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A study of_derivatives_for_hedging (1)
1. Summer Internship Project
A STUDY OF DERIVATIVES FOR HEDGING AND
CAPITAL APPRECIATION
Presented By:
Pranav Marar (A-
54)
Internship at
QUANTUM GLOBAL SECURITIES LIMITED
2. INDEX
SR NO TITLE
1 Introduction to the company
2 Project Description
3 Research Methodology
4 Data Analysis
I. Derivative and its uses
II. Types of Derivatives
III. Future Trading
IV. Options Trading
V. Participants in Derivative market
VI. Hedging with Example
5 Recommendations
6 Conclusion
7 Bibliography
3. Introduction of the Company
“Quantum Global Securities” is an independent Share Broking
and financial advisory firm focused on managing individuals’
investments.
Established in the year 1995 and has its Head office at Delhi.
Has more than 35 branches across the country, mainly focused in
northern part of India.
Company is certified by financial regulatory authorities like SEBI,
IRDA, AMFI.
Deals in all segments such as equities, derivatives, currency futures,
mutual funds and IPOs.
Peers are Motilal Oswal, Sharekhan, Angel Broking etc.
Headed by Atul Malik and Bhavesh Singh.
4. Project Description
Project is all about Derivative market, its necessary concept.
It includes Forward, Futures, Options and Swap with all basic
terminologies.
Participants in Derivative Market and their Role.
What Hedging is and how hedging helps to reduce risk.
Examples of Hedging.
5. Research Methodology
Research methodology used was secondary method.
Live Market tracking with the help of Money Control and Market
Pulse is being used.
NSE website
NISM modules.
6. Derivatives and its uses
Derivatives are financial contracts that derive their value from an
underlying asset. Underlying asset could be stocks, indices,
commodities, currencies, exchange rates, or the rate of interest.
It helps in generating profit by betting in future value of underlying
asset. As value is derived from underlying asset, it is termed as
Derivatives.
Derivaties helps in:
1. Earn money on shares that are lying idle
2. Benefit from arbitrage
3. Protect your securities against
4. Transfer of risk
8. Future and Forwards: Futures are contracts that represent an
agreement to buy or sell a set of assets at a specified time in the
future for a specified amount. Forwards are futures, which are not
standardized. They are not traded on a stock exchange.
For example, in the derivatives market, you cannot buy a contract
for a single share. It is always for a lot of specified shares and
expiry date. This does not hold true for forward contracts. They can
be tailored to suit your needs.
Options: These contracts are quite similar to futures and forwards.
However, there is one key difference. Once you buy an options
contract, you are not obligated to hold the terms of the agreement.
This means, even if you hold a contract to buy 100 shares by the
expiry date, you are not required to. Options contracts are traded on
the stock exchange.
Swaps: A swap is an agreement made between two parties to
exchange cash flows in the future according to a prearranged
formula. Swaps are broadly speaking series of forward contracts.
Swaps help market participants manage risk associated with volatile
interest rates, currency exchange rates and commodity prices
13. Hedging
Hedging is an investment taken out to limit the risk of another
investment, insurance is an example of a real-world hedge.
Investment in cash can be hedged with the help of Future
Derivative.
Options are hedged along itself i.e by Call or Put according to the
situation and also for cash market stocks.
14. Hedging with Example
The below example is situation stocks are hedged with the help of
Futures.
