project on derivatives(futures&options)

8/2/2019 Project on DERIVATIVES(Futures&Options)

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Introduction

A Derivative is a financial instrument that derives its

value from an underlying asset. Derivative is an financial contract whose

price/value is dependent upon price of one or more basic underlying asset,

these contracts are legally binding agreements made on trading screens of

stock exchanges to buy or sell an asset in the future. The most commonly

used derivatives contracts are forwards, futures and options, which we shall

discuss in detail later.

The main objective of the study is to analyze the derivatives market in India

and to analyze the operations of futures and options. Analysis is to evaluate

the profit/loss position futures . Derivates market is an innovation to cash

market. Approximately its daily turnover reaches to the equal stage of cash

market

In cash market the profit/loss of the investor depend the market price

of the underlying asset. Derivatives are mostly used for hedging purpose. In

bullish market the call option writer incurs more losses so the investor is

suggested to go for a call option to hold, where as the put option holder

suffers in a bullish market, so he is suggested to write a put option. In

bearish market the call option holder will incur more losses so the investor

is suggested to go for a call option to write, where as the put option writer

will get more losses, so he is suggested to hold a put option.

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OBJECTIVES OF THE STUDY

To analyze the derivatives market in India.

To analyze the operations of futures and options.

To find the profit/loss position of futures buyer and also

The option writer and option

To study the role of stock exchange

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NEED OF THE STUDY

To analyze the derivatives in India and to analyze the operations of

future and options.

Derivatives market is an innovations to cash market.

Profit or loss of the investor depend on the market prize of theunderlying asset.

This financial contracts are legally binding agreements made on

trading screens.

.

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SCOPE OF THE STUDY

The Study is limited to Derivatives with special reference to futures and

Option in the Indian context and the STEEL CITY SECURITIES Pvt Ltd

have been Taken as a representative sample for the study. The study cant

be said as totally perfect. Any alteration may come. The study has only

made a humble Attempt at evaluation derivatives market only in India

context. The study is not Based on the international perspective of

derivatives markets, which exists in NASDAQ, CBOT etc.,

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RESEARCH METHODOLOGY:

The type of research is selected on the basis of problems identified. Here

the research type used is descriptive research. Descriptive research includes

fact-findings and enquiries of different kinds. The major purpose of

descriptive research is a description of the state of affairs, as it exists in the

present system. In this dissertation an attempt has been made to discover

various issues related to derivatives in the Indian market and how they help

the hedge the risk.

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ACTUAL COLLECTION OF DATA

Data Collection from secondary Sources

Secondary data were gathered from numerous sources. While

preparation of this project report, the secondary data have been collected

through:

Data was generated from general library research sources, textbooks,

trade journals, articles from newspaper, treasury management,

brochures,

interviews with different brokers of HYDERABAD stock Exchange

and Internet web site.

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Limitations of the study

The study is conducted in HYDERABAD only.

Since the study covers the overview of derivatives market, it cannot be

generalized.

Data collected is only from secondary sources.

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DERIVATIVES INSTRUMENTS IN INDIA

The first derivative product to be introduced in the Indian securities market

is going to be "INDEX FUTURES". In the world, first index futures were

traded in U.S. on Kansas City Board of Trade (KCBT) on Value Line

Arithmetic Index (VLAI) in 1982.

Organized exchanges began trading options on equities in 1973 ,where as

exchange traded debt options did not appear until 1982 ,on the other hand

fixed income futures began trading in 1975 ,but equity related futures did

not begin until 1982 .

DERIVATIVES SEGMENT IN BSE & NSE

On June 9-2000 BSE & NSE became the first exchanges in India to

introduce trading in exchange traded derivative product with the launch of

index futures on sense and Nifty futures respectively.

Index futures was follows by launch of index options in June 2001, stock

options in July 2001 and stock futures in Nov 2001.Presently stock futures

and options available on 41 well-capitalized and actively traded scrips

mandated by SEBI.

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Nifty is the underlying asset of the Index Futures at the Futures & Options

segment of NSE with a market lot of 200 and the BSE 30 Sensex is the

underlying stock index with the market lot of 50. This difference of market

lot arises due to a minimum specification of a contract value of Rs. 2 lakhs

by Securities Exchange Board of India. A contract value is contract Index

lied by its market lot. For e.g. If Sensex is 4730 then the contract value of a

futures Index having Sensex as underlying asset will

be 50 x 4730 = Rs. 2,36,500. Similarly if Nifty is 1462.7, its futures contract

value will be 200 x 1462.7 = Rs.2,92,540/-.

Every transaction shall be in multiple of market lot. Thus, Index futures at

NSE shall be traded in multiples of 200 and at BSE in multiples of 50.

CONTRACT PERIODS:

At any point of time there will always be available near three months

contract periods. For e.g. in the month of June 2001 one can enter into either

June Futures contract or July Futures contract or August Futures Contract.

The last Thursday of the month specified in the contract shall be the final

settlement date for that contract at both NSE as well BSE. Thus June 29,

July 27 and August 31 shall be the last trading day or the final settlement

date for June Futures contract, July Futures Contract and August Futures

Contract respectively.

When one futures contract gets expired, a new futures contract will get

introduced automatically. For instance, on 30th June, June futures contract

becomes invalidated and a September Futures Contract gets activated.

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SETTLEMENT :

Settlement of all Derivatives trades is in cash mode. There is Daily as well

as Final Settlement.

Outstanding positions of a contract can remain open till the last Thursday of

that month. As long as the position is open, the same will be marked to

Market at the Daily Settlement Price, the difference will be credited or

debited accordingly and the position shall be brought forward to the next

day at the daily settlement price. Any position which remains open at the

end of the final settlement day .

HISTORY OF STOCK

EXCHANGE

The only stock exchanges operating in the 19th century were

those of Bombay set up in 1875 and Ahmedabad set up in 1894. These were

organized as voluntary non profit-making association of brokers to regulate

and protect their interests. Before the control on securities trading becamecentral subject under the constitution in 1950, it was a state subject and the

Bombay securities contracts (control) Act of 1925 used to regulate trading

in securities. Under this act, the Bombay stock exchange was recognized in

1927 and Ahmedabad in 1937.

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During the war boom, a number of stock exchanges were

organized in Bombay, Ahmedabad and other centers, but they were not

recognized. Soon after it became a central subject, central legislation was

proposed and a committee headed by A.D. Gorwala went into the bill for

securities regulation. On the basis of the committees recommendations and

public discussion, the securities contracts (regulation) Act became law in

1956.

DEFINITION OF STOCKEXCHANGE

Stock exchange means any body or individuals whether incorporated

or not, constituted for the purpose of assisting, regulating or controlling the

business of buying, selling or dealing in securities.

It is an association of member brokers for the purpose of self-

regulation and protecting the interests of its members.

It can operate only if it is recognized by the Government under the

securities contracts (regulation) Act, 1956. The recognition is granted under

section 3 of the Act by the central government, Ministry of Finance.

BYLAWS

Besides the above act, the securities contracts (regulation) rules were

also made in 1975 to regulative certain matters of trading on the stock

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exchanges. There are also bylaws of the exchanges, which are concerned

with the following subjects.

Opening / closing of the stock exchanges, timing of trading,

regulation of blank transfers, regulation of Badla or carryover business,

control of the settlement and other activities of the stock exchange, fixating

of margin, fixation of market prices or making up prices, regulation of

taravani business (jobbing), etc., regulation of brokers trading, brokerage

chargers, trading rules on the exchange, arbitrage and settlement of disputes,

settlement and clearing of the trading etc

REGULATION OF STOCK EXCHANGES

The securities contracts (regulation) act is the basis for operations of

the stock exchanges in India. No exchange can operate legally without the

government permission or recognition. Stock exchanges are given

monopoly in certain areas under section 19 of the above Act to ensure that

the control and regulation are facilitated. Recognition can be granted to a

stock exchange provided certain conditions are satisfied and the necessary

information is supplied to the government. Recognition can also be

withdrawn, if necessary. Where there are no stock exchanges, the

government licenses some of the brokers to perform the functions of a stock

exchange in its absence.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI).

SEBI was set up as an autonomous regulatory authority by the government

of India in 1988 to protect the interests of investors in securities and to

promote the development of, and to regulate the securities market and for

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matter connected therewith or incidental thereto. It is empowered by two

acts namely the SEBI Act, 1992 and the securities contract (regulation) Act,

1956 to perform the function of protecting investors rights and regulating

the capital markets.

