This document provides an introduction and methodology for a study on futures and options trading in India. It discusses the rationale for developing derivatives markets to help manage systematic risk. It defines key terms like futures, options, and swaps. It also outlines the regulatory framework for derivatives trading in India established by the Securities and Exchange Board of India. The objectives of the study are to analyze the Indian derivatives market and futures and options operations, and to evaluate the profit/loss positions of options writers and holders.
Introduction to derivative markets in India; scope, significance, contribution & impact on the financial structure through unique derivative instruments for the market participants
Introduction to derivative markets in India; scope, significance, contribution & impact on the financial structure through unique derivative instruments for the market participants
Derivative is a financial instrument that derives its value from the value of some underlying asset. When the prices of commodities, currencies, securities, and interest rate are not fixed and keep on fluctuating, it becomes very necessary to hedge. Copy the link given below and paste it in new browser window to get more information on Derivatives and Hedging:- http://www.transtutors.com/homework-help/finance/derivaties-and-hedging.aspx
Securities that are purchased in order to be held for investment. This is in contrast to securities that are purchased by a broker-dealer or other intermediary for resale. Banks often purchase marketable securities to hold in their portfolios.
Security analysis comprises of an examination and evaluation of the various factors affecting the value of a security. Security analysis is about valuing the assets, debt, warrants, and equity of companies from the perspective of outside investors using publicly available information. The security analyst must have a through understanding of financing statements, which are an important source of this information. As such, the ability to value equity securities requires cross-disciplinary knowledge in both finance and financial accounting. While there is much overlap between the analytical tools used in security analysis and those used in corporate finance, security analysis tends to take the perspective of potential investors, whereas corporate finance tends to take an inside perspective such as that of a corporate financial manager.
Derivative is a financial instrument that derives its value from the value of some underlying asset. When the prices of commodities, currencies, securities, and interest rate are not fixed and keep on fluctuating, it becomes very necessary to hedge. Copy the link given below and paste it in new browser window to get more information on Derivatives and Hedging:- http://www.transtutors.com/homework-help/finance/derivaties-and-hedging.aspx
Securities that are purchased in order to be held for investment. This is in contrast to securities that are purchased by a broker-dealer or other intermediary for resale. Banks often purchase marketable securities to hold in their portfolios.
Security analysis comprises of an examination and evaluation of the various factors affecting the value of a security. Security analysis is about valuing the assets, debt, warrants, and equity of companies from the perspective of outside investors using publicly available information. The security analyst must have a through understanding of financing statements, which are an important source of this information. As such, the ability to value equity securities requires cross-disciplinary knowledge in both finance and financial accounting. While there is much overlap between the analytical tools used in security analysis and those used in corporate finance, security analysis tends to take the perspective of potential investors, whereas corporate finance tends to take an inside perspective such as that of a corporate financial manager.
The objective of this project is to provide the reader with knowledge of the various equity option strategies used today that are applicable in different market situations.
A derivative is a financial security with a value that is reliant upon or derived from an underlying asset or group of assets. The derivative itself is a contract between two or more parties based upon the asset or assets. Its price is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Derivatives can either be traded over-the-counter (OTC) or on an exchange. OTC derivatives constitute the greater proportion of derivatives in existence and are unregulated, whereas derivatives traded on exchanges are standardized. OTC derivatives generally have greater risk for the counterparty than do standardized derivatives.
Mutual Funds or Stock Investments Best 5 Facts for Wise Investments.pdfNazim Khan
https://pivotstocks.com/
When investor takes entry into the world of stock market, lots of investment options attract investors to grow their wealth. Two popular choices are mutual funds and stock investments. While they both involve investing in the financial markets, there are important distinctions between the two. In this article, we will find out the differences between mutual funds and stock investments, helping you make informed decisions about your investment strategy.
1. Understanding Mutual Funds
1.1 Definition and Structure of Mutual Funds
Mutual funds are investment vehicles that aggregate money from various individuals in order to invest in a diverse portfolio of stocks, bonds, and other securities.
They are managed by professional fund managers who make investment decisions on behalf of the investors. Each investor in a mutual fund owns shares that represent their proportionate ownership of the fund’s assets.
1.2 Types of Mutual Funds
There are various types of mutual funds, including equity funds, bond funds, index funds, sector funds, and balanced funds. Equity funds focus on investing in stocks, while bond funds primarily invest in fixed-income securities. Index funds track specific market indices, and sector funds concentrate on specific industries. Balanced funds aim to provide a mix of stocks and bonds to balance risk and return.
1.3 Advantages of Mutual Funds
• Professional Management: Mutual funds are managed by experienced professionals who have expertise in analyzing and selecting investments.
• Diversification: Investing in mutual funds allows you to diversify your portfolio across multiple securities, reducing the risk associated with individual investments.
• Liquidity: Mutual fund shares can be easily bought or sold, providing investors with liquidity.
• Accessibility: Mutual funds are accessible to both small and large investors, allowing individuals to participate in various markets.
1.4 Disadvantages of Mutual Funds
• Fees and Expenses: Mutual funds charge fees for management, administration, and other expenses, which can impact overall returns.
• Lack of Control: Investors have limited control over the investment decisions made by fund managers.
• Capital Gains Taxes: Mutual funds distribute capital gains to investors, which may result in tax liabilities.
2. Stock Investments Explained
2.1 Basics of Stock Investments
Stock investments involve buying shares of individual companies. When you invest in stocks, you become a partial owner of the company and have the potential to benefit from its profits and growth. Stock investments offer the opportunity for capital appreciation and the ability to earn dividends.
2.2 Types of Stocks
Stocks can be categorized into different types, including common stocks and preferred stocks. Common stocks represent ownership in a company and usually come with voting rights. Preferred stocks have a higher claim on a company’s
A project on derivatives market in indiaProjects Kart
A project on derivatives market in India report goes beyond that the local derivative in the emerging markets have witnessed widespread use of the derivative instrument for a variety of reasons. This continuous growth and development by the emerging market participants has resulted in capital inflows as well as helped the investors in risk protection through hedging. Visit: http://www.projectskart.com/p/contact-us.html for more information.
