INTRODUCTION

HISTORYA

Established in 1875 the Bombay Stock Exchange is Asias first stock exchange

12th century France the courratiers de change were concerned with managing

and regulating debts of agricultural communities on behalf of the banks

Because these men also traded with debts they could be called the first brokers

A common misbelief is that in late 13th century Bruges commodity traders

gathered inside the house of a man called Van der Beurze and in 1309 they

became the Brugse Beurse institutionalizing what had been until then an

informal meeting but actually the family Van der Beurze had a building in

Antwerp where those gatherings occurred the Van der Beurze had Antwerp as

most of the merchants of that period as their primary place for trading The idea

quickly spread around Flanders and neighboring counties and Beurzen soon

opened in Ghent and Amsterdam In the middle of the 13th century Venetian

bankers began to trade in government securities In 1351 the Venetian

government outlawed spreading rumors intended to lower the price of

government funds Bankers in Pisa Verona Genoa and Florence also began

trading in government securities during the 14th century This was only possible

because these were independent city states not ruled by a duke but a council of

influential citizens The Dutch later started joint stock companies which let

shareholders invest in business ventures and get a share of their profits - or

losses In 1602 the Dutch East India Company issued the first share on the

Amsterdam Stock Exchange It was the first company to issue stocks and bonds

The Amsterdam Stock Exchange (or Amsterdam Beurs) is also said to have

Page 1

been the first stock exchange to introduce continuous trade in the early 17th

century The Dutch pioneered short selling option trading debt-equity swaps

merchant banking unit trusts and other speculative instruments much as we

know them There are now stock markets in virtually every developed and most

developing economies with the worlds biggest markets being in the United

States United Kingdom Japan India China Canada Germany France South

Korea and the Netherlands

CAPITALMARKET

The capital market is the market for securities where Companies and

governments can raise long-term funds It is a market in which money is lent for

periods longer than a year A nations capital market includes such financial

institutions as banks insurance companies and stock exchanges that channel

long-term investment funds to commercial and industrial borrowers Unlike the

money market on which lending is ordinarily short term the capital market

typically finances fixed investments like those in buildings and machinery

Nature and Constituents The capital market consists of number of individuals

and institutions(including the government) that canalize the supply and demand

for longterm capital and claims on capital The stock exchange commercial

banks co-operative banks saving banks development banks insurance

companies investment trust or companies etc are important constituents of the

capital markets The capital market like the money market has three important

Components namely the suppliers of loanable funds the borrowers and the

Intermediaries who deal with the leaders on the one hand and the Borrowers on

Page 2

the other The demand for capital comes mostly from agriculture industry trade

the government The predominant form of industrial organization developed

Capital Market becomes a necessary infrastructure for fast industrialization

Capital market not concerned solely with the issue of new claims on capital But

also with dealing in existing claims

DEBT OR BOND MARKET

The bond market (also known as the debt credit or fixed income market) is a

financial market where participants buy and sell debt securities usually in the

form of bonds As of 2009 the size of the worldwide bond market (total debt

outstanding) is an estimated $822 trillion of which the size of the outstanding

US bond market debt was $312 trillion according to BIS (or alternatively

$343 trillion according to SIFMA)Nearly all of the $822 billion average daily

trading volume in the US bond market takes place between broker-dealers and

large institutions in a decentralized over-the-counter (OTC) market However a

small number of bonds primarily corporate are listed on exchanges References

to the bond market usually refer to the government bond market because of

its size liquidity lack of credit risk and therefore sensitivity to interest rates

Because of the inverse relationship between bond valuation and interest rates

the bond market is often used to indicate changes in interest rates or the shape of

the yield curve

Contents

middot 1 Market structure

Page 3

middot 2 Types of bond markets

middot 3 Bond market participants

middot 4 Bond market size

middot 5 Bond market volatility

middot 6 Bond market influence

middot 7 Bond investments

middot 8 Bond indices

MARKET STUCTURE

Bond markets in most countries remain decentralized and lack common

exchanges like stock future and commodity markets This has occurred in part

because no two bond issues are exactly alike and the variety of bond securities

outstanding greatly exceeds that of stocks However the New York Stock

Exchange (NYSE) is the largest centralized bond market representing mostly

corporate bonds The NYSE migrated from the Automated Bond System(ABS)

to the NYSE Bonds trading system in April 2007 and expects the number of

traded issues to increase from 1000 to 6000Besides other causes the

decentralized market structure of the corporate and municipal bond markets as

distinguished from the stock market structure results in higher transaction costs

and less liquidity A study performed by Profs Harris and Piwowar in 2004

Secondary Trading Costs in the Municipal Bond Market reached the following

conclusions (1) Municipal bond trades are also substantially more expensive

than similar sized equity trades We attribute these results to the lack of price

transparency in the bond markets Additional cross-sectional analyses show that

bond trading costs decrease with credit quality and increase with instrument

Page 4

complexity time to maturity and time since issuance (2) Our results show

that municipal bond trades are significantly more expensive than equivalent

sized equity trades Effective spreads in municipal bonds average about two

percent of price for retail size trades of 20000 dollars and about one percent for

institutional trade size trades of 200000 dollars

TYPES OF BOND MARKETS

The Securities Industry and Financial Markets Association (SIFMA) classifies

the broader bond market into five specific bond markets

middot Corporate

middot Government amp agency

middot Municipal

middot Mortgage backed asset backed and collateralized debt obligation

middot Funding

Bond market participants

Bond market participants are similar to participants in most financial markets

and are essentially either buyers (debt issuer) of funds or sellers (institution) of

funds and often both

Participants include

middot Institutional investors

middot Governments

middot Traders

middot Individuals

Page 5

Because of the specificity of individual bond issues and the lack of liquidity in

many smaller issues the majority of outstanding bonds are held by institutions

like pension funds banks and mutual funds In the United States approximately

10 of the market is currently held by private individuals

STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of

economic transactions not a physical facility or discrete entity) for the trading of

company stock and derivatives at an agreed price these are securities listed on a

stock exchange as well as those only traded privatelyThe size of the world

stock market was estimated at about $366 trillion US at the beginning of

October 2008 The total world derivatives market has been estimated at about

$791 trillion face or nominal value 11 times the size of the entire world

economy The value of the derivatives market because it is stated in terms of

notional values cannot be directly compared to a stock or a fixed income

security which traditionally refers to an actual value Moreover the vast

majority of derivatives cancel each other out (ie a derivative bet on an event

occurring is offset by a comparable derivative bet on the event not occurring)

Many such relatively illiquid securities are valued as marked to model rather

than an actual market price The stocks are listed and traded on stock exchanges

which are entities of a corporation or mutual organization specialized in the

business of bringing buyers and sellers of the organizations to a listing of stocks

and securities together The largest stock market in the United States by market

cap is the New York Stock Exchange NYSE and while in Canada it is the

Page 6

Toronto Stock Exchange Major European examples of stock exchanges include

the London Stock Exchange Paris Bourse and the Deutsche Borse Asian

examples include the Tokyo Stock Exchange the Hong Kong Stock Exchange

the Shanghai Stock Exchange and the Bombay Stock Exchange In Latin

America there are such exchanges as the BMampF Bovespa and the BMV

Contents

middot 1 Trading

middot 2 Market participants

middot 3 History

middot 4 Importance of stock market

o 41 Function and purpose

o 42 Relation of the stock market to the modern financial system

o 43 The stock market individual investors and financial risk

TRADING

Participants in the stock market range from small individual stock investors to

large hedge fund traders who can be based anywhere Their orders usually end

up with a professional at a stock exchange who executes the order Some

exchanges are physical locations where transactions are carried out on a trading

floor by a method known as open outcry This type of auction is used in stock

exchanges and commodity exchanges where traders may enter verbal bids and

offers simultaneously The other type of stock exchange is a virtual kind

composed of a network of computers where trades are made electronically via

Page 7

traders Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific price

for the stock (Buying or selling at market means you will accept any ask price

or bid price for the stock respectively) When the bid and ask prices match a

sale takes place on a first-come-first-served basis if there are multiple bidders

or askers at a given price The purpose of a stock exchange is to facilitate the

exchange of securities between buyers and sellers thus providing a marketplace

(virtual or real) The exchanges provide real-time trading information on the

listed securities facilitating price discovery The New York Stock Exchange is a

physical exchange also referred to as a listed exchange mdashonly stocks listed

with the exchange may be traded Orders enter by way of exchange members

and flow down to a floor broker who goes to the floor trading post specialist for

that stock to trade the order The specialists job is to match buy and sell orders

using open outcry If a spread exists no trade immediately takes place--in this

case the specialist should use hisher own resources (money or stock) to close

the difference after hisher judged time Once a trade has been made the details

are reported on the tape and sent back to the brokerage firm which then

notifies the investor who placed the order Although there is a significant

amount of human contact in this process computers play an important role

especially for so-called program trading The NASDAQ is a virtual listed

exchange where all of the trading is done over a computer network The

process is similar to the New York Stock Exchange However buyers and

sellers are electronically matched One or more NASDAQ market makers will

always provide a bid and ask price at which they will always purchase or sell

their stockThe Paris Bourse now part of Euronext is an order-driven

Page 8

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

been the first stock exchange to introduce continuous trade in the early 17th

century The Dutch pioneered short selling option trading debt-equity swaps

merchant banking unit trusts and other speculative instruments much as we

know them There are now stock markets in virtually every developed and most

developing economies with the worlds biggest markets being in the United

States United Kingdom Japan India China Canada Germany France South

Korea and the Netherlands

CAPITALMARKET

The capital market is the market for securities where Companies and

governments can raise long-term funds It is a market in which money is lent for

periods longer than a year A nations capital market includes such financial

institutions as banks insurance companies and stock exchanges that channel

long-term investment funds to commercial and industrial borrowers Unlike the

money market on which lending is ordinarily short term the capital market

typically finances fixed investments like those in buildings and machinery

Nature and Constituents The capital market consists of number of individuals

and institutions(including the government) that canalize the supply and demand

for longterm capital and claims on capital The stock exchange commercial

banks co-operative banks saving banks development banks insurance

companies investment trust or companies etc are important constituents of the

capital markets The capital market like the money market has three important

Components namely the suppliers of loanable funds the borrowers and the

Intermediaries who deal with the leaders on the one hand and the Borrowers on

Page 2

the other The demand for capital comes mostly from agriculture industry trade

the government The predominant form of industrial organization developed

Capital Market becomes a necessary infrastructure for fast industrialization

Capital market not concerned solely with the issue of new claims on capital But

also with dealing in existing claims

DEBT OR BOND MARKET

The bond market (also known as the debt credit or fixed income market) is a

financial market where participants buy and sell debt securities usually in the

form of bonds As of 2009 the size of the worldwide bond market (total debt

outstanding) is an estimated $822 trillion of which the size of the outstanding

US bond market debt was $312 trillion according to BIS (or alternatively

$343 trillion according to SIFMA)Nearly all of the $822 billion average daily

trading volume in the US bond market takes place between broker-dealers and

large institutions in a decentralized over-the-counter (OTC) market However a

small number of bonds primarily corporate are listed on exchanges References

to the bond market usually refer to the government bond market because of

its size liquidity lack of credit risk and therefore sensitivity to interest rates

Because of the inverse relationship between bond valuation and interest rates

the bond market is often used to indicate changes in interest rates or the shape of

the yield curve

Contents

middot 1 Market structure

Page 3

middot 2 Types of bond markets

middot 3 Bond market participants

middot 4 Bond market size

middot 5 Bond market volatility

middot 6 Bond market influence

middot 7 Bond investments

middot 8 Bond indices

MARKET STUCTURE

Bond markets in most countries remain decentralized and lack common

exchanges like stock future and commodity markets This has occurred in part

because no two bond issues are exactly alike and the variety of bond securities

outstanding greatly exceeds that of stocks However the New York Stock

Exchange (NYSE) is the largest centralized bond market representing mostly

corporate bonds The NYSE migrated from the Automated Bond System(ABS)

to the NYSE Bonds trading system in April 2007 and expects the number of

traded issues to increase from 1000 to 6000Besides other causes the

decentralized market structure of the corporate and municipal bond markets as

distinguished from the stock market structure results in higher transaction costs

and less liquidity A study performed by Profs Harris and Piwowar in 2004

Secondary Trading Costs in the Municipal Bond Market reached the following

conclusions (1) Municipal bond trades are also substantially more expensive

than similar sized equity trades We attribute these results to the lack of price

transparency in the bond markets Additional cross-sectional analyses show that

bond trading costs decrease with credit quality and increase with instrument

Page 4

complexity time to maturity and time since issuance (2) Our results show

that municipal bond trades are significantly more expensive than equivalent

sized equity trades Effective spreads in municipal bonds average about two

percent of price for retail size trades of 20000 dollars and about one percent for

institutional trade size trades of 200000 dollars

TYPES OF BOND MARKETS

The Securities Industry and Financial Markets Association (SIFMA) classifies

the broader bond market into five specific bond markets

middot Corporate

middot Government amp agency

middot Municipal

middot Mortgage backed asset backed and collateralized debt obligation

middot Funding

Bond market participants

Bond market participants are similar to participants in most financial markets

and are essentially either buyers (debt issuer) of funds or sellers (institution) of

funds and often both

Participants include

middot Institutional investors

middot Governments

middot Traders

middot Individuals

Page 5

Because of the specificity of individual bond issues and the lack of liquidity in

many smaller issues the majority of outstanding bonds are held by institutions

like pension funds banks and mutual funds In the United States approximately

10 of the market is currently held by private individuals

STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of

economic transactions not a physical facility or discrete entity) for the trading of

company stock and derivatives at an agreed price these are securities listed on a

stock exchange as well as those only traded privatelyThe size of the world

stock market was estimated at about $366 trillion US at the beginning of

October 2008 The total world derivatives market has been estimated at about

$791 trillion face or nominal value 11 times the size of the entire world

economy The value of the derivatives market because it is stated in terms of

notional values cannot be directly compared to a stock or a fixed income

security which traditionally refers to an actual value Moreover the vast

majority of derivatives cancel each other out (ie a derivative bet on an event

occurring is offset by a comparable derivative bet on the event not occurring)

