Perception Toward Investment in Derivative Market

Perception Toward Investment In Derivative Market
INRODUCTION
FINANCE
Finance is the lifeblood of any business and it is very vital for its growth and development. It is very essential for the smooth functioning of the business activity function smoothly unless it has got sufficient funds at its disposal for purchase of machines, materials and land and building to house them and to meet day to day expenses to meet several other purposes to run the business. According to the Guthumann and Dougall, Business finance can broadly be defined as the activity concerned with planning, raising, controlling, administering of the funds used in the business. Finance is classified into two classes; Public finance Private finance Public finance: It deals with the requirements, receipts and disbursements of funds in the government institutions like states, local self-government
Private finance: It is concerned with requirements, receipts and disbursement of funds in case of an individual, a profit seeking business organization and a non-profit organization.
ST.GEORGE COLLEGE OF MANAGEMENT AND SCIENCE
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The main reasons a business needs finance are to:

Start a business:-Depending on the type of business, it will need to finance the purchase of assets, materials and employing people. There will also need to be money to cover the running costs. It may be some time before the business generates enough cash from sales to pay for these costs. Link to cash flow forecasting. Finance expansions to production capacity:-As a business grows, it needs higher capacity and new technology to cut unit costs and keep up with competitors. New technology can be relatively expensive to the business and is seen as a long term investment, because the costs will outweigh the money saved or generated for a considerable period of time. And remember new technology is not just dealing with computer systems, but also new machinery and tools to perform processes quicker, more efficiently and with greater quality. To develop and market new products:-In fast moving markets, where competitors are constantly updating their products, a business needs to spend money on developing and marketing new products. To enter new markets:-When a business seeks to expand it may look to sell their products into new markets. These can be new geographical areas to sell to (e.g. export markets) or new types of customers. This costs money in terms of research and marketing e.g. advertising campaigns and setting up retail outlets.
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Take-over/ Acquisition:-When a business buys another business, it will need to find money to pay for the acquisition (acquisitions involve significant investment). This money will be used to pay owners of the business which is being bought. Moving to new premises:-Finance is needed to pay for simple expenses such as the cost of renting of removal vans, through to relocation packages for employees and the installation of machinery. To pay for the day to day running of business:-A business has many calls on its cash on a day to day basis, from paying a supplier for raw materials, paying the wages through to buying a new printer cartridge. FIANANCIAL MARKETS
Generally speaking, there is no specific place or location to indicate a financial market. Wherever a financial transaction takes place, it is deemed to have taken place in the financial market. Hence financial markets are pervasive throughout the economic system. For instance, issue of equity share, granting of loan by term landing institutions, deposits of money into bank, purchase of debentures, sale of shares and so on. However, financial markets can be referred to as those centers and arrangement, which facilitate buying and selling of financial assets, it claims and services. Sometimes, we do find the existence of a specific place or location for financial markets as in the case of stock exchange
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NEW FINANCIAL PRODUCTS AND SERVICE Today, the importance of financial services is gaining momentum all over the world. With the injection of the economic liberation policy into our economy and the opening of the economy to multinationals, the free market concept has assumed much significance. As a result, the clients both corporate and individuals are exposed to the phenomena of volatility and uncertainty and hence they expect the financial service company to innovate new products and services so as to meet their varied requirements. Some of them are briefly discussed below:I) Mutual Funds: A mutual funds refers to a fund raised by a financial service company by pooling the savings of the public. It is invested in a diversified portfolio with a view to spreading and minimizing risk. The fund provides Investment Avenue for small investors who cannot participate in the equity of big companies. Its ensures low risks, steady returns, high liquidity and better capital appreciation in the long run. II) Derivative Security: A derivative security is a security whose Value depends upon the values of other basic variables backing the security. In most cases, these variables are nothing but the prices of traded securities. A derivative security is basically used as risk management tool and it is resorted to cover Ac risks due to price fluctuations by the investments manager. Derivative helps to break the ; risks into various components such as credit risk, interest rates risk, exchange rates risk and so on. It enables the various risk components to be identified precisely and priced them and even traded them if necessary, In India some forms of derivatives are in operation. Example: Forwards in forex market.
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INTRODUCTION TO DERIVATIVES The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by lockingin asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk.
A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty.
On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth, although favourable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be futurestype contract, which would enable both parties to eliminate the price risk.
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In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the to-arrive contract that permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price charges. These were eventually standardized, and in 1925 the first futures clearing house came into existence.
Today derivatives contracts exist on variety of commodities such as corn, pepper, cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc.
THE NEED OF DERIVATIVES MARKET: The derivatives market performs a number of economic functions: 1. They help in transferring risks from risk adverse people to risk oriented People 2. They help in the discovery of future as well as current prices 3. They catalyze entrepreneurial activity 4. They increase the volume traded in markets because of participation of risk adverse people in greater numbers 5. They increase savings and investment in the long run
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DERIVATIVES A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. In our earlier discussion, we saw that wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying in this case.
The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts in commodities all over India. As per this the Forward Markets Commission (FMC) continues to have jurisdiction over commodity futures contracts. However when derivatives trading in securities was introduced in 2001, the term security in the Securities Contracts (Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets.
Derivatives are securities under the SCRA and hence the trading of derivatives is governed by the regulatory framework under the SCRA.
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The Securities Contracts (Regulation) Act, 1956 defines derivative to include A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities
Types Of Derivative Market
Exchange Traded Derivatives
Over the counter Traded Derivatives
BSE
NSE
National Commodity and Derivative Exchange
Index Option
Stock Future Interest
Stock Option
Index Future
Future Rate
The National Stock Exchange of India Limited (NSE) is a Mumbai-based Stock Exchange. It is the second largest stock exchange in India in terms of daily turnover and number of trades, for both equities and derivative trading NSE is mutually owned by a set of leading financial institutions, banks, insurance companies
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and other financial intermediaries in India but its ownership and management operate as separate entities.
The Bombay Stock Exchange (BSE) is the first stock exchange in the country, which obtained permanent recognition (in 1956) from the Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized. It migrated from the open outcry system to an online screen-based order driven trading system in 1995.
Index Option:-A financial derivative that gives the holder the right, but not the obligation, to buy or sell a basket of stocks, such as the S&P 500, at an agreed-upon price and before a certain date. An index option is similar to other options contracts, the difference being the underlying instruments are indexes. Stock Option:-A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date. Index Futures:-A futures contract on a stock or financial index. For each index there may be a different multiple for determining the price of the futures contract. Future Interest Rate:-A futures contract with an underlying instrument that pays interest. An interest rate future is a contract between the buyer and seller agreeing to the future delivery of any interest-bearing asset. The interest rate future allows the buyer and seller to lock in the price of the interest-bearing Asset for a future date.
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TYPES OF DERIVATIVES
Derivatives Future
FORWARD CONTRACTS
Option
Forward
Swaps
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 n o r m a l l y traded outside the exchanges. The salient features of forward contracts are: They are bilateral contracts and hence exposed to counterparty risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged.
ST.GEORGE COLLEGE OF MANAGEMENT AND SCIENCE Page 10
FUTURE CONTRACT In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date. A futures contract gives the holder the right and the obligation to buy or sell, which differs from an options contract, which gives the buyer the right, but not the obligation, and the option writer (seller) the obligation, but not the right. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing out the futures position and its contract obligations. Futures contracts are exchange traded derivatives. The exchange acts as counterparty on all contracts, sets margin requirements, etc.
BASIC FEATURES OF FUTURE CONTRACT 1. Standardization:
Futures contracts ensure their liquidity by being highly standardized, usually by specifying: The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. The type of settlement, either cash settlement or physical settlement.
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The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc. The currency in which the futures contract is quoted. The grade of the deliverable. In case of bonds, this specifies which bonds can be delivered. In case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. The delivery month. The last trading date. Other details such as the tick, the minimum permissible price fluctuation. 2. Margin: Although the value of a contract at time of trading should be zero, its price constantly fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange, who always acts as counterparty. To minimize this risk, the exchange demands that contract owners post a form of collateral, commonly known as Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as determined by historical price changes, which is not likely to be exceeded on a usual day's trading. It may be 5% or 10% of total contract price. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the
exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the "settlement" or markto-market price of the contract. To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will debit his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid. 3. Settlement Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract: Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. A futures contract might also opt to settle against an index based on trade in a related spot market.
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Expiry: is the time when the final prices of the future are determined. For many equity index and interest rate futures contracts, this happens on the Last Thursday of certain trading month. On this day the t+2 futures contract becomes the t forward contract.
In the case where the forward price is higher:
1. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. 2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed forward price. 3. He then repays the lender the borrowed amount plus interest. 4. The difference between the two amounts is the arbitrage profit.
In the case where the forward price is lower:
1. The arbitrageur buys the futures contract and sells the underlying today (on the spot market); he invests the proceeds. 2. On the delivery date, he cashes in the matured investment, which has appreciated at the risk free rate. 3. He then receives the underlying and pays the agreed forward price using the matured investment. [If he was short the underlying, he returns it now.] 4. The difference between the two amounts is the arbitrage profit.
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DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS

