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STUDY ON DERIVATIVES AS A TOOL FOR HEDGING
Submitted in partial fulfillment of the requirements for the award of the
Degree of Bachelor of Business Management
Of Christ University
By
SNEHA JAIN
(Reg. No. 1011263)
Under the guidance of
Prof. VIJAY AGAWANE
Department of Management Studies
CHRIST UNIVERSITY
BANGALORE
2013
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CERTIFICATE (Company-Optional)
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CERTIFICATE
This is to certify that SNEHA JAIN, (Reg. No. 1011263) is a bonafide student
of Bachelor of Business Management of Christ University, Bangalore and she
has prepared and submitted the project report, titled Derivatives as a tool for
hedging in partial fulfillment of the requirements for the award of the Degree
of Bachelor of Business Management of Christ University, Bangalore, for theacademic year 2012-2013.
Place: Bangalore Dr. Jain
Mathew
Date: 20-02-2013 HOD
Dept. of Management
Studies
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CERTIFICATE
This is to certify that the project report, titled Derivatives as a tool for
hedging submitted to Christ University, in partial fulfillment of the
requirements for the award of the Degree of Bachelor of Business Management,
is a record of original research work done by Sneha Jain, during the period2012 2013 of her study in the Department of Management Studies at Christ
University, Bangalore, under my supervision and guidance and the project
report has not formed the basis for the award of any Degree/ Diploma/
Associate ship/ Fellowship or other similar title of recognition to any candidate
of any University.
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Date: 20 - 02 - 2013 Prof. Vijay
Agawane
DECLARATION
I, Sneha Jain, hereby declare that the project report, titled Derivatives as a tool
for hedging submitted to Christ University, in partial fulfilment of the
requirements for the award of the Degree of Bachelor of Business Management
is a record of original and independent research work done by me during 2012
2013 under the supervision and guidance ofProf. Vijay Agawane, Department
of Management Studies and it has not formed the basis for the award of any
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Degree/ Diploma/ Associate ship/ Fellowship or other similar title of
recognition to any candidate of any University.
Date: 20 - 02- 2013 Sneha
Jain
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ACKNOWLEDGEMENT
Sneha Jain
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INTRODUCTION TO FINANCE
Finance is the study of funds and management. It is the study of how investors allocate
theirassets over time under conditions of certainty and uncertainty. A key point in finance,
which affects decisions, is the time value of money, which states that a unit of currency today
is worth more than the same unit of currency tomorrow. Finance aims to price assets based on
their risk level, and expected rate of return.
The word finance was originally a French word. In the 18th century, it was adapted by
English speaking communities to mean the management of money. Since then, it has found
a permanent place in the English dictionary.
Finance is nothing but an exchange of available resources. Finance is not restricted only to
the exchange and/ormanagement ofmoney. A barter trading system is also a type of finance.
Thus, we can say, Finance is an art of managing various available resources like money,
assets, investments, securities, etc.
Finance can be defined as, Finance is a simple task of providing the necessary funds
(money) required by the business of entities like companies, firms, individuals and others on
the terms that are most favourable to achieve their economic objectives.
"Finance is the procurement of funds and effective utilisation of funds. It also deals with
profits that adequately compensate for the cost and risks borne by the business."
The general areas of finance are business finance, personal finance, and public finance. It also
deals with the concepts of time, money, risk, and the interrelation between the given factors.
It is basically focused on how the money is spent and budgeted. It is one of the most
important aspects in handling business. Finance addresses the methods wherein business
entities used their financial resources on a certain period of time. It is the application of a set
http://en.wikipedia.org/wiki/Investorshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Time_value_of_moneyhttp://kalyan-city.blogspot.com/2011/04/what-is-management-definitions-meaning.htmlhttp://kalyan-city.blogspot.com/2011/07/what-is-money-meaning-definition.htmlhttp://en.wikipedia.org/wiki/Investorshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Time_value_of_moneyhttp://kalyan-city.blogspot.com/2011/04/what-is-management-definitions-meaning.htmlhttp://kalyan-city.blogspot.com/2011/07/what-is-money-meaning-definition.html -
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of techniques used by organizations in managing their financial affairs. The income and
expenditure are emphasized in finance and its differences can easily be indicated.
Nowadays, loans have been packaged for resale. This means that the debt has been bought by
an investor from the bank. These bonds are sold to investors by financial corporations who
have exceeded beyond their expenditures. The investor can now collect all the interests and
be sold again through a secondary market. Banks serve as facilitators to companies in the
provision of credit and mutual funds. Investments are managed carefully under a financial
risk management to control gambling chances of these financial assets. Financial instruments
are also used to secure these assets on securities exchanges such as stock exchanges and
bonds. A bank provokes the activities of both borrowers and lenders. Lenders pay deposits to
banks on which it pays the interest rates. The central banks are the last resorts that handle the
monetary funds. These banks affect the interest rates being charged such as an increase in the
money supply will result to a decrease in the interest rates.
Financial capital is a monetary resource that allows businesses to purchase items that will
create goods for production and other services. The budget is the documentation of the entire
entrepreneurship. The outline includes the objectives of the business, the target sets, resulting
costs, required investment, planned sales, growth, financing source, and financial results. It
can be directed on long term or on a short term basis. The capital budget is mainly concerned
with the proposed fixed asset requirements. The financing of the expenditure is also indicated
in the capital budget. A detailed plan of all the sources and cash usage is emphasized in the
cash budget. It has six main sections such as the beginning cash balance, cash collections,
cash disbursements, cash excess, cash deficiencies, financing, the ending cash balance, and
the management of current assets. A credit comes in various forms such as of open accounts,
instalment sales, credit cards, and supplier credits. The advantages of a credit trade are
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gaining loyalty and goodwill amongst costumers, drawing in more customers than cash
trades, stimulates agricultural and industrial production, and increases rates. But there are
also disadvantages to credit trades as well such as risks of bad debt, high administration
expenses, necessitates more working capital, risks of bankruptcy declaration, and leading to
purchasing nonessential items. An effective credit control may lead to increase in sales,
increase in profits, reduces bad debts, builds customer loyalty, and increases company
capitalization. The information on creditworthiness is acquired through credit agencies, bank
references, credit agencies, chambers of commerce, and credit application forms. Taking
legal actions is one part of the many duties of the credit department.
Personal finance is related to how much money is needed by an individual. It is concerned on
financial resources and its usage. Tax policies and family assets will certainly affect personal
decisions. It will also identify the credit score of the lender and the actual financial standing.
