EXECUTIVE SUMMARY

Markets have always played a central role in the economic development and ensuring orderly conduct of markets had been a constant endeavor various theories have provided an essential back drop to analyze and understand market behavior. In the case of financial markets, the prominent ones are. Efficient market hypothesis agency theory and information theory. Whenever the assumptions of these theories are not met fully there begins a case for regulation. The key concerns of financial market regulators are market integrity systemic safety and customer protection. These three concerns are inter wined and inter related. s it is evident from the growth pattern of the international markets that develop countries have maintained their position, while the emerging markets are also coming forward with full strength. few

prominent emerging trends are the investors are becoming more market savvy information and communication technology is revolutionizing the way transactions are carried out world is becoming a financial village

emergence of trans!national business demands better coordination among regulators etc. In the future Indian markets are e"pected to become more vibrant and attain a leading position in the global financial system. With increasing role of information and communication technology information asymmetry is e"pected to reduce at an increasing rate organized e"changes are likely to become one!stop financial shopping malls. The committee has noted recent introduction of new products based on its interim recommendations and it has further recommended widening the range of new products. It is e"pected that these new products, namely mini contracts on e#uity inde", options contract with longer life$tenure creation of volatility inde" and futures and options contracts on it, options on futures, creation of bond inde"es and futures and options contracts on them, e"change traded currency %foreign e"change& futures and options contracts, e"change 'traded products involving different strategies, e"change traded credit derivatives over the count or product and e"change traded third party products will be able to meet the needs of various classes of investors. Each class of these products needs to be carefully designed and risk management specified by the e"changed with due approval by (E)I. *inally the committee feels that while the small individual investors could best protect their investments by hedging their positions in options market, they should carefully consider taking positions on futures markets because mark!to!market losses resulting in margin calls could wipe out small individual investors.

INTRODUCTION: DERIVATIVES:
,erivative is a financial instrument that derives its value from an underlying asset. ,erivative 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 e"changes to buy or sell an asset in the future. These assets can be anything ranging from share, inde", bond, rupee dollar e"change rate, sugar crude, soya bean, cotton, coffee etc. ,erivative on its own does not have any value. It is considered important because of its underlying asset. ,erivatives can of different types like forwards, futures, option, swaps, collars, caps, floor etc. The most popular derivative instruments are futures and options.

Examplevery simple e"ample of derivative is curd, which is derivative of milk. The price of curd depends upon the price of milk, which in turn depends upon the demand, and supply of milk. .et/s see it in this way, the price of the 0eliance Triple 1ption 2onvertible debentures 30eliance T12,4 varies upon the price of the 0eliance (hares, similarly the price of TE.21 Warrants depends upon the price of the TE.21 shares.

The merican ,epository 0eceipts 3 ,04 and 6lobal ,epository 0eceipts 36,04 1f I2I2I, (atyam and Infosys Traded on stock e"changes in 7 (, 8 of 9( , draw their values from the prices of shares traded in India. (imilarly in mutual funds the prices of mutual fund units depends upon the prices of portfolio of securities under that scheme.

History of Deri ati es

The ,erivatives market has e"isted from centuries as need for both users and producers of natural resources to hedge against price fluctuations in underlying commodities. lthough trading in agriculture and other commodities has been the driving force behind the development of ,erivatives market in India, the demand for products based on financial instruments ' such as bond, currencies, stocks and stock indices had outstripped the commodities markets. India has been trading in derivatives market in (ilver, spices, gold, coffee, cotton and in oil markets for decade/s gray market. Trading in derivatives market was legal before Morar:i ,esai/s 6overnment had banned forward contracts. ,erivatives on stocks were traded in the form of Te:i and mandi in unorganized markets. 0ecently futures contracts various commodities were allowed to be on various e"changes. *or E"ample 2otton and 1il futures were traded in Mumbai, (oya bean futures in )hopal, ;epper futures in <ochi, 2offee futures in )angalore etc. In =une 5>>>, 7ational stock e"change and )ombay stock e"change started trading in futures in (ense" and 7ifty. 1ptions trading on (ense" and 7ifty commenced in =une 5>>+. ?ery soon thereafter trading began on futures and options on @+ prominent stocks in the month of =uly and 7ovember respectively, currently there are A+ stocks trading in 7(E derivatives and the list keeps growing. ,erivatives products initially emerged has hedging devices against fluctuations in commodity prices and commodity linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post +BC> period, due to the in stability in the financial markets. *inancial derivatives are instruments that their value from financial assets. These assets can be stocks, bonds, currency etc. These ,erivatives can be *orward rate agreements, *utures, 1ptions, and (waps. s stated earlier the most traded instruments are futures and options. Dowever these products became very popular and by +BB>s, they accounted for about two!thirds of total transactions in derivatives products. In recent years, the market for financial derivatives has grown tremendously.

