237557025 project complete document

8/9/2019 237557025 Project Complete Document

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A STUDY ON THE EFFECTIVENESS OF FINANCIAL DERIVATIVES AS A RISK DIVERSIFICATION AND PROFITMAXIMIZATION TOOL

1MSN Institute of Management and Technology, Chavara,. Kollam

“A STUDY ON THE EFFECTIVENESS OF FINANCIAL

DERIVATIVES AS A RISK DIVERSIFICATION AND PROFIT

MAXIMIZATION TOOL”

AT

HEDGE EQUITIES, COCHIN

A project report submitted to the University of Kerala

For the partial fulfillment of the award of the degree of

Master of Business Administration

Submitted By

GOKUL VT

Reg. No: 11811020

Under the guidance of

Prof Dr. K Govindankutty

Professor, MSNIMT, Chavara

MEMBER SREE NARAYANA PILLAI INSTITUTE OF MANAGEMENT

AND TECHNOLOGY

(Approved by AICTE and Affiliated to the University of Kerala)

Mukundapuram P.O,Chavara,Kollam-691585,Kerala

2011 – 2013


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CHAPTER 1

INTRODUCTION TO THE STUDY


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INTRODUCTION

Derivative contract is a contract whose value is determined by the changes in the

value of underlying asset. Underlying assets include stocks, bonds, commodities,

currencies, interest rates and market indices. Hedgers are the investors who use

derivatives as a hedging tool to reduce their future risk. Hedge is an investment

made in order to reduce the risk of adverse price movements in a security by

taking an offsetting position in a related security.

In this study, we use derivative futures and options to diversify the risk and

maximize the profit from the investment. A future is defined as a standardized

contract to buy or sell a specified commodity of standardized quality at a certain

date in future and at a determined future price. The party agreeing to buy the

underlying asset in future is said to have taken a long position and the party who

agrees to sell the underlying in future is said to have taken a short position.

In finance, an option is a contract which gives the owner the right, but not the

obligation, to buy or sell an underlying asset or instrument at a specified strike

price on or before a specified date. The seller incurs a corresponding obligation to

fulfill the transaction, which is to sell or buy, if the long holder elects to "exercise"the option prior to expiration. The buyer pays a premium to the seller for this

right. An option which conveys the right to buy something at a specific price is

called a call; an option which conveys the right to sell something at a specific

price is called a put. Both are commonly traded, though in basic finance for clarity

the call option is more frequently discussed, as it moves in the same direction as

the underlying asset, rather than opposite, as does the put.


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1.1. BACKGROUND OF THE PROBLEM

The project aims to analyse the effectiveness of using financial derivatives as a

risk diverisification and profit maximization tool. Derivatives such as futures and

options are used to diversify risk and maximize profit of a portfolio. Here we

consider Nifty Index futures and options for the study.

Investing in securities such as shares, debentures and bonds is profitable as well as

existing. It is indeed rewarding, but involves a great deal of risk and calls for

scientific as well as artistic skill. In such investment both rational as well as

emotional responses are involved. Investing in financial securities is now

considered to be one of the most risky avenues of investments.

It is rare to investors investing their savings in a single security. Instead they tend

to invest in a group of securities. Such a group of securities is called as Portfolio.

Creation of a portfolio helps to reduce risk without sacrificing returns.

Portfolio management deals with the analysis of individual securities as well as

with the theory and practice of optimally combining securities into portfolios. An

investor who understands the fundamental principles and analytical aspects of

portfolio management has a better chance of success. An investor considering

investments in securities is faced with the problem of choosing from among a

large number of securities. His choice depends upon the risk returns

characteristics of individual securities. He would attempt to choose the most

desirable securities and like to allocate his funds over this group of securities.

Again he is faced with the problem of deciding which securities to hold and how

much to invest in each. The investor faces an infinite number of possible

portfolios differ from those of individual securities combining to form a portfolio.

The investor tries to choose the optimal portfolio taking into consideration the risk

return characteristics of all possible portfolios.

An investor invests his funds in a portfolio expecting to get a good return

consistent with the risk that has to be bear. The return realized from the portfolio

has to be measured and the performance of the portfolio has to be evaluated. It is


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1.2 INTRODUCTION TO THE INDUSTRY

Financial services

Financial services are the economic services provided by the finance industry,

which encompasses a broad range of organizations that manage money, including

credit unions, banks, credit card companies, insurance companies, consumer

finance companies, stock brokerages, investment funds and some government

sponsored enterprises.

The Indian financial services industry is characterized by increasingly vibrant

public- and private-sector institutions. As the common Indian acronym BFSI,

which stands for ―banking and financial services industry,‖ indicates, the banking

sector has historically dominated the industry. But other sectors have made

significant gains as well. Though the industry continues to be dominated by

public-sector institutions, particularly in insurance and asset management, there is

a growing list of private enterprises, competing fiercely both among themselves

and with the public entities.

Recent economic growth has given rise to a growing consumer middle class —

‖Middle India‖— with a strong credit culture and increasing financialsophistication. Many of the goods and services these newly affluent consumers

seek — such as autos, housing, and retirement planning — indicate a significant role

for financial services. On the institutional side, as Indian companies continue to

grow and globalize they will likely require increasingly sophisticated services

from the industry.

Strong demand from consumers and businesses drove India‘s growth over the last

two decades and are expected to continue to set the pace in the future.

Asset management - the term usually given to describe companies which

run collective investment funds. Also refers to services provided by others,

generally registered with the Securities and Exchange Commission as

Registered Investment Advisors.

Hedge fund management - Hedge funds often employ the services of

"prime brokerage" divisions at major investment banks to execute their

trades.


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Custody services - the safe-keeping and processing of the world's

securities trades and servicing the associated portfolios. Assets under

custody in the world are approximately US$100 trillion.

Intermediation or advisory services - These services involve stock

brokers (private client services) and discount brokers. Stock brokers assist

investors in buying or selling shares. Primarily internet-based companies

are often referred to as discount brokerages, although many now have

branch offices to assist clients. These brokerages primarily target

individual investors. Full service and private client firms primarily assist

and execute trades for clients with large amounts of capital to invest, such

as large companies, wealthy individuals, and investment management

funds.

Private equity - Private equity funds are typically closed-end funds,

which usually take controlling equity stakes in businesses that are either

private, or taken private once acquired. Private equity funds often use

leveraged buyouts (LBOs) to acquire the firms in which they invest. The

most successful private equity funds can generate returns significantly

higher than provided by the equity markets

Venture capital is a type of private equity capital typically provided by

professional, outside investors to new, high-potential-growth companies in

the interest of taking the company to an IPO or trade sale of the business.

Angel investment - An angel investor or angel (known as a business angel

or informal investor in Europe), is an affluent individual who provides

capital for a business start-up, usually in exchange for convertible debt or

ownership equity. A small but increasing number of angel investors

organize themselves into angel groups or angel networks to share research

and pool their investment capital.