FEATURES Operational Mechanism FORWARD CONTRACT FUTURE CONTRACT
Traded directly between two Traded on the exchanges. parties (not traded on the exchanges).
Contract Specifications Counter-party risk
Differ from trade to trade.
Contracts are standardized contracts.
Exists.
Exists. However, assumed by the clearing corp., which becomes the counter party to all the trades or unconditionally
guarantees their settlement.
Liquidation Profile
Low, as contracts are tailor High,
as
contracts
are
standardized
made contracts catering to exchange traded contracts. the needs of the needs of the parties.
Price discovery
Not efficient, as markets are Efficient, as markets are centralized and scattered. all buyers and sellers come to a common platform to discover the price.
Examples
Currency market in India.
Commodities, futures, Index Futures and Individual stock Futures in India.
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OPTIONS A derivative transaction that gives the option holder the right but not the obligation to buy or sell the underlying asset at a price, called the strike price, during a period or on a specific date in exchange for payment of a premium is known as option. Underlying asset refers to any asset that is traded. The price at which the underlying is traded is called the strike price. There are two types of options i.e., CALL OPTION AND PUT OPTION. I. CALL OPTION: A contract that gives its owner the right but not the obligation to buy an underlying asset-stock or any financial asset, at a specified price on or before a specified date is known as a Call option. The owner makes a profit provided he sells at a higher current price and buys at a lower future price. II. PUT OPTION: A contract that gives its owner the right but not the obligation to sell an underlying asset-stock or any financial asset, at a specified price on or before a specified date is known as a Put option. The owner makes a profit provided he buys at a lower current price and sells at a higher future price. Hence, no option will be exercised if the future price does not increase. Put and calls are almost always written on equities, although occasionally preference shares, bonds and warrants become the subject of options.
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4. SWAPS Swaps are transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. They can be regarded as portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a SWAP. In case of swap, only the payment flows are exchanged and not the principle amount. The two commonly used swaps are: I.INTEREST RATE SWAPS: Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed rate interest payments to a party in exchange for his variable rate interest payments. The fixed rate payer takes a short position in the forward contract whereas the floating rate payer takes a long position in the forward contract.
II.CURRENCY SWAPS: Currency swaps is an arrangement in which both the principle amount and the interest on loan in one currency are swapped for the principle and the interest payments on loan in another currency. The parties to the swap contract of currency generally hail from two different countries. This arrangement allows the counter parties to borrow easily and cheaply in their home currencies. Under a currency swap, cash flows to be exchanged are determined at the spot rate at a time when swap is done. Such cash flows are supposed to remain unaffected by subsequent changes in the exchange rates.
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PARTICIPANTS IN DERIVATIVE CONTRACTS: HEDGERS: They are in the position where they face risk associated with the price of an asset. They use derivatives to reduce or eliminate risk. For example, a farmer may use futures or options to establish the price for his crop long before he harvests it. Various factors affect the supply and demand for that crop, causing prices to rise and fall over the growing season. The farmer can watch prices discovered in trading at the commodity exchange and when they reflect the price he wants, sell futures contracts to assure him of a fixed price for his crop. Hedging usually presupposes that the spot and futures markets of any commodity move in the same direction and by almost the same magnitude. But this relationship depends on the amount of carrying or storage costs till the maturity month of the futures contract. Normally when the stocks are abundant, the futures price will exceed the spot price by the cost of storage till the maturity month of the futures contract. This is called as Contango. SPECULATORS: Speculators wish to bet on the futures movement in the price of an asset. They use derivatives to get extra leverage. A speculator will buy and sell in anticipation of future price movements, but has no desire to actually own the physical commodity. ARBITRAGEURS: They are in the business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the future 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.
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TRADING ASPECTS IN DERIVATIVES: Derivative contracts can be traded either in an exchange or OTC. 1. EXCHANGE: Exchange is a central marketplace for buyers and sellers. The contracts are standardized to ensure that the prices mean the same to everyone in the market. The prices in an exchange are determined in the form of a continuous auction by the members who are acting on behalf of their clients. 2. OVER-THE-COUNTER: Over-the-Counter is an alternative-trading platform linked to a network of dealers who do not physically meet but instead communicate through a network of phones and computers. Trades are usually transacted between financial institutions that can also act as market makers for the commonly traded instruments. All transactions over the telephone are recorded, in case of future disputes that may arise. The buyer and seller to suit their requirements can customize the contracts traded in these markets. Hence, terms of the contract need not Bespecified as in the case of an exchange.
There are 3 types of OTC Markets.
Traditional Dealer Market: In this, the dealers act as market makers by maintaining bid and offer quotes. The dealers communicate the quotes and the execution prices are negotiated upon over the telephone and sometimes through an electronic bulletin board. It is a bilateral trading as only the two ends of a phone observe prices at a given point of time.
Electronic Broking Market: This is similar to the electronic trading platforms used by exchanges. These are considered to be Over-theCounter since the contracts are less standardized. The EBM neither sets the contract design not clears the derivative transactions.
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Proprietary Trading Platform Markets: This is a combination of the first two in which a dealer sets up his own proprietary electronic trading platform. The dealer quotes the Bids and Asks exclusively for the market participants to observe his quotes only and not each others.
