dragging by the BSE helped radicalize the position of the government,
which encouraged the creation of the National Stock Exchange (NSE), which created an electronic
marketplace.
National Stock Exchange started trading on 4th
November, 1994. Within less than a year, NSE
turnover exceeded the BSE. BSE rapidly automated, but it never caught up with NSE spot market
turnover. The second strategic failure at BSE came in the following two years. NSE embarked on
the launch of equity derivatives trading. BSE responded by political effort, with a friendly SEBI
chairman (D. R. Mehta) aimed at blocking equity derivatives trading. The BSE and D. R. Mehta
succeeded in delaying the onset of equity derivatives trading by roughly five years. But this
trading, and the accompanying shift of the spot market to rolling settlement, did come along in
2000 and 2001 - helped by another major scandal at BSE involving the then President Mr. Anand
Rathi. NSE scored nearly 100% market share in the runaway success of equity derivatives trading,
thus consigning BSE into clearly second place. Today, NSE has roughly 66% of equity spot
turnover and roughly 100% of equity derivatives turnover.

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1.1. An overview of the Indian securities market
Securities markets provides a channel for allocation of savings to those who have a
productive need for them. The Indian securities market has two interdependent and
inseparable segments:
1. Primary market
2. Secondary market
1.1.1. Primary Market:
Primary market provides an opportunity to the issuers of securities, both Government
and corporations, to raise resources to meet their requirements of investment.
Securities, in the form of equity or debt, can be issued in domestic/international markets
at face value, discount or premium.
The primary market issuance is done either through public issues or private placement.
Under Companies Act, 1956, an issue is referred as public if it results in allotment of
securities to 50 investors or more. However, when the issuer makes an issue of
securities to a select group of persons not exceeding 49 and which is neither a rights
issue nor a public issue it is called a private placement.
1.1.2. Secondary Market:
Secondary market refers to a market where securities are traded after being offered to
the public in the primary market or listed on the Stock Exchange. Secondary market
comprises of equity, derivatives and the debt markets. The secondary market is
operated through two mediums, namely, the Over-the-Counter (OTC) market and the
Exchange-Traded market. OTC markets are informal markets where trades are
negotiated.

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1.2.Key Indicators of Securities Market
1.2.1. Index:
An Index is used to give information about the price movements of products in the
financial, commodities or any other markets. Stock market indices are meant to capture
the overall behavior of the equity markets. The stock market index is created by
selecting a group of stocks that are representative of the whole market or a specified
sector or segment of the market. The bluechip index of NSE is S&P CNX Nifty and for
BSE is Sensex.
1.2.2. Market Capitalization:
Market capitalization is defined as value of all listed shares on the country’s exchanges.
It is computed on a daily basis. Market capitalization of a particular company on a
particular day can be computed as product of the number of shares outstanding and the
closing price of the share. Here the number of outstanding shares refers to the issue size
of the stock.
1.2.3. Market Capitalization Ratio:
The market capitalization ratio is defined as market capitalization of stocks divided by
GDP. It is used as a measure of stock market size.
1.2.4. Turnover:
Turnover for a share is computed by multiplying the traded quantity with the price at
which the trade takes place. Similarly, to compute the turnover of the companies listed
at the Exchange we aggregate the traded value of all the companies traded on the
Exchange.
1.2.5. Turnover Ratio:
The turnover ratio is defined as the total value of shares traded on a country’s stock
Exchange for a particular period divided by market capitalization at the end of the
period. It is used as a measure of trading activity or liquidity in the stock markets.

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1.3.Products and Participants
1.3.1. Products:
Financial markets facilitate reallocation of savings from savers to entrepreneurs.
Savings are linked to investments by a variety of intermediaries through a range of
complex financial products called “Securities”.
Under the Securities Contracts (Regulation) Act [SC(R)A], 1956, “Securities” include
A. Shares, bonds, scrips, stocks or other marketable securities of like nature
in or of any incorporate company or body corporate
B. Government securities
C. Derivatives of securities
D. Units of collective investment scheme
E. Interest and rights in securities, and security receipt or any other
instruments so declared by the central government.
Broadly, securities can be of three types
1. Equities
2. Debt securities
3. Derivatives.
1.3.2. Participants:
The securities market has essentially three categories of participants
1. The investors
2. The issuers
3. The intermediaries
These participants are regulated by the Securities and Exchange Board of India (SEBI),
Reserve Bank of India (RBI), Ministry of Corporate Affairs (MCA) and the Department of
Economic Affairs (DEA) of the Ministry of Finance.

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1.4. Market Segments and their Products
The Exchange provides trading in four different segments as shown in the figure below
Figure 1: Market Segments in India Source: NSE, NCFM Module
1.4.1. Wholesale Debt Market (WDM) Segment:
This segment at NSE commenced its operations in June 1994. It provides the trading
platform for wide range of debt securities which includes State and Central
Government securities, T-Bills, PSU Bonds, Corporate debentures, Commercial
Papers, Certificate of Deposits etc.
1.4.2. Capital Market (CM) Segment:
This segment at NSE commenced its operations in November 1994. It offers a fully
automated screen based trading system, known as the National Exchange for
Automated Trading (NEAT) system. Various types of securities e.g. equity shares,
warrants, debentures etc. are traded on this system.
1.4.3. Futures & Options (F&O) Segment:
This segment provides trading in derivatives instruments like index futures, index
options, stock options, and stock futures, and commenced its operations at NSE in June
2000.
1.4.4. Currency Derivatives Segment (CDS) Segment:
This segment at NSE commenced its operations on August 29, 2008, with the launch
of currency futures trading in US Dollar-Indian Rupee (USD-INR). Trading in other
Market
Segments
Whole sale
debt market
Capital Maket
Futures &
Options
Currency
Derivatives

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currency pairs like Euro-INR, Pound Sterling-INR and Japanese Yen-INR was further
made available for trading in February 2010. ‘Interest rate futures’ was another product
made available for trading on this segment with effect from August 31, 2009.
1.5. Reforms in Indian Securities Markets
Over a period, the Indian securities market has undergone remarkable changes and grown
exponentially, particularly in terms of resource mobilization, intermediaries, the number
of listed stocks, market capitalization, turnover and investor population. The following
paragraphs list the principal reform measures undertaken since 1992.
1.5.1. Creation of Market Regulator:
Securities and Exchange Board of India (SEBI), the securities market regulator in India,
was established under SEBI Act 1992, with the main objective and responsibility for
A. Protecting the interests of investors in securities
B. Promoting the development of the securities market
C. Regulating the securities market
1.5.2. Screen Based Trading:
Prior to setting up of NSE, the trading on stock exchanges in India was based on an
open outcry system. The system was inefficient and time consuming because of its
inability to provide immediate matching or recording of trades. In order to provide
efficiency, liquidity and transparency, NSE introduced a nation-wide on-line fully
automated screen based trading system (SBTS) on the CM segment on November 3rd
,
1994.
1.5.3. Reduction of Trading Cycle:
Earlier, the trading cycle for stocks, based on type of securities, used to vary between
14 days to 30 days and the settlement involved another fortnight. The Exchanges,
however, continued to have different weekly trading cycles, which enabled shifting of
positions from one Exchange to another. It was made mandatory for all Exchanges to

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follow a uniform weekly trading cycle in respect of scrips not under rolling settlement.
In December 2001, all scrips were moved to rolling settlement and the settlement
period was reduced progressively from T+5 to T+3 days. From April 2003 onwards,
T+2 days settlement cycle is being followed.
1.5.4. Equity Derivatives Trading:
In order to assist market participants in managing risks better through hedging,
speculation and arbitrage, SC(R) A was amended in 1995 to lift the ban on options in
securities. Trading in derivatives, however, took off in 2000 with index futures after
suitable legal and regulatory framework was put in place. The market presently offers
index futures, index options, single stock futures and single stock options.
1.5.5. Demutualization:
Historically, stock exchanges were owned, controlled and managed by the brokers. In
case of disputes, integrity of the stock exchange suffered. NSE, however, was set up
with a pure demutualized governance structure, having ownership, management and
trading with three different sets of people. Currently, all the stock exchanges in India
have a demutualized set up.
1.5.6. Dematerialization:
As discussed before, the old settlement system was inefficient due to the time lag for
settlement and the physical movement of paper-based securities. To obviate these
problems, the Depositories Act, 1996 was passed to provide for the establishment of
depositories in securities with the objective of ensuring free transferability of securities
with speed and accuracy.
There are two depositories in India
1. National Securities Depository Limited (NSDL)
2. Central Depository Services Limited (CDSL)
They have been set up to provide instantaneous electronic transfer of securities.
Demat (Dematerialized) settlement has eliminated the bad deliveries and associated