)oth in terms of variety of instruments available, their comple"ity and also turnover. In class of e#uity derivatives, futures and options on stock indices have gained more popularity than on individual stocks, especially among the institutional investors, who are ma:or users of inde"!linked derivatives. Even small investors find these useful due to high correlation of popular indices with various portfolios and ease of use. The following factors have been driving the growth of financial derivatives 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. Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets, leading to higher returns, reduced risks as well as transactions costs as compared to individual financial assets.

!"AYERS IN THE MAR#ET

The following are the players in the ,erivatives markets-

Spe$%lators;eople who buy or sell in the market to make profits. *or e"ample, if you will the stock price of 0eliance is e"pected to go up to 0s. A>> in one monthE one can buy a one!month future of 0eliance at 0s. @F> and make profits.

He&'ers;eople who buy or sell to minimize their losses. *or e"ample, an importer has to pay 9( G to buy goods and rupee is e"pected to fall to 0s.F>$G from 0s.AH$G, then the importer can minimize his losses by buying a currency future at 0s.AB$G.

Ar(itra'e%rs;eople who buy or sell to make money on price differentials in different markets. *or e"ample, a futures price is simply the current price plus the interest cost. If there is any change in the interest, it presents an arbitrage opportunity. We will e"amine this in detail when we look at futures in a separate chapter. )asically, every investor assumes one or more of the above and derivatives are a very good option for him.

TY!ES O) DERIVATIVES
The most commonly used derivatives contracts are forwards, futures and options, which we shall discuss in detail later. Dere we take a brief look at various derivatives contracts that have come to be used.

)or*ar&sforward contract is a customized contract between two entities, where settlement takes place on specific date in the future at today/s pre!agreed price.

)%t%res-

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. *utures contracts are special types of forward contracts in the sense that the former are standardized e"change!traded contracts. Optio+s1ptions are of two types 2all option ;ut option

Call optio+:
2all option gives the buyer the right but not the obligation to buy a given #uantity of the underlying asset, at a given price on or before a given future date.

!%t optio+:
;ut option gives the buyer the right, but not the obligation to sell a given #uantity of the underlying asset at a given price on or before a given date.

,arra+ts1ptions generally have lives of unto one year, the ma:ority of options traded on options e"changes having a ma"imum maturity of nine months. .onger!dated options are called warrants and are generally traded over the years.

-as.ets)asket options are on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. E#uity inde" options are a form of basket options

S*aps(waps are private agreements between two parties to e"change cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are-

I+terest rate s*apsThese entail swapping only the interest related cash flows between the parties in the same currency.

C%rre+$y s*apsThese entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.

NEED O) THE STUDY

The turnover of the stock e"change has been tremendously increasing from last +> years. The number of trades and the number of investors, who are participating, have increased. The investors are willing to reduce their risk, so they are seeking for the risk management tools. ;rior to (E)I abolishing the ) ,. system, the investors had this system as a source of reducing the risk, as it has many problems like no strong margining system, unclear e"piration date and generating counter party risk. In view of this problem (E)I abolished the ) ,. system. fter the abolition of the ) ,. system, the investors are seeking for a hedging system, which could reduce their portfolio risk. (E)I thought the introduction of the derivatives trading, as a first step it has set up a 5A member committee under the chairmanship of ,r. ..2. 6upta to develop the appropriate framework for derivatives trading in India, (E)I accepted the recommendation of the committee on may ++, +BBH and approved the phase introduction of the derivatives trading beginning with stock inde" futures. There are many investors who are willing to trade in the derivatives segment, because of its advantages like limited loss unlimited profit by paying the small premiums.

SCO!E O) THE STUDY:

The study is limited to J0isk 0eturn nalysis of *utures K 1ptionsL with special reference to futures and option in the Indian conte"t and the Inter!2onnected (tock E"change has been taken as a representative sample for the study. The study can/t be said as totally perfect. ny alteration may come. The study has only made a humble attempt at evaluation derivatives market only in India conte"t. The study is not based on the international perspective of derivatives markets, which e"ists in 7 (, 8, 2)1T etc.