It's another new era of digital and marketers are faced with making big bets on their digital strategy. If you are looking at modernizing your tech stack to support your digital evolution, there are a few can't miss (often overlooked) areas that should be part of every conversation. We'll cover setting your vision, avoiding siloes, adding a democratized approach to data strategy, localization, creating critical governance requirements and more. Attendees will walk away with actions they can take into initiatives they are running today and consider for the future.
Most small businesses struggle to see marketing results. In this session, we will eliminate any confusion about what to do next, solving your marketing problems so your business can thrive. You’ll learn how to create a foundational marketing OS (operating system) based on neuroscience and backed by real-world results. You’ll be taught how to develop deep customer connections, and how to have your CRM dynamically segment and sell at any stage in the customer’s journey. By the end of the session, you’ll remove confusion and chaos and replace it with clarity and confidence for long-term marketing success.
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• Uncover the power of a foundational marketing system that dynamically communicates with prospects and customers on autopilot.
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Most small businesses struggle to see marketing results. In this session, we will eliminate any confusion about what to do next, solving your marketing problems so your business can thrive. You’ll learn how to create a foundational marketing OS (operating system) based on neuroscience and backed by real-world results. You’ll be taught how to develop deep customer connections, and how to have your CRM dynamically segment and sell at any stage in the customer’s journey. By the end of the session, you’ll remove confusion and chaos and replace it with clarity and confidence for long-term marketing success.
Key Takeaways:
• Uncover the power of a foundational marketing system that dynamically communicates with prospects and customers on autopilot.
• Harness neuroscience and Tribal Alignment to transform your communication strategies, turning potential clients into fans and those fans into loyal customers.
• Discover the art of automated segmentation, pinpointing your most lucrative customers and identifying the optimal moments for successful conversions.
• Streamline your business with a content production plan that eliminates guesswork, wasted time, and money.
Everyone knows the power of stories, but when asked to come up with them, we struggle. Either we second guess ourselves as to the story's relevance, or we just come up blank and can't think of any. Unlocking Everyday Narratives: The Power of Storytelling in Marketing will teach you how to recognize stories in the moment and to recall forgotten moments that your audience needs to hear.
Key Takeaways:
Understand Why Personal Stories Connect Better
How To Remember Forgotten Stories
How To Use Customer Experiences As Stories For Your Brand
For too many years marketing and sales have operated in silos...while in some forward thinking companies, the two organizations work together to drive new opportunity development and revenue. This session will explore the lessons learned in that beautiful dance that can occur when marketing and sales work together...to drive new opportunity development, account expansion and customer satisfaction.
No, this is not a conversation about MQLs and SQLs. Instead we will focus on a framework that allows the two organizations to drive company success together.
First Things First: Building and Effective Marketing Strategy
Too many companies (and marketers) jump straight into activation planning without formalizing a marketing strategy. It may seem tedious, but analyzing the mindset of your targeted audiences and identifying the messaging points most likely to resonate with them is time well spent. That process is also a great opportunity for marketers to collaborate with sales leaders and account managers on a galvanized go-to-market approach. I’ll walk you through the methods and tools we use with our clients to ensure campaign success.
Key Takeaways:
-Recognize the critical role of strategy in marketing
-Learn our approach for building an actionable, effective marketing strategy
-Receive templates and guides for developing a marketing strategy
The What, Why & How of 3D and AR in Digital CommercePushON Ltd
Vladimir Mulhem has over 20 years of experience in commercialising cutting edge creative technology across construction, marketing and retail.
Previously the founder and Tech and Innovation Director of Creative Content Works working with the likes of Next, John Lewis and JD Sport, he now helps retailers, brands and agencies solve challenges of applying the emerging technologies 3D, AR, VR and Gen AI to real-world problems.
In this webinar, Vladimir will be covering the following topics:
Applications of 3D and AR in Digital Commerce,
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Come learn how YOU can Animate and Illuminate the World with Generative AI's Explosive Power. Come sit in the driver's seat and learn to harness this great technology.
SEO as the Backbone of Digital MarketingFelipe Bazon
In this talk Felipe Bazon will share how him and his team at Hedgehog Digital share our journey of making C-Levels alike, specially CMOS realize that SEO is the backbone of digital marketing by showing how SEO can contribute to brand awareness, reputation and authority and above all how to use SEO to create more robust global marketing strategies.
How to Use AI to Write a High-Quality Article that Ranksminatamang0021
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Disclaimer: Some of the prompts mentioned here are the examples of Matt Diggity. Please use it as reference and make your own custom prompts.
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Monthly Social Media News Update May 2024Andy Lambert
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1. A STUDY ON FUTURES AND POTIONS
Project submitted in partial fulfillment for the award of the
degree of
MASTER OF BUSINESS ADMINISTRATION
2. DECLARATION
I hereby declare that this Project Report titled, “A STUDY ON THE
DERIVATIVES” submitted by me to the Department OF BUSINESS
ADMINISTRATION, XXXX and is a bonafide work under taken by
me and it is not submitted to any other University or Institution for
the award of any degree diploma / certificate or published any time
before.
Name and Address of the Student Signature of the student
Date :
3. ACKNOWLEDGEMENT
I wish to express my sincere deep sense of gratitude and also thank my
guide XXX, Faculty of Finance for his significant suggestions and help in
every aspect to accomplish the project work. His persisting
encouragement, everlasting patience and keen interest in discussions
have benefited me to the extent that cannot be spanned by words.
I take my pleasure to acknowledge XXXX for the facilities provided and
constant encouragement.
Finally I express bows to everyone who are involved with this project.
6. NATURE OF THE PROBLEM:
The turnover of the stock exchanges has been tremendously
increasing from last 10 years. The number of trades and the number of
investors, who are participating, have increased. The investors are willing to
reduce their risk, so they are seeking for the risk management tools.
Prior to SEBI abolishing the BADLA system, the investors had
this system as a source of reducing the risk, as it has many problems like no
strong margining system, unclear expiration date and generating counter party
risk. In view of this problem SEBI abolished the BADLA system.
After the abolition of the BADLA system, the investors are
seeking for a hedging system, which could reduce their portfolio risk. SEBI
thought the introduction of the derivatives trading, as a first step it has set up a
24 member committee under the chairmanship of Dr.L.C.Gupta to develop the
appropriate regulatory framework for derivative trading in India, SEBI
accepted the recommendations of the committee on May 11, 1998 and
approved the phased introduction of the derivatives trading beginning with
stock index futures.
