This document is a project report submitted as part of an internship at JM Financial in their Derivatives division. It includes an overview of JM Financial, including their history, vision, values, and the services they provide. It also provides a high-level overview of the financial markets, including the primary market, secondary market, and derivatives segment. The report focuses on derivatives, including the origins and development of derivatives in India, as well as definitions and explanations of different derivative products like forwards, futures, and options contracts.

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K. S. SCHOOL OF BUSINESS MANAGEMENT
YEAR: - 2013-2014
JM FINANCIAL
Derivatives
Summer Internship Project

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PROJECT REPORT
ON
SUMMER TRAINING
ON
“J M FINANCIAL”
(DERIVATIVES)
4TH YEAR MBA
ROLL NO. “4036”
SUBMITTED TO:-
K.S.SCHOOL OF BUSINESS MANAGEMENT
GUJARAT UNIVERSITY
AHMEDABAD-380009

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ACKNOWLEDGEMENT:
Success can never be achieved through individual effort but through proper guidance and
support.
First of all I would like to thank Dr.SARLA ACHUTHAN and K.S.School of Business
`Management for giving me such a wonderful opportunity to explore my potential and for
increasing the practical knowledge of real corporate field.
My sincere thanks to Mrs.Ingita Jain for giving me guidance on this summer project.
I would like to take this opportunity to thank my project guide MR. ANKIT ARORA, THE
DERIVATIVE EXPERT in JM FINANCIAL for his constant interest, involvement and
support and faculty guides who helped me to complete this challenging task.
I would like to extend my gratitude to Mr. PRANAV PARIKH, Mr. KAUSHAL SUTRIA THE
FUNDAMENTAL ANALYST , Mr. BARGAV DAVE, THE TECHNICLE ANALYST ,Mr.
SAMEER MEHTA, for giving me such an opportunity and making me learn things which
added a great value to my knowledge.
Besides, I thank all those invisible hands without whose contribution this project would
not have been possible.

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PREFACE:
“Learning only can’t suffice a person and make him walk on the path of success unless and
until he is given practical knowledge.”
Practical knowledge leads a man toward perfection.
The work summer project work is most important for having practical knowledge of real
corporate world.
This project is made on the summer training. I have done summer training in broking firm
“J M FINANCIAL.”
This project report refers to the indepth concept of derivative options and their
implications. It shows the overview of secondary market.
This project is compilation of information collected from various sources such as internet,
library, NCFM authority and company itself.
This project work has given me an opportunity to enhance and develop my theoretical as
well as practical knowledge. I have also learnt how to work in the real corporate life and
how to manage the work life balance. It is also helpful in improving my communication
skills and personal skills.

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TABLE OF CONTENTS
CHAPTER – I
JM FINANCIAL OVERVIEW--------------------------------------- [9]
COMPANY PROFILE
HISTORY
BACKGROUND
FUNCTIONS
CHAPTER– II
FINANCIAL SEGMENT OVERVIEW------------------- ----------------------------- [16]
PRIMARY MARKET
SECONDARY MARKET
CHAPTER-III
DERIVATIVE---------------------------- [19]
ORIGINE OF DERIVATIVE
EMERGENCE OF DERIVATIVE
DEVELOPMENT OF DERIVATIVE IN INDIA
MARKET PLAYERS OF DERIVATIVE
COMPONENT OF DERIVATIVE

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CHAPTER-IV
FORWARD CONTRACT-------------------------------------- [37]
DEFINATION
FEATURES
USE & LIMITATIONS
CHAPTER-V
FUTURE CONTRACT-------------------------------------- [40]
DEFINITION
FEATURES
MARGINE
CHAPTER-VI
OPTIONS CONTRACT ------------------------ [47]
DEFINITION
CALL OPTION
PUT OPTION
CHAPTER-VII
MARKET TRENDS & OPTIONS STRATEGY OVERVIEW------------------------ [50]
TYPES OF MARKET TREND
OPTION STRATEGY ACCORDING TO MARKET TREND

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CHAPTER-VIII
OPTIONS STRATEGY ---------------- ---------------------------- [57]
CHAPTER-IX
CONCLUSION------------------------------------------- [70]
FINDINGS
SUGGETIONS
LIMITATIONS
CONCLUTIONS
CHAPTER-X
BIBLIOGRAPHY-------------- ---------------------------- [74]
WEBOGRAPHY
ANNEXUTERS

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COMPANY OVERVIEW:
COMPANY PROFILE
JM Financial Limited, the flagship listed company of the Group, is led by the Chairman &
Managing Director, Mr. Nimesh Kampani. The members of the Board meet periodically to
discuss and review the performance of the Company.
REGISTERED OFFICE
141, Maker Chambers III
Nariman Point
Mumbai 400 021
India
Tel: 91 22 6630 3030
COMPANY LOGO
Dynamic Growth Triangle
The red triangle represents movement, pace, agility and dynamism. It positions JM
Financial as a distinct, powerful and adaptable financial force.

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The Colour Blue
Blue is the colour of the sky and sea meaning abundance. It is associated with depth and
stability. It represents knowledge, integrity and expertise.
HISTORY
The Company was incorporated as a private limited company on 30th January 1986 in the
name of J M Share & Stock Brokers Pvt. Ltd.
The Company has been promoted by JMFICS to engage directly or indirectly in the
business of share and stock broking, finance broking, underwriting of securities including
shares, debentures, etc. The present issued, Equity Share JMFICS and, therefore, by virtue
of Section 4 of the Act, the Company is a subsidiary of JMFICS.
On JMFICS becoming a deemed public limited company by virtue of the Companies
(Amendment) Act, 1988 read with the Companies Act, 1956, on 15th June, 1988, the
Company also became a deemed public limited company as of that date pursuant to the
applicable provisions of the Companies Act, 1956.
BACKGROUND
JM Financial is an integrated financial services group, offering a wide range of services
to a significant clientele that includes corporations, financial institutions, high net‐worth
individuals and retail investors.
The company has interests in investment banking, institutional equity sales, trading,
research and broking, private and corporate wealth management, equity broking,
portfolio management, asset management, Non‐Banking Finance Company activities,
private equity and asset reconstruction.
JM Financial Services Private Ltd is the dedicated financial services arm of the JM
Financial Group . JM Financial are one of the largest brokerage firms in India, offering
comprehensive investment advisory and investment management services to
institutions, banks, corporate, ultra high net‐worth individuals and Family offices.