Planning for a secured financial future within the environments economic stability is one
primary concern of the personal finance as well. There are various factors that affect
decisions in handling personal finance which are financing durable goods, paying for
education, monthly bills, secured loans, minimal debt obligations, and health insurance, and
retirement plans. Meanwhile, corporate finance holds a task in providing financial resources
for certain organizations and balances risks and profitability. It is referred as SME finance for
small enterprises. Managerial finance maximizes a companys wealth and it also values the
stocks. Bonds are long-term funds created by ownership equity and long-term credits. Short-
term funding comes from a line of credit given by banks as a working capital.
Studying finance will lead to wiser decisions making on financial funds. It can help to
identify risks and benefits while planning to set up ones business. Finance gives you
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optimum control over your financial assets which will certainly help you in attaining a
financially secured life.
Relationship of Finance with Other Discipline
In these other discipline, we can include production and its department, marketing and its
department and personnel and its department. Relationship shows balanced behavior of
officers of finance department and other department's officers. They should concentrate on
one target of company and many other things, they should know for creating good relation.
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Relationship of Finance with Production
Production departments main duty is to produce the goods. For producing goods, it needs
raw material, labor and other expenses. For paying all expenses, production department needs
money and fund which will be fulfilled by finance department. Finance department checks
the budget of production department and allow funds for production department. With this
view, we can understand that production department is dependent on finance departments
decision. Now, if production department performs his duty honestly and products are
produced and sold on time, it will be helpful for increase sale and profitability and it will
again recycle the fund with high profit in finance department. So, we can say both are
dependent on each other. Both are players of business team. Both should be adopt co-
operative view for each other. After this, business team can succeed in business.
Relationship of Finance with Marketing
Marketing departments main duty is to sell maximum goods and satisfy the consumers. Its
products input cost will decrease if all products are sold by marketers of company. For
developing the product, promotion activities and distribution activities of marketing
department need some money for paying salesmen, advertising budget and other promotional
expenses. For this marketing department makes his marketing budget and it is cleared by
finance department, but sometime finance department will not all specific marketing
expenses but marketing department need that type of expenses for promotion of sales. This
will create confliction. Good relations will be helpful for both departments. If both
department does meeting and show behavior like good relative, the problem can easily solve.
Both departments should think that both are the part of companys organization and co-
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ordination between them is must. Sometime, marketing department obtains big order for
supplying the goods, at that time finance department should help marketing department for
arrangement of money for buying raw material and supplying quickly without any delay.
Relationship of Finance with Human Resources
Human Resource is that science which manages the employees of company and finance is
that science which manages the money. If personnel department and finance department work
together with co-operation, both departments can satisfy the objectives of company. It is the
objective of company to satisfy employee by fulfilling their financial needs. It is also
objective of company to reduce the misuse of fund by paying excess salary that required cost
of doing work by employee. So, both department should understand each others objective
and should help other department for fulfilling the objectives. One more thing, financial
decisions are also very necessary in human resource area. Corporate are moving to the
development of employees. They are human resource capital of company. Now, investment
in training of employees, incentive schemes and retirement schemes etc should be calculated
like other investment and both departments should take maximum advantages from this asset.
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INTRODUCTION TO THE STUDY
Derivatives are financial contracts whose value/price is dependent on the behavior of the
price of one or more basic underlying assets (often simply known as the underlying). These
contracts are legally binding agreements, made on the trading screen of stock exchanges, to
buy or sell an asset in future. The asset can be a share, index, interest rate, bond, rupee dollar
exchange rate, sugar, crude oil, soybean, cotton, coffee etc. Thus, a derivative instrument
derives its value from some underlying variable.
Derivatives are specialized contracts which are employed for a variety of purposes
including reduction of funding costs by borrowers, enhancing the yield on assets and
modifying the payment structure on assets. The most important use of derivatives is in
transferring market risk, called hedging, which a protection against losses resulting from
unforeseen price or volatility changes. Thus derivatives are a very important tool of risk
management.
Derivatives are an emerging financial product. Different types of people use
derivatives for different purposes. They are producers, customers, traders, financial
institutions, investors, etc. But they are using derivatives mostly for hedging their price. In
recent years, derivatives have increasingly become important in the field of finance.
Risk minimization is one of the measures that can be best applied in derivatives. My
study focuses mainly on how effectively traders, investors and those dealing in the
derivatives can minimize the risk and hedge more successfully.
Factors driving the growth of derivatives
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Over the last three decades, the derivatives market has seen a phenomenal growth. A large
variety of derivative contract have been launched at exchanges across the world. Some of the
factors driving the growth of financial derivatives are: -
Increased volatility in asset prices in financial markets
Increased integration of national financial markets with international markets
Marked improvement in communication facilities and sharp decline in their costs
Development of more sophisticated risk management tools, providing economic
agents a wider choice of risk management strategies
Innovations in the derivatives markets, which optimally combine the risks and returns
over a large number of financial assets leading to higher returns, reduced risks as well
as transactions costs as compared to individual financial assets
HIGHLIGHTS OF THE RESEARCH PROJECT
The main objective of the study is to analyze different strategies available for minimizing the
risks in derivatives for different market conditions and to identify how the investor can
reduce his risk using derivatives and speculate effectively. The title of the project is A Study
onDerivatives as a tool for hedging
Besides that I am also trying to gain basic knowledge about derivatives
For studying and analyzing purpose I have used some of the most popular index of nifty
with my company indiabulls and calculated beta value which shows the volatility of the
stock.
The study also includes the findings derived from the analysis and interpretation of the
secondary data collected. On the basis of the analysis I have been able to interpret that risk
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minimization techniques can be effectively applied in the derivatives and can be used for
hedging the price.
Moreover, before going for hedging the investors should have a clear idea about
derivatives and before they implement various risk minimization strategies of derivatives it is
important for these investors to have a thorough knowledge of about the market.
HISTORY OF DERIVATIVES
The history of derivatives is quite colorful and surprisingly a lot longer than most people
think.
To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the
year 1700 B.C., Jacob purchased an option costing him seven years of labor that granted
him the right to marry Laban's daughter Rachel. His prospective father-in-law, however,
reneged, perhaps making this not only the first derivative but the first default on a
derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah,
but because he preferred Rachel, he purchased another option, requiring seven more years
of labor, and finally married Rachel, bigamy being allowed in those days. Jacob ended up
with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel, and
a lot of domestic friction, which is not surprising. Some argue that Jacob really had
forward contracts, which obligated him to the marriages but that does not matter. Jacob
did derivatives, one way or the other. Around 580 B.C., Thales the Milesian purchased
options on olive presses and made a fortune off of a bumper crop in olives. So derivatives
were around before the time of Christ.
The first exchange for trading derivatives appeared to be the Royal Exchange in London,
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which permitted forward contracting. The celebrated Dutch Tulip bulb mania, which you
can read about in Extraordinary Popular Delusions and the Madness of Crowds by
Charles Mackay, published 1841 but still in print, was characterized by forward
contracting on tulip bulbs around 1637. The first "futures" contracts are generally traced
to the Yodoya rice market in Osaka, Japan around 1650. These were evidently
standardized contracts, which made them much like today's futures, although it is not
known if the contracts were marked to market daily and/or had credit guarantees.