BOMBAY STOCK EXCHANGE

This stock exchange, Mumbai, popularly known as BSE was

established in 1875 as The Native share and stock brokers association, as

a voluntary non-profit making association. It has an evolved over the years

into its present status as the premiere stock exchange in the country. It may

be noted that the stock exchanges the oldest one in Asia, even older than the

Tokyo stock exchange, which was founded in 1878.

The exchange, while providing an efficient and transparent

market for trading in securities, upholds the interests of the investors and

ensures redressed of their grievances, whether against the companies or its

own member brokers. It also strives to educate and enlighten the investors

by making available necessary informative inputs and conducting investor

education programs.

A governing board comprising of 9 elected directors, 2 SEBI

nominees, 7 public representatives and an executive director is the apex

body, which decides is the apex body, which decides the policies and

regulates the affairs of the exchange.

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The Exchange director as the chief executive offices is responsible

for the daily today administration of the exchange.

BSE INDICES:

In order to enable the market participants, analysts etc., to track the

various ups and downs in the Indian stock market, the Exchange has

introduced in 1986 an equity stock index called BSE-SENSEX that

subsequently became the barometer of the moments of the share prices in

the Indian stock market. It is a Market capitalization weighted index of 30

component stocks representing a sample of large, well-established and

leading companies. The base year of sensex 1978-79. The Sensex is widely

reported in both domestic and international markets through print as well as

electronic media.

Sensex is calculated using a market capitalization weighted method.

As per this methodology the level of the index reflects the total market

value of all 30-component stocks from different industries related to

particular base period. The total market value of a company is determined

by multiplying the price of its stock by the nu7mber of shared outstanding.

Statisticians call index of a set of combined variables (such as price and

number of shares) a composite Index. An indexed number is used to

represent the results of this calcution in order to make the value easier to go

work with and track over a time. It is much easier to graph a chart based on

Indexed values than on based on actual valued world over majority of the

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well-known Indices are constructed using Market capitalization weighted

method.

In practice, the daily calculation of SENSEX is done by dividing

the aggregate market value of the 30 companies in the index by a number

called the Index Divisor. The divisor is the only link to the original base

period value of the SENSEX. The Devisor keeps the Index comparable over

a period value of time and if the references point for the entire Index

maintenance adjustments. SENSEX

is widely used to describe the mood in the Indian stock markets. Base year

average is changed as per the formula new base year average = old base

year average*(new market value / old market value).

NATIONAL STOCK EXCHANGE

The NSE was incorporated in Nov, 1992 with an equity

capital of Rs.25 crs. The international securities consultancy (ISC) of Hong

Kong has helped in setting up NSE. ISC has prepared the detailed business

plans and initialization of hardware and software systems. The promotions

for NSE were financial institutions, insurances, companies, banks and SEBI

capital market ltd, Infrastructure leasing and financial services ltd and stock

holding corporations ltd.

It has been set up to strengthen the move towards professionalisationof the capital market as well as provide nation wide securities trading

facilities to investors.

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NSE is not an exchange in the traditional sense where brokers own

and manage the exchange. A two tier administrative set up involving a

company board and a governing aboard of the exchange is envisaged.

NSE is a national market for shares PSU bonds, debentures and

government securities since infrastructure and trading facilities are

provided.

NSE-NIFTY:

The NSE on Apr22, 1996 launched a new equity Index. The NSE-50.

The new Index which replaces the existing NSE-100 Index is expected to

serve as an appropriate Index for the new segment of future and option.

NIFTY mean National Index for fifty stocks. The NSE-50 comprises fifty

companies that represent 20 board industry groups with an aggregate market

capitalization of around Rs 1, 70,000 crs. All companies included in the

Index have a market capitalization in excess of Rs. 500 crs each and should

have trade for 85% of trading days at an impact cost of less than 1.5%.

The base period for the index is the close of price on Nov 3 1995,

which makes one year of completion of operation of NSEs capital market

segment. The base value of the index has been set at 1000.

NSE-MIDCAP INDEX:

The NSE madcap index or the junior nifty comprises 50 stocks that

represent 21st board industry groups and will provide proper representation

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of the midcap segment of the Indian capital market. All stocks in the Index

should have market capitalization of grate than Rs.200 crs and should have

traded 85% of the trading days at an impact cost of less than 2.5%.

The base period for the index is Nov 4 1996, which signifies 2 years

for completion of operations of the capital market segment of the

operations. The base value of the Index has been set at 1000.

Average daily turn over of the present scenario 258212 (Laces) and

number of average daily trades 2160(Laces).

At present there are 24 stock exchanges recognized under the

securities contract (regulation Act, 1956.

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COMPANY PROFILE

PROFILE OF STEELCITY SECURITIES LIMITED:

In the beginning, we have put up our centres in southern states of India and

later into other parts across the country.

Steel City Holding Limited (SCHL) was incorporated on August 22, 1995

as a public limited company under the Companies Act, 1956 as a group

concern under the same management with the objective to carry on the

SteelCity Securities Limited:

The Company was incorporated on February 22, 1995 as a public limited

company under the Companies Act,1956 with Registration No. 01-19521

and obtained certificate of commencement of business on April 20, 1995

from the Registrar of Companies, Andhra Pradesh at Hyderabad. The

Company was incorporated with a view to carry on the business of stock

broking and obtained the Trading Membership of National Stock Exchange

of India Limited (NSE) on its Capital Market Segment. The first VSAT for

its Trading Work Station (TWS) at Hyderabad was installed in December

1995 and the second at Visakhapatnam in April 1996. We are the one

amongst the broking companies, started stock broking services to big and

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small retail clients by putting centres at towns, semi-urban and other cities.

business of share broker or sub-broker or dealer to obtain membership of

the one or more stock exchanges and to deal with securities, stocks, bonds,

debentures whether convertible or otherwise issued to or to be issued by any

Public Limited Companies or Private Limited Companies registered under

the Companies Act, 1956. SCHL was not carrying any business activity and

finally, amalgamated with SCSL in 2005. Steel City Capital Services

Private Limited (SCCSPL), a group concern of the Company under the

same Management was incorporated on October 23, 1997. SCCSPL commenced

initially its operation as sub-broker and subsequently obtained membership of the Bombay

Stock Exchange (BSE).

It has than commenced operations of Future and Options in the year 2001.

SCCSPL has obtained approval from SEBI for F&O trading and Trading or

Clearing Member from SEBI in the year 2001 and 2004 respectively and

finally amalgamated with Steel City Securities Limited in the year 2005.

Steel City Insurance Agencies Private Limited (SCIAPL) was incorporated

as a subsidiary of company on August 20, 2002 as a private limited

company with the objective to carry on or otherwise deal in all kinds of

Insurance and Assurance business. SCIAPL is a Corporate Agent of Birla

Sun Life Insurance Ltd. In the year 2004, it has disinvested 60% of its

shareholding with few individual investors and presently holds 40% of its

equity share capital

Steel City Commodities Private Limited (SCCPL) was incorporated on

October 07, 2002 as one of the group company under the same management

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with a view to commence commodities broking. It has obtained

Membership of National Commodity and Derivatives Exchange of India

Limited (NCDEX) and Multi Commodity Exchange of India Ltd. (MCX) in

the year 2003-04 and commenced operations in commodities broking.We

commenced our operations as an independent provider of information

,analyses and research covering Indian business,financial markets and

economy,to institutional customers.

In 1998 the company has achieved the phenomental growth in all

aspects.The workforce has been given top priority to meet and enhance our

ehdless support and services.

In 2000 we approved as a depository participant of National Security

Depository Limited,subsidiary of National Stock Exchange of India

Limited.After approval of NSDL we have greather advantage to our

valuable customers.We follow the one-stop service providervery few

trading members having this facility.

In 2001,We became the member of the Bombay Stock Exchange with the

support of 25 BOLT terminals across the state by this facility.We have

great opportunity to trade in low-price scripts,which facility to trade is not

available in other exchanges.

In 2002,We approved as a depository participant Of Central Depository

Services Limited ,subsidiary of Bombay Stock Exchange,this avails intra

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depository facility to our valuable customers,this also acts as end-to-end

service provider.