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With more than three decades of experience & expertise in managing wealth, the
company offer clients guidance to grow, protect & transfer their wealth.
An exclusive level of personal attention, research capabilities and in‐depth capital
market expertise enables the company to design and execute customised investment
solutions for our clients. Company provide comprehensive financial planning, research‐based
investment consulting services and execution capabilities.
OVERVEIW
What Company Does
‣ The Company is among the largest distributors of third party products (Mutual
funds/IPO).
‣ The company have a strong network of more than 25,000 IFAs spread across
India.
‣ The company facilitate client transactions with a diverse group of financial
institutions, investment funds, governments and individuals, trading of and
investing in fixed income and equity products and derivatives on these
products.
JM’s VISION
To be the most trusted partner for every stakeholder in the financial world.
Its VALUES

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The company have always sought to be a value‐driven organisation, where our values
direct our growth and success.

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It’s PHILOSOPHY
‣ The company believe self‐trust is the first step towards trusting others.
‣ Its philosophy is to provide advisory services to make your investments as
successful as you.
‣ For JM Financial anything worth doing is worth doing well.
Its Belief
• Earning trust is a process (it can be gained and lost every day!)
• Sharing trust creates great teams (whether between employees or between
organisations)
• Being trustworthy is the most efficient way of generating and retaining long‐term
busines

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FINANCIAL MARKET
OVERVIEW:

14. PRIMARY
MARKET
14
FINANCIAL MARKET OVERVIEW :
CASH
SAGMENT
CASH SEGMENT
FINANCIAL
MARKET
SECOANDARY
MARKET
DERIVATIVE
SAGMENT
FUTURES OPTIONS
CALL PUT
FOWARDS
IPO
MF
This is the most preferred segment. This is safe one. Those who have enough fund, should go
for this segment.
In this segment you can buy shares within your capacity by making 100 % payment and
taking delivery. You have to wait till you get your favorable rates and then sell the shares. You
can buy back the same shares when the rates are reasonably low.
GOVT.
SECURITIES

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Your ownership of position remains with you unless and until you have squared off. Such
people are known as Investors. They don’t undergo frequent or day-to-day trading. It is
observed that investors earn a good percentage of profit and that also without any tension.
DERIVATIVE SEGMENT
This is the segment where one can do higher volume with less fund compared to Cash
Segment. There are two parts in this segment. (1) Future Trading & (2) Option Trading
CASH SEGMENT
DERIVATIVES
100 % payment is to be made for
buying and similarly 100 % payment is
received while selling
Ownership – Ownership remains with
you unless and until you have squared
off the position.
Quantity – Any quantity of shares can
be bought or sold. There is no
compulsion
Delivery is to be given or taken.
Prefixed Margin say 20-40 % is to be paid
as Deposit (known as margin) to meet with
any risk or liability due to the trade done.
Ownership of the position remains with
you until you have squared off or till the
last Thursday of the Contract Month.
One cannot buy any odd quantity but has
to buy or sell the Lot in prefixed size.
There is nothing like delivery.

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DERIVATIVES
OVERVIEW:

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DERIVATIVES
The term derivatives are used to refer to financial instruments which derive
their value from some underlying assets.
The underlying assets could be:
 Interest Rate derivative
 Foreign Exchange derivative
 Credit derivative
 Equity derivative
 Commodity derivative
Other examples of underlying exchangeables are:
 Property (mortgage) derivatives
 Economic derivatives that pay off according to economic reports[] as measured and
reported by national statistical agencies
 Freight derivatives
 Inflation derivatives
 Weather derivatives
 Insurance derivatives
 Emissions derivatives

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DERIVATIVES
COMMODITY
DERIVATIVES
TENGIBLE
GOLD
SILVER
INTENGIBLE
WETHER
TIME
FINANCIAL
DERIVATIVES
EQUITY
DERIVATIVES
INDEX
PRODUCT
INDEX
FUTURES
INDEX
OPTIONS
DERIVATIV
ES ON
SECURITIES
STOCK
FUTURE
STOCK
OPTION
REAL
ESTATE
FOREIGN
EXCHANGE
DEBT
INTEREST
RATE
PRODUCTS
SECURITIES
BONDS
T-BILLS

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EMERGENCE OF DERIVATIVES:
Derivative products initially emerged as hedging devices against fluctuations in
commodity prices and commodity-linked derivatives remained the sole form of such
products for almost three hundred years. The financial derivatives came into spotlight
in post-1970 period due to growing instability in the financial markets. However,
since their emergence, these products have become very popular and by 1990s, they
accounted for about two-thirds of total transactions in derivative products.
The basic purpose of derivatives is to transfer the price risk (inherent in
fluctuations of the asset prices) from one party to another.
They facilitate the allocation of risk to those who are willing to take it.
E.g.: On Nov 1, 2009 a rice farmer may wish to sell his harvest at the future date
(say ‐ Jan 1, 2010) for a predetermined fixed price to eliminate the risk of change
in prices by that date. Such a transaction is an example of a derivatives contract.
The price of derivatives contract is driven by the spot price of rice which is the
underlying.
We will focus on EQUITY DERIVETIVES only.