BENEFITS OF DERIVATIVES
Derivative markets help investors in many different ways: RISK MANAGEMENT: Futures and options contract can be used for altering the risk of investing in spot market. For instance, consider an investor who owns an asset. He will always be worried that the price may fall before he can sell the asset. He can protect himself by selling a futures contract, or by buying a Put option. If the spot price falls, the short hedgers will gain in the futures market, as you will see later. This will help offset their losses in the spot market. PRICE DISCOVERY: Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices are believed to contain information about future spot prices and help in disseminating such information. As we have seen, futures markets provide a low cost trading mechanism. Thus information pertaining to supply and demand easily percolates into such markets. Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. OPERATIONAL ADVANTAGES:- As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they offer greater liquidity. Large spot transactions can often lead to significant price changes. However, futures markets tend to be more liquid than spot markets, because herein you can take large
positions by depositing relatively small margins. Consequently, a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to a transaction of the same magnitude in the spot market. Finally, it is easier to take a short position in derivatives markets than it is to sell short in spot markets. MARKET EFFICIENCY: The availability of derivatives makes markets more efficient; spot, futures and options markets are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is possible to exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help to ensure that prices reflect true values. EASE OF SPECULATION: Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions. Also, the amount of capital required to take a comparable position is less in this case. This is important because facilitation of speculation is critical for ensuring free and fair markets. Speculators always take calculated risks.
The derivative market performs a number of economic functions. The prices of derivatives converge with the prices of the underlying at the expiration of derivative contract. Thus derivatives help in discovery of future as well as current prices. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity.
DEVELOPMENT OF DERIVATIVES MARKET IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary preconditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trad ing of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk containment in derivatives market in India. The report, which was submitted in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and real time monitoring requirements. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework were developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect
In may 2001 SEBI permitted the derivative segment of two stock exchanges NSE and BSE and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with SEBI approved trading in index futures contract based on S&P CNX Nifty and BSE-30(sense) index this was followed by approval for trading in options based on these two indexes and options on individual securities TURNOVER OF CASH MARKET AFTER DERIVATIVES INTRODUCED: YEAR 2009-10(up to 31stAug.) 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 2003-2004 2002-2003 2001-2002 BSE Turnover(Rs. Cr,)(F.Y. Jan-Dec) 587901 1586441.49 1160248.63 701709.67 547922.44 365613.61 409372.67 332909.01 475278.79 NSE Turnover (Rs. Cr.)(F.Y. Apr-Mar) 1922783 2,752,023 3,551,038 1,945,285 1,569,556 1,140,071 1,099,535 617,989 513,167
TURNOVER OF CASH MARKET BEFORE DERIVATIVES INTRODUCED: YEAR 2000-2001 1999-2000 1998-1999 1997-1998 1996-1997 1995-1996 1994-1995 BSE Turnover(Rs. Cr,)(F.Y. Jan-Dec) 998655.28 527960.16 NSE Turnover (Rs. Cr.)(F.Y. Apr-Mar) 1,339,510 839,052 414,474 370,193 294,503 67,287 1,805
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The Bank of International Settlements measures the size and the growth of the derivative market. According to BIS, the derivative market growth in the over the counter derivative market witnessed a slump in the second half of 2006. Although the credit derivative market grew at a rapid pace, such growth was made offset by a slump somewhere else. The notional amount of the Credit Default Swap witnessed a growth of 42%. Credit derivatives grew by 54%. The single name contracts grew by 36%. The interest derivatives grew by 11%. The OTC foreign exchange derivatives slowed by 5%, the OTC equity derivatives slowed by 10%. Commodity derivatives also experienced crawling growth pattern.
Business Growth in Derivatives segment
Year Index Futures Stock Futures Index Options Stock Options
No. of contracts
Turnover No. of (Rs. cr.) contracts
Turnover No. of (Rs. cr.) contracts
Notional Turnover (Rs. cr.)
No. of contracts
Notional Turnover (Rs. cr.)
2009-10 2008-09 2007-08 2006-07
86651879 210428103 156598579 81487424
1715349.01 3570111.40 3820667.27 2539574
59128122 221577980 203587952 104955401
2257189.61 3479642.12 7548563.23 3830967
132889753 212088444 55366038 25157438
2789950.24 3731501.84 1362110.88 791906
4731748
187261.34
13295970 229226.81 9460631 359136.55 5283310 193795
2005-06 2004-05 2003-04 2002-03 2001-02
58537886 21635449 17191668 2126763 1025588
1513755 772147 554446 43952 21483
80905493 47043066 32368842 10676843 1957856
2791697 1484056 1305939 286533 51515
12935116 3293558 1732414 442241 175900
338469 121943 52816 9246 3765
5240776 5045112 5583071 3523062 1037529
180253 168836 217207 100131 25163
2000-01
90580
2365
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Research Design
Meaning of research design
According to Green and Tull "A research design is the specification of methods and procedures for acquiring the information needed. It is the over-all operational pattern or framework of the project that stipulates what information is to be collected from which source by what procedures."
Research design can also be defined as the
- plan, structure and
strategy. The plan is the outline of the research scheme on which the researcher is to work. The structure of the research work is a more specific scheme and the strategy suggests how the research will be carried out i.e. methods to be used for the collection and analysis of data. In brief, research design is the blueprint of research. It is the specification of methods and procedures for acquiring the information needed for solving the problem. Questionnaires, forms and samples for investigation are decided while framing research design. Finally, the research design enables the researcher to arrive at certain meaningful conclusions at the end of proposed study.
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STATEMENT OF THE PROBLEM