7. There are many investors who are willing to trade in the
derivative segment, because of its advantages like limited loss and unlimited
profit by paying the small premiums.
IMPORTANCE OF THE STUDY:
To evaluate the profit/loss position of option holder and option writer.
OBJECTIVES OF THE STUDY:
To analyze the derivatives market in India.
To analyze the operations of futures and options.
To find out the profit/loss position of the option writer and option holder.
To study about risk management with the help of derivatives.
SCOPE OF THE STUDY:
The study is limited to “Derivatives” with special reference to futures
and options in the Indian context and the Hyderabad stock exchange has been
taken as a representative sample for the study. The study can’t be said as
totally perfect. Any alteration may come. The study has only made a humble
attempt at evaluating derivatives market only in Indian context. The study is
not based on the international perspective of derivatives markets, which exists
in NASDAQ, NYSE etc.
8. LIMITATIONS OF THE STUDY:
The following are the limitations of this study.
The scrip chosen for analysis is STATE BANK OF INDIA and the contract
taken is March 2005 ending one-month contract.
The data collected is completely restricted to the STATE BANK OF INDIA
of March 2005; hence this analysis cannot be taken as universal.
METHODOLOGY
9. The emergence of the market for derivative products, most
notably forwards, futures and options, can be traced back to the willingness of
risk-averse economic agents to guard themselves against uncertainties arising
out of fluctuations in asset prices. By their very nature, the financial markets
are marked by a very high degree of volatility. Through the use of derivative
products, it is possible to partially or fully transfer price risks by locking–in
asset prices. As instruments of risk management, these generally do not
influence the fluctuations in the underlying asset prices. However, by locking-
in asset prices, derivative products minimize the impact of fluctuations in asset
prices on the profitability and cash flow situation of risk-averse investors.
Derivatives are risk management instruments, which derive their
value from an underlying asset. The underlying asset can be bullion, index,
share, bonds, currency, interest etc. Banks, securities firms, companies and
investors to hedge risks, to gain access to cheaper money and to make profit,
use derivatives. Derivatives are likely to grow even at a faster rate in future.
DEFINITION:
10. Derivative is a product whose value is derived from the value of
an underlying asset in a contractual manner. The underlying asset can be
equity, forex, commodity or any other asset.
Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines “derivative” to
include –
1. A security derived from a debt instrument, share, loan whether
secured or unsecured, risk instrument or contract for differences or any other
form of security.
2. A contract which derives its value from the prices, or index of prices,
of underlying securities.
PARTICIPANTS:
The following three broad categories of participants in the derivatives market.
HEDGERS:
Hedgers face risk associated with the price of an asset. They use futures
or options markets to reduce or eliminate this risk.
SPECULATORS:
Speculators wish to bet on future movements in the price of an asset.
Futures and options contracts can give them an extra leverage; that is, they can
increase both the potential gains and potential losses in a speculative venture.
ARBITRAGEURS:
Arbitrageurs are in business to take advantage of a discrepancy between
prices in two different markets. If, for example, they see the futures price of an
asset getting out of line with the cash price, they will take offsetting positions
in the two markets to lock in a profit.
11. FUNCTIONS OF DERIVATIVES MARKET:
The following are the various functions that are performed by the derivatives
markets. They are:
Prices in an organized derivatives market reflect the perception of market
participants about the future and lead the prices of underlying to the perceived
future level.
Derivatives market helps to transfer risks from those who have them but may
not like them to those who have an appetite for them.
Derivative trading acts as a catalyst for new entrepreneurial activity.
Derivatives markets help increase savings and investment in the long run.
TYPES OF DERIVATIVES:
The following are the various types of derivatives. They are:
FORWARDS:
A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at today’s pre-agreed
price.
FUTURES:
A futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price.
OPTIONS:
Options are of two types - calls and puts. Calls give the buyer the right
but not the obligation to buy a given quantity of the underlying asset, at a given
price on or before a given future date. Puts give the buyer the right, but not the
12. obligation to sell a given quantity of the underlying asset at a given price on or
before a given date.
WARRANTS:
Options generally have lives of upto one year; the majority of options
traded on options exchanges having a maximum maturity of nine months.
Longer-dated options are called warrants and are generally traded over-the-
counter.
LEAPS:
The acronym LEAPS means Long-Term Equity Anticipation Securities.
These are options having a maturity of upto three years.
BASKETS:
Basket options are options on portfolios of underlying assets. The
underlying asset is usually a moving average of a basket of assets. Equity index
options are a form of basket options.
SWAPS:
Swaps are private agreements between two parties to exchange cash
flows in the future according to a prearranged formula. They can be regarded as
portfolios of forward contracts. The two commonly used swaps are:
Interest rate swaps:
These entail swapping only the interest related cash flows between the
parties in the same currency.
_ Currency swaps:
These entail swapping both principal and interest between the parties,
with the cash flows in one direction being in a different currency than those in
the opposite Direction.
SWAPTIONS:
13. 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.
RATIONALE BEHIND THE DEVELOPMENT OF
DERIVATIVES:
Holding portfolio of securities is associated with the risk of the
possibility that the investor may realize his returns, which would be much
lesser than what he expected to get. There are various factors, which affect the
returns:
1. Price or dividend (interest).
2. Some are internal to the firm like –
Industrial policy
Management capabilities
Consumer’s preference
Labor strike, etc.
These forces are to a large extent controllable and are termed as non
Systematic risks. An investor can easily manage such non-systematic by
having a well – diversified portfolio spread across the companies, industries
and groups so that a loss in one may easily be compensated with a gain in
other.
There are yet other types of influences which are external to the firm,
cannot be controlled and affect large number of securities. They are termed as
systematic risk. They are:
1. Economic
2. Political
3. Sociological changes are sources of systematic risk.
14. For instance, inflation, interest rate, etc. their effect is to cause prices of
nearly all individual stocks to move together in the same manner. We therefore
quite often find stock prices falling from time to time in spite of company’s
earnings rising and vice versa.
Rationale behind the development of derivatives market is to manage
this systematic risk, liquidity and liquidity in the sense of being able to buy and
sell relatively large amounts quickly without substantial price concessions.