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ORIGIN OF DERIVATIVES:
The earliest evidence of derivatives can be traced back to ancient Greece.
Derivatives were is existence in some or the other form since ancient time. The
advent of modern day derivatives was attributed to protect farmers against
decline in crop prices.
The securities contract (regulation) act, 1956 defines “derivatives” to include:
I. A security derived from a debt instrument, share loan whether secured or
unsecured, security, risk instrument or contract for difference or any other form.

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Development of derivatives market in India:
The first step towards introduction of derivatives trading in India was the promulgation
of The Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition
on Options in securities. The market for derivatives, however, did not take off, as there
was no regulatory framework to govern trading of derivatives. SEBI set up a 24–
member Committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to
develop appropriate regulatory framework for derivatives trading in India. The
committee submitted its report on March 17, 1998 prescribing necessary pre–
conditions for introduction of derivatives trading in India. The committee recommended
that derivatives should be declared as ‘securities’ so that regulatory framework
applicable to trading of ‘securities’ could also govern trading of securities. SEBI also set
up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend
measures for risk containment in derivatives market in India. The report, which was
submitted in October 1998, worked out the operational details of margining system,
methodology for charging initial margins, broker net worth, deposit requirement
and real–time monitoring requirements.
The Securities Contract Regulation Act (SCRA) was amended in December 1999 to
include derivatives within the ambit of ‘securities’ and the regulatory framework was
developed for governing derivatives trading. The act also made it clear that derivative
shall be legal and valid only if such contracts are traded on a recognized stock exchange,
thus precluding OTC derivatives. The government also rescinded in March 2000,
thethree– decade old notification, which prohibited forward trading in securities.
Derivatives trading commenced in India in June 2000 after SEBI granted the final
approval to this effect in May 2001. SEBI permitted the derivative segments of two stock
exchanges, NSE and BSE, and their clearing house/corporation to commence trading
and settlement in approved derivatives contracts. To begin with, SEBI approved trading
in index futures contracts based on S&P CNX Nifty and BSE–30(Sensex) index. This was
followed by approval for trading in options based on these two indexes and options on
individual securities.
The trading in BSE Sensex options commenced on June 4, 2001 and the trading in
options on individual securities commenced in July 2001. Futures contracts on
individual stocks were launched in November 2001. The derivatives trading on NSE
commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index
options commenced on June 4, 2001 and trading in options on individual securities
commenced on July 2, 2001.
Single stock futures were launched on November 9, 2001. The index futures and options
contract on NSE are based on S&P CNX.
Trading and settlement in derivative contracts is done in accordance with the rules,

22. byelaws, and regulations of the respective exchanges and their
clearing house/corporation duly approved by SEBI and notified in the official gazette.
Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded
derivative products.
The following are some observations based on the trading statistics provided in the NSE
report on the futures and options (F&O):
• Single‐stock futures continue to account for a sizable proportion of the F&O segment.
It constituted 70 per cent of the total turnover during June 2002. A primary reason
attributed to this phenomenon is that traders are comfortable with single‐stock futures
22
than equity options, as the former closely resembles the erstwhile badla system.
• On relative terms, volumes in the index options segment continues to remain poor.
This may be due to the low volatility of the spot index. Typically, options are considered
more valuable when the volatility of the underlying (in this case, the index) is high. A
related issue is that brokers do not earn high commissions by recommending index
options to their clients, because low volatility leads to higher waiting time for round‐trips.
• Put volumes in the index options and equity options segment have increased since
January 2002. The call‐put volumes in index options have decreased from 2.86 in
January 2002 to 1.32 in June. The fall in call‐put volumes ratio suggests that the traders
are increasingly becoming pessimistic on the market.
• Farther month futures contracts are still not actively traded. Trading in equity options
on most stocks for even the next month was non‐existent.
• Daily option price variations suggest that traders use the F&O segment as a less risky
alternative (read substitute) to generate profits from the stock price movements. The
fact that the option premiums tail intra‐day stock prices is evidence to this. Calls on
Satyam fall, while puts rise when Satyam falls intra‐day.
If calls and puts are not looked as just substitutes for spot trading, the intra‐day stock
price variations should not have a one‐to‐one impact on the option premiums.

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TYPES OF TRADING:
OTC and Exchange-traded
In broad terms, there are two groups of derivative contracts, which are distinguished by
the way they are traded in the market:
 Over-the-counter
(OTC) derivatives are contracts that are traded (and privately negotiated) directly
between two parties, without going through an exchange or other intermediary.
Products such as swaps, forward rate agreements, and exotic options are almost
always traded in this way. The OTC derivative market is the largest market for
derivatives, and is largely unregulated with respect to disclosure of information
between the parties, since the OTC market is made up of banks and other highly
sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult
because trades can occur in private, without activity being visible on any exchange.
According to the Bank for International Settlements, the total outstanding notional
amount is US$684 trillion (as of June 2008).[6] Of this total notional amount, 67% are
interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange
contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other.
Because OTC derivatives are not traded on an exchange, there is no central counter-party.
Therefore, they are subject to counter-party risk, like an ordinary contract, since
each counter-party relies on the other to perform.
Exchange-traded derivative contracts
(ETD) are those derivatives instruments that are traded via specialized derivatives
exchanges or other exchanges. A derivatives exchange is a market where individuals
trade standardized contracts that have been defined by the exchange.A derivatives
exchange acts as an intermediary to all related transactions, and takes Initial margin
from both sides of the trade to act as a guarantee.