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problems. To prevent physical certificates from sneaking into circulation, it has
been made mandatory for all newly issued securities to be compulsorily traded in
dematerialized form. Now, the public listed companies making IPO of any security
for Rs.10 crore or more have to make the IPO only in dematerialized form.
1.5.7. Clearing Corporation:
The anonymous electronic order book ushered in by the NSE or BSE did not permit
members to assess credit risk of the counter-party and thus necessitated some
innovation in this area. To address this concern, NSE had set up the first clearing
corporation, viz. National Securities Clearing Corporation Ltd. (NSCCL), which
commenced its operations in April 1996.
1.5.8. Investor Protection:
In order to protect the interest of the investors and promote awareness, the Central
Government (Ministry of Corporate Affairs1) established the Investor Education and
Protection Fund (IEPF) in October 2001. With the similar objectives, the Exchanges
and SEBI also maintain investor protection funds to take care of investor claims. SEBI
and the stock exchanges have also set up investor grievance / service cells for redress
of investor grievance. All these agencies and investor associations also organize
investor education and awareness programs.
1.5.9. Globalization:
Indian companies have been permitted to raise resources overseas through issue of
ADRs, GDRs, FCCBs and ECBs. Further, FIIs have been permitted to invest in all
types of securities, including government securities and tap the domestic market. The
investments by FIIs enjoy full capital account convertibility. They can invest in a
company under portfolio investment route up to 24% of the paid up capital of the
company. This can be increased up to the sectorial cap/statutory ceiling, as applicable
to the Indian companies concerned, by passing a resolution of its Board of Directors
followed by a special resolution to that effect by its general body. The Indian stock
exchanges have been permitted to set up trading terminals abroad. The trading platform

9
of Indian exchanges is now accessible through the Internet from anywhere in the world.
RBI permitted two-way fungibility for ADRs / GDRs, which means that the investors
(foreign institutional or domestic) who hold ADRs / GDRs can cancel them with the
depository and sell the underlying shares in the market.
1.5.10. Direct Market Access:
In April 2008, SEBI allowed the direct market access (DMA) facility to the institutional
investors. DMA allows brokers to offer their respective clients, direct access to the
Exchange trading system through the broker’s infrastructure without manual
intervention by the broker.
1.6. Objectives of the Study
The growth of the security market in India especially in equity and equity derivative
instruments can be seen with the increase in the interest of investors for these instruments
and their willingness to take risk.
Investors investing in any security ultimately looks for the return on investment and the
return on risk whether it is for long term or short term. But a value investor takes all the
factors into consideration and invests in the best available securities. Thus it is important
to find value stocks or securities to get maximum possible return with the minimum
possible risk.
The objective of this report is to help the investors through the following activities:
1. To identify the best stocks for long term investment in NSE index CNX Nifty using
fundamental analysis.
2. To find the return on investment in CNX NIFTY index and the identified stocks for
the span of 5years i.e. FY 2010-15.
3. To analyze the return on investment in CNX NIFTY index and the identified stocks
with and without portfolio management techniques.

10
4. To study the impact of cash market segment on derivative market using settlement
price and the value of underlying equity.
5. To predict the cash market index (CNX NIFTY) & underlying index (FUTIDX
NIFTY) using PIVOT POINT Method.
1.7. Scope of the study
All the data required for present study were collected from reliable sources and thus are
secondary data. The data collected for equity picks were from CNX Nifty index only and
thus the study deals with stocks from CNX Nifty index only. The data used for the equity
study is the historical data of last 5 years i.e. FY 2010-15.
For equity derivative market the derivative instrument taken for study is FUTIDX NIFTY
and the span of future derivative is 3 months i.e. 23rd
March, 2015 to 21st
June, 2015
expiring on 25th
June, 2015.
1.8. Methodology
Defining objective won’t suffice unless and until a proper methodology is used to achieve
the objectives. Hence different methods were used to archive different objectives as
follows:
For investment in Equity:
1. We started with the 50 stocks in the CNX Nifty index as it is a large cap index,
small and midcap stocks get eliminated.
2. To avoid value traps, only companies that made profits during the past five years
were considered—1 company fell out, leaving only 49 stocks.
3. Of these profitable companies, only those with at least 10% annualized net profit
growth were considered—28 companies fell out, leaving only 21 stocks.

11
4. Next, only companies with positive operating margin were retained to ensure that
the net profit is from business operations and not from other incomes—1 stock
moved out, leaving 20 stocks.
5. While profits are good, the stocks must justify the investment in the business. Only
stocks with at least 10% ROCE & RONW of at least 15% were kept—1 company
fell through, leaving us with 19 stocks.
6. The next filter was a debt to equity ratio of less than 2. One of the company had a
debt to equity ratio of more than 2 which left us with 18 stocks.
7. Next, only stocks that paid dividends in the past five years and distributed at least
10% of their profits as dividend were kept—1 company fell out, leaving us with
17 stocks.
8. A good company can be a bad buy at a high price. Stocks with a PE of over 25
were kept out—5 high priced stocks fell out, leaving us with 12 stocks.
9. Another valuation metric is the price to book value (PBV). The PBV can vary
greatly, so we kept a liberal cut off of 5. One company got dropped, leaving us
with 11 stocks.
10. Lastly, only stocks with a dividend yield of at least 1% were considered. None of
the companies moved out. Leaving us with 11 value picks.
For investment in Equity Derivative:
1. Settlement price of FUTIDX NIFTY & CNX NIFTY index are compared using
charts.
2. Turnover of both the indexes are compared using different charts.
3. Spread of both the indexes are observed using Volume-Open-High-Low-Close
charts.
4. For prediction of Settlement price: Pivot Point of each day is calculated and
compared with the day’s opening price.
5. Trend Analysis: The trend of calculated pivot point is observed for finding out
whether the market is bullish or bearish using trend line feature in the chart.

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2. LITERATURE REVIEW
The Indian capital market has changed dramatically over the last few years, especially since 1990.
Changes have also been taking place in government regulations and technology. The expectations
of the investors are also changing. The only inherent feature of the capital market, which has not
changed is the “Risk” involved in investing in corporate securities. Managing the risk is emerging
as an important function of both large scale and small-scale investors.
The risk taken by the investors can be minimized when the investors understand the company and
does some research about the future performance of the company. Apart from the research, the
investors should understand the current market scenario i.e. the economy of the country, industry
performance etc. and have a prediction of the same.
Now a days the information about the companies are easily available through annual reports but
connecting the dots of external environment with the internal operation of the companies is what
is needed.
Mr. Narendra Nathan in his article on “Learn how to pick value stock” in economics times
(18th
May, 2015) has made the long researches short to understand the company from different
aspects. Mr. Nathan has carried out 11 steps to pick the best stocks for investment. All the 11 steps
are very logical which gives the overall performance of the company and to understand the
companies better. The 11 steps are eliminating steps which eliminates stocks which doesn’t meet
the criteria from an index thus leaving us with filtered stocks for investment. The stocks are not
only selected on the basis of these 11 steps, it also considers the recent information in the market
about the company and a comparison of the 11 steps is repeated to predict the future performance
of the company. The process of fundamental analysis is compressed to these 11 steps which is the
method used in this report for equity analysis.
Avijit Banerjee (1998) reviewed Fundamental Analysis and Technical Analysis to analyze
the worthiness of the individual securities needed to be acquired for portfolio construction. The
Fundamental Analysis aims to compare the Intrinsic Value (I.V) with the prevailing market price

13
(M.P) and to take decisions whether to buy, sell or hold the investments. The fundamentals of the
economy, industry and company determine the value of a security. If the I.V is greater than the
M.P., the stock is underpriced and should be purchased. He observed that the Fundamental
Analysis could never forecast the M.P. of a stock at any particular point of time. Technical
Analysis removes this weakness. Technical Analysis detects the most appropriate time to buy or
sell the stock. It aims to avoid the pitfalls of wrong timing in the investment decisions. He also
stated that the modern portfolio literature suggests 'beta' value p as the most acceptable measure
of risk of scrip. The securities having low P should be selected for constructing a portfolio in order
to minimize the risks.
The trading of financial derivatives has received extensive attention, while at the same time it has
led to a debate over its impact on the underlying stock market from various facets by the
academicians. The researchers all over the world have done research on derivative trading and
were able to find out various facts about derivative and its trading.
Mr. S. Dinesh in his study on “Effectiveness of Equity Derivatives in Cash Market Segment
in India” have assess the impact of derivative market effect in cash market segment by evaluate
different strike price movement of the contract. Mr. S. Dinesh have also tried to predict the cash
market index and underlying index using Pivot Point method.
James (1993) studied the impact of price discovery by futures market on the cash market
volatility. The study is conducted using Garbade and Silber model to estimate the price discovery
function of the futures market. The results affirm that futures market is beneficial with respect to
cash market as it offers better efficiency, liquidity and also lowers the long-term volatility of the
spot market.
Darrat et al (1995) examines if futures trading activity has caused stock price volatility.
The study is conducted on S & P 500 index futures for a period of 1982 - 1991. The study also
examines the influence of macro-economic variables such as inflation, term structure rates on the
volatility of the S&P 500 stock returns. Granger causality tests are applied to assess the impact on
stock price volatility due to futures trading and other relevant macro-economic variables. The

14
results indicate that the futures trading have not caused any jump volatility (occasional and sudden
extreme changes in stock prices). Term structure rates and OTC index have caused the stock price
volatility while, inflation and risk premium have not influenced the volatility of stock prices.
Gregory et al (1996) examined how volatility of S&P 500 index futures affects the S&P
500 index volatility. The study also examines the effect of good and bad news on the spot market
volatility. The change in the correlation between the index and futures before and after October
1987 crash is also examined. Volatility is estimated by E-GARCH model. It is shown that the bad
news increases the volatility than the good news and the degree of asymmetry is much higher for
the futures market. The correlation between the S&P 500 index future and S&P500 index declines
during the October 1987 crash.