Many such relatively illiquid securities are valued as marked to model rather

than an actual market price The stocks are listed and traded on stock exchanges

which are entities of a corporation or mutual organization specialized in the

business of bringing buyers and sellers of the organizations to a listing of stocks

and securities together The largest stock market in the United States by market

cap is the New York Stock Exchange NYSE and while in Canada it is the

Page 6

Toronto Stock Exchange Major European examples of stock exchanges include

the London Stock Exchange Paris Bourse and the Deutsche Borse Asian

examples include the Tokyo Stock Exchange the Hong Kong Stock Exchange

the Shanghai Stock Exchange and the Bombay Stock Exchange In Latin

America there are such exchanges as the BMampF Bovespa and the BMV

Contents

middot 1 Trading

middot 2 Market participants

middot 3 History

middot 4 Importance of stock market

o 41 Function and purpose

o 42 Relation of the stock market to the modern financial system

o 43 The stock market individual investors and financial risk

TRADING

Participants in the stock market range from small individual stock investors to

large hedge fund traders who can be based anywhere Their orders usually end

up with a professional at a stock exchange who executes the order Some

exchanges are physical locations where transactions are carried out on a trading

floor by a method known as open outcry This type of auction is used in stock

exchanges and commodity exchanges where traders may enter verbal bids and

offers simultaneously The other type of stock exchange is a virtual kind

composed of a network of computers where trades are made electronically via

Page 7

traders Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific price

for the stock (Buying or selling at market means you will accept any ask price

or bid price for the stock respectively) When the bid and ask prices match a

sale takes place on a first-come-first-served basis if there are multiple bidders

or askers at a given price The purpose of a stock exchange is to facilitate the

exchange of securities between buyers and sellers thus providing a marketplace

(virtual or real) The exchanges provide real-time trading information on the

listed securities facilitating price discovery The New York Stock Exchange is a

physical exchange also referred to as a listed exchange mdashonly stocks listed

with the exchange may be traded Orders enter by way of exchange members

and flow down to a floor broker who goes to the floor trading post specialist for

that stock to trade the order The specialists job is to match buy and sell orders

using open outcry If a spread exists no trade immediately takes place--in this

case the specialist should use hisher own resources (money or stock) to close

the difference after hisher judged time Once a trade has been made the details

are reported on the tape and sent back to the brokerage firm which then

notifies the investor who placed the order Although there is a significant

amount of human contact in this process computers play an important role

especially for so-called program trading The NASDAQ is a virtual listed

exchange where all of the trading is done over a computer network The

process is similar to the New York Stock Exchange However buyers and

sellers are electronically matched One or more NASDAQ market makers will

always provide a bid and ask price at which they will always purchase or sell

their stockThe Paris Bourse now part of Euronext is an order-driven

Page 8

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

the other The demand for capital comes mostly from agriculture industry trade

the government The predominant form of industrial organization developed

Capital Market becomes a necessary infrastructure for fast industrialization

Capital market not concerned solely with the issue of new claims on capital But

also with dealing in existing claims

DEBT OR BOND MARKET

The bond market (also known as the debt credit or fixed income market) is a

financial market where participants buy and sell debt securities usually in the

form of bonds As of 2009 the size of the worldwide bond market (total debt

outstanding) is an estimated $822 trillion of which the size of the outstanding

US bond market debt was $312 trillion according to BIS (or alternatively

$343 trillion according to SIFMA)Nearly all of the $822 billion average daily

trading volume in the US bond market takes place between broker-dealers and

large institutions in a decentralized over-the-counter (OTC) market However a

small number of bonds primarily corporate are listed on exchanges References

to the bond market usually refer to the government bond market because of

its size liquidity lack of credit risk and therefore sensitivity to interest rates

Because of the inverse relationship between bond valuation and interest rates

the bond market is often used to indicate changes in interest rates or the shape of

the yield curve

Contents

middot 1 Market structure

Page 3

middot 2 Types of bond markets

middot 3 Bond market participants

middot 4 Bond market size

middot 5 Bond market volatility

middot 6 Bond market influence

middot 7 Bond investments

middot 8 Bond indices

MARKET STUCTURE

Bond markets in most countries remain decentralized and lack common

exchanges like stock future and commodity markets This has occurred in part

because no two bond issues are exactly alike and the variety of bond securities

outstanding greatly exceeds that of stocks However the New York Stock

Exchange (NYSE) is the largest centralized bond market representing mostly

corporate bonds The NYSE migrated from the Automated Bond System(ABS)

to the NYSE Bonds trading system in April 2007 and expects the number of

traded issues to increase from 1000 to 6000Besides other causes the

decentralized market structure of the corporate and municipal bond markets as

distinguished from the stock market structure results in higher transaction costs

and less liquidity A study performed by Profs Harris and Piwowar in 2004

Secondary Trading Costs in the Municipal Bond Market reached the following

conclusions (1) Municipal bond trades are also substantially more expensive

than similar sized equity trades We attribute these results to the lack of price

transparency in the bond markets Additional cross-sectional analyses show that

bond trading costs decrease with credit quality and increase with instrument

Page 4

complexity time to maturity and time since issuance (2) Our results show

that municipal bond trades are significantly more expensive than equivalent

sized equity trades Effective spreads in municipal bonds average about two

percent of price for retail size trades of 20000 dollars and about one percent for

institutional trade size trades of 200000 dollars

TYPES OF BOND MARKETS

The Securities Industry and Financial Markets Association (SIFMA) classifies

the broader bond market into five specific bond markets

middot Corporate

middot Government amp agency

middot Municipal

middot Mortgage backed asset backed and collateralized debt obligation

middot Funding

Bond market participants

Bond market participants are similar to participants in most financial markets

and are essentially either buyers (debt issuer) of funds or sellers (institution) of

funds and often both

Participants include

middot Institutional investors

middot Governments

middot Traders

middot Individuals

Page 5

Because of the specificity of individual bond issues and the lack of liquidity in

many smaller issues the majority of outstanding bonds are held by institutions

like pension funds banks and mutual funds In the United States approximately

10 of the market is currently held by private individuals

STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of

economic transactions not a physical facility or discrete entity) for the trading of

company stock and derivatives at an agreed price these are securities listed on a

stock exchange as well as those only traded privatelyThe size of the world

stock market was estimated at about $366 trillion US at the beginning of

October 2008 The total world derivatives market has been estimated at about

$791 trillion face or nominal value 11 times the size of the entire world

economy The value of the derivatives market because it is stated in terms of

notional values cannot be directly compared to a stock or a fixed income

security which traditionally refers to an actual value Moreover the vast

majority of derivatives cancel each other out (ie a derivative bet on an event

occurring is offset by a comparable derivative bet on the event not occurring)

Many such relatively illiquid securities are valued as marked to model rather

than an actual market price The stocks are listed and traded on stock exchanges

which are entities of a corporation or mutual organization specialized in the

business of bringing buyers and sellers of the organizations to a listing of stocks

and securities together The largest stock market in the United States by market

cap is the New York Stock Exchange NYSE and while in Canada it is the

Page 6

Toronto Stock Exchange Major European examples of stock exchanges include

the London Stock Exchange Paris Bourse and the Deutsche Borse Asian

examples include the Tokyo Stock Exchange the Hong Kong Stock Exchange

the Shanghai Stock Exchange and the Bombay Stock Exchange In Latin

America there are such exchanges as the BMampF Bovespa and the BMV

Contents

middot 1 Trading

middot 2 Market participants

middot 3 History

middot 4 Importance of stock market

o 41 Function and purpose

o 42 Relation of the stock market to the modern financial system

o 43 The stock market individual investors and financial risk

TRADING

Participants in the stock market range from small individual stock investors to

large hedge fund traders who can be based anywhere Their orders usually end

up with a professional at a stock exchange who executes the order Some

exchanges are physical locations where transactions are carried out on a trading

floor by a method known as open outcry This type of auction is used in stock

exchanges and commodity exchanges where traders may enter verbal bids and

offers simultaneously The other type of stock exchange is a virtual kind

composed of a network of computers where trades are made electronically via

Page 7

traders Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific price

for the stock (Buying or selling at market means you will accept any ask price

or bid price for the stock respectively) When the bid and ask prices match a

sale takes place on a first-come-first-served basis if there are multiple bidders

or askers at a given price The purpose of a stock exchange is to facilitate the

exchange of securities between buyers and sellers thus providing a marketplace

(virtual or real) The exchanges provide real-time trading information on the

listed securities facilitating price discovery The New York Stock Exchange is a

physical exchange also referred to as a listed exchange mdashonly stocks listed

with the exchange may be traded Orders enter by way of exchange members

and flow down to a floor broker who goes to the floor trading post specialist for

that stock to trade the order The specialists job is to match buy and sell orders

using open outcry If a spread exists no trade immediately takes place--in this

case the specialist should use hisher own resources (money or stock) to close

the difference after hisher judged time Once a trade has been made the details

are reported on the tape and sent back to the brokerage firm which then

notifies the investor who placed the order Although there is a significant

amount of human contact in this process computers play an important role

especially for so-called program trading The NASDAQ is a virtual listed

exchange where all of the trading is done over a computer network The

process is similar to the New York Stock Exchange However buyers and

sellers are electronically matched One or more NASDAQ market makers will

always provide a bid and ask price at which they will always purchase or sell

their stockThe Paris Bourse now part of Euronext is an order-driven

Page 8

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

middot 2 Types of bond markets

middot 3 Bond market participants

middot 4 Bond market size

middot 5 Bond market volatility

middot 6 Bond market influence

middot 7 Bond investments

middot 8 Bond indices

MARKET STUCTURE

Bond markets in most countries remain decentralized and lack common

exchanges like stock future and commodity markets This has occurred in part

because no two bond issues are exactly alike and the variety of bond securities

outstanding greatly exceeds that of stocks However the New York Stock

Exchange (NYSE) is the largest centralized bond market representing mostly

corporate bonds The NYSE migrated from the Automated Bond System(ABS)

to the NYSE Bonds trading system in April 2007 and expects the number of

traded issues to increase from 1000 to 6000Besides other causes the

decentralized market structure of the corporate and municipal bond markets as

distinguished from the stock market structure results in higher transaction costs

and less liquidity A study performed by Profs Harris and Piwowar in 2004

Secondary Trading Costs in the Municipal Bond Market reached the following

conclusions (1) Municipal bond trades are also substantially more expensive

than similar sized equity trades We attribute these results to the lack of price

transparency in the bond markets Additional cross-sectional analyses show that

bond trading costs decrease with credit quality and increase with instrument

Page 4

complexity time to maturity and time since issuance (2) Our results show

that municipal bond trades are significantly more expensive than equivalent

sized equity trades Effective spreads in municipal bonds average about two

percent of price for retail size trades of 20000 dollars and about one percent for

institutional trade size trades of 200000 dollars

TYPES OF BOND MARKETS

The Securities Industry and Financial Markets Association (SIFMA) classifies

the broader bond market into five specific bond markets

middot Corporate

middot Government amp agency

middot Municipal

middot Mortgage backed asset backed and collateralized debt obligation

middot Funding

Bond market participants

Bond market participants are similar to participants in most financial markets

and are essentially either buyers (debt issuer) of funds or sellers (institution) of

funds and often both

Participants include

middot Institutional investors

middot Governments

middot Traders

middot Individuals

Page 5

Because of the specificity of individual bond issues and the lack of liquidity in

many smaller issues the majority of outstanding bonds are held by institutions

like pension funds banks and mutual funds In the United States approximately

10 of the market is currently held by private individuals

STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of

economic transactions not a physical facility or discrete entity) for the trading of

company stock and derivatives at an agreed price these are securities listed on a

stock exchange as well as those only traded privatelyThe size of the world

stock market was estimated at about $366 trillion US at the beginning of

October 2008 The total world derivatives market has been estimated at about

$791 trillion face or nominal value 11 times the size of the entire world

economy The value of the derivatives market because it is stated in terms of

notional values cannot be directly compared to a stock or a fixed income

security which traditionally refers to an actual value Moreover the vast

majority of derivatives cancel each other out (ie a derivative bet on an event

occurring is offset by a comparable derivative bet on the event not occurring)