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MARKET PLAYERS OF DERIVATIVES:
SPECULATORS ARBITRAGEURS
HEDGERS:
HEDGERS
The objective of this kind of traders is to reduce the risk. They are not in the
derivatives market to make profit. They are in it to safeguard their existing position.
Derivatives allow risk related to the price of the underlying asset to be transferred
from one party to another.
For example, a wheat farmer and a miller could sign a futures contract to have reduced
a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the
availability of wheat. From another perspective, the farmer and the miller both reduce
a risk and acquire a risk when they sign the futures contract: the farmer reduces the
risk that the price of wheat will fall below the price specified in the contract and
acquires the risk that the price of wheat will rise above the price specified in the
contract (thereby losing additional income that he could have earned). The miller, on
the other hand, acquires the risk that the price of wheat will fall below the price

25. specified in the contract (thereby paying more in the future than he otherwise would
have) and reduces the risk that the price of wheat will rise above the price specified in
the contract. In this sense, one party is the insurer (risk taker) for one type of risk, and
the counter-party is the insurer (risk taker) for another type of risk.
25
Apart from EQUITY MARKETS, Hedging is common in the foreign exchange markets
where the fluctuations in the foreign exchange rate have to be taken care of in the
foreign currency transactions. Derivatives can serve legitimate business purposes.
For example, a corporation borrows a large sum of money at a specific interest
rate.The rate of interest on the loan resets every six months. The corporation is
concerned that the rate of interest may be much higher in six months. The corporation
could buy a forward rate agreement (FRA), which is a contract to pay a fixed rate of
interest six months after purchases on a notional amount of money. If the interest rate
after six months is above the contract rate, the seller will pay the difference to the
corporation, or FRA buyer. If the rate is lower, the corporation will pay the difference
to the seller. The purchase of the FRA serves to reduce the uncertainty concerning the
rate increase and stabilize earnings.
SPECULATORS:
Speculators are some what like a middle man. They are never interested in actual
owing the commodity. They will just buy from one end and sell it to the other in
anticipation of future price movements. They actually bet on the future movement in
the price of an asset.
They are the second major group of futures players. These participants include
independent floor traders and investors. They handle trades for their personal clients
or brokerage firms.
Buying a futures contract in anticipation of price increases is known as ‘going long’.
Selling a futures contract in anticipation of a price decrease is known as ‘going short’.
Speculative participation in futures trading has increased with the availability of
alternative methods of participation.
Speculators have certain advantages over other investments they are as follows:

26.  If the trader’s judgment is good, he can make more money in the futures market
faster because prices tend, on average, to change more quickly than real estate
or stock prices.
 Futures are highly leveraged investments. The trader puts up a small fraction of
the value of the underlying contract as margin, yet he can ride on the full value
of the contract as it moves up and down. The money he puts up is not a down
payment on the underlying contract, but a performance bond. The actual value
of the contract is only exchanged on those rare occasions when delivery takes
place.
26
Arbitrators :
Arbitrators are in the market for the risk free profit opportunity.
Arbitrators are the person who take the advantage of a discrepancy between prices in
two different markets. If he finds future prices of a stock edging out with the cash price,
he will take offsetting positions in both the markets to lock in a profit.
Misleading arbitrage opportunity:
 When company declare dividend more than 10%. Investors think that there
exist arbitrage opportunity, and take long position. But it is not actually like this.
Because the future prices have already discounted in the market.
 When it is likely to be that there is an arbitrage opportunity but bechause of
transaction charges, there is no risk free profit.
Charges Leviable Trading(Cash) Delivery(Cash) FUTURE
Rate Rate Rate
Value
Brokerage (%) 0.0500% 0.1000% 0.0100%
Transaction Charges 0.0032% 0.0032% 0.0019%
Stamp Duty 0.0020% 0.0100% 0.0020%
STT 0.0250% 0.1250% 0.0170%
Sebi Fees 0.0001% 0.0001% 0.0001%
Service Tax 10.3000% 10.3000% 10.3000%
TOTAL

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Charges Leviable OPTIONS
Rate
Premium Per Lot
No.of Lot
Total Premium Value
Brokerage (%) 1%
Minimum Brokerage per Lot 100
Transaction Charge 0.050%
Stamp Duty 0.002%
STT 0.017%
Sebi Fees 0.000%
Service Tax 10.30%
TOTAL
IF options are to be EXERCISED THAN STT WOULD BE 0.125% ON STRIKE
PRICE.
So it is necessary to take the STT charges into consideration while
calculating arbitrage opportunity.

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DERIVATIVE COMPONENTS:
FORWARD
COMPONENT
OF
DERIVATIVES
FUTURE
OPTION
WARRANT
LEAPS
BASKETS
SWAPS
SWAPTION

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Derivative contracts have several variants. The most common variants are
forwards, futures, options and swaps.
(i) FORWARDS:
A forward contract is a customized contract between 2 entities, were
settlement takes place on a specific date in the future today pre‐agreed
price.
(ii) FUTURES:
A future 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.
(iii) OPTIONS:
Options are 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 asset at a given price on or
before a given date.
(iv) WARRANTS:
Options generally have lives of up to 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.
(v) LEAPS:
The acronym LEAPS means Long Term Equity Anticipation Securities.
These are options having a maturity of up to three years.

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(vi) BASKETS:
Basket options are 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.
(vii) SWAPS:
Swaps are private agreement between two parties to exchange cash
flows in the future according to a prearranged formula. They can be
regarded as portfolios of forward contracts.
(viii) SWAPTIONS:
Swaptions are options to buy or sell a swap that will become operative at the
expiry of options. Thus a Swaptions is an option on a forward swap. Rather
than have calls and puts the Swaptions market has receiver Swaptions and
payer Swaptions. A receiver Swaptions is an option to receive fixed and pay
floating. A payer Swaptions is an option to pay fixed and receives floating.