In debt market, a large position of the total risk of securities is
systematic. Debt instruments are also finite life securities with limited
marketability due to their small size relative to many common stocks. Those
factors favour for the purpose of both portfolio hedging and speculation, the
introduction of a derivative security that is on some broader market rather than
an individual security.
India has vibrant securities market with strong retail participation that
has rolled over the years. It was until recently basically cash market with a
facility to carry forward positions in actively traded ‘A’ group scrips from one
settlement to another by paying the required margins and borrowing some
money and securities in a separate carry forward session held for this purpose.
However, a need was felt to introduce financial products like in other financial
markets world over which are characterized with high degree of derivative
products in India.
Derivative products allow the user to transfer this price risk by looking
in the asset price there by minimizing the impact of fluctuations in the asset
price on his balance sheet and have assured cash flows.
15. Derivatives are risk management instruments, which derive their value
from an underlying asset. The underlying asset can be bullion, index, shares,
bonds, currency etc.
DERIVATIVE SEGMENT AT NATIONAL STOCK
EXCHANGE:
The derivatives segment on the exchange commenced with S&P CNX
Nifty Index futures on June 12, 20007.The F&O segment of NSE provides
trading facilities for the following derivative segment:
1. Index Based Futures
2. Index Based Options
3. Individual Stock Options
4. Individual Stock Futures
COMPANY NAME CODE LOT SIZE
ABB Ltd. ABB 200
Associated Cement Co. Ltd. ACC 750
Allahabad Bank ALBK 2450
Andhra Bank ANDHRABANK 2300
Arvind Mills Ltd. ARVINDMILL 2150
Ashok Leyland Ltd ASHOKLEY 9550
Bajaj Auto Ltd. BAJAJAUTO 200
Bank of Baroda BANKBARODA 1400
Bank of India BANKINDIA 1900
Bharat Electronics Ltd. BEL 550
Bharat Forge Co Ltd BHARATFORG 200
Bharti Tele-Ventures Ltd BHARTI 1000
16. Bharat Heavy Electricals Ltd. BHEL 300
Bharat Petroleum Corporation Ltd. BPCL 550
Cadila Healthcare Limited CADILAHC 500
Canara Bank CANBK 1600
Century Textiles Ltd CENTURYTEX 850
Chennai Petroleum Corp Ltd. CHENNPETRO 950
Cipla Ltd. CIPLA 1000
Kochi Refineries Ltd
COCHINREFN 1300
Colgate Palmolive (I) Ltd. COLGATE 1050
Dabur India Ltd. DABUR 1800
GAIL (India) Ltd. GAIL 1500
Great Eastern Shipping Co. Ltd. GESHIPPING 1350
Glaxosmithkline Pharma Ltd. GLAXO 300
Grasim Industries Ltd. GRASIM 175
Gujarat Ambuja Cement Ltd. GUJAMBCEM 550
HCL Technologies Ltd. HCLTECH 650
Housing Development Finance
Corporation Ltd.
HDFC 300
HDFC Bank Ltd. HDFCBANK 400
Hero Honda Motors Ltd. HEROHONDA 400
Hindalco Industries Ltd. HINDALC0 150
Hindustan Lever Ltd. HINDLEVER 2000
Hindustan Petroleum Corporation Ltd. HINDPETRO 650
ICICI Bank Ltd. ICICIBANK 700
Industrial development bank of India
Ltd.
IDBI 2400
Indian Hotels Co. Ltd. INDHOTEL 350
Indian Rayon And Industries Ltd INDRAYON 500
Infosys Technologies Ltd. INFOSYSTCH 100
Indian Overseas Bank IOB 2950
Indian Oil Corporation Ltd. IOC 600
ITC Ltd. ITC 150
17. Jet Airways (India) Ltd. JETAIRWAYS 200
Jindal Steel & Power Ltd JINDALSTEL 250
Jaiprakash Hydro-Power Ltd. JPHYDRO 6250
Cummins India Ltd KIRLOSKCUM 1900
LIC Housing Finance Ltd LICHSGFIN 850
Mahindra & Mahindra Ltd. M&M 625
Matrix Laboratories Ltd. MATRIXLABS 1250
Mangalore Refinery and
Petrochemicals Ltd.
MRPL 4450
Mahanagar Telephone Nigam Ltd. MTNL 1600
National Aluminium Co. Ltd. NATIONALUM 1150
Neyveli Lignite Corporation Ltd. NEYVELILIG 2950
Nicolas Piramal India Ltd NICOLASPIR 950
National Thermal Power Corporation
Ltd.
NTPC 3250
Oil & Natural Gas Corp. Ltd. ONGC 300
Oriental Bank of Commerce ORIENTBANK 600
Patni Computer System Ltd PATNI 650
Punjab National Bank PNB 600
Ranbaxy Laboratories Ltd. RANBAXY 200
Reliance Energy Ltd. REL 550
Reliance Capital Ltd RELCAPITAL 1100
Reliance Industries Ltd. RELIANCE 600
Satyam Computer Services Ltd. SATYAMCOMP 600
State Bank of India SBIN 500
Shipping Corporation of India Ltd. SCI 1600
Siemens Ltd SIEMENS 150
Sterlite Industries (I) Ltd STER 350
Sun Pharmaceuticals India Ltd. SUNPHARMA 450
Syndicate Bank SYNDIBANK 3800
Tata Chemicals Ltd TATACHEM 1350
Tata Consultancy Services Ltd TCS 250
18. Tata Power Co. Ltd. TATAPOWER 800
Tata Tea Ltd. TATATEA 550
Tata Motors Ltd. TATAMOTORS 825
Tata Iron and Steel Co. Ltd. TISCO 675
Union Bank of India UNIONBANK 2100
UTI Bank Ltd. UTIBANK 900
Vijaya Bank VIJAYABANK 3450
Videsh Sanchar Nigam Ltd VSNL 1050
Wipro Ltd. WIPRO 300
Wockhardt Ltd. WOCKPHARMA 600
REGULATORY FRAMEWORK:
The trading of derivatives is governed by the provisions contained in
the SC ( R ) A, the SEBI Act, the and the regulations framed there under the
rules and byelaws of stock exchanges.