15
3. KARVY STOCK BROKING LIMITED
3.1. COMPANY OVERVIEW
KARVY was established as “KARVY & Company” by 5 chartered accountants during
the year1979-80. At that time it was confined only to audit and taxation. Later on it
diversified into financial and accounting services during the year 1981-82 with a capital
of Rs.1,50,000. It achieved its first milestone after its first investment in technology.
Karvy became a known name during the year 1985-86 when it forayed into capital market
as registrar.
But now KARVY, is a premier integrated financial services provider, and ranked among
the top five in the country in all its business segments, services over 16 million individual
investors in various capacities, and provides investor services to over 300 corporates,
comprising who is who of corporate India.
KARVY covers the entire spectrum of financial services such as Stock broking,
Depository Participants, Distribution of financial products like mutual funds, bonds, fixed
deposit, Merchant Banking & Corporate Finance, Commodities Broking, Personal
Finance Advisory Services, placement of equity, IPOs, among others.

16
KARVY has a professional management team and ranks among the best in technology,
operations, and more importantly, in research of various industrial segments.
Figure 2: Subsidiaries of Karvy Group Source: www.karvy.com
KARVY CONSULTANT LIMITED
As the flagship company of the Karvy Group, Karvy Consultants Limited has always remained at
the helm of organizational affairs, pioneering business policies, work ethic and channels of
progress.
Having emerged as a leader in the registry business, the first of the businesses that Karvy Group
ventured into, they have now transferred this business into a joint venture with Computershare
Limited of Australia, the world’s largest registrar. With the advent of depositories in the Indian

17
capital market and the relationships that they have created in the registry business, Karvy
Consltants Ltd. believe that they were best positioned to venture into this activity as a Depository
Participant. Karvy Consltants were one of the early entrants registered as Depository Participant
with NSDL (National Securities Depository Limited), the first Depository in the country and then
with CDSL (Central Depository Services Limited). Today, Karvy Consltants service over 6 lakhs
customer accounts in this business spread across over 250 cities/towns in India and are ranked
amongst the largest Depository Participants in the country. With a growing secondary market
presence, Karvy Consltants Ltd. have transferred this business to Karvy Stock Broking Limited
(KSBL), an associate and a member of NSE and BSE.
KARVY REALITY & SERVICES
(INDIA) LIMITED
KARVY Realty & Services (India) Limited (KRSIL) is engaged in the business of real estate and
property services offering value added property services and offers individuals and establishments
a myriad of options across investments, financing and advisory services in the realty sector.
KARVY Realty & Services India Limited carries forward its legacy of trust and excellence in
investor and customer services delivered with a passion for services and the highest level of quality
that align with global standards.
KARVY INVESTOR SERVICES
LIMITED
Karvy investor services limited is recognized as a leading merchant banker in the country,
registered with SEBI as a Category I merchant banker. This reputation was built by capitalizing
on opportunities in corporate consolidations, mergers and acquisitions and corporate restructuring,
which have earned them the reputation of a merchant banker. Raising resources for corporate or

18
Government Undertaking successfully over the past two decades have given them the confidence
to renew their focus in this sector.
The quality professional team and their work-oriented dedication have propelled them to offer
value-added corporate financial services and act as a professional navigator for long term growth
of their clients, which include leading corporates, State Governments, foreign institutional
investors, public and private sector companies and banks, in Indian and global markets.
They have also emerged as a trailblazer in the arena of relationships, both at the customer and trade
levels because of our unshakable integrity, seamless service and innovative solutions that are tuned
to meet varied needs. Their team of committed industry specialists, having extensive experience
in capital markets, further nurtures this relationship.
Their financial advice and assistance in restructuring, divestitures, acquisitions, de-mergers, spin-
offs, joint ventures, privatization and takeover defense mechanisms have elevated their
relationship with the client to one based on unshakable trust and confidence.
KARVY COMTRADE LIMITED
At Karvy Commodities is focused on taking commodities trading to new dimensions of reliability
and profitability. They have made commodities trading, an essentially age-old practice, into a
sophisticated and scientific investment option.
They enable trade in all goods and products of agricultural and mineral origin that include lucrative
commodities like gold and silver and popular items like oil, pulses and cotton through a well-
systematized trading platform. Their technological and infrastructural strengths and especially
their street-smart skills make them an ideal broker. Their service matrix is holistic with a gamut of
advantages, the first and foremost being their legacy of human resources, technology and
infrastructure that comes from being part of the Karvy Group.

19
KARVY COMPUTERSHARE PRIVATE
LIMITED
Karvy Computershare is the largest registrar and a market leader, servicing over 70 million
investor accounts spread over 900 issuers including banks, PSUs and mutual funds. With a work
force of over 2500 experienced professionals drawn from various disciplines. Karvy
Computershare has emerged as a market leader in Investor Servicing in the country by offering its
services through its network of 450 Branches + 400 locations spread across the country. Karvy
Computershare has set new benchmarks in Investor Servicing by establishing performance
standards for its Service Delivery. The company has developed and enhanced its Service delivery
through structured and custom built training and development initiatives.
Karvy Computershare is the first organization, in its line of business, to achieve the distinction of
receiving an ISO 9002 certification and have now migrated to ISO 9001:2008 standards, for quality
management systems, certified by DNV. They have also been awarded ISO 27001:2005
certification by DNV, for our high standards with respect to information security and management
system. Karvy Computershare Pvt. Ltd. is a 50:50 Joint Venture between Karvy and Australia
based Computershare - the world's largest Transfer Agent. The joint venture with Computershare
Limited helps us adopt international practices in client and investor servicing.
KARVY GLOBAL SERVICES LIMITED
Karvy Global Services Ltd is a wholly owned subsidiary of the Karvy Group, which was formed
in the year 2004 as a third party service provider. The company has its headquarters and multiple
global delivery centers at Hyderabad and a business development office at New York. The service
specialization of Karvy lies in providing high end advanced analytical knowledge process services
in domains like advanced financial modeling & analysis, investment research, market research
analytics, CRM analytics, models for demand forecasting etc. The company also provides

20
outsourcing services for F&A function supported with process expertise and scalable IT platforms
in synergy with domain knowledge. Karvy has strategic technical partnerships with globally top
software solution enterprises like Oracle Financials, Peoplesoft HRMS and SAP.
The services offered by KGSL includes Finance & Accounting, Inbound/Outbound Voice, Human
Resource Services, Data Capture/Management, Market Analysis and Investment Research.
KARVY STOCK BROKING LIMITED
Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely towards
attaining diverse goals of the customer through varied services. Creating a plethora of
opportunities for the customer by opening up investment vistas backed by research-based advisory
services. Here, growth knows no limits and success recognizes no boundaries. Helping the
customer create waves in his portfolio and empowering the investor completely is the ultimate
goal.
Karvy Stock Brokers Limited, a member of National Stock Exchange of India and the Bombay
Stock Exchange, ranks among the top 5 stock brokers in India. With over 6,00,000 active accounts,
it ranks among the top 5 Depositary Participant in India, registered with NSDL and CDSL.It is an
undisputed fact that the stock market is unpredictable and yet enjoys a high success rate as a wealth
management and wealth accumulation option. The difference between unpredictability and a
safety anchor in the market is provided by in-depth knowledge of market functioning and changing
trends, planning with foresight and choosing one & more options with care. KSBL offer services
that are beyond just a medium for buying and selling stocks and shares. Instead they provide
services which are multi-dimensional and multi-focused in their scope. There are several
advantages in utilizing KSBL services, which are the reasons why it is one of the best in the
country.

21
KARVY STOCK BROKING LIMITED (KSBL), DILSUKHNAGAR is a branch under the Karvy
Stock Broking Limited segment of the Karvy Group which caters to stock broking services and
other broking related services.
This KSBL branch has its head office at Banjara hills, Hyderabad. It covers the suburban area of
south-eastern Hyderabad and surrounding places, Dilsukhnagar branch is one of the three branches
of karvy, spread across Hyderabad and Secunderabad. This branch was established in the year
2003 and since then it has been very popular in its area and have a fair client base.
KSBL Dilsukhnagar previously had two offices, one for stock broking and other for gold loan. But
recently both these offices has been combined and are under one roof. This branch has
approximately 40 employees including the two departments that is gold loans and stock broking.
Stock broking was my department for Summer Internship where I was a trainee under the guidance
of Mr. B. Srinivas Rao.
Mr. B. Srinivas Rao is the head of KSBL Dilsukhnagar branch who is also the cluster manager of
stock broking department and manages two branches i.e. Dilsukhnagar branch and Kukatpally
branch. The stock broking segment has two parts that deal with daily trading. Mr. B. Srinivas Rao
is liable to report to the Zonal manager of South Zone and the flow will go (in reverse order) to
country manager and finally to Chairman.