Any business concerns in the economy needs money in order to run the business successfully, money is available with the general public in the form of savings. The investors invest their savings in various investment avenues in order to get returns. Now a days investors have lost their interest in investing in non-marketable securities due to less rate of returns, but they are much aware of and interest in making investments in marketable securities which gives back higher returns in minimum period of time. But investment in one type of security is very risky, because the investors have to do security analysis. Investors have the other option of investing in portfolios where the investment is made on different types of securities of different companies where again risk and returns are uncertain. Therefore there is confusion prevailing between investors have to do security analysis.
SCOPE OF THE STUDY

The corporate Exposure & Learning Research on A study of Perception towards Derivative Market, helps to know the attitude, awareness, preferences of the investors. Based on this information stock brokers can carry out further research on specific problems. The researchers suggestion through this report may be helpful for stockbrokers to improve their services in stock broking & particularly in derivative market. The services like counselling, fundamental analysis, technical analysis can be improved to attract new investors. This study helps to give value added services & maintain healthy investor relationship.
NEED OF THE STUDY

The study has been done to know the different types of derivatives and also to know the derivative market in India. This study also covers the recent developments in the derivative market taking into account the trading in past years. Through this study I came to know the trading done in derivatives and their use in the stock markets.
TYPE OF RESEARCH
Descriptive is fact finding investigation with adequate interpretation it provides information for formulating more sophisticated studies. Data are collected by filled questionnaire the researcher has no control over variables he can only report the happenings. The research is descriptive in nature the sources of information are both primary and secondary. a well structured questionnaire was prepared for the primary research to collect responses of the target population
OBJECTIVES OF THE STUDY:

1. To study investors attitude towards stock market investment. 2. To study the investors preferences towards Derivative Market. 3. To study the factors influencing for Derivative Investment. 4. To suggest the improvement of services in Derivative Trading.
TITLE OF THE STUDY

A STUDY ON THE PERCEPTION OF INVESTOR TOWARDS DERIVATIVES MARKET
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AREA OF THE STUDY

The area of the study of the topic A STUDY ON THE PERCEPTION OF INVESTOR TOWARDS DERIVATIVES MARKET was conducted in Bangalore city only
DATA COLLECTION METHOD
Both Primary Data and Secondary Data were used for the study. Primary Data: are obtained by a study specifically designed to fulfil the data needs of the problem at hand. Such data are original in character. Primary data for the study were collected through questionnaires. The selection of respondents is made on the basis of simple random method of sampling. The questionnaire is prepared in a structural manner. Also information was collected from personal interview with clients. Secondary Data: are those data which are not originally collected but rather obtained from published or unpublished sources. The Secondary data for study has been collected from various sources: Books Journals Magazines Internet sources Reports
TOOLS USED FOR ANALYSIS

Simple tools like graphs, Ms-Excel and tables have been used.
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SAMPLING METHODOLOGY
Sampling is the process of learning about the population on the basis of a sample drawn from it thus in sampling technique instead of every unit of the universe only a part of the universe is studied and the conclusion are drawn on the basis for the entire universe
Sampling technique The non-probability sampling technique was used to collect the data from the respondent. Convenience sampling is obtained by selecting convenient people. This method is also called the chunk. A chunk refers to the fraction of the population being investigated which is selected neither by probability nor by judgement but by convenience
Sampling Unit The respondent who were asked to fill out the questionnaire in the Bangalore city are the sampling units. These respondents comprise of the person dealing in derivative market. The people have been asked to fill the questionnaire in the open market, in front of the companies and through other sources also.
Sample Size The sample size was restricted to only 30 respondents. Sampling Area The area of the research was held in Bangalore city.
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LIMITATIONS OF THE STUDY

1. Due to time constraint, extensive study is not conducted on the topic. 2. Sampling survey is restricted to only 30 respondents. 3. Sampling survey is restricted to only Bangalore city. 4. Availability of information is limited. 5. Language barrier
CHAPTER SCHEME
1. INTRODUCTION: This chapter covers the introduction to finance, and Introduction to derivative and types of derivatives.
2. RESEARCH DESIGN: This chapter covers the following topicIntroduction, type of research, statement of problem, Scope of the study, topic of the study, objective of the study, area of the study,samplingtools used for analysis, limitation of the study, chapter scheme
3. COMPANY PROFILE: Brief information about the company i.e. into what the business is, When it came into existence, its products.
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4. ANANLYSIS AND INTERPRETATION: This chapter deals in application of statistical tools on the data collected for the project report and is being represented in graphs and tables.
5. FINDINGS
SUGGESTIONS
AND
CONCLUSIONS:-This
chapter gives details on the findings dealt with analysis and interpretation. providing suitable suggestion to the company based on the findings and conclusion stating how a project was dealt with and its suitability to the organization
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Company Profile
Religare is one of the leading integrated financial services institutions of India. The company offers a large and diverse bouquet of services ranging from equities, commodities, insurance broking, to wealth advisory, portfolio management services, personal finance services, Investment banking and institutional broking services. The services are broadly clubbed across three key business verticals- Retail, Wealth management and the Institutional spectrum. Religare Enterprises Limited is the holding company for all its businesses, structured and being operated through various subsidiaries. Religare Enterprises Limited (REL) is a leading emerging markets financial services group anchored in India. In India, we offer a wide array of services including broking, insurance, asset management, lending solutions, investment banking and wealth management. With a network of over 2,200 business centres across 550 plus locations, and more than a million clients, REL enjoys a dominant presence in the Indian financial services space. We have also built an emerging markets Investment Banking business and a multi-boutique global asset management platform to tap the broader opportunities offered by the most promising emerging markets around the world. Our robust experience of doing business in India equips us with the ability to work around the constraints and peculiarities of other emerging markets that are in the middle of similar multi-year growth cycles.
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Religares retail network spreads across the length and breadth of the country with its presence through more than 1,217 locations across more than 392 cities and towns. Having spread itself fairly well across the country and with the promise of not resting on its laurels, it has also aggressively started eyeing global geographies.
Religare Enterprises Limited (REL) is a significant player in the field of Retail, Institutional and Wealth spectrums. It has a diverse and wide base of clientele. REL holds 44% equity in AEGON Religare Life Insurance Company Ltd. Talking about Bennett, Coleman & Co. Ltd. (BCCL) it is a mammoth in the field of media, since it is associated with the Times Group, India's largest media house. The Joint Venture of the three giants (of their respective fields) has given rise to AEGON Religare Life Insurance word that translates as 'to bind together'. This name has been chosen to reflect the integrated nature AEGON Religare Life Insurance Company (ARLI) in India is a joint venture
between AEGON (26%), Religar Enterprises Limited (44%) and Bennett, Coleman & Company (30%). AEGON, with its headquarters in Netherlands, is one of the worlds largest providers of life insurance, pension, long-term savings and investment products. With approximately 28,000 employees, the group serves over 40 million customers in over 20 markets. Aegon was formed in 1983 though the companys history goes back to the 19th century. Religare Enterprises Limited is one of the leading integrated financial services groups in India which offers insurance, asset
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management, broking, consumer finance, investment banking and wealth management solutions to its clients. Bennett, Coleman & Co. Ltd. (BCCL) is part of the mammoth Times Group, is Indias largest media house and is part of this venture through Times Private Treaties arm.
Aegon
Religare has
launched
multiple
products,
but
the iTerm
Plan which is the cheapest term insurance plan available in India, is by far their most attractive offering. It is an online product which can be purchased on the internet by anyone and is very simple to understand thus eliminating the need of agents. 3.2 Our Brand Identity Name Religare is a Latin of the financial services the company offers. The name is intended to unite and bring together the phenomenon of money and wealth to co-exist and serve the interest of individuals and institutions, alike. Symbol The Religare name is paired with the symbol of a four-leaf clover. The four-leaf clover is used to define the rare quality of good fortune that is the aim of every financial plan. It has traditionally been considered good fortune to find a single four leaf clover considering that statistically one may need to search through over 10,000 three-leaf clovers to even find one four leaf clover. Each leaf of the four-leaf clover has a special meaning in the sphere of Religare.
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Mission Providing financial care driven by the core values of diligence and transparency. Vision "To be the leading emerging markets financial services group driven by innovation, delivering superior value for all stakeholders globally"
This vision animates our Three Pillar Strategy that seeks to maximize value from our vast presence in India and to build a financial services franchise that connects the most promising emerging markets globally. Our Three Pillar Strategy
An Integrated Indian Financial Services Platform that leverages the robust Indian growth story, providing solid breadth and depth to the financial services sector, resulting in rapid growth of profit pools.
An Emerging Markets Capital Markets Platform that intermediates the flow of capital into and out of emerging markets based on its global reach and an on-the-ground understanding of how emerging markets function.
A Global Asset Management Platform that brings together niche asset managers with proven track record and capabilities in the alternatives space.
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The first leaf of the clover represents Hope. The aspirations to succeed. The dream of becoming. Of new possibilities. It is the beginning of every step and the foundations on which a person reaches for the stars.
The second leaf of the clover represents Trust. The ability to place ones own faith in another. To have a relationship as partners in a team. To accomplish a given goal with the balance that brings satisfaction to all not in the binding but in the bond that is built.
The third leaf of the clover represents Care. The secret ingredient that is the cement in every relationship. The truth of feeling that underlines sincerity and the triumph of diligence in every aspect. From it springs true warmth of service and the ability to adapt to evolving environments with consideration to all.
The fourth and final leaf of the clover represents Good Fortune. Signifying that rare ability to meld opportunity and planning with circumstance to generate those often looked for remunerative moments of success.
Hope. Trust. Care. Good fortune. All elements perfectly combine in the emblematic and rare, four-leaf clover to visually symbolize the values that bind together and form the core of the Religare vision
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3.5 The Milestone

