Download - Commodities Project
-
7/31/2019 Commodities Project
1/26
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.
-
7/31/2019 Commodities Project
2/26
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.
-
7/31/2019 Commodities Project
3/26
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.
-
7/31/2019 Commodities Project
4/26
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.
-
7/31/2019 Commodities Project
5/26
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.
-
7/31/2019 Commodities Project
6/26
Types of derivatives;
Derivatives
Financials Commodities
Basic Complex
Forwards Futures Options Warrants Swaps Exotics
& (Non-standard), Convertibles
-
7/31/2019 Commodities Project
7/26
Types as per availability
-
7/31/2019 Commodities Project
8/26
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.
-
7/31/2019 Commodities Project
9/26
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.
-
7/31/2019 Commodities Project
10/26
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.
-
7/31/2019 Commodities Project
11/26
(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.
-
7/31/2019 Commodities Project
12/26
(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.
-
7/31/2019 Commodities Project
13/26
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
-
7/31/2019 Commodities Project
14/26
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
-
7/31/2019 Commodities Project
15/26
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
-
7/31/2019 Commodities Project
16/26
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.
-
7/31/2019 Commodities Project
17/26
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.
-
7/31/2019 Commodities Project
18/26
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
-
7/31/2019 Commodities Project
19/26
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.
-
7/31/2019 Commodities Project
20/26
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.
-
7/31/2019 Commodities Project
21/26
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.
-
7/31/2019 Commodities Project
22/26
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/ -
7/31/2019 Commodities Project
23/26
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
-
7/31/2019 Commodities Project
24/26
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
-
7/31/2019 Commodities Project
25/26
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
-
7/31/2019 Commodities Project
26/26
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.