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FORWARD
CONTRACTS

32. 32
FORWARD:
It is a customized contract between two parties.
Example:
Imagine you are a farmer. You grow 1,000 dozens of mangoes every year. You want to
sell these mangoes to a merchant but are not sure what the price will be when the season
comes. You therefore agree with a merchant to sell all your mangoes for a fixed price for
Rs 2lakhS.
This is a forward contract where in you are the seller of mangoes forward and the
merchant is the buyer.
The price is agreed today in advance and The delivery will take place sometime in the
future.
The essential features of a forward contract
The essential features of a forward contract are:
 l Contract between two parties (without any exchange between them)
 l Price decided today
 l Quantity decided today (can be based on convenience of the parties)
 l Quality decided today (can be based on convenience of the parties)
 l Settlement will take place sometime in future (can be based on convenience of
the parties)
 l No margins are generally payable by any of the parties to the other
Uses of forward
Forwards have been used in the commodities market since centuries. Forwards are also
widely used in the foreign exchange market.

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Limitations of forwards
Forwards involve counter party risk. In the above example, if the merchant does not buy
the mangoes for Rs 2lakhs when the season comes, what can you do? You can only file a
case in the court, but that is a difficult process. Further, the price of Rs 2lakhs was
negotiated between you and the merchant. If somebody else wants to buy these mangoes
from you, there is no mechanism of knowing what the right price is.
Thus, the two major limitations of forwards are:
 l Counter party risk
 l Price not being transparent
 Counter party risk is also referred to as default risk or credit risk.
How do Futures overcome these difficulties?
An exchange (or its clearing corporation) becomes the legal counterparty in case of
futures. Hence, if you buy any futures contract on an exchange, the exchange (or its
clearing corporation) becomes the seller.
If the other party (the real seller) does not deliver on the expiry date, you do not have to
worry. The exchange (or its clearing corporation) will guarantee you the delivery.
Further, prices of all Futures quoted on the exchange are known to all players.
Transparency in prices is a big advantage over forwards.

34. 34
FUTURES
CONTRACT

35. 35
FUTURES :
Futures are similar to forwards in the sense that the price is decided today and the
delivery will take place in future. But Futures are quoted on a stock exchange. Prices are
available to all those who want to buy or sell because the trading takes place on a
transparent computer system.
Features of Futures
The essential features of a Futures contract are:
 Contract between two parties through an exchange
 l Exchange is the legal counterparty to both parties
 l Price decided today
 l Quantity decided today (quantities have to be in standard denominations
specified by the exchange)
 l Quality decided today (quality should be as per the specifications decided by the
exchange)
 l Tick size (i.e. the minimum amount by which the price quoted can change) is
decided by the exchange
 l Delivery will take place sometime in future (expiry date is specified by the
exchange)
 l Margins are payable by both the parties to the exchange
 l In some cases, the price limits (or circuit filters) can be decided by the exchange

36. 36
Features Forward Contract Future Contract
Trading Not traded on exchange. Traded on exchange.
Settlement Directly between the two
parties.
Through the clearing system
of the exchange.
Contract
specifications
May differ from trade to trade.
High flexibility in deciding the
terms.
Contracts are standardized.
Counterparty
risk or credit
risk
Each party takes credit risk on
other.
The counterparty risk is
transferred to Clearing
System. Clearing system takes
credit risk on each party and
each party takes credit risk
on the clearing system.
Liquidity Poor liquidity as contracts are
tailor made.
High liquidity as contracts are
standardized. And traded on
the exchange.
Price
discovery
Poor, as markets are
fragmented.
Better, as traded on a
transparent exchange.

37. Future Trading is jut like Cash Segment Trading. In Future Trading you are not to pay 100
% payment as you have to do in Cash Segment and there is nothing like delivery.
37
MARGINS :
(A)INITIAL MARGIN:
It is the margin that needs to be paid to exchange while taking exposure in
Option or Future contracts. It is the percentage of total value of exposure taken
that the investor must pay in the form of cash or marginable securities.
E.g. If the investor wants to buy 100 shares of Reliance at Rs. 1000 each, then he
has to pay the margin of say 20% of total value i.e. 20000 in the form of initial
margin to his broker and broker further pays to the exchange.

38. 38
(B)MARK TO MARKET MARGIN:
It is the margin that needs to be paid or received based on the daily movement of
prices. So futures and options contracts are marked to daily market prices and
based on exposure taken the investor’s account is debited or credited. If price
movement goes against your expectation then the investor has to pay mark to
market margin and if price run as per expectation then margin is credited in his
account which he/she can withdraw.
In Future contracts it has to be paid in the form of cash whereas in option
contracts it can be paid in form of cash or marginable securities.

39. 39
OPTION

40. 40
OPTIONS
Options are instruments whereby the right is given by the option seller to the
option buyer to buy or sell a specific asset at a specific price on or before a specific date.
There are mainly two options.
Call
option
Put
option
Call Option: A call option gives the holder the right but not the obligation to
buy an asset by a certain date for a cert ain price.
Put Option: A put option gives the holder the right but not the obligation to sell
an asset by a certain date for a cert ain price.

41. 41
DIFFERENCE BETWEEN FUTURES & OPTIONS:

42. 42
Call & Put Option:
Division of an option:
The option premium can be broken down into 2 components:
(i) Intrinsic value: Value investors that follow fundamental analysis look at
both qualitative and quantitative aspects of a business to see if the
business is currently out of favour which the market and is really worth
much more than its current valuation. Intrinsic value in options is in the
money portion of the options premium.
E.g.: If a call option strike price is $ 15 and the underlined stocks market
price is $25 then the intrinsic value of call option is $10.