In 2004 we (steelcity commodities private limited)became the members of

NCDEL(NATIONAL COMMADITITY EXCHANGE AND

DERIVATIVES EXCHANGE LIMITED),MCX(Multi Commadity

Exchange of India),this membership gives to trade on commodity futures

throughVSAT and internet.Commadity futures Trading Facility is extended

to the associates and partners made available through 20 centres wide our

Regional offices at Hyderabad,Vijaawada and Tirupati of Andhra Pradesh.

Highly remunerative,Strategic business plans and our expansion all over

India,mainly aimed at readily accessible network for an easy business

transparency and accountability.

We also came up with Private Network (VPN),this allows us to trade in all

segments of NSE/BSE/MCX/NCDEX with a single VSAT connectivity,by

this mode of connectivity our BPS(Business Partners) which gives greater

advantage towards capital investment,Expenditure and Surveillance.

Steelcity securities limited provides services like Reuters market watch with

latest news and updates ,charts, trends of international markets,bullion

markets and other financial news.A part from this we also provide

analysis,tecnicals and fundamentals of 6000 companies for client future

investment plans.

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For our successful business functioning we have effective management

solutions for business promotion and expansion.We reserve best track

record of intime pay-in of funds and securities to our customers every where

and every time.

We strictly follow the guidelines of SEBI/NSE/BSE/NSDL/CDSL to

promote healthy and wealthy business

CORPORATE STRUCTURE:

A)Equity brokerage services:

We are member of NSE and BSE and offer secondary market broking

services to our various retail customers. As on date, we have a registered

client base of 36,311 nos. We offer equity and derivatives broking services

through dedicated dealers and managers. All our centres are connected via

VSAT, VPN and CTCL. Brokerage services are provided to active trades,

retail investors and high networth investors with advisory assistance by our

dedicated dealers and managers located at our centres based on technical,

fundamental and market research carried out by our research team. The

retail customer acquisition has seen accelerated growth owing to wide

spread branch and franchisee network of the Company.

B) Depository Services

We are having NSDL and CDSL Depository segments to attract our clients

to open their DEMAT accounts at one stop. We are ready with the trade

anywhere to integrate our DP server with the Online Back-Office platform

to serve more transparently. At present, we have strong base of 46,712

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registered depository participants clients and continue to increase the

number of registered DPclients services due to increase in no. of centres,

internet trading and quality service.

C) Commodities Brokerage Services

We are having accessibility to trade in two different exchanges being

member of Multi Commodity Exchange (MCX) and National Commodity

& Derivative Exchange (NCDEX). We also offer commodities broking

through our subsidiary company i.e. Steel City Commodities Private

Limited. SCCPL offer this service to its client as integrated broking services

using its infrastructure for equity broking. It has an advantage of using its

existing infrastructure and other support and back-up office for effective

and efficient execution of these activities.

D) Margin Trade Finance

We being engaged in the equity broking services and one of the key

elements for enhancing the volume is availability of margin amount. At

present, the Company is marginally extending this facility due to limited

resources. We are permitted for margin trade finance as per SEBI

guidelines, which inter alia permits brokers with a minimum networth of Rs.

30 million to offer margin-trade financing facility to its customers after

seeking prior approval from the stock exchange. The Company has networth

of Rs. 153.28 million as on March 31, 2005 and is in a position to offer this

facility to its customers and for the same, it has already put in place all

the necessary systems and procedures. This would enable it to increase its

trade volumes, number of clients and at the same time additional earning

from this specific activity.

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E) Distribution of Financial Products

We are also in the activities of distribution of mutual funds, IPO marketing

and now plan to use our strength of network, customers specially high

networth individuals and corporates with high liquidity for distribution of

financial products including fixed income products such as bonds, corporate

debentures, corporate fixed deposits etc. The Company uses its relationship

with its clients for marketing IPOs where it acts as broker and also uses its

centres for mobilizing retail subscription.The retail segment is set to grow

for number of reasons such as significant portion of their saving comprising

of financial assets, parked in bank fixed deposits, postal schemes etc, which

would now require an assets reallocations as these instruments no longer

yield attractive returns. Reforms in financial sector have opened up new

avenues for investments. Investors generally lack a perspective on planning

for the future and need to 74 allocate their saving and earning in the right

proportion to address their current and future needs. Currently,

there are very few and nominal investors who invest in the equity market

and it is expected that number will increase in due course. With a robust

capital market, remaining investors in the population class will look for a

shift to equity related instruments. Over the years, investors parked their

surplus investments in high yielding debt instruments with the steep

reduction in interest rate, leading to a reduction in the yield on fixed

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depositsand bank deposits. Investors need to look at alternate options, which

provide greater returns.

F) Distribution of Insurance products

We are also in the distribution of life insurance products through our group

concern Steel City Insurance Agencies Private Limited being corporate

agent of Birla Sunlife Insurance Limited. We have decided to expand this

activity and propose to make it a wholly owned subsidiary. We propose to

act as insurance broker and for which necessary approvals would be

obtained in due course.

The board of directors:

Mr.G.Sree Rama Murthy

Managing Director.

Mr.G.Raja Gopala Reddy

Executive Director

Mr.K.Satyanarayna

Executive Director.

Mr.Satish Kumar Arya

Director(operations).

Mr.G.Satya Ram Prasad

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Director.

Asn Associate Company Secretries.

INTRODUCTION OF DERIVATIVES

The emergence of the market for derivative products, most notably

forwards, futures and options, can be traced back to the willingness of risk-

averse economic agents to guard themselves against uncertainties arising

out of fluctuations in asset prices. By their very nature, the financial

markets are marked by a very high degree of volatility. Through the use of

derivative products, it is possible to partially or fully transfer price risks by

locking-in asset Prices. As instruments of risk management, these generally

do not influence the Fluctuations in the underlying asset prices. However,

by locking-in asset prices, Derivative products minimize the impact of

fluctuations in asset prices on the Profitability and cash flow situation of

risk-averse investors.

Derivatives are risk management instruments, which derive their value

from an underlying asset. The underlying asset can be bullion, index, share,

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bonds, Currency, interest, etc., Banks, Securities firms, companies and

investors to hedge risks, to gain access to cheaper money and to make

profit, use derivatives. Derivatives are likely to grow even at a faster rate in

future.

DEFINITION OF DERIVATIVES

Derivative is a product whose value is derived from the value of an

underlying asset in a contractual manner. The underlying asset can be

equity, Forex, commodity or any other asset.

Securities Contract ( regulation) Act, 1956 (SC(R) A)defines debt

instrument, share, loan whether secured or unsecured, risk instrument

or contract for differences or any other form of security

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

of underlying securities.

HISTORY OF DERIVATIVES MARKETS

Early forward contracts in the US addressed merchants concerns about

ensuring that there were buyers and sellers for commodities. However

credit risk remained a serious problem. To deal with this problem, a

group of Chicago; businessmen formed the Chicago Board of Trade

(CBOT) in 1848. The primary intention of the CBOT was to provide a

centralized location known In advance for buyers and sellers to negotiate

forward contracts. In 1865, the CBOT went one step further and listed the

first exchange traded derivatives Contract in the US; these contracts

were called futures contracts. In 1919, Chicago Butter and Egg Board, a

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spin-off CBOT was reorganized to allow futures trading. Its name was

changed to Chicago Mercantile Exchange (CME). The CBOT and the

CME remain the two largest organized futures exchanges, indeed the two

largest financial exchanges of any kind in the world today.

The first stock index futures contract was traded at Kansas City Board

of Trade. Currently the most popular stock index futures contract in the

world is based onS&P 500 index, traded on Chicago Mercantile Exchange.

During the Mid eighties, financial futures became the most active derivative

instruments Generating volumes many times more than the commodity

futures. Index futures, futures on T-bills and Euro-Dollar futures are the

three most popular Futures contracts traded today. Other popular

international exchanges that trade derivatives are LIFFE inEngland, DTB

in Germany, SGX in Singapore, TIFFE in Japan, MATIF in France,

Eurex etc.,

THE GROWTH OF DERIVATIVES MARKET

Over the last three decades, the derivatives markets have seen a

phenomenal growth. A large variety of derivative contracts have been

launched at exchanges across the world. Some of the factors driving the

growth of financial derivatives are:

Increased volatility in asset prices in financial markets,

Increased integration of national financial markets with the

international markets,

Marked improvement in communication facilities and sharp

decline in their costs,

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Development of more sophisticated risk management tools,

providing economic agents a wider choice of risk management

strategies, and

Innovations in the derivatives markets, which optimally

combine the risks and returns over a large number of financial

assets leading to higher returns, reduced risk as well as

transactions costs as compared to individual financial assets.