Many such relatively illiquid securities are valued as marked to model rather

than an actual market price The stocks are listed and traded on stock exchanges

which are entities of a corporation or mutual organization specialized in the

business of bringing buyers and sellers of the organizations to a listing of stocks

and securities together The largest stock market in the United States by market

cap is the New York Stock Exchange NYSE and while in Canada it is the

Page 6

Toronto Stock Exchange Major European examples of stock exchanges include

the London Stock Exchange Paris Bourse and the Deutsche Borse Asian

examples include the Tokyo Stock Exchange the Hong Kong Stock Exchange

the Shanghai Stock Exchange and the Bombay Stock Exchange In Latin

America there are such exchanges as the BMampF Bovespa and the BMV

Contents

middot 1 Trading

middot 2 Market participants

middot 3 History

middot 4 Importance of stock market

o 41 Function and purpose

o 42 Relation of the stock market to the modern financial system

o 43 The stock market individual investors and financial risk

TRADING

Participants in the stock market range from small individual stock investors to

large hedge fund traders who can be based anywhere Their orders usually end

up with a professional at a stock exchange who executes the order Some

exchanges are physical locations where transactions are carried out on a trading

floor by a method known as open outcry This type of auction is used in stock

exchanges and commodity exchanges where traders may enter verbal bids and

offers simultaneously The other type of stock exchange is a virtual kind

composed of a network of computers where trades are made electronically via

Page 7

traders Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific price

for the stock (Buying or selling at market means you will accept any ask price

or bid price for the stock respectively) When the bid and ask prices match a

sale takes place on a first-come-first-served basis if there are multiple bidders

or askers at a given price The purpose of a stock exchange is to facilitate the

exchange of securities between buyers and sellers thus providing a marketplace

(virtual or real) The exchanges provide real-time trading information on the

listed securities facilitating price discovery The New York Stock Exchange is a

physical exchange also referred to as a listed exchange mdashonly stocks listed

with the exchange may be traded Orders enter by way of exchange members

and flow down to a floor broker who goes to the floor trading post specialist for

that stock to trade the order The specialists job is to match buy and sell orders

using open outcry If a spread exists no trade immediately takes place--in this

case the specialist should use hisher own resources (money or stock) to close

the difference after hisher judged time Once a trade has been made the details

are reported on the tape and sent back to the brokerage firm which then

notifies the investor who placed the order Although there is a significant

amount of human contact in this process computers play an important role

especially for so-called program trading The NASDAQ is a virtual listed

exchange where all of the trading is done over a computer network The

process is similar to the New York Stock Exchange However buyers and

sellers are electronically matched One or more NASDAQ market makers will

always provide a bid and ask price at which they will always purchase or sell

their stockThe Paris Bourse now part of Euronext is an order-driven

Page 8

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

complexity time to maturity and time since issuance (2) Our results show

that municipal bond trades are significantly more expensive than equivalent

sized equity trades Effective spreads in municipal bonds average about two

percent of price for retail size trades of 20000 dollars and about one percent for

institutional trade size trades of 200000 dollars

TYPES OF BOND MARKETS

The Securities Industry and Financial Markets Association (SIFMA) classifies

the broader bond market into five specific bond markets

middot Corporate

middot Government amp agency

middot Municipal

middot Mortgage backed asset backed and collateralized debt obligation

middot Funding

Bond market participants

Bond market participants are similar to participants in most financial markets

and are essentially either buyers (debt issuer) of funds or sellers (institution) of

funds and often both

Participants include

middot Institutional investors

middot Governments

middot Traders

middot Individuals

Page 5

Because of the specificity of individual bond issues and the lack of liquidity in

many smaller issues the majority of outstanding bonds are held by institutions

like pension funds banks and mutual funds In the United States approximately

10 of the market is currently held by private individuals

STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of

economic transactions not a physical facility or discrete entity) for the trading of

company stock and derivatives at an agreed price these are securities listed on a

stock exchange as well as those only traded privatelyThe size of the world

stock market was estimated at about $366 trillion US at the beginning of

October 2008 The total world derivatives market has been estimated at about

$791 trillion face or nominal value 11 times the size of the entire world

economy The value of the derivatives market because it is stated in terms of

notional values cannot be directly compared to a stock or a fixed income

security which traditionally refers to an actual value Moreover the vast

majority of derivatives cancel each other out (ie a derivative bet on an event

occurring is offset by a comparable derivative bet on the event not occurring)

Many such relatively illiquid securities are valued as marked to model rather

than an actual market price The stocks are listed and traded on stock exchanges

which are entities of a corporation or mutual organization specialized in the

business of bringing buyers and sellers of the organizations to a listing of stocks

and securities together The largest stock market in the United States by market

cap is the New York Stock Exchange NYSE and while in Canada it is the

Page 6

Toronto Stock Exchange Major European examples of stock exchanges include

the London Stock Exchange Paris Bourse and the Deutsche Borse Asian

examples include the Tokyo Stock Exchange the Hong Kong Stock Exchange

the Shanghai Stock Exchange and the Bombay Stock Exchange In Latin

America there are such exchanges as the BMampF Bovespa and the BMV

Contents

middot 1 Trading

middot 2 Market participants

middot 3 History

middot 4 Importance of stock market

o 41 Function and purpose

o 42 Relation of the stock market to the modern financial system

o 43 The stock market individual investors and financial risk

TRADING

Participants in the stock market range from small individual stock investors to

large hedge fund traders who can be based anywhere Their orders usually end

up with a professional at a stock exchange who executes the order Some

exchanges are physical locations where transactions are carried out on a trading

floor by a method known as open outcry This type of auction is used in stock

exchanges and commodity exchanges where traders may enter verbal bids and

offers simultaneously The other type of stock exchange is a virtual kind

composed of a network of computers where trades are made electronically via

Page 7

traders Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific price

for the stock (Buying or selling at market means you will accept any ask price

or bid price for the stock respectively) When the bid and ask prices match a

sale takes place on a first-come-first-served basis if there are multiple bidders

or askers at a given price The purpose of a stock exchange is to facilitate the

exchange of securities between buyers and sellers thus providing a marketplace

(virtual or real) The exchanges provide real-time trading information on the

listed securities facilitating price discovery The New York Stock Exchange is a

physical exchange also referred to as a listed exchange mdashonly stocks listed

with the exchange may be traded Orders enter by way of exchange members

and flow down to a floor broker who goes to the floor trading post specialist for

that stock to trade the order The specialists job is to match buy and sell orders

using open outcry If a spread exists no trade immediately takes place--in this

case the specialist should use hisher own resources (money or stock) to close

the difference after hisher judged time Once a trade has been made the details

are reported on the tape and sent back to the brokerage firm which then

notifies the investor who placed the order Although there is a significant

amount of human contact in this process computers play an important role

especially for so-called program trading The NASDAQ is a virtual listed

exchange where all of the trading is done over a computer network The

process is similar to the New York Stock Exchange However buyers and

sellers are electronically matched One or more NASDAQ market makers will

always provide a bid and ask price at which they will always purchase or sell

their stockThe Paris Bourse now part of Euronext is an order-driven

Page 8

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Because of the specificity of individual bond issues and the lack of liquidity in

many smaller issues the majority of outstanding bonds are held by institutions

like pension funds banks and mutual funds In the United States approximately

10 of the market is currently held by private individuals

STOCK OR EQUITY MARKET

A stock market or equity market is a public market (a loose network of

economic transactions not a physical facility or discrete entity) for the trading of

company stock and derivatives at an agreed price these are securities listed on a

stock exchange as well as those only traded privatelyThe size of the world

stock market was estimated at about $366 trillion US at the beginning of

October 2008 The total world derivatives market has been estimated at about

$791 trillion face or nominal value 11 times the size of the entire world

economy The value of the derivatives market because it is stated in terms of

notional values cannot be directly compared to a stock or a fixed income

security which traditionally refers to an actual value Moreover the vast

majority of derivatives cancel each other out (ie a derivative bet on an event

occurring is offset by a comparable derivative bet on the event not occurring)

Many such relatively illiquid securities are valued as marked to model rather

than an actual market price The stocks are listed and traded on stock exchanges

which are entities of a corporation or mutual organization specialized in the

business of bringing buyers and sellers of the organizations to a listing of stocks

and securities together The largest stock market in the United States by market

cap is the New York Stock Exchange NYSE and while in Canada it is the

Page 6

Toronto Stock Exchange Major European examples of stock exchanges include

the London Stock Exchange Paris Bourse and the Deutsche Borse Asian

examples include the Tokyo Stock Exchange the Hong Kong Stock Exchange

the Shanghai Stock Exchange and the Bombay Stock Exchange In Latin

America there are such exchanges as the BMampF Bovespa and the BMV

Contents

middot 1 Trading

middot 2 Market participants

middot 3 History

middot 4 Importance of stock market

o 41 Function and purpose

o 42 Relation of the stock market to the modern financial system

o 43 The stock market individual investors and financial risk

TRADING

Participants in the stock market range from small individual stock investors to

large hedge fund traders who can be based anywhere Their orders usually end

up with a professional at a stock exchange who executes the order Some

exchanges are physical locations where transactions are carried out on a trading

floor by a method known as open outcry This type of auction is used in stock

exchanges and commodity exchanges where traders may enter verbal bids and

offers simultaneously The other type of stock exchange is a virtual kind

composed of a network of computers where trades are made electronically via

Page 7

traders Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific price

for the stock (Buying or selling at market means you will accept any ask price

or bid price for the stock respectively) When the bid and ask prices match a

sale takes place on a first-come-first-served basis if there are multiple bidders

or askers at a given price The purpose of a stock exchange is to facilitate the

exchange of securities between buyers and sellers thus providing a marketplace

(virtual or real) The exchanges provide real-time trading information on the

listed securities facilitating price discovery The New York Stock Exchange is a

physical exchange also referred to as a listed exchange mdashonly stocks listed

with the exchange may be traded Orders enter by way of exchange members

and flow down to a floor broker who goes to the floor trading post specialist for

that stock to trade the order The specialists job is to match buy and sell orders

using open outcry If a spread exists no trade immediately takes place--in this

case the specialist should use hisher own resources (money or stock) to close

the difference after hisher judged time Once a trade has been made the details

are reported on the tape and sent back to the brokerage firm which then

notifies the investor who placed the order Although there is a significant

amount of human contact in this process computers play an important role

especially for so-called program trading The NASDAQ is a virtual listed

exchange where all of the trading is done over a computer network The

process is similar to the New York Stock Exchange However buyers and

sellers are electronically matched One or more NASDAQ market makers will

always provide a bid and ask price at which they will always purchase or sell

their stockThe Paris Bourse now part of Euronext is an order-driven

Page 8

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Toronto Stock Exchange Major European examples of stock exchanges include

the London Stock Exchange Paris Bourse and the Deutsche Borse Asian

examples include the Tokyo Stock Exchange the Hong Kong Stock Exchange

the Shanghai Stock Exchange and the Bombay Stock Exchange In Latin

America there are such exchanges as the BMampF Bovespa and the BMV

Contents

middot 1 Trading

middot 2 Market participants

middot 3 History

middot 4 Importance of stock market

o 41 Function and purpose

o 42 Relation of the stock market to the modern financial system

o 43 The stock market individual investors and financial risk

TRADING

Participants in the stock market range from small individual stock investors to

large hedge fund traders who can be based anywhere Their orders usually end

up with a professional at a stock exchange who executes the order Some

exchanges are physical locations where transactions are carried out on a trading

floor by a method known as open outcry This type of auction is used in stock

exchanges and commodity exchanges where traders may enter verbal bids and

offers simultaneously The other type of stock exchange is a virtual kind

composed of a network of computers where trades are made electronically via

Page 7

traders Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific price

for the stock (Buying or selling at market means you will accept any ask price

or bid price for the stock respectively) When the bid and ask prices match a

sale takes place on a first-come-first-served basis if there are multiple bidders

or askers at a given price The purpose of a stock exchange is to facilitate the

exchange of securities between buyers and sellers thus providing a marketplace

(virtual or real) The exchanges provide real-time trading information on the

listed securities facilitating price discovery The New York Stock Exchange is a

physical exchange also referred to as a listed exchange mdashonly stocks listed

with the exchange may be traded Orders enter by way of exchange members

and flow down to a floor broker who goes to the floor trading post specialist for

that stock to trade the order The specialists job is to match buy and sell orders

using open outcry If a spread exists no trade immediately takes place--in this

case the specialist should use hisher own resources (money or stock) to close

the difference after hisher judged time Once a trade has been made the details

are reported on the tape and sent back to the brokerage firm which then

notifies the investor who placed the order Although there is a significant

amount of human contact in this process computers play an important role

especially for so-called program trading The NASDAQ is a virtual listed

exchange where all of the trading is done over a computer network The

process is similar to the New York Stock Exchange However buyers and

sellers are electronically matched One or more NASDAQ market makers will

always provide a bid and ask price at which they will always purchase or sell

their stockThe Paris Bourse now part of Euronext is an order-driven

Page 8

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

traders Actual trades are based on an auction market model where a potential

buyer bids a specific price for a stock and a potential seller asks a specific price

for the stock (Buying or selling at market means you will accept any ask price

or bid price for the stock respectively) When the bid and ask prices match a

sale takes place on a first-come-first-served basis if there are multiple bidders

or askers at a given price The purpose of a stock exchange is to facilitate the

exchange of securities between buyers and sellers thus providing a marketplace

(virtual or real) The exchanges provide real-time trading information on the

listed securities facilitating price discovery The New York Stock Exchange is a

physical exchange also referred to as a listed exchange mdashonly stocks listed

with the exchange may be traded Orders enter by way of exchange members

and flow down to a floor broker who goes to the floor trading post specialist for