O-/ECTIVE O) THE STUDY

To study the benefits of *utures and 1ptions in Indian Market. To study the functioning of futures K options in financial market. To make decisions of the shareholders in overcoming by investing in futures and options To study K compare the returns on inviting in future options. To study the different ways of buying and selling of options. To study the role of derivatives in India financial market.

"IMITATIONS O) THE STUDY:

The following are the limitation of this study.

The study of this pro:ect is limited to only AF days. The ma:or limitation of this pro:ect is time fact. The scrip is selected for analysis through secondary data so the analysis cannot be taken as universal.

DESCRI!TION O) THE METHODO"O0Y:

The following are the steps involved in the study.

12 Sele$tio+ of t3e s$rip:4

The scrip selection is done on a random and the scrip selected is I0 ,E22 7, )D 0 TI I0TE., and WI;01. 0isk K return Involved in the *utures contracts K option 2ontract.

52 Data Colle$tio+:4
The data of the I0 ,E22 7, )D 0 TI I0TE., and WI;01 has been collected from the web site of 7ational (tock E"change i.e. Jwww.nseindia.comL. The data consist of the March contract and the period of data collection is from +st *ebruary 5>+5 ' @+st March 5>+5.

62 A+alysis:4
The analysis consist of the tabulation of the data assessing the 0isk K 0eturn of *utures 2ontracts K 1ption 2ontracts, representing the data with graphs and making the interpretation using data.

INDUSTRY !RO)I"E HISTORY O) STOC# EXCHAN0E:

The only stock e"change operating in the +Bth century were those of )ombay set up in +HCF and hmadabad set up in +HBA. These were organized as voluntary non profit!making association of brokers to regulate and protect their interests. )efore the controls on securities trading became central sub:ect under the constitution in +BF>, it was a state sub:ect and the )ombay securities contracts 3control4 ct of +B5F used to regulate trading in securities. 9nder this act, the )ombay stock was recognized in +B5C and hmadabad in +B@C. ,uring the war boom, a number of stock e"changes were organized in )ombay, hmadabad and other centers, but they were not recognized. (oon after it became a central sub:ect, central legislation was proposed and a committee headed by ., 6orwala went into the bill for securities regulation. 1n the basis of the committee/s recommendations and public discussion, the securities contracts 3regulation4 ct became law in +BFI.

DE)INATION O) STOC# EXCHAN0E:

J(tock e"change means anybody or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.L 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 that 6overnment under securities recognizes it contracts 3regulation4 *inance. ct +BFI.The recognition is granted under section @ of the act by the central government, ministry of

NEED )OR STOC# EXCHAN0E:

+>

s the business and industry e"panded and economy became more comple" in nature, a need for permanent finance arose. Entrepreneurs re#uire money for long!term needs, where as investors demand li#uidity. The solution to this problem gave way for the origin of M(tock E"change/, which is a ready market for investment and li#uidity.

)UNCTIONS O) STOC# EXCHAN0E: Mai+tai+s A$ti e Tra&i+':

(hares are traded on the stock e"changes, enabling the investors to buy and sell securities. The prices may vary from transaction to transaction. continues trading increases the li#uidity or marketability of the shares traded on the stock e"changes .

)ixatio+s of pri$es:
;rices are determined by the transactions that flow from investors demand and the supplies preferences. 9sually the traded prices are named known to the public . This helps the investors to
make better decisions.

E+s%res safe a+& fair &eali+'s:

The rules, regulations and bye laws of the stock e"changes provide a measure of safety to the investors to get a fair deal.

Ai&s i+ fi+a+$i+' t3e i+&%stry:

continuous market for shares provided a favorable climate for raising capital. The negotiability and transferability of the securities help the companies to raise long!term funds. stimulates the capital formation. s it is easy to trade the securities, investors are willing to subscribe the Initial public offerings 3I;14. This

Dissemi+atio+ of I+formatio+:
(tock E"change provides information through their various publications. They publish the share prices traded on their basis along with the volume traded. ,irectory of corporate information is useful for the investor/s assessment regarding the corporate. Dandouts and pamphlets provide information regarding the functioning of the stock e"changes .

!erforma+$e i+&%$ers:
The prices of stocks reflect the performance of the traded companies. This makes the corporate more concerned with its public image and tries to maintain good performance .