Conglomerates - A financial services conglomerate is a financial services

firm that is active in more than one sector of the financial services market

e.g. life insurance, general insurance, health insurance, asset management,

retail banking, wholesale banking, investment banking, etc. A key

rationale for the existence of such businesses is the existence of

diversification benefits that are present when different types of businesses

are aggregated i.e. bad things don't always happen at the same time. As a


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consequence, economic capital for a conglomerate is usually substantially

less than economic capital is for the sum of its parts.

Debt resolution is a consumer service that assists individuals that have too

much debt to pay off as requested, but do not want to file bankruptcy and

wish to pay off their debts owed. This debt can be accrued in various ways

including but not limited to personal loans, credit cards or in some cases

merchant accounts. There are many services/companies that can assist with

this.

Money market

As money became a commodity, the money market became a component of the

financial markets for assets involved in short-term borrowing, lending, buying and

selling with original maturities of one year or less. Trading in the money markets

is done over the counter, is wholesale. Various instruments exist, such as Treasury

bills, commercial paper, bankers' acceptances, deposits, certificates of deposit,

bills of exchange, repurchase agreements, federal funds, and short-lived mortgage-

, and asset-backed securities. It provides liquidity funding for the global financial

system. Money markets and capital markets are parts of financial markets. The

instruments bear differing maturities, currencies, credit risks, and structure.

Therefore they may be used to distribute the exposure.

Participants

The money market consists of financial institutions and dealers in money or credit

who wish to either borrow or lend. Participants borrow and lend for short periods

of time, typically up to thirteen months. Money market trades in short-term

financial instruments commonly called "paper." This contrasts with the capital

market for longer-term funding, which is supplied by bonds and equity.

The core of the money market consists of interbank lending--banks borrowing and

lending to each other using commercial paper, repurchase agreements and similar

instruments. These instruments are often benchmarked to (i.e. priced by reference

to) the London Interbank Offered Rate (LIBOR) for the appropriate term and

currency.

Finance companies typically fund themselves by issuing large amounts of asset-

backed commercial paper (ABCP) which is secured by the pledge of eligible

assets into an ABCP conduit. Examples of eligible assets include auto loans, credit


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card receivables, residential/commercial mortgage loans, mortgage-backed

securities and similar financial assets. Certain large corporations with strong credit

ratings, such as General Electric, issue commercial paper on their own credit.

Other large corporations arrange for banks to issue commercial paper on their

behalf via commercial paper lines.

Functions of the money market

The money market functions are

transfer of large sums of money

transfer from parties with surplus funds to parties with a deficit

allow governments to raise funds

help to implement monetary policy

determine short-term interest rates

Common money market instruments

Certificate of deposit - Time deposit, commonly offered to consumers by

banks, thrift institutions, and credit unions.

Repurchase agreements - Short-term loans — normally for less than two

weeks and frequently for one day — arranged by selling securities to an

investor with an agreement to repurchase them at a fixed price on a fixed

date.

Commercial paper - short term usanse promissory notes issued by

company at discount to face value and redeemed at face value

Eurodollar deposit - Deposits made in U.S. dollars at a bank or bank

branch located outside the United States.

Federal agency short-term securities - (in the U.S.). Short-term securities

issued by government sponsored enterprises such as the Farm Credit

System, the Federal Home Loan Banks and the Federal National Mortgage

Association.

Federal funds - (in the U.S.). Interest-bearing deposits held by banks and

other depository institutions at the Federal Reserve; these are immediately

available funds that institutions borrow or lend, usually on an overnight

basis. They are lent for the federal funds rate.

Municipal notes - (in the U.S.). Short-term notes issued by municipalities

in anticipation of tax receipts or other revenues.


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Treasury bills - Short-term debt obligations of a national government that

are issued to mature in three to twelve months.

Money funds - Pooled short maturity, high quality investments which buy

money market securities on behalf of retail or institutional investors.

Foreign Exchange Swaps - Exchanging a set of currencies in spot date and

the reversal of the exchange of currencies at a predetermined time in the

future.

Short-lived mortgage- and asset-backed securities

Discount and accrual instruments

There are two types of instruments in the fixed income market that pay the interest

at maturity, instead of paying it as coupons. Discount instruments, like

repurchase agreements, are issued at a discount of the face value, and their

maturity value is the face value. Accrual instruments are issued at the face value

and mature at the face value plus interest.

Stock Markets:

Stock Market is a market where the trading of company stock, both listedsecurities and unlisted takes place. It is different from stock exchange because it

includes all the national stock exchanges of the country. For example, we use the

term, "the stock market was up today" or "the stock market bubble."

Stock Exchanges:

Stock Exchanges are an organized marketplace, either corporation or mutual

organization, where members of the organization gather to trade company stocksor other securities. The members may act either as agents for their customers, or

as principals for their own accounts. Stock exchanges also facilitates for the issue

and redemption of securities and other financial instruments including the

payment of income and dividends. The record keeping is central but trade is

linked to such physical place because modern markets are computerized. The

trade on an exchange is only by members and stock broker do have a seat on the

exchange.


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History of the Indian Stock Market - The Origin

One of the oldest stock markets in Asia, the Indian Stock Markets has a 200 years

old history.

It dates back to the close of 18th century when the East India Company used to

transact loan securities. In the 1830s, trading on corporate stocks and shares in

Bank and Cotton presses took place in Bombay. Though the trading was broad but

the brokers were hardly half dozen during 1840 and 1850.

An informal group of 22 stockbrokers began trading under a banyan tree opposite

the Town Hall of Bombay from the mid-1850s, each investing a (then) princely

amount of Rupee 1. This banyan tree still stands in the Horniman Circle Park,

Mumbai. In 1860, the exchange flourished with 60 brokers. In fact the 'Share

Mania' in India began with the American Civil War broke and the cotton supply

from the US to Europe stopped. Further the brokers increased to 250. The

informal group of stockbrokers organized themselves as the The Native Share and

Stockbrokers Association which, in 1875, was formally organized as the Bombay

Stock Exchange (BSE).

BSE was shifted to an old building near the Town Hall. In 1928, the plot of land

on which the BSE building now stands (at the intersection of Dalal Street,

Bombay Samachar Marg and Hammam Street in downtown Mumbai) was

acquired, and a building was constructed and occupied in 1930.

Premchand Roychand was a leading stockbroker of that time, and he assisted in

setting out traditions, conventions, and procedures for the trading of stocks at

Bombay Stock Exchange and they are still being followed.

Several stock broking firms in Mumbai were family run enterprises, and were

named after the heads of the family.The following is the list of some of the initial members of the exchange, and who

are still running their respective business:

D.S. Prabhudas & Company (now known as DSP, and a joint venture

partner with Merrill Lynch)

Jamnadas Morarjee (now known as JM)

Champaklal Devidas (now called Cifco Finance)

Brijmohan Laxminarayan


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In 1956, the Government of India recognized the Bombay Stock Exchange as the

first stock exchange in the country under the Securities Contracts (Regulation)

Act.