that stock to trade the order The specialists job is to match buy and sell orders

using open outcry If a spread exists no trade immediately takes place--in this

case the specialist should use hisher own resources (money or stock) to close

the difference after hisher judged time Once a trade has been made the details

are reported on the tape and sent back to the brokerage firm which then

notifies the investor who placed the order Although there is a significant

amount of human contact in this process computers play an important role

especially for so-called program trading The NASDAQ is a virtual listed

exchange where all of the trading is done over a computer network The

process is similar to the New York Stock Exchange However buyers and

sellers are electronically matched One or more NASDAQ market makers will

always provide a bid and ask price at which they will always purchase or sell

their stockThe Paris Bourse now part of Euronext is an order-driven

Page 8

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

electronic stock exchange It was automated in the late 1980s Prior to the

1980s it consisted of an open outcry exchange Stockbrokers met on the trading

floor or the Palais Brongniart In 1986 the CATS trading system was

introduced and the order matching process was fully automated From time to

time active trading (especially in large blocks of securities) have moved away

from the active exchanges Securities firms led by UBS AG Goldman Sachs

Group Inc and Credit Suisse Group already steer 12 percent of US security

trades away from the exchanges to their internal systems That share probably

will increase to 18 percent by 2010 as more investment banks bypass the NYSE

and NASDAQ and pair buyers and sellers of securities themselves according to

data compiled by Boston-based Aite Group LLC a brokerage-industry

consultant Now that computers have eliminated the need for trading floors like

the Big Boards the balance of power in equity markets is shifting By bringing

more orders in-house where clients can move big blocks of stock anonymously

brokers pay the exchanges less in fees and capture a bigger share of the $11

billion a year that institutional investors pay in trading commissions as well as

the surplus of the century had taken place

Market participants

A few decades ago worldwide buyers and sellers were individual investors

such as wealthy businessmen with long family histories (and emotional ties) to

particular corporations Overtime markets have become more

institutionalized buyers and sellers are largely institutions (eg pension

funds insurance companies mutual funds index funds exchange-traded funds

hedge funds investor groups banks and various other financial institutions)

Page 9

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

The rise of the institutional investor has brought with it some improvements in

market operations Thus the government was responsible for fixed (and

exorbitant) fees being markedly reduced for the small investor but only after

the large institutions had managed to break the brokers solid front on fees

(They then went to negotiated fees but only for large institutions However

corporate governance (at least in the West) has been very much adversely

affected by the rise of (largely absentee) institutional owners

IMPORTANCE OF STOCK MARKET

Function and purpose

The main trading room of the Tokyo Stock Exchange where trading is currently

completed through computers The stock market is one of the most important

sources for companies to raise money This allows businesses to be publicly

traded or raise additional capital for expansion by selling shares of ownership

of the company in a public market The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities This is an

attractive feature of investing in stocks compared to other less liquid

investments such as real estate History has shown that the price of shares and

other assets is an important part of the dynamics of economic activity and can

influence or be an indicator of social mood An economy where the stock

market is on the rise is considered to be an up-and-coming economy In fact the

Page 10

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

stock market is often considered the primary indicator of a countrys economic

strength and development Rising share prices for instance tend to be

associated with increased business investment and vice versa Share prices also

affect the wealth of households and their consumption Therefore central banks

tend to keep an eye on the control and behavior of the stock market and in

general on the smooth operation of financial system functions Financial

stability is the raison detre of central banks Exchanges also act as the

clearinghouse for each transaction meaning that they collect and deliver the

shares and guarantee payment to the seller of a security This eliminates the risk

to an individual buyer or seller that the counterparty could default on the

transaction The smooth functioning of all these activities facilitates economic

growth in that lower costs and enterprise risks promote the production of goods

and services as well as employment In this way the financial system contributes

to increased prosperity An important aspect of modern financial markets

however including the stock markets is absolute discretion For example

American stock markets see more unrestrained acceptance of any firm than in

smaller markets For example Chinese firms that possess little or no perceived

value to American society profit American bankers on Wall Street as they reap

large commissions from the placement as well as the Chinese company which

yields funds to invest in China However these companies accrueno intrinsic

value to the long-term stability of the American economy but rather only short-

term profits to American business men and the Chinese although when the

foreign company has a presence in the new market this can benefit the markets

citizens Conversely there are very few large foreign corporations listed on the

Toronto Stock Exchange TSX Canadas largest stock exchange This discretion

Page 11

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

has insulated Canada to some degree to worldwide financial conditions In order

for the stock markets to truly facilitate economic growth via lower costs and

better employment great attention must be given to the foreign participants

being allowed in

GROWTH OF INDIAN STOCK EXCHANGE

The second world war broke out in 1939 It gave a sharp boom which was

followed by a slump But in 1943 the situation changed radically when India

was fully mobilized as supply base On account of the restrictive controls on

cotton bullion seeds and other commodities those dealing in them found in the

stock market as the only outlet for their activities they were anxious to join the

trade and their number was swelled by numerous others Many few associations

were constituted for the purpose and stock exchanges in all parts of the country

were floated In Delhi two stock exchanges- Delhi stock and share brokers

association limited and the Delhi stocks and shares exchange limited-were

floated and later June 1947 amalgamated into Delhi stock exchange association

limited

Page 12

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

MAJOR STOCK EXCHANGES IN INDIA

Page 13

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

ROLE OF CAPITAL MARKET

Financial market is a market where financial instruments are exchanged or

traded and

Helps in determining the prices of the assets that are traded in and is also called

the price discovery process

1 Organizations that facilitate the trade in financial products For eg Stock

exchanges

(NYSE NASDAQ) facilitate the trade in stocks bonds and warrants

2 Coming together of buyer and sellers at a common platform to trade financial

products is termed as financial markets ie stocks and shares are traded

between buyers and sellers in a number of ways including the use of stock

exchanges directly between

buyers and sellers etc

Financial markets may be classified on the basis of

types of claims ndash debt and equity markets

maturity ndash money market and capital market

trade ndash spot market and delivery market

deals in financial claims ndash primary market and secondary market

Indian Financial Market consists of the following markets

Capital Market Securities Market

Primary capital market

Secondary capital market

Page 14

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Money Market

Debt Market

Primary capital market- A market where new securities are bought and sold

for the first time

Types of issues in Primary market

bull Initial public offer (IPO) (in case of an unlisted company)

bull Follow-on public offer (FPO)

Page 15

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

bull Rights offer such that securities are offered to existing shareholders

bull Preferential issue bonus issue QIB placement

bull Composite issue that is mixture of a rights and public offer or offer for sale

(offer of securities by existing shareholders to the public for subscription)

Difference between

Primary market Secondary market

Deals with new securities Market for existing securities which are already

listed

Provides additional capital to issuer companies No additional capital generated

Provides liquidity to existing stock leading stock exchanges

bull Bombay Stock Exchange Limited

Oldest in Asia

Presence in 417 cities and towns in India

Trading in equity debt instrument and derivatives

bull National Stock Exchange

bull New York Stock Exchange NYSE)

bull NASDAQ

bull London Stock Exchange

Functions of Stock Exchanges

bull Liquidity and marketability of securities

bull Fair price determination

Page 16

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

bull Source of long-tern funds

bull Helps in capital formation

bull Reflects general state of economy

Basics of Stock Market Indices

A stock market index is the reflection of the market as a whole It is a

representative of

The entire stock market Movements in the index represent the average returns

obtained

By the investors Stock market index is sensitive to the news of

bull Company specific

bull Country specific

Thus the movement in the stock index is also the reflection of the expectation of

the

Future performance of the companies listed on the exchange

Capital market and money market

Financial markets can broadly be divided into money and capital market

Money Market Money market is a market for debt securities that pay off in

the short term usually less than one year for example the market for 90-days

treasury bills This market encompasses the trading and issuance of short term

non-equity debt instruments including treasury bills commercial papers

bankersrsquo acceptance certificates of deposits etc

Page 17

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Capital Market Capital market is a market for long-term debt and equity

shares In this market the capital funds comprising of both equity and debt are

issued and traded This also includes private placement sources of debt and

equity as well as organized markets like stock exchanges Capital market

includes financial instruments with more than one year maturity

CAPITAL MARKET STRUCTURE

Significance of Capital Markets

Page 18

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

A well functioning stock market may help the development process in an

economy

through the following channels

1 Growth of savings

2 Efficient allocation of investment resources

3 Better utilization of the existing resources

In market economy like India financial market institutions provide the avenue

by which long-term savings are mobilized and channeled into investments

Confidence of the investors in the market is imperative for the growth and

development of the market For any stock market the market Indices is the

barometer of its performance and reflects the prevailing sentiments of the entire

economy Stock index is created to provide investors with the information

regarding the average share price in the stock market The ups and downs in the

index represent the movement of the equity market These indices need to

represent the return obtained by typical portfolios in the country

Generally the stock price of any company is vulnerable to three types of news

bull Company specific

bull Industry specific

bull Economy specific

An all-share index includes stocks from all the sectors of the economy and thus

cancels

Out the stock and sector specific news and events that affect stock prices (law

of portfolio diversification) and reflect the overall performance of the

Page 19

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

companyequity market and the news affecting it The most important use of an

equity market index is as a benchmark for a portfolio of stocks All diversified

portfolios belonging either to retail investors or mutual funds use the common

stock index as a yardstick for their returns Indices are useful in modern

financial application of derivatives

Capital Market Instruments ndash some of the capital market instruments are

bull Equity

CORPORATE SECURITIES

SHARES

The total capital of a company may be divided into small units called shares

For example if the required capital of a company is US $500000 and is

divided into 50000 units of US $10 each each unit is called a share of face

value US $10 A share may be of any face value depending upon the capital

required and the number of shares into which it is divided The holders of the

shares are called share holders The shares can be purchased or sold only in

integral multiples Equity shares signify ownership in a corporation and

represent claim over the financial assets and earnings of the corporation

Shareholders enjoy voting rights and the right to receive dividends however in

case of liquidation they will receive residuals after all the creditors of the

company are settled in full A company may invite investors to subscribe for the

shares by the way of

Page 20

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

bull Public issue through prospectus

bull Tender book building process

bull Offer for sale

bull Placement method

bull Rights issue

STOCKS

The word stock refers to the old English law tradition where a share in the

capital of the company was not divided into ldquosharesrdquo of fixed denomination but

was issued as one chunk This concept is no more prevalent but the word

ldquostockrdquo continues The word ldquojoint stock companiesrdquo also refers to this

tradition

DEBT INSTRUMENTS

A contractual arrangement in which the issuer agrees to pay interest and repay

the

Borrowed amount after a specified period of time is a debt instrument Certain

features

Common to all debt instruments are

bull Maturity ndash the number of years over which the issuer agrees to meet the

contractual obligations is the term to maturity Debt instruments are classified

on the basis of the time remaining to maturity

Page 21

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

bull Par value ndash the face value or principal value of the debt instrument is called

the par value

bull Coupon rate ndash agreed rate of interest that is paid periodically to the investor

and is calculated as a percentage of the face value Some of the debt instruments

may not have an explicit coupon rate for instance zero coupon bonds These

bonds are issued on discount and redeemed at par Thus the difference between

the investorrsquos investment and return is the interest earned Coupon rates may be

fixed for the term or may be variable

bull Call option ndash option available to the issuer specified in the trust indenture

to lsquocall

inrsquo the bonds and repay them at pre-determined price before maturity Call

feature acts like a ceiling f or payments The issuer may call the bonds before

the stated maturity as it may recognize that the interest rates may fall below the

coupon rate and redeeming the bonds and replacing them with securities of

lower coupon rates will be economically beneficial It is the same as the

prepayment option where the borrower prepays before scheduled payments or

slated maturity of Some bonds are issued with lsquocall protection feature ie they

would not be called for a specified period of time o Similar to the call option of

the issuer there is a put option for the investor to sell the securities back to the

issuer at a predetermined price and date The investor may do so anticipating

rise in the interest rates wherein the investor would liquidate the funds and

alternatively invest in place of higher interest

bull Refunding provisions ndash in case where the issuer may not have cash to

redeem the

Page 22

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

debt instruments the issuer may issue new debt instrument and use the proceeds

to repay the securities or to exercise the call option Debt instruments may be of

various kinds depending on the repayment

bull Bullet payment ndash instruments where the issuer agrees to repay the entire

amount

at the maturity date ie lump sum payment is called bullet payment

bull Sinking fund payment ndash instruments where the issuer agrees to retire a

specified portion of the debt each year is called sinking fund requirement

bull Amortization ndash instruments where there are scheduled principal repayments

before maturity date are called amortizing instruments

Debentures Bonds

The term Debenture is derived from the Latin word lsquodeberersquo which means lsquoto

owe a Debtrsquo A debenture is an acknowledgment of debt taken either from the

public or a particular source A debenture may be viewed as a loan represented

as marketable security The word ldquobondrdquo may be used interchangeably with

debentures Debt instruments with maturity more than 5 years are called lsquobondsrsquo