43. (ii) Time value: The time value of an option is the difference between its
premium and its intrinsic value. Both calls and puts have time value. An
option that is OTM or ATM has only time value. Usually the maximum
time value exits when option is ATM. The longer the time to expiration, the
greater is an options time value, or else equal. At expiration, an option should
have more time value.
43

44. 44
Market Trend &
Option Strategies
overview

45. 45
MARKET TRENDS:­A
market trend is a putative tendency of a financial market to move in a
particular direction over time. There are mainly 3 types of market trends
There are mainly 3 types of market trends
1> Secular market trend
2> Primary market trend
3> Secondary market trend
Primary
Secular
Secondary

46. 46
Secular market trend:-
A secular market is for long time frames A secular market trend is a long term trend
that lasts 5 to 25 years and consists of a series of a series of sequential primary trends. A
secular bear Market consists of smaller bull markets and larger bear markets. A secular
bull market consists of larger bull markets and smaller bear markets.
In a secular bull market the prevailing trend is "bullish" or upward moving. In a secular
bear market, the prevailing trend is "bearish" or downward moving.
Secondary market trend:-
Secondary market changes are short term changes in price direction with in a primary
trend. The duration is few weeks or few months.
(i) CORRECTION:
One type of secondary market trend is called a market CORRECTION a correction is
short term price decline of 5%to20% or so. A correction is a
downward movement that is not large enough to be a bear market.
(ii) BEAR MARKET RALLY:
Another type of secondary trend is called a bear market rally which consists of a
market price increase of 10%to20%.

47. 47
Primary market trend:-
A primary trend has broad support throughout the entire market (most sectors) and lasts for a year or more.
Market
top
Primary
market
Bull
market
(i) BULL MARKET:
Market
bottom
A bull market is
Bear
market
associated with increasing investor confidence,
and increased investing in anticipation of future price increases. A bullish trend in the stock market often begins
before the general economy shows clear signs of recovery. It is a win‐ win situation for the investors.

48. 48
(ii) BEAR MARKET:
A bear market is a general decline in the stock market over a period of time. It is a transition from
high investor optimism to
widespread investor fear and pessimism.
(iii) MARKET TOP:
A market top (or market high) is usually not a dramatic event. The market has simply
reached the highest point that it will, for some time (usually a few years). It is, by
definition, retroactively defined as market participants are not aware of it as it
happens. A decline
then follows, usually gradually at first and later with more rapidity.
(iv) MARKET BOTTOM:
A market bottom is a trend reversal, the end of a market downtown, and
precedes the beginning of an upward moving trend (bull market).
It is very difficult to identify bottom while it is occurring. The
upturn following decline is often short lived and prices may resume their decline.
This would bring a loss for the investors who
purchased stocks during “false” market bottom.

49. 49
OPTION STRATEGIES ACCORDING TO MARKET TRENDS:
BULLISH MARKET STRATERGIES
Option Spread
Strategy
Description
Reason to use
When to use
Buy a Call
Strongest bullish
option position.
Loss limited to
premium paid.
Undervalued option with
volatility increasing.
Sell a Put
Neutral bullish option
position.
Profit limited to
premium received.
High volatility,
bullish trending
market.
Buy Vertical Bull
Call Spread
Buy Call & sell Call of higher
strike price.
Loss limited to
debit.
Small debit, bullish
market.
Sell Vertical Bear
Put Spread
Sell Put & buy Put of lower
strike price.
Loss limited to
strike
price
difference minus
premium received.
Large credit, bullish
market.
BEARISH MARKET STRATERGY
Option Spread
Strategy
Description
Reason to use
When to use
Buy a Put
Strongest bearish option
position.
Loss limited to premium
paid.
Undervalued option with
increasing volatility.
Sell a Call
Neutral bearish option
position.
Profit limited to premium
received.
Option overvalued market
flat to bearish.
Buy Vertical Bear
Put Spread
Buy at the money Put & sell
out of the money Put.
Loss limited to debit.
Small debit, bearish
market.
Sell Vertical Bull
Call Spread
Sell Call & buy Call of higher
strike price.
Loss limited to strike price
difference minus credit.
Large credit, bearish
market.

50. 50
NEUTRAL MARKET STRATERGIES
Option Spread
Strategy
Description
Reason to use
When to use
Strangle
Sell out of the money Put & Call.
Maximum use of
time value decay.
Trading range market with
volatility peaking.
Arbitrage
Buy & sell similar options
simultaneously.
Profit certain if
done at credit.
Any time credit received.
Calendar
Sell near month, buy far month, same
strike price.
Near month time
value decays faster.
Small debit, trading range
market.
Butterfly
Buy at the money Call (Put) & sell 2 out
of the money Calls (Puts) & buy out of
the money Call (Put).
Profit certain if
done at credit.
Any time credit received.
Guts
Sell in the money Put & Call.
Receive large
premium.
Options have time
premium & market in
trading range.
Box
Sell Calls & Puts same strike price. Profit certain if
done at credit.
Any time credit received.
Ratio Call
Buy Call & sell Calls of higher strike price.
Neutral,
slightly bullish.
Large credit & difference
between strike prices of
option bought & sold.
Buy futures & buy at the money
Put & sell out of the money Call.
Profit certain if
done at credit.
Any time credit received.

51. 51
OPTION
STATEGIES

52. PAYOFF
5100 5150 5200 5250 5300 5350 5400 5450 5500 5550 5600 5650 5700 5750 5800 5850 5900 5950 6000 6050 6100
52
STRADDLE STRATEGY:
In straddle strategy trader/ investor calls for buying at the money puts and at of the
money call options were the strike price is same of both the options.
MARKET VIEW FOR STRATEGY:
A straddle option strategy is a basic volatility strategy which will require dramatic price
moves to pay out profitably.
EXAMPLE:
INS
TYPE SCRIP
STRIKE
PRICE
OPTION
TYPE QUANTITY
BUY/
SELL
PRICE/
PREMIUM
Premium
Gain or
Loss
P&L
from
Option
Total
P&L
OPT NIFTY 5600 CALL 100 B 128 -12800 50000 37200
OPT NIFTY 5600 put 100 B 113 -11300
-
11300
PAYOFF CHART :
30,000
20,000
PAYOFF
10,000
0
-10,000
-20,000
-30,000
PRICE

53. 53
PAYOFF TABLE:
PRICE PAYOFF
5100 25900
5150 20900
5200 15900
5250 10900
5300 5900
5350 900
5400 -4100
5450 -9100
5500 -14100
5550 -19100
5600 -24100
5650 -19100
5700 -14100
5750 -9100
5800 -4100
5850 900
5900 5900
5950 10900
6000 15900
6050 20900
6100 25900
RISK AND REWARD:
Maximum loss for the long straddle options strategy is when the underlying stock price
on expiration date is trading at the strike prices of the options bought.
Large gains for the long straddle option strategy are attainable when the underlying
stock price makes a very strong move either upwards or downwards at expiration.