The most decisive period in the history of the BSE took place after 1992. In the

aftermath of a major scandal with market manipulation involving a BSE member

named Harshad Mehta, BSE responded to calls for reform with intransigence. The

foot-dragging by the BSE helped radicalise the position of the government, which

encouraged the creation of the National Stock Exchange (NSE), which created an

electronic marketplace. NSE started trading on 4 November 1994. Within less

than a year, NSE turnover exceeded the BSE. BSE rapidly automated, but it never

caught up with NSE spot market turnover. The second strategic failure at BSE

came in the following two years. NSE embarked on the launch of equity

derivatives trading. BSE responded by political effort, with a friendly SEBI

chairman (D. R. Mehta) aimed at blocking equity derivatives trading. The BSE

and D. R. Mehta succeeded in delaying the onset of equity derivatives trading by

roughly five years. But this trading, and the accompanying shift of the spot market

to rolling settlement, did come along in 2000 and 2001 - helped by another major

scandal at BSE involving the then President Mr. Anand Rathi. NSE scored nearly

100% market share in the runaway success of equity derivatives trading, thus

consigning BSE into clearly second place. Today, NSE has roughly 66% of equity

spot turnover and roughly 100% of equity derivatives turnover.

CAPITAL MARKET:

The capital market is the market for securities, where companies and the

government can raise long-term funds. The capital market includes the stock

market and the bond market. The capital markets consist of the primary market,

where new issues are distributed to investors, and the secondary market, where

existing securities are traded.

Primary market

The primary market is that part of the capital markets that deals with the

issuance of new securities. Companies, governments or public sector institutions

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Secondary Market

The secondary market, also called aftermarket, is the financial market in which

previously issued financial instruments such as stock, bonds, options, and futures

are bought and sold. Another frequent usage of "secondary market" is to refer to

loans which are sold by a mortgage bank to investors such as Fannie Mae and

Freddie Mac. The term "secondary market" is also used to refer to the market for

any used goods or assets, or an alternative use for an existing product or asset

where the customer base is the second market (for example, corn has been

traditionally used primarily for food production and feedstock, but a "second" or

"third" market has developed for use in ethanol production).

With primary issuances of securities or financial instruments, or the primary

market, investors purchase these securities directly from issuers such as

corporations issuing shares in an IPO or private placement, or directly from the

federal government in the case of treasuries. After the initial issuance, investors

can purchase from other investors in the secondary market.

The secondary market for a variety of assets can vary from loans to stocks, from

fragmented to centralized, and from illiquid to very liquid. The major stock

exchanges are the most visible example of liquid secondary markets - in this case,

for stocks of publicly traded companies. Most bonds and structured products trade

―over the counter,‖ or by phoning the bond desk of one‘s broker -dealer. Loans

sometimes trade online using a Loan Exchange.

Function

In the secondary market, securities are sold by and transferred from one investor

or speculator to another. It is therefore important that the secondary market be

highly liquid (originally, the only way to create this liquidity was for investors and

speculators to meet at a fixed place regularly; this is how stock exchanges

originated. As a general rule, the greater the number of investors that participate in

a given marketplace, and the greater the centralization of that marketplace, the

more liquid the market.

Fundamentally, secondary markets mesh the investor's preference for liquidity

(i.e., the investor's desire not to tie up his or her money for a long period of time,

in case the investor needs it to deal with unforeseen circumstances) with the


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capital user's preference to be able to use the capital for an extended period of

time.

Accurate share price allocates scarce capital more efficiently when new projects

are financed through a new primary market offering, but accuracy may also matter

in the secondary market because:

1) price accuracy can reduce the agency costs of management, and make hostile

takeover a less risky proposition and thus move capital into the hands of better

managers, and

2) accurate share price aids the efficient allocation of debt finance whether debt

offerings or institutional borrowing.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI):

Securities and Exchange Board of India (SEBI) is an autonomous body created by

the Government of India in 1988 and given statutory form in 1992 with the SEBI

Act 1992. Its head office is in Mumbai, and has regional offices in Chennai,

Kolkata and Delhi. SEBI is the regulator of Securities markets in India.

FUNCTIONS OF SEBI:

Regulating the business in stock exchanges and any other securities market.

Registering and regulating the working of collective investment schemes

including mutual funds.

Promoting and regulating self-regulatory organisations.

Prohibiting fraudulent and unfair trade practices in the securities market.

Promoting investors education and training of intermediaries in securities market.

Prohibiting insiders trading in securities.

Regulating substantial acquisition of shares and take-over of companies.

OBJECTIVES OF SEBI:

The promulgation of the SEBI ordinance in the parliament gave statutory status to

SEBI in 1992. According to the preamble of the SEBI, the three main objectives

are: -

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To protect the interests of the investors in securities.

To promote the development of securities market.

To regulate the securities market.

SALIENT FEATURES OF SEBI:

The SEBI shall be a body corporate by the name having perpetual succession and

a common seal with power to acquire, hold and dispose of property, both movable

and immovable, and to contract, and shall, by the said name, sue or by sued.

The Head Office of the Board shall be at Bombay. The Board may

establish offices at other places in India. In Bombay, the Board is situated

at Mittal Court, B-Wing, 224, Nariman Point, Bombay-400 021.

The Chairman and the Members of the Board are appointed by the Central

Government.

The general superintendence, direction and management of the affairs of

the Board are in a Board of Members, which may exercise all powers and

do all acts and things which may be exercised or done by that Board.

The Government can prescribe terms of office and other conditions of

service of the Chairman and Members of the Board. The members can be

removed under section 6 of the SEBI Act under specified circumstances.

It is primary duty of the Board to protect the interest of the investor in

securities and to promote the development of and to regulate the securities

market by such measures, as it thinks fit.

BOMBAY STOCK EXCHANGE:

The Stock Exchange, Mumbai, Popularly known as "Bombay Stock Exchange"

(BSE) was established in 1875 as "The Native Share and Stock Brokers

Association", as a voluntary non-profit making association. It has evolved over the

years into its present status as the premier Stock Exchange in the country. It may

be noted that the Bombay Stock Exchange is the oldest one in Asia, even older

than the Tokyo Stock Exchange, which was founded in 1878.


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The Bombay Stock 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 program.

A Governing Board having 20 directors is the apex body, which decides the

policies and regulates the affairs of the Exchange. The Governing Board consists

of 9 elected directors, who are from the broking community (one third of them

retire every year by rotation), three SEBI nominees, six public representatives and

an Executive Director & Chief Executive Officer and a Chief Operating Officer.

The Executive Director as the Chief Executive Officer is responsible for the day-

to-day administration of the Exchange and he is assisted by the Chief Operating

Officer and other Heads of Department. The Exchange has inserted new Rule in

its Rules, Bye-laws & Regulations pertaining to constitution of the Executive

Committee of the Exchange. Accordingly, an Executive Committee, consisting of

three elected directors, three SEBI nominees or public representatives, Executive

Director & CEO and Chief Operating Officer has been constituted. The

Committee considers judicial & quasi matters in which the Governing Board has

powers as an Appellate Authority, matters regarding annulment of transactions,

admission, continuance and suspension of member-brokers, declaration of a

member-broker as defaulter, norms, procedures and other matters relating to

arbitration, fees, deposits, margins and other monies payable by the member-

brokers to the Exchange, etc.

