project on derivatives A STUDY ON CO INTEGRATION AND CAUSALITY BETWEEN SPOT AND FUTURES PRICES OF SELECTED STOCKS

1. 1
INTRODUCTION
A derivative security is a security whose value depends on the value of together more basic
underlying variable. These are also known as contingent claims. Derivatives securities have
been very successful in innovation in capital markets.
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, financial markets are market by a very high degree of volatility. Though the use of
derivative products, it is possible to partially or fully transfer price risks by locking – in asset
prices. As instrument of risk management these generally don’t 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 investor.
Derivatives are risk management instruments which derives their value from an underlying
asset. Underlying asset can be Bullion, Index, Share, Currency, Bonds, Interest, etc.
Need for the Study of Volatility Spillovers between Spot and Futures
Markets
The efficiency of the market depends on how new information is impounded
simultaneously into cash and futures markets. In other words, the financial market pricing
theory states that market efficiency is a function of how fast and how much information is
reflected in prices. The rate at which prices exhibit market information is the rate at which
this information is disseminated to market participants (Zapata et al. 2005). The essence of
the discovery function of future markets hinges on whether new information is reflected first
in changed futures prices or in changed cash price (Hoffman, 1931). It is conventionally
claimed that the futures market tends to be the dominant points of price discovery than that of
spot market.
The risk management involving the volatility in the prices should be addressed to
understand the performance of the market stability. Volatility refers to the spread of all likely
outcomes of an uncertain variable. An increase in market volatility brings a large price

2. 2
change in the advances or declines. Investors interpret a raise in market volatility and
increase in the risk of investments and shift their funds to less risky assets.( Pandin and
Jeyanthi,2009).
The volatility spillovers between the two markets should be understood in regard to the
information destabilization and its movement from one market to another market. The
persistence of volatility or existence of volatility clusters is also an aspect of interest as the
more persistence of volatility in markets is considered to have long term impact of news and
may lead to depression. The impact of positive news and negative news on the markets also
should be observed as they provide the details of whether the market is asymmetric or there is
more volatility towards good or bad information. Hence, the present study provides the
volatility spillovers between spot and futures market using asymmetric GARCH models.
OBJECTIVES OF THE STUDY
The main objective is to study the efficiency of commodity derivative markets in India
through informational efficiency and hedging effectiveness with special reference to the
selected stocks from different stock exchanges
The specific objectives of this study include the following:
1. To understand the derivatives market.
2. To study the co-integration and causality between spot and futures prices of selected
stocks in from 2012 to 2016.
3. To study the volatility spillovers between spot and futures prices of selected stocks
traded in from 2012 to 2016
METHODOLOGY
Methodology is the systematic, theoretical analysis of the methods applied to a field of
study. It comprises the theoretical analysis of the body of methods and principles associated
with a branch of knowledge. Typically, it encompasses concepts such as paradigm,
theoretical model, phases, and quantitative or qualitative techniques.
Method of Study
Analytical method is used for the current study. It is a quantitative method which determines
the relationship between one thing [an independent variable] and another [a dependent or
outcome variable. The analytical method involves the application of various tools and

3. 3
techniques for the analysis of the data already available which is the secondary data in nature,
and drawing conclusions based on the analysis.
Study Period
The time period from 2012-2016 is considered for the data analysis of the present study.
This study period represents the post-economic crisis period.
Corresponding Data
The data used in the present study is secondary in nature. The data has been collected from
the websites of the respective stock exchanges (NSE ,BSE and Yahoo finance). Review of the
literature has been done extensively with reference to commodity markets. The data has been
collected from various journals, magazines and official documents of various national and
international bodies relating to the functioning of commodity markets all across the world
Tools and Techniques
The analysis of the informational and hedging efficiency of a market involves many
techniques based upon the objective of the study. For the present study, various techniques
like unit root, co-integration, causality, and hedging models with conditional
Heteroscedasticity elements are used. Suitable graphs and tables have been used for the
presentation of data. Data analysis has been done with the help of various software like MS
Excel, and Gretl (open source).
MODEL SPECIFICATIONS
Co-integration and Causality between Spot and Futures Prices of Selected
Commodities.
As this study is dealing with the time series data, the biggest issue with the time series data
is non-stationary. In the absence of stationarity, hypothesis test results will be spurious. In
order to check the presence of unit root and determining the order of differencing required to
bring stationarity, this study has used the Augmented Dickey-Fuller (ADF).
If the series are co-integrated, then causality testing should be based on a Vector Error
Correction Model (VECM) rather than an unrestricted VAR model (Johansen, 1988). In order
to explore the effects of possible co-integration, a VAR in error correction form (VECM) is
estimated using the methodology developed by Engle and Granger (1987). Causality analysis

4. 4
states that if spot and futures price series are co-integrated, then causality must exist at least
in one direction (Granger 1969, Granger, 1980). This causality can be identified by the help
of VECM. To test the causality VECM may be estimated using OLS in each equation as
follows:
∆𝑠𝑡 = 𝑎 𝑠,0 + ∑ 𝑎 𝑠,𝑖∆𝑠𝑡−1 +
𝑝=1
𝑖=1
∑ 𝑏𝑠,𝑖∆𝐹𝑡−1 + 𝑎 𝑠 𝑍𝑡−1
𝑝=1
𝑖=1
+ 𝜀𝑠,𝑡
∆𝐹𝑡 = 𝑎 𝑓,0 + ∑ 𝑎 𝑓,𝑖∆𝑠𝑡−1 +
𝑝=1
𝑖=1
∑ 𝑏𝑓,𝑖∆𝐹𝑡−1 + 𝑎𝑓 𝑍𝑡−1
𝑝=1
𝑖=1
+ 𝜀𝑓,𝑡
where ‘as,o’ and ‘af,o’ are intercept terms, ‘as,i’, ‘af,i’, ‘bs,i’ and ‘bf, i’ are the short-run
coefficients, ‘Zt- 1’ is the error correction term which measures how the dependent variable
adjusts to the previous period’s deviation from long-run equilibrium.
In the above two VECM equations, ‘Ft’ Granger causes ‘St’ if some of the ‘bs,i’ coefficients
are non zero. Similarly ‘St’ Granger causes ‘Ft’ if some of the ‘af,i’ are non Zero. t -test is used
to test the hypothesis for the significance of the error correction coefficients and ‘Wald test’
is used to test the joint significance of lagged estimated coefficients. Number of lags in the
model has been identified by Schwarz Bayesion Information Criterion. If both ‘as’ and ‘af ’
are significant, it indicates there is a two way or feedback relation between the two markets.
By the help of ‘as’ and ‘af’. direction of causality, speed with which correction is being taken
place and identification of leading or lagging market is possible.
Volatility Spillovers between the Spot and Futures Prices of the Selected Commodities
Volatility spillovers between the spot and futures prices in the selected commodities can be
described based on impulse response function, variance decomposition, and VECM –
GARCH model for identifying asymmetry and spillover of volatility.
VECM –GARCH Model for Identifying Asymmetry and Spillover of Volatility
While conventional time series and econometric models operate under an assumption of
constant variance, the ARCH (Autoregressive Conditional Heteroskedastic) process
introduced in Engle (1982) allows the conditional variance to change over time as a function
of past errors leaving the unconditional variance constant. GARCH (Generalized

5. 5
Autoregressive Conditional Heteroskedasticity), is introduced, allowing for a much more
flexible lag structure. The extension of the ARCH process to the GARCH process bears much
resemblance to the extension of the standard time series AR process to the general ARMA
process (Bollerslev,1986).
GARCH methodology is also instrumental in supporting or refusing the Mixture of
Distribution Hypothesis (MDH). According to the MDH, a serially correlated mixing variable
measuring the rate at which information arrives to the market explains the GARCH effect in
the returns. This relationship has been documented for the U.S. stock market by Lamoureux
and Lastrapes (1990), Andersen (1996) and Gallo and Pacini (2000), and the UK stock
market by Omran and McKenzie (2000). In general, the bulk of empirical studies has found
evidence that the inclusion of trading volume in GARCH models for returns results in a
decrease of the estimated persistence or even causes it to vanish. This finding generally
interpreted as empirical evidence in favor of the MDH (Sharma, Mougoue and Kamath
(1996) and Brailsford (1996)). Thus, in order to investigate whether trading volume explains
the GARCH effects for returns, GARCH (1,1) model with a volume parameter is estimated
using the following variance equation:
𝑅𝑡 = 𝛼 + ∑ 𝛽𝑖 𝑅𝑡−𝑖
𝑝
𝑖=1
+ 𝜀𝑡
ℎ𝑡 = 𝜔 + ∑ 𝛼𝑖
𝑚
𝑖=1
𝜀𝑡−𝑖
2
+ ∑ 𝛽𝑗
𝑛
𝑖=1
ℎ𝑡−𝑗 + 𝛾𝑖 𝑉𝑡 + 𝑒 𝑡
However the results based upon GARCH (1,1) may again be doubtful because it does not
take into account for asymmetry and non-linearity in the conditional variance. Thus it would
be more appropriate to apply asymmetric GARCH model. Engle and Ng (1993) developed an
asymmetric GARCH model which allows asymmetric shocks to volatility. Thus, among the
specifications, which allow asymmetric shocks to volatility, the EGARCH (1,1) or
exponential GARCH (1,1) model is estimated proposed by Nelson (1991).
In this model specification, ‘γ2’ is the ARCH term that measures the effect of news about
volatility from the previous period on current period volatility. ‘γ3’ measures the leverage
effect. Ideally ‘γ3’ is expected to be negative, implying that bad news has a bigger impact on
volatility than good news of the same magnitude. A positive ‘γ4’ indicates volatility
clustering, implying that positive stock price changes are associated with further positive

6. 6
changes and vice-versa. The parameter ‘γ5’ measures the impact of volume on volatility and
all these values are obtained using the following equations:
ℎ𝑡 = 𝛾1 + 𝛾2 |
𝜀𝑡−1
ℎ𝑡−1
| + 𝛾3
𝜀𝑡−1
ℎ𝑡−1
𝜔 + 𝛾4 ℎ𝑡−1 + 𝑒 𝑡
ℎ𝑡 = 𝛾1 + 𝛾2 |
𝜀𝑡−1
ℎ𝑡−1
| + 𝛾3
𝜀𝑡−1
ℎ𝑡−1
𝜔 + 𝛾4 ℎ𝑡−1 + 𝛾5 𝑉𝑡 + 𝑒 𝑡
LIMITATIONS OF THE STUDY
The following are the limitations of the present study:
 The results of the study are influenced by various extraneous variables that are beyond the
scope of the present study.
 The markets in developing economies improve their efficiency over the time, and the
study results have short-term validity.
 The statistical techniques used for the study have their own limitations, which in turn
apply to the present study.
.