Yields

Most common method of calculating the yields on debt instrument is the lsquoyield

to maturityrsquo method the formula is as under YTM = coupon rate + prorated

discount (face value + purchase price)2

Page 23

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Main differences between shares and debentures

bull Share money forms a part of the capital of the company The shareholders are

part proprietors of the company whereas debentures are mere debt and

debenture holders are just creditors

bull Shareholders get dividend only out of profits and in case of insufficient or no

profits they get nothing and debenture holders being creditors get guaranteed

interest as agreed whether the company makes profit or not

bull Shareholders are paid after the debenture holders are paid their due first

bull The dividend on shares depends upon the profit of the company but the

interest on debentures is very well fixed at the time of issue itself

bull Shares are not to be paid back by the company whereas debentures have to be

paid back at the end of a fixed period

bull In case the company is wound up the shareholders may lose a part or full of

their capital but he debenture holders invariably get back their investment

bull Investment in shares is riskier as it represents residual interest in the

company Debenture being debt is senior

bull Debentures are quite often secured that is a security interest is created on

some assets to back up debentures There is no question of any security in case

of shares

Page 24

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

bull Shareholders have a right to attend and vote at the meetings of the

shareholders whereas debenture holders have no such rights

DERIVATIVES

What are derivatives A derivative picks a risk or volatility in a financial asset

transaction market rate or contingency and creates a product the value of

which will

change as per changes in the underlying risk or volatility The idea is that

someone may

either try to safeguard against such risk (hedging) or someone may take the

risk or may engage in a trade on the derivative based on the view that they

want to execute The risk that a derivative intends to trade is called underlying

A derivative is a financial instrument whose value depends on the values of

basic underlying variable In the sense derivatives is a financial instrument that

offers return based on the return of some other underlying asset ie the return is

derived from another instrument The best way will be take examples of

uncertainties and the derivatives that can be structured around the same

bull Stock prices are uncertain - Lot of forwards options or futures contracts are

based on movements in prices of individual stocks or groups of stocks

bull Prices of commodities are uncertain - There are forwards futures and

options on commodities

bull Interest rates are uncertain - There are interest rate swaps and futures

bull Foreign exchange rates are uncertain - There are exchange rate derivatives

Page 25

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

bull Weather is uncertain - There are weather derivatives and so on

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices and commodity linked derivatives remained the sole form of

such products for almost three hundred years It was primarily used by the

farmers to protect

Themselves against fluctuations in the price of their crops From the time it was

sown to the time it was ready for harvest farmers would face price

uncertainties Through the use of simple derivative products it was possible for

the farmers to partially or fully transfer price risks by locking in asset prices

From hedging devices derivatives have grown as major trading tool Traders

may execute their views on various underlying by going long or short on

derivatives of different types

DERIVATIVES PRODUCTS

Some significant derivatives that are of interest to us are depicted in the

accompanying graph

Major types of derivatives

Derivative contracts have several variants Depending upon the market in which

they are traded derivatives are classified as 1) exchange traded and 2) over the

counter

The most common variants are forwards futures options and swaps

Forwards

Page 26

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

A forward contract is a customized contract between two entities where

settlement takes place as a specific date in the future at todayrsquos predetermined

price Ex On 1st June X enters into an agreement to buy 50 bales of cotton for

1stDecember at Rs1000 per bale from Y a cotton dealer It is a case of a

forward contract where X has to pay Rs50000 on 1st December to Y and Y has

to supply 50 bales of cotton

Options

Options are of two types ndash call and put 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

Warrants

Options generally have maturity period of three months majority of options that

are traded on exchanges have maximum maturity of nine months Longer-traded

options are called warrants and are generally traded over-the-counter

Leaps

The acronym LEAPS means Long-term Equity Anticipation Securities These

are options having a maturity of up to three years

Baskets

Page 27

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Basket Options are currency-protected options and its return-profile is based on

the average performance of a pre-set basket of underlying assets The basket can

be interest rate equity or commodity related A basket of options is made by

purchasing different options The payout is therefore the addition of each

individual option payout

Swaps

Swaps are private agreement between two parties to exchange cash flows in the

future according to a pre-arranged formula They can be regarded as portfolio of

forward contracts The two commonly used Swaps are

i) Interest Rate Swaps - A interest rate swap entails swapping only the interest

related cash flows between the parties in the same currency

ii) Currency Swaps -A currency swap is a foreign exchange agreement

between two parties to exchange a given amount of one currency for another

and after a specified period of time to give back the original amount swapped

FUTURES FORWARDS AND OPTIONS

An option is different from futures in several ways At practical level the option

buyer faces an interesting situation He pays for the options in full at the time it

is purchased After this he only has an upside There is no possibility of the

Page 28

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

options position generating any further losses to him This is different from

futures where one is free to enter but can generate huge losses This

characteristic makes options attractive to many market participants who trade

occasionally who cannot put in the time to closely monitor their futures

position Buying put options is like buying insurance To buy a put option on

Nifty is to buy insurance which reimburses the full amount to which Nifty drops

below the strike price of the put option This is attractive to traders and to

mutual funds creating ldquoguaranteed return productsrdquo

FORWARDS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price One of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price The other party assumes a short position and agrees to sell the

asset on the same date for the same price other contract details like delivery

date price and quantity are negotiated bilaterally by the parties to the contract

The forward contracts are normally traded outside the exchange

The salient features of forward contracts are

1 They are bilateral contracts and hence exposed to counter-party risk

2 Each contract is custom designed and hence is unique in terms of

contract size

3 expiration date and the asset type and quality

4 The contract price is generally not available in public domain

Page 29

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

5 On the expiration date the contract has to be settled by delivery of the

asset or net settlement

The forward markets face certain limitations such as

1048766 Lack of centralization of trading

1048766 Illiquidity and

1048766 Counterparty risk

FUTURES

Futures contract is a standardized transaction taking place on the futures

exchange Futures market was designed to solve the problems that exist in

forward market A futures contract is an agreement between two parties to buy

or sell an asset at a certain time in the future at a certain price but unlike

forward contracts the futures contract are standardized and exchange traded To

facilitate liquidity in the futures contracts the exchange specifies certain

standard quantity and quality of the underlying instrument that can be delivered

and a standard time for such a settlement Futuresrsquoexchange has a division or

subsidiary called a clearing house that performs the specific responsibilities of

paying and collecting daily gains and losses as well as guaranteeing

performance of one party to other A futures contract can be offset prior to

maturity by entering into an equal and opposite transaction More than 99 of

futures transactions are offset this way Yet another feature is that in a futures

contract gains and losses on each partyrsquos position is credited or charged on a

daily basis this process is called daily settlement or marking to market Any

Page 30

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

person entering into a futures contract assumes a long or short position by a

small amount to the clearing house called the margin money

The standardized items in a futures contract are

1048766 Quantity of the underlying

1048766 Quality of the underlying

1048766 The date and month of delivery

1048766 The units of price quotation and minimum price change

1048766 Location of settlement

Stock futures contract

It is a contractual agreement to trade in stock shares of a company on a future

date Some of the basic things in a futures trade as specified by the exchange

are

bull Contract size

bull Expiration cycle

bull Trading hours

bull Last trading day

bull Margin requirement

Advantages of stock futures trading

bull Investing in futures is less costly as there is only initial margin money to be

deposited

bull A large array of strategies can be used to hedge and speculate with smaller

cash outlay there is greater liquidity

Page 31

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Disadvantages of stock futures trading

bull The risk of losses is greater than the initial investment of margin money

bull The futures contract does not give ownership or voting rights in the equity in

which it is trading

bull There is greater vigilance required because futures trades are marked to market

daily

INDEX DERIVATIVES

Index derivatives are derivative contracts that has index as the underlying The

most popular index derivatives contract is index futures and index options

NSErsquos market index - the SampP CNX Nifty are examples of exchange traded

index futures An index is a broad-based weighted average of prices of selected

constituents that form part of the index The rules for construction of the index

are defined by the body that creates the index Trading in stock index futures

was first introduced by the Kansas City Board of Trade in 1982

Advantages of investing in stock index futures

bull Diversification of the risks as the investor is not investing in a particular stock

bull Flexibility of changing the portfolio and adjusting the exposures to particular

stock index market or industry

OPTIONS

An option is a contract or a provision of a contract that gives one party (the

option holder) the right but not the obligation to perform a specified

transaction with another party (the option issuer or option writer) according to

Page 32

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

the specified terms The owner of a property might sell another party an option

to purchase the property any time during the next three months at a specified

price For every buyer of an option there must be a seller The seller is often

referred to as the writer As with futures options are brought into existence by

being traded if none is traded none exists conversely there is no limit to the

number of option contracts that can be in existence at any time As with futures

the process of closing out options positions will cause contracts to cease to

exist diminishing the total number Thus an option is the right to buy or sell a

specified amount of a financial instrument at a pre-arranged price on or before a

particular date

There are two options which can be exercised

1048766 Call option the right to buy is referred to as a call option

1048766 Put option the right to sell is referred as a put option

Factors affecting value of optionsndash you would understand this while using

the

Valuation techniques but the terms are introduced below

bull Price ndash value of the call option is directly proportionate to the change in the

price of the underlying Say for example

bull Time ndash as options expire in future time has an effect on the value of the

options

bull Interest rates and Volatility ndash in case where the underlying asset is a bond or

interest rate interest rate volatility would have an impact on the option prices

The statistical or historical volatility (SV) helps measure the past price

Page 33

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

movements of the stock and helps in understanding the future volatility of the

stock during the life of the option

Commodity Derivatives

Commodity Derivatives are the first of the derivatives contracts that emerged to

hedge against the risk of the value of the agricultural crops going below the cost

of production Chicago Board of Trade was the first organized exchange

established in 1848 to have started trading in various commodities Chicago

Board of Trade and Chicago Mercantile Exchange are the largest commodities

exchanges in the world It is important to understand the attributes necessary in a

commodity derivative contract

a) Commodity should have a high shelf life ndash only if the commodity has

storability durability will the carriers of the stock feel the need for hedging

against the pricerisks or price fluctuations involved

b) Units should be homogenous ndash the underlying commodity as defined in the

commodity derivative contract should be the same as traded in the cash market

to facilitate actual delivery in the cash market Thus the units of the commodity

should be homogenous

c) Wide and frequent fluctuations in the commodity prices ndash if the price

fluctuations in the cash market are small people would feel less incentivised to

hedge or insure against the price fluctuations and derivatives market would be

of no significance Also if by the inherent attributes of the cash market of the

commodity the cash market of the commodity was such that it would eliminate

Page 34

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

the risks of volatility or price fluctuations derivatives market would be of no

significance Taking an oversimplified example if an investor had purchased

100tons of rice Rs 10 kg in the cash market and is of the view that the

prices may fall in the future he may short a rice future at Rs 10 kg to hedge

against the fallin prices Now if the prices fall to Rs 2 kg the loss that the

investor makes in the cash market may be compensated by squaring of the short

position thus seliminating the risk of price fluctuations in the commodity market

Commodity derivative contracts are standardized contracts and are traded as per

the investors needs The needs of the investor may be instrumental or

convenience depending upon the needs the investor would trade in a derivative

product Instrumental risks would relate to price risk reduction and convenience

needs would relate to flexibility in trade or efficient clearing process

Commodity Derivatives in India

Commodity derivatives in India were established by the Cotton Trade

Association in1875 since then the market has suffered from liquidity problems

and several regulatory However in the recent times the commodity trade has

grown significantly and today there are 25 derivatives exchanges in India which

include four national commodity exchanges National Commodity and

Derivatives Exchange (NCDEX) National Multi Commodity Exchange of India

(NCME) National Board of Trade (NBOT) and MultiCommodity Exchange

(MCX)

NCDEX

Page 35

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

It is the largest commodity derivatives exchange in India and is the only

commodity exchange promoted by national level institutions NCDEX was

incorporated in 2003 under the Companies Act 1956 and is regulated by the

Forward Market Commission in respect of the futures trading in commodities

NCDEX is located in Mumbai

MCX

MCX is recognized by the government of India and is amongst the worldrsquos top

three bullion exchanges and top four energy exchanges MCXrsquos headquarter is

in Mumbai and facilitates online trading clearing and settlement operations for

the commodities futures market in the country

Over the Counter Derivatives (OTC Derivatives)

Derivatives that are privately negotiated and not traded on the stock exchange

are called OTC Derivatives

Interest Rate Derivatives (IRD)