Regulation for Derivative Trading:
SEBI set up a 24 member committed under Chairmanship of
Dr.L.C.Gupta develop the appropriate regulatory framework for derivative
trading in India. The committee submitted its report in March 1998. On May
11, 1998 SEBI accepted the recommendations of the committee and approved
the phased introduction of Derivatives trading in India beginning with Stock
Index Futures. SEBI also approved he “Suggestive bye-laws” recommended
19. by the committee for regulation and control of trading and settlement of
Derivatives contracts.
The provisions in the SC (R) A govern the trading in the securities. The
amendment of the SC (R) A to include “DERIVATIVES” within the ambit of
‘Securities’ in the SC (R ) A made trading in Derivatives possible within the
framework of the Act.
1. Any exchange fulfilling the eligibility criteria as prescribed in the L.C.
Gupta committee report may apply to SEBI for grant of recognition
under Section 4 of the SC (R) A, 1956 to start Derivatives Trading. The
derivatives exchange/segment should have a separate governing council
and representation of trading / clearing members shall be limited to
maximum of 40% of the total members of the governing council. The
exchange shall regulate the sales practices of its members and will
obtain approval of SEBI before start of Trading in any derivative
contract.
2. The exchange shall have minimum 50 members.
3. The members of an existing segment of the exchange will not
automatically become the members of the derivative segment. The
members of the derivative segment need to fulfill the eligibility
conditions as lay down by the L.C.Gupta Committee.
4. The clearing and settlement of derivates trades shall be through a SEBI
approved Clearing Corporation / Clearing house. Clearing
Corporation /
Clearing House complying with the eligibility conditions as lay down
By the committee have to apply to SEBI for grant of approval.
20. 5. Derivatives broker/dealers and Clearing members are required to seek
registration from SEBI.
6. The Minimum contract value shall not be less than Rs.2 Lakh.
Exchanges should also submit details of the futures contract they
purpose to introduce.
7. The trading members are required to have qualified approved user and
sales person who have passed a certification programme approved by
SEBI.
FUTURES
DEFINITION:
A Futures contract is an agreement between two parties to buy or sell an
asset at a certain time in the future at a certain price. To facilitate liquidity in
the futures contract, the exchange specifies certain standard features of the
contract. The standardized items on a futures contract are:
♦ Quantity of the underlying
♦ Quality of the underlying
21. ♦ The date and the month of delivery
♦ The units of price quotations and minimum price change
♦ Locations of settlement
TYPES OF FUTURES:
On the basis of the underlying asset they derive, the futures are divided
into two types:
Stock futures:
The stock futures are the futures that have the underlying asset as the
individual securities. The settlement of the stock futures is of cash settlement
and the settlement price of the future is the closing price of the underlying
security.
22. Index futures:
Index futures are the futures, which have the underlying asset as an
Index. The Index futures are also cash settled. The settlement price of the
Index futures shall be the closing value of the underlying index on the expiry
date of the contract.
Parties in the Futures Contract:
There are two parties in a future contract, the Buyer and the Seller. The
buyer of the futures contract is one who is LONG on the futures contract and
the seller of the futures contract is one who is SHORT on the futures contract.
The pay off for the buyer and the seller of the futures contract are as follows.
PAYOFF FOR A BUYER OF FUTURES:
23. CASE 1:
The buyer bought the future contract at (F); if the futures price goes to
E1 then the buyer gets the profit of (FP).
CASE 2:
The buyer gets loss when the future price goes less than (F), if the
futures price goes to E2 then the buyer gets the loss of (FL).
PAYOFF FOR A SELLER OF FUTURES:
24. F – FUTURES PRICE
E1, E2 – SETTLEMENT PRICE.
CASE 1:
The Seller sold the future contract at (f); if the futures price goes to E1
then the Seller gets the profit of (FP).
CASE 2:
The Seller gets loss when the future price goes greater than (F), if the
futures price goes to E2 then the Seller gets the loss of (FL).
MARGINS:
25. Margins are the deposits, which reduce counter party risk, arise in a
futures contract. These margins are collected in order to eliminate the counter
party risk. There are three types of margins:
Initial Margin:
Whenever a futures contract is signed, both buyer and seller are
required to post initial margin. Both buyer and seller are required to make
security deposits that are intended to guarantee that they will infact be able to
fulfill their obligation. These deposits are Initial margins and they are often
referred as performance margins. The amount of margin is roughly 5% to 15%
of total purchase price of futures contract.
Marking to Market Margin:
The process of adjusting the equity in an investor’s account in order to
reflect the change in the settlement price of futures contract is known as MTM
Margin.
Maintenance margin:
The investor must keep the futures account equity equal to or greater
than certain percentage of the amount deposited as Initial Margin. If the equity
goes less than that percentage of Initial margin, then the investor receives a call
for an additional deposit of cash known as Maintenance Margin to bring the
equity up to the Initial margin.
Role of Margins:
The role of margins in the futures contract is explained in the following
example.
S sold a Satyam February futures contract to B at Rs.300; the following
table shows the effect of margins on the contract. The contract size of Satyam
26. is 1200. The initial margin amount is say Rs.20000, the maintenance margin is
65% of Initial margin.
DAY PRICE OF SATYAM EFFECT ON
BUYER (B)
EFFECT ON
SELLER (S)
REMARKS
1
2
3
4
300.00
311(price increased)
287
305
MTM
P/L
Bal.in Margin
+13,200
-28,800
+15,400
+21,600
MTM
P/L
Bal.in Margin
-13,200
+13,200
+28,800
-21,600
Contract is
entered and
initial margin
is deposited.
B got profit
and S got
loss, S
deposited
maintenance
margin.
B got loss and
deposited
maintenance
margin.
B got profit, S
got loss.
Contract
settled at 305,
totally B got
profit and S
got loss.
Pricing the Futures:
27. The fair value of the futures contract is derived from a model known as
the Cost of Carry model. This model gives the fair value of the futures
contract.
Cost of Carry Model:
F=S (1+r-q)t
Where
F – Futures Price
S – Spot price of the Underlying
r – Cost of Financing
q – Expected Dividend Yield
T – Holding Period.
FUTURES TERMINOLOGY:
Spot price:
The price at which an asset trades in the spot market.