7. 7
INDUSTRY PROFILE
DEFINITION OF STOCK EXCHANGE:
"Stock exchange means anybody or individuals whether incorporated or not, constituted for
the purpose of assisting, regulating or controlling the business of buying, selling or dealing in
securities”.
"An association, organization or body of individuals, whether incorporated or not, established
for the purpose of assisting, regulating and controlling business in buying, selling and dealing
in securities."
It is an association of member brokers for the purpose of self-regulation and protecting the
interests of its members. It can operate only if it is recognized by the Government under the
securities contracts (regulation) Act, 1956. The recognition is granted under section 3 of the
Act by the central government, Ministry of Finance.
SECURITIES & EXCHANGE BOARD OF INDIA (SEBI):
SEBI was set up as an autonomous regulatory authority by the Government of India in 1988 "
to protect the interests of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected therewith or incidental thereto." It is
empowered by two acts namely the SEBI Act, 1992 and the securities contract (regulation)
Act, 1956 to perform the function of protecting investor's rights and regulating the capital
markets.
BOMBAY STOCK EXCHANGE (BSE):
The first and largest securities market in India, the Bombay Stock Exchange (BSE) was
established in 1875 as the Native Share and Stock Brokers' Association. Based in Mumbai,
India, the BSE lists over 6,000 companies and is one of the largest exchanges in the world.
The BSE has helped develop the country's capital markets, including the retail debt market,
and helped grow the Indian corporate sector.

8. 8
This stock exchange, Mumbai, popularly known as "BSE" was established in 1875 as “The
Native share and stock brokers association", as a voluntary non-profit making association. It
has an evolved over the years into its present status as the premiere stock exchange in the
country. It may be noted that the stock exchanges the oldest one in Asia, even older than the
Tokyo Stock exchange which was founded in 1878. The exchange, while providing an
efficient and transparent market for trading in securities, upholds the interests of the investors
and ensures redressed of their grievances, whether against the companies or its own member
brokers.
It also strives to educate and enlighten the investors by making available necessary
informative inputs and conducting investor education programmes. A governing board
comprising of 9 elected directors, 2 SEBI nominees, 7 public representatives and an
executive director is the apex body, which decides the policies and regulates the affairs of the
exchange.
National Stock Exchange (NSE):
The National Stock Exchange (NSE) is the Leading stock exchange in India and the fourth
largest in the world by equity trading volume in 2015, according to World Federation of
Exchanges (WFE).It began operations in 1994 and is ranked as the largest stock exchange in
India in terms of total and average daily turnover for equity shares every year since 1995,
based on annual reports of SEBI.
NSE launched electronic screen-based trading in 1994, derivatives trading (in the form of
index futures) and internet trading in 2000, which were each the first of its kind in India.
NSE has a fully-integrated business model comprising our exchange listings, trading services,
clearing and settlement services, indices, market data feeds, technology solutions and
financial education offerings. NSE also oversees compliance by trading and clearing
members and listed companies with the rules and regulations of the exchange.
NSE is a pioneer in technology and ensures the reliability and performance of its systems
through a culture of innovation and investment in technology. NSE believes that the scale and
breadth of its products and services, sustained Aluminiumumership positions across multiple
asset classes in India and globally enable it to be highly reactive to market demands and

9. 9
changes and deliver innovation in both trading and non-trading businesses to provide high-
quality data and services to market participants and clients.
List of Stock Exchanges: INDIA
There are 22 stock exchanges in India. These are shown below
 Bombay Stock Exchange
 National Stock Exchange
 Ahmedabad Stock Exchange Ltd.
 Calcutta Stock Exchange Ltd.
 India International Exchange (India INX)
 Magadh Stock Exchange Ltd.
 Metropolitan Stock Exchange of India Ltd.
 NSE IFSC Ltd.
1. ROLE OF INDUSTRY IN THE ECONOMY
Indian Stock Markets With over 20 million shareholders, India has the third largest investor
base in the world after the USA and Japan. Over 9,000 companies are listed on the stock
exchanges, which are serviced by approximately 7,500 stockbrokers. The Indian capital
market is significant in terms of the degree of development, volume of trading and its
tremendous growth potential.
India's market capitalization was amongst the highest among the emerging markets. Total
market capitalization of the BSE as on July 31, 1997 was Rs 5,573.07 billion growing by 18
percent over a period of twelve months and as of August 2005 was over $500 billion (about
Rs 22 lakh crores).
India has emerged as the world’s 14th largest equity market after it added several companies
to the billion dollar club in terms of capitalization in the last three months, taking the total to
81 companies. India has become the third largest Asian market (excluding Japan and
Australia) after having toppled Korea, China and Singapore that have 80, 50 and 47 firms
with billion-dollar market.

10. 10
INFRASTRUCTURE DEVELOPMENT
Traditionally brokers were serving the need of local public only as there was limited
infrastructure development. But after the entry of corporate brokers, now they have not
restricted themselves to local boundaries only, Brokers are going for expanding their network
to the wide area. Every corporate broker is now trying to reach in each of the geographical
corner of the country & providing as many services as possible to the investors.
a.MAJOR DEVELOPMENTS
i) Corporate memberships
There is a growing surge of corporate memberships (92% in NSE and 75% in BSE), and the
scope of functioning of the brokerage firms has transformed from that of being a family run
business to that of professional organized function that lays greater emphasis on observance
of market principles and best practices. With proliferation of new markets and products,
corporate nature of the memberships is enabling broking firms to expand the realm of their
operations into other exchanges as also other product offerings. Memberships range from
cash market to derivatives to commodities and a few broking firms are making forays into
obtaining memberships in exchanges outside the country subject to their availability and
eligibility.
ii) Wider product offerings
The product offerings of brokerage firms today go much beyond the traditional trading of
equities. A typical brokerage firm today offers trading in equities and derivatives, most
probably commodities futures, exchange traded funds, distributes mutual funds and
insurance and also offers personal loans for housing, consumptions and other related loans,
offers portfolio management services, and some even go to the extent of creating niche
services such as a brokerage firm offering art advisory services. In the background of
growing opportunities for Investors to invest in India as also abroad, the range of products
and services will widen further. In the offing will be interesting opportunities that might
arise in the exchange enabled corporate bond trading, soon after its commencement and
futures trading that might be introduced in the near future in the areas of interest rates and
Indian currency.

11. 11
iii) Greater reliance on research
Client advising in India has graduated from personal insights, market tips to becoming
extensively research oriented and governed by fundamentals and technical factors. Vast
progress has been made in developing company research and refining methods in technical
and fundamental analysis. The research and advice are made online giving ready and real
time access to market research for investors and clients, thus making research important
brand equity for the brokerage firms.
iv) Accessing equity capital markets
Access to reliable financial resources has been one of the major constraints faced by the
equity brokerage industry in India since long. Since the banking system is not fully
integrated with the securities markets, brokerage firms face limitations in raising financial
resources for business and expansion. With buoyancy of the stock markets and the rising
prospects of several well organized broking firms, important opportunity to access capital
markets for resource mobilization has become available. The recent past witnessed several
Leading brokerage firms accessing capital markets for financial resources with success.
v) Foreign collaborations and joint ventures
The way the brokerage industry is run and the manner in which several of them pursued
growth and development attracted foreign financial institutions and investment banks to buy
stakes in domestic brokerage firms, paving the way for stronger brokerage entities and
possible scope for consolidation in the future. Foreign firms picked up stake in some of the
Leading brokerage firms, which might Aluminiumum to creating of greater interest in
investing in brokerage firms by entities in India and abroad.
vi) Specialized services/niche broking
While supermarkets approach are adopted in general by broking firms, there are some which
are creating niche services that attract a particular client group such as day traders, arbitrage
trading, investing in small cap stocks etc, and providing complete range of research and
other support to back up this function.

12. 12
vii) Online broking
Several brokers are extending benefits of online trading through creation of separate
windows. Some others have dedicated online broking portals. Emergence of online broking
enabled reduction in transaction costs and costs of trading. Keen competition has emerged in
online broking services, with some of these offering trading services at the cost of a few
basis points or costs which are fixed in nature irrespective of the volume of trading
conducted. A wide range of incentives are being created and offered by online brokerage
firms to attract larger number of clients.
viii) Compliance oriented
With stringent regulatory norms in operation, broking industry is giving greater emphasis on
regulatory compliance and observance of market principles and codes of conduct. Many
brokerage firms are investing time, money and resources to create efficient and effective
compliance and reporting systems that will help them in avoiding costly mistakes and
possible market abuses. Brokerage firms now have a compliance officer who is responsible
for all compliance related aspects and for interacting with clients and other stake holders on
aspects of regulation and compliance.
ix) Focus on training and skill sets
Brokerage firms are giving importance and significance to aspects such as training on skill
sets that could prove to be beneficial in the long run. With the nature of markets and
products becoming more complex, it becomes imperative for the broking firms to keep their
staff continuously updated with latest development in practices and procedures. Moreover, it
is mandated for certain types of dealers/brokers to seek specific certification and
examinations that will make them eligible to carry business or trade. Greater emphasis on
aspects such as research and analysis is giving scope for in-depth training and skills sets on
topics such as trading programs, valuations, economic and financial forecasting and
company research.
x) From owners to traders
A fundamental change that has taken place in the equity brokerage industry, which is a
global trend as well, is the transformation of broking from owners of the stock exchange to

13. 13
traders of the stock market. Demutualization and corporatisation of stock exchanges
bifurcated the ownership and trading rights with brokers vested only with the later and
ownership being widely distributed. Demutualization is providing balanced welfare gains to
both the stock exchanges and the members with the former being able to run as corporations
and the latter being able to avoid conflict of interests that sometimes came as a major
deterrent for the long term growth of the industry.
1.1. Emerging challenges and outlook for the brokerage industry
Brokerage firms in India made much progress in pursuing growth and building
professionalism in operations. Given the nature of the brokerage industry being very
dynamic, changes could be rapid and so as the challenges that emerge from time to time. A
brief description on some of the prospects and challenges of the brokerage firms are
discussed below.
i) Fragmentation
Indian brokerage industry is highly fragmented. Numerous small firms operate in this space.
Given the growing importance of technology in operations and increasing emphasis on
regulatory compliance, smaller firms might find it constrained to make right type of
investments that will help in business growth and promotion of investor interests.
ii) Capital Adequacy
Capital adequacy has emerged as an important determinant that governs the scope of
business in the financial sector. Current requirements stipulation capital adequacy in regard
to trading exposure, but in future more tighter norms of capital adequacy might come into
force as a part of the prudential norms in the financial sector. In this background, it becomes
imperative for the brokerage firms to focus on raising capital resources that will enable to
give continuous thrust and focus on business growth.
iii) Global Opportunities
Broking in the future will increasingly become international in character with the stock
markets being open for domestic and international investors including institutions and
individuals, as also opportunities for investing abroad. Keeping abreast with developments