22
There are various functions performed by Dilsukhnagar branch namely
1. Depository Participant:
KSBL is registered with the National Securities Depository Ltd (NSDL)
and Central Securities Depository Ltd (CSDL) as DP which gives it the
permission to hold the securities of investors in electronic form at the
request of the investors.
2. Trading Center:
KSBL offers online trading on both key platforms—National Stock
Exchange and Bombay Stock Exchange. They make trading safe to the
maximum possible extent by accounting for several risk factors and
planning accordingly. They have created a very robust trading platform that
facilitates customers to trade online not only in equities, but also buy fixed
deposits, mutual funds, commodities, currencies and also participate in a
public issue. The online platform enables customers to view their portfolio
online and also access various research reports and views on stocks. It also
provides them with a facility to communicate with research/advisory teams
online.
3. PAN Center:
KSBL Dilsukhnagar branch also provides the TIN or PAN card facility to
the investors thus providing a services from the beginning to facilitate the
easy process of investing.
The learning and the experience at the KSBL Dilsukhnagar branch during internship will be
reflected in this project.

23
4. EQUITY MARKET
The secondary market is where securities are traded after being initially offered to the public in
the primary market and/or being listed on the stock exchange. The stock exchanges along with a
host of other intermediaries provide the necessary platform for trading in the secondary market,
and also for clearing and settlement.
The trading volumes in the equity segments of the stock exchanges have witnessed a phenomenal
growth over the last few years. The year 2013-14 witnessed a remarkable performance of the
Indian equity markets supported by improved conditions in global financial markets and some
decisive actions on the domestic policy front. During the year, there has been a rise in inflows of
foreign capital, increased trading activity in equity markets and moreover, new highs have been
attained by benchmark indices and market capitalization.
The NSE and the BSE were the only two stock exchanges that reported significant trading volumes.
No other stock exchange in India reported any significantly large trading volumes during 2013–
14. The NSE consolidated its position as the market leader by contributing 84.1 percent of the total
turnover in India in 2013–14 and 83.7 percent in first half of 2014–15. Since its inception in 1994,
the NSE has emerged as the favored exchange among trading members. The attraction of investors
towards NSE is more leading to higher turnover and make NSE stocks and indexes a proper
platform of investing in securities. Thus it is advisable to find value stocks listed on NSE for
investment. The S&P CNX Nifty and S&P CNX 500 are the most preferred NSE index and hence
investment in stocks of these index reduces the risk in investment. CNX Nifty is a larger cap index
which consists of blue chip stocks, an ideal index to look for valuable stocks. Thus to understand
the Indian equity market I have taken S&P CNX Nifty Index for identifying the best value stocks
for investment.

24
4.1. Identification of stocks for investment from CNX NIFTY Index:
S&P CNX Nifty Index includes 50 large cap companies and to identify the best stocks for
investment, the company’s overall performance was taken into consideration. The factors on
the basis of which the companies were selected were
1) At least 10% annualized net profit growth
2) Positive Operating Margin
3) At least 10% ROCE & RONW of at least 15%
4) Debt to equity ratio of less than 2
5) Dividends paying stocks for the past five years and distributed at least 10%
of their profits as dividend
6) Price to Earning (P/E) Ratio of less than 25
7) Price to book value (PBV) of less than 5
8) Dividend yield of at least 1%
All the above factors acts as a filters for stocks from CNX NIFTY which will ultimately
give us the best stocks. All the important factors are covered which an investor has to keep
in mind before selecting stocks for investment.
When all the above factors were taken into consideration we were left with only 11
companies out of 50 large cap companies which can be considered as an equity portfolio
for investors.

25
The 11 companies which can be considered as an equity portfolio for an investor are
mention in the table below out of which detail analysis of 8 companies have been include
in this report.
Table 1: Selected Companies from CNX Nifty
Sr. No. Sector Company
1 Banks Yes Bank Limited
2 Banks Axis Bank
3 Refineries Bharat Petroleum Corporation
4 Oil Drilling and Exploration GAIL INDIA
5 Software HCL Technologies
6 Software Wipro
7 IT-Software Infosys
8 IT-Software Tata Consultancy Services
9 Cigarettes and FMCG ITC Limited
10 Infrastructure Larsen & Toubro Limited
11 Automobile Mahindra & Mahindra Limited
Source: Analysis

26
Figure 3: 5 years Annual Net Profit of Yes Bank Source: Moneycontrol.com
 Despite being one of the fast growing banks, its net profit has grown at an annualized rate
of 36.26% in the last five years and it is still quoting at reasonable valuations.
 Yes Bank is now focusing on the retail segment and given its relatively low share, this
should be its next growth engine.
 Due to higher interest rate offered by the bank on its savings accounts, its CASA (current
and savings account) funding base is also been improving over the years, helping the bank
bring down its cost of funds.
 Due to increased reach and softening interest rate structure, its NIM should improve further
from the current 3.2%.
YES Bank
Net profit growth
(5 years)
36.26%
PBV
2.94
RONW
21.33%
Price
Rs.866.40
Dividend Payout
(5 years average)
15.898
P/E Ratio
17.07
Dividend
Yield
1.09%
2010 2011 2012 2013 2014
Net Profit (Rs. Crore) 727.14 977 1300.68 1617.78 2005.36
0
500
1000
1500
2000
2500

27
Figure 4: 5 years Annual Net Profit of BPCL Source: Moneycontrol.com
 BPCL stands to benefit from the government's decontrol of diesel prices. The resultant
subsidy reduction on oil products will reduce its working capital requirement and its
interest cost.
 Since international crude oil prices have now stabilized, there should not be any inventory
losses in the coming quarters. What makes BPCL unique, however, is its exposure to
foreign upstream oil assets in Brazil and Mozambique.
 Though the counter suffered when crude oil prices of the Brent variety crashed from $115
dollars a barrel to less than $40 a barrel, the recent recovery is helping BPCL.
Bharat Petroleum Corporation
Net profit growth
(5 years)
164.10%
PBV
2.52
RONW
22.50%
Price
Rs.860.85
Dividend Payout
(5 years average)
31.26
P/E Ratio
12.18
Dividend
Yield
2.60%
2010 2011 2012 2013 2014
Net Profit (Rs. Crore) 1,537.62 1,546.68 1,311.27 2,642.90 4,060.88
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00

28
Figure 5: 5 years Annual Net Profit of Infosys Ltd. Source: Moneycontrol.com
 The erstwhile IT bellwether is in a transformative phase under its new CEO Vishal Sikka.
Even as the firm lags behind peers such as TCS and HCL Tech, Sikka aims to make Infosys
a $20-billion company by 2020 and return to an above-industry growth rate.
 Vishal Sikka’s strategy includes heavy-mining the company's top 100 clients, with
dedicated partners for each, driving up margins through automation, squeezing higher share
of revenue from services such as consulting, and acquisitions.
 Analysts are optimistic about Sikka's vision of taking Infosys away from its traditional
maintenance-centric business model to a next-generation technology solutions provider. Its
current valuations make it a compelling buy, despite weakness in earnings.
Infosys Limited
Net profit growth
(5 years)
88.79%
PBV
4.81
RONW
26.98%
Price
Rs.995.10
Dividend Payout
(5 years average)
37.85
P/E Ratio
19
Dividend
Yield
2.96%
2010 2011 2012 2013 2014
Net Profit (Rs. Crore) 6,443.00 8,470.00 9,116.00 10,194.0012,164.00
0.00
2,000.00
4,000.00
6,000.00
8,000.00
10,000.00
12,000.00
14,000.00

29
Figure 6:5 years Annual Net Profit of HCL Tech. Ltd. Source: Moneycontrol.com
 HCL Technologies have increased its net profit 5 folds in the last 5 years with best ever
currency growth in the last 16 quarters led by broad based growth.
 HCL Technologies signed new deals worth $1 billion TCV during Q2 of FY 2015 taking
LTM order booking to $4 billion+ (FY14 total was >$5 billion). Noticeably, this is the
ninth consecutive quarter where the company signed deals in excess of $1 billion.
 Though HCLT reported 25%, 38% PAT CAGR in FY09-14 with average 18.2% EBIT
margins, its current PER represents a modest 20% premium relative to its FY09-14
HCL Technologies Limited
Net profit growth
(5 years)
466.41%
PBV
8.31
RONW
46.06%
Price
Rs.938.10
Dividend Payout
(5 years average)
29.06
P/E Ratio
18.97
Dividend
Yield
1.07%
2010 2011 2012 2013 2014
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00

30
average. Further, HCLT could report revenue, PAT CAGR of 13%, 15% in FY14-16E with
average 23.4% margins in FY15-16E led by order book conversion. We can believe the
scope for PE expansion exists as lop-sided growth concerns seem to be alleviating with
recovery in core software business.
Figure 7: 5 years Annual Net Profit of ITC Limited Source: Moneycontol.com
 ITC, the undisputed leader in cigarettes in India (~75% share by volume in FY12), has
been witnessing a moderation in volume growth since the beginning of FY14. But ITC
plans to shift its focus on other sectors especially FMCG can make up for the moderation.
ITC Limited
Net profit growth
(5 years)
116.33%
PBV
9.29
RONW
36.27%
Price
Rs.312.35
Dividend Payout
(5 years average)
66.08
P/E Ratio
25.42
Dividend
Yield
1.97%
2010 2011 2012 2013 2014
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
8,000.00
9,000.00
10,000.00