DERIVATIVE PRODUCTS (TYPES)

The following are the various types of derivatives. They are:

Forwards:

A forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the future at todays pre-agreed

price.

Futures:

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. Futures contracts are

special types of forward contracts in the sense that the former are

standardized exchange-traded contracts.

Options:

Options are of two types-calls and puts. Calls give the buyer the right but

not the obligation to buy a given quantity of the underlying asset, at a given

price on or before a given future date. Puts give the buyer the right, but not

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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 lives of upto one year; the majority of options

traded on options exchanges having a maximum maturity of nine months.

Longer-dated 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 upto three years.

Baskets:

Basket options are options on portfolio of underlying assets. The

underlying asset is usually a moving average of a basket of assets. Equity

index options are a form of basket options.

Swaps:

Swaps are private agreement between two parties to exchange cash flows

in the future according to a prearranged formula. They can be regarded as

portfolios of forward contracts.

PARTICIPANTS IN THE DERRIVATIVES MARKETS

The following three broad categories of participants:

HEDGERS:

Hedgers face risk associated with the price of an asset. They use futures

or options markets to reduce or eliminate this risk.

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SPECULATORS:

Speculators wish to bet on future movements in the price of an asset.

Futures and options contracts can give them an extra leverage; that is, they

can increase both the potential gains and potential losses in a speculative

venture.

ARBITRAGEURS:

Arbitrageurs are in business to take advantage of a discrepancy between

prices in two different markets. If, for example they see the futures prices

of an asset getting out of line with the cash price, they will take offsetting

positions in the two markets to lock in a profit.

FUNCTIONS OF THE DERIVATIVES MARKET

In spite of the fear and criticism with which the derivative markets

are commonly looked at, these markets perform a number of economic

functions.

Price in an organized derivative markets reflect the perception of

market participants about the future and lead the prices of

underlying to the perceived future level. The prices of

derivatives converge with the prices of the underlying at the

Expiration of the derivative contract. Thus derivatives help in

discovery of future as well as current prices.

The derivative markets helps to transfer risks from those who

have them but may not like them to those who have an appetite

for them.

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Derivative due to their inherent nature, are linked to the

underlying cash markets. With the introduction of derivatives,

the underlying market witness higher trading volumes because of

participation by more players who would not otherwise

participate for lack of an arrangement to transfer risk.

Speculative trades shift to a more controlled environment of

derivatives market. In the absence of an organized derivatives

market, speculators trade in the underlying cash markets.

Margining, monitoring and surveillance of the activities of

various participants become extremely difficult in these kinds ofmixed markets.

INTRODUCTION OF FUTURES

Futures markets were designed to solve the problems that exist in

forward markets. 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 contract, the futures contracts are standardized and exchange

traded. To facilitate liquidity in the futures contract, the exchange specifies

certain standard features of the contract. It is standardized contract with

standard underlying instrument, a standard quantity and quality of the

underlying instrument that can be delivered,

(Or which can be used for reference purpose in settlement) and a standard

timing of such settlement. A futures contract may be offset prior to

maturity by entering into an equal and opposite transaction. More than 90%

of futures transactions are offset this way.

The standardized items in a futures contract are:

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Quantity of the underlying

Quality of the underlying

The date and the month of delivery

The units of price quotation and minimum price

change

Location of settlement

DEFINATION

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. Futures

contracts are special types of forward contracts in the sense that the former

are standardized exchange-traded contracts.

HISTORY OF FUTURES

Merton Miller, the 1990 Nobel Laureate had said that financial futures

represent the most significant financial innovation of the last twenty years.

The first exchange that traded financial derivatives was launched in

Chicago in the year 1972. A division of the Chicago Mercantile

Exchange, it was called the international monetary market (IMM) and

traded currency futures. The brain behind this was a man called Leo

Melamed, acknowledged as the father of financial futures who was then

the Chairman of the Chicago Mercantile Exchange. Before IMM opened in

1972, the Chicago Mercantile Exchange sold contracts whose value was

counted in millions. By 1990, the underlying value of all contracts traded at

the Chicago Mercantile Exchange totaled 50 trillion dollars.

These currency futures paved the way for the successful marketing of a

dizzying array of similar products at the Chicago Mercantile Exchange, the

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Chicago Board of Trade and the Chicago Board Options Exchange. By the

1990s, these exchanges were trading futures and options on everything from

Asian and American stock indexes to interest-rate swaps, and their success

transformed Chicago almost overnight into the risk-transfer capital of the

world.

DISTINCTION BETWEEN FUTURES AND FORWARDS

CONTRACTS

Forward contracts are often confused with futures contracts. The

confusion is primarily because both serve essentially the same economic

functions of allocating risk in the presence of futures price uncertainty.

However futures are a significant improvement over the forward contracts

as they eliminate counterparty risk and offer more liquidity. Comparison

between two as follows:

FUTURES FORWARDS

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1.Trade on an

Organized Exchange

2.Standardized

contract terms

3. hence more liquid

4. Requires margin

payment

5. Follows daily

Settlement

1. OTC in nature

2.Customized contract

terms

3. hence less liquid

4. No margin payment

5. Settlement happens

at end of period

Table 3.1

FEATURES OF FUTURES

Futures are highly standardized.

The contracting parties need not pay any down

payment.

Hedging of price risks.

They have secondary markets to.

TYPES OF FUTURES

On the basis of the underlying asset they derive, the futures are divided

into two types:

Stock Futures

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Index Futures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a futures contract, the buyers and the seller. The

buyer of the futures contract is one who is LONG on the futures contract

and the seller of the futures contract is who is SHORT on the futures

contract.

The pay-off for the buyers and the seller of the futures of the contracts are

as follows:

PAY-OFF FOR A BUYER OF FUTURES

LOSS

PROFIT

F

L

P

E1

E2

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Figure 3.2

CASE 1:- The buyers bought the futures contract at (F); if the futures

PriceGoes to E1 then the buyer gets the profit of (FP).

CASE 2:-The buyers gets loss when the futures price less then (F); if

The Futures price goes to E2 then the buyer the loss of (FL).

PAY-OFF FOR A SELLER OF FUTURES

F

LOSS

PROFIT

E1

P

E2

L

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Figure 3.3

F = FUTURES PRICE

E1, E2 = SATTLEMENT PRICE

CASE 1:-The seller sold the future contract at (F); if the future goes to

E1Then the seller gets the profit of (FP).

CASE 2:-The seller gets loss when the future price goes greater than (F);

If the future price goes to E2 then the seller get the loss of (FL).

MARGINS

Margins are the deposits which reduce counter party risk, arise in a

futures contract. These margins are collect in order to eliminate the counterparty risk. There are three types of margins:

Initial Margins:-

Whenever a future contract is signed, both buyer and seller are required

to post initial margins. Both buyers and seller are required to make security

deposits that are intended to guarantee that they will infect be able to fulfill

their obligation. These deposits are initial margins and they are often

referred as purchase price of futures contract.

Mark to market margins:-

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The process of adjusting the equity in an investors account in order to

reflect the change in the settlement price of futures contract is known as

MTM margin.

Maintenance margin:-

The investor must keep the futures account equity equal to or grater than

certain percentage of the amount deposited as initial margin. If the equity

goes less than that percentage of initial margin, then the investor receives a

call for an additional deposit of cash known as maintenance margin to bring

the equity up to the initial margin.

ROLE OF MARGINS

The role of margins in the futures contract is explained in the following

example: Siva Rama Krishna sold an ONGC July futures contract to

Nagesh at Rs.600; the following table shows the effect of margins on the

Contract. The contract size of ONGC is 1800. The initial margin amount is

say Rs. 30,000 the maintenance margin is 65% of initial margin.

PRICING FUTURES

Pricing of futures contract is very simple. Using the cost-of-carry logic,

we calculate the fair value of a future contract. Every time the observed

price deviates from the fair value, arbitragers would enter into trades to

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captures the arbitrage profit. This in turn would push the futures price back

to its fair value. The cost of carry model used for pricing futures is given

below.