14. 14
in international markets as also familiarization with global standards in broking operations
and assimilating major practices and procedures will become relevant for the domestic
brokerage firms.
iv) Opportunities from regional finance
Regional economic integration such as that under the European Union and the ASEAN have
greatly benefited businesses in the individual countries with cross border opportunities that
helped to expand the scope and significance of the business. Initial measures to promote
South Asian economic integration is being made by governments in the region first at the
political level to be followed up in regard to financial markets. South Asian economic
integration will provide greater opportunities for broking firms in India to pursue cross
border business. In view of several of common features prevailing in the markets, it would
be easier to make progress in this regard.
v) Product Dynamics
As domestic finance matures and greater flow of cross border flows continue, new market
segments will come into force, which could benefit the domestic brokerage firms, if they are
well prepared. For instance, in the last three to four years, brokerage firms had newer
opportunities in the form of commodities futures, distribution of insurance products, wealth
management, mutual funds etc, and as the market momentum continues, broking firms will
have an opportunity to introduce a wider number of products.
vi) Competition from foreign firms
Surging markets and growing opportunities will attract a number of international firms that
will increase the pace of competition. Global firms with higher levels of capital, expertise
and market experience will bring dramatic changes in the brokerage industry space which
the local firms should be able to absorb and compete. Domestic broking firms should always
give due focus to emerging trends in competition and prepare accordingly.
vii) Investor Protection
Issues of investor interest and protection will assume centre stage. Firms found not having
suitable infrastructure and processes to ensure investor safety and protection will encounter

15. 15
constraints from regulation as also class action suits that investors might bring against erring
firms. The nature of penalties and punitive damages would become more severe. It is
important for brokerage firms to establish strong and streamlined systems and procedures for
ensuring investor safety and protection.
2. MAJOR PLAYERS: INDIAN STOCK MARKET
The Stock Broking industry is a fragmented industry. We cannot easily define that who is the key
players in the industry. It is not easy to identify that that are lading & dominating the industry.
The products & the services are so much diverse in this industry. In this chapter we have just
given the brief information about few big players in the stock broking industry in India. We have
included several aspects of them like services, geographic coverage, branches, tenure etc. We
will look at some players one by one.
2.1.1 ICICI SECURITIES
ICICI Securities Limited is India’s full-service investment bank with position in all segments
of its operations - Corporate Finance, Fixed Income & Equities. It is a subsidiary of ICICI
Bank, the largest private sector bank in India & operates out of Mumbai with offices in New
Delhi, Chennai, Calcutta & New York, London & Singapore.
ICICI Securities today is India's Investment Bank & one of the most significant players in the
Indian capital markets. This is reflected in the number of awards that our teams in Fixed
Income, M&A & equity capital markets win. ICICI Web Trade provides a facility of e-
trading through its own portal named www.icicidirect.com & it contributes the major part of
the total volume in the online trading segment.
2.1.2 Performance
ICICI’s Fixed Income team for the last two years (CY 2004 & 2005) has been adjudged as
the “Best Bond House” in India by both Asia money & Finance Asia. The equities team was
adjudged as the ‘Best Indian Brokerage House-2003’ by Asia money. The Corporate Finance
team, according to Bloomberg topped the M&A league tables in 2003.

16. 16
2.1.3 Subsidiaries
It’s wholly owned subsidiary, ICICI Brokerage Services Limited (IBSL), we buy & sell
equities for our institutional clients. ICICI Securities has a U.S. subsidiary, ICICI Securities
Inc., which is a member of the National Association of Securities Dealers, Inc. (NASD). As a
result of this membership, ICICI Securities Inc. can engage in permitted activities in the U.S.
securities markets. These activities include dealing in securities markets transactions in the
United States & providing research & investment advice to U.S. investors.
ICICI Securities Inc. is also registered with the Financial Services Authority, UK (FSA) &
the Monetary Authority of Singapore (MAS) to carry out Corporate Advisory Services. ICICI
Securities is registered with SEBI & IBSL is & registered with the Leading stock exchanges
NSE & BSE.
2.1.4 KOTAK SECURITIES
Kotak Securities Ltd., a strategic joint venture between Kotak Mahindra Bank & Goldman
Sachs (holding 25% - one of the world's Leading investment banks & brokerage firms) is
India's Leading stock broking house with a market share of around 8%.
The company offers institutional & retail stock broking, portfolio management services
(PMS) & distribution & depository services. It manages Rs 1,200 crore under its PMS
services. Currently, the company is spread across 150 cities with 60 branches & 890
franchisees. Kotak Securities Ltd. has been the largest in IPO distribution.
2.1.4 Performance
www.kotakstreet.com, the e-broking arm of Kotak Securities, contributed 15 % to the total
revenue of the firm in the last fiscal. "In the next one year, the contribution should grow to
25-30 % of the total revenue,
Kotak securities have been graced with awards include:
 Prime Ranking Award (2003-04)- Largest Distributor of IPO's
 Finance Asia Award (2004)- India's best Equity House
 Finance Asia Award (2005)-Best Broker In India
 Euro money Award (2005)-Best Equities House In India

17. 17
The company has a full-fledged research division involved in Macro Economic studies,
Sectoral research & Company Specific Equity Research combined with a strong & well
networked sales force which helps deliver current & up to date market information & news.
Kotak Securities Ltd is also a depository participant with National Securities Depository
Limited (NSDL) & Central Depository Services Limited (CDSL), providing dual benefit
services wherein the investors can use the brokerage services of the company for executing
the transactions & the depository services for settling them.
Kotak Securities has 122 branches servicing more than 1, 70,000 customers & coverage of
187 cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers
Internet Broking services & also online IPO & Mutual Fund Investments.
Kotak Securities Limited manages assets over 2500 crores of Assets under Management
(AUM) .It also provide the portfolio Management Services, catering to the high end of the
market.
2.1.5 INDIABULLS SECURITIES
India bulls is India's retail financial services company with 135 locations spread across 95
cities. Provide varied products & services at very attractive prices
Area of operation
The company provides various types of brokerage accounts & services related to the purchase
& sale of securities such as equity, debt & derivatives listed on the BSE & the NSE. It
provides depository services, equity research services, mutual fund & IPO distribution to its
clients. It has a tie up with a Birla Sun life insurance to distribute various insurance products.
It also provides commodity trading through India bulls commodity. It provides these services
through on-line & off-line distribution channels, the latter primarily through its relationship
managers & marketing associates. ISL has invested heavily in building a strong sales team, &
at 31 March 2005, it had over 865 relationship managers.

18. 18
2.1.6 GEOJIT SECURITIES
The Kochi based Geojit Securities Limited was promoted by C J George & A V
Viswanadhan.It was incorporated in the year 1994 & commenced the business from January
1995.Immediately after commencement of business, the company came out with the Public
Issue (IPO) of 950000 Equity Shares of Rs.10 each. The company has changed its name from
Geojit Securities Limited to Geojit Financial Services Limited. Recently Rakesh juhnjunwala
has acquired majority of stock holding of the company.
Area of operation
Geojit Securities has been engaged mainly in Stock & Share Broking, commodity broking,
Depository Services & Portfolio Management services. The company was the first to start
online/internet trading in the country which was started in the year 2000. The Company has
entered the distribution business of insurance & financial products by incorporation of 3 new
subsidiary companies for undertaking the business.
The company has signed MOU with Barjeel Shares & Bonds of UAE, owned by a member of
the ruling family of Sharjah, during the year 2000-01 for setting up a joint venture in Dubai.
This joint venture gives the company a unique advantage of being the only licensed operator
in the UAE for Indian Capital Market products.
Subsidiaries
During the year 2002-03 Geojit's wholly owned subsidiary Geojit Infofin Technologies Ltd
became the Corporate Agent of Met life India Insurance Company for distribution of their
products. The Company aims to be a niche player in the capital market through partnership
philosophy by carefully selecting business associates & other intermediaries in other fields.
2.1.7 KARVY CONSULTANT
KARVY, is a premier integrated financial services provider, & ranked among the top five in the
country in all its business segments, services over 16 million individual investors in various
capacities, & provides investor services to over 300 corporate, comprising the who is who of
Corporate India.

19. 19
Area of operations
KARVY covers the entire spectrum of financial services such as Stock broking, Depository
Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities,
Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant
Banking & Corporate Finance, placement of equity, IPO’s, among others. Karvy has a
professional management team & ranks among the best in technology, operations & research of
various industrial segments.
2.1.7 Achievements
 Among the top 5 stock brokers in India (4% of NSE volumes)
 India's No. 1 Registrar & Securities Transfer Agents
 Among the to top 3 Depository Participants
 Largest Network of Branches & Business Associates
 ISO 9002 certified operations by DNV
 Among top 10 Investment bankers
 Largest Distributor of Financial Products
 Adjudged as one of the top 50 IT uses in India by MIS Asia
 Full Fledged IT driven operations
2.1.8 MOTILAL OSWAL SECURITIES
Motilal Oswal is one of the top-ranking broking houses in India, with a dominant position in
both institutional & retail broking, Motilal Oswal Securities Ltd. is amongst the best-
capitalized firms in the broking industry in terms of net worth.
It focuses on customer-first-attitude, ethical & transparent business practices respect for
professionalism, research-based value investing & implementation of cutting-edge
technology have enabled it to blossom into a thousand-member team.
The institutional business unit has relationships with several foreign institutional investors
(FIIs) in the US, UK, Hong Kong & Singapore. In a recent media report Motilal Oswal
Securities Ltd. was rated as one of the top-10 brokers in terms of business transacted for FIIs.

20. 20
Achievements
Motilal Oswal Securities Ltd’s equity research has been consistently ranked very highly in
surveys conducted by international publications like Asia Money & Institutional Investor. In
Asia Money Brokers Poll 2003 Motilal Oswal Securities Ltd. has been rated as the Best
Domestic Research House - Mega Funds, while in 2000 & 2002 it has been rated as the Best
Domestic Equity Research House & Second best amongst Indian Brokerage firms
respectively. The unique Wealth Creation Study, authored by Mr. Reamed Agawam,
Managing Director, is now in its tenth year. Investors keenly await the annual study for the
wealth of information it has on how companies created wealth during the preceding five
years.
BROKER BUSINESS MODEL
Traditionally there are only individual can become the broker but after 1992 corporate
brokers are approved to become the brokers. So, the business models are changed drastically
mentioned below:
Till 1992, there are only individual were allowed to act as a broker. But after 1923, corporate
are allowed to become a member. Due to this, there is a drastic change in the business model
of the broking firm.
As shown in the above model, there are two main parts:
 Individual members
 Corporate members
Here, individual member due to the resource constraint can not provide wide range of
services, while corporate member can provide wide range of services & among them, 54
member are providing the facility of online trading.