54. PAYOFF
PAYOFF
5300 5325 5350 5375 5400 5425 5450 5475 5500 5525 5550 5575 5600 5625 5650 5675 5700 5725 5750 5775 5800
54
BULL CALL SPREAD STRATEGY:
In bull call spread strategy trader/ investor calls for buying one in the money call, sell
one out of the money calls at different strike prices.
MARKET VIEW FOR STRATEGY:
A bull call spread option strategy is generally applied when one expects market
will move from moderately bullish to bullish.
EXAMPLE:
INS
TYPE SCRIP
STRIKE
PRICE
OPTION
TYPE QUANTITY
BUY/
SELL
PRICE/
PREMIUM
Premium
Gain or
Loss
P&L
from
Option
Total
P&L
OPT NIFTY 5600 CALL 100 B 124.5 -12450 20000 7550
OPT NIFTY 5700 CALL 100 S 78.5 7850 -10000 -2150
PAYOFF CHART:
6,000
4,000
2,000
0
-2,000
-4,000
-6,000
PRICE

55. 55
PAYOFF TABLE:
PRICE PAYOFF
5300 -4600
5325 -4600
5350 -4600
5375 -4600
5400 -4600
5425 -4600
5450 -4600
5475 -4600
5500 -4600
5525 -4600
5550 -4600
5575 -4600
5600 -4600
5625 -2100
5650 400
5675 2900
5700 5400
5725 5400
5750 5400
5775 5400
5800 5400
RISK AND REWARD:
The maximum profit for bull call spread will generally occur as underlying stock price
rise above the higher strike price.
Maximum loss for the bull call spread is limited to the premium paid while entering the
trade.

56. PAYOFF
PAYOFF
5300 5325 5350 5375 5400 5425 5450 5475 5500 5525 5550 5575 5600 5625 5650 5675 5700 5725 5750 5775 5800
56
BEAR PUT SPREAD STRATEGY:
In bear put spread strategy trader/ investor calls for buying one in the money put, sell
one out of the money put at different strike prices.
MARKET VIEW FOR STRATEGY:
A bear put spread option strategy is generally applied when one expects market to
move from moderately bearish to bearish.
EXAMPLE:
INS
TYPE SCRIP
STRIKE
PRICE
OPTION
TYPE QUANTITY
BUY/
SELL
PRICE/
PREMIUM
Premium
Gain or
Loss
P&L
from
Option
Total
P&L
OPT NIFTY 5600 Put 100 B 113 -11300
-
11300
OPT NIFTY 5500 put 100 S 76 7600
7600
PAYOFF CHART:
8,000
6,000
4,000
2,000
0
-2,000
-4,000
-6,000
PRICE

57. 57
PAYOFF TABLE :
PRICE PAYOFF
5300 6300
5325 6300
5350 6300
5375 6300
5400 6300
5425 6300
5450 6300
5475 6300
5500 6300
5525 3800
5550 1300
5575 -1200
5600 -3700
5625 -3700
5650 -3700
5675 -3700
5700 -3700
5725 -3700
5750 -3700
5775 -3700
5800 -3700
RISK AND REWARD:
The maximum profit for bear put spread will generally occur as underlying stock price
decline below the lower strike price.
The maximum loss for bear put spread will generally occur as underlying stock price
rises above the higher strike price.

58. PAYOFF
PAYOFF
5100 5150 5200 5250 5300 5350 5400 5450 5500 5550 5600 5650 5700 5750 5800 5850 5900 5950 6000 6050 6100
58
BUTTERFLY STRATEGY:
In butterfly strategy trader/ investor calls for buying 1in the money call, sell 2 at the
money calls and buy 1out of the money call options at different strike prices.
MARKET VIEW FOR THE STRATEGY:
A butterfly option strategy is applied when the market is range bound.
Example
INS
TYPE SCRIP
STRIKE
PRICE
OPTION
TYPE QUANTITY
BUY/
SELL
PRICE/
PREMIUM
Premium
Gain or
Loss
P&L
from
Option
Total
P&L
OPT NIFTY 5500 CALL 100 B 194 -19400 6000 40600
OPT NIFTY 5600 CALL 200 S 130 26000 -10000 -74000
OPT NIFTY 5700 CALL 100 B 82 -8200 40000 318000
Payoff Chart:-
10,000
8,000
6,000
4,000
2,000
0
-2,000
-4,000
PRICE

59. 59
Payoff Table:-
PRICE PAYOFF
5100 -1600
5150 -1600
5200 -1600
5250 -1600
5300 -1600
5350 -1600
5400 -1600
5450 -1600
5500 -1600
5550 3400
5600 8400
5650 3400
5700 -1600
5750 -1600
5800 -1600
5850 -1600
5900 -1600
5950 -1600
6000 -1600
6050 -1600
6100 -1600

60. 60
Conclusion

61. 61
F I N D I N G S
 Derivative have existed and evolved over a long time, with roots in
commodities market .In the recent years advances in financial markets
and technology has made derivatives easy for the investors.
 De r i va t i ve s ma rket in Indi a i s growing rapidl y unl ike equi t y
ma rket s . Trading in derivatives require more than average understanding
of finance. Being now markets, Maximum number of investors has not
yet understood the full implications of the trading in derivatives.
 Introduction of derivative implies better risk management. These markets can
greater depth, stability and liquidity to India capital markets. Successful risk
management with derivatives requires a thorough understanding of principles
that govern the pricing of financial derivatives.
 Derivatives are mostly used for hedging purpose.
 In derivative market the profit and loss of the option writer/option
holder purely depends on the fluctuations of the underlying