F = SerT

Where:

F = Futures price

S = Spot Price of the Underlying

r = Cost of financing (using continuously compounded

Interest rate)

T = Time till expiration in years

e = 2.71828

(OR)

F = S (1+r- q) t

Where:

F = Futures price

S = Spot price of the underlying

r = Cost of financing (or) interest Rate

q = Expected dividend yield

t = Holding Period

FUTURES TERMINOLOGY

Spot price:

The price at which an asset trades in the spot market.

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Futures Price:

The price at which the futures contract trades in the futures market.

Contract cycle:

The period over which a contract trades. The index futures contracts on

the NSE have one-month and three-month expiry cycles whichexpire on

the last Thursday of the month. Thus a January expiration contract

expires on the last Thursday of January and a February expiration contract

ceases trading on the last Thursday of February. On the Friday following

the last Thursday, a new contract having a three-month expiry is introduced

for trading.

Expiry date:

It is the date specified in the futures contract. This is the last day on

which the contract will be traded, at the end of which it will cease to exist.

Contract size:

The amount of asset that has to be delivered under one contract. For

instance, the contract size on NSEs futures markets is 200 Nifties.

Basis:

In the context of financial futures, basis can be defined as the futures

price minus the spot price. These will be a different basis for each delivery

month for each contract. In a normal market, basis will be positive. This

reflects that futures prices normally exceed spot prices.

Cost of carry:

The relationship between futures prices and spot prices can be

summarized in terms of what is known as the cost of carry. This measures

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the storage cost plus the interest that is paid to finance the asset less the

income earned on the asset.

Initial margin:

The amount that must be deposited in the margin account at the time a

futures contract is first entered into is known as initial margin.

Marking-to-market:

In the futures market, at the end of each trading day, the margin account

is adjusted to reflect the investors gain or loss depending upon the futures

closing price. This is called marking-to-market.

Maintenance margin:

This is some what lower than the initial margin. This is set to ensure that

the balance in the margin account never becomes negative. If the balance in

the margin account falls below the maintenance margin, the investor

receives a margin call and is expected to top up the margin account to the

initial margin level before trading commences on the next day.

INTRODUCTION TO OPTIONS

In this section, we look at the next derivative product to be traded on the

NSE, namely options. Options are fundamentally different from forward

and futures contracts. An option gives the holder of the option the right to

do something. The holder does not have to exercise this right. In contrast,

in a forward or futures contract, the two parties have committed themselves

to doing something. Whereas it costs nothing (except margin requirement)

to enter into a futures contracts, the purchase of an option requires as up-

front payment.

DEFINITION

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Options are of two types- calls and puts. Calls give the buyer the right

but not the obligation to buy a given quantity of the underlying asset, at a

given price on or before a given future date. Puts give the buyers 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.

HISTORY OF OPTIONS

Although options have existed for a long time, they wee traded OTC,

without much knowledge of valuation. The first tradingin options began

in Europe and the USas early as the seventeenth century. It was only in

the early 1900s that a group of firms set up what was known as the put and

call Brokers and Dealers Association with the aim of providing a

mechanism for bringing buyers and sellers together. If someone wanted to

buy an option, he or she would contact one of the member firms. The firms

would then attempt to find a seller or writer of the option either from its

own clients of those of other member firms. If no seller could be found, the

firm would undertake to write the option itself in return for a price.

This market however suffered form two deficiencies. First, there was no

secondary market and second, there was no mechanism to guarantee that the

writer of the option would honor the contract. In 1973, Black, Mertonand

scholes invented the famed Black-Scholes formula. In April 1973, CBOE

was set up specifically for the purpose of trading options. The market for

option developed so rapidly that by early 80s, the number of shares

underlying the option contract sold each day exceeded the daily volume of

shares traded on the NYSE. Since then, there has been no looking back.

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Option made their first major mark in financial history during the tulip-

bulb mania in seventeenth-century Holland. It was one of the most

spectacular get rich quick binges in history. The first tulip was brought Into

Holland by a botany professor from Vienna. Over a decade, the tulip

became the most popular and expensive item in Dutch gardens. The more

popular they became, the more Tulip bulb prices began rising. That was

when options came into the picture. They were initially used for hedging.

By purchasing a call option on tulip bulbs, a dealer who was committed to a

sales contract could be assured of obtaining a fixed number of bulbs for a

set price. Similarly, tulip-bulb growers could assure themselves of selling

their bulbs at a set price by purchasing put options. Later, however, options

were increasingly used by speculators who found that call options were an

effective vehicle for obtaining maximum possible gains on investment. As

long as tulip prices continued to skyrocket, a call buyer would realize

returns far in excess of those that could be obtained by purchasing tulip

bulbs themselves. The writers of the put options also prospered as bulb

prices spiraled since writers were able to keep the premiums and the options

were never exercised. The tulip-bulb market collapsed in 1636 and a lot of

speculators lost huge sums of money. Hardest hit were put writers who

were unable to meet their commitments to purchase Tulip bulbs.

PROPERTIES OF OPTION

Options have several unique properties that set them apart from other

securities. The following are the properties of option:

Limited Loss

High leverages potential

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Limited Life

PARTIES IN AN OPTION CONTRACT

There are two participants in Option Contract.

Buyer/Holder/Owner of an Option:

The Buyer of an Option is the one who by paying the option premium

buys the right but not the obligation to exercise his option on the

seller/writer.

Seller/writer of an Option:

The writer of a call/put option is the one who receives the option premiumand is thereby obliged to sell/buy the asset if the buyer exercises on him.

TYPES OF OPTIONS

The Options are classified into various types on the basis of various

variables. The following are the various types of options.

1. On the basis of the underlying asset:

On the basis of the underlying asset the option are divided in to two

types:

Index options:

These options have the index as the underlying. Some options are

European while others are American. Like index futures contracts, index

options contracts are also cash settle

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Stock options:

Stock Options are options on individual stocks. Options currently trade

on over 500 stocks in the United States. A contract gives the holder the

right to buy or sell shares at the specified price.

2. On the basis of the market movements :

On the basis of the market movements the option are divided into two

types. They are:

Call Option:

A call Option gives the holder the right but not the obligation to buy an

asset by a certain date for a certain price. It is brought by an investor when

he seems that the stock price moves upwards.

Put Option:

A put option gives the holder the right but not the obligation to sell an

asset by a certain date for a certain price. It is bought by an investor when

he seems that the stock price moves downwards.

3.On the basis of exercise of option:

On the basis of the exercise of the Option, the options are classified into

two Categories.

American Option:

American options are options that can be exercised at any time up to the

expiration date. Most exchange traded options are American.

European Option:

European options are options that can be exercised only on the expiration

date itself. European options are easier to analyze than American options,

and properties of an American option are frequently deduced from those of

its European counterpart.

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PAY-OFF PROFILE FOR BUYER OF A CALL OPTION

The Pay-off of a buyer options depends on a spot price of an underlying

asset. The following graph shows the pay-off of buyers of a call option.

Figure 3.4

S = Strike price ITM = In the MoneySp = premium/loss ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

SR = Profit at spot price E1

CASE 1:(Spot Price > Strike price)

As the Spot price (E1) of the underlying asset is more than strike price(S).

The buyer gets profit of (SR), if price increases more than E1 then profit also

increase more than (SR)

CASE 2:(Spot Price < Strike Price)

OTM

LOSS

S

PE2

RPROFIT

ITM

ATM E1

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As a spot price (E2) of the underlying asset is less than strike price (S)

The buyer gets loss of (SP); if price goes down less than E2 then also his

loss is limited to his premium (SP)

PAY-OFF PROFILE FOR SELLER OF A CALL OPTION

The pay-off of seller of the call option depends on the spot price of the

underlying asset. The following graph shows the pay-off of seller of a call

option:

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Figure 3.5

S = Strike price ITM = In the MoneySP = Premium / profit ATM = At The money

E1 = Spot Price 1 OTM = Out of the Money

E2 = Spot Price 2

SR = loss at spot price E2

CASE 1:(Spot price < Strike price)

As the spot price (E1) of the underlying is less than strike price (S). The

seller gets the profit of (SP), if the price decreases less than E1 then also

profit of the seller does not exceed (SP).

CASE 2:(Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S)

the Seller gets loss of (SR), if price goes more than E2 then the loss of the

seller also increase more than (SR).