Probably the next major event, and the most significant as far as the history of U. S.
futures markets, was the creation of the Chicago Board of Trade in 1848. Due to its prime
location on Lake Michigan, Chicago was developing as a major center for the storage,
sale, and distribution of Midwestern grain. Due to the seasonality of grain, however,
Chicago's storage facilities were unable to accommodate the enormous increase in supply
that occurred following the harvest. Similarly, its facilities were underutilized in the
spring. Chicago spot prices rose and fell drastically. A group of grain traders created the
"to-arrive" contract, which permitted farmers to lock in the price and deliver the grain
later. This allowed the farmer to store the grain either on the farm or at a storage facility
nearby and deliver it to Chicago months later. These to-arrive contracts proved useful as
a device for hedging and speculating on price changes. Farmers and traders soon realized that
the sale and delivery of the grain itself was not nearly as important as the ability to
transfer the price risk associated with the grain. The grain could always be sold and
delivered anywhere else at any time. These contracts were eventually standardized
around 1865, and in 1925 the first futures clearinghouse was formed. From that point on,
futures contracts were pretty much of the form we know them today.
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In the mid 1800s, famed New York financier Russell Sage began creating synthetic loans
using the principle of put-call parity. Sage would buy the stock and a put from his
customer and sell the customer a call. By fixing the put, call, and strike prices, Sage was
creating a synthetic loan with an interest rate significantly higher than usury laws
allowed.
One of the first examples of financial engineering was by none other than the beleaguered
government of the Confederate States of America, which is sued a dual currency
optionable bond. This permitted the Confederate States to borrow money in sterling with
an option to pay back in French francs. The holder of the bond had the option to convert
the claim into cotton, the south's primary cash crop.
Interestingly, futures/options/derivatives trading was banned numerous times in Europe
and Japan and even in the United States in the state of Illinois in 1867 though the law was
quickly repealed. In 1874 the Chicago Mercantile Exchange's predecessor, the Chicago
Produce Exchange, was formed. It became the modern day Merc in 1919. Other
exchanges had been popping up around the country and continued to do so.
The early twentieth century was a dark period for derivatives trading as bucket shops
were rampant. Bucket shops are small operators in options and securities that typically
lure customers into transactions and then flee with the money, setting up shop elsewhere.
In 1922 the federal government made its first effort to regulate the futures market with
the Grain Futures Act. In 1936 options on futures were banned in the United States. All
the while options, futures and various derivatives continued to be banned from time to
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time in other countries.
The 1950s marked the era of two significant events in the futures markets. In 1955 the
Supreme Court ruled in the case of Corn Products Refining Company that profits from
hedging are treated as ordinary income. This ruling stood until it was challenged by the
1988 ruling in the Arkansas Best case. The Best decision denied the deductibility of
capital losses against ordinary income and effectively gave hedging a tax disadvantage.
Fortunately, this interpretation was overturned in 1993.
Another significant event of the 1950s was the ban on onion futures. Onion futures do not
seem particularly important, though that is probably because they were banned, and we
do not hear much about them. But the significance is that a group of Michigan onion
farmers, reportedly enlisting the aid of their congressman, a young Gerald Ford,
succeeded in banning a specific commodity from futures trading. To this day, the law in
effect says, "you can create futures contracts on anything but onions.
In 1972 the Chicago Mercantile Exchange, responding to the now-freely floating
international currencies, created the International Monetary Market, which allowed
trading in currency futures. These were the first futures contracts that were not on
physical commodities. In 1975 the Chicago Board of Trade created the first interest rate
futures contract, one based on Ginnie Mae (GNMA) mortgages. While the contract met
with initial success, it eventually died. The CBOT resuscitated it several times, changing
its structure, but it never became viable. In 1975 the Merc responded with the Treasury
bill futures contract. This contract was the first successful pure interest rate futures. It was
held up as an example, either good or bad depending on your perspective, of the
enormous leverage in futures. For only about $1,000, and now less than that, you
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controlled $1 million of T -bills. In 1977, the CBOT created the T -bond futures contract,
which went on to be the highest volume contract. In 1982 the CME created the
Eurodollar contract, which has now surpassed the T -bond contract to become the most
actively traded of all futures contracts. In 1982, the Kansas City Board of Trade launched
the first stock index futures, a contract on the Value Line Index. The Chicago Mercantile
Exchange quickly followed with their highly successful contract on the S&P 500 index.
1973 marked the creation of both the Chicago Board Options Exchange and the
publication of perhaps the most famous formula in finance, the option pricing model of
Fischer Black and Myron Scholes. These events revolutionized the investment world in
ways no one could imagine at that time. The Black-Scholes model, as it came to be
known, set up a mathematical framework that formed the basis for an explosive
revolution in the use of derivatives. In 1983, the Chicago Board Options Exchange
decided to create an option on an index of stocks. Though originally known as the CBOE
100 Index, it was soon turned over to Standard and Poor's and became known as the S&P
100, which remains the most actively traded exchange-listed option.
The 1980s marked the beginning of the era of swaps and other over-the-counter
derivatives. Although over-the-counter options and forwards had previously existed, the
generation of corporate financial managers of that decade was the first to come out of
business schools with exposure to derivatives. Soon virtually every large corporation, and
even some that were not so large, were using derivatives to hedge, and in some cases,
speculate on interest rate, exchange rate and commodity risk. New products were rapidly
created to hedge the now-recognized wide varieties of risks. As the problems became
more complex, Wall Street turned increasingly to the talents of mathematicians and
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physicists, offering them new and quite different career paths and unheard-of money. The
instruments became more complex and were sometimes even referred to as "exotic."
In 1994 the derivatives world was hit with a series of large losses on derivatives trading
announced by some well-known and highly experienced firms, such as Procter and
Gamble and Metallgesellschaft. One of America's wealthiest localities, Orange County,
California, declared bankruptcy, allegedly due to derivatives trading, but more accurately,
due to the use of leverage in a portfolio of short- term Treasury securities. England's
venerable Barings Bank declared bankruptcy due to speculative trading in futures
contracts by a 28- year old clerk in its Singapore office. These and other large losses led to a
huge outcry, sometimes against the instruments and sometimes against the firms that
sold them. While some minor changes occurred in the way in which derivatives were
sold, most firms simply instituted tighter controls and continued to use derivatives.