SENSEX:

The sensitive index has long been known as the barometer of the daily

temperature of Indian bourses. In 1978-79 stock market contained only private

sector companies and they were mostly geared to commodity production .

SENSEX is a "Market Capitalization-Weighted" index of 30 stocks representing a

sample of large, well-established and financially sound companies. SENSEX is


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considered to be the pulse of the Indian stock markets. SENSEX is widely used to

describe the mood in the Indian Stock markets.

Source: Sensex fact sheet Dec 2012, http://www.bseindia.com

NATIONAL STOCK EXCHANGE:

The National Stock Exchange (NSE) is India's leading stock exchange covering

364 cities and towns across the country. NSE was set up by leading institutions to

provide a modern, fully automated screen-based trading system with national

reach. The Exchange has brought about unparalleled transparency, speed &

efficiency, safety and market integrity. It has set up facilities that serve as a model

for the securities industry in terms of systems, practices and procedures.

NSE has played a catalytic role in reforming the Indian securities market in terms

of microstructure, market practices and trading volumes. The market today uses

state-of-art information technology to provide an efficient and transparent trading,

clearing and settlement mechanism, and has witnessed several innovations in

products & services viz. demutualisation of stock exchange governance, screen

based trading, compression of settlement cycles, dematerialisation and electronic

transfer of securities, securities lending and borrowing, professionalisation of

trading members, fine-tuned risk management systems, emergence of clearing

corporations to assume counterparty risks, market of debt and derivative

instruments and intensive use of information technology. The National Stock

Exchange of India Limited has genesis in the report of the High Powered Study

Group on Establishment of New Stock Exchanges, which recommended


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promotion of a National Stock Exchange by financial institutions (FIs) to provide

access to investors from all across the country on an equal footing. Based on the

recommendations, NSE was promoted by leading Financial Institutions at the

behest of the Government of India and was incorporated in November 1992 as a

tax-paying company unlike other stock exchanges in the country. On its

recognition as a stock exchange under the Securities Contracts (Regulation) Act,

1956 in April 1993, NSE commenced operations in the Wholesale Debt Market

(WDM) segment in June 1994. The Capital Market (Equities) segment

commenced operations in November 1994 and operations in Derivatives segment

commenced in June 2000. NSE's mission is setting the agenda for change in the

securities markets in India. The NSE was set-up with the following objectives:

establishing a nation-wide trading facility for equities, debt instruments

and hybrids,

ensuring equal access to investors all over the country through an

appropriate communication network,

providing a fair, efficient and transparent securities market to investors

using electronic trading systems,

enabling shorter settlement cycles and book entry settlements systems, and

Meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technologies have

become industry benchmarks and are being emulated by other market participants.

NSE is more than a mere market facilitator. It's that force which is guiding the

industry towards new horizons and greater opportunities. Till the advent of NSE,

an investor wanting to transact in a security not traded on the nearest exchange

had to route orders through a series of correspondent brokers to the appropriate

exchange. This resulted in a great deal of uncertainty and high transaction costs.

One of the objectives of NSE was to provide a nationwide trading facility and to

enable investors spread all over the country to have an equal access to NSE. NSE

has made it possible for an investor to access the same market and order book,

irrespective of location, at the same price and at the same cost. NSE usessophisticated telecommunication technology through which members can trade


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remotely from their offices located in any part of the country. NSE trading

terminals are present in 363 cities and towns all over India. NSE has been

promoted by leading financial institutions, banks, insurance companies and other

financial intermediaries NSE is one of the first demutualised stock exchanges in

the country, where the ownership and management of the Exchange is completely

divorced from the right to trade on it. Though the impetus for its establishment

came from policy makers in the country, it has been set up as a public limited

company, owned by the leading institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the

ownership, management and trading is in the hands of three different sets of

people. NSE is owned by a set of leading financial institutions, banks, insurance

companies and other financial intermediaries and is managed by professionals,

who do not directly or indirectly trade on the Exchange. This has completely

eliminated any conflict of interest and helped NSE in aggressively pursuing

policies and practices within a public interest framework. The NSE model

however, does not preclude, but in fact accommodates involvement, support and

contribution of trading members in a variety of ways. Its Board comprises of

senior executives from promoter institutions, eminent professionals in the fields of

law, economics, accountancy, finance, taxation, etc, public representatives,

nominees of SEBI and one full time executive of the Exchange. While the Board

deals with broad policy issues, decisions relating to market operations are

delegated by the Board to various committees constituted by it. Such committees

include representatives from trading members, professionals, the public and the

management. The day-to-day management of the Exchange is delegated to the

Managing Director who is supported by a team of professional staff.

NIFTY:

The Nifty is relatively a new comer in the Indian market. S&P CNX Nifty is a 50

stock index accounting for 23 sectors of the economy. S&P CNX Nifty is owned

and managed by India Index Services and Products Ltd. (IISL), which is a joint

venture between NSE and CRISIL. IISL is a specialized company focused upon

the index as a core product. IISL have a consulting and licensing agreement with

Standard & Poor's (S&P), who are world leaders in index services.


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MCX-SX

MCX Stock Exchange Limited (MCX-SX), India‘s new stock exchange, is

recognized by Securities and Exchange Board of India under Section 4 of

Securities Contracts (Regulation) Act, 1956. The Exchange was notified as a

―recognized stock exchange‖ under Section 2(39) of the Companies Act, 1956 by

the Govt. of India on December 21, 2012. In line with global best practices and

regulatory requirements, clearing and settlement of trades done on the Exchange is

conducted through a separate clearing corporation − MCX-SX Clearing

Corporation Ltd. (MCX-SX CCL).

MCX-SX commenced operations in Currency Futures in the Currency Derivatives(CD) segment on October 7, 2008 under the regulatory framework of SEBI and

Reserve Bank of India (RBI). The Exchange commenced trading in Currency

Options on August 10, 2012. MCX-SX commenced trading in Capital Market

(Equity Cash) and Futures & Options (Equity Derivatives) Segments with effect

from February 11, 2013.

SX40-Index of India

SX40 is the flagship Index of MCX-SX. A free float based index of 40 large cap -

liquid stocks representing diversified sectors of the economy. SX40 is designed to

measure the economic performance with better representation of various

industries and sectors based on ICB®, leading global Industry Classification

system from FTSE. The Index is devised to offer cost-effective support for

investment and structured products such as index futures and option, index

portfolio, exchange traded funds, Index funds, etc.

BROKING FIRMS

STOCK BROKERS

A broker is an intermediary who arranges to buy and sell securities on behalf of

clients (the buyer and the seller).

According to Rule 2 (e) of SEBI (Stock Brokers and Sub-Brokers) Rules, 1992, a

stockbroker means a member of a recognized stock exchange. No stockbroker is

allowed to buy, sell or deal in securities, unless he or she holds a certificate of


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registration granted by SEBI.

