commodities project

7/31/2019 Commodities Project

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PrefaceMost of financial derivatives trading activities began extensively during

seventies as recently as 1973 with the introduction of futures trading in foreignexchange which was followed by the interest rate futures in 1975, stock index

futures in 1982 and so on.

Due to globalization and liberalization process initiated by the states all over

the world, the international trade and financial activities have grown in multifold

resulting into rising level of all types of risks for market participants such as

market risk, interest rate risk, foreign exchange risk, inflation risk and price risk.

Financial derivatives like options, futures, forwards and swaps have emerged in the

financial markets to handle and emerged in the financial markets to handle and

manage such risks.

Options and futures trading in India commenced from June, 2000 on

National Stock Exchange and Bombay Stock Exchange in stock index futures,

stock futures, stock index option and stock option. It was a welcome step on the

part of the government since it was important in the present environment. This was

significant development in the history of Indian stock markets. A lot of trading in

futures and options segment in India stock market was seen and the number of

market participants increased phenomenal in a short period. As a result, awareness

about the financial derivatives instruments and their application has increased

among the investing people at large. On the other side of this development was

that element of risk and volatility in the stock market has risen.


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Key FeaturesThis project is written with the objective that investor may get clear and

logical way that why they should invest in selected stocks for option trading. This

project gives investors knowledge about highly volatile stocks. Investors gainprofit at lesser risk by investing in this stocks. It determines the strategy that will

hedge the funds of investors in buying options.


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OBJECTIVE OF RESEARCH

1.SEARCH FOR BEST COMPANIES FOR INVESTMENT IN BUYING OF

OPTIONS IN INDIAN DERIVATIVE MARKET.

2. DETERMINING STRETEGY THAT WILL HEDGE THE FUNDS OF

INVESTORS IN BUYING OPTIONS.


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HistoryIn the 1988s the process of liberalization and deregulation of the financial markets

gain momentum when British & American leadership led, what could perhaps be

considered as the world wide deregulatory movement.

With the integration of the financial markets and free mobility of capital, risks also

multiplied and risk diversification came to occupy the center stage. This logically

led to the risk hedging mechanisms, first in the forex market, later in the other

segments of financial service industry and these have come to be known generally

as Derivatives.

After emerging in USA, the derivatives business expanded rapidly and flourished

in the European markets.


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IntroductionFinancial derivative is a financial instrument whose payoff is based on the

price of an underlying asset, reference rate, or an index. The term derivatives is

hardly thirty years old in the academic discipline of finance, though it does notnecessarily mean that they are a modern invention. Since derivatives market have

been in existence for as long, and by many accounts even longer than that for

securities, it has been their growth in the past 30 years that has made them a

significant segment of the financial markets.

Today, the financial derivatives have become increasingly popular and most

commonly used in the world of finance. This has grown with so phenomenal speed

all over the world that now it is called as the derivatives revolution. In an estimate,

the present annual trading volume of derivative markets has crossed US $ 30,000 billion, representing more than 100 times gross domestic product of India.

DefinitionThe Securities Contracts (Regulation) Act 1956 defines

derivativesas under:

Derivatives includes

1. Security derived from a debt instrument, share, loan whether secured or

unsecured, risk instrument or contract for differences or any other form of

security.

2. A contract which derives its value from the prices, or index of prices of

underlying securities.


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Types of derivatives;

Derivatives

Financials Commodities

Basic Complex

Forwards Futures Options Warrants Swaps Exotics

& (Non-standard), Convertibles


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Types as per availability


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Commodity derivativesThe underlying instrument is a commodity which may be

wheat, cotton, pepper, sugar, jute, turmeric, corn, crude oil, natural gas, gold,

silver, copper and so on.

Financial derivativesThe underlying instrument may be treasury bills, stocks,

bonds, foreign exchange, stock index, cost of living index, etc.

Financial derivative is fairly standard and there are no quality

issues whereas in commodity derivative, the quality may be the

underlying matters.

Basic financial derivativesA forward contract is a simple customized contract between two parties to

buy or sell an asset at a certain time in the future for a certain price. Unlike future

contracts, they are not traded on an exchange, rather traded in the over-the-counter

market, usually between two financial institutions or between a financial institution

and one of its clients.


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Derivative contracts have several variations. Themost common variants are following:

FORWARD:A forward contract is a customized contract between two entities,where the settlement takes place on a specific date in the future at todays pre-

agreed price.

FUTURES: A future contact is an agreement between two parties to buy or sellan asset at a certain time in the future at a certain price. Futures contracts are

special types of forward contracts in the sense that the former are standardizedexchange-traded contracts.

OPTIONS: Options are of two types

CALL: calls give the buyer the right but not the obligation to buy a givenquantity of the underlying assets, at a given future date.