2005 2004 Mutual fund distribution BSE Membership & Commodities 2004 100+ Branches & 200+ Franchise Locations
2004 2003 2002 2001 1999 Custodial Service Institutional Business Retail Operations Corporate Finance
Portfolio Management Service
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Perception Toward Investment In Derivative Market 3.6 Our Envisaged Group Structure
Client Interface
Retail Spectrum- To cater to a large number of retail clients by offering all products under one roof through the Branch Network and Online mode Equity and Commodity Trading Personal Finance Services Mutual Funds Insurance Saving Products

Personal Credit Personal Loans Loans against Shares Online Investment Portal
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Perception Toward Investment In Derivative Market Institutional Spectrum- To Forge & build strong relationships with Corporate and Institutions Institutional Equity Broking Investment Banking Merchant Banking Transaction Advisory Corporate Finance Wealth Spectrum - To provide customized wealth advisory services to High Net worth Individuals Wealth Advisory Services Portfolio Management Services International Advisory Fund Management Services Priority Equity Client Services Arts Initiative
Religare Service Offering
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MAJOR COMPETITORS IN THE REGION
ICICI DIRECT INDIA INFOLINE SECURITY PVT. LTD. INDIA BULLS KOTAK SECURITIES RELIANCE MONEY SHARE KHAN SECURITIES MOTILAL OSWAL ANAND RATHI SECURITIES
SHAREKHAN SECURITIES :Sharekhan Securities is one of the
leading retail brokerage of Citi Venture which is running successfully since 1922 in the country. Earlier it was the retail broking arm of the Mumbai- based SSKI Group, which has over eight decades of experience in the stock broking business. Sharekhan offers its customers a wide range of equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, investment advice etc.
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ANANDRATHI SECURITIES :Anand Rathi is a leading full service
investment bank founded in 1994 offering a wide
range of
financial services and wealth management solutions to institutions, corporations, high-net worth individuals and families. The firm has rapidly expanded its footprint to over 350 locations across India with international presence in Dubai & New York. Founded by Mr. Anand Rathi and Mr. Pradeep Gupta, the group today employs over 2,500 professionals throughout India and its international offices.
HDFC SECURITIES:HDFC Securities, a trusted financial service
provider promoted by HDFC Bank and JP Morgan Partners and their associates, is a leading stock broking company in the country, serving a diverse customer base of institutional and retail investors.
INDIA BULLS: India bulls Securities Limited (ISL) is the pioneer
in Retail Broking Industry having a pan India presence and providing services to a customer base exceeding half a million. ISL is in the business of providing securities broking and advisory services and is a corporate member of capital market, wholesale debt market and derivative segment of NSE and of the capital market and derivative segment of BSE. ISL is the first and only brokerage house to be assigned the highest rating BQ-1 by CRISIL.
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Joint Venture
AEGON RELIGARE
Religare The largest shareholder in the JV Launched with pan-India multi-channel operation in July 2008 with over 30 branches spread across India Targeting to be one of the strongest life insurance brands with a strong retail network Successfully beginning to build the brand through the much talked about KILB Campaign. Religare Macquaire
Indias 1st Wealth Management JV between Religare and Macquarie Poised to redefine the landscape of wealth management for the HNIs In India ACTIVE Advisory led approach Powered By Religares strong local insights and Macquaries global expertise
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Vistaar Religare
Religare and Vistaar entertainment ventures private limited entered a 74:26 joint venture agreement Vistaar Religare capital advisors limited (VRCAL) formed SEBI approved Film Fund Category First Aims at completing 50 projects in one year Four releases till date including one international releases
Milestone Religare
Religare Venture Capital Limited and Milestone Capital Entered a 50:50 Joint venture agreement Together they will manage a Rs 600 crores health care and education fund to be raised domestically They would manage Milestones current India Build out Fund I with a clear focus on healthcare and education space. Religare along with its affiliates has also committed to contribute Rs 60 Crores to the fund which has an existing corpus of more than Rs.100 Crores.
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About Promoters
AEGON 160 years of experience in the insurance business Ranked 5th largest insurance company in the world on revenues* Present in 20 countries throughout the America, Europe & Asia Track record of finding beneficiaries of policies and settling claims Even in the wake of crisis in the financial world, rated AA# by rating agencies AEGON is an international business, providing life insurance, pensions and other long-term savings and investment products to millions of customers around the world. The company has major operations in the United States, the Netherlands and the United Kingdom as well as other businesses in Asia, the Americas and elsewhere in Europe. AEGON is listed on the stock exchanges of Amsterdam, London, New York and Tokyo. With just over EUR 330 billion in revenue-generating investments at the end of 2008, AEGON companies employ just over 31,000 people worldwide, serving more than 40 million policyholders in over twenty countries across the globe. It holds 26% equity in AEGON Religare.
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RELIGARE A diversified financial services group with a pan-India presence and presence in multiple international locations, Religare Enterprises Limited ("REL") offers a comprehensive suite of customer-focused financial products and services targeted at retail investors, high net worth individuals and corporate and institutional clients. REL, along with its joint venture partners, offers a range of products and services in India, including asset management, life insurance, wealth management, equity and commodity broking, investment banking, lending services, private equity and venture capital. Religare has also ventured into the alternative investments sphere through its holistic arts initiative and film fund. Has launched India's first wealth management joint venture under the brand name 'Religare Macquarie Private Wealth'. REL, through its subsidiaries, has launched India's first holistic arts initiative - with a gallery - as well as the first SEBI approved film fund, which is an initiative towards innovation and spotting new opportunities for creation and maximization of wealth for investors.