21. 21
Broker’s business model
Inside the broking firm
Firm’s
Client Sales
Department
(Account
Executives)
Research
Investment
Banking (or
Syndication
Department)
Order
Room
Order
Processing
(Operations)
Issuers
Over the
Counter Market
Traders
Exchange Floor
Brokers

22. 22
Comparison of Broking firms:
Companies Religare Angel
India
Bulls
ICICI
Motilal
Oswal
India
Infolin
e
Relianc
e
Money
Share
Khan
Anagram
Brokerage
0.05,
0.5
0.05,
.0.5
0.04,
0.4
0.10, 0.75
0.05,
0.5
0.05,
0.5
0.01
per
trade
0.05,
0.4
0.05,
0.5
Registration
299, 499,
999
660 900 750 500 555 750 750, 1000 600
Exposure 6 10 10to12 5 10 8 5 4 5
Minimum
Margin
1000 1000 5000
savings
A/C
500l 2000 nil 2000 Nil
Slip Charges 15 6 6 25
Minim
um Rs
15 and
max-
100
12 0 19
Online incl Incl 750 incl incl
incl
(+ 500
coupon
chg.)
incl. 599
Days for
Registration
5 6 days 7days 5 5days 15days 4days 7 days
Interest
Charges
18% 16% 18% 18% 18% 24% 18% 18%
Net Banking Yes Yes Yes Yes Yes Yes Yes Yes Yes
Software
r-ace,
r-acelite
ODIN &
angel
anywhere
Web
based
web based ODIN
ODIN
&
T.T.A
dv
Web
based
CLASS
SPLIT
Moneypore
Express

23. 23
COMPANY PROFILE
THE INDIA INFOLINE LIMITED
The India Infoline group, comprising the holding company, India Infoline Limited
and its wholly-owned subsidiaries, include the entire financial services space with offerings
ranging from Equity research, Equities and derivatives trading, Commodities trading,
Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits, Go I bonds
and other small savings instruments to loan products and Investment banking.
India Infoline also owns and manages the websites. The company has a network of
over 2100 business locations (branches and sub-brokers) spread across more than 450 cities
and towns. The group caters to approximately a million customers. Founded in 1995 by Mr.
Nirmal Jain (Chairman and Managing Director) as an independent business research and
information provider, the company gradually evolved into a one-stop financial services
solutions provider.
India Infoline received registration for a housing finance company from the National
Housing Bank and received the ‘Fastest growing Equity Broking House - Large firms’ in
India by Dun & Bradstreet in 2009. It also received the Insurance broking license from
IRDA; received the venture capital license; received in principle approval to sponsor a
mutual fund; received ‘Best broker- India’ award from Finance Asia; ‘Most Improved
Brokerage- India’ award from Asia money.
Indian Info line Media and Research Services Limited
The services represent a strong support that drives the broking, commodities, mutual
fund and portfolio management services businesses. It undertakes equities research which is
acknowledged by none other than Forbes as 'Best of the Web' and '…a must read for
investors in Asia'. India Infoline's research is available not just over the internet but also on
international wire services like Bloomberg (Code: IILL), brokers.
1. India Infoline Commodities
India Infoline Commodities Pvt., Limited is engaged in the business of commodities
broking. Their experience in securities broking empowered them with the requisite skills and

24. 24
technologies to allow them to offer commodities broking as a contra-cyclical alternative to
equities broking. It enjoys memberships with the MCX and NCDEX, two leading Indian
commodities exchanges, and recently acquired membership of DGCX. It has a multi-channel
delivery model, making it among the select few to offer online as well as offline trading
facilities.
2. India Infoline Marketing & Services
India Infoline Marketing and Services Limited is the holding company of India
Infoline Insurance Services Limited and India Infoline Insurance Brokers Limited.
 India Infoline Insurance Services Limited is a registered Corporate Agent with the
Insurance Regulatory and Development Authority (IRDA). It is the largest Corporate
Agent for ICICI Prudential Life Insurance Co Limited, which is India's largest private
Life Insurance Company. India Infoline was the first corporate agent to get licensed
by IRDA in early 2001.
 India Infoline Insurance Brokers Limited India Infoline Insurance Brokers Limited is
a newly formed subsidiary which will carry out the business of Insurance broking.
India Infoline Investment Services Limited
Consolidated shareholdings of all the subsidiary companies engaged in loans and financing
activities under one subsidiary. Recently, Orient Global, a Singapore-based investment
institution invested USD 76.7 million for a 22.5% stake in India Infoline Investment Services.
This will help focused expansion and capital raising in the said subsidiaries for various
lending businesses like loans against securities, SME financing, distribution of retail loan
products, consumer finance business and housing finance business. India Infoline Investment
Services Private Limited consists of the following step-down subsidiaries.
 India Infoline Distribution Company Limited (distribution of retail loan products)
 Money line Credit Limited (consumer finance)
 India Infoline Housing Finance Limited (housing finance)

25. 25
IIFL (Asia) Private Limited
IIFL (Asia) Private Limited is wholly owned subsidiary which has been incorporated
in Singapore to pursue financial sector activities in other Asian markets. Further to obtaining
the necessary regulatory approvals, the company has been initially capitalized at 1 million
Singapore dollars.
3. IIFL Management
Nirmal Jain, MBA (IIM, Ahmadabad) and a Chartered and Cost Accountant, founded
India’s leading financial services company India Infoline Ltd. in 1995, providing globally
acclaimed financial services in equities and commodities broking, life insurance and mutual
funds distribution, among others.
Mr. R Venkataraman, Executive Director
R Venkataraman, co-promoter and Executive Director of India Infoline Ltd., is a B.
Tech (Electronics and Electrical Communications Engineering, IIT Kharagpur) and an MBA
(IIM Bangalore). He joined the India Infoline board in July 1999.
4. Products & Services
 Equities
India Infoline provided the prospect of researched investing to its clients, which was
hitherto restricted only to the institutions. Research for the retail investor did not exist prior to
India Infoline. India Infoline leveraged technology to bring the convenience of trading to the
investor’s location of preference (residence or office) through computerized access. India
Infoline made it possible for clients to view transaction costs and ledger updates in real time.
The Company is among the few financial intermediaries in India to offer a complement of
online and offline broking. The Companies network of branches also allows customers to
place orders on phone or visit our branches for trading.
 Commodities
India Infoline’s extension into commodities trading reconciles its strategic intent to
emerge as a one stop solutions financial intermediary. Its experience in securities broking has
empowered it with requisite skills and technologies. The Companies commodities business

26. 26
provides a contra-cyclical alternative to equities broking. The Company was among the first
to offer the facility of commodities trading in India’s young commodities market (the MCX
commenced operations in 2003). Average monthly turnover on the commodity exchanges
increased from Rs 0.34 ban to Rs 20.02 bn.
 Insurance
An entry into this segment helped complete the client's product basket; concurrently,
it graduated the Company into a one stop retail financial solutions provider. To ensure
maximum reach to customers across India, it has employed a multi pronged approach and
reaches out to customers via our Network, Direct and Affiliate channels. India Infoline was
the first corporate in India to get the agency license in early 2001.
 Invest Online
India Infoline has made investing in Mutual funds and primary market so effortless.
Only registration is needed. No paperwork no queues and No registration charges. India
Infoline offers a host of mutual fund choices under one roof, backed by in-depth research and
advice from research house and tools configured as investor friendly.
 Wealth Management
The key to achieving a successful Investment Portfolio is to have a carefully planned
financial strategy based on a thorough understanding of the client's investment needs and risk
appetite. The IIFL Private Wealth Management Team of financial experts will recommend an
appropriate financial strategy to effectively meet customer’s investment requirements.
 Asset Management
India Infoline is a leading pan-India mutual fund distribution house associated with
leading asset management companies. It operates primarily in the retail segment leveraging
its existing distribution network to reach prospective clients. It has received the in-principle
approval to set up a mutual fund.

27. 27
 Portfolio Management
IIFL Portfolio Management Service is a product wherein an equity investment
portfolio is created to suit the investment objectives of a client. India Infoline invests the
client’s resources into stocks from different sectors, depending on client’s risk-return profile.
This service is particularly advisable for investors who cannot afford to give time or don't
have that expertise for day-to-day management of their equity portfolio.
Company Structure
India Infoline Limited is listed on both the leading stock exchanges in India, viz. the
Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a
member of both the exchanges. It is engaged in the businesses of Equities broking, Wealth
Advisory Services and Portfolio Management Services. It offers broking services in the Cash
and Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered
with NSDL as well as CDSL as a depository participant, providing a one-stop solution for
clients trading in the equities market. It has recently launched its Investment banking and
Institutional Broking business.
A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to
clients. These services are offered to clients as different schemes, which are based on
differing investment strategies made to reflect the varied risk-return preferences of clients.

28. 28
VISION
Its vision is to be the most respected company in the financial services space India Infoline
Ltd. India Infoline Ltd is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE). The India Infoline group,
comprising the holding company, India Infoline Ltd and its subsidiaries, straddles the entire
financial services space with offerings ranging from Equity research, Equities and derivatives
trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance,
Fixed deposits, GoI bonds and other small savings instruments to loan products and
Investment banking. India Infoline also owns and manages the websites,
www.indiainfoline.com and www.5paisa.com .
IIndia Infoline Commodities Pvt Ltd:
India Infoline Commodities Pvt Ltd is a 100% subsidiary of India Infoline Ltd,
which is engaged in the business of commodities broking. Our experience in securities
broking empowered us with the requisite skills and technologies to allow us offer
commodities broking as a contra-cyclical alternative to equities broking. We enjoy
memberships with the MCX and NCDEX, two leading Indian commodities exchanges, and
recently acquired membership of DGCX. We have a multi-channel delivery model, making
it among the select few to online as well as offline trading facilities.
India Infoline Distribution Co Ltd (IILD)
India Infoline.com Distribution Co Ltd is a 100% subsidiary of India Infoline Ltd
and is engaged in the business of distribution of Mutual Funds, IPOs, Fixed Deposits and
other small savings products. It is one of the largest 'vendor-independent' distribution
houses and has a wide pan-India footprint of over 232 branches coupled with a huge
number of 'feet-on-street', which help source and service customers across the length and
breadth of India. Its unique value proposition of free doorstep expert advice coupled with
free pick-up and delivery of cheques has been met with an enthusiastic response from
customers and fund houses alike. Our business has expanded to include the online
distribution of mutual funds, wherein users can view and compare different product
offerings and download application.