ITM

PROFIT

E1

P

S

ATM

E2

OTM

R

LOSS

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PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

The Pay-off of the buyer of the option depends on the spot price of the

underlying asset. The following graph shows the pay-off of the buyer of a

call option.

Figure 3.6S = Strike price ITM = In the Money

SP = Premium / loss ATM = At the Money


E2 = Spot price 2

SR = Profit at spot price E1

CASE 1: (Spot price < Strike price)As the spot price (E1) of the underlying asset is less than strike price (S).

The buyer gets the profit (SR), if price decreases less than E1 then profit also

increases more than (SR).


PROFIT

ITM

R

E1

ATM

PLOSS

OTM

E2

S

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As the spot price (E2) of the underlying asset is more than strike price (S),

The buyer gets loss of (SP), if price goes more than E2 than the loss of the

buyer is limited to his premium (SP).

PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

The pay-off of a seller of the option depends on the spot price of the

underlying asset. The following graph shows the pay-off of seller of a put

option.

Figure 3.7

S = Strike price ITM = In the Money

SP = Premium/profit ATM = At the Money


E2 = Spot price 2SR = Loss at spot price E1

CASE 1:(Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S),

the seller gets the loss of (SR), if price decreases less than E1 than the loss

also increases more than (SR).

LOSS

OTM

R

S

E1

P

PROFIT

ITM

ATM

E2

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As the spot price (E2) of the underlying asset is more than strike price (S),

the seller gets profit of (SP), of price goes more than E2 than the profit of

seller is limited to his premium (SP).

FACTORS AFFECTING THE PRICE OF AN OPTION

The following are the various factors that affect the price of an option

they are:

Stock Price:

The pay-off from a call option is an amount by which the stock price

exceeds the strike price. Call options therefore become more valuable as

the stock price increases and vice versa. The pay-off from a put option is

the amount; by which the strike price exceeds the stock price. Put options

therefore become more valuable as the stock price increases and vice versa.

Strike price:

In case of a call, as a strike price increases, the stock price has to make a

larger upward move for the option to go in-the money. Therefore, for a

call, as the strike price increases option becomes less valuable and as strike

price decreases, option become more valuable.

Time to expiration:

Both put and call American options become more valuable as a time to

expiration increases.

Volatility:

The volatility of a stock price is measured of uncertain about future stock

price movements. As volatility increases, the chance that the stock will do

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very well or very poor increases. The value of both calls and puts therefore

increases as volatility increase.

Risk- free interest rate:

The put option prices decline as the risk-free rate increases where as the

price of call always increases as the risk-free interest rate increases.

Dividends:

Dividends have the effect of reducing the stock price on the X- dividend

rate. This has a negative effect on the value of call options and a positive

effect on the value of put options.

PRICING OPTIONS

An option buyer has the right but not the obligation to exercise on the

seller. The worst that can happen to a buyer is the loss of the premium paid

by him. His downside is limited to this premium, but his upside is

potentially unlimited. This optionality is precious and has a value, which is

expressed in terms of the option price. Just like in other free markets, it is

the supply and demand in the secondary market that drives the price of an

option.

There are various models which help us get close to the true price of an

option. Most of these are variants of the celebrated Black- Scholes model

for pricing European options. Today most calculators and spread-sheets

come with a built-in Black- Scholes options pricing formula so to price

options we dont really need to memorize the formula. All we need to know

is the variables that go into the model.

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The Black-Scholes formulas for the price of European calls and puts on a

non-dividend paying stock are:

OPTIONS TERMINOLOGY

Option price/premium:

Option price is the price which the option buyer pays to the option seller.

It is also referred to as the option premium.

Expiration date:

The date specified in the options contract is known as the expiration date,

the exercise date, the strike date or the maturity.

Strike price:

The price specified in the option contract is known as the strike price or

the exercise price.

DISTINCTION BETWEEN FUTURES AND OPTIONS

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Table 3.9

CALL OPTION

STRIKE

PRICE

PREMIUM

CONTRACTINTRINSIC

VALUE

TIME

VALUE

TOTAL

VALUE

560540520

000

2510

25

10

OUT OF

THE

MONEY

FUTURES OPTIONS

1. Exchange traded,

with Novation

2. Exchange defines the

product3. Price is zero, strike

price moves

4.Price is Zero5.Linear payoff6.Both long and shortat risk

1. Same as futures

2. Same as futures

3. Strike price is fixed,

price moves

4. Price is always positive

5. Nonlinear payoff

6. Only short at risk

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500 0 15 15AT THE

MONEY

480

460440

20

4060

10

52

30

4562

IN THE

MONEY

Table 3.10

PUT OPTION

STRIKE

PRICE

PREMIUM

CONTRACTINTRINSIC

VALUE

TIME

VALUE

TOTAL

VALUE

560540520

604020

2510

624530

IN THE

MONEY

500 0 15 15AT THE

MONEY

480460440

000

1052

1052

OUT OF THE

MONEY

Table 3.11

PREMIUM = INTRINSIC VALUE + TIME VALUEThe difference between strike values is calledinterval

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TRADING INTRODUCTION

The futures & Options trading system of NSE, called NEAT-F&O

trading system, provides a fully automated screen-based trading for Nifty

futures & options and stock futures & Options on a nationwide basis as well

as an online monitoring and surveillance mechanism. It supports an order

driven market and provides complete transparency of trading operations. It

is similar to that of trading of equities in the cash market segment.

The software for the F&O market has been developed to facilitate

efficient and transparent trading in futures and options instruments.

Keeping in view the familiarity of trading members with the current capital

market trading system, modifications have been performed in the existing

capital market trading system so as to make it suitable for trading futures

and options.

On starting NEAT (National Exchange for Automatic Trading)

Application, the log on (Pass Word) Screen Appears with the Following

Details.

1) User ID

2) Trading Member ID

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3) Password NEAT CM (default Pass word)

4) New Pass Word

Note: - 1) User ID is a Unique

2) Trading Member ID is Unique & Function; it is Common for all

user of the Trading Member

3) New password Minimum 6 Characteristic, Maximum 8

characteristics only 3 attempts are accepted by the user to enter the

password to open the Screen

4) If password is forgotten the User required to inf

orm the Exchange in writing to reset the Password.

BASKET TRADING SYSTEM

1) Taking advantage for easy arbitration between future market and & cash

market difference, NSE introduce basket trading system by off setting

positions through off line-order-entry facility.

2) Orders are created for a selected portfolio to the ratio of their market

Capitalization from 1 lake to 30 crores.

1)

2) Offline-order-entry facility: - generate order file in as specified

format out side the system & up load the order file in to the system by

invoking this facility in Basket trading system.

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TRADING NETWORK

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Fig

ure 3.12

Participants in Security Market

NSE MAIN FRAME

HUB ANTENNA

SATELLITE

BROKERS PREMISES

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1) Stock Exchange (registered in SEBI)-23 Stock Exchanges

2) Depositaries (NSDL,CDSL)-2 Depositaries

3) Listed Securities-9,413

4) Registered Brokers-9,519

5) FIIs-502

Highest Investor Population

Table 3.13

State Total No.Investors

% of Investors inIndia

Maharastra 9.11 Lakhs 28.50

Gujarat 5.36 Lakhs 16.75

Delhi 3.25 Lakhs 10.10%

Tamilnadu 2.30 Lakhs 7.205

West Bangal 2.14 Lakhs 6.75%

Andhra

Pradesh

1.94 Lakhs 6.05%

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LOT SIZES OF SELECTED COMPANIES FOR ANALYSIS

CODE LOT SIZE COMPANY NAME

ICICI 250 Industrial Credit &

Investment Corporation of

India

ACC 376 Associates Cement

Companies Ltd.

GMR 2500 GMR INFRASTRUCTURE

Ltd.

BHEL 150 Bharat Heavy Electrical Ltd.

The following tables explain about the table that took place

in futures and options between 31/01/10 to 26/03/10. The table

has various columns, which explains various factors involved in

derivative trading.

Date the day on which the trading took place.

Closing premium Premium for that day.

Open interest- No. of options that did not get exercised.

Traded Quantity No. of futures and options traded on that

day.

N.O.C No. of contracts traded on that day.

Closing PriceThe price of the futures at the end of the

trading day.

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Spot parities relation to dividends.