Self4re'%lati+' or'a+i7atio+s:

++

The stock e"changes monitor the integrity of the members, brokers, listed companies and clients. 2ontinuous internal audit safeguards the investors against unfair trade practices. It settles the disputes between member broker, investors and brokers. The national stock E"change 37(E4 of India became operational in the capital market segment on @rd 7ovember +BBA in Mumbai. The genesis of 7(E lies in the recommendations of the pertains committee +BB+. part from the 7(E, it had recommended for the establishment of national stock market system also. The committee pointed out some ma:or defects in the Indian stock market. The ,efects specified are +. .ack of infrastructure facilities and outdated trading system. 5. .ack of transparency in the operations that effect investor/s confidence. @. 1ut dated settlement systems that are inade#uate to cater to the growing volume, leading to delays. A. .ack of single market due to inability of various stock e"changes to function cohesively with legal structure and regularity framework. These factors led to the establishment of the 7(E.

O-/ECTIVES:
+. To establish a nationwide trading facility for e#uities, debt instruments and hybrids. 5. To ensure e#ual access investors all over the country through appropriate communication network. @. To provide a fair, efficient and transparent securities market to investors using an electronic communication network. A. To enable shorter settlement cycle and book entry settlement system. F. To meet current international standards of securities market.

!ROMOTERS:
Industrial ,evelopment )ank of India 3I,)I4 Industrial 2redit and Investment 2orporation of India 3I2I2I4 Industrial *inancing 2orporation of India 3I*2I4 .ife Insurance 2orporation of India 3.I24 (tate )ank of India 3()I4 6eneral Insurance 2orporation 36I24 )ank of )aroda 2anara )ank

+5

2orporation )ank Indian )ank 1riental )ank of 2ommererce 9nion )ank of India ;un:ab 7ational )ank Infrastructure .easing and *inancial (ervices (tock Dolding 2orporation of India ()I capital market

MEM-ERSHI!:
The membership is based on the factors as capital ade#uacy, corporate structure, Track record, Education, E"perience etc. dmission is a two!storage process with applicants re#uired to go through a written e"amination followed by an interview. committee consisting of e"perienced professionals from the industry, to access the applicant/s capability to operate as an e"change member. The e"change admits members separately to whole sale debt market 3W,M4 segment and the capital market segment. 1nly corporate members are admitted to the debt market segment where as individuals and firms are also eligible to the capital market segment. Eligibility criteria for trading membership on the segment of W2M are as follows+. The person eligible to become trading members are bodies corporate, companies, institutions including subsidiaries of banks engaged in financial services and such other persons or entities are may be permitted from time to time by 0)IN(E)I. 5. The Whole!Time ,irectors should possess at least two years e"perience in any activity related to banking or financial services. @. The applicant must be engaged solely in the business of the securities and must not be engaged in any fund!based activities. A. The applicant must possess a minimum of 0s.5crores.

Eli'i(ility $riteria for t3e $apital mar.et se'me+t are:

+. Individual, registered firms, corporate bodies, companies and such other persons may be permitted under the (20 ct, +BFC. 5. The applicant may be engaged in the business of securities and must not be engaged in any fund!based activities. @. The minimum net worth re#uirements prescribed are as follows Individuals and registered firms!0s.CF.akhs.

+@

2orporate bodies!0s+>>.akhs In case of partnership firm each partner should contribute at least FO of the net worth of the firm.

A.

corporate trading member should consist only of individuals 3ma"imum of A4

Who should directly hold at least A>O of the paid!up capital in case of listed companies and at least F+O in case of these companies. F.The minimum prescribed #ualification of graduation and two years e"perience of handling securities as broker , (ub!broker, authorized assistant etc.,must be fulfilled by Minimum two directors in case the applicant are a corporate Minimum two partners in case of partnership firms In case of individual or sole proprietary concerns. The two e"perienced directors in a corporate applicant or trading member should hold minimum FO of the capital of the company.

MAR#4TO4MAR#ET MAR0IN AND INTRADAY "IMIT

9nder the current clearing and settlement system, if an Indian investor buys and subse#uently sells the same number of shares of stock during a settlement period, or sells and subse#uently buys, it is not necessary to take. 1r deliver the shares. The difference between the selling and buying prices can be paid or received .In other words, the s#uaring 'off of the trading position during the same settlement period results in non!delivery of the shares that the investor traded. Thus, possible at a relatively low cost.*II/s and domestic institutional increasing 7umber of no delivery transactions as the stock market becomes e"cessively speculative. ccordingly, (E)I has introduced a daily mark!to!market margin and intraday trading limit. The daily market!to! market margin is a margin on a broker/s daily position. The intraday trading limit is the limit to a broker/s intraday trading volume. Every broker is sub:ect to these re#uirements. Each stock e"change may take any other measures to ensure the safety of the market.)(E and 7(E impose on members a more stringent daily margin, including one based on concentration of business . daily mark!to!market margin is +>> percent of the notional loss of the stockbroker for every stock, calculated as the difference between buying or selling price and the closing price of that stock at the end of that day. Dowever, there is a threshold limit of 5F percent of the base