Futures price:
The price at which the futures contract trades in the futures market.
Contract cycle:
The period over which a contract trades. The index futures contracts on
the NSE have one-month, two-months and three-month expiry cycles which
expire on the last Thursday of the month. Thus a January expiration contract
expires on the last Thursday of January and a February expiration contract
ceases trading on the last Thursday of February. On the Friday following the
28. last Thursday, a new contract having a three-month expiry is introduced for
trading.
Expiry date:
It is the date specified in the futures contract. This is the last day on
which the contract will be traded, at the end of which it will cease to exist.
Contract size:
The amount of asset that has to be delivered under one contract. For
instance, the contract size on NSE’s futures market is 200 Nifties.
Basis:
In the context of financial futures, basis can be defined as the futures
price minus the spot price. There will be a different basis for each delivery
month for each contract. In a normal market, basis will be positive. This
reflects that futures prices normally exceed spot prices.
Cost of carry:
The relationship between futures prices and spot prices can be
summarized in terms of what is known as the cost of carry. This measures the
storage cost plus the interest that is paid to finance the asset less the income
earned on the asset.
Open Interest:
Total outstanding long or short positions in the market at any specific
time. As total long positions for market would be equal to short positions, for
calculation of open interest, only one side of the contract is counted.
29. OPTIONS
DEFINITION:
Option is a type of contract between two persons where one grants the
other the right to buy a specific asset at a specific price within a specified time
period. Alternatively the contract may grant the other person the right to sell a
specific asset at a specific price within a specific time period. In order to have
this right, the option buyer has to pay the seller of the option premium.
The assets on which options can be derived are stocks, commodities,
indexes etc. If the underlying asset is the financial asset, then the options are
financial options like stock options, currency options, index options etc, and if
the underlying asset is the non-financial asset the options are non-financial
options like commodity options.
PROPERTIES OF OPTIONS:
Options have several unique properties that set them apart from other
securities. The following are the properties of options:
♦ Limited Loss
♦ High Leverage Potential
♦ Limited Life
30. PARTIES IN AN OPTION CONTRACT:
1. Buyer of the Option:
The buyer of an option is one who by paying option premium
buys the right but not the obligation to exercise his option on
seller/writer.
2. Writer/Seller of the Option:
The writer of a call/put options is the one who receives the
option premium and is there by obligated to sell/buy the asset if the
buyer exercises the option on him.
.
TYPES OF OPTIONS:
The options are classified into various types on the basis of various
variables. The following are the various types of options:
I) On the basis of the Underlying asset:
On the basis of the underlying asset the options are divided into two types:
INDEX OPTIONS:
The Index options have the underlying asset as the index.
STOCK OPTIONS:
A stock option gives the buyer of the option the right to buy/sell stock at
a specified price. Stock options are options on the individual stocks, there
are currently more than 50 stocks are trading in this segment.
31. II. On the basis of the market movement:
On the basis of the market movement the options are divided into two
types. They are:
CALL OPTION:
A call options is bought by an investor when he seems that the stock
price moves upwards. A call option gives the holder of the option the right
but not the obligation to buy an asset by a certain date for a certain price.
PUT OPTION:
A put option is bought by an investor when he seems that the stock
price moves downwards. A put option gives the holder of the option right
but not the obligation to sell an asset by a certain date for a certain price.
III. On the basis of exercise of Option:
On the basis of the exercising of the option, the options are classified
into two categories.
AMERICAN OPTION:
American options are options that can be exercised at any time up to the
expiration date, most exchange-traded options are American.
EUROPEAN OPTION:
European options are options that can be exercised only on the
expiration date itself. European options are easier to analyze than
American options.
32. PAY-OFF PROFILE FOR BUYER OF A CALL OPTION:
The pay-off of a buyer options depends on the spot price of the
underlying asset. The following graph shows the pay-off of buyer of a call
option:
S
-
Strike
price
OTM -
Out of
the
Money
SP - Premium/Loss ATM - At the Money
E1 - Spot price 1 ITM - In The Money
E2 - Spot price 2
SR - profit at spot price E1
CASE 1: (Spot price > Strike Price)
As the spot price (E1) of the underlying asset is more than strike price
(S). The buyer gets the profit of (SR), if price increases more than E1 than
profit also increase more than SR.
CASE 2: (Sport price < Strike Price)
As the spot price (E2) of the underlying asset is less than strike price (s).
The buyer gets loss of (SP), if price goes down less than E2 than also his loss is
limited to his premium (SP).
PAY – OFF PROFILE FOR SELLER OF A CALL OPTION:
33. The pay-off of seller of the call option depends on the spot price of the
underlying asset. The following graph shows the pay-off of seller of a call
option:
S - Strike price ITM - In the Money
SP - Premium/profit ATM - At the Money
E1 - Spot price 1 OTM - Out of The Money
E2 - Spot price 2
SR - profit at spot price E1
CASE 1: (Spot price < Strike price)
As the spot price (E1) of the underlying asset is less than strike price
(S). The seller gets the profit of (SP), if the price decreases less than E1 than
also profit of the seller does not exceed (SP).
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset is more than strike price
(S). The seller gets loss of (SR), if price goes more less than E2 than the loss of
the seller also increase more than (SR).
PAY-OFF PROFILE FOR BUYER OF A PUT OPTION:
34. The payoff of buyer of the option depends on the spot price of the
underlying asset. The following graph shows the pay off of the buyer of a call
option:
S - Strike price ITM - In The Money
SP - Premium/profit OTM - Out of The Money
E1 - Spot price 1 ATM - At The Money
E2 - Spot price 2
SR - profit at spot price E1
CASE 1: (Spot price < Strike price)
As the spot price (E1) of the underlying asset is less than strike price
(S). The buyer gets the profit of (SR), if price decreases less than E1 than the
profit also increases more than (SR).
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset is more than strike price
(s), the buyer gets loss of (SP), if price goes more than E2 than the loss of the
buyer is limited to his premium (SP).