29. 29
India Infoline Insurance Services Ltd
India Infoline Insurance Services Ltd is also a 100% subsidiary of India Infoline Ltd and is
a registered Corporate Agent with the Insurance Regulatory and Development Authority
(IRDA). It is the largest Corporate Agent for ICICI Prudential Life Insurance Co Ltd, which
is India's largest private Life Insurance Company
India Infoline Investment Services Ltd
India Infoline Investment Service Ltd is also a 100% subsidiary of India Infoline
Ltd. It has an NBFC licence from the Reserve Bank of India (RBI) and offers margin-
funding facility to the broking customers
India Infoline Insurance Brokers Ltd
India Infoline Insurance Brokers Ltd is a 100% subsidiary of India Infoline Ltd and is a
newly formed subsidiary which will carry out the business of Insurance broking. We have
applied to IRDA for the insurance broking licence and the clearance for the same is
awaited.

30. 30
THEORETICAL FRAMEWORK OF DERIVATIVE MARKET
Efficient Market Hypothesis
1. Capital Market Efficiency
An efficient capital market is one in which security prices adjust rapidly to the arrival of
new information and, therefore, the current prices of securities reflect all information
about the security. This is referred to as an informational efficient market. (In other
words, an efficient market is a market in which all transactions have net present value
equal to zero). Alternatively, it can be said that the price of any asset is always equal to its
present value, so that the return for an investment is equal to the equilibrium return for a
given level of risk. All that is required for a market to be efficient is that current market
prices reflect available information. If a market is efficient with respect to some piece of
information, then that piece of information cannot be used to identify a positive NPV
investment.
The efficient market hypothesis (EMH) asserts that prices for assets are efficient with
respect to available information. The hypothesis implies that no investment strategy based
on current or historical information produces extraordinary large profits. With thousands
of investment advisory services, mountains of information, and millions of investors, the
adjustment of prices to new information is almost instantaneous.
Assumptions made for the requirements of an efficient market include:
 A large number of competing profit-maximizing participants analyse and value
securities, each independently from the others;
 New information regarding securities comes to the market in a random fashion;
 The competing investors attempt to adjust security prices rapidly to reflect the
new information (i.e., security prices adjust rapidly because numerous profit-
maximizing investors are competing against one another).
1.1 Weak-Form Efficient Market Hypothesis

31. 31
A market is said to be weak-form efficient if current security prices completely
incorporate the information contained in past prices. The set of information includes the
historical sequence of price, rates of return, trading volume data, and other market-
generated information, such as odd-lot transactions, block trades, and transactions by
exchange specialists or other unique groups. Since this hypothesis assumes that current
market prices already reflect all past returns and any other security-market information,
this means that it is pointless to analyse past prices in an attempt to predict future prices.
In other words, past rates of return and other market data should have no relationship with
future rates of return. Such an evaluation procedure is called technical analysis or
(“charting”). Weak-from efficiency implies that technical analysis cannot be used
successfully to forecast future prices and therefore that technical analysts do not earn
extraordinary profits. There is a great deal of evidence indicating that financial markets
are weak-form efficient.
1.2. Semi strong-form EMH
A market is said to be semi strong-form efficient if current prices incorporate all publicly
available information. That is, current prices fully reflect all public information. It
encompasses the weak-form hypothesis because all the market information considered by
the weak-form hypothesis - such as stock prices, rates of return, and trading volume - is
public. Public information also includes all non-market information, such as earnings and
dividend announcements, price to-earnings (P/E) ratios, dividend-yield (D/P) ratios, book
value-market value (BV/MV), stock splits, news about the economy, and political news.
Semi strong form efficiency implies that the analysis of published financial statements,
for example, does not result in earning excess profits. Notice that a semi strong efficient
market is also weak-form efficient, since past prices are a form of publicly available
information.
1.3. Strong-form EMH
At the extreme, a market is strong-form efficient if current prices reflect all information -
public and private-, including inside information; inside information is information about
a firm which is available only to “insiders” including corporate executives and major
shareholders. There seems to be little reason to believe that markets are strong-form
efficient: that is, available evidence seems to indicate that valuable inside information
does exist. At the other extreme, there are compelling reasons for believing that markets

32. 32
are weak-form efficient. There is a great deal of debate, however, over semi strong-form
efficiency. A reasonable compromise view might be summarized as follows: some prices,
some of the time, might not reflect all publicly available information, but most assets,
most of the time, do reflect this information.
NSE
FUTURES:
A Future contract is a contract to buy or sell a stated quantity of a commodity or a
financial claim at a specified price at a future specified date. The parties to the Future have to
buy or sell the asset regardless of what happens to its value during the intervening period or
what shall be the price of the date for which the contract is finalized.
Future Delivery Contract:
Where the physical delivery of the asset is slated for a future date and the payment to
be made as agreed it is future delivery contract.
Debt Capital
Cash Market Segment
Derivative Market Segment
Futures Options Interest rate
Stock Index
Call Put

33. 33
However in practice all Future are settled by the himself then it will be settled by the
exchange at a specified price and the difference is payable by or to the party. The basic
motive for a Future is not the actual delivery but the heading for future risk or speculation.
Futures can be of two types:
1. Commodity Future:
These include a wide range of agricultural products and other commodities like oil,
gas including precious metals like gold, silver.
2. Financial Future:
These include financial claims such as shares, debentures, treasury bonds, and share
index, foreign exchange. Futures are traded at the organized exchanges only. The
exchange provides the counter-party guarantee through its clearinghouse and different
types of margins system. Some of the centers where Futures are traded are Chicago board
of trade, Tokyo stock exchange.
FUTURE TERMINOLOGY:
Spot Price: The price at which an asset trades in the market.
Future Price: The price at which the Future contract trades in the future market.
Contract Cycle:
The period over which a contract trades. The index Future contract on the NSE have one-
month, two months, three-month expiry cycles which expire on the last Thursday of the
month. On the Friday following the last Thursday a new contract having a three months
expiry is introduced for trading.
Expiry Date: It is the date specified in the Future contract at the end of which it will cease
to exit.
Contract Size:
The amount of asset that has to be delivered under on contract. For Ex: The contract
size on NSES Futures market is 200 niftys.
Initial Margin:
The amount that must be deposited in the margin account at the time a Futures
contract is first entered in to be known as initial margin.

34. 34
Marking to Market:
At the end of each trading day, the margin account is adjusted to reflect the investor’s
gain or loss depending upon the Futures closing price. This is called Marking to Market.
Maintenance Margin:
This is set to ensure that the balance in the margin account never becomes negative. If
the balance in the margin account falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the initial margin
level before trading commences on the next day.
Trading In Future Contract:
The customer who desired to buy or sell Future has to contact a broker or a brokerage
firm.
Customers are required by the future exchange to establish a margin deposit with the
respective, broker before the transaction is executed. This is called initial margin, which is
between 5-20% of the value of the future contract.
The margin deposit is regulated by the future exchange depending on the volatility in
the price of future.
When the contract values moves in response to the change in the rate, gains are
credited and losses are debited to the margin account.
If the account falls below a particular level know as maintenance level, the trade
receives a margin call and must make up, the account equal to initial margin failing which his
account is liquidates
Those who have held the positions are required to liquidate the position prior to the
last trading day of the contract or the position is settled but the exchange.
At the end of the settlement period or at the time of squaring off a transaction, the
difference between the trading price and settlement prices is settled by the cash payment.
No carry forward of a Future contract is allowed beyond the settlement period.
Future, as a technique of risk management provide several services to the investor and
speculators as follows:

35. 35
A) Future provides a hedging facility to counter the expected movement in prices.
B) Futures help indication the future price movement in the market.
C) Future provides an arbitrage opportunity to the speculators.
Pay off for Futures: A pay off is the likely profit/loss would accrue to a market participant
with change in the price of the underling asset. Futures contract have linear pay offs. It means
the losses as well as profits for the buyer and the seller of a Future contract are unlimited.
Pay off for buyer of Futures: Long Futures
The pay off for a person who buys a Futures contract is similar to the pay off for a person
who held on asset. He has a potentially unlimited upside as well as a potentially unlimited
downside.
E.g.: An investor buys nifty Futures when the index is at 1320 if the index goes up, his
Future position starts making profit. If the index falls his Future position starts showing
losses.
Profit
0 1320 Nifty
Loss
Pay off for seller of Futures: Short Futures

36. 36
They pay off for a person who sells a Future contract is similar to the pay off for a person
who shorts an asset. He has potentially unlimited upside as well as a potentially unlimited
downside. E.g.: An investor sells nifty Future when the index is at 1320. If the index goes
down, his Future position starts making profit. If the index rises, his Futures position starts
showing losses.
Profit
1320
0 Nifty
Loss
Divergence of Futures and Spot Prices: The basis the difference between the Future price and
the current price is known as the basis.
Thus basis = F-S Where F= Future Price S= Spot Price
In a normal market the Future price would be greater then spot price and therefore, the basis
will be positive, while in an inverted market, the basis is negative since the spot price exceeds
the future price in such a market.
The price of Future referred to the rate at which the Futures contract will be entered into.
The basic determinants of future prices are:
1) Spot rate 2) Other Carrying costs
The cost of carrying depends upon the:
1) Time involved 2) Rate of Interest 3) Storage Cost, obsolescence, insurance cost and
other costs incurred till the delivery date.
Generally longer the time of maturity, the greater the carrying costs. As the delivery month
approaches, the basis declines until the spot and Futures prices are approximately the same.
The phenomenon is known as convergence.

37. 37
Price Futures Price
Spot price
Valuation of Future Prices:
The valuation of Futures is done using the cost of carry model. The assumptions for pricing
future contracts as follows:
 The markets are perfect.
 There are no transaction costs.
 All the assets are infinitely divisible.
 Bid-Ask spreads do not exist so that is assumed that only one price prevails.
 There are no restrictions on short selling. Also short sellers get to use the full proceeds
of the sales.
Stock Index Futures:
A stock index represents the change in the value of a set of stocks, which constitute the
index
A stock index number is the current relative value of a weighted average of the prices of a
pre-defined group of equities
NSE – 50, NIFTY:
THE NSE – 50 indexes called NIFITY was launched by the national stock exchange of
India Limited (NSE) in April 1996, taking as base the closing prices of November 3, 1995
when one year of operations of its capital market segment was completed. The base value of
the index has been set to 1000.