+A

minimum capital plus additional capital kept with the stock e"change or 0s + million, whichever is lower. 9ntil the notional loss e"ceeds the threshold limit, the margin is not payable. This margin is payable by a stockbroker to the stock e"change in cash or as a bank guarantee from a scheduled commercial bank, on a net basis. It will be released ion the pay!in day for the settlement period .The margin money is held by the e"change for I!+5 days. This cost the broker about >.A!+.5 percent of the notional loss, assuming that the broker/s funding cost is about 5A!@I percent. Thus (peculative trading without the delivery of shares is no longer cost!free. Each broker/s trading volume during a day is not allowed to e"ceed the intraday trading limit. This limit is @@.@ times the base minimum capital deposited with the e"change on a gross basis. i.e., purchase plus sale. In the event of brokers wishing to e"ceed this limit, they have to deposit additional capital with the e"change and this cannot be withdrawn for si" months.

NEATSYSTEM:
7eat I( (T TE!1*!TDE! 0T 2.IE7T (E0?E0 ) (E, ;;.I2 TI17. t the server end, all trading information is stored in an in!memory database to achieve minimum response time and ma"imum system availability for users. Each trading member trades on the 7(E with other members through a ;2 located in the trading member/s office, anywhere in India. The trading members on the Wholesale ,ebt Market segment are linked to the central computer at the 7(E through dedicated IA<bps leased lines and ?( T terminals. These leased lines are multiple"ed using dedicated 5 Mbps, optical!fiber links. The W,M participants connect to the trading system through dial!uplinks. 7(E is one the largest interactive ?( T based stocked e"change in the world. Today it supports more than @>>> ?( Ts and is e"pected to grow to more than A>>> ?( Ts in the ne"t year. The 7(E ' network in the world. 2urrently more than B>>> users are trading on the real time!online 7(E application. There are over +F large computer systems.

INDICES
n Inde" is used to give information about the price movements of products in the financial, commodities or any other markets. *inancial inde"es are constructed to measure price movements of stocks, bonds!bills and other forms of investments. (tock market inde"es are meant to capture the overall behavior of e#uity markets. stock market inde" is created by selecting a group of stock that are representative of the whole market or a specified sector or

+F

segment of market.

n Inde" is calculated with reference to a base period and base inde" value.

(tock market inde"es are useful for a ?arity of reasons. (ome of them are They provide a historical comparison of returns on money invested in the stock market against other forms of investments such as gold or debt. They can be used as a standard against which to compare the performance of an e#uity fund. It is a lead indicator of the performance of the overall economy or a sector of the economy (tock inde"es reflect highly up to date information Modern financial applications such as Inde" *unds, Inde" *utures, Inde" 1ptions play an important role in financial investments and risk management Ma8or I+&i$es S9! CNX NI)TY CNX Nifty /%+ior S9! CNX :;; CNX Mi&$ap 5;; S9! CNX Defty Ot3er I+&i$es CNX IT Se$tor I+&ex CNX -a+. I+&ex CNX )MC0 I+&ex CNX !SE I+&ex CNX MNC I+&ex

NSE4NI)TY
The national (tock E"change on pril 55, +BBI launched a new E#uity Inde". The 7(E!F>.The new Inde" which replaces the e"isting 7(E!+>> Inde" is e"pected to serve as an appropriate Inde" for the new segment of futures and options. J7ifty Jmeans 7ational Inde" for *ifty (tock. The 7(E!F> comprises F> companies that represent 5> broad Industry groups with an aggregate market capitalization of around 0s.+C>>>>crores. ll companies included in the inde" have a market capitalization in e"cess of 0s.F>> cores each and should have traded for HFO of trading days at an impact cost of less than +.FO.

+I

The base period for the inde" is the close of prices on 7ov @, +BBF which makes one year of completion of operation of 7(E/s capital market segment. The base value of the Inde" has been set at +>>>. 7(E has also launched the 7(!27)2!T?+H media center in association with 27)2!T?+H, India/s 7o.+ business news channel.