Situation 1(Without Hedging)
Initial capital Rs.1090000
Capital 23rd July Rs.1078000
Date Cash Capital Invested
13th July,
2018
Mr.A purchased 500 shares of HDFC Bank at Rs.2180 500*2180=
Rs.1090000
16th July,
2018
The value of the share price goes down which is Rs.2168 500*2168=
Rs.1084000
23rd July,
2018
Mr.A sells the shares of HDFC Bank at Rs.2156, because
the share price are continuously falling down and suffering
a loss of Rs.12000
500*2168=
Rs.1078000
16. Situation 2(With Hedging)
Initial Capital Invested
Cash Rs.1090000
Future Rs.109000 (only margin)
Total Rs.1199000
Capital on 23rd July, 2018
Cash Rs.1078000
Future Rs.117500
Total Rs.1195500
Date Cash Future Capital Invested
13th
July,
2018
Mr.A purchased HDFC Bank 500 shares
at price Rs.2180 = 1090000
500*2180(10%
margin) =
109000
1090000 + 109000 =
Rs.1199000
16th
July,
2018
HDFC Bank price comes to Rs.2168 and
then he tries to hedge his funds in future
market = 1084000
500*2180(10%
margin) =
109000
1084000 + 109000 =
Rs.1193000
23rd
July,
2018
As he has hedge his fund by going short
in future market his value goes to
Rs.2156 and he makes a profit of Rs.17
(2180 – 2163) = 1078000
500*17 = 8500
+ 109000
(initial margin)
= 117500
1078000 + 8500 =
Rs.1195500
18. Hedging in Options
Situation 3(refer Ex 1)
Initial capital Rs.1090000 (2180*500)
Capital 23rd July Rs.1078000 (2156*500)
Here, Sale of HDFC Bank has resulted to a loss of Rs 12000.
After Hedging of Cash by Options:
As Stock value is expected to fall due to some reason, BUY PUT
strategy is used to hedge in this example.
Date Cash Options Capital Invested
13th July,
2018
Mr.A purchased HDFC Bank 500
shares at price Rs.2180 = 1090000
2 Lots (500*2) of 2160 @ 40
Rs premium = 40000
1090000 + 40000 =
Rs.1130000
16th July,
2018
HDFC Bank price comes to
Rs.2168 and then he tries to hedge
his funds in future market =
1084000
Premium from 40 to 45=
1000*5 = 5000
1084000 + 45000=
Rs.1129000
23rd July,
2018
As he has hedge his fund by going
short in future market his value
goes to Rs.2156 and he makes a
profit of Rs.17 (2180 – 2163) =
1078000
Premium from 45 to 50=
1000*10 = 5000 + 5000 +
40000 (Premium) = 50000
1078000 + 10000 =
Rs.1088000
19. Here, the actual loss which was being incurred is Rs 12000.
As the stocks are hedged by buying a Put option, the total loss of Rs
12000 reduced to Rs 2000.
Statistics:
Rupees
Total Investment (A) 1090000
Capital Depriciation (B) 1078000
Loss (A-B)= C 12000
Profit from Options (D) 10000
Final loss (C-D) 2000
20. Recommendations
Derivative is a risky segment as there is a scope of huge profits as
well as huge losses. So proper analysis and knowledge should be
gained prior to investing in this segment.
In India only equity derivative is emphasized. Currency derivatives
and Swaps should also be given the same importance as these are
the most traded securities in other developed counties.
If you have less capital, investment would give a very less return. If
you are ready to take risk options are the best way to multiply our
money.
Derivatives is best segment to hedge the risk of cash market. So
discrepancies in cash market can be tackled by Futures or Options.
21. Conclusion
Derivative is one of the new segments in our capital market, so
more awareness should be made among individuals so that more
and more investment should be driven in this segment as well.
Hedging is the best tool protect your capital, the same should be
practices.
22. Bibliography
Hull, J. C. (2007). Risk Management and Financial Institutions.
Delhi: Dorling Kindersley.
NISM Book Series VIII. (n.d.).
Raiyani, J. (2011). Financial derivatives in India. New Delhi.
https://www.nseindia.com/content/ncfm/sm_otsm.pdf
Zucchi, K. (2018, May 9). https://www.investopedia.com/.
Retrieved from Investopedia:
https://www.investopedia.com/articles/optioninvestor/10/derivatives
-101.asp
https://www.investopedia.com/articles/optioninvestor/07/hedging-
intro.asp
www.marketpulse.com. (n.d.). Retrieved from Market Pulse.
www.moneycontrol.com. (n.d.). Retrieved from Money Control.