38. 38
The index is based on the prices of shares of 50 companies chosen from among the
companies traded on the NSE, each with a market capitalization of at least Rs.500 crores and
having a high degree of liquidity.
The methodology used for the computation of this index is market capitalization weight age
as followed by the S & P Nifty, which is maintained by IISL i.e., India Index services, and
products limited, a company set up by NSE and CRISIL with technical assistance from
standard & poor’s.
In the market capitalization weighted method,
Current Market Capitalization
Index = ---------------------------------------- * Base Value
Base Market Capitalization
Where Current market capitalization = Sum of (Current marketing Price * Outstanding
Shares) of all securities in the index.
Base market capitalization = Sum of (Market Price * Issue Size) of all securities as on
base date.
Heading using Futures contract:
Heading is the process of reducing exposure to risk. Thus a hedge is any act that reduces
the price risk of a certain position in the cash market. Future act as a hedge when a position is
taken in them, which is opposite to that of the existing or anticipated cash position.
In a short hedger sells Future contract when they have taken a long position on the cash
asset, apprehending that prices would fall. A loss in the cash market would result when the
prices do fall, but a gain would occur due to the short position in the Future.
In a long hedge the hedger buys Futures contract when they have taken a short position on
the cash asset. The long hedger faces the rise that prices may risk. If a price rise does not take
place, the long hedger would incur a loss in the cash good but would realize gains on the long
Futures position.

39. 39
When the asset whose price is to be hedge does not exactly match with the asset underlying
the Futures contract so held is called as cross hedge. Hedge ration is the number of future
contacts to buy or sell per unit of the spot good position. Optimal hedge ration depends on the
extent and nature of relative price movements of the Futures prices and the cash good prices.
Hence the points to be noted are:
1. Reliable relationship exists between price change of spot asset and price change of
Future contract.
2. Choice of data depends on the hedging horizon. For a daily hedge, daily price changes
can be taken. But for longer periods take weekly, bimonthly or monthly charges do not
take too lies tonic data like 1 year, as it would give a distorted estimate of relation
between current and futures prices.
Hedging using Index Futures:
1. When the markets are expected to go up
1. Long stock short index Futures: Buy selects liquid securities, which move with the
index and sell them at a later date.
2. Have funds long index Futures: Buy the entire index portfolio in their correct
proportions and sell it at a later date.
2. When the markets are expected to do down.
a) Short stock long index Futures: Sell selects liquid securities, which move with the
index and buy them at a later date.
b) Have portfolio, short index Futures: Sell the entire index portfolio in their correct
proportions and buy them at a later date.
Even when a stock picker carefully purchases stock his estimate may go wrong because the
entire market moves against the estimate even though the underlying idea was correct. Hence
when a long position is adopted away his index exposure.
Speculation using index Futures:
1. Bullish Index Long index Futures:
When you think the market index is going to rise you can make a profit by adopting a
position on the index. This could be after a good budget or good corporate results. Using
index Futures an investor can ‘buy’ or ‘sell’ the entire index b trading on one single security.

40. 40
Hence id you buy index Future you gain if the index rises and lose if the index falls.
3. Bearish Index short index Futures:
When you think the market index is going to fall you can make a profit buy adoption a
position on the index. This could be after a bad budget or bad corporate results,
instability. Using index Futures an investor can ‘buy’ or ‘sell’ the entire index by trading
on one single security.
Hence if you sell index Futures you gain if the index falls you lose if the index rises.
To prevent large price movement occurring because of “speculative excesses” and to
allow the market to digest any information which is likely to affect the Futures prices in a
significant way for most Futures contract there are limits, (both minimum and maximum),
on the daily movements of their prices.
Every Future contract has a minimum limit on trade-to-trade price changes, which is
called a tick say 5 pays or 10 pays. Normally trading on a contract stops one the contract is
limit up or limit down. However exchanges ay change the limits when they feel appropriate.
OPTIONS:
Options are contracts, which provide the holder the right to sell or buy a specified
quantity of an underlying asset at an affixed price on or before the expiration of the option
date. Options provide a right and not the obligation to buy or sell.
1) The call option: A call option provides the holder a right to buy specified assets at
specified on or before a specified date.
2) The put option: A put option provides to the holder a right to sell specified assets at
specified price on or before a specified date.
Options may also be classified as:
1) American Options: In the American option, the option holder can exercise the right to
buy or sell, at any time before the expiration or on the expiration date.
2) European Options: In the European option, the right can be exercised only on the
expiry date and not before. The possibility of early exercise of right makes the
American option to be more valuable that the European option to the option holder.
3) Naked Option and covered Options: A call option is called a covered option is called a
covered option if it is covered/written against the assets owned by the option writer. In

41. 41
case of exercised of the call option writer can deliver the asset or the price differential.
On the other hand, if the option is not covered by physical asset, if is known as naked
option.
Option Terminology:
Index Option: These Options have index as the underlying
Stock Options: These Options are on individual stock
Buyer of an option: Is the one who by paying the option premium buys the right but not the
obligation. To exercise his option on the seller/writer
Writer of an option: Is the one who receives the option premium and is thereby obliged to
sell/buy the asset is the buyer exercises on him.
Option Price: I s the Price, which the option buyer pays to the option seller.
Expiration Price: The date specified in the Options contract is known an expiration date,
the exercise date, the strike date or the maturity.
Option premium: The buyer of the option has to but the right from the seller by paying an
option premium. The premium is one-time non-refundable amount for awaiting the right. In
case, the right is not exercised later, the option writer does not refund the premium.
In-the-money option: If the actual price of the asset is more than the strike price of a call
option, then the call is said to be in the money. In the case of put option, if the strike price is
more than the actual price them the put is said to be in the money.
At the money option: If the spot price is equal to the strike price the option is called at the
money. It would lead to zero cash flow if it were exercised immediately.
Out of the money option: If the actual price is less than the strike price the call option is said
to be out of money. In the case of put option if the strike price is less then the actual price,
then the put is said to be of money.

42. 42
Option payoffs:
The optionally characteristics of Options results in a non-Linear payoff for Options. It
means that the losses for the buyer of an option are limited, however the profits are
potentially unlimited. For a write the payoff is exactly the opposite. His profits are limited to
the option premium, however is losses are potentially unlimited.
1. Pay off profile for buyer of call option:
The profit/loss that the buyer makes on the option depends on the spot price of
underlying. Higher the spot price them the strike price, more is the profit he makes. His
loss is limited to the premium he paid for buying an option. E.g.: An investor buys Nifty
Option when the index is at 1220. If the index goes up, he profits. If the index falls he
looses
Profit
Net pay off on call (Profit/ Loss)
0 1220
Premium
Nifty
Loss
2. Pay off profile writer of call option:
The profit/loss that the buyer makes on the option depends on the spot of the
underlying. Whatever is the buyer’s profit is the seller’s loss. Higher the spot price, more is
he loss he makes. I f upon expiration the spot price of the underlying is less than the strike
price, the buyer lets his option expire unexercised and the writer gets to keep the premium

43. 43
E.g.: An investor seller nifty Options when the index is at 1220. If the index goes up, he
looses.
Profit
Premium
0 1220 Nifty
Loss
3. Payoff profile for buyer of put option:
The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. If upon expiration, the spot price is below the strike price, he makes a profit.
Lower the spot price more is the profit he makes. His loss in this case is the premium he paid
for buying the option. Ex: An investor buys nifty Options when the index is at 1220, if the
index goes up he looses.
Profit
0 1220
Premium Nifty
Loss
4. Payoff profile for writer of put option:
The profit/loss that the seller maker on the option depends on the spot price of the
underlying. If upon expiration the spot prices happen to be below the strike price, the buyer

44. 44
will exercise the option on the writer. If upon expiration the spot price of the underlying is
more than the strike price, the buyer lets his option expire un-exercised and the writer gets to
keep the premium. E.g.: An investor sells nifty Options when the index is 1220. If the index
goes up he profits
Prof
0
1220 Nifty
Loss
Differences between Futures and Options:
FUTURES OPTIONS
1. It involves obligations it involves rights
2. No premium is payable Premium is payable
3. Linear payoff Non-Liner payoff
4. Price is zero; strike price moves Strike price is fixed, price moves
5. Both long and short at risk only short at risk
6.Uncertainty in cash flows is more relatively Uncertainty thing is cash flows
Is less relatively
7.Both parties have unlimited profits Loss of option holder is limited
And losses to the premium paid but gains
Is unlimited profit of option?
Writer is limited .

45. 45
.
Valuation of Option:
Option cannot be valued in terms of the series of inflow and outflows, required rate of
return and the time pattern of inflows and outflows, in these terms because Options have
characteristics that make them different from the securities. The valuation of an option
depends upon a number of factors relating to the underlying asset and the financial market.
Effect of Different factors on the valuation of Options
SL.No. Factor Call Option Put Option
Value Value
1. Increase in value of underlying asset Increases Decreases
2. Extent of volatility in value of asset Increases Decreases
3. Increase in strike price Decreases Increases
4. Longer expiration time Increases Decreases
5. Increases in rate of Interest Increases Decreases
6. Increase in Income from asset Decreases Increases
Limitations:
The assumption that there are only two possibilities for the share price over next one year
is impractical and hypothetical such a strategy may not work because of possibilities is
reduce as the time period is shortened.
Black & Scholes Model:
Fisher Black and Myron Scholes presented an option valuation model in 1973. The model
is based on the following assumptions:
 The call option is the European option i.e., it cannot be exercised before the Specified
date.
 The underlying shares do not pay any dividend during the option period.

46. 46
 There are no taxes and transaction costs.
 Share prices move randomly in continuous time and the percentage change Follows
normal distribution.
 The short-term risk free rate is known and is constant during option period.
 The short selling in shares is permitted without penalty.
 Volatility of the underlying asset is known and constant over the period of time.
 The black Scholes model has the following advantages:
 Out of the 5 basic variables required 4 are mentioned in the option contract. Volatility,
which is not mentioned, can be estimated on the basis of historical Data.
 The model is not affected by the risk perception of the investor.
 The model does not depend on the expected return on the share.
Limitations:
The basic assumption that a risk less hedge can be set up in unrealistic.
 The transaction costs are bound to be there is the form of brokerage and will Dilute
the return.
 The estimation of the proper volatility in put remains a serious problem.
 The model also helps to calculate the value of put option, through I was Developed
primarily to values the call Options.
Options offer a number of advantages. They are as follows:
 Flexibility: Options offer flexibility to the buyer in form of right to buy or sell But not
the obligation.
 Versatility: Option can be as conservative or as speculative as one’s investment
Strategy dictates.
 Leverages: Options give high leverage by investing small amount of capital in the
form of premium one can take exposure in the underlying asset of much greater value.
 Risk: Pre-known maximum risk for an option buyer.
 Profit: Large profit potential for limited risk to the option buyer.