Early forward contracts in the US addressed merchants concerns about ensuring that there
buyers and sellers for commodities. However credit risk remained a serious problem to deal
with these problems a group of Chicago Board of Trade (CBOT) in 1848. The primary
intention of CBOT was to provide a centralized location known in advance for buyers and
sellers to negotiate forward contracts. In 1865 the CBOT went one step further and listed the
first exchange traded derivatives contract in the US, these contracts were called futures
contracts. In 1919, Chicago Mercantile Exchange (CME). The CBOT and the CME
remain the two largest organized futures exchanges, indeed the two largest financial
exchanges of any kind in the world today.
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The first stock index futures index futures contract was traded at Kansas City Board
of Trade. Currently the most popular stock index futures contract in the world is based on
S&P 500 index, traded on Chicago Mercantile Exchange. During the mid eighties, financial
futures became the most active derivatives instruments generating volumes many times more
than the commodity futures. Index futures, futures on t-bills and Euro Dollar futures are the
most popular futures contracts traded today.
Derivative products initially emerged as hedging devices against fluctuations in
commodity prices, and commodity linked derivatives remained the sole form of such
products for almost three hundred years. Financial derivatives came into spotlight in the post
1970 periods due to growing instability in the financial markets. However, since their
emergence these products have become very popular and by 1990s, they accounted for about
two-thirds of total transactions in derivative products.
In recent years, the market for financial derivatives has grown tremendously in terms
of variety of instruments available, their complexity and also turnover. In the class of equity
derivatives all over the world, futures and options on stocks, especially among institutional
investors, are major users of index-linked derivatives. Even small investors find the easeful
due to high correlation of the popular indexes with various portfolios and ease of use. The
lower costs associated with index derivatives vis--vis derivative products based on
individual securities is another reason for their growing use.
They will innovate as a way of life.
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They will compete on value in meeting member needs, not on price.
They will achieve leadership in related niche markets.
1.1.6 Quantitative Analysis
One of the concepts used in risk and return calculations is standard deviation, which
measures the dispersion of actual returns around the expected return of an investment. Since
standard deviation is the square root of the variance, this is another crucial concept to know.
The variance is calculated by weighting the dispersion by its relative probability (take the
difference between the actual return and the expected return, then square the number).
The standard deviation of an investment's expected return is considered a basic measure of
risk. If two potential investments had the same expected return, the one with the lower
standard deviation would be considered to have less potential risk.
Standard deviation takes into account both systematic risk and unsystematic risk and is
considered to be a measure of an investment's total risk.
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Risk measures
There are many statistical risk measures used to predict volatility and return such as:
Beta: measures stock-price volatility based solely on general market movements.
Beta is a relative measure of systematic risk. Typically, the market as a whole is
assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is
predicted to have a higher risk, and potentially, a higher return than the market.
Conversely, if a stock (or fund) had a beta of 0.85, this would indicate that if the
market increased by 10%, this stock (or fund) would likely return only 8.5%.
However, if the market dropped 10%, this stock would likely drop only 8.5%.
Alpha:measures stock-price volatility based on the specific characteristics of the
particular security. As with beta, the higher the number, the higher the risk.
R-Squared: Measures the percentage of an investment's movement that are
attributable to movements in its benchmark index
Standard Deviation: Measures how much return on an investment is deviating from
the expected normal or average returns
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DERIVATIVES MARKET AT NSE
The derivatives trading on the exchange commenced with S&P CNX Nifty Index
futures on June 12, 2000. The trading in Index options commenced on June 4, 2001
and trading in options on individual securities commenced on July 2, 2001. Single
stock futures were launched on November 9, 2001. The index futures and option
contract on NSE are based on S&P CNX Nifty Index. Currently, the futures contracts
have a maximum of 3-month expiration cycles. Three contracts are available for
trading with 1 month, 2 months and 3 months expiry. A new contract is introduced
on the next trading day following the expiry of near month contract.
The futures and options trading system of NSE, called NEAT-F&O trading
system, provides a fully automated screen-based trading for Nifty futures & options
and stock futures and options on a national wide basis and an online monitoring and
surveillance mechanism. It supports an anonymous order driven market which
provides complete transparency of trading operations and operates on strict price-
time priority. It is similar to that of trading of equities in cash market segment.
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INDUSTRY PROFILE
One of the key features of financial markets are extreme volatility. Prices of foreign
currencies, petroleum and other commodities, equity shares and instruments fluctuate all the
time, and poses a significant risk to those whose businesses are linked to such fluctuating
prices . To reduce this risk, modern finance provides a method called hedging. Derivatives
are widely used for hedging. Of course, some people use it to speculate as well although in
India such speculation is prohibited.
Derivatives are products whose val ue is derived from one or more basic variables called
underlying assets or base . In simpler form, derivatives are financial security such as an
option or future whose value is derived in part from the value and characteristics of another
an underlying asset. The primary objectives of any investor are to bring an element of
certainty to returns and minimise risks. Derivatives are contracts that originated from the
need to limit risk. Derivative contracts can be standardized and traded on the stock exchange.
Such derivatives are called exchange-traded derivatives. Or they can be customised as per the
needs of the user by negotiating with the other party involved. Such derivatives are called
over-the-counter (OTC) derivatives.
A Derivative includes :
(a) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk
instrument or contract for differences or any other form of security ;
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(b) a contract which derives its value from the prices, or index of prices, of underlying
securities.
Advantages of Derivatives:
1. They help in transferring risks from risk adverse people to risk oriented people.
2. They help in the discovery of future as well as current prices.
3. They catalyze entrepreneurial activity.
4. They increase the volume traded in markets because of participation of risk adverse
people in greater numbers.
5. They increase savings and investment in the long run.
Types of Derivative Instruments:
Derivative contracts are of several types. The most common types are forwards, futures,
options and swap.
Forward Contracts
A forward contract is an agreement between two parties a buyer and a seller to purchase or
sell something at a later date at a price agreed upon today. Forward contracts, sometimes
called forward commitments , are very common in everyone life. Any type of contractual
agreement that calls for the future purchase of a good or service at a price agreed upon today
and without the right of cancellation is a forward contract.
Future Contracts
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A futures contract is an agreement between two parties a buyer and a seller to buy or sell
something at a future date. The contact trades on a futures exchange and is subject to a daily
settlement procedure. Future contracts evolved out of forward contracts and possess many of
the same characteristics. Unlike forward contracts, futures contracts trade on organized
exchanges, called future markets. Future contacts also differ from forward contacts in that
they are subject to a daily settlement procedure. In the daily settlement, investors who incur
losses pay them every day to investors who make profits.
Options Contracts
Options are of two types calls and puts. Calls give the buyer the right but not the obligation
to buy a given quantity of the underlying asset, at a given price on or before a given future
date. Puts give the buyer the right, but not the obligation to sell a given quantity of the
underlying asset at a given price on or before a given date.
Swaps
Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts.
The two commonly used swaps are interest rate swaps and currency swaps.