A stockbroker applies for registration to SEBI through a stock exchange or stock

exchanges of which he or she is admitted as a member. SEBI may grant a

certificate to a stock-broker [as per SEBI (Stock Brokers and Sub-Brokers) Rules,

1992] subject to the conditions that:

a) he holds the membership of any stock exchange;

b) he shall abide by the rules, regulations and bye-laws of the stock exchange or

stock exchanges of which he is a member;

c) in case of any change in the status and constitution, he shall obtain prior

permission of SEBI to continue to buy, sell or deal in securities in any stock

exchange;

d) he shall pay the amount of fees for registration in the prescribed manner; and

e) he shall take adequate steps for redressal of grievances of the investors within

one month of the date of the receipt of the complaint and keep SEBI informed

about the number, nature and other particulars of the complaints.

While considering the application of an entity for grant of registration as a stock

broker, SEBI shall take into account the following namely, whether the stock

broker applicant –

a) is eligible to be admitted as a member of a stock exchange;

b) has the necessary infrastructure like adequate office space, equipment and man

power to effectively discharge his activities;

c) has any past experience in the business of buying, selling or dealing in

securities;


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d) is being subjected to any disciplinary proceedings under the rules, regulations

and bye-laws of a stock

exchange with respect to his business as a stockbroker involving either himself or

any of his partners, directors or employees

MAJOR STOCK BROKERS IN INDIA

HEDGE EQUITIES LTD

Hedge Equities is one of the leading Financial Services Company in India,

specialized in offering a wide range of financial products, tailor made to suit

individual needs. As a first step to make their presence Global, Hedge Equities

have initiated operations in Middle East to cater to the vast Non Resident Indian

(NRI) population in that region. Ever since their inception, they have spanned

their presence all over India through their Meticulous Research, High Brand

Awareness, and Intellectual Management and Extensive Industry knowledge. At

Hedge they believe in creating a new breed of Investors who take judicious

decisions through them. Hedge equities ltd. is one of the leading retail stock

broking house which is running successfully in the country.

GEOJIT BNP PARIBAS

Geojit BNP Paribas today is a leading retail financial services company in India

with a growing presence in the Middle East. The company rides on its rich

experience in the capital market to offer its clients a wide portfolio of savings and

investment solutions. The gamut of value added products and services offered

ranges from equities and derivatives to mutual funds., Life & General insurance

and third party fixed deposits. The need of over 5, 76,000 clients are met via

multichannel services – a country wide network of over 540 offices, phone

service, dedicated customer care centre and internet.

Geojit BNP Paribas has membership in National Stock Exchange (NSE) and the

Bombay Stock Exchange (BSE). In 2007, global ranking major BNP Paribas

joined the company‘s other major shareholders- Mr .C .J. George, KSIDC (Kerala

State Industriai Development Corporation) and Mr. RakeshJunjunwala- when it

took a stake to become the single largest share holder.


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At the forefront of the many fruitful associations between Geojit BNP Pariba and

BNP Paribas in their joint venture namely, BNP Paribas Securities India Private

Limited. This joint venture was created exclusively for domestic and foreign

institutional clients. An industry first was achieved when Geojit BNP Paribas

became the first broker in India to offer full Direct Market Access (DMA) on NSE

to JV‘s institutional clients.

JRG SECURITIES

JRG Securities Ltd. Is one of India‘s leading finance services providers with

strong presence in south India. It was incorporated in 1994 and over the years, it

acquired a name of trust through equity and commodity broking business. In 2007,

Baring India Private Equity fund II Ltd, a leading private equity firm of

international repute acquired a majority stake in the company. With the

investment of BIPEF came fresh inflow of talent and a focused team committed to

taking this company to greater heights. Since then JRG has undergone several

transformations- expanding into new geographies, adopting new state of art

technology, strengthening credit, and risk management systems, creating new

products and strengthening client relationships through service focus. The

company is committed to fully compliant with all regulatory compliances with the

exchanges, SEBI, IRDA, FMC, and RBI. JRG is listed on the BSE and has a

divers set of public shareholders.

RELIGARE

Religare is an emerging market financial services group with a presence across

Asia, Africa, Middle East, Europe and the Americas. In India Religare‘s largest

market, the group offers a wide array of products and services including broking,

insurance, and asset management, lending solutions, investment banking and

wealth management. With more than 10000 employees across multiple

geographies, Religare serves over a million clients, including corporate and

institutions, high net worth families and individuals, and retail investors.

MUTHOOT SECURITIES

The Muthoot group has emerged as one of the India‘s largest financial group of itskind with business interest in 17 diverse fields, a network of over 2000 branches


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nationwide and serving 750 million customers across the country. The muthoot

group with more than 16000 employers representing almost every culter and state

in the country, shall continue to provide supreme quality of service and earn the

trust of millions of people with its constant innovation and dynamism in the times

to come.

SHARE WEALTH

Sharewealth Securities Ltd is the first corporate member of National Stock

Exchange of India Ltd, Bombay Stock Exchange IndiaLtd and MCX Stock

Exchange from Thrissur, the cultural capital of Kerala. It is also depository

participant with CDSL ( Central Depository Services India Ltd). This securities

have two group companies:

Share wealth commodities Pvt Ltd

Share wealth Financial Services Ltd,

MOTILAL OSWAL

MotilalOswal Securities Ltd (MOSL) was founded in 1987 as a small sub-broking

unit, with just two people running the show. Focus on customer first attitude,

ethical and transparent business practises, respect for professionalism. Research

based value investing and implementation of innovative technology has enabled

us to blossom into an over 1600 member team. Today they are a well diversified

financial services firm offering a arrange of financial products and services such

as Wealth Management, broking & distribution. Commodity broking, portfolio

management services, institutional equities. Private equity, investment banking

services and principal strategies.

ANANDRATHI

AnandRathi is a leading full service investment bank founded in 1994 offering a

wide range of financial services and wealth management solutions to institutions,

corporations, high net worth individuals and families. The firm has rapidly

expanded its footprint to over 350 locations across India with international

presence in Hong Kong, Dubai & London.


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interest rate of LIBOR plus 3.50% P.A. and prepaid the existing loan. This

refinance will reduce significantly our interest cost by approximately USD

2.5 Million over the next 4 year period."


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1.3 INTRODUCTION TO THE COMPANY

HEDGE EQUITIES LTD

Hedge equities ltd. is one of the leading retail stock broking house which is

running successfully in the country. Hedge offers its customers a wide range of

equity related services including trade execution on BSE , NSE , Derivatives ,

Depository services , online trading , investment advice etc.. The firm has an

online trading and investment site – www.hedgeequities.com. The site gives access

to superior content and transaction facility to retail customers across the country.

As a first step to make our presence Global, Hedge Equities have initiated

operations in Middle East to cater to the vast Non Resident Indian (NRI)

population in that region. Known for its jargon- free, investor friendly language

and high quality research, the site has a registered base of over thousands of

customers. The content rich and research oriented portal has stood out among its

contemporaries because of its steadfast dedication to offering customers best-of-

breed technology and superior market information. Hedge Equities endeavor to

become a well reputed financial services super-mart catering to the evolving needs

and unique requirements of our clientele, and partnering with them to build,

manage, and grow their Wealth. The objective has been to let customers make

informed decision and to simplify the process of investing in stocks. Hedge

equities have always believed in investing in technology to build its business.