"o'o of NSE
The logo of the 7(E symbolizes a single nationwide securities trading facility ensuring e#ual and fair access to investors, trading members and issuers all over the country. The initials of the E"change viz., 7, ( and E have been etched on the logo and are distinctly visible. The logo symbolizes use of state of the art information technology and satellite connectivity to bring about the change within the securities industry. The logo symbolizes vibrancy and unleashing of creative energy to constantly bring about change through innovation.

Missio+ O) NSE
7(E/s mission is setting the agenda for change in the securities markets in the India. The 7(E was set!up with the main ob:ective of Establishing a nation!wide trading facility for e#uities, debt instruments and hybrids, Ensuring e#ual access to investors all over the country through an appropriate communication network. ;roviding a fair , efficient and transparent securities market to investors using electronic trading systems, Enabling shorter settlement cycles and book entry settlements systems, and Meeting the current international standards of securities markets.

The standards set by 7(E in terms of market practices and technologies have become industry benchmarks and are being emulated by other market participants.7(E is more than a mere market facilitators. It/s that force which is guiding the industry towards new horizons and greater opportunities.

Corporate Str%$t%re:
7(E is one of the first de!mutualised stock e"changes in the country, where the ownership and management of the E"change is completely divorced from the right to trade on it. Though the

+C

impetus for its establishment came from policy makers in the country, it has been set up a public limited company, owned by the leading institutional investors in the country. *rom day one, 7(E has adopted the form of a demutualised e"change the ownership, management and trading is in the hands of three different sets of people.7(E is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the E"change. This has completely eliminated any conflict of interest and helped 7(E in aggressively pursuing policies and practices within a public interest framework. The 7(E model however, does not preclude, but in fact accommodates involvement, support and contribution of trading members in a variety of ways. Its )oard companies of senior e"ecutives from promoter institutions, eminent professionals in the fields of law, economics, accountancy ,finance, ta"ation, etc, public representatives, nominees of (E)I While the )oard deals with broad policy issues, decisions relating to market operations are delegated by the )oard to various committees constituted by it. (uch committee includes representatives from trading members, professionals, the public and management. The day!to!day management of the E"change is delegated to the Managing ,irector who is supported by a team of professional.

Committees:
The E"change has constituted various committees to advise it on areas such as good market practices, settlement procedures, risk containment systems etc.Industry professionals manage these committees, trading members, E"change staff as also representatives from the market regulator. E"ecutive 2ommittee 2ommittee 1n Trade 0elated Issues321TI4

SECURITITIES AND EXCHAN0E -OARD O) INDIA SE-I<S RO"E IN A STOC# EXCHAN0E

The (E)I was established on pril +5, +BBH through an administrative order, but it became a statutory and really powerful organization only since +BB5.The (E)I is under the overall control of the Ministry of *inance, and has its head office at Mumbai. The philosophy underlying the certain of the (E)I is that multiple regulatory bodies for securities industry mean that the regulatory system gets dividend, causing confusion among market participants as to who is really in command. In a multiple regulatory structure, there is also an

+H

overlap of functions of different regulatory bodies .Through the (E)I, the regulation model which is sought to be put in place in India is one in which every aspect of securities market regulation is entrusted to a single highly visible and independent organization, which is backed by a statute, and which is accountable to the parliament and in which investors can have trust.

!O,ER= SCO!E= AND )UNCTIONS O) SE-I:

The scope of operations of the (E)I is very wideE it can frame or issue rules, regulations, directives, guidelines, norms in respect of both primary and secondary markets, and certain financial institutions. The (E)I is empowered to register any agency or intermediary who may be associated with the securities market and none of them shall by, sell or deal in securities e"cept under and in accordance with the conditions of certificate of registration issued by the (E)I. The (E)I can suspend or cancel a certificate of registration issued by it to anyone after giving him a reasonable opportunity of being heard. Dowever, in e"ercise of its powers and in performing its functions, such directions on #uestions of policy bind the (E)I as the 61I may give in writing from time to time. final in every case. lthough it has the opportunity to e"press its views before any direction is given, the decision of the 61I is

+B

COM!ANY !RO)I"E: >EN SECURITIES "TD:

Pen (ecurities .imited 3P(.4 is one of the leading financial services company !providing *inancial and Investment related (ervices and ;roducts. The 2ompany commenced as a proprietary concern of M$s <. 0avindra )abu in +BHI was converted to a .imited company in *ebruary +BBF as Pen (ecurities .td. Pen has the distinction of being the *irst 2orporate Member from Dyderabad and also the first .;. based broking firm to start trading on the 7ational (tock E"change 37(E4. PE7 is a registered Member on the 2apital Market (egment and *utures K 1ptions segment of both