1. Interest rate swaps: These involve swapping only the interest related cash flows
between the parties in the same currency.
2. Currency swaps: These entail swapping both principal and interest between the
parties, with the cash flows in one direction being in a different currency than those in
the opposite direction.
PLAYERS OF DERIVATIVES MARKET
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There are three types of players in the derivatives market. They are
Hedgers
Hedgers are the traders who wish to eliminate the risk (of price change) to which
they are already exposed. The main objective of these kinds of traders is to reduce
the risk and not for making profits. Again traders dealing in exports and imports are
subject to fluctuations in the exchange rates called forex risk. So, apart from the
equity markets, hedging is also common in the foreign exchange market where
fluctuations in the exchange rate have to be taken care as transactions are in the
foreign currency. It could also be used in the commodities market where spiraling oil
prices have to be tamed using the derivative instrument.
Speculators
Hedgers are the people who wish to avoid the price risk and speculators are those
who are willing to take such risk. These people take positions in the market and
assume risks to profit from fluctuations in prices. They consume information, make
forecasts about the prices and put their money in these forecasts. By taking
positions, they are bet whether the market would go up or down.
Arbitrageurs
Arbitrageurs thrive on market imperfections. They earn profits by trading a given
commodity or other item for different prices in different markets. Thus arbitrage
involves making risk-less profit by simultaneously entering into transactions into
two or more markets.
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For example, if a certain share is quoted at a lower rate on the Delhi stock exchange
(DSE) and at a higher rate at Bombay stock exchange (BSE), an arbitrageur would
profit by buying the share at DSE and simultaneously selling it at BSE.
They could be making money even without putting their own money in and such
opportunities often come up in the market but last for very shot time frames. This is
because as soon as this si tuation arises arbitrageurs take the advantage before
demand-supply forces drive the market back to the normal.
SEBI Guidelines:
SEBI has laid the eligibility conditions for Derivative Exchange/Segment and its Clearing
Corporation/House to ensure that Derivative Exchange/Segment and Clearing
Corporation/House provide a transparent trading environment, safety and integrity and
provide facilities for redressal of investor grievances. Some of the important eligibility
conditions are :
1. Derivative trading to take place through an on-line screen based Trading System.
2. The Derivatives Exchange/Segment shall have on-line surveillance capability to
monitor positions, prices, and volumes on a real time basis so as to deter market
manipulation.
3. The Derivatives Exchange/ Segment should have arrangements for dissemination of
information about trades, quantities and quotes on a real time basis through at least
two information vending networks, which are easily accessible to investors across the
country.
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4. The Derivatives Exchange/Segment should have arbitration and investor grievances
redressal mechanism operative from all the four areas/regions of the country.
5. The Derivatives Exchange/Segment should have satisfactory system of monitoring
investor complaints and preventing irregularities in trading.
6. The Derivative Segment of the Exchange would have a separate Investor Protection
Fund.
7. The Clearing Corporation/House shall perform full novation, i.e., the Clearing
Corporation/House shall interpose itself between both legs of every trade, becoming
the legal counterparty to both or alternatively should provide an unconditional
guarantee for settlement of all trades.
8. The Clearing Corporation/House shall have the capacity to monitor the overall
position of Members across both derivatives market and the underlying securities
market for those Members who are participating in both.
9. The level of initial margin on Index Futures Contracts shall be related to the risk of
loss on the position. The concept of value-at-risk shall be used in calculating required
level of initial margins. The initial margins should be large enough to cover the one-
day loss that can be encountered on the position on 99 per cent of the days.
10. The Clearing Corporation/House shall establish facilities for electronic funds transfer
(EFT) for swift movement of margin payments.
11. In the event of a Member defaulting in meeting its liabilities, the Clearing
Corporation/House shall transfer client positions and assets to another solvent
Member or close-out all open positions.
12. The Clearing Corporation/House should have capabilities to segregate initial margins
deposited by Clearing Members for trades on their own account and on account of his
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client. The Clearing Corporation/House shall hold the clients margin money in trust
for the client purposes only and should not allow its diversion for any other purpose.
13. The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the
trades executed on Derivative Exchange/Segment.
SEBI has specified measures to enhance protection of the rights of investors in the Derivative
Market. These measures are as follows:
1. Investors money has to be kept separate at all levels and is permitted to be used only
against the liability of the Investor and is not available to the trading member or
clearing member or even any other investor.
2. The Trading Member is required to provide every investor with a risk disclosure
document which will disclose the risks associated with the derivatives trading so that
investors can take a conscious decision to trade in derivatives.
3. Investor would get the contract note duly time stamped for receipt of the order and
execution of the order. The order will be executed with the identity of the client and
without client ID order will not be accepted by the system. The investor could also
demand the trade confirmation slip with his ID in support of the contract note. This
will protect him from the risk of price favour, if any, extended by the Member.
4. In the derivative markets all money paid by the Investor towards margins on all open
positions is kept in trust with the Clearing House /Clearing Corporation and in the
event of default of the Trading or Clearing Member the amounts paid by the client
towards margins are segregated and not utilised towards the default of the member.
However, in the event of a default of a member, losses suffered by the Investor, if
any, on settled/closed out position are compensated from the Investor Protection
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Fund, as per the rules, bye-laws and regulations of the derivative segment of the
exchanges.
COMPANY PROFILE
Indiabulls security limited is a premier brokerage house in India on the fast growth
trackIndiabulls Securities Limited is part of the indiabulls group of companies. Indiabulls
group is leading financial services and Real estate player with a pan India presence. ISL offer
ease, convenience and reliability in all our products ranging from securities trading to
customers finance, mortgages to real estates development. Started functioning in the stock
market in 2000. Over the years, the company has grown from strength to strength to become
a major player in India's financial services sector.
Today Indiabull Securities limitedis Indias leading capital markets company with All-
India Presence and an extensive client base. Indiabulls Securities is the first and only
brokerage house in India to be assigned the highest rating BQ 1 by CRISIL. Indiabulls
Securities Ltd is listed on NSE, BSE & Luxembourg stock exchange., the National Securities
Depository Ltd and Central Depository Services (India) Limited.
To help the clients better Indiabull Securities limited has located their offices in major
towns, and placed highly qualified and experienced financial experts to man them. A team of
dynamic finance professionals with decades of experience leads them. These professionals
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share a common vision not only to transform the company into a highly professional
organization, but also make their clients earn the maximum from their hard-earned money.
HISTORY
In middle of 1999, when e-commerce was just about starting in India, Sameer Gehlaut and
his close IIT Delhi friend Rajiv Rattan got together and bought a defunct securities company
with a NSE membership and started offering brokerage services . A Few months later, their
friend Saurabh Mittal also joined them. By December 1999, the company embarked on its
journey to build one of the first online platforms in India for offering internet brokerage
services. In January 2000, the 3 founders incorporated Indiabulls Financial Services and
made it as the flagship company.