PAY-OFF PROFILE FOR SELLER OF A PUT OPTION:
35. The pay off of seller of the option depends on the spot price of the
underlying asset. The following graph shows the pay-off of seller of a put
option:
S - Strike price ITM - In The Money
SP - Premium/profit ATM - At The Money
E1 - Spot price 1 OTM - Out of The Money
E2 - Spot price 2
SR - profit at spot price E1
CASE 1: (Spot price < Strike price)
As the spot price (E1) of the underlying asset is less than strike price
(S), the seller gets the loss of (SR), if price decreases less than E1 than the loss
also increases more than (SR).
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset is more than strike price
(S), the seller gets profit of (SP), if price goes more than E2 than the profit of
the seller is limited to his premium (SP).
FACTORS AFFECTING THE PRICE OF AN OPTION:
36. The following are the various factors that affect the price of an option.
They are:
Stock price:
The pay-off from a call option is the amount by which the stock price
exceeds the strike price. Call options therefore become more valuable as the
stock price increases and vice versa. The pay-off from a put option is the
amount; by which the strike price exceeds the stock price. Put options
therefore become more valuable as the stock price increases and vice versa.
Strike price:
In the case of a call, as the strike price increases, the stock price has to
make a larger upward move for the option to go in-the –money. Therefore, for
a call, as the strike price increases, options become less valuable and as strike
price decreases, options become more valuable.
Time to expiration:
Both Put and Call American options become more valuable as the time
to expiration increases.
Volatility:
The volatility of n a stock price is a measure of uncertain about future
stock price movements. As volatility increases, the chance that the stock will
do very well or very poor increases. The value of both Calls and Puts
therefore increase as volatility increase.
Risk-free interest rate:
The put option prices decline as the risk – free rate increases where as
the prices of calls always increase as the risk – free interest rate increases.
Dividends:
Dividends have the effect of reducing the stock price on the ex dividend
date. This has a negative effect on the value of call options and a positive
affect on the value of put options.
PRICING OPTIONS
37. The Black Scholes formulas for the prices of European Calls and puts on a non-
dividend paying stock are:
CALL OPTION:
C = SN (D1)-Xe-rt
N(D2)
PUT OPTION:
P = Xe-rt
N(-D2)-SN (-D2)
C – VALUE OF CALL OPTION
S – SPOT PRICE OF STOCK
X – STRIKE PRICE
r - ANNUAL RISK FREE RETURN
t – CONTRACT CYCLE
D1 – (ln(s/x) +(r+ )/2) t)/
D2 – D1-
Options Terminology:
Strike Price:
The price specified in the options contract is known as the Strike price
or Exercise price.
Option Premium:
Option premium is the price paid by the option buyer to the option
seller.
Expiration Date:
38. The date specified in the options contract is known as the expiration
date.
In-The-Money Option:
An in the money option is an option that would lead to a positive cash
inflow to the holder if it is exercised immediately.
At-The-Money Option:
An at the money option is an option that would lead to zero cash flow if
it is exercised immediately.
Out-Of-The-Money Option:
An out of the money option is an option that would lead to a negative
cash flow if it is exercised immediately.
Intrinsic Value of an Option:
The intrinsic value of an option is ITM, if option is ITM. If the option
is OTM, its intrinsic value is ZERO.
Time Value of an Option:
The time value of an option is the difference between its premium and
its intrinsic value.
DESCRIPTION OF THE METHOD:
The following are the steps involved in the study.
39. 1. Selection of the scrip:
The scrip selection is done on a random basis and the scrip selected is
RELIANCE COMMUNICATIONS. The lot size of the scrip is 500.
Profitability position of the option holder and option writer is studied.
2. Data collection:
The data of the RELIANCE COMMUNICATIONS has been collected
from the “The Economic Times” and the internet. The data consists of the
March contract and the period of data collection is from 30th
December 2008 to
31st
January 2008.
3. Analysis:
The analysis consists of the tabulation of the data assessing the
profitability positions of the option holder and the option writer, representing
the data with graphs and making the interpretations using the data.
41. The objective of this analysis is to evaluate the profit/loss position of
option holder and option writer. This analysis is based on the sample data,
taken RELIANCE COMMUNICATIONS scrip. This analysis considered the
March ending contract of the SBI. The lot size of SBI is 500. The time period
in which this analysis is done is from 30/12/2007 To 31/01/2008
Price of SBI in the Cash Market.
DATE
MARKET
PRICE
30-Dec-
07 685.1
31-Dec-
07 714.65
1-Jan-
08 695.6
2-Jan-
08 706.4
3-Jan-
08 717.1
4-Jan-
08 713.45
7-Jan-
08 726.6
8-Jan-
08 724.05
9-Jan-
08 720.85
10-Jan-
08 742.1
11-Jan-
08 736.9
14-jan-
08 734.1
15-Jan-
08 731.75
16-Jan-
08 728
17-Jan-
08 726.2
18-Jan-
08
727.8
21-Jan-
08 722.7
22-Jan- 693.25
43. The closing price of SBI at the end of the contract period is 654.80 and this is
considered as settlement price.
The following table explains the amount of transaction between option holder
and option writer.
The first column explains the trading date.
The second column explains the market price in cash segment on that date.
The call column explains the call/put options which are considered. Every
call/put has three sub columns.
The first column consists of the premium value per share of the contracts,
second column consists of the volume of the contract, and the third column
consists of total premium value paid by the buyer.
NET PAYOFF FOR CALL OPTION HOLDERS AND WRITERS
MARKET
PRICE CALLS
VOLUME
('000)
PREMIUM
('000)
PROFIT
TO
HOLDER
('000)
NET
PROFIT TO
HOLDER
('000)
NET
PROFIT
TO BUYER
('000)
654.8 640 199.5 3634.15 2952.6 -681.55 681.55
654.8 660 1463 21600.35 0 -21600.35 21600.35
654.8 680 2008 51831.53 0 -51831.525 51831.525
654.8 700 3297 85603.45 0 -85603.45 85603.45
654.8 720 3796.5 74881.93 0 -74881.925 74881.925
654.8 740 2309.5 30208.4 0 -30208.4 30208.4
OBSERVATIONS AND FINDINGS:
44. Six call options are considered with six different strike prices.
The current market price on the expiry date is Rs.654.80 and this is
considered as final settlement price.
The premium paid by the option holders whose strike price is far and
greater than the current market price have paid high amounts of premium
than those who are near to the current market price.
The call option holders whose strike price is less than the current market
price are said to be In-The-Money. The calls with strike price 640 are said
to be In-The-Money, since, if they exercise they will get profits.