PUT: Puts give the buyer right, but not the obligation to sell a given quantity ofassets at a given price on or before a g given date.

SWAPS: swaps are private agreements between two parties to exchange flows inthe future according to a prearranged formula. They can be regarded as portfolios

of forward contracts.


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HEDGING:For limiting financial risk Hedging take two positions that will offset each other if

prices change.

In regards to financial market hedging is done by investing funds in more than

financial product in such a way that losses that may occur due to one investment

will be covered by other.


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(b) The Sample

The research requires comparison of fluctuation in share prices of all thecompanies in which derivative trading is allowed. Therefore data of all the

companies are collected. Since few companies are recently listed with Stock

exchange board of India, data of those companies are not available for whole year

therefore they are excluded from the study.


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(c)TOOLS

FOR DATA COLLECTION:

The data require for the project are shareprices of last 52 weeks. Internet is used for the collection of data. Web site of

national stock exchange keep record of share prices of all companies listed to

Stock exchange Board of India. The data is collected from the web site of national

stock exchange.

FOR DATA ANALYSIS: Standard deviation and coefficient of variation are

statistical tools used for the analysis of data.

Dispersion is the measure of the variation of the item

A.L bowley:Dispersion is the degree of the scatter or variation of the variable about a central

value.

Brooks and Dick:Standard deviation is a statistical tool to measure dispersion in a series.

Definition: Standard deviation is a square root of arithmetic average of thesquare of derivative measured from mean.

Standard deviation = [((x*X)-(X*X)/N]/N

Where,

X= value of the item.

N= Number of items.


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Coefficient of variation:For purpose of relative measure of dispersion. Wecalculate coefficient of variation.

Coefficient .of variation= standard deviation /X*

Where,

X* =mean value of all items in a given series

BETA: The most important source of risk is the market risk because it cannot beeliminated through diversification. The Modern Portfolio Theory, therefore, argues

that the riskiness of a security should be measured by its vulnerability to market

risk. If the market were to go down by 1%, would the security go down by 0.5%,

by 1% or by 2%? This sensitivity of the security to the movement of the market is

known as the beta coefficient of the security.

BETA= (nxy-x*y)/ (nx2-(x2))Where,

X= % change in Nifty

Y=% change in particular stock


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Steps in calculating standard deviation

1. Find the square of the values of various variables and total them.

2. Find square of total of all the values. Divide it by the number of items.

3. Subtract the above values from sum of square of variables and divide it bynumber of items.

4. Find square root of above calculation.

RESULTS

NAME OF THE COMPANY BETASTANDARDDEVIATION

COEFFICIENT OFVARIATION


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AXIS BANK 1.69 57.006 8.34

BHEL 1.17 103.67 6.917

CAIRN0.2190

8 24.456 9.574

CHAMBAL FERTILISERS 1.693 9.7633 13.387

DLF 0.175 46.16 9.85GMR 1.416 13.566 14

HDIL 0.86 87.542 17.77

ICICI BANK 1.699 78.681 11.639

IDBI 1.093 6.369 8.755

IDEA 0.44 10.073 10.65

IDFC 1.696 15.342 13.585

IFCI 1.81 9.103 19.489

INFOSYS 0.7006 141.955 8.125

ISPAT 1.407 3.149 12.585

JP ASSOCIATES 1.716 19.246 11.55MTNL 0.47 4.637 4.919

NTPC 0.639 9.925 5.99

ONGC 0.815 59.023 6.622

POWER GRID 1.161 7.1909 8.308

RELIANCE CAPITAL 1.861 122.35 11.19

RELIANCE COMMUNICATION 1.413 51.536 10.64

RELIANCE INDUSTRIES 1.0369 112.699 5.22

RELIANCE INFRASTRUCTURE 2.091 123.994 13.3

RELIANCE PETROLEUM 0.8271 7.627 4.53

RELIANCE POWER 1.594 26.1 16.108

RANBAXY 0.4678 39.305 7.637

RENUKA 1.197 9.379 8.641

RNRL 2.0274 12.75 15.725

SAIL 1.0728 12.622 8.761

SATYAM 0.6713 46.056 10.377

SBI 1.3103 112.282 8.767

STER 0.7093 91.445 12.902

TATA MOTORS 0.9843 55.443 12.151

TATA TELESERVICES 0.994 2.497 9.55

UNITECH 1.6063 19.433 11.05

INTERPRETATIONThe profit by investing in purchasing of options in derivative market of a particular

company is directly proportional to the fluctuation in price of share of that


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company in the cash market. In the research the nature of share price of all the

companies are made by studying the share prices of companies in last 2 months

.By applying statistical tools, the estimation of fluctuation in prices of shares in

future is done. The companies which were highly fluctuating last year are

suggested for investment

Mathematical expression:

P F

Where

P=profit.