In mid 2000, Indiabulls Financial Services received venture capital funding from Mr L.N.
Mittal & Mr Harish Fabiani. In late 2000, Indiabulls Securities, a subsidiary of Indiabulls
Financial Services started offering online brokerage services and simultaneously opened
physical offices across India. By 2003, Indiabulls securities had established a strong pan
India presence and client base through its offices and on the internet.
In September 2004, Indiabulls Financial Services went public with an IPO at Rs 19 a share.
In late 2004, Indiabulls Financial Services started its financing business with consumer loans.
In March 2005, Indiabulls Properties Private Ltd, a subsidiary of Indiabulls Financial
Services, participated in government auction of Jupiter Mills, a defunct 11 acre textile mill
owned by NTC in Lower Parel, Mumbai. Indiabulls Properties private Ltd won the mill in
auction and that purchase started Indiabulls real estate business. A few months later,
Indiabulls Real Estate company pvt ltd bought Elphinstone mill in Lower Parel, another
textile mill auctioned by NTC.
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With real estate business gaining size, Indiabulls Financial Services demerged the real estate
business under Indiabulls Real Estate and each shareholder of Indiabulls Financial Services
received additional share of Indiabulls Real Estate through the demerger. Subsequently,
Indiabulls Financial Services also demerged Indiabulls Securities and each shareholder of
Indiabulls Financial Services also received a share of Indiabulls Securities.
In year 2007, Indiabulls Real Estate incorporated a 100% subsidiary, Indiabulls Power, to
build power plants and started work on building Nashik & Amrawati thermal power plants.
Indiabulls Power went public in September 2009.
Today, Indiabulls Group has a networth of Rs 16,796 Crore & has a strong presence in
important sectors like financial services, power & real estate through independently listed
companies and Indiabulls Group continues its journey of building businesses with strong cash
flows.
BUSINESSES
Indiabulls Group is one of the country's leading business houses with business interests in
Power, Financial Services, Real Estate and Infrastructure. Indiabulls Group companies are
listed in Indian and overseas financial markets. The Net worth of the Group is Rs 16,844
Crore and the total planned capital expenditure of the Group by 2013-14 is Rs 35,000 Crore.
Indiabulls Power is currently developing Thermal Power Projects with an aggregate
capacity of 5400 MW. The first unit is expected to go on stream in May 2012. The net worth
of Indiabulls Power is Rs 3,919 Crore. The company has a total capital expenditure of Rs
27,500 Crore. The company has been assigned 'BBB' rating.
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Indiabulls Financial Services is one of Indias leading non-banking finance companies
providing Home Loans, Commercial Vehicle Loans and Secured SME Loans. The company
has a net worth of Rs 4,661 crore with an asset book of Rs 23,792 Crore. The company has
disbursed loans over Rs 50,000 Crore to over 3,00,000 customers till date. Amongst its
financial services and banking peers, Indiabulls Financial Services ranks amongst the top few
companies both in terms of net worth and capital adequacy. Indiabulls Financial Services has
been assigned AA+ rating and has presence in over 87 cities and towns with a total branch
network of 170 branches.
Indiabulls Real Estate is among India's top Real Estate companies with development
projects spread across residential complexes, integrated townships, commercial office
complexes, hotels, malls, Special Economic Zones (SEZs) and infrastructure development.
Indiabulls Real Estate partnered with Farallon Capital Management LLC of USA to bring the
first FDI into real estate in the country. The company has a networth of Rs 7,505 Crore and
has purchased prime land, mostly in the metros and other Tier 1 cities worth Rs 4,000 Crore
in government auctions alone. Indiabulls Real Estate is currently developing 64.32 million
sqft into premium quality, high-end commercial, residential and retail spaces. The company
has been assigned 'A+' rating.
Indiabulls Securities is one of India's leading capital markets companies providing securities
broking and advisory services. Indiabulls Securities also provides depository services, equity
research services and IPO distribution to its clients and offers commodities trading through a
separate company. These services are provided both through on-line and off-line distribution
channels. Indiabulls Securities is a pioneer of on-line securities trading in India. Indiabulls
Securities in-house trading platform is one of the fastest and most efficient trading platforms
in the country. Indiabulls Securities has been assigned the highest rating BQ-1 by CRISIL.
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Vision:
Indiabulls Securities Limited was born out of a vision to explore the immense investment
opportunities in the Indian financial market, to benefit the investors. The vision of the
Indiabulls Securities Limited is to be a Financial Super Market. It aims to provide all types of
financial services to its clients at one place to save them from going from place to place to
meet their investment needs. Creating a world of smart investors.
Products or Services:
Equity and Derivatives
Depository Services
Margin Trading
Equity Analysis
IPO Financing
Loan Against Shares
Trading Platforms
- Power Indiabulls (PIB)
- Browser Based
Indiabulls Securities Limited
Indiabulls Securities Limited is a big player financial market that has put the brokerage
business on fast growth track over the years. They are providing through indiabulls
o Equity Research
o Commodities
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o Internet Trading
o NRI Online Trading
Competitors:
Major competitors for India bulls Securities Limited Include:
o ICICI Direct
o Share khan
o India infoline Limited
o Indian Angels
o Mothilal Oswol
Indiabulls Securities Ltd. : Board of Directors
1 Brig.Labh Singh Sitara Director
2 Mr.Karan Singh Director
3 Mr.Ashok Sharma Director
4 Mr.Aishwarya Katoch Director
5 Mr.Prem Prakash Mirdha Director
6 Mr.Divyesh B Shah Director
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Securities Limited
SENIOR VICE PRESIDENT
BRANCH MANAGER/
Support
System
Sales Hierarchy & Branch Structure
Securities Limited
Sales
Current Position of the Company
SENIOR VICE PRESIDENT
BRANCH MANAGER/
SupportSystem
SalesFunctions
Back officeExecutive
LocalCompliance
Officer
RM/SRM
Dealer ARM
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On March 2011, the company earned an after tax profit of Rs. 37.75 crores
as compared to Rs. 58.51crores during the previous year. The total revenue earned by the
company in 2011 march is Rs 325.45 the company raised its funds through the issue 46.22
Crores equity. ISL, which is into capital market operations generate a volume of Rs 40000
through commodity futures transactions.
Indiabulls Securities Ltd. : Capital Structure
From To Class of
Shares
Auth.