31
 ITC’s distribution strategy for its FMCG business by increasing its direct reach to ~1 lakh
villages in India depicts ITC’s aggressive approach towards growing its FMCG business,
which currently accounts for ~25% of its net sales (FY14) in comparison to ~16% in FY08.
The company’s aggressive diversification in newer categories can also be seen through the
acquisition of two brands “Savlon” & “Shower to Shower”.
 We can believe that with continuous regulatory pressure and belligerent price hikes in
cigarettes, ITC would be far more aggressive to grow its FMCG business.
Figure 8:5 years Annual Net Profit of L&T Ltd. Source: Moneycontrol.com
Larsen & Toubro Limited
Net profit growth
(5 years)
25.54%
PBV
9.29
RONW
36.27%
Price
Rs.312.35
Dividend Payout
(5 years average)
66.08
P/E Ratio
25.42
Dividend
Yield
1.97%
2010 2011 2012 2013 2014
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00

32
 L&T is the most diversified engineering & infrastructure developer in the country with a
presence across all segments of infrastructure i.e. power, roads, hydrocarbons & process
industries. It is also planning to scale up in niche areas like defence, nuclear power and
shipbuilding, which have the potential to add significantly to overall revenues in the next
three to five years.
 Strong Order pipeline of L&T i.e. on a consolidated basis, order inflow was up 19% YoY
to Rs.34,580 crore, taking the total tally of order inflows in 9MFY15 at Rs.10,77,785 crore.
The consolidated backlog as of 9MFY15 stood at Rs.225788 crore, up 14% YoY. L&T has
trimmed its order inflow growth guidance to 15-20% vs. 20% earlier.
 In terms of ordering pipeline, L&T has Rs.150000-170000 crore of pipeline, majority of
which is from the infrastructure segment and thus for the next 2-3years the growth of the
company is clearly visible.

33
Figure 9:5 years Annual Net Profit of GAIL India Ltd. Source: Moneycontrol.com
 GAIL India’s volumes are expected to increase gradually on account of the gas pooling
policy for power plants and also incremental volumes from fertilizer plants. According to
the management, the company will increase volumes by ~8 mmscmd during monsoons
when the gas pooling mechanism gets implemented.
 In the gas trading business, out of the 8.3 mmtpa (US - 5.8 mmtpa; Russia-Gazprom - 2.5
mmtpa) long term contract signed, ~6 mmtpa will be sold domestically while ~1 mmtpa
will be sold in the international market via GGSPL Singapore. With majority of the long
term gas linked to Henry Hub and the company considering swapping gas, the landed cost
of gas in India is expected to come down. This will lead to better volumes in the long term.
GAIL INDIA
Net profit growth
(5 years)
39.35%
PBV
1.63
RONW
17.06%
Price
Rs.399.50
Dividend Payout
(5 years average)
66.08
P/E Ratio
16.14
Dividend
Yield
2.69%
2010 2011 2012 2013 2014
0.00
500.00
1,000.00
1,500.00
2,000.00
2,500.00
3,000.00
3,500.00
4,000.00
4,500.00
5,000.00

34
 The gas trading segment reported an EBIT of Rs.93.4 crore in Q4FY14 due to a sharp
decline in spot gas prices leading to lower trading margins but the performance of the gas
trading business is expected to improve in the next fiscal.
Figure 10: 5 years Annual Net Profit of Wipro Ltd. Source: Moneycontrol.com
 Wipro have laid the roadmap, which is similar to other IT companies & is backed by
execution targets. The company plans to execute its run strategy through driving scale in
core markets, hyper-automation, building IP assets. Its change strategy hinges on servicing
Wipro Limited
Net profit growth
(5 years)
50.82%
PBV
4.68
RONW
27.57%
Price
Rs.558.65
Dividend Payout
(5 years average)
27.41
P/E Ratio
16.76
Dividend
Yield
1.44%
2010 2011 2012 2013 2014
0.00
1,000.00
2,000.00
3,000.00
4,000.00
5,000.00
6,000.00
7,000.00
8,000.00

35
the new buyer with distinct agenda, accelerating the digital agenda, and reimagining
business with artificial intelligence (AI) and open source.
 Wipro plans to drive market leadership in the US, UK, Middle East and India geography
even as it invests in building scale in Continental Europe, Canada, Australia and South
Africa. Wipro also plans to reboot Japan and is open to Joint Ventures, partnerships and
acquisition.
 Wipro had a team of 200 employees working for the past two years on building automation,
AI and IP tools, which could be rolled out in this year i.e. FY2015. Noticeably, the
company has set a roadmap to drive hyper-automation in each of its accounts over the next
year. Further, it also plans to shift 80% of basic process resolution to predictive, proactive
vs. current reactive leading to 90% reduction in mean processing time, 73% reduction in
headcount for similar scope of work and 90% error reduction. Finally, audacious targets of
35% employee reduction for same work scope, if achieved, could drive significant
productivity gains.
 Wipro is driving cultural change in its sales organization (primarily farmers) to improve
client mining. Though improved hunting efficiency led to 12 times improvement in its
pipeline over two years, it believes, farmers need cultural change as account size grows.
To achieve the same, the company has changed its incentive plan from portfolio size to
incremental growth and set cross-selling targets for account managers (selling at least three
service lines of its portfolio). Noticeably, the same, overtime could apply to delivery teams
and implies that promotion policy could be driven by value generation along with skill set.
 The company growth plans and keen interest in improving client satisfaction along with
increase in its revenue makes it a value stock for investment.

36
Figure11:PerformanceofCNXNifty&OtherScriptsSource:NSEwebsite

37
The performance of CNX Nifty and the value scripts can be compared from the chart.
If we look at the chart of CNX Nifty we see that it has been performing well over the past 5 years
i.e. FY2010-15 which is an outcome of the stocks which it is consists of. The scripts like Infosys
and HCLT have been star performer for CNX Nifty over a long time but in the FY 2014-15 they
were not able to perform but the demand for these stocks are still intact and makes a good choice
for investment.
Similarly stocks like BPCL, Yes Bank and GAIL India are the stocks which are proving themselves
and thus long term investment in these stocks can give higher returns for sure.
4.2. Return on investment in CNX NIFTY index and the identified stocks
To compare the return on investment from CNX NIFTY & identified stocks, we need to invest
equally in all the stocks and the sum of investments of all the stock in CNX NIFTY to have a
better comparison of the returns.
Table 2: Investment in Nifty BeES & other selected stocks
Company/Index Price Shares Purchased
Amount
Invested
Nifty Bees 532.75 206 110000
Axis Bank 1242.40 8 10000
Yes Bank 269.30 37 10000
BPCL 662.75 15 10000
Gail 467.30 21 10000
HCL 364.15 27 10000
Wipro 384.50 26 10000
Infosys 2791.00 4 10000
TCS 751.00 13 10000
ITC 305.45 33 10000
L&T 1808.96 6 10000
M&M 627.35 16 10000
Source: NSE Website
The table above shows the price of shares and NIFTY Bees index in July, 2010. Equal amount is
invested i.e. Rs.10,000 in all the 11 stocks and thus the sum of amount i.e. Rs.1,10,000 is invested
in NIFTY BeES. The investment is done in NIFTY BeES as it replicates CNX NIFTY index in
the same manner thus it will give the same result as CNX NIFTY.

38
The number of shares of different stocks purchased in July, 2010 are also shown in the table. If
these shares are sold in 2015 the return on the investment will be as shown below.
Table 3: Return on Investment in Nifty BeES & other stocks
Company/Index Price No. of shares Returns
Nifty Bees 847.19 206 174924
Axis Bank 585.4 8 4712
Yes Bank 882.3 37 32763
BPCL 850.15 15 12828
Gail 388.85 21 8321
HCL 1010.75 27 27756
Wipro 561.7 26 14609
Infosys 2023.16 4 7249
TCS 2610.3 13 34758
ITC 327.1 33 10709
L&T 1654.45 6 9146
M&M 1258.1 16 20054
Source: Calculations
The return on investment of TCS, Yes Bank, HCL and Mahindra & Mahindra is above Rs.20,000
indicating more than 200% as gain.
Table 4: Difference in gain in Nifty BeES & other stocks Source: Calculations
Company/Index July 2010 May 2015 Difference
Nifty Bees 110000 174924 64924
Axis Bank 10000 4712 -5288
Yes Bank 10000 32763 22763
BPCL 10000 12828 2828
Gail 10000 8321 -1679
HCL 10000 27756 17756
Wipro 10000 14609 4609
Infosys 10000 7249 -2751
TCS 10000 34758 24758
ITC 10000 10709 709
L&T 10000 9146 -854
M&M 10000 20054 10054

39
The total return on investment of Rs.1,10,000 in all the 11 stocks is Rs.72,904 whereas the return
on the same investment in NIFTY BeES is Rs.64,924.
Difference in the return (in Rs.):
Equity Portfolio Nifty Bees Difference
72,904 64,924 7,980
Hence the return on investing in equity portfolio of the 11 stocks is higher than investment in Nifty
BeES.
4.3. Return on investment using portfolio management techniques
The return on the equity portfolio can be increased by managing the portfolio of these 11
stocks. For instance, by using the simple method of buying or switching of stock when the
stock is not performing well.
Table 5: Portfolio Management
Shares Sold Share Bought
Company
Share
Price
No. of
Shares
Amount
(Rs.)
Company
Share
Price
No. of
Shares
Amount
(Rs.)
Axis
Bank
1404 8 11300
Yes
Bank
310 36 11300
Gail 488 21 10447
Axis
Bank
481 22 10447
Infosys 4051 4 14515 BPCL 725 20 14515
The table above shows the buying and selling of stocks i.e. switching of stocks. As the table shows,
the share of companies like Axis Bank, Gail and Infosys which were not performing well at some
point of the time and thus to protect from the downtrend of these stocks it is important to get out
of these stocks. The money got by selling these stocks has to be invested in other good performing
stocks i.e. Stocks like Yes bank, Axis Bank and BPCL.