BACKGROUND AND INCEPTION OF THE COMPANY

Hedge Equities is one of the leading Financial Services Company in India,

specialized in offering a wide range of financial products, tailor made to suit

individual needs. As a first step to make our presence Global, Hedge Equities

have initiated operations in Middle East to cater to the vast Non Resident Indian

(NRI) population in that region. Ever since their inception, they have spanned

their presence all over India through their Meticulous Research, High Brand

Awareness, and Intellectual Management and Extensive Industry knowledge.

Hedge believes in creating a new breed of Investors who take judicious decisions

through them.


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Team Hedge Equities is a balanced mix of more than 25 years of cutting edge

experience cutting across various industries with a strong background in the

financial market. The Board comprises of veterans from six power houses in their

respective fields: Fedex Securities, Baby Marine Exports, Thakker Developers,

Smart Financial, S.M.Hegde (CFO, Videocon Industries), and Padmashree Mohan

Lal.

Fedex securities: Managed by a team of ex-bankers, Fedex is a SEBI

registered category 1 merchant banker. The company concentrates on non-fund

based activities like structuring, tie up of project financing, financial restructuring

investment banking, corporate and advisory services. The core management team

consists of bankers with rich experience of decades and exposure to volatile

situations in commercial and investment banking. With offices at Nariman point

and Vile Parle east, Mumbai, state of the art infrastructure and qualified

manpower to conduct the business, Fedex securities envisages a phenomenal

growth in this sector for its clients.

Baby Marine Exports: Baby Marine Group, started its operation in 1977

from Kozhikode and through innovations and hard work has grown into three

unit and related industries spanning both the west and east coast of Indian. Baby

Marine Exports, B.M Products and Baby Marine (Eastern) Exports are

efficiently aided by pre-processing units, ice factories and a fleet of insulated

and refrigerated trucks for sea food transportation. Due to constant upgrading of

machinery, state-of-the-art infrastructural facilities, better links with raw

materials suppliers, and an established network of purchasers have obviously

made Baby Marine Group a leading exporter of processed marine products to

various international markets.

Smart financial: Smart financial entered the financial market only in 1992

but over this brief span has covered a niche for itself by becoming the leading

financial provider. The company offer guidance to investors as equities,

commodities, mutual fund‘s portfolio management services and insurance. It

offers complete range of financial solutions that encompasses every sphere of life

Thakker group: Starting off as a land developer and builder in 1962,

Thakkers groups diversified into commercial production of agricultural and

horticultural products, housing real estate marketing plantation etc. They have

provided shelter to more than 40000 families by offering residential plots and


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premises .Thakker developers is the flagship company of the group. It was

established as private limited in 1987 and later went on to become the only

public limited company in North Maharashtra engaged in housing ,commercial

construction and land development. The company is also a Class1 contractor

registered with the Public Work Department, Govt. of Maharashtra.

SM Hedge: Mr. S.M Hedge, a chartered accountant by profession is the

Chief Finance Officer of the Indian Multinational Videocon International and has

been at the helm of affairs for the last 20 year.

Padmashree Bharat Mohanlal: Mohanlal, the south Indian movie

superstar has become a legend, a brand and cultural ambassador owing to

various factors. Versatility and natural flair for donning complex characters have

won him numerous accolades not to speak of some unforgettable films

contributed by him. A multifaceted personality, he has some business ventures

also which include Vismaya Max Film Post Production Studio, College for

Dubbing Artists at the Kinfra film and Video Park Thiruvananthapuram. He is

the also the director of Uni Royal Marine Exports; a Seafood Export Company.

Intellectual and knowledge arbitrage is the mantra of modern day business. The

same holds true for the financial markets. With the breadth and depth of

knowledge of modern day business that the Board of Hedge brings to the table,

you can be rest assured that some of the best minds in the business are taking care

of your investments.

Mission

“To create an ethical and sustainable financial services platform for

our customers and partner them to build business, to provide

employees with meaningful work, self-development and progression,and to achieve a consistent and competitive growth in profit and

earnings for our shareholders and staff ”.

Vision

“Ever since its inception, Hedge Equities has been a household name

among the masses owing our success to timely Professional financial

assistance to our clients. This aptly articulates our vision of 'Evolving


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into a financial supermarket which will be a one stop shop for all

financial solutions”.

Corporate Social Responsibility

Being a Responsible Corporate Citizen, Hedge Equities has initiated a Non Profit

movement, ‗Hedge Yuva‘, which focuses on educating the masses about Stock

Market. The movement has also formulated various scholarship programs for

young and dynamic youth.

Hedge School of Applied Economics

In its efforts to promote financial education in the country, Hedge Equities has

launched the Hedge School of Applied Economics in the year 2010 with the

objective of creating professionals for the financial markets. The focus is to groom

students in share trading, banking, insurance or wealth management, by

implementing innovative solutions. The tailor-made syllabus is interspersed with

live class rooms, where live share trading is shown and explained. The packed

academic schedules are conducted in sessions led by experienced faculty, market

players from the trading and financial industry, and experts from BSE, NSE and

SEBI. The Hedge School will complement the motivating cause of attracting the

largely untapped segment.

Hedge Yuva

Hedge Equities has also initiated a non-profit movement called Hedge Yuva, an

ambitious programme aimed at propagating the virtues of stock market. The

movement seeks to trickle down to the micro level and educate the masses,

especially the youth, with the intention of converting liquid money to aninvestment in shares. It is as part of this programme that the Hedge School of

Applied Economics was started. This movement believes in creating a financially

strong young India and this initiative is to enlighten the youth into making

educated investment decisions. To accelerate its objectives, it started to become

member of many social networking sites like Face book, Orkut, etc. and as a

result, they are getting faster response. They say that they looking forward for

―smart investors.‖ If any personal advice is needed, just drop in the details and

the rest will be assured.


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Hedge Equities Wealth Management Services

As a part of national wise service development, Hedge Equities launched its

wealth management service (WMS) during December 2010. The services include

portfolio management services, portfolio advisory services and Mutual Fund

Advisory services. This service offering will have tailor-made investment

solutions for each client-based on their risk appetite.

The main objective of this WMS is to make a customer into a successful investor.

In order to understand the customer‘s behavior and their risk bearing capacity,

hedge equities appointed certain wealth management service teams. They will

collect details regarding customers through questionnaires. After studying

consumer‘s expectations and goals they will prepare special investment policies

and teach them its merits and demerits. It‘s the one of the main duties of WMS

teams. Team will choose investment policies from the different kind of assets like

Equity, Commodity, etc. The launch of Wealth Management Services has helped

the company in expanding its services in the State.

Hedge Dhruva

The company rolled out a mobile service outlet called Hedge Dhruva – a new

concept aimed at imparting investment awareness programs throughout Kerala.

The vehicle has investment advisors and conduct investment awareness programs

throughout the state. The idea is being carried out through a mobile van which

will have investment advisors for providing proper financial education thereby,

improving the market participation. The focus will be more on the rural side of the

State where the company feels that there is lot of potential.