Calculation of rate of return

ANLYSIS AND INTERPRETATION:

FUTURES:

Futures are legally binding agreement to buy or sell an asset

at a certain time in the future at a certain price.

FORMULA:

Fo = So (1+r-d) T

So = closing price of a market on that day.

r = Rate of return

d = Dividend

T = Time period

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FUTURES OF ICICI BANK

Table: 4.1

DATE(DD/MM/YY)

High Rs Low RsClose

RsOpen Int

('000)Trd Qty('000)

N.O.C. FO

29/01/10 837.00 777.10 827.65 780.25 14200 4059 114970

01/02/10 847.00 813.30 831.90 815.00 5600 16142 47015

02 /02/10 839.50 813.05 815.50 839.00 6500 18617 53706

03/02/10 844.00 820.50 835.90 825.00 5400 15472 45173

04 /02/10 855.00 823.10 825.90 838.00 6000 17185 50229

05/02/10 810.00 789.00 796.20 810.00 5700 16375 45777

08/02/10 818.90 783.30 805.50 802.00 6500 18472 51899

10/02/10 819.00 795.55 798.95 815.10 6100 17346 48970

15/02/10 825.00 811.50 816.15 823.00 3000 8498 24328

16/02/10 837.50 816.75 833.50 819.65 3300 5409 1585

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17/02/10 847.80 801.55 837.55 801.55 6200 17689 51968

18/02/10 851.30 834.15 839.30 837.10 6800 19510 57467

19/02/10 837.00 815.00 830.70 825.00 6000 17182 49702

22/02/10 848.00 828.55 831.60 837.95 4500 12824 37743

23/02/10 849.50 828.00 844.55 828.00 6300 18070 53276

24/02/10 845.00 833.70 840.25 826.20 4500 12874 37852

25/02/10 854.40 832.35 851.85 843.80 5800 16435 48345

26/02/10 887.80 843.50 872.50 850.80 9800 28009 85118

02/03/10 901.60 885.70 889.00 889.89 5200 14971 46874

04/03/10 912.50 888.55 898.15 905.00 5300 15199 47847

05/03/10 907.95 895.5 903.50 905.00 4600 13091 41293

08/03/10 925.95 912.65 923.50 915.00 6000 13090 55036

09/03/10 930.35 906.35 921.40 924.00 6000 17206 55389

10/03/10 928.65 908.25 918.50 920.90 6200 17837 57342

11/03/10 934.40 912.10 933.50 912.10 4900 14021 45404

17/03/10 954.70 936.25 949.25 937.90 6100 17546 58134

18/03/10 964.70 948.00 961.35 955.00 6200 17572 58848

23/03/10 946.40 923.10 927.15 941.00 6000 17242 56256

26/03/10 956.10 933.10 951.60 933.10 5100 14531 48043

The above table has been given in the following graph.

Picture 4.2

FUTURES OF ICICI BANK

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Source:

The data has been col lected BUSINESS STANDARDS (paper)

and Online Trading of KOTAK SECURITIES.

FUTURES OF ACC CEMENTS

Table: 4.3

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Date

dd/mm/yyHigh Rs

Low

Rs

Close

Rs

Open Int

('000)

Trd

Qty

('000)

N.O.C. FO

29/01/10 887.90 861.60 872.30 862.2 81 2241 738

01/02/10 883.00 863.00 875.80 868.75 61 1500 494

02 /02/10 896.00 870.00 873.60 878.00 1000 2774 919

03/02/10 895.00 874.00 885.05 881.10 700 1820 606

04 /02/10 888.40 848.60 856.85 886.00 1300 3489 1143

05/02/10 850.85 825.25 842.65 836.30 900 2381 749

08/02/10 856.65 830.00 844.45 844.00 600 1605 509

10/02/10 882.65 865.00 868.00 876.05 900 2293 753

15/02/10 889.80 875.30 877.55 887.40 400 1055 349

16/02/10 919.00 871.55 914.75 878.00 1100 3043 1029

17/02/10 930.80 911.00 915.15 923.90 700 1935 669

18/02/10 918.50 905.00 908.50 916.00 400 968 331

19/02/10 913.90 890.55 899.65 904.80 800 2120 717

22/02/10 921.00 900.00 903.85 903.00 800 2020 692

23/02/10 914.80 900.00 904.75 903.80 600 1600 546

24/02/10 911.60 888.10 903.20 903.80 1200 3297 1117

25/02/10 921.00 895.20 919.15 902.50 1100 2835 965

26/02/10 919.00 892.00 912.05 909.10 800 2097 716

02/03/10 959.20 913.05 948.60 920.10 1600 4152 1471

04/03/10 949.00 927.70 944.50 936.50 1000 2709 955

05/03/10 974.00 940.10 955.30 940.10 1200 3074 1111

08/03/10 987.00 955.00 979.25 962.30 1600 4208 1535

09/03/10 992.85 972.35 976.55 980.20 1000 2610 965

10/03/10 1003.50 975.00 998.80 975.50 1400 3684 1377

11/03/10 1001.90 981.40 986.40 1001.90 900 2349 874

17/03/10 978.50 951.40 954.20 962.90 1100 2945 1069

18/03/10 964.80 944.00 961.50 944.00 700 1913 689

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23/03/10 968.60 952.15 958.65 964.00 1300 3547 1278

26/03/10 947.70 922.65 944.30 922.65 500 1422 504


Picture 4.4

FUTURES OF ACC CEMENTS

Source: The data has been col lected BUSINESS STANDARDS

(paper) and Online Trading of KOTAK SECURITIES.

INTERPRETATION:

It is observed from the above mentioned table that the future

price (Fo) has increased tremendously due to increase in closing

price , decrease in open interes t and reduction in value and

volume of futures.

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FUTURES OF GMR INFRASTRUCTURE Ltd.

Table 4.5

DATEDD/MM/YY

High

Rs

Low

Rs

Close

Rs

Open Int

('000)

Trd Qty

('000)N.O.C. FO

29/01/10 60.50 58.00 60.20 59.00 8600 3445 5106

01/02/10 61.85 59.00 61.15 89.50 4300 1716 2604

02/02/10 61.90 58.90 59.35 61.75 4200 1681 2544

03/02/10 60.05 58.30 58.70 59.90 9200 3669 5431

04/02/10 58.60 54.70 55.00 58.45 12800 5120 7230

05/02/10 53.10 50.35 52.50 52.60 19600 7855 10149

08/02/10 56.80 53.85 56.30 55.00 9800 3934 5461

10/02/10 56.75 54.50 55.20 56.40 6100 2439 3417

15/02/10 56.20 55.20 55.50 55.55 3600 1458 2027

16/02/10 56.85 54.65 56.45 55.75 4200 1665 2317

17/02/10 57.50 56.15 56.55 57.05 5500 2216 3144

18/02/10 58.75 55.35 55.55 56.60 4900 1942 2714

19/02/10 56.10 54.40 54.80 54.80 19900 7955 10983

22/02/10 55.95 54.40 54.90 55.70 12700 5060 6993

23/02/10 55.85 54.35 55.60 54.75 17300 6917 9521

24/02/10 55.75 54.55 55.30 54.55 13000 5190 7182

25/02/10 55.60 52.90 53.45 55.60 16600 6652 8974

26/02/10 55.80 53.40 54.65 54.00 8800 3508 4824

02/03/10 55.65 54.50 55.45 55.10 4300 1701 2348

04/03/10 59.00 57.75 58.20 58.70 5500 2193 3201

05/03/10 59.60 58.25 58.90 58.40 7600 3051 4492

08/03/10 59.70 58.10 58.40 59.45 3200 1287 1895

09/03/10 58.60 57.00 57.25 58.45 3500 189 1988

10/03/10 57.95 56.80 57.60 57.30 2700 110 1545

11/03/10 58.15 57.05 57.50 57.60 3100 1222 1759

17/03/10 59.10 57.85 58.20 58.55 8700 1512 5089

18/03/10 59.60 58.00 59.15 58.50 11300 2755 6641

23/03/10 58.15 57.45 57.85 57.60 11800 4703 6772

26/03/10 61.40 60.50 60.85 60.50 5100 2045 3119


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Picture 4.6

FUTURES OF GMR INFRASTRUCTURE Ltd.

Source:

The data has been collected BUSINESS STANDARDS (paper)


INTERPRETATION:

The above graph shows that the future price (Fo) has been

decrease due to decrease in closing price and decrease in open

interest and it is observed that increase in volume and value.