62. 62
SUGGESTIONS
 The inve s tor s can minimi ze r i sk by inve s t ing in de r i vat i ves .
The us e of derivative equips the investor to face the risk, which is
uncertain. Though the use of derivatives does not completely eliminate the
risk, but it certainly lessens the risk.
 It is advisable to the investor to invest in the derivatives market because of the
greater amount of liquidity offered by the financial derivatives and the
lower transaction costs associated with the trading of financial derivatives.
 The derivative products give the investor an option or choice whether
the exercise the contract or not . Option gives the choice to the investor
toeither exercises his right or not.
 If on expiry date the investor finds that the underlying asset in the
option contract is traded at a less price in the stock market then, he
has the full liberty to get out of the option contract and go ahead and
buy the asset from the stock market. So in case of high uncertainty the
investor can go for option.
 However, these instruments act as a powerful instrument for
knowledge t r ade r s to e xpose them to the prope r l y c al cul at ed
and we l l under s tood risks in pursuit of reward i.e., profit
 In orde r to inc r eas e the de r ivat i ves ma rket in India SEBI
should r e vi s e some of thei r re gula t ion l ike cont ra c t s i z e,
pa r t i c ipa t ion of Fi l l in th e de r i va t i ve ma rket . Cont ra c t s i z e
should be minimi zed be caus e smal l investor cannot afford this much

63. 63
LIMITATIONS
The following are the limitations of the study
 The S c r i p c h o s e n f o r a n a l y s i s i s N i f t y ’ 5 0 a n d t h e
c o n t r a c t t a k e n i n JULY 2011 is a one month contract ending in JULY.
 The data collected is completely restricted to the NIFTY ’50 hence this analysis
cannot be taken universally.
CONCLUSION
 Derivatives have existed and evolved over a long time, with roots in
commodities market. In the recent years. Advances in financial
markets and the technologies have made derivatives easy for the investors.
 Derivatives market in Indian is growing unlike equity markets.
Trading in derivatives require more than average unde rstanding of
finance. Being new to markets maximum number of investors has not yet
understood the full implications of the trading and derivatives. SEBI should take
actions to create awareness in investors about the derivative market.
 Introduction of derivatives implies better risk management. These markets c an
g i ve g rea te r depth, s t abi l i t y and l iquidi t y to Indi an capi ta l
ma rket s . Successful risk management with derivatives requires a thorough
understanding of principles that govern the pricing of financial derivatives.
 In orde r to inc r eas e the de r ivat i ves ma rket in India SEBI
should r e vi s e some of their regulation like contract size, participation of FII
in the derivative market, Contract size should be minimize because small
investor cannot afford this much of huge premiums

64. 64
Bibliography

65. 65
BIBLOGRAPHY:
Secondary data
‐ NCFM’S Derivatives module
 www.nseindia.com
 www.bseindia.com
 www.derivativeindia.com
 www.indianderivatives.com
‐ Reports and analysis of J M Financial

66. 66
GLOSSARY:
Multiplier - It is a pre-determined value, used to arrive at the contract size. It is the
price per index point.
Tick Size - It is the minimum price difference between two quotes of similar nature.
Contract Month - The month in which the contract will expire.
Expiry Day - The last day on which the contract is available for trading.
Open interest - Total outstanding long or short positions in the market at any specific
point in time. As total long positions for market would be equal to total short positions,
for calculation of open Interest, only one side of the contracts is counted.
Volume - No. of contracts traded during a specific period of time. During a day, during a
week or during a month.
Long position- Outstanding/unsettled purchase position at any point of time.
Short position - Outstanding/ unsettled sales position at any point of time.
Open position - Outstanding/unsettled long or short position at any point of time.
Cash settlement - Open position at the expiry of the contract is settled in cash. These
contracts are designated as cash settled contracts. Index Futures fall in this category.
Alternative Delivery Procedure (ADP) - Open position at the expiry of the contract is
settled by two parties - one buyer and one seller, at the terms other than defined by the
exchange. Worldwide a significant portion of the energy and energy related contracts
(crude oil, heating and gasoline oil) are settled through Alternative Delivery Procedure.
Option Seller - One who gives/writes the option. He has an obligation to perform, in
case option buyer desires to exercise his option.
Option Buyer - One who buys the option. He has the right to exercise the option but no
obligation.
Call Option - Option to buy.
Put Option - Option to sell.
American Option - An option which can be exercised anytime on or before the expiry
date.
European Option - An option which can be exercised only on expiry date.

67. 67
Strike Price/ Exercise Price - Price at which the option is to be exercised.
Expiration Date - Date on which the option expires.
Exercise Date - Date on which the option gets exercised by the option holder/buyer.
Option Premium - The price paid by the option buyer to the option seller for granting
the option.
In the money options:
An in the money option is an option that would lead to a positive cash flow to the holder
if it were exercised immediately. A call option on the index is said to be in the money
when the current index stands at a level higher than strike price (i.e. spot price > strike
price). If the index is much higher than strike price the call is said to be deep in the
money. In the case of put the put is in the money if the index is below than strike
price.
At the money options:
At the money option is an option that would lead to zero cash flow if it were
exercise immediately. An option on the index is at the money when the current index
equals the strike price (i.e. spot price = strike price).
Out of the money options:
An out of the money is an option that would lead to negative cash flow if it were
exercise immediately. A call option on the index is out of the money when the current
index stands at a level which is less than strike price (i.e. spot price < strike price). If
the index is much lower than strike price the call is said to be deep out of the money