Product & Services of Hedge Equities

Equity Trading: Equity gives you the opportunity to have a partnership with

all the leading Business tycoons around the globe. Total capital contribution

for a company comprises of investments through equity share holdings by

small and big investors. The investors who have a stake in a company are

referred to as shareholders. Power of Equity shareholders lies in the optimum

selection of the Industry, have a strong belief in the Company's fundamentals

and also having a confidence in the profit making capability of the company.


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Equity Market, at present, is a rewarding field for the investors and investing

in Indian stocks are profitable for not only the long and medium-term

investors, but also the position traders, short-term swing traders and also very

short term intra-day traders. Fundamentally, stock market is an avenue for

business people to meet shareholders. Other than bank loans, they now have

another option to finance their business. They did it by offering their

company's equities in exchange of shareholders cash. The company is never

required to repay the capital, but the new shareholders have a right to future

profits distributed by the company. For shareholders, they have alternatives to

where they should put their money into. In the same time, they get the

opportunity to participate in capital intensive businesses at an affordable price.

Equity is an investment area which you can capitalize on with proper

assistance regardless of the market circumstances. Hedge Equities opens the

door to this highly lucrative investment opportunity that could provide a

feasible solution to all your financial queries.

Commodities Trading: Commodity "futures" are contracts to buy or sell

certain goods at set prices at a predetermined time in the future. Futures

trading plays a key role in the marketing of a number of important agriculturaland nonagricultural commodities as it provides the industrial and farming

communities with a transparent price discovery platform, which also enables

them to hedge their price risk and price volatility. The growth of Indian

commodities futures trading towards an efficient, transparent and well-

organized market has thrown open a window of benefits and opportunities to

Indian producers and traders. Besides the primary benefits of its twin

economic functions of price discovery and price risk management, commodity

futures trading has also played an instrumental role in integrating various

fragmented components of the commodity ecosystem, thus developing the

overall infrastructure of agricultural commodities marketing in the country.

At present, 24 commodity futures exchanges are operational in India,

which include 21 regional bourses and the three national-level players, with

another three proposed exchanges on the cards. With the state-of the-art

technology-powered secure and efficient operational infrastructure, thesenational exchanges are creating a near-perfect market situation with a much


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wider participation from the ecosystem stakeholders in a large number of

domestic and global commodities during local and international timings.

While the trade in non-agricultural commodities, especially bullion and crude,

has increased in the past two financial years, the same in agricultural

commodities has declined. The share of agricultural commodities almost

halved during 2008-09, due to the continued ban on several commodities. The

clients can trade in commodity futures like gold, silver, crude oil, rubber etc.

And take advantage of the extended trading hours (10 am to 11pm) in

commodities trading.

Currency Trading: Investments in Currency Derivatives can help you to

diversify your portfolio from traditional asset classes. Currency derivatives

can be described as contracts between the sellers and buyers, whose values are

to be derived from the underlying assets, the currency amounts. These are

basically risk management tools in force and money markets used for hedging

risks and act as insurance against unforeseen and unpredictable currency and

interest rate movements. Any individual or corporate expecting to receive or

pay certain amounts in foreign currencies at future date can use these products

to opt for a fixed rate - at which the currencies can be exchanged now itself.

Mutual Funds: A Mutual Fund is a trust that pools the savings of a number of

investors who share a common financial goal. The money thus collected is

invested by the fund manager in different types of securities depending upon

the objective of the scheme. These could range from shares to debentures to

money market instruments. The income earned through these investments and

the capital appreciations realized by the scheme are shared by its unit holder.

Thus a Mutual Fund is the most suitable investment for the common man as it

offers an opportunity to invest in a diversified, professionally managed

portfolio at a relatively low cost.

Online trading: Hedge Equities has a large network of branches with online

terminals of NSE and BSE in the Capital market and derivative segments. The

clients are assured of prompt order execution through dedicated phones and expert

dealers at our offices.


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Internet trading: Hedge Equities offers Internet trading through this site. You

can trade through the Internet from the comforts of your office or home, anywhere

in the world. The dedicated IT systems ensure service up time and speed, making

Internet broking through Hedge Equities hassle-free. Using the ‗easiest‘ facility

provided by NSDL, the clients can transfer the shares sold by them online without

delivery instruction slips. Additionally, digitally signed contract notes can be sent

to clients through E-mail.

Depository services: Hedge Equities is a member of the National Securities

Depository Limited (NSDL), offer depository services with minimum Annual

Maintenance Charges and transaction charges. Account holders can view their

holding position through the Internet. They also offer the ‗easiest‘ facility

provided by NSDL (electronic access to securities information and execution of

secured transaction) through which clients can give delivery instructions via the

Internet.

Derivative trading: Hedge offer trading in the futures and options segment of the

National Stock Exchange (NSE).Through the present derivative trading an

investor can take a short-term view on the market for up to a three months‘

perspective by paying a small margin on the futures segment and a small premium

in the options segment. In the case of options, if the trade goes in the opposite

direction the maximum loss will be limited to the premium paid.

Knowledge Centre: Knowledge Centre activities are intended to provide

systematic and structured services mainly to new investors and also to young

aspirant aiming for a career in financial markets. The centre has three functional

areas: the Publication Division, the Training Centre, and Wealth Management

Advisory Service. And the Hedge Equities initiates Hedge School of Applied

Economics with the sole objective of moulding highly qualified investment

professionals in the state.

Equity Research: Hedge Equities constantly strive to deliver insightful research

to enable pro-active investment decisions. The research department is broadly

divided into two divisions-Fundamental Analysis Group (FAG) and Technical

Analysis Group (TAG).The fundamental analysts are continuously scanning the

entire economy for discovering what they call the ―hidden gems‖ in stock market

terminology and present it to the clients for profitable investments. Timing the

market has always been the most difficult task for all analysts and their Technical


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Analysis Group has emerged to predict the market movements well in advance

using complex Analytical methods including Eliot Wave Theory. They are

equipped with cutting – edge technologies for technical charting which assist the

technical analysts to predict both upside and downside movements efficiently for

the benefit of clients.

Portfolio Management Service: Hedge Equities is a SEBI-approved portfolio

manager offering discretionary and non-discretionary schemes to its clients.

Hedge Equities ‗portfolio management team keeps track of the markets on a daily

basis and is exposed to a lot of information and analytic tools which an investor

would not normally have access to. Other technicalities pertaining to shares like

dividends, rights, bonus, buy-back, mergers and acquisitions are also taken care of

by them.

AREA OF OPERATION:

Hedge Equities has 130 branches in India and one branch in Dubai, UAE.

106 branches in Kerala

06 branches in Karnataka

07 branches in Maharashtra

01 branch in Tamilnadu.

Hedge Equities registered office is at Nariman Point, Mumbai and Corporate

office is in Kaloor, Kochi and their regional offices are in Bnagalore, Shimoga,

and Hyderabad. There are 117 employees in their Head office, 8-10 employees in

their Regional office and 4-5 employees in each branch.