47. 47
 Insurance: Equity portfolio can be protected from a decline in the market by way of
buying a protective put. This option position supplies the needed insurance to over
come the uncertainty of the market place.
 Seller Profits: Selling put options is like selling insurance to anyone who feels like
earning revenues by selling insurance can set himself up to do so in the index Options
market.
Index Options:
An index option provides the buyer of the option, the right but not the obligation to buy
or sell the underlying index, at a pre-determined strike price on or before the date of
expiration, depending on the type of option.
Benefits of Index Option:
 Help to capitalize on an expected market move.
 Hedge price risk of the physical stock holdings against adverse market moves.
 Diversified exposure to the market as a whole with a single trading decision.
 Predetermined maximum risk for the buyer.
 High leverage i.e., large percentage gains from relatively small, favorable percentage
moves in the underlying index.
STRATEGIES FOR INDEX OPTIONS:
I. Bullish view of the market:
1. Buy a call: It is exercised if the index is above the strike price. The profit is unlimited. It
is equal to the value of index minus break-even point.
Where BEP = premium paid + strike price. The maximum loss is limited to the premium
paid.
2. Sell a put: It is exercised if the index is below the strike price, the profit is limited to the
premium received and the loss is equal to the difference BEP and the index.
II. Bullish view but not sure:
Bull call spread: It contains of the purchase of a lower strike price call and the sale of higher
strike price call, of the same month. It is excursed if the index is above the strike prices. The
maximum profit is limited to the difference between the two strike prices minus the net
premium paid the loss is limited to the net premium paid
III. Bearish view of the market:

48. 48
1.Sell a call: It is exercised it the index is above strike price the maximum profit is limited to
the premium received. The maximum loss is unlimited and equals to the value of the index
minus break-even point.
2.Buy a put: It is exercised if the index is below the strike price. The maximum profit is equal
to the difference between BEP ad indexes.
IV. Bear view but not sure
Bear put spread: It contains of selling one put option with lower strike price and purchase
another put option with a higher strike price. It is exercised if the index is below the strike
price. The maximum price is limited to the deference between the two strike prices plus the
net premium paid.
V. Neutral view of the market:
1. Long straddle: The purchase of a call and put with the same strike price, the same
expiration date and the same underlying. Maximum risk is limited to the premium paid
and the maximum profit is unlimited.
2. Long Strangle: The purchase of a higher call and a lower put that are both slightly out of
the money and have the same expiration date and are on the same underlying. Maximum risk
is limited to the premium paid and the maximum profit is unlimited.
VI. High Volatility but direction unknown:
1. Short Straddle: The sale of a call and put with the same strike price, same expiration date
and the same underlying. Maximum risk is unlimited and the profit is limited to the
premium paid.
2. Short Strangle: The sale of a higher call and lower put with the same expiration date and
the same underlying. Maximum risk is limited and the maximum profit is limited to the
premium paid.
The difference between straddle and strangle is the strike price of the options. The strangle
has strikes which are slightly out of the money. The advantage of this strategy is that
premiums will be less than that of a straddle as premiums for out of money Options are
lower. The disadvantage is that index needs to move even further for the position to become
profitable. Though strangle is cheaper than the straddle, it also carries much more risk stock
Options.

49. 49
Stock Options:
A stock option is a contact, which conveys to its holder the right, but not the obligation, to
buy or sell shares of the underlying security at a specified price on or before a given date.
After this given date, the option ceases to exist.
The caller of an option is, in turn, obligated to the sell shares to the call option buyer or buy
shares from the put option buyer at the specified price within the time period the option.
Benefits of Stock Options:
 Protect stock holdings from a decline in market price by buying a put.
 Increase income against current stock holdings by writing a covered call.
 Fix buying price of a stock, by buying a call.
 Position for a buy market move-even when you don’t know which way prices will move
by buying a straddle or strangle.
 Benefit from a stock price’s rise or fall without incurring the lost of buying or selling the
stock outright by writing Options.
Strategies for Options of Stocks:
1. Buy a Call: when the market view is bullish a call is bought. It is exercised if the stock
prince is above strike. Maximum profit is unlimited equal to the price of the stock -
BEP. Maximum loss is limited to premium paid.
2 Short stock Long Call: It’s taken to offset a short stock position’s upside risk. It is
exercised if the stock price is above strike. Maximum profit is equal to the difference between
the BEP and the stock price maximum loss is limited to the premium paid.
3. Covered Call: selling call when you are long on the stock does it. It is exercised if the
stock is above the strike price. Profit is limited to the premium paid loss is equal to the
difference between the BEP and the stock price.
4 .Buy a put: When the market view is bearish a put is purchased. It is exercised if the stock
price is below strike. Maximum profit is equal to the difference between BEP and stock price
is below strike. Maximum profit is equal to the difference between BEP and stock price.
Maximum loss is limited to the premium paid.
5. Protective Put: buying put when you are long on the stock does it. It helps to protect
unrealized profits of the stock. Its is exercised it the stock price is below the strike price.
Profit is unlimited while the loss is limited to the premium paid.

50. 50
DATA ANALYSIS
DATA:
The purpose of analysing data is to obtain usable and useful information. The analysis,
irrespective of whether the data is qualitative or quantitative, may:
• Describe and summarise the data
• Identify relationships between variables
• compare variables
• Identify the difference between variables
• Forecast outcomes
DATA ANALYSIS:
"Data analysis is the process of bringing order, structure and meaning to the mass of
collected data. It is a messy, ambiguous, timeconsuming, creative, and fascinating process. It
does not proceed in a linear fashion; it is not neat. Qualitative data analysis is a search for
general statements about relationships among categories of data."
These are the certain companies:
1) HDFC
2) RELIANCE
3) INFOSYS
4) TATA
5) SUNPHARMA
The below are the data analysis of derivatives stock of spot and futures prices.

51. 51
DATA ANALYSIS & INTERPRETATION
Table 1.1: Unit root test of Reliance spot and futures Prices
The above table shows the unit root results of spot and futures prices of reliance. The results
of adf test proves that the futures and spot price have unit root problem and the results of
kpp test statistics confirms the result of adf test. This is also observed that the first difference
of the spot and futures prices donot have unit root problem
Table1.2:Johansen test of Reliance spot and futures Prices
Number of equations = 2
Rank Eigenvalue Trace test p-value Lmax test p-value
0 0.18204 252.43 [0.0000] 246.76 [0.0000]
1 0.0046070 5.6705 [0.0173] 5.6705 [0.0173]
The above table shows the result of johansen co integration test between spot and
futures prices of reliance .From johansen co integration test estimates it is observed that there
is a co integration between spot and futures prices of reliance .and one co integration equation
between equation between spot and future prices of reliance.
TESTS RELIANCE
FUTURES
WITH
DIFFERENCE
FUTURES
RELIANCE
SPOT
WITH
DIFFERENCE
SPOT
ADF test statistic:
tau_c(1)=2.62437
p-value 0.08826
test statistic:
tau_c(1)=-25.8567
asymptotic
p-value3.243e-052
test statistic:
tau_c(1) = -
2.64858
p-value 0.08357
test statistic:
tau_c(1) =
-35.532
p-value 2.493e-
023
KPSS Test statistic =
10.2793
Test statistic =
0.7430229171
Test statistic =
10.2867
Test statistic =
0.0229171
Rank Trace test p-value
0 252.43 [0.0000]
1 5.6705 [0.0172]

52. 52
Table1.3:VECRM test of Reliance spot and futures Prices
The above table shows the result of vector error correction model equations of
reliance spot and futures equations .significant error correction coefficient in the spot
equation of reliance indicates that there is a unidirectional causality from futures to spot in
the long run.futures prices has predictive ability towards spot prices of reliance in the long
run.
coefficient std. error t-ratio p-value
const 0.0683940 0.0267767 2.554 0.0108 **
l_RELIANCE
future 1
1.00344 0.0285121 35.19 3.71e-188
***
1_RELIANCE
future 2
−0.0134491 0.0284886 −0.4721 0.6369
EC1 −0.432537 0.239892 −1.803 0.0716 *
coefficient std. error t-ratio p-value
const 0.0701870 0.0270659 2.593 0.0096
***
l_RELIANCE
spot 1
0.991017 0.0287983 34.41 3.28e-182
***
1_RELIANCE
spot 2
−0.00130590 0.0287793 −0.04538 0.9638
EC1 0.559884 0.245039 2.285 0.0225 **

53. 53
Table1.4: GARCH test of Reliance spot and futures Prices
Dependent variable: Reliance Futures
coefficient
std. error ‘ z p-value
const −1.93074e-06 4.91472e-05 −0.03928 0.9687
uhat2 0.981104 0.00325575 301.3 0.0000 ***
alpha(0) 8.99079e-08 3.83576e-08 2.344 0.0191 **
alpha(1) 0.0403826 0.0102182 3.952 7.75e-05 ***
beta(1) 0.0403826 0.0181643 51.28 0.0000 **
Dependent variable: Reliance Spot
coefficient
std. error ‘ z p-value
const 2.71622e-07 4.98777e-05 0.005446 0.9957
Uhat1 1.00560 0.00335560 299.7 0.0000 ***
alpha(0) 1.13751e-07 4.71201e-08 2.414 0.0158 **
alpha(1) 0.0431881 0.0112019 3.855 0.0001 ***
beta(1) 0.922232 0.0212068 43.49 0.0000 ***
The above table explains the volatility spillovers coefficients of spot and futures
prices of reliance.The residuals spillover co effecients of spot and future equations are
significant there is a bidirectional volatility spillover between spot and futures prices is
observed

54. 54
Graphs:1 of RELIANCE spot and futures
The graph of spot and future prices of RELIANCE that there is a possibility of co
integration between the both spot and future prices.
0
200
400
600
800
1000
1200
RELIANCE spot
RELIANCE spot
0
200
400
600
800
1000
1200
RELIANCE FUTURES
RELIANCE CLOSE