In the OTC derivatives segment interest rate derivatives (IRDs) are easily the

largest and therefore the most significant globally In markets with complex risk

exposures and high volatility Interest Rate Derivatives are an effective tool for

management of financial risks In IRDs the parties are trying to trade in the

volatility of interest rates Interest rates affect a whole spectrum of financial

assets ndash loans bonds fixed income securities government treasuries and so on

In fact changes in interest rates have major macroeconomic implications for

Page 36

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

various economic parameters ndash exchange rates state of the economy and

thereby the entire spectrum of the financial sector

Definition of IRDs

Interest Rate Derivatives (IRD) are derivatives where the underlying risk

interest rates Hence depending on the type of the transaction parties either

swap interest at a fixed or floating rate on a notional amount or trade in interest

rate futures or engage in forward rate agreements As in case of all derivatives

the contract is mostly settled by net settlement that is payment of difference

amount

Types

The basic IRDs are simple and mostly liquid and are called vanilla products

whereasderivatives belonging to the least liquid category are termed as exotic

interest rate derivatives Some vanilla products are

1) Interest Rate Swaps

2) Interest Rate Futures

3) Forward Rate Agreements

4) Interest rate capsfloors

Interest Rate Swapsndash These are derivatives where one party exchanges or

swaps the fixed or the floating rates of interest with the other party The interest

rates are calculatedon the notional principal amount which is not exchanged but

used to determine thequantum of cash flow in the transaction Interest rate

Page 37

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

swaps are typically used bycorporations to typically alter the exposure to

fluctuations on interest rates by swappingfixed rate obligations for floating and

vice-a-versa or to obtain lower rates of interest thanotherwise availableInterest

rate swaps can be a) fixed-for-fixed rate swap b) fixed-for-floating rate swap

c)floating-for-floating rate swap and so on As the names suggest interest rates

are beingswapped either in the same currency or different currency and there

could be as manycustomized variations of the swaps as desiredThis can be

further explained simply For instance if there are two borrowers in themarket

where Borrower A has borrowed at a fixed rate but wants a floating rate

ofinterest and Borrower B has borrowed with floating and wants a fixed rate of

interest

Such a scenario they can swap their existing interest rates without any further

borrowingThis would make the transaction of the two borrowers independent

of the underlyingborrowings For instance if a company has investments with a

floating rate of interest of47 and can obtain fixed interest rate of 45 then

the company may enter into a fixedfor-floating swap and earn a profit of 20

basis points

Forward Rate Agreements (FRAs) ndash These are cash settled forward

contracts on interest rate traded among international banks active in the

Eurodollar marketThese are contracts between two parties where the interest

rates are to be paid receivedon an obligation at a future date The rate of

interest notional amount and expiry date isfixed at the time of entering the

contract and only difference in the amount is paidreceived at the end of the

period The principal is called notional because while itdetermines the amount

Page 38

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

of payment actual exchange of principal never takes place Forinstance if A

enters an FRA with B and receives a fixed rate of interest say 6 onprincipal

say P for three years and B receives floating rate on P If at the end of

contractperiod of C the LIBOR rate is 65 then A will make a payment of the

differentialamount (that is 5 on the principal P) to B The settlement

mechanism can be furtherexplained as followsFor instance at a notional

principal of USD 1 million where the borrower buys an FRAfor 3 months that

carries an interest rate of 6 and the contract run is 6 months At thesettlement

date the settlement rate is at 65 Then the settlement amount will becalculated

in the following mannerSettlement amount = [(Difference between settlement

rate and agreed rate)contract run principal amount][(36000 or 36500) +

(settlement ratecontract period) That is in the above problemSettlement

amount = [(65-6)180USD 1 million][36000 + (65 90)(Note 36000 is

used for currencies where the basis of calculation is actual360days and 36500

is used for currencies where the basis of calculation of interest isactual365

days)

Interest Rate CapsFloors Interest rate capsfloors are basically hedging

instruments that can give the investor both benefits of fixed rate interest and

fluctuating rate interestThe person providing an interest rate cap is the

protection seller The seller assures the borrower or the buyer that in case of

high volatility in the interest rates if interest ratemoves beyond the cap the

borrower will be paid amount beyond the cap In case themarket rates do not go

beyond the cap limit the seller need not pay anything to theborrower In such a

situation as long as the interest rates are within the cap limit borrowerenjoys the

Page 39

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

floating rates and if rates move above the cap limit he will be compensatedwith

the requisite amount by the protection seller and the borrower will pay fixed to

thecapped rate of interest The same is the case when a person enters a Interest

Rate Floor transaction In case of Interest Rate Cap transaction the borrower is

expects the market interest rates to go up in the future and hedge against the

movement of the market rates Interest Rate CapsFloors transactions are ideally

of one two five or ten years and the desired level of protection the buyer seeks

are 6 8 or 10

FACTORS AFFECTING CAPITAL MARKET IN INDIA

The capital market is affected by a range of factors Some of the factors which

influence capital market are as follows-

A Performance of domestic companies-

The performance of the companies or rather corporate earnings is one of the

factors which has direct impact or effect on capital market in a country Weak

corporate earnings indicate that the demand for goods and services in the

economy is less due to slow growth in per capita income of people Because of

slow growth indemand there is slow growth in employment which means slow

growth in demand in the near future Thus weak corporate earnings indicate

average or not so good prospects for the economy as a whole in the near term

In such a scenario the investors ( both domestic as well as foreign ) would be

wary to invest in the capital market and thus there is bear market like situation

The opposite case of it would be robust corporate earnings and itrsquos positive

Page 40

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

impact on the capital market The corporate earnings for the April ndash June

quarter for the current fiscal has been good The companies like TCS

InfosysMaruti Suzuki Bharti Airtel ACC ITC WiproHDFCBinani cement

IDEA Marico Canara Bank Piramal Health India cements Ultra Tech LampT

Coca- Cola Yes Bank Dr Reddyrsquos Laboratories Oriental Bank of Commerce

Ranbaxy Fortis Shree Cement etc have registered growth in net profit

compared to the corresponding quarter a year

ago Thus we see companies from Infrastructure sector Financial Services

Pharmaceutical sector IT Sector Automobile sector etc doing well This

across the sector growth indicates that the Indian economy is on the path of

recovery which has been positively reflected in the stockmarket( rise in sensex

amp nifty) in the last two weeks (July 13-July 24)

B) Environmental Factors-

Environmental Factor in Indiarsquos context primarily means- Monsoon In India

around 60 of agricultural production is dependent on monsoon Thus there is

heavy dependence on monsoon The major chunk of agricultural production

comes from the states of Punjab Haryana amp Uttar Pradesh Thus deficient or

delayed monsoon in this part of the country would directly affect the

agricultural output in the country Apart from monsoon other natural calamities

like Floods tsunami drought earthquake etc also have an impact on the

capital market of a country The Indian Met Department (IMD) on 24th June

stated that India would receive only 93 rainfall of Long Period Average

(LPA) This piece of news directly had an impact on Indian capital market with

BSE Sensex falling by 05 on the 25th June The major losers were

Page 41

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

automakers and consumer goods firms since the below normal monsoon

forecast triggered concerns that demand in the crucial rural heartland would take

a hit This is because a deficient monsoon could seriously squeeze rural

incomes reduce the demand for everything from motorbikes to soaps and

worsen a slowing economy

C) Macro Economic Numbers-

The macroeconomic numbers also influence the capital market It includes

Index of Industrial Production (IIP) which is released every month annual

Inflation number indicated by Wholesale Price Index (WPI) which is released

every week Export ndash Import numbers which are declared every month Core

Industries growth rate (It includes Six Core infrastructure industries ndash Coal

Crude oil refining power cement and finished steel) which comes out every

month etc This macro ndasheconomic indicators indicate the state of the economy

and the direction in which the economy is headed and therefore impacts the

capital market in India A case in the point was declaration of core industries

growth figure The six Core Infrastructure Industries ndash Coal Crude oil refining

finished steel power amp cement ndashgrew 65 in June this figure came on the

23rd of July and had a positive impact on the capital market with the Sensex and

nifty rising by 388 points amp 125 points respectively

D) Global Cues-

In this world of globalization various economies are interdependent and

interconnected An event in one part of the world is bound to affect other parts

of the world however the magnitude and intensity of impact would vary Thus

Page 42

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

capital market in India is also affected by developments in other parts of the

world ie US Europe Japan etc Global cues includes corporate earnings of

MNCrsquos consumer confidence index in developed countries jobless claims in

developed countries global growth outlook given by various agencies like IMF

economic growth of major economies price of crude ndashoil credit rating of

various economies given by Moodyrsquos S amp P etc An obvious example at this

point in time would be that of subprime crisis amp recession Recession started in

US and some parts of the Europe in early 2008 Since then it has impacted

all the countries of the world- developed developing less- developed and even

emerging economies

E) Political stability and government policies-

For any economy to achieve and sustain growth it has to have political stability

and pro- growth government policies This is because when there is political

stability there is stability and consistency in governmentrsquos attitude which is

communicated through various government policies The vice- versa is the case

when there is no political stability So capital market also reacts to the nature of

government attitude of government and various policies of the government

The above statement can be substantiated by the fact the when the mandate

came in UPA governmentrsquos favor ( Without the baggage of left party) on May

16 2009 the stock markets on Monday 18th May had a bullish rally with

Sensex closing 800 point higher over the previous dayrsquos close The reason was

political stability Also without the baggage of left party government can go

ahead with reforms

Page 43

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

F) Growth prospectus of an economy-

When the national income of the country increases and per capita income of

people increases it is said that the economy is growing Higher income also

means higher expenditure and higher savings This augurs well for the economy

as higher expenditure means higher demand and higher savings means higher

investment Thus when an economy is growing at a good pace capital market of

the country attracts more money from investors both from within and outside

the country and vice -versa So we can say that growth prospects of an economy

do have an impact on capital markets

G) Investor Sentiment and risk appetite-

Another factor which influences capital market is investor sentiment and their

ris appetite Even if the investors have the money to invest but if they are not

confident about the returns from their investment they may stay away from

investment for some timeAt the same time if the investors have low risk

appetite which they were having in global and Indian capital market some four

to five months back due to global financial meltdown and recessionary situation

in US amp some parts of Europe they may stay away from investment and wait

for the right time to come

CAPITAL MARKET EFFICIENCY

An efficient capital market is a market where the share prices reflect new

information

Page 44

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

accurately and in real time Capital market efficiency is judged by its success in

incorporating and inducting information generally about the basic value of

securities into the price of securities This basic or fundamental value of

securities is the present value of the cash flows expected in the future by the

person owning the securities The fluctuation in the value of stocks encourage

traders to trade in a competitive manner with the objective of maximum profit

This results in price movements towards the current value of the cash flows in

the future The information is very easily available at cheap rates because of the

presence of organized markets and various technological innovations An

efficient capital market incorporates information quickly and accurately into the

prices of securitiesIn the weak-form efficient capital market information about

the history of previous returns and prices are reflected fully in the security

prices the returns from stocks in this type of market are unpredictable In the

semi strong-form efficient market the public information is completely

reflected in

security prices in this market those traders who have non-public information

access can earn excess profits In the strong-form efficient market under no

circumstances can investors earn excess profits because all of the information is

incorporated into the security prices The funds that are flowing in capital

markets from savers to the firms with the aim of financing projects must flow

into the best and top valued projects and therefore informational efficiency is

of supreme importance Stocks must be efficiently priced because if the

securities are priced accurately then those investors who do not have time for

market analysis would feel confident about making investments in the capital

market Eugene Fama was one of the earliest to theorize capital market

Page 45

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

efficiency but empirical tests of capital market efficiency had begun even

before that

Efficient-market hypothesis

In finance the efficient-market hypothesis (EMH) asserts that financial

markets are Informationally efficient That is one cannot consistently achieve

returns in excess of average market returns on a risk-adjusted basis given the

information publicly available at the time the investment is made There are

three major versions of the hypothesis weak semi-strong and strong

Weak EMH claims that prices on traded assets (eg stocks bonds or property)

already reflect all past publicly available information Semi-strong EMH claims

both that prices reflect all publicly available information and that prices

instantly change to reflect new public information Strong EMH additionally

claims that prices instantly reflect even hidden or insider information There is

evidence for and against the weak and semi-strong EMHs while there is

powerful evidence against strong EMH The validity of the hypothesis has been

questioned by critics who blame the belief in rational markets for much of the

financial crisis of 2007ndash2010 Defenders of the EMH caution that conflating

market stability with the EMH is unwarranted when publicly available

information is unstable the market can be just as unstable

Historical background

The efficient-market hypothesis was first expressed by Louis Bachelor a French

mathematician in his 1900 dissertation The Theory of Speculation His work

was largely ignored until the 1950s however beginning in the 30s scattered

Page 46

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

independent work corroborated his thesis A small number of studies indicated

that US stock prices and related financial series followed a random walk model

[5] Research by Alfred Cowles in the rsquo30s and rsquo40s suggested that professional

investors were in general unable to outperform the market The efficient-market

hypothesis was developed by Professor Eugene Fama at the University of

Chicago Booth School of Business as an academic concept of study through his

published PhD thesis in the early 1960s at the same school It was widely

accepted up until the 1990s when behavioral finance economists who were a

fringe element became mainstream Empirical analyses have consistently found

problems with the efficient-market hypothesis the most consistent being that

stocks with low price to earnings (and similarly low price to cash-flow or book

value) outperform other stocks Alternative theories have proposed that

cognitive biases cause these inefficiencies leading investors to purchase

overpriced growth stocks rather than value stocks Although the efficient-

market hypothesis has become controversial because substantial and lasting

inefficiencies are observed Beechey et al (2000) consider that it remains a

worthwhile starting point The efficient-market hypothesis emerged as a

prominent theory in the mid-1960s Paul Samuelson had begun to circulate

Bacheliers work among economists In 1964 Bacheliers dissertation along with

the empirical studies mentioned above were published in an anthology edited by

Paul Cootner In 1965 Eugene Fama published his dissertation arguing for the

random walk hypothesis and Samuelson published a proof for a version of the

efficient-market hypothesis In 1970 Fama published a review of both the theory

and the evidence for the hypothesis The paper extended and refined the theory

included the definitions for three forms of financial market efficiency weak

Page 47

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

semi-strong and strong (see below) Further to this evidence that the UK stock

market is weak-form efficient other studies of capital markets have pointed

toward their being semi-strong-form efficient A study by Khan of thegrain

futures market indicated semi-strong form efficiency following the release of

large trader position information (Khan 1986) Studies by Firth (1976 1979

and 1980) in the United Kingdom have compared the share prices existing after

a takeover announcement with the bid offer Firth found that the share prices

were fully and instantaneously adjusted to their correct levels thus concluding

that the UK stock market was semi-strong-form efficient However the markets

ability to efficiently respond to a short term widely publicized event such as a

takeover announcement does not necessarily prove market efficiency related to

other more long term amorphous factors David Dreman has criticized the

evidence provided by this instant efficient response pointing out that an

immediate response is not necessarily efficient and that the longterm

performance of the stock in response to certain movements is better indications

A study on stocks response to dividend cuts or increases over three years found

that after an announcement of a dividend cut stocks underperformed the market

by 153 for the three-year period while stocks outperformed 248 for the

three years afterward after a dividend increase announcement

RISK VS RETURN

Page 48

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

RESEARCH METHODOLOGY

Page 49

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Research Methodology is a way to systematically solve the research problem