Capital
Issued
Capital
Paid-up Shares
(No's)
Face Value
(Rs)
Paid-up
Capital
2006 2007 Equity Share 19.00 17.83 17834099 10 17.83
2007 2008 Equity Share 100.00 50.69 253426989 2 50.69
2008 2009 Equity Share 100.00 50.69 253426989 2 50.69
2009 2010 Equity Share 100.00 45.99 229940648 2 45.99
2010 2011 Equity Share 100.00 46.22 231112511 2 46.22
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Indiabulls Securities Ltd. : Share Holding
Share Holding Pattern
as on :
30/09/2011 30/06/2011 31/03/2011
FaceValue 2.00 2.00 2.00
Share Holder No. Of
Shares
%
Holding
No. Of
Shares
%
Holding
No. Of
Shares
%
Holding
PROMOTER'S HOLDING
Foreign Promoters 0 0.00 0 0.00 0 0.00
Indian Promoters 68713425 29.73 68713425 29.73 68713425 29.73
Person Acting in
Concert
0 0.00 0 0.00 0 0.00
Sub Total 68713425 29.73 68713425 29.73 68713425 29.73
NON PROMOTER'S HOLDING
Institutional Investors
Mutual Funds and UTI 0 0.00 0 0.00 0 0.00
Banks Fin. Inst. and
Insurance
345724 0.15 395254 0.17 382320 0.17
FII's 23247349 10.06 24127109 10.44 24732792 10.70
Sub Total 23593073 10.21 24522363 10.61 25115112 10.87
Other Investors
Private Corporate
Bodies
30868583 13.36 30873758 13.36 33163095 14.35
NRI's/OCB's/Foreign
Others
14753231 6.38 14664216 6.35 14556410 6.30
GDR/ADR 4188982 1.81 4688982 2.03 4688982 2.03Directors/Employees 0 0.00 0 0.00 0 0.00
Government 0 0.00 0 0.00 0 0.00
Others 335671 0.15 300189 0.13 465950 0.20
Sub Total 50146467 21.70 50527145 21.86 52874437 22.88
General Public 88659546 38.36 87349578 37.80 84409537 36.52
GRAND TOTAL 231112511 100.00 231112511 100.00 231112511 100.00
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Indian stock Market: An Introduction
The Indian securities market has a long history going back 130 years. The
Bombay Stock Exchange, the iconic trademark of our securities market, is one of the
oldest stock exchanges in the world, having been set up in 1875. A pioneer in
organized stock broking activity, this exchange was the brainchild of a group of
enterprising brokers. Over the years, the Indian securities market has evolved
gradually to become one of the Asias most modern and efficient markets, setting
international standards in technology and settlement systems.
Stock markets have a stellar role to play in the economic growth of every
country. Needless to mention, the Indian stock market too is inextricably entwined in
the business fabric of our country. At the end of 2003, S&P has ranked the Indian
market 17th in terms of market capitalization on a global scale, 16 th in terms of
turnover and 6 th in terms of turnover ratio. India has the highest number of listed
securities in the world surpassing even the US which is the worlds largest equity
market in terms of market capitalization.
The Indian securities market has two fundamental segments the primary
market and the secondary market. The primary market is the market for new
issues where resources get mobilized either through public issues or through private
placements. The secondary market provides liquidity to participants holdings by
enabling them to buy and sell securities according to their risk return assessments.
This market is further divided into the over the counter (OTC) market and the
exchange traded market. The OTC markets are informal markets where
transactions are negotiated over the telephone and/or computer network of dealers.
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The two most tracked indices in India are the BSE Sensex and the S&P CNX
Nifty. Originally complied in 1986, the Sensex is a basket of 30 constituent stocks of
companies that figure in the top 100 in terms of market capitalization. The S&P
CNX Nifty is an S&P endorsed index, owned and managed by the Indian Index
Services Ltd. (IISL). It is an index of 50 stocks representing 24 sectors of the
economy.
Apart from being a popular avenue of investments, Indian stock market is
today an important source of financing for both the industry as well as the
government. It registers the pulse of the Indian markets and is indeed the most
publicized barometer of the economy.
Indian Capital Market
The Indian capital markets have witnessed a transformation over the last decade. India now
finds its place amongst some of the most sophisticated and largest markets of the world. 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 Indian stock exchanges. The Indian
capital market is significant in terms of the degree of development, volume of trading and its
tremendous growth potential.
Over the past few years, the capital markets have also witnessed substantial reforms in
regulation and supervision. Reforms, particularly the establishment and empowerment of
SEBI, market-determined prices and allocation of resources, screen-based nation-wide
trading, dematerialization and electronic transfer of securities, rolling settlement and
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derivatives trading have greatly improved both the regulatory framework and efficiency of
trading and settlement. There are 23 recognized stock exchanges in India, including the
OTCEI for small and new companies and the NSE, which was set up as a model exchange to
provide nation-wide services to investors.
During 2002-03 the NSE and the BSE were ranked third and sixth respectively
amongst all exchanges in the world with respect to the number of transactions. The year
2003, also witnessed setting up of the NCDEX, an online multi-commodity exchange for
trading of various commodities.
The entry of new players has resulted in a more sophisticated range of financial
services being offered to corporate and retail customers which has compelled the existing
players to upgrade their product offerings and distribution channels. This is particularly
evident in the non banking financial services sector, such as brokerage industry, where
innovative products combined with new delivery methods have helped the sector achieve
high growth rates.
Over the last 7 years, the market share of the top 5 brokers has increased from 6%
(1996-97) to 15% (December, 2005), with most of the consolidation coming in the last 2
years. The consolidation in the online business is even greater, with the top 5 players owning
more than 90% of the market. This consolidation is expected to continue, and provide an
opportunity for the top broker to own 15% market share or more over the next 3-4 years.
Key initiatives in recent years include:
Depository and share de-materialization process have enhanced the efficiency of the
transaction cycle.
Replacing the flexible, but often exploited, long settlement cycles with rolling settlement,
to bring about transparency.
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IT driven stock exchanges (NSE and BSE) with a national presence (for the benefit of
investors across locations) and other initiatives to enhance the quality of financial disclosures
by the listed companies.
Empowering SEBI with powers to impose higher penalties and establish itself as an
independent regulator with adequate statutory powers.
NSE, which in the recent past has accounted for the largest trading volumes, has a fully
automated screen based system (NEAT and BOLD) that operates in the wholesale debt
market segment as well as the capital market segment.
Many new instruments have been introduced in the markets, including index futures,
index options, derivatives and options and futures in select stocks.
Porters Five Forces Analysis
Buyer Power
Lack of Expertise Curtails Bargaining Power.
Retail investors often lack the knowledge and expertise in the financial sector that calls
them to approach the broking houses.
Low Product Differentiation Proves Beneficial.
The retail broking services provided by the various companies are homogeneous with very
low product differentiation. This allows customers to enjoy a greater bargaining power.
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Supplier Power
Increased Dependence on IPOs
There is a growing dependence of corporate on broking houses with the rising number of
IPOs coming to the market.