Main Competitors:

Geojit BNP Parbas

JRG Securities

Religare

Muthoot Securities

Share wealth MotilalOswal


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Anandrathi

Angel Brocking

Functional departments

Client Relation Department: The client relation department assists the client or

customer top open an account in HEDGE EQUITIES (p) Ltd securities. This

department is also known as the front office. A client has to open two types of

accounts to trade and own securities in the NSE & BSE.

Finance Department: Thus a department, to organize financial activities may be

created under the direct control of the board of directors. Finance manager will

decide the major financial policy methods. Lower levels can delegate the other

routine activities.

Marketing Department: The major functions of marketing department are:

(i) Business associate development: The company takes up the marketing

activities of the various branches. It ensures an efficient marketing arena at its

various branches. The company encourages better relations in its branches and

promotes for the development of various marketing strategies.

(ii) Brand promotion: An important function of marketing department is to

promote the name of the company.

(iii) Investment promotion: The main clients of the company were its investors.

Hence the marketing department tries to capture as many investors as possible to

encourage them to invest.

(iv) Delivery promotion: Intraday trading is not always profitable and might

involve a lot of risk hence the company promotes for delivery were the shares are

kept to be sold for a later date analysing the profitability factors.

Systems Department: The systems department is playing a vital role in the day

operations of the company. It is through the systems department that the clients

can avail the facilities of Internet trading. Optic fibre cables and high bandwidth

connections from the Hedge Equities (P) Ltd office to the ISP, a dedicated server

and back-up ISDN connections were maintained directly by the systems

department. For the purpose of trading they have made use of two software

namely ODIN (Open Dealers Integrated Network)

Human Resources Department: Human resource is often considered as the back bone of an organization even in this age of advanced automation and


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be placed by the client itself, and he can make changes before the trade is done

for changing the price, cancellation of the order.

Delivery and Depository Department: Delivery refers to the share that bought

on particular day are not sold on that day itself and holding of the share for an

appreciation in the value of the security and to trade it on a future date. Deliver

Instruction Slip: it is a slip the client should fill and gave to the dealer regarding

the purchase of the share.

Equity Research Department: The function of the department is to study the

details regarding the share or securities and to make prediction regarding the

future performance of the company. The following types of approaches done

through this department:

i) Fundamental analysis

ii) Technical analysis

Management of the Company

Alex K Babu Managing Director

Bhuvanendran CEO

Bobby J Arakunnel COO

Mr. Mohanlal Director

Mr. Joy Arrackal Director

Dr.Samuel George Director

Pradeep Kumar C Director


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Organisation Structure


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Under the GM

Regional Organization Structure


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1.4. RESEARCH METHODOLOGY

A) OBJECTIVE OF THE STUDY

For the effectiveness of the study the objectives are:

PRIMARY OBJECTIVE:

1. To analyse and determine the effectiveness of Financial Derivatives as a

risk diversification and profit maximization tool.

SECONDARY OBJECTIVES:

2. To study about the impact of hedging in the derivative market.

3. To construct an optimal portfolio to test the diversification strategy.

4. To study how to use derivatives, especially futures and options in volatile

markets to make profits maximization and risk reduction.

B) METHODOLOGY AND SAMPLE DESIGN

Research Problem

Stock market is an investment avenue where the returns can be maximum and

within no time. However, the market is volatile and the investment involves high

risk. Investors always expect the market to be bullish and give them maximum

possible returns. For that the risk diversification must be done. Hedging is a

popular method used by investors to reduce the risk and maximize the profit from

such investments. This research analyses whether hedging with financial

derivatives such as futures and options is effective in risk management.

Methodology of Data Collection

The data are collected in the form of secondary data. It is taken from published

reports, annual company reports, and library books and from the websites of NSE

and various other websites. The data used for the study and historical or secondary

nature. The companies are selected according to their beta value and market

capitalization.


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Area of Study – Index Futures and Options

Fluctuations in the market indices affect the investors‘ investments in the stock

market. Stocks with high beta value have a positive change in response to the

market indices. Derivatives help to reduce to the risk of losing value due to the

volatility of the market. Index futures and index options were the first derivatives

to be introduced in India. These are basically derivative tools based on stock

index. They are considered to be the real risk management tools. Since the

derivatives are permitted legally, one can use them to insulate its portfolio against

the vagaries of the market.

Sample design / Portfolio Build up

For the purpose of the study a portfolio has been built with 10 companies from 5

different industries based on high beta value and market capitalization.

The companies and the industries are:

Industry Name Company Name Beta Value Market Cap in million

Steel TATA STEEL LTD. 2.04 290,150.59

JINDAL STEEL &

POWER LTD

1.5 266,240.69

Banking ICICI Bank Ltd 1.67 1,313,518.00

HDFC Bank Ltd 1.02 1,627,000.00

Telecom Idea Cellular LTD 1.08 449,054.41

Reliance Communications

Ltd

1.85 227,662.20

Power Adani Power Ltd 1.2 161,258.41

Reliance Power Ltd 1.61 194,535.50

Engineering Larsen & Toubro Ltd 1.55 868,572.69

Bharath Heavy Electricals

Ltd

1.34 478,138.69


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C) SAMPLING PLAN

The data used is secondary data from the Indian stock market. Data is

collected from March 1st 2013 to May 30th 2013. The historical data

regarding the stock market index S&P Nifty, the futures index FUTIDX

NIFTY and OPTIDX Nifty are considered.

D) RESEARCH DESIGN

The research is conducted at Hedge Equities, Cochin. The type of research

used is descriptive research.

E) PERIOD OF STUDY

The period of study is from May 2nd 2013 to June 15th 2013, with duration

of 45 days.

F) SOURCES OF DATA COLLECTION

The nature of data used is historical data. The information is collected

from various textbooks, websites and company data.

G) STATISTICAL TOOLS USED FOR ANALYSIS

1) Beta value analysis

Beta is the slope of the characteristic regression line. The beta valuedescribes the relationship between the stock‘s return and the index returns.

Beta = +1

One percent change in market index return causes exactly one percent

change in the stock return indicates that the stock moves in tandem with

market.

Beta = +0.5

One percent changes in market index return causes 0.5 percent change in

the stock return. The stock is less volatile compared to the market.

Beta = +2

One percent change in market index return causes 2 percent change in the

stock return. The stock return is more volatile. When there is a decline in

the market return, the stock with beta of 2 would give a negative return of

20 percent. The stocks with more than 1 beta value are considered to be

risky.


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Negative Beta value indicates that the stock return moves in the opposite

direction to the market return. A stock with a negative beta of -1 would

provide a return of 10 percent, if the market return declines by 10 percent

and vice versa. Stocks with negative returns are very rare.

Recipe for calculation of beta value:

β = n ∑ X Y - (∑ x) ∑ y)

N ∑ x2 - (∑ x) 2

Where

X Index Return

Y Stock Return

X Sum of Index return

Y Sum of stock return

N No. of days

The beta is calculated in excel sheet by using data on month of April of the

particular stock & Index market.

2) Weightage of Share

Weightage of share =

3) Hedge Ratio

Hedge Ratio=


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46MSN Insti

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