Itmay be understood as a science of studying how research is done

scientifically

RESEARCH DESIGN

Research Design is a arrangement of the conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with

the economy in procedure The research problem having been formulated in

clear cut terms helps the researcher to prepare a research design The

preparation of such a design facilities in conducting it in efficient manner as

possible As the aim of the research in this project is to find the reasons behind

starting of regional stock exchanges their growth and downfall Diagnostic

Research aims at determining the frequency with which something occurs or its

association with something else

DATA COLLECTION -The data will be collected by both primary as well as

-secondary sources

PRIMARY DATA-Primary data which are collected afresh and happens to be

actual in character So the lsquoStructured Interviewed Methodrsquo will be used for

collection of primary data by visiting various brokers and professionals

Page 50

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

SECONDARY DATA Secondary data refers to the information which has already

been collected So the sources of secondary information will include various

newspapers magazines journals books and internet etc

SAMPLING DESIGNA Sample Design is a definite plan for obtaining a

sample from a givenpopulation It refers to the technique or procedure the

researcher would adopt inselecting items from a sample and is determined before

data are collected

SAMPLE SIZE

Sample size refers to the number of items to be selected from the universe to

constitute a sample Due to constraints like time and money the sample size

selected for the research is twenty five brokers and professional etc

SAMPLING DESIGN

Data has been presented with the help of bar graphpie chartsline graphs etchellip

SAMPLING PLANNING

Sampling plan is a technique for obtaining the sample from given population

probability sampling method is selectedunder which everyitem in the universe has

an equal chance the probability sampling used in the project will be Simple

Random Sampling

LIMITATION OF STUDY

Page 51

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Some of the person were not so responsive

Possibility of error in data collection because many of investors may have not given

actual answers of my questionnaire

Sample size is limited to 25 members of brokers and professional

Page 52

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Chapter-3

EMTEC SOFTWARE INDIA PRIVATE LIMITED

ADDRESS EMTEC SOFTWARE INDIA PVT LTD

56 Sai Arcade First Floor Marthahalli Outer Ring Road Bangalore-

560103

HEAD OFFICE NEW JERSEY

LOGO

Page 53

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

HISTORY Emtec established in 1964 provides technology-empowered

business solutions for world-class organizations in the enterprise federal state

and local government and education markets With offices in 14 cities in the

US Canada and India Emtec is big enough to address our client needs but

small enough to care Our local offices highly-skilled associates and global

delivery capabilities ensure the accessibility and scale to align clientrsquos

technology solutions with their business needs Emtecrsquos singular mission is to

create ldquoClients for liferdquo - long-term relationships that deliver rapid meaningful

and lasting business value Our offerings span the entire IT lifecycle

from Consulting through Packaged Custom and Cloud Applications as well as a

variety of Infrastructure Services

The EMTEC brand was launched from a company steeped in history and

experience BASF the inventor of the first magnetic tape for audio recording

was a pioneer in the media industry In the late nineties after years of

innovations in the production of consumer tape products including audio-

cassettes floppy discs and video-cassettes BASF magnetic became EMTEC

magnetic

Page 54

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Turning the companyrsquos focus to mobile storage products the EMTEC brand

became a huge success in Europe symbolized by the powerful red spiral logo

By 2006 EMTEC had produced the number- one selling brand of flash drives in

France and the number-three selling brand of flash drives in Europe for five

years and counting Today EMTEC is distributed in over 50 countries and

prides itself on a 75 year history of creating innovative products that embody

the human spirit to preserve protect and share the most valuable moments of

daily life Whatever the technology or the media EMTEC commits to providing

hassle-free creative and stylish solutions that make technology easy to use and

serve our customers memories ideas and emotions

VISION ldquoTo become a leading ICT solution provider in the regionrdquo

MISSION ldquoThe unique expertise and diverse technology that Emtec brings

to the table combined with their proven track record for success made it a very

easy choice to continue our relationshiprdquo

PRODUCTS

Page 55

MOVIE CUBE

Page 56

HARD DRIVES

MP3 PLAYERS

USB FLASH

Page 57

MEMORY CARDS

ACCESSORIES

SERVICES

Consulting services

Packaged applications

Cloud technologies

Application outsourcing

Infrastructure services

Emtec provides a broad array of professional services to suit the needs of our

clients Organized around five practice areas ndash Consulting Package and

Custom Application Services Cloud and Infrastructure ndash Emtec specializes in

helping world-class organizations leverage technology to achieve business

objectives With an average of 15 years experience our consultants bring real

world experience critical thinking and a passion for client success to every

engagement

DEPARTMENTS OF THE COMPANY

Page 58

RECORDING MEDIA

ORGANISATIONSTRUCTURE

Page 59

FINANCIAL AND ACCOUNTING

SALES AND MARKETING

HUMAN CAPITAL MANAGEMENT

OUTSOURCING

COMPETITORS

IBM

HP

DELL

Page 60

CEO

DIRECTOR

PRESIDENT

CHAIRMAN

CO-CHAIRMAN

CHIEF EXECUTIVE OFFICER

CHIEF OPERATING OFFICER

ldquoCLIENT FOR LIFErdquo

Emtecrsquos track record ofsuccess demonstrates our vast IT and domain expertise

across a broad range of sectors We have demonstrated experience serving

commercial clients in numerous industries including financial services

marketing retail manufacturing healthcare and gaming In the Public Sector

we offer specific services and solutions geared toward education state and local

governments and US amp Canadian federal governments as well as not-for-profit

organizations We deliver on our commitments Our rich legacy and multi-

decade client relationships demonstrate our commitment to the success of our

clients

LATEST THINKINGWe are extremely proud of our consultants and the

work we have done over the years Emtec offers our insights thoughts on

trends what we have learned and our past successes with you We are

passionate about what we do and are happy to share it

Scroll through articles and interviews where our associates have been

highlighted Download our white papers to gain insights on the technologies

tools and methodologies we use every day Browse through our recent work to

learn about our many projects and satisfied clients Lastly subscribe to our blog

to get the latest practical insights on tools technologies methodologies and the

latest trends from our experienced team of consultants

Page 61

Emtec is committed to assisting its clients in empowering IT into an investment

that delivers true value to their respective organizations Our Executive Team

includes world-leading experts in IT strategy implementation management

and support True engagement with management is Emtecrsquos core value Our

clientsrsquo ability to access decision makers at all levels ensures the necessary

flexibility and critical alignment to make projects successful Our global team

of consultants engineers deployment and integration specialists training and

support personnel stay ahead of the curve through a continuous and rigorous

program of education certification and training Our rewarding culture results

in highly committed experienced and motivated associates who have solved

client problems before And our partnership strategies ensure that our solutions

integrate the most appropriate IT products and systems - whether proven

performers or state-of-the-art innovations

Page 62

• INTRODUCTION
• 1. Widget [Type here]
  2. _2 [Type here]
  3. _3 [Type here]
  4. _4 [Type here]
  5. _5 [Type here]
  6. _6 [Type here]
  7. _7 [Type here]
  8. _8 [Type here]
  9. _9 [Type here]
  10. _10 [Type here]
  11. _11 [Type here]
  12. _12 [Type here]
  13. _13 [Type here]
  14. _14 [Type here]
  15. _15 [Type here]
  16. _16 [Type here]
  17. _17 [Type here]
  18. _18 [Type here]
  19. _19 [Type here]
  20. _20 [Type here]
  21. _21 [Type here]
  22. _22 [Type here]
  23. _23 [Type here]
  24. _24 [Type here]
  25. _25 [Type here]
  26. _26 [Type here]
  27. _27 [Type here]
  28. _28 [Type here]
  29. _29 [Type here]
  30. _30 [Type here]
  31. _31 [Type here]
  32. _32 [Type here]
  33. _33 [Type here]
  34. _34 [Type here]
  35. _35 [Type here]
  36. _36 [Type here]
  37. _37 [Type here]
  38. _38 [Type here]
  39. _39 [Type here]
  40. _40 [Type here]
  41. _41 [Type here]
  42. _42 [Type here]
  43. _43 [Type here]
  44. _44 [Type here]
  45. _45 [Type here]
  46. _46 [Type here]
  47. _47 [Type here]
  48. _48 [Type here]
  49. _49 [Type here]
  50. _50 [Type here]
  51. _51 [Type here]
  52. _52 [Type here]
  53. _53 [Type here]
  54. _54 [Type here]
  55. _55 [Type here]
  56. _56 [Type here]
  57. _57 [Type here]
  58. _58 [Type here]
  59. _59 [Type here]
  60. _60 [Type here]
  61. _61 [Type here]
  62. _62 [Type here]
  63. _63 [Type here]
  64. _64 [Type here]
  65. _65 [Type here]
  66. _66 [Type here]
  67. _67 [Type here]
  68. _68 [Type here]
  69. _69 [Type here]
  70. _70 [Type here]
  71. _71 [Type here]
  72. _72 [Type here]
  73. _73 [Type here]
  74. _74 [Type here]
  75. _75 [Type here]
  76. _76 [Type here]
  77. _77 [Type here]
  78. _78 [Type here]
  79. _79 [Type here]
  80. _80 [Type here]
  81. _81 [Type here]
  82. _82 [Type here]
  83. _83 [Type here]
  84. _84 [Type here]
  85. _85 [Type here]
  86. _86 [Type here]
  87. _87 [Type here]
  88. _88 [Type here]
  89. _89 [Type here]
  90. _90 [Type here]
  91. _91 [Type here]
  92. _92 [Type here]
  93. _93 [Type here]
  94. _94 [Type here]
  95. _95 [Type here]
  96. _96 [Type here]
  97. _97 [Type here]
  98. _98 [Type here]
  99. _99 [Type here]
  100. _100 [Type here]
  101. _101 [Type here]
  102. _102 [Type here]
  103. _103 [Type here]
  104. _104 [Type here]
  105. _105 [Type here]
  106. _106 [Type here]
  107. _107 [Type here]
  108. _108 [Type here]
  109. _109 [Type here]
  110. _110 [Type here]
  111. _111 [Type here]
  112. _112 [Type here]
  113. _113 [Type here]
  114. _114 [Type here]
  115. _115 [Type here]
  116. _116 [Type here]
  117. _117 [Type here]
  118. _118 [Type here]
  119. _119 [Type here]
  120. _120 [Type here]
  121. _121 [Type here]
  122. _122 [Type here]
  123. _123 [Type here]
  124. _124 [Type here]

COMPETITORS

IBM

HP

DELL

Page 60

CEO

DIRECTOR

PRESIDENT

CHAIRMAN

CO-CHAIRMAN

CHIEF EXECUTIVE OFFICER

CHIEF OPERATING OFFICER

ldquoCLIENT FOR LIFErdquo

Emtecrsquos track record ofsuccess demonstrates our vast IT and domain expertise

across a broad range of sectors We have demonstrated experience serving

commercial clients in numerous industries including financial services

marketing retail manufacturing healthcare and gaming In the Public Sector

we offer specific services and solutions geared toward education state and local

governments and US amp Canadian federal governments as well as not-for-profit

organizations We deliver on our commitments Our rich legacy and multi-

decade client relationships demonstrate our commitment to the success of our

clients

LATEST THINKINGWe are extremely proud of our consultants and the

work we have done over the years Emtec offers our insights thoughts on

trends what we have learned and our past successes with you We are

passionate about what we do and are happy to share it

Scroll through articles and interviews where our associates have been

highlighted Download our white papers to gain insights on the technologies

tools and methodologies we use every day Browse through our recent work to

learn about our many projects and satisfied clients Lastly subscribe to our blog

to get the latest practical insights on tools technologies methodologies and the

latest trends from our experienced team of consultants

Page 61

Emtec is committed to assisting its clients in empowering IT into an investment

that delivers true value to their respective organizations Our Executive Team

includes world-leading experts in IT strategy implementation management

and support True engagement with management is Emtecrsquos core value Our

clientsrsquo ability to access decision makers at all levels ensures the necessary