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REL operates from seven domestic regional offices, 43 subregional offices, and has a presence in 498* cities and towns controlling 1,837* business locations all over India. To make a mark in the global arena, REL acquired UK-based Hichens, Harrison & Co. in 2008 which was subsequently renamed as Religare Hichens Harrison PLC ("RHH"). Hichens, Harrison & Co. was incorporated in London in the year 1803 and is believed to be one of the oldest firms of stockbrokers in the City of London. Pursuant to expansion of REL's business, the company has grown from largely an equity trading company into a diversified financial services company. With the addition of RHH the REL group now operates out of multiple global locations, other than India, (the UK, the USA, Brazil, South Africa, Dubai and Singapore). It holds 44% equity in AEGON Religare.
Page 46
Bennett, Coleman & Co. Limited Bennett, Coleman & Co. Limited, is the flagship company of The Times Group, which has a heritage of over 150 years and is one of India's leading media groups. It reaches out to 2468 cities and towns all over India. The group owns and manages powerful media brands like The Times of India, The Economic Times, Maharashtra Times, Navbharat Times, Femina, Filmfare, Grazia, Top Gear, Radio Mirchi, Zoom, Times Now, Times Music, Times OOH, Private Treaties and indiatimes.com All of its brands are multinational in outlook, traditional at heart and national in spirit. From the very first edition on November 3, 1838 the mammoth BCCL Group has come a long way. By way of the innovative venture of Times Private Treaties, the BCCL Group holds 30% equity in our company.
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3.9 Awards and Accolades Religare Capital Markets has been adjudged the Most Improved Brokerage in the Last 12 Months by Asia Money Brokers Poll.
Religare Broking TVC (archery creative) won Silver Abby in the Sound and Design craft category at Goafest 2011.
Religare Capital Markets Limited has been awarded the coveted Starmine award for the ''Best Brokerage Research House''.
Religare Commodities Ltd has been awarded the ''The Best Commodity Broker of the year'' at the Bloomberg UTV''s financial Leadership awards.
Religare Enterprises Ltd presented the the Best Retail Marketing Campaign of the Year 2010 at Asia Retail Congress.
Religare Enterprises Ltd received the coveted Master Brand Award for 2010 and Best Marketing Campaign of the year at World Brand Congress 2010.
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Religare Securities Limited was awarded the "Best Broking House with a Global Presence" by Dun and Bradstreet for 2010.
Religare Tax Plan awarded the first runner up for NDTV mutual fund awards in the Equity Tax plan Category.
Religare Capital Markets Ltd was awarded Best Deal in the Health Care Category for Acquisition of stake in Parkway Holdings Ltd by Fortis Health Care Ltd in the HealthCare/ Life Sciences Category.
Religare awarded Greentech HR Excellence Awards, 2010 in 2 categories - Innovation in Recruitment & Technology Excellence in HR.
Mr. Sunil Godhwani, conferred the ''Indian Business Leader of the Year'' award at the Global Indian Business Meeting hosted by Horasis.
Page 49
Table 4.1
TABLE SHOWING THE EDUCATIONAL QUALIFICATION OF INVESTORS
S.No 1 2 3
Education Graduate Post graduate Professional Total
No. of respondent Percentage 11 17 2 30 37 56 7 100
Interpretation From the above table we can conclude that 37% are graduates, 56% of respondent are post graduate and 7% of them are professional degree holder. GRAPH 4.1 GRAPH SHOWING THE EDUCATIONAL QUALIFICATION OF INVESTORS
No. of respondent Percentage 56%
33%
17 10 1 4% Graduate Post graduate 2 Professional 7%
Under graduate
Page 50
Table 4.2
TABLE SHOWING THE ANNUAL INCOME RANGE OF INVESTORS IN DERIVATIVE MARKET
S.No 1
Income range Below Rs 1,50,000 Rs 1,50,000- Rs 3,00,000 Rs 3,00,000- Rs 5,00,000 above Rs 5,00,000 Total
No. of Respondent
Percentage 7
5 30 9 46 14 17 2 30 100
Interpretation
The above table shows that 7% of respondent are having income range below Rs 150000,30% are having income range between Rs 1,50,000-Rs 3,00,000,46% of respondent are having income range of Rs 3,00,000-Rs 5,00,000 and 17% of the respondent are having income range above Rs 5,00,000
Page 51
GRAPH 4.2 GRAPH SHOWING THE ANNUAL INCOME RANGE OF INVESTORS IN DERIVATIVE MARKET
below Rs 1,50,000 Rs3,00,000-Rs5,00,000
Rs1,50,000-Rs3,00,000 above Rs5,00,000
17%
7%
30%
46%
Page 52
Table 4.3
TABLE SHOWING THE INVESTMENT TERM PREFERRED BY INVESTOR
S.No Term
No. Of Respondent
Percentage
1 2 3
Long Term Investor Short Term Investor Daily Trader Total
10 15 5 30
34 50 16 100
Interpretation
The above table shows that 34% of the respondents are long term investor, 50% of the respondents are short term investor and 16% of the respondents are daily trader.
Page 53
GRAPH 4.3
GRAPH SHOWING THE INVESTMENT TERM PREFERRED BY INVESTOR
No. Of Respondent
Percentage
50%
34% 15 10 5 16%
Long Term Investor
Short Term Investor
Daily Trader
Page 54
Table 4.4
TABLE SHOWING PERCENTAGE OF THE MONTHLY HOUSEHOLD INCOME AVAILABLE FOR INVESTMENT
S.No 1 2 3 4 5
Investment Between 5% to 10% Between 11% to 15% Between 16% to 20% Between 21% to 25% More than 25% Total
No. of Percentage Respondent 8 12 6 4 0 30 27 40 20 13 0 100
Interpretation
The above table shows that 27% of respondent provide between 5-10% of their income for investment, 40% of respondent provide between 11-15% of their income for investment, 20% of the respondent provide between16-20% of their income for investment and 13% of the investment provide between 21-25% of income for investment.
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GRAPH 4.4
GRAPH SHOWING PERCENTAGE OF THE MONTHLY HOUSEHOLD INCOME AVAILABLE FOR INVESTMENT
Between 5% to 10% Between 21% to 25%
Between 11% to 15% More than 25%
Between 16% to 20%
13% 20%
27%
40%
Page 56
Table 4.5
TABLE SHOWING THE REASON FOR NOT INVESTING IN DERIVATIVE MARKET S.No Reason No. of respondent 1 2 3 4 Lack of knowledge Increase speculation Risky & highly leveraged Counter party risk Total 15 6 8 1 30 50 20 26 4 100 Percentage
Interpretation
The above table shows that 50% of the respondent do not invest in derivative market because of lack of knowledge and understanding,20% of respondent do not invest because of increase speculation,26% of the respondent do not invest because of risk and high leverage and 4% of respondent because of counter party risk.
Page 57
GRAPH 4.5 GRAPH SHOWING THE REASON FOR NOT INVESTING IN DERIVATIVE MARKET
No.of Responant
Percentage
50%
26% 15 6 20% 8 1 Lack of knowledge & understanding Increase speculation Risky & highly leveraged 4%
Counter party risk
Page 58
Table 4.6
TABLE SHOWING PERCENTAGE OF INVESTMENT ALLOCATED FOR DERIVATIVES
S.No
Allocated for derivatives
No.Of Respondent 16 12 2 0 30
Percentage
1 2 3 4
Less than 20% 20%-40% 40%-60% Above 60% Total
53 40 7 0 100
Interpretation
The above table shows that 53% of respondent allocate less than 20 percentage of their investment for derivative, 40% of the respondent allocate 20-40% of their investment and 7% of the respondent allocate 40-60% of their investment for derivatives.
Page 59
GRAPH 4.6 GRAPH SHOWING PERCENTAGE OF INVESTMENT ALLOCATED FOR DERIVATIVES