The call option holders whose strike price is less than the current market
price are said to be Out-Of-The-Money. The calls with strike price of 660,
680,700,720,740 are said to be Out-Of-The-Money, since, if they exercise,
they will get losses.
GRAPH SHOWING THE PREMIUM AMOUNT TRANSACTED FOR A CALL OPTION
3634.15
21600.35
51831.525
85603.45
74881.925
30208.4
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
1 2 3 4 5 6
CALL OPTIONS
PREMIUM('000)
PREMIUM
FINDINGS:
45. The premium of the options with strike price of 700 and 720 is high, since most
of the period of the contract the cash market is moving around 700 mark.
GRAPH SHOWING PROFIT OF CALL OPTION HOLDER
2952.6
0 0 0 0 00
500
1000
1500
2000
2500
3000
3500
1 2 3 4 5 6
CALL OPTIONS
PROFIT('000)
PROFIT
FINDINGS:
The contracts with strike price 660, 680, 700, 720, 740 get no profit, since
their strike price is more than the settlement price.
The contract with strike price 640 gets the profit.
46. NET PAY OFF OF PUT OPTION HOLDERS AND WRITERS.
MARKET
PRICE PUTS
VOLUME
('000)
PREMIUM
('000)
PROFIT TO
HOLDER
('000)
NET PROFIT
TO HOLDER
('000)
NET PROFIT
TO WRITER
('000)
654.8 600 25 47.625 0 -47.625 47.625
654.8 640 323.5 993.5 0 -993.5 993.5
654.8 660 1239.5 9506.575 6445.4 -3061.175 3061.175
654.8 680 1399.5 21894 35267.4 13373.4 -13373.4
654.8 700 1858 30871.28 83981.6 53110.325 -53110.325
654.8 720 1468.5 23727.83 95746.2 72018.375 -72018.375
OBSERVATIONS AND FINDINGS:
Six put options are considered with six different strike prices.
The current market price on the expiry date is Rs.654.80 and this is
considered as the final settlement price.
The premium paid by the option holders whose strike price is far and
greater than the current market price have paid high amount of premium
than those who are near to the current market price.
The put option holders whose strike price is more than the current market
price are said to be In-The-Money. The puts with strike price
660,680,700,720 are said to be In-The-Money, since, if they exercise they
will get profits.
47. The put option holders whose strike price is less than the current market
price are said to be Out-Of-The-Money. The puts with strike price of
600,640 are said to be Out-Of-The-Money, since, if they exercise their puts,
they will get losses.
GRAPH SHOWING THE AMOUNT OF PREMIUM TRANSACTED OF PUT OPTIONS
47.625
993.5
9506.575
21894
30871.275
23727.825
0
5000
10000
15000
20000
25000
30000
35000
1 2 3 4 5 6
PUT OPTIONS
PREMIUM('000)
PREMIUM
FINDINGS:
The premium of the option with strike price 700 is higher when compared
to other strike prices. This is because of the movement of the cash market
price of the SBI between 640 and 720.
48. GRAPH SHOWING PROFIT OF PUT OPTIONS HOLDER
0 0
6445.4
35267.4
83981.6
95746.2
0
20000
40000
60000
80000
100000
120000
1 2 3 4 5 6
PUT OPTIONS
PROFIT('000)
PROFIT
FINDINGS:
The put option holders whose strike price is more than the settlement price
are In-The-Money.
The put options whose strike price is less than the settlement price are Out-
Of-The-Money.
50. GRAPH SHOWING THE PRICE MOVEMENT OF FUTURES Vs CASH MARKET
620
640
660
680
700
720
740
760
22-Feb-05 27-Feb-05 4-Mar-05 9-Mar-05 14-Mar-05 19-Mar-05 24-Mar-05 29-Mar-05 3-Apr-05
DATES
PRICE(Rs.)
FUTURES
CASH MARKET
OBSERVATIONS AND FINDINGS:
The cash market price of the SBI is moving along with the futures price.
If the buy price of the futures is less than the settlement price, then the
buyer of the futures get profit.
If the selling price of the futures is less than the settlement price, then the
seller incur losses.
52. SUMMARY
Derivatives market is an innovation to cash market. Approximately its
daily turnover reaches to the equal stage of cash market.
Presently the available scrips in futures are 89 and in options segment are
62.
In cash market the profit/loss of the investor depends on the market price of
the underlying asset. The investor may incur huge profits or he may incur
huge losses. But in derivatives segment the investor enjoys huge profits
with limited downside.
In cash market the investor has to pay the total money, but in derivatives
the investor has to pay premiums or margins, which are some percentage of
total money.
Derivatives are mostly used for hedging purpose.
In derivative segment the profit/loss of the option holder/option writer is
purely depended on the fluctuations of the underlying asset.
53. CONCLUSIONS
In bullish market the call option writer incurs more losses so the investor is
suggested to go for a call option to hold, where as the put option holder
suffers in a bullish market, so he is suggested to write a put option.
In bearish market the call option holder will incur more losses so the
investor is suggested to go for a call option to write, where as the put option
writer will get more losses, so he is suggested to hold a put option.
In the above analysis the market price of State Bank of India is having low
volatility, so the call option writers enjoy more profits to holders.
54. RECOMMENDATIONS
The derivative market is newly started in India and it is not known by every
investor, so SEBI has to take steps to create awareness among the investors
about the derivative segment.
In order to increase the derivatives market in India, SEBI should revise
some of their regulations like contract size, participation of FII in the
derivatives market.
Contract size should be minimized because small investors cannot afford
this much of huge premiums.
SEBI has to take further steps in the risk management mechanism.
SEBI has to take measures to use effectively the derivatives segment as a
tool of hedging.
56. BIBLIOGRAPHY
BOOKS:
FUTURES AND OPTIONS - N.D.VOHRA,
B.R.BAGRI
DERIVATIVES CORE MODULE
WORKBOOK - NCFM MATERIAL
FUTURES AND OPTIONS - R.MAHAJAN
WEBSITES:
www.nseindia.com
www.equitymaster.com
www.peninsularonline.com
NEWS EDITIONS:
THE ECONOMIC TIMES
BUSINESS LINE