F=fluctuation in share price

SUGGESTIONS

On the basis of the above research study following companies are suggested for

purchasing of options in derivative market since the fluctuation in these companies

are higher as compare to other companies.


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1.

2.

3.

4.

5.

6.

7.

STRATEGIES TO HEDGE THE FUND

While investing in buying the options in derivative market the investors should

apply strategy that will give return at comparatively low risk.


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1. Investors may buy call and put options of particular company in samequantity.

2. If investor has bought future option, a put option may be purchased in orderto hedge the fund.

3. If investor has sold future option, a call option may be purchased in order tohedge the fund.

4. If investor has invested in the shares of a particular company for long term.The fund can be hedged by purchasing put option to safeguard against shortterm volatility.

IMPLICATIONThe above research study estimates the nature of share prices of companies

regarding fluctuation. Thus it guides the investors about in which companies they

should invest in. Apart from investment derivative has also been used as an


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instrument to hedge other investment. The study also gives the information of the

companies in which it will beneficial to hedge the funds.

By applying investment strategy investors can safeguard themselves from losses.One investment may cover the losses that may occur due to the other investment.

In this way funds can be invested in a way that ensures higher return to investors at

comparatively lower risk.

EXAMPLE:

Suppose an investor purchase call and put option of suggested companies. As per

our estimation in the study the prices of shares will increase/decrease to a high

extent, since the nature of share of these companies are highly volatile. Let us

consider various possibilities.


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CASE I. Price of share increases in the cash market.

There will be loss on purchasing of put option.

Loss = price of put option at the time of purchasing.

There will be profit on purchasing of call option.

Profit = Increase in prices of shares.

CASEII: Price of share decreases in the cash market.

There will be loss on purchasing of call option.

Loss = price of call option at the time of purchasing.

There will be profit on purchasing of put option.

Profit = Increase in prices of shares.

LIMITATIONSShare prices of companies are influenced by many factors like performance of

company, government policies, international market, interest rates, inflation,

investment of foreign investors, and overall performance of sensex etc. Thus the

nature of the companies may not be exactly as expected in the research study.


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The above research is for short term only as data keeps on changing with

market conditions and investor has to react accordingly.

REFERENCES

BOOKS:

Elhance D.N, Elhance veena, Fundamental of Statistics.1. NCFM book,Derivative Market (dealer) module.2. Kothari C.R.,Research Methodology methods and techniques.


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WEB SITES:

1. www.nseindia.com.2. www.myiris.com.3. www.google.co.in.

Appendices

1. Last Thursday of every month is expiry day of option. Therefore closingprice of last Thursday was taken for the study.

2. Brokerage has to be given for trading in derivative market.

3. Other formula may also be applied for calculating standard deviation.
http://www.nseindia.com/http://www.myiris.com/http://www.google.co.in/http://www.nseindia.com/http://www.myiris.com/http://www.google.co.in/


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4. Example of calculation of standard deviation, beta and coefficient of

variation is shown below:

SymbolSeries Date

ClosePrice(Y) clo*clo

%CHANGE(Y) Close

%CHANGE(X) X*X X

RPOWER EQ 2-Jun-08 228.6 52257.96 4739.6RPOWER EQ 3-Jun-08 218.75 47851.5625 -4.3088364 4715.9 -0.50004

0.250042

RPOWER EQ 4-Jun-08 202.6 41046.76

-7.3828571

4 4585.6 -2.762997.63413

22

RPOWER EQ 5-Jun-08 198.6 39441.96

-1.97433366

4676.95 1.992106

3.968485 3

RPOWER EQ 6-Jun-08 193.6 37480.96

-2.5176233

6 4627.8 -1.05091.10438

82

RPOWER EQ 9-Jun-08 185.15 34280.5225

-4.3646694

24500.9

5 -2.741047.51331

81

RPOWER EQ

10-Jun-08 182.25 33215.0625 -1.5662976 4449.8 -1.13643

1.291466

1

RPOWE

R EQ

11-Jun-

08 182.3 33233.29

0.0274348

42 4523.6 1.658502

2.75062

7

0

RPOWER EQ

12-Jun-08 186.15 34651.8225

2.111903456

4539.35 0.348174

0.121225 0

RPOWER EQ

13-Jun-08 187.65 35212.5225

0.805801773 4517.1 -0.49016

0.240255 0

RPOWER EQ

16-Jun-08 184.7 34114.09

-1.5720756

7 4572.5 1.2264511.50418

1 1RPOWER EQ

17-Jun-08 190.95 36461.9025

3.383865728 4653 1.760525

3.099448 5

RPOWE

R EQ

18-Jun-

08 186.35 34726.3225

-2.4090075

9 4582.4 -1.5173

2.30220

1

3

RPOWER EQ

19-Jun-08 180.9 32724.81

-2.9246042

44504.2

5 -1.705442.90851

94

RPOWER EQ

20-Jun-08 174.95 30607.5025

-3.2891100

14347.5

5 -3.47894 12.1031

RPOWER

EQ 23-Jun-08

162.6 26438.76 -7.0591597

4266.4 -1.86657 3.484078

1


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6

RPOWER EQ

24-Jun-08 152.7 23317.29

-6.0885608

9 4191.1 -1.764953.11506

31

RPOWER EQ

25-Jun-08 155.6 24211.36

1.899148657

4252.65 1.468588

2.156751

2

RPOWER EQ

26-Jun-08 154.05 23731.4025

-0.9961439

64315.8

5 1.4861322.20858

9 RPOWER EQ

27-Jun-08 145 21025 -5.874716

4136.65 -4.15214

17.24024

2

RPOWER EQ

30-Jun-08 136.65 18673.2225

-5.7586206

94040.5

5 -2.32314 5.396961

RPOWER EQ 1-Jul-08 127.55 16269.0025 -6.6593487

3896.75 -3.55892

12.66592 2

RPOWER EQ 2-Jul-08 132.35 17516.5225

3.763230106

4093.35 5.04523

25.45435

1

RPOWER EQ 3-Jul-08 130.35 16991.1225

-1.5111446

93925.7

5 -4.0944516.7644

9 RPOWER EQ 4-Jul-08 135.95 18482.4025

4.296125815 4016 2.298924

5.285051

9

RPOWER EQ 7-Jul-08 135.6 18387.36

-0.2574475

9 4030 0.3486060.12152

6 0RPOWER EQ 8-Jul-08 136.9 18741.61

0.958702065

3988.55 -1.02854

1.057886 0

RPOWER EQ 9-Jul-08 148.65 22096.8225

8.582907232 4157.1 4.225846

17.85778

3

RPOWER EQ

10-Jul-08 147.75 21830.0625

-0.6054490

4 4162.2 0.1226820.01505

1 0RPOWER EQ

11-Jul-08 140.6 19768.36 -4.8392555 4049 -2.71972

7.396853 1

RPOWER EQ

14-Jul-08 137.6 18933.76

-2.1337126

6 4039.7 -0.229690.05275

60

RPOWER EQ

15-Jul-08 131.05 17174.1025

-4.7601744

2 3861.1 -4.4211219.5463

1 2

RPOWER EQ 16-Jul-08 127.85 16345.6225 -2.4418161 3816.7 -1.14993 1.322342 2

RPOWER EQ

17-Jul-08 131.8 17371.24

3.089558076 3947.2 3.419184

11.69082

1

RPOWER EQ

18-Jul-08 132.3 17503.29

0.379362671

4092.25 3.674757

13.50384

1

RPOWER EQ

21-Jul-08 132.2 17476.84

-0.0755857

9 4159.5 1.64335 2.7006 0


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RPOWER EQ

22-Jul-08 142.75 20377.5625

7.980332829 4240.1 1.937733

3.754809

1

RPOWER EQ

23-Jul-08 171.1 29275.21

19.85989492 4476.8 5.582416

31.16336

1

RPOWER EQ

24-Jul-08 176 30976

2.863822326

4433.55 -0.96609

0.933333 2

RPOWER EQ

25-Jul-08 168.85 28510.3225 -4.0625

4311.85 -2.74498

7.534908

1

RPOWER EQ

28-Jul-08 169.2 28628.64

0.207284572 4332.1 0.469636

0.220558

0

RPOWER EQ

29-Jul-08 154.15 23762.2225

-8.8947990

54189.8

5 -3.2836310.7822

1 2RPOWER EQ

30-Jul-08 163.15 26617.9225

5.838469024

4313.55 2.952373

8.716506

1

RPOWER EQ

31-Jul-08 165.6 27423.36

1.501685565

4332.95 0.449746

0.202271

0

7129.4 1185163.45

-

26.7783203 -7.57613

279.1365

4

BETA=1.594

S.D.=26.100C.V.=16.108

BETA = (nxy-x*y)/ (nx2-(x2))

Standard deviation = [((X*X)-(X*X)/N]/N

Coefficient .of variation= (standard deviation /X*)*100

BETA= (44* 447.6527- (-7.57613* -26.7783203))/ (44*279.1365-(-7.57613))

=1.594

STANDARD DEVIATION= ((1185163.45*1185163.45)-(7129.4*7129.4)/44)44

=26.100


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COEFFECIENT OF VARIATION= (26.100/162.031)*100

=16.108

MEAN=7129.4/44

=162.031

5. The price of call and put are very less as compare to price of share in cash

market.

commodities project

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