Less than 20% 20%-40% 40%-60% Above 60%
7%
40%
53%
Page 60
Table 4.7
TABLE SHOWING INSTRUMENT INVESTORS TRADE IN DERIVATIVES S.No 1 2 Instruments Futures Options Total No.Of Result 18 12 30 Percentage 60 40 100
Interpretation
The above table shows that 40% of the respondent trade in option derivative and 60% of them trade in future derivatives.
GRAPH 4.7 GRAPH SHOWING INSTRUMENT INVESTORS TRADE IN DERIVATIVES

Futures Options
40%
60%
Page 61
Table 4.8
TABLE SHOWING THE FACTOR INFLUENCING INVESTORS FOR TRADING IN DERIVATIVE MARKET
S.No
Factors for trading in derivative
No.Of Respondent
Percentage
Technical Information
2 3 4
Market Information Individual Analysis All of the above Total
8 6 15 30
27 20 50 100
Interpretation
The above table shows that 3% of respondent invest in derivative market using technical information, 27% of respondent using market information, 20 % of respondent by individual analysis of market and 50% of respondent using all the above factors.
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GRAPH 4.8 GRAPH SHOWING THE FACTOR INFLUENCING INVESTORS FOR TRADING IN DERIVATIVE MARKET
No.Of Respondent Percentage
50%
27% 20% 8 1 3% Market Information Individual Analysis All of the above 6 15
Technical Information
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Table 4.9
TABLE SHOWING THE EXPECTATION OF INVESTORS IN OPTIONS
S.No
Expectation
No. Of Respondent
Percentage
1 2 3 4
Grow very fast Grow moderately Not grow much Cant say anything Total
5 18 2 5 30
17 60 6 17 100
Interpretation
The above table shows that 17% of the respondents expect option will grow very fast, 60% of the respondents predict that it will grow moderately, 6% of the respondents expect that option will not grow much and 17% of respondents cannot say anything about option.
Page 64
GRAPH 4.9 GRAPH SHOWING THE EXPECTATION OF INVESTORS IN OPTIONS

60%
18 17% 5 2 Grow modearately 5 6% Cant say anything 17%
Grow very fast
Not grow much
Page 65
Table 4.10
TABLE SHOWING THE RISK INVESTOR PERCEIVE WHILE INVESTING IN THE STOCK MARKET S.No 1 2 3 4 Risk in stock market Uncertainty of returns Slump in stock market Fear of windup of company Others Total No. of Respondent 23 5 2 0 30 Percentage 77 16 7 0 100
Interpretation
From the above graph we can say that 77% of respondent are having the risk of uncertainty of returns, 16% of respondent are having risk of slump in stock market and 7% of respondent are having fear of winding up of the company. GRAPH 4.10 GRAPH SHOWING THE RISK INVESTOR PERCEIVE WHILE INVESTING IN THE STOCK MARKET
No.of Respondent Percentage
77%
23 5 Uncertainity of returns 16% 2
7%
Slump in stock market
Fear of windup of company
Others
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Table 4.11
TABLE SHOWING THE MOST FAVORED FACTORS BY INVESTORS IN DERIVATIVE MARKET
S.No
Factors Favored
No. Of Respondent
Percentage
1 2 3
Stock index futures Stock index options Futures on individual stocks
15 2 10 3 30
50 7 33
Options on individual stocks Total
10
100
Interpretation
The above table shows that 50% of the respondent favors stock index futures, 7% of respondent favor stock index option, 33% of respondent favor futures on individual stocks and 10% of the respondent favor options on individual stocks.
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GRAPH 4.11 GRAPH SHOWING THE MOST FAVORED FACTORS BY INVESTORS IN DERIVATIVE MARKET
50%
33%
15 10 2 7% Futures on individual stocks 3 10%
Stock index futures Stock index options
Options on individual stocks
Page 68
Table 4.12
TABLE SHOWING STRATEGIES USED BY INVESTORS IN A BEARISH MARKET
S.No 1 2 3 4
Strategies Short futures Short Call Short Index Futures Short Index Call Total
No. of respondent 15 5 10 0 30
Percentage 50 17 33 0 100
Interpretation
The above table shows that 50% of the respondent used short future strategy in a bearish market, 17% of the respondents prefer short call strategy in a bearish market and remaining 33% of the respondents prefer short index future strategy in a bearish market.
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GRAPH 4.12 GRAPH SHOWING STRATEGIES USED BY INVESTORS IN A BEARISH MARKET
No. of respondent
Percentage
50%
33% 15 17% 5 0 Short futures Short Call Short Index Futures 0% 10
Short Index Call
Page 70
Table 4.13
TABLE SHOWING THE PURPOSE OF INVESTING IN DERIVATIVE MARKET
S.No
Purpose of investment
No. Of Respondent
Percentage
1 2 3 4
Hedge their fund Risk Control More Stable Direct investment without buying & holding assets Total
10 9 6 5
33 30 20 17
30
100
Interpretation
The above table shows that 33% of respondent invest in derivative to hedge their fund, 30% invest for risk control, 20% invest because it is more stable and remaining 17% prefer because of direct investment without buying and holding assets.
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GRAPH 4.13 GRAPH SHOWING THE PURPOSE OF INVESTING IN DERIVATIVE MARKET
No. of Respondent
Percentage
33% 30%
20% 17% 10 9 6 5
Hedge their fund
Risk control
More stable
Direct investment without buying & holding assets
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Table 4.14
TABLE SHOWING THE PARTICIPATION OF INVESTOR IN DERIVATIVE MARKET
S.No 1 2 3 4
Participation as Investor Speculator Broker/Dealer Hedger Total
No. of Respondent 17 2 8 3 30
Interpretation
From the above table we can say that 56% of respondent invest in derivative market as an investor, 7% of the respondent participate as a speculator, 27% of the respondent participate as a broker/dealer and remaining 10% of the respondent participate as an hedger.
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GRAPH 4.14 GRAPH SHOWING THE PARTICIPATION OF INVESTOR IN DERIVATIVE MARKET