40
The return on investment by switching from one stock to another is higher when compared to one
time investment in a portfolio which is depicted by the table on the next page.
Table 6: Returns for Equity Portfolio Management
Company/Index Price (Rs.) No. of shares Return (Rs.)
Nifty Bees 847.19 206 174924
Axis Bank 585.4 22 12710
Yes Bank 882.3 74 65290
BPCL 850.15 35 29755
HCL 1010.75 27 27756
Wipro 561.7 26 14609
TCS 2610.3 13 34758
ITC 327.1 33 10709
L&T 1654.45 6 9146
M&M 1258.1 16 20054
Return on Equity
Portfolio (Rs.)
224787
Difference 49862
Managing equity portfolio by simply switching from one stock to another bullish stock can give
outstanding results. In this case the difference in the return has increased from Rs.7,980 to
Rs.49,862.
With PM (Rs.) Without PM (Rs.) Difference (Rs.) Increase (%)
49862.24 7979.529 41882.71 525%
The increase in the difference in return on NIFTY BeES and stocks has increased by 525% by
managing the portfolio of these 11 equities.

41
5. EQUITY DERIVATIVE MARKET
As Indian securities markets continue to evolve, market participants, investors and regulators are
looking at different ways in which the risk management may be efficiently met through the
introduction of Derivative markets. Through the use of derivative products, it is possible to
partially or fully transfer price risks by locking in asset prices. As instruments of risk management,
these generally do not influence the fluctuations in the underlying asset prices. Derivatives are risk
management instruments, which derive their value form an underlying asset. The underlying asset
can be bullion, index, share, bonds, currency, interest etc. banks, securities firms, companies and
investors to hedge risks, to gain access to cheaper money and to make profit, uses derivatives.
Derivatives are likely to grow even at a faster rate in future. However, the advent of modern day
derivative contracts is attributed to the need for farmers to protect themselves from any decline in
the price of their crops due to delayed monsoon, or overproduction. The first „futures‟ contracts
can be traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently
standardized contracts, which made them much like today’s futures. The Chicago Board of trade
(CBOT), the largest derivative exchange in the world, was established in 1848 where forward
contracts on various commodities were standardized around 1865. From then on, derivatives have
remained more or less in the same form, as we know them today.
“Derivatives are defined as financial instruments whose value derived from the prices of one or
more other assets such as equity securities, fixed-income securities, foreign currencies, or
commodities. Derivative is also a kind of contract between two counter parties to exchange
payments linked to the prices of underlying assets.”
In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines
“derivative” to include
1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
2. A contract which derives its value from the prices, or index or prices, of underlying
securities.

42
The above definition conveys that Derivatives are financial products and derive its value from the
underlying assets. Derivatives are derived from a matter financial contract called the underlying.
5.1. Derivative markets
Derivatives markets have been in existence in India in some form or other for a long time. In
the area of commodities, the Bombay Cotton Trade Association started futures trading in 1875
and, by the early 1900s India had one of the world’s largest futures industry. In 1952 the
government banned cash settlement and options trading and derivatives trading shifted to
informal forwards markets. In recent years, government policy has changed, allowing for an
increased role for market-based pricing and less suspicion of derivatives trading. The ban on
futures trading of many commodities was lifted starting in the early 2000s, and national
electronic commodity exchanges were created. In the equity markets, a system of trading
called “Badla” involving some elements of forwards trading had been in existence for
decades. However, the system led to a number of undesirable practices and it was prohibited
off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001.
A series of reforms of the stock market between 1993 and 1996 paved the way for the
development of exchange-traded equity derivatives markets in India. In 1993, the government
created the NSE in collaboration with state-owned financial institutions. NSE improved the
efficiency and transparency of the stock markets by offering a fully automated screen-based
trading system and real-time price dissemination. In 1995, a prohibition on trading options
was lifted. In 1996, the NSE sent a proposal to SEBI for listing exchange-traded derivatives.
The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction
of derivative products, and bilevel regulation i.e., self-regulation by exchanges with SEBI
providing a supervisory and advisory role. Another report, by the J. R. Varma Committee in
1998, worked out various operational details such as the margining systems. In 1999, the
Securities Contracts (Regulation) Act of 1956, or SC(R) A, was amended so that derivatives
could be declared “securities.” This allowed the regulatory framework for trading securities
to be extended to derivatives. The Act considers derivatives to be legal and valid, but only if
they are traded on exchanges. Finally, a 30-year ban on forward trading was also lifted in
1999. The economic liberalization of the early nineties facilitated the introduction of

43
derivatives based on interest rates and foreign exchange. A system of market-determined
exchange rates was adopted by India in March 1993. In August 1994, the rupee was made
fully convertible on current account. These reforms allowed increased integration between
domestic and international markets, and created a need to manage currency risk. The use of
derivatives varies by type of institution. Financial institutions, such as banks, have assets and
liabilities of different maturities and in different currencies, and are exposed to different risks
of default from their borrowers. Thus, they are likely to use derivatives on interest rates and
currencies, and derivatives to manage credit risk. Non-financial institutions are regulated
differently from financial institutions, and this affects their incentives to use derivatives.
5.2. The Need for a Derivatives market
The derivatives market performs a number of economic functions:
1. They help in transferring risks from risk averse people to risk oriented people.
2. They help in the discovery of future as well as current prices.
3. They catalyze entrepreneurial activity.
4. They increase the volume traded in markets because of participation of risk
averse people in greater numbers.
5. They increase savings and investment in the long run
5.3. Functions of derivative market
The following are the various functions that are performed by the derivatives markets.
 Price in an organized derivatives market reflects the perception of market
participations about the futures and let the prices of underlying to the perceived
future level.
 Derivatives market helps to transfer risks from those who have them but may
not like them to those who have an appetite for them.
 Derivative trading acts as a catalyst for new entrepreneurial activity.
 Derivatives markets help increase savings and investment in the long run.

44
5.4. The Economic Role of Derivatives
5.4.1. Risk Management
The principal benefit of the Derivative market is that it provides the opportunity for
risk management through Hedging. Risk can be defined as “The possibility or
probability of loss”. Derivatives are used to separate risks from traditional instruments
and transfer these risks. The fundamental risks involved in derivatives business
includes following:
 Credit Risk is the risk of a counterpart to perform its obligations as per the
contract. Also known as default or counterpart risk, it differs with different
instruments.
 Market risk is a risk of financial loss as a result of adverse movements of
prices of the underlying asset.
 Liquidity risk is the inability of a firm to arrange a transaction at prevailing
market prices.
 Legal risk is the legal aspects associated with the deal.
5.4.2. Price Discovery
The second major function of derivative market is price discovery. This is a process of
providing equilibrium prices that reflect current and prospective demands on current
and prospective supplies and making these prices visible to all.
5.4.3. Transactional Efficiency
Derivative markets allow institution to transact more efficiently than otherwise. They
reduce the direct cost of transacting in cash/financial markets are also provided, through
clearing houses, an efficient mechanism to deal with counter party risk.

45
5.5. The Participants in a Derivatives market
1. Hedgers use futures or options markets to reduce or eliminate the risk
associated with price of an asset.
2. Speculators use futures and options contracts to get extra leverage in betting
on future movements in the price of an asset. They can increase both the
potential gains and potential losses by usage of derivatives in a speculative
venture.
3. Arbitrageurs are in business to take advantage of a discrepancy between prices
in two different markets. For example, they see the futures price of an asset
getting out of line with the cash price, they will take offsetting positions in the
two markets to lock in a profit.
5.6. Factors driving the growth of financial derivatives
1. Increased volatility in asset prices in financial markets
2. Increased integration of national financial markets with the international
markets
3. Marked improvement in communication facilities and sharp decline in their
costs
4. Development of more sophisticated risk management tools, providing
economic agents a wider choice of risk management strategies
5. Innovations in the derivatives markets, which optimally combine the risks and
returns over a large number of financial assets leading to higher returns, reduced
risk as well as transactions costs as compared to individual financial assets.