55. 55
Table 2.1: Unit root test of Infosys spot and futures Price
The above table shows the unit root results of spot and futures prices of INFOSYS. The
results of ADF test proves that the futures and spot price have unit root problem and the
results of KPSS test statistics confirms the result of ADF test. This is also observed that the
first difference of the spot and futures prices donot have unit root problem.
Table 2.2:Johansen test of Infosys spot and futures Prices
Rank Eigenvalue Trace test p-value Lmax test p-value
0 0.021872 31.541 [0.0001] 27.157 27.157
1 0.0035640 4.3844 [0.0363] 4.3844 [0.0363]
The above table shows the result of JOHANSEN co-integration test between spot and
futures prices of INFOSYS .From JOHANSEN co-integration test estimates it is observed
that there is a co-integration between spot and futures prices of INFOSYS .and one co-
integration equation between equation between spot and future prices of INFOSYS
TESTS INFY
FUTURES
WITH
DIFFERENCE
FUTURES
INFY SPOT WITH
DIFFERENCE
SPOT
ADF test statistic:
tau_nc(1) = -
1.04825
asymptotic
p-value
0.2663
test statistic:
tau_nc(1) = -
22.7274
asymptotic p-
value 9.216e-042
test statistic:
tau_nc(1) = -
0.911994
asymptotic
p-value
0.3214
test statistic:
tau_nc(1) = -
22.7594
asymptotic p-
value 9.137e-042
KPSS Test statistic
= 3.28902
Test statistic =
0.0141634
Test statistic
= 2.28782
Test statistic =
0.0139876
Rank Trace test p-value
0 31.541 [0.0001]
1 4.3844 [0.0362]

56. 56
Table2.3:VECRM test of Infosys spot and futures Prices
The above table shows the result of vector error correction model equations of
INFOSYS spot and futures equations .significant error correction coefficient in the spot
equation of INFOSYS indicates that there is a unidirectional causality from futures to spot in
the long run.futures prices has predictive ability towards spot prices of INFOSYS in the long
run.
coefficient std. error t-ratio p-value
const 1.05166 0.157048 6.696 3.24e-011
***
d_l_infy
future _1
−0.0775355 0.608128 −0.1275 0.8986
d_l_infyspot_1 −0.0682536 0.612100 −0.1115 0.9112
EC1 0.105065 0.0155185 6.770 1.99e-011
***
coefficient std. error t-ratio p-value
const 1.04886 0.155941 6.726 2.67e-011
***
d_l_infy
future_1
−0.105040 0.603841 −0.1740 0.8619
d_l_infyspot_1 −0.0420142 0.607785 −0.06913 0.9449
EC1 0.104758 0.0154091 6.798 1.65e-011
***

57. 57
Table2.4: GARCH test of Infosys spot and futures Prices
Dependent variable: l_infyfutures
coefficient
std. error ‘ z p-value
const 9.04341 0.0207479 435.9 0.0000 ***
uhat2 1.06972 0.00808636 132.3 0.0000 ***
alpha(0) 0.179139 0.0149882 11.95 6.34e-033
***
alpha(1) 0.926894 0.0763495 12.14 6.47e-034
***
beta(1) 1.05504e-012 0.0259465 4.066e-011 1.0000
Dependent variable: l_infyspot
coefficient
std. error ‘ z p-value
const 10.4881 0.0155834 673.0 0.0000 ***
Uhat1 1.03081 0.00626155 164.6 0.0000 ***
alpha(0) 0.139648 0.0123739 11.29 1.54e-029
***
alpha(1) 0.997876 0.0814758 12.25 1.73e-034
***
beta(1) 0.00212405 0.0136433 0.1557 0.8763
The above table explains the volatility spillovers coefficients of spot and futures
prices of INFOSYS.The residuals spillover co effecients of spot and future equations are
significant there is a bidirectional volatility spillover between spot and futures prices is
observed

58. 58
Graphs:2 of INFOSYSspotand futuresprices
The graph of spotand futurespricesof INFOSYSthatthere isa possibilityof cointegrationbetween
the both spotand futuresprices
0
200
400
600
800
1000
1200
1400
1600
1800
2000
02/Jan/12 02/Jan/13 02/Jan/14 02/Jan/15 02/Jan/16
INFY SPOT
0
200
400
600
800
1000
1200
1400
1600
1800
2000
02/Jan/12 02/Jan/13 02/Jan/14 02/Jan/15 02/Jan/16
INFY FUTURES

59. 59
Table 3.1: Unit root test of HDFC spot and futures Price
The above table shows the unit root results of spot and futures prices of HDFC. The
results of ADF test proves that the futures and spot price have unit root problem and the
results of kpp test statistics confirms the result of ADF test. This is also observed that the
first difference of the spot and futures prices do not have unit root problem.
Table 3.2:Johansen test HDFC spot and futures Prices
Rank Eigenvalue Trace test p-value Lmax test p-value
0 0.18130 247.61 0.0000 245.65 0.0000
1 0.0015970 1.9627 0.1612 1.9627 0.1612
The above table shows the result of johansen Co-integration test between spot and
futures prices of HDFC .From johansen cointegration test estimates it is observed that
there is a Co-integration between spot and futures prices of HDFC .and one Co-integration
equation between equation between spot and future prices of HDFC.
TESTS HDFC
FUTURES
WITH
DIFFERENCE
FUTURES
HDFC SPOT WITH
DIFFERENCE
SPOT
ADF test statistic:
tau_c(1) = -
1.26131
asymptotic p-
value 0.6497
test statistic:
tau_c(1) = -
12.5932
asymptotic p-
value 1.234e-027
test statistic:
tau_c(1) = -1.25792
asymptotic p-value
0.6513
test statistic:
tau_c(1) = -
12.6618
asymptotic p-
value 7.4e-028
KPSS Test statistic =
2.39981
Test statistic =
0.0524536
Test statistic =
14.0287
Test statistic =
0.0522421
Rank Trace test p-value
0 247.61 [0.0000]
1 1.9627 [0.1613]

60. 60
Table3.3:VECRM test of HDFC spot and futures Prices
The above table shows the result of vector error correction model equations of HDFC
spot and futures equations .significant error correction coefficient in the spot equation of
HDFC indicates that there is a unidirectional causality from futures to spot in the long
run.futures prices has predictive ability towards spot prices of reliance in the long run.
coefficient std. error t-ratio p-value
const 0.0212659 0.0135013 1.575 0.1155
l_HDFC
FUTURE_1
1.01541 0.0285009 35.63 3.42e-191
***
l_HDFC
FUTURE_2
−0.0873532 0.0403979 −2.162 0.0308 **
EC1 −0.883191 0.217069 −4.069 5.03e-05
***
coefficient std. error t-ratio p-value
const 0.0189692 0.0134979 1.405 0.1602
l_HDFC
SPOT_1
1.01611 0.0286575 35.46 6.68e-190
***
l_HDFC
SPOT_2
−0.0873725 0.0407836 −2.142 0.0324 **
EC1 0.198361 0.216863 0.9147 0.3605

61. 61
Table3.4: GARCH test of HDFC spot and futures Prices
Dependent variable: HDFC Futures
coefficient
std. error ‘ z p-value
const −5.57425e-05 5.76489e-05 −0.9669 0.3336
uhat2 0.988029 0.00366522 269.6 0.0000 ***
alpha(0) 1.15210e-07 4.69610e-08 2.453 0.0142 **
alpha(1) 0.0546666 0.0141475 3.864 0.0001 ***
beta(1) 0.921811 0.0204525 45.07 0.0000 ***
Dependent variable: HDFC Spot
coefficient
std. error ‘ z p-value
const 5.05694e-05 5.80483e-05 0.8712 0.3837
Uhat1 0.995143 0.00372805 266.9 0.0000 ***
alpha(0) 1.16738e-07 5.23370e-08 2.231 0.0257 **
alpha(1) 0.0517350 0.0150765 3.431 0.0006 ***
beta(1) 0.821813 0.0304325 39.07 0.0000***
The above table explains the volatility spillovers coefficients of spot and futures prices of
HDFC.The residuals spillover co effecients of spot and future equations are significant there
is a bidirectional volatility spillover between spot and futures prices is observed.

62. 62
Graphs:3 of HDFC spot and futures
The graph of spotand futuresof HDFC there isa possibilityof cointegrationbetweenthe
bothspot and futuresprices.
0
200
400
600
800
1000
1200
1400
1600
02/Jan/12 02/Jan/13 02/Jan/14 02/Jan/15 02/Jan/16
HDFC FUTURES
0
200
400
600
800
1000
1200
1400
1600
02/Jan/12 02/Jan/13 02/Jan/14 02/Jan/15 02/Jan/16
HDFCSPOT

63. 63
Table 4.1: Unit root test of Sunpharma spot and futures Price
The above table shows the unit root results of spot and futures prices of sunpharma. The
results of adf test proves that the futures and spot price have unit root problem and the
results of kpp test statistics confirms the result of adf test. This is also observed that the first
difference of the spot and futures prices donot have unit root problem
Table 4.2:Johansen test sunpharma spot and futures Prices
Rank Eigenvalue Trace test p-value Lmax test p-value
0 0.0069739 13.258 [0.1055] 8.5939 [0.3290]
1 0.0037910 4.6642 [0.0308] 4.6642 [0.0308]
The above table shows the result of johansen co integration test between spot and
futures prices of sunpharma .From johansen co integration test estimates it is observed there
TESTS SUNPHARMA
FUTURES
WITH
DIFFERENCE
FUTURES
SUNPHARMA
SPOT
WITH
DIFFERENCE
SPOT
ADF test statistic:
tau_c(1) = -
2.78064
p-value 0.06134
test statistic:
tau_c(1) = -
23.9823
asymptotic p-
value 5.877e-052
test statistic:
tau_c(1) = -
2.7963
p-value 0.05905
test statistic:
tau_c(1) = -
24.0779
asymptotic p-
value 5.32e-052
KPSS Test statistic =
4.04267
Test statistic =
0.131424
Test statistic =
4.03664
Test statistic =
0.130559
Rank Trace test p-value
0 13.258 [0.1059]
1 4.6642 [0.0307]

64. 64
is a co integration between spot and futures prices of sunpharma .and one co integration
equation between equation between spot and future prices of sunpharma.
Table4.3:VECRM test of sunpharma spot and futures Prices
The above table shows the result of vector error correction model equations of
sunpharma spot and futures equations .significant error correction coefficient in the spot
equation of sunpharma indicates that there is a unidirectional causality from futures to spot in
the long run.futures prices has predictive ability towards spot prices of sunpharma in the long
run.
coefficient std. error t-ratio p-value
const 0.0701442 0.0260547 2.692 0.0072
***
Lsunpharma
futures_1
0.967701 0.0285731 33.87 4.59e-178
***
l_sunpharma
futures_2
0.0216234 0.0285317 0.7579 0.4487
EC1 −0.164398 0.337355 −0.4873 0.6261
coefficient std. error t-ratio p-value
const 0.0737866 0.0262450 2.811 0.0050
***
Lsunpharma
spot_1
0.971746 0.0287174 33.84 7.68e-178
***
l_sunpharma
spot_2
0.0175167 0.0286730 0.6109 0.5414
EC1 0.782237 0.342202 2.286 0.0224 **