No. of Respondent Percentage
56%
27% 17 8 2 Investor 7% Broker/Dealer 3 10%
Speculator
Hedger
Page 74
Table 4.15
TABLE SHOWING THE SOURCE OF ADVICE INVESTOR TAKE BEFORE INVESTING IN DERIVATIVE MARKET
S.No 1 2 3 4
Source of advice Brokerage houses Research analyst Websites News Networks Total
No. of respondent 5 21 1 3 30
Interpretation
The above table shows that 17% of respondent get advice on derivative market from brokerage houses, 70% of respondent get advice from research analyst, 3% of respondent get advice from websites and 10% of respondent from news networks.
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GRAPH 4.15 GRAPH SHOWING THE SOURCE OF ADVICE INVESTOR TAKE BEFORE INVESTING IN DERIVATIVE MARKET
No. of Respondent
Percentage
70%
21 17% 1 Brokerage houses Research analyst 3% 3 10%
Websites
News Networks
Page 76
Table 4.16
TABLE SHOWING THE PARTICIPATION OF INVESTOR IN DERIVATIVE MARKET S.No 1 2 3 4 5 Participate in Stock index futures Stock index Options Future on individual stock Currency futures Options on individual stock Total No. of respondent 15 2 8 2 3 30 Percentage 50 7 26 7 10 100
Interpretation
The above table shows that 50% of the investor participate in stock index futures,7% of the investor as stock index options,26% of the respondent participate in future on individual stock,7% of the respondent participate in currency futures and 10% of the respondent participate in option on individual stock.
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GRAPH 4.16 GRAPH SHOWING THE PARTICIPATION OF INVESTOR IN DERIVATIVE MARKET
No. of Respondent
Percentage
50%
26% 15 8 2 Stock index futures 7% Future on individual stock 2 7% 3 10%
Stock index Options
Currency futures
Options on individual stock
Page 78
Table 4.17
TABLE SHOWING THE CONTRACT MATURITY PERIOD FOR TRADING IN DERIVATIVE MARKET
S.No
Maturity Period
No. of Respondent
Percentage
1 2 3 4 5 6
1 Month 2 Month 3 Month 6 Month 9 Month 12 Month Total
0 5 6 9 2 8 30
0 17 20 30 7 26 100
Interpretation
From the above we can say that 17% of the respondent prefer maturity period of 2 month, 20% of the investor prefer maturity period of 3 month, 30% of the respondent prefer maturity period of 6 month, 7% of the respondent prefer maturity period of 9 month and 26% of the respondent prefer maturity period of 12 month.
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GRAPH 4.17 GRAPH SHOWING THE CONTRACT MATURITY PERIOD FOR TRADING IN DERIVATIVE MARKET
No. of Respondant Percentage
30% 26%
20% 17% 9 5 0 0 2 Month 3 Month 6 Month 9 Month 12 Month 6 2 1 Month 7% 8
Page 80
Table 4.18
TABLE SHOWING THE OVERALL APPROACH OF INVESTOR FOR ACHIEVING HIS GOAL No. of Respondent 3 13 9 5 30
S.No 1 2 3 4
Approaches Relative level of stability in overall investment portfolio increasing investment value while minimizing potential for loss of principal Investment growth with moderate high levels of risk Maximum long term returns with high risk Total
Percentage 10 43 30 17 100
Interpretation
The above table shows that 10% of the respondent approach relative level of stability in overall portfolio investment,43% of respondent approach increasing investment value while minimizing potential for loss of principal,30% of the respondent approach investment growth with moderate high level of risk and the remaining 17% of respondent approach maximum long term returns with high risk.
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GRAPH 4.18 GRAPH SHOWING THE OVERALL APPROACH OF INVESTOR FOR ACHIEVING HIS GOAL
NO. of Respondent Percentage
43%
30%
13 9 3 10% 5
17%
Relative level of increasing Investment growth Maximum long term stability in overall investment value with moderate high returns with high investment portfolio while minimizing levels of risk risk potential for loss of principal
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Table 4.19
TABLE SHOWING THE RESULT OF INVESTOR ON INVESTMENT S.No 1 2 3 Result of investment Great results Moderate but acceptable Disappointed Total No. of respondent 11 14 5 30 Percentage 37 46 17 100
Interpretation
The above table shows that 36% of the respondent got great result on investment, 47% of the respondent got moderate but acceptable return on investment and 17% of the respondent are disappointed on the return of their investment. GRAPH 4.19 GRAPH SHOWING THE RESULT OF INVESTOR ON INVESTMENT
Great results Moderate but acceptable Disappointed
17% 36%
47%
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Table 4.20
TABLE SHOWING THE OPINION OF INVESTOR ON NIFTY AND SENSEX BY MAY 2012 S.NO 1 2 3 4 Investors Opinion Less than 10% 10%-30% 30%-50% Above 50% Total No. of Respondent 12 8 7 3 30 Percentage 40 27 23 10 100
Interpretation
The above table shows that 40% of the respondents predict that nifty and sensex will grow by less than 10%, 27% of the respondents predict that it will grow by 10-30%, 23% of the respondent predict it will grow between 30-50% and 10% of the respondent predict that it will grow above 50%. GRAPH 4.20 GRAPH SHOWING THE OPINION OF INVESTOR ON NIFTY AND SENSEX BY MAY 2012
Less than 10% 10%-30% 30%-50% Above 50%
10% 23% 40%
27%
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FINDINGS & CONCLUSION A study was conducted on the topic Perception toward investment in derivative market in Bangalore city and the major findings are as follows Regarding the profile of investors perception in derivative market majority of the respondent are postgraduate with annual income range between Rs 3,00,000-Rs 5,00,000 Most of the respondent are short term investor and could invest between 11%-15% on monthly household income The percentage of total investment allocated for derivatives is less than 20% and mostly traded instrument is future The factor used in trading derivatives is technical information market information and individual analysis The expectation of investors in trading options in India is moderate growth with uncertainty of return and stock index future is the most favoured investment in derivative Most of the respondent strategy used in bearish market is short future to hedge their fund and would like to participate as investor in derivative market The investor would like to get advices before investing in derivative market from research analyst and would like to participate in stock index future with a contract maturity period of 6 month The overall approach of investors to invest is to minimise potentiality of loss with moderate result in derivative market The focus of investor by May 2012 on nifty and sensex from current level is less than 40%
5.2 RECOMMENDATIONS & SUGGESTIONS Commodity derivatives have a crucial role to play in the price risk management process for the commodities in which it deals. And it can be extremely beneficial in agriculture-dominated economy, like India, as the commodity market also involves agricultural produce. Derivatives like forwards, futures, options, swaps etc are extensively used in the country. However, the commodity derivatives have been utilized in a very limited scale. Only forwards and futures trading are permitted in certain commodity items. RBI should play a greater role in supporting derivatives. Derivatives market should be developed in order to keep it at par with other derivative markets in the world. Speculation should be discouraged. There must be more derivative instruments aimed at individual investors. SEBI should conduct seminars regarding the use of derivatives to educate individual investors.
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After study it is clear that Derivative influence our Indian Economy up to much extent. So, SEBI should take necessary steps for improvement in Derivative Market so that more investors can invest in Derivative market. There is a need of more innovation in Derivative Market because in today scenario even educated people also fear for investing in Derivative Market Because of high risk involved in Derivatives.
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ST.GEORGE COLLEGE OF MANAGEMENT AND SCIENCE