46
5.7. Types of Derivatives
1. FORWARDS: A forward contract is a customized contract between two
entities, where settlement takes place on a specific date in the future at today‟s
pre-agreed price.
2. FUTURES: A futures contract is an agreement between two parties to buy or
sell an asset at a certain time in the future at a certain price. Futures contracts
are special types of forward contracts in the sense that the former are
standardized exchange-traded contracts.
3. OPTIONS: Options are of two types - calls and puts. Calls give the buyer the
right but not the obligation to buy a given quantity of the underlying asset, at a
given price on or before a given future date. Puts give the buyer the right, but
not the obligation to sell a given quantity of the underlying asset at a given price
on or before a given date.
4. WARRANTS: Options generally have lives of upto one year, the majority of
options traded on options exchanges having a maximum maturity of nine
months. Longer-dated options are called warrants and are generally traded over-
the-counter.
5. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation
Securities. These are options having a maturity of upto three years.
6. BASKETS: Basket options are options on portfolios of underlying assets. The
underlying asset is usually a moving average or a basket of assets. Equity index
options are a form of Basket options.

47
7. SWAPS: Swaps are private agreements between two parties to exchange cash
flows in the future according to a prearranged formula. They can be regarded
as portfolios of forward contracts. The two commonly used swaps are:
 Interest Rate Swaps: These entail swapping only the interest related
cash flows between the parties in the same currency.
 Currency Swaps: These entail swapping both principal and interest
between the Parties, with the cash flows in one direction being in a
different currency than those in the opposite direction.
8. SWAPTIONS: Swaptions are options to buy or sell a swap that will become
operative at the Expiry of the options. Thus a swaption is an option on a forward
swap. Rather than have Calls and puts, the swaptions market has receiver
swaptions and payer swaptions. A receiver swaption is an option to receive
fixed and pay floating. A payer swaption is an Option to pay fixed and receive
floating.
5.8. EQUITY DERIVATIVES IN INDIA
Equity derivatives market in India has registered an "explosive growth" and is expected to
continue the same in the years to come. Introduced in 2000, financial derivatives market in
India has shown a remarkable growth both in terms of volumes and numbers of traded
contracts. NSE alone accounts for 99 percent of the derivatives trading in Indian markets.
The introduction of derivatives has been well received by stock market players. Trading in
derivatives gained popularity soon after its introduction. In due course, the turnover of the
NSE derivatives market exceeded the turnover of the NSE cash market. For example, in
2008, the value of the NSE derivatives markets was Rs.130, 90,477.75 Cr. whereas the
value of the NSE cash markets was only Rs.35,51,038 Cr, similarly the value of the NSE
equity derivatives markets now i.e. 2015 is Rs.90,442.91 Cr. and the value of equity market
is Rs.5,464.87 Cr.

48
On compare the trading figures of NSE and BSE, performance of BSE is not encouraging
both in terms of volumes and numbers of contracts traded in all product categories. Among
all the products traded on NSE in F& O segment, index options are most popular in terms
of volumes and number of contract traded, followed by stock futures also known as equity
futures with turnover shares of 74.9 percent and 10.69 percent, respectively. In case of
BSE, index options outperform stock options.
5.8.1. Impact of cash market segment on derivative market
The impact of cash market on derivative market can be studied by comparing the
settlement price of derivative instrument i.e. FUTIDX NIFTY with the underlying price
of CNX NIFTY.
 Settlement Price:
The settlement price is the average price at which a contract trades, calculated at
both the open and close of each trading day. In derivatives markets, the price used for
determining profit or loss for the day, as well as margin requirements. Additionally, it
is important because it determines whether a trader may be required to post additional
margins. It is generally set by defined procedures that differ slightly among each
exchange and the instrument traded.
 Underlying Price:
In derivatives, the security that must be delivered when a derivative contract, such as a
put or call option, is exercised. Whereas in equities, the common stock that must be
delivered when a warrant is exercised, or when a convertible bond or Convertible
preferred share is converted to common stock.

49
Table 7: Details of NIFTY Futures along with the Settlement prices & underlying prices
Date Settle Price Underlying Value No. Of Contracts Open Interest Change in OI
01-Jun-15 8,431.65 8,433.40 3,09,987 1,60,97,875 2,46,850
02-Jun-15 8,225.35 8,236.45 8,29,989 1,61,10,750 12,875
03-Jun-15 8,136.35 8,135.10 5,29,274 1,60,24,700 -86,050
04-Jun-15 8,141.60 8,130.65 4,72,806 1,62,56,250 2,31,550
05-Jun-15 8,114.25 8,114.70 5,40,264 1,63,34,750 78,500
08-Jun-15 8,044.20 8,044.15 3,76,842 1,62,46,550 -88,200
09-Jun-15 8,030.60 8,022.40 3,85,780 1,63,78,950 1,32,400
10-Jun-15 8,120.05 8,124.45 5,17,670 1,54,08,525 -9,70,425
11-Jun-15 7,959.20 7,965.35 6,97,716 1,65,90,775 11,82,250
12-Jun-15 7,978.70 7,982.90 4,07,275 1,66,57,725 66,950
15-Jun-15 8,009.20 8,013.90 5,02,224 1,58,95,775 -7,61,950
Source: NSE Website
The table above shows the details of CNX Nifty Futures Index (FUTIDX) from 1st
June, 2015 up
to 15th
June, 2015 expiring on 25th
June, 2015.
Figure 12: Movement of Underlying Value & Settlement price of FUTIDX Nifty
7400
7600
7800
8000
8200
8400
8600
8800
9000
9200
Underlying Value Settle Price

50
The chart on the previous page shows the movement of daily settlement price and underlying price
in future market. From the graph above it is clear that the settlement price is in and around
underlying prices of FUTIDX.
When we consider the open interest along with the settlement price from the TABLE 1 (Appendix
B), we can observe that the open interest is increasing continuously and the settlement price is
increasing initially indicating that the market is strong but later on the settlement price decreases
indicating that the market is has started weakening.
Table 8: Day-to-day movement of CNX NIFTY
Date Open High Low Close
01-Jun-15 8,450.00 8,484.80 8,421.00 8,431.65
02-Jun-15 8,436.00 8,438.90 8,210.95 8,225.35
03-Jun-15 8,204.70 8,222.00 8,098.70 8,136.35
04-Jun-15 8,137.00 8,164.75 8,055.25 8,141.60
05-Jun-15 8,113.90 8,200.00 8,101.45 8,114.25
08-Jun-15 8,113.00 8,127.75 8,031.35 8,044.20
09-Jun-15 8,024.70 8,064.00 8,001.10 8,030.60
10-Jun-15 8,025.30 8,154.00 8,011.00 8,120.05
11-Jun-15 8,151.35 8,156.00 7,950.00 7,959.20
12-Jun-15 7,949.00 7,994.00 7,931.00 7,978.70
15-Jun-15 7,968.00 8,065.00 7,944.00 8,009.20
Source: NSE Website
The table shows the day-to-day volatility of CNX Nifty Futures index from 1st
June, 2015 to 15th
June, 2015. The opening price as well as the closing price was highest on 1st
June as seen in the
table above. Similarly when we take CNX Nifty Futures index data from 23rd
March, 2015 to 21st
June, 2015 from the TABLE 1 (Appendix B) and plot it we get the chart as shown on the next
page.

51
Figure 13: Volatility in CNX Nifty Futures Source: NSE Website
The above Open-High-Low-Close chart indicates clearly the volatility in the FUTIDX. The candle
sticks in the chart represent the increase and decrease in the settlement prices. The decrease in the
price is represented in colored candle sticks whereas the increase in the price is indicated by simple
uncolored candle sticks. 6th
May, 2015 is the day with the highest negative difference between the
opening and the closing or settlement price. Similarly 29th
May is the day with highest positive
change.
To understand equity derivatives better let us plot CNX NIFTY FUTURE with CNX NIFTY to
get a broad picture of the performance of the market.
7400
7600
7800
8000
8200
8400
8600
8800
9000
9200
Open High Low Close

52
Figure 14: Price comparison of FUTIDX & CNX Nifty Source: NSE Website
The chart shows the relation between the prices of FUTIDX Nifty and CNX Nifty for the period
of 3 months i.e. 23rd
March, 2015 to 21st
June, 2015. We can clearly see from the chart that most
of the time the movement of FUTIDX NIFTY accompanied the movement of CNX NIFTY. This
give the clear indication that there is an effect of CNX NIFTY on FUTIDX or vice-versa.
Figure 15: Turnover comparison of FUTIDX & CNX Nifty Source: NSE Website
The chart above shows the relation between the turnover of FUTIDX Nifty and CNX Nifty. As we
can see from the chart that the turnover of CNX NIFTY in the beginning of the 3 months is high
7400
7600
7800
8000
8200
8400
8600
8800
9000
9200
CNX NIFTY FUTIDX NIFTY
0
5000
10000
15000
20000
25000
30000
35000
FUTIDX (Rs. Cr.) CNX NIFTY (Rs. Cr)