flexibility and critical alignment to make projects successful Our global team

of consultants engineers deployment and integration specialists training and

support personnel stay ahead of the curve through a continuous and rigorous

program of education certification and training Our rewarding culture results

in highly committed experienced and motivated associates who have solved

client problems before And our partnership strategies ensure that our solutions

integrate the most appropriate IT products and systems - whether proven

performers or state-of-the-art innovations

Page 62

• INTRODUCTION
• 1. Widget [Type here]
  2. _2 [Type here]
  3. _3 [Type here]
  4. _4 [Type here]
  5. _5 [Type here]
  6. _6 [Type here]
  7. _7 [Type here]
  8. _8 [Type here]
  9. _9 [Type here]
  10. _10 [Type here]
  11. _11 [Type here]
  12. _12 [Type here]
  13. _13 [Type here]
  14. _14 [Type here]
  15. _15 [Type here]
  16. _16 [Type here]
  17. _17 [Type here]
  18. _18 [Type here]
  19. _19 [Type here]
  20. _20 [Type here]
  21. _21 [Type here]
  22. _22 [Type here]
  23. _23 [Type here]
  24. _24 [Type here]
  25. _25 [Type here]
  26. _26 [Type here]
  27. _27 [Type here]
  28. _28 [Type here]
  29. _29 [Type here]
  30. _30 [Type here]
  31. _31 [Type here]
  32. _32 [Type here]
  33. _33 [Type here]
  34. _34 [Type here]
  35. _35 [Type here]
  36. _36 [Type here]
  37. _37 [Type here]
  38. _38 [Type here]
  39. _39 [Type here]
  40. _40 [Type here]
  41. _41 [Type here]
  42. _42 [Type here]
  43. _43 [Type here]
  44. _44 [Type here]
  45. _45 [Type here]
  46. _46 [Type here]
  47. _47 [Type here]
  48. _48 [Type here]
  49. _49 [Type here]
  50. _50 [Type here]
  51. _51 [Type here]
  52. _52 [Type here]
  53. _53 [Type here]
  54. _54 [Type here]
  55. _55 [Type here]
  56. _56 [Type here]
  57. _57 [Type here]
  58. _58 [Type here]
  59. _59 [Type here]
  60. _60 [Type here]
  61. _61 [Type here]
  62. _62 [Type here]
  63. _63 [Type here]
  64. _64 [Type here]
  65. _65 [Type here]
  66. _66 [Type here]
  67. _67 [Type here]
  68. _68 [Type here]
  69. _69 [Type here]
  70. _70 [Type here]
  71. _71 [Type here]
  72. _72 [Type here]
  73. _73 [Type here]
  74. _74 [Type here]
  75. _75 [Type here]
  76. _76 [Type here]
  77. _77 [Type here]
  78. _78 [Type here]
  79. _79 [Type here]
  80. _80 [Type here]
  81. _81 [Type here]
  82. _82 [Type here]
  83. _83 [Type here]
  84. _84 [Type here]
  85. _85 [Type here]
  86. _86 [Type here]
  87. _87 [Type here]
  88. _88 [Type here]
  89. _89 [Type here]
  90. _90 [Type here]
  91. _91 [Type here]
  92. _92 [Type here]
  93. _93 [Type here]
  94. _94 [Type here]
  95. _95 [Type here]
  96. _96 [Type here]
  97. _97 [Type here]
  98. _98 [Type here]
  99. _99 [Type here]
  100. _100 [Type here]
  101. _101 [Type here]
  102. _102 [Type here]
  103. _103 [Type here]
  104. _104 [Type here]
  105. _105 [Type here]
  106. _106 [Type here]
  107. _107 [Type here]
  108. _108 [Type here]
  109. _109 [Type here]
  110. _110 [Type here]
  111. _111 [Type here]
  112. _112 [Type here]
  113. _113 [Type here]
  114. _114 [Type here]
  115. _115 [Type here]
  116. _116 [Type here]
  117. _117 [Type here]
  118. _118 [Type here]
  119. _119 [Type here]
  120. _120 [Type here]
  121. _121 [Type here]
  122. _122 [Type here]
  123. _123 [Type here]
  124. _124 [Type here]

ldquoCLIENT FOR LIFErdquo

Emtecrsquos track record ofsuccess demonstrates our vast IT and domain expertise

across a broad range of sectors We have demonstrated experience serving

commercial clients in numerous industries including financial services

marketing retail manufacturing healthcare and gaming In the Public Sector

we offer specific services and solutions geared toward education state and local

governments and US amp Canadian federal governments as well as not-for-profit

organizations We deliver on our commitments Our rich legacy and multi-

decade client relationships demonstrate our commitment to the success of our

clients

LATEST THINKINGWe are extremely proud of our consultants and the

work we have done over the years Emtec offers our insights thoughts on

trends what we have learned and our past successes with you We are

passionate about what we do and are happy to share it

Scroll through articles and interviews where our associates have been

highlighted Download our white papers to gain insights on the technologies

tools and methodologies we use every day Browse through our recent work to

learn about our many projects and satisfied clients Lastly subscribe to our blog

to get the latest practical insights on tools technologies methodologies and the

latest trends from our experienced team of consultants

Page 61

Emtec is committed to assisting its clients in empowering IT into an investment

that delivers true value to their respective organizations Our Executive Team

includes world-leading experts in IT strategy implementation management

and support True engagement with management is Emtecrsquos core value Our

clientsrsquo ability to access decision makers at all levels ensures the necessary

flexibility and critical alignment to make projects successful Our global team

of consultants engineers deployment and integration specialists training and

support personnel stay ahead of the curve through a continuous and rigorous

program of education certification and training Our rewarding culture results

in highly committed experienced and motivated associates who have solved

client problems before And our partnership strategies ensure that our solutions

integrate the most appropriate IT products and systems - whether proven

performers or state-of-the-art innovations

Page 62

• INTRODUCTION
• 1. Widget [Type here]
  2. _2 [Type here]
  3. _3 [Type here]
  4. _4 [Type here]
  5. _5 [Type here]
  6. _6 [Type here]
  7. _7 [Type here]
  8. _8 [Type here]
  9. _9 [Type here]
  10. _10 [Type here]
  11. _11 [Type here]
  12. _12 [Type here]
  13. _13 [Type here]
  14. _14 [Type here]
  15. _15 [Type here]
  16. _16 [Type here]
  17. _17 [Type here]
  18. _18 [Type here]
  19. _19 [Type here]
  20. _20 [Type here]
  21. _21 [Type here]
  22. _22 [Type here]
  23. _23 [Type here]
  24. _24 [Type here]
  25. _25 [Type here]
  26. _26 [Type here]
  27. _27 [Type here]
  28. _28 [Type here]
  29. _29 [Type here]
  30. _30 [Type here]
  31. _31 [Type here]
  32. _32 [Type here]
  33. _33 [Type here]
  34. _34 [Type here]
  35. _35 [Type here]
  36. _36 [Type here]
  37. _37 [Type here]
  38. _38 [Type here]
  39. _39 [Type here]
  40. _40 [Type here]
  41. _41 [Type here]
  42. _42 [Type here]
  43. _43 [Type here]
  44. _44 [Type here]
  45. _45 [Type here]
  46. _46 [Type here]
  47. _47 [Type here]
  48. _48 [Type here]
  49. _49 [Type here]
  50. _50 [Type here]
  51. _51 [Type here]
  52. _52 [Type here]
  53. _53 [Type here]
  54. _54 [Type here]
  55. _55 [Type here]
  56. _56 [Type here]
  57. _57 [Type here]
  58. _58 [Type here]
  59. _59 [Type here]
  60. _60 [Type here]
  61. _61 [Type here]
  62. _62 [Type here]
  63. _63 [Type here]
  64. _64 [Type here]
  65. _65 [Type here]
  66. _66 [Type here]
  67. _67 [Type here]
  68. _68 [Type here]
  69. _69 [Type here]
  70. _70 [Type here]
  71. _71 [Type here]
  72. _72 [Type here]
  73. _73 [Type here]
  74. _74 [Type here]
  75. _75 [Type here]
  76. _76 [Type here]
  77. _77 [Type here]
  78. _78 [Type here]
  79. _79 [Type here]
  80. _80 [Type here]
  81. _81 [Type here]
  82. _82 [Type here]
  83. _83 [Type here]
  84. _84 [Type here]
  85. _85 [Type here]
  86. _86 [Type here]
  87. _87 [Type here]
  88. _88 [Type here]
  89. _89 [Type here]
  90. _90 [Type here]
  91. _91 [Type here]
  92. _92 [Type here]
  93. _93 [Type here]
  94. _94 [Type here]
  95. _95 [Type here]
  96. _96 [Type here]
  97. _97 [Type here]
  98. _98 [Type here]
  99. _99 [Type here]
  100. _100 [Type here]
  101. _101 [Type here]
  102. _102 [Type here]
  103. _103 [Type here]
  104. _104 [Type here]
  105. _105 [Type here]
  106. _106 [Type here]
  107. _107 [Type here]
  108. _108 [Type here]
  109. _109 [Type here]
  110. _110 [Type here]
  111. _111 [Type here]
  112. _112 [Type here]
  113. _113 [Type here]
  114. _114 [Type here]
  115. _115 [Type here]
  116. _116 [Type here]
  117. _117 [Type here]
  118. _118 [Type here]
  119. _119 [Type here]
  120. _120 [Type here]
  121. _121 [Type here]
  122. _122 [Type here]
  123. _123 [Type here]
  124. _124 [Type here]

Emtec is committed to assisting its clients in empowering IT into an investment

that delivers true value to their respective organizations Our Executive Team

includes world-leading experts in IT strategy implementation management

and support True engagement with management is Emtecrsquos core value Our

clientsrsquo ability to access decision makers at all levels ensures the necessary

flexibility and critical alignment to make projects successful Our global team

of consultants engineers deployment and integration specialists training and

support personnel stay ahead of the curve through a continuous and rigorous

program of education certification and training Our rewarding culture results

in highly committed experienced and motivated associates who have solved

client problems before And our partnership strategies ensure that our solutions

integrate the most appropriate IT products and systems - whether proven

performers or state-of-the-art innovations

Page 62

• INTRODUCTION
• 1. Widget [Type here]
  2. _2 [Type here]
  3. _3 [Type here]
  4. _4 [Type here]
  5. _5 [Type here]
  6. _6 [Type here]
  7. _7 [Type here]
  8. _8 [Type here]
  9. _9 [Type here]
  10. _10 [Type here]
  11. _11 [Type here]
  12. _12 [Type here]
  13. _13 [Type here]
  14. _14 [Type here]
  15. _15 [Type here]
  16. _16 [Type here]
  17. _17 [Type here]
  18. _18 [Type here]
  19. _19 [Type here]
  20. _20 [Type here]
  21. _21 [Type here]
  22. _22 [Type here]
  23. _23 [Type here]
  24. _24 [Type here]
  25. _25 [Type here]
  26. _26 [Type here]
  27. _27 [Type here]
  28. _28 [Type here]
  29. _29 [Type here]
  30. _30 [Type here]
  31. _31 [Type here]
  32. _32 [Type here]
  33. _33 [Type here]
  34. _34 [Type here]
  35. _35 [Type here]
  36. _36 [Type here]
  37. _37 [Type here]
  38. _38 [Type here]
  39. _39 [Type here]
  40. _40 [Type here]
  41. _41 [Type here]
  42. _42 [Type here]
  43. _43 [Type here]
  44. _44 [Type here]
  45. _45 [Type here]
  46. _46 [Type here]
  47. _47 [Type here]
  48. _48 [Type here]
  49. _49 [Type here]
  50. _50 [Type here]
  51. _51 [Type here]
  52. _52 [Type here]
  53. _53 [Type here]
  54. _54 [Type here]
  55. _55 [Type here]
  56. _56 [Type here]
  57. _57 [Type here]
  58. _58 [Type here]
  59. _59 [Type here]
  60. _60 [Type here]
  61. _61 [Type here]
  62. _62 [Type here]
  63. _63 [Type here]
  64. _64 [Type here]
  65. _65 [Type here]
  66. _66 [Type here]
  67. _67 [Type here]
  68. _68 [Type here]
  69. _69 [Type here]
  70. _70 [Type here]
  71. _71 [Type here]
  72. _72 [Type here]
  73. _73 [Type here]
  74. _74 [Type here]
  75. _75 [Type here]
  76. _76 [Type here]
  77. _77 [Type here]
  78. _78 [Type here]
  79. _79 [Type here]
  80. _80 [Type here]
  81. _81 [Type here]
  82. _82 [Type here]
  83. _83 [Type here]
  84. _84 [Type here]
  85. _85 [Type here]
  86. _86 [Type here]
  87. _87 [Type here]
  88. _88 [Type here]
  89. _89 [Type here]
  90. _90 [Type here]
  91. _91 [Type here]
  92. _92 [Type here]
  93. _93 [Type here]
  94. _94 [Type here]
  95. _95 [Type here]
  96. _96 [Type here]
  97. _97 [Type here]
  98. _98 [Type here]
  99. _99 [Type here]
  100. _100 [Type here]
  101. _101 [Type here]
  102. _102 [Type here]
  103. _103 [Type here]
  104. _104 [Type here]
  105. _105 [Type here]
  106. _106 [Type here]
  107. _107 [Type here]
  108. _108 [Type here]
  109. _109 [Type here]
  110. _110 [Type here]
  111. _111 [Type here]
  112. _112 [Type here]
  113. _113 [Type here]
  114. _114 [Type here]
  115. _115 [Type here]
  116. _116 [Type here]
  117. _117 [Type here]
  118. _118 [Type here]
  119. _119 [Type here]
  120. _120 [Type here]
  121. _121 [Type here]
  122. _122 [Type here]
  123. _123 [Type here]
  124. _124 [Type here]