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FUTURES OF BHEL

Table 4.7

Date

dd/mm/yyHigh Rs Low Rs

Close

Rs

Open Int

('000)

Trd

Qty

('000)

N.O.C. FO

29/01/10 2401.75 2293.00 2390.85 2305.00 1000 6792 2407

01/02/10 2425.00 2378.00 2386.00 2387.50 700 4766 1716

02/02/10 2403.00 2352.00 2365.70 2394.70 700 4825 1720

03/02/10 2400.80 2364.00 2384.85 2385.00 500 3421 1224

04/02/10 2388.00 2352.50 2360.10 2385.00 400 2491 885

05/02/10 2350.00 2277.55 2287.90 2299.00 600 4298 1484

08/02/10 2337.00 2258.00 2325.85 2288.00 500 3069 1059

10/02/10 2357.00 2290.00 2300.85 2352.00 500 3462 1201

15/02/10 2368.50 2334.00 2349.75 2340.00 500 3145 110916/02/10 2397.20 2352.25 2386.95 2359.70 800 5005 1782

17/02/10 2417.50 2378.10 2388.95 2402.00 500 3193 1145

18/02/10 2387.00 2365.30 2374.85 2385.00 300 1695 604

19/02/10 2388.10 2340.00 2355.65 2350.05 400 2335 825

22/02/10 2393.40 2311.35 2347.05 2389.00 1200 8105 2884

23/02/10 2388.70 2343.65 2379.60 2345.05 800 5292 1883

24/02/10 2383.40 2346.00 2357.50 2370.00 1200 8040 2847

25/02/10 2386.20 2330.00 2378.00 2359.00 500 3135 1110

26/02/10 2417.90 2340.00 2354.05 2370.35 700 4729 169002/03/10 2457.35 2380.00 2436.25 2380.00 1000 6704 2442

04/03/10 2460.00 2430.00 2453.65 2432.00 400 2756 1010

05/03/10 2477.95 2427.00 2436.65 2461.2 800 5074 1868

08/03/10 2461.50 2427.00 2334.85 2452.55 400 2642 967

09/03/10 2453.80 2421.00 2426.80 2428.00 300 2258 826

10/03/10 2463.00 2415.00 2435.45 2430.00 800 5436 1991

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11/03/10 2442.90 2416.00 2432.35 2434.00 400 2793 1018

17/03/10 2412.50 2383.45 2387.55 2399.00 1000 6455 2323

18/03/10 2395.80 2381.00 2388.60 2388.45 300 2213 792

23/03/10 2369.60 2345.55 2362.80 2358.80 800 5126 1815

26/03/10 2411.90 2362.00 2370.15 2390.10 500 3378 1207


Picture 4.8

FUTURES OF BHEL

Source:

The data has been col lected BUSINESS STANDARDS (paper)


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INTERPRETATION:

From the above mentioned table it is observed that the

future price (Fo) has shown fluctuation due to fluctuation

in closing price and volume, value is increase and it is

observed that open interest is decrease.

Comparison of 4 companies in no of contracts traded on that

days

74

COMPANY

NAME

26/3

/10

29/1/1

0

ICICI 14531 4059

ACC 1422 2241

GMR 2045 3445

BHEL 3378 6792


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No .of contracts

0

2000

4000

6000

8000

10000

12000

14000

16000

ICICI ACC GMR BHEL

29/1/10

26/3/10

INTREPRETATAION : In the above table comparison of 4 companies

the ICICI company trading 29/1/2010 (4059) it is increased to the

26/3/10(14531).so ICICI BANK is best one to compare the others.

OPTIONS:

Opt ions are two types. They are CALL OPTION and PUT

OPTION

CALL OPTION : A Call opt ion is bought by an investor when he

seems that the stock price moves upwards. A call option gives the

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holder of the option the right but not the obligation to buy an asset

by an certain date for a certain price.

PUT OPTION :

A Put opt ion is bought by an investor when he seems that the

stock price moves downwards. A put option gives the holder of the

option the r ight but not the obl igat ion to sel l asset by an certain

date for a certain price.

Formula:

Profit of the holder = (Spot Price Strike Price) Premium*

(Lot Size) in case of call option.

Profit of the holder = Premium* (Lost Size) in case of Put

Option.

Source:

The data has been collected through BUSINESS

STANDARDS (Paper) and Online Trading of KOTAK SECURITIES.

The fol lowing table of Net pay-off explain the profi t / loss of

opt ion holder/wr iter o f ACC for the week 16/02 /2009 to

20/02/2010.

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PROFIT/LOSS POSITION OF CALL OPTION BUYER OF A CC

Table 1

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYERS

GAIN/LOSS

WEITER

GAIN/LOSS

818.34 800 27.00 YES 150.00 -150.00

818.34 820 10.45 YES 2737.50 -2737.50

818.34 840 5.30 NO -3975.00 13875.00

818.34 860 1.90 NO -1425.00 26325.00

Profit and Loss graph of the buyers

with stike price of call option

-6000

-4000

-2000

0

2000

4000

1 2 3 4

STRIKE PRICE

BUYERS

GAIN/LOSS

Profit and Loss graph of the writer with stock

price of call option

-10000

0

10000

20000

30000

1 2 3 4

STRIKE PRICE

WEITER

GAIN/LOSS

h

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PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OF

ACC

Table 2

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYERS

GAIN/LOSS

WEITER

GAIN/LOSS

818.34 800 0.20 NO -150 150

818.34 820 2.40 NO -1800 1800

818.34 840 8.90 NO -6675 6675

818.34 860 12.00 YES 900 -900

Profit andLossgraphof theBuyer

withStrikePriceof Put Option

-8000

-6000

-4000

-2000

0

2000

1 2 3 4STRIKEPRICE

BUYERS

GAIN/LOSS

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Profit and Loss Graph of the Writer

with Strike Price of Put Option

-2000

0

2000

4000

6000

8000

1 2 3 4

STRIKE PRICE

WEITER

GAIN/LOSS

INTERPERATATION:

From the above graph i t observed that the buyer get Prof i t

when the Str ike Pr ice is less than the spot pr ice and i t is a lso

observed that the wr i ter get loss when the str ike pr ice is more

than the spot price.

The following table of Net pay-off explains the profit/ loss of option

holder/writer of ARAVIND MILL

PROFIT/LOSS POSITION OF CALL OPTION BUYER/WRITER OF

ARAVINDMILL

Table 3

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SPOT

PRICESTRIKE

PRICE PREMIUM

WHETHER

EXERCISED

BUYERS

GAIN/LOSS

WRITERS

GAIN/LOSS

100.40 85 12.50 YES 537.5 -537.5

100.40 90 8.30 YES 1182.5 -1182.5

100.40 95 4.30 YES 3332.5 -3332.5

100.40 100 2.00 NO -4300 9137.5

PROFIT/LOSS POSITION OF PUT OPTION BUYER/WRITER OFARAVIND MILL

Table 4

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYERS

GAIN/LOSS

WRITERS

GAIN/LOSS

Profit/Loss Graph of the Writer with Strike Price of

Call Option

-4000

-2000

0

2000

4000

6000

1 2 3 4

STRIKE PRICE

WRITERS GAIN/LOSS

Profit and Loss Graph of the Buyer with Strike Price of

Call Option

-6000

-4000

-2000

0

20004000

1 2 3 4STRIKE PRICE

BUYERS GAIN/LOSS

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100.40 80 0.25 NO -537.5 537.5

100.40 85 0.05 NO -967.5 967.5

100.40 90 0.45 NO -2795 2795

100.40 95 1.300 NO -10535 10535

100.40 100 4.900 YES 5697.5 -5697.5

INTERPRETATION:

Profit/Loss graph of the Buyer with Strike Price

Of Put Option

-15000

-10000

-5000

0

5000

10000

1 2 3 4STRIKE PRICE

BUYERS GAIN/LOSS

Profit/Loss Graph of the Writer with Strike

Price of Put Option

-10000

-5000

0

5000

10000

15000

1 2 3 4

STRIKE PRICE

WRITER'S

GAIN/LOSS

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I t is observed f rom the above ment ioned tables that the

strike price is less than the spot price the buyer wil l get profit and

strike price is more than the spot pric

project on derivatives(futures&options)

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