53
compared to the FUTIDX NIFTY but in the last month before expiry date the turnover of the
FUTIDX NIFTY is greater than CNX NIFTY. The reason for the higher turnover in the last month
is the decrease in the margin that is required for the day-to-day settlement of the futures.
Figure 16: Spread in FUTIDX NIFTY Source: NSE Website
The chart above shows the relation between the volume of the future traded with the day to day
opening and closing prices of the FUTIDX.
The turnover in the beginning of the month is less but as the expiry date comes nearer the turnover
increases drastically as seen from the figure. There is an increase in the turnover of futures in the
ending of the May month as well as in the beginning of the June month.
The Chart also represents the volatility in the price of futures for the period of 3 months. The
highest positive volatility is on the 30th
March, 2015 and the negative volatility is on 6th
May, 2015.
7400
7600
7800
8000
8200
8400
8600
8800
9000
9200
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
Volume Open High Low Close

54
Figure 17: Spread in CNX NIFTY Source: NSE Website
The above chart shows the volume traded for 3 months i.e. from 23rd
March, 2015 to 21st
June,
2015. Along with the volume traded it also represents the volatility in the cash market i.e. CNX
NIFTY. Unlike the futures, the trade in cash market is continuous as seen in the chart.
The continuous trade in cash market is the reason for higher turnover. The volatility in the cash
market is also higher as compared to derivatives which can be seen clearly from the figure above.
7400
7600
7800
8000
8200
8400
8600
8800
9000
0
50000000
100000000
150000000
200000000
250000000
300000000
350000000
400000000
450000000
Volume Open High Low Close

55
Figure 18: Options CE closing price for different strike prices Source: NSE Website
The chart shows the settlement price of two different call options with different strike price of
ST8450 & ST8500.
The reason for choosing these two strike price is the turnover of options at these strike prices.
ST8450 and ST8500 has the highest turnover over the span of 3 months thus making it sensible
to compare them.
The chart also shows that there is not much difference in the settlement price for ST8450 & ST8500
but for the month of April we can find a bit variation in their prices. The higher settlement price
in the 1st
month also shows higher expectation of the buyers or investors but with the time the
buyer’s or investor’s expectation decreases as there might be no good information for the investor
or buyer to continue investing.
0
100
200
300
400
500
600
700
Settle Price for ST8450 Settle Price for ST8500

56
Figure 19: Options PE closing price for different strike prices Source: NSE Website
As the call and put options goes in different direction, similarly the expectation of buyers or
investors changes from call option to put option.
When there is no good information in the market the buyer’s or investor’s expectations changes
and thus from call the buyer or investor rely on put option to take advantage of the decreases in
settlement price which is the case shown in the chart above.
The settlement price of both the put options is low in the beginning but with the time the buyer
or investor starts taking the advantage of put options, the settlement price of put options starts
increasing.
0
100
200
300
400
500
600
Settle Price for ST8450 Settle Price for ST8500

57
5.8.2. Prediction of future values for derivative instruments
We often hear market analysts or experienced traders talking about an equity price
nearing a certain support or resistance level, each of which is important because it
represents a point at which a major price movement is expected to occur. But how do
these analysts and professional traders come up with these so-called levels? One of the
most common methods is using pivot points.
There are several different methods for calculating pivot points, the most common of
which is the five-point system which we are going to use for the predicting the
settlement price for next day for FUTIDX NIFTY.
The five-point system includes:
 Pivot Point (P): It is simply the average of the high, low and closing prices
from the previous trading day, which is used as an indicator to determine the
overall trend of the market over different time frame.
 Support (S1, S2) and Resistance level (R1, R2): Price support and
resistance levels are key trading tools in any market. Their roles may be
interchangeable, depending on whether the price level is approached in an up-
trending or a down-trending market.

58
Table 9: Day-to-day prices of FUTIDX NIFTY
Date Open High Low Close
01-Jun-15 8,450.00 8,484.80 8,421.00 8,431.65
02-Jun-15 8,436.00 8,438.90 8,210.95 8,225.35
03-Jun-15 8,204.70 8,222.00 8,098.70 8,136.35
04-Jun-15 8,137.00 8,164.75 8,055.25 8,141.60
05-Jun-15 8,113.90 8,200.00 8,101.45 8,114.25
08-Jun-15 8,113.00 8,127.75 8,031.35 8,044.20
09-Jun-15 8,024.70 8,064.00 8,001.10 8,030.60
10-Jun-15 8,025.30 8,154.00 8,011.00 8,120.05
11-Jun-15 8,151.35 8,156.00 7,950.00 7,959.20
12-Jun-15 7,949.00 7,994.00 7,931.00 7,978.70
15-Jun-15 7,968.00 8,065.00 7,944.00 8,009.20
Source: NSE Website
The table above shows the day-to-day different prices of CNX Nifty Futures index from
1st
June, 2015 to 15th
June, 2015.
The previous day's high, low and close, along with two support levels and two
resistance levels (totaling five price points) are needed to derive a pivot point using the
following equations:
R2 = P + ( H – L ) = P + ( R1 – S1 ) where, S = Support level
R1 = ( P x 2 ) – L R = Resistance level
P = ( H + L + C ) / 3 P = Pivot Point
S1 = ( P x 2 ) – H H = High ,L = Low
S2 = P - ( H – L ) = P - ( R1 – S1 ) C = Close

59
Caring out the calculations need for pivot point and arranging it, we get a table which is shown
below
Table 10: Pivot Points for different FUTIDX prices
Date Open High Low Close S2 S1 Pivot Point R1 R2
01-Jun-15 8,450 8,485 8,421 8,432 8,382 8,407 8,446 8,471 8,510
02-Jun-15 8,436 8,439 8,211 8,225 8,064 8,145 8,292 8,373 8,520
03-Jun-15 8,205 8,222 8,099 8,136 8,029 8,083 8,152 8,206 8,276
04-Jun-15 8,137 8,165 8,055 8,142 8,011 8,076 8,121 8,186 8,230
05-Jun-15 8,114 8,200 8,101 8,114 8,040 8,077 8,139 8,176 8,237
08-Jun-15 8,113 8,128 8,031 8,044 7,971 8,008 8,068 8,104 8,164
09-Jun-15 8,025 8,064 8,001 8,031 7,969 8,000 8,032 8,063 8,095
10-Jun-15 8,025 8,154 8,011 8,120 7,952 8,036 8,095 8,179 8,238
11-Jun-15 8,151 8,156 7,950 7,959 7,816 7,887 8,022 8,093 8,228
12-Jun-15 7,949 7,994 7,931 7,979 7,905 7,942 7,968 8,005 8,031
15-Jun-15 7,968 8,065 7,944 8,009 7,885 7,947 8,006 8,068 8,127
Source: NSE Website
The pivot point calculated from the previous day’s high, low & close is compared with the present
day’s open price.
If we see 4th
June’s open price and the calculated pivot point, the open price lies between S1 and
Pivot point, which indicates the support level i.e. the market is going to go above the opening price
and thus it is advisable to invest until the price crosses the pivot point i.e. reaching the resistance
level which expects market to go down.
Open Price: 8,137 < Pivot Point: 8,152
Similarly if the market is going down the investor can take the advantage of this information and
can go short, booking profit for the day.

60
For example, if you have gone short at 8420 with different strike price as shown below
Future Price Strike Price Difference Lot Size Profit
8420 8400 20 25 500
8420 8300 120 25 3000
8420 8230 190 25 4750
In the above example, it depends on the investor’s capability to take risk, the higher risk taken the
higher is the return.
The pivot point can also be used for trend analysis as it the average of high, low and close.
Table 11: Comparison of Pivot points & closing prices of FUTIDX
Date Close Pivot Point
01-Jun-15 8,432 8,446
02-Jun-15 8,225 8,292
03-Jun-15 8,136 8,152
04-Jun-15 8,142 8,121
05-Jun-15 8,114 8,139
08-Jun-15 8,044 8,068
09-Jun-15 8,031 8,032
10-Jun-15 8,120 8,095
11-Jun-15 7,959 8,022
12-Jun-15 7,979 7,968
15-Jun-15 8,009 8,006
Source: NSE Website & Calculations
The chart & table shows the trend of the future index market for a period from 1st
June, 2015 to
15th
June, 2015 similarly we can find the trend for entire 3 months from the TABLE 3 (Appendix
B) as shown on the next page.
7,600
7,700
7,800
7,900
8,000
8,100
8,200
8,300
8,400
8,500
01-Jun-15
02-Jun-15
03-Jun-15
04-Jun-15
05-Jun-15
06-Jun-15
07-Jun-15
08-Jun-15
09-Jun-15
10-Jun-15
11-Jun-15
12-Jun-15
13-Jun-15
14-Jun-15
15-Jun-15
FUTIDX Close Pivot Point Linear (FUTIDX Close)
Figure 20: Trend Analysis of FUTIDX from 1st
June, 2015 to 15th
June, 2015

61
Figure 21: Trend Analysis of FUTIDX
As seen from the chart, the FUTIDX price and the pivot point are accompanying each other from
the 8,432 point sliding down to 8006 indicating bearish market. Thus pivot points can also be used
as an indicator for market.
7400
7600
7800
8000
8200
8400
8600
8800
9000
9200
Close Pivot Point Linear (Pivot Point)

A STUDY ON EQUITY & EQUITY DERIVATIVE - INDIAN SECURITIES MARKET

A STUDY ON EQUITY & EQUITY DERIVATIVE - INDIAN SECURITIES MARKET

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