Intensity of Competition
Move towards consolidation-Lot of brokerage companies are moving towardsconsolidation with the smaller ones becoming either franchisees for the larger brokers or
closing operations.
Increased Focus of Banks in Retail Broking-Various foreign banks like ABN Amro and
others are planning to enter the Indian retail brokerage industry.
Online Trading Competes with Traditional Brokerage-There is an increasing demand for
online trading due to consumers growing preference for internet as compared to approaching
the brokers.
Threat of New Entrants
Entry of Foreign Players
New forms of trading including T+2 settlement system, dematerialization etc are
strengthening the retail brokerage market and attracting foreign companies to enter the Indian
industry.
Threat of Substitutes
Alternative Investment Options-Various alternative forms of investment including fixeddeposits with banks and post offices etc act as substitutes to retail broking products and
services
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Growth Drivers
Constantly tapping new business areas to drive growth
IPO financing
Consumer loans to a large lower and middle class client base
Mortgages & Loans against Property
Financial Overview of the Company
a) Financial Services Revenue Contribution
FY 06 Rs 6,135 million
3.8 b) Increasing Market share of Indiabulls in NSE trading volumes
Other
Rs 1,175
Brokerage
Rs 2,555
FinancingRs 2,405
42%
39%
19%
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c) Growing Customer Base
Increasing Number of Customers
22.3%
17.5%
18.8%21.9%
30.7%
2.2%
5.5%3.4%
1.1% 1.9%
0%
5%
10%
15%
20%
25%
30%
35%
FY2002 FY2003 FY2004 FY2005 FY2006
Share in Online Trading Share in Total Trading
(1)
(1) Source: NSE data from NSE website (Equity Segment)
Increasing Market share of Indiabulls in NSE trading volumes
16,455 30,498
79,9321,08,324 1,44,000
1,78,800
2,35,000
4,50,000
0
50,000
1,00,000
1,50,000
2,00,000
2,50,000
3,00,000
3,50,000
4,00,000
4,50,000
5,00,000
37681 38047 38412 38504 Sep -05 Dec -05 Mar -06 2007 Jan
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d) High Revenue Growth
Brokerage and Tax break up
Remarks Delivery Intraday Futures
Buy Sell Buy Sell Buy Sell
Brokerage 0.5 0.5 0.1 0.1 0.1 0.1
Service
tax(@12.24%
on
0.0612 0.0612 0.01224 0.01224 0.01224 0.01224
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
FY03 FY04 FY05 FY06
Rs mm
Brokerage Financing Insuranc
266.7
719.5
1,684.1
6131.5
CAGR
(03-0
6):
CAGR
(03-0
6):
184%
184%
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brokerage)
Security
transaction
tax (STT) 0.125 0.125 0 0.025 0 0.017
Turnover
Tax (T oT) 0.018 0.018 0.018 0.018 0.018 0.018
Stamp duty 0.0112240.0112240.0022450.0022450.0022450.002245
Total 0.7154240.7154240.1324850.1574850.1324850.149485
Products and Services
The products of Indiabulls are:-
Trading Platform for Equity and Derivatives
Depository Services
Commodities
Equity Analys is
IPO Financing
Loan Against Shares
Margin Trading
Indiabulls offers
Broker assisted trade execution
Automated online investing
Access to all IPOs
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Sales of Equity, Derivatives and commodities instruments listed on
NSE, BSE, NCDEX and MCX
There are 3 mediums of using / accessing Indiabulls Trading Services.
Click
Power Indiabulls (PIB)
Indiabulls Signature Account
Call Indiabulls
Visit the nearest branch
Depository Services
Value added Services for seamless delivery.
Depository Participant with:
Central Depository Services (India) Limited [CDSL]
National Securities Depository Limited [NSDL]
Execute trades through Indiabulls Securities and settle these transactions
through Indiabulls Depository services.
RESEARCH DESIGN
TITLE
A study on Derivatives as a tool for hedging.
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STATEMENT OF PROBLEM
India is a developing country. It is prone to frequent changes in the market due to political,
social, economic changes. As a result this leads to high volatility in the stock market. The
players in the Indian stock market are prone to various kinds of risks and level of risk. This
may be due to lack of information regarding trading practices in stock exchange. This study
attempts to provide the derivatives as a hedging tool to reduce the various risks in the stock
market.
NEEDS FOR OR IMPORTANCE OF THE STUDY
B u s i n e s s c o n c e r n s a n d c o r p o r a t e i n v e s t o r s w o r l d w i d e a r e u s i n g v a r i o u s
fin anc ia l instruments to hedge the r isks. Derivat ives effectively to reduce
substant ia l loss have proved that these instruments can effectively reduce risk.
OBJECTIVES OF THE RESEARCH
To study the trading practices in the derivative market.
To study the various risk associated with derivatives.
To study the financial derivatives as a hedging tool in the stock market
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SCOPE OF THE STUDY
This study is done to know the derivative markets in India. There are various
types of derivatives instruments like commodities, cash market, futures, stock futures but in
this study mainly it is concentrated on the stock futures for finding the risk
involved in the stock futures.
Statistical tools for analysis
Beta Analysis
Beta is calculated using historical data for the benchmark index and historical data for the
same period for the instrument for which you are trying to calculate the beta. First, the data
has to be retrieved then second step is to normalize the data by calculating the percent change
from one period to another. Then the data has to be calculated as the percent change for each
day to another for the benchmark index and for the instrument for which beta is being
calculated. Once the data is normalized begin with the calculation of the relationship of the
two instruments. Excel's slope function lets you calculate this relationship. Excel's slope
function takes two arguments:
the array of dependent variables (daily percent change of instrument)
the array of independent variables and returns the rate of change along the regression
line (daily percent change of the benchmark index)
FORMULA USING BETA
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Beta = Covariance of stock ,nifty index
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Variance of Nifty index
DATA COLLECTION
The report is prepared by using secondary data. The secondary data are collected
from reports, magazines, and journals and also from websites. Market moveme nts were
observed for one month with Nifty Index Futures, observation on the price
movement of derivative market for the purpose of analysis of data were collected
from the official websites of National
Stock e x c h a n g e a n d D e r i v a t i v e s I n d i a ( www.nseindia.com& derivative
sindia.com) Theobservation period was from 1st November to 30th November.
The data collec ted from websites were used to analyze the strategies and for calculations.
PLAN OF ANALYSIS
In this study I have used figures, tables, charts, and beta formula for finding the analysis
LIMITATIONS OF THE RESEARCH
http://www.nseindia.com/http://www.nseindia.com/ -
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A)Availability of data because the data used for calculating beta is only one
month
B)In the stock market various options are available like commodities, cash
marke t, options except from this I have used stock futures for calculation.
DATA COLLECTION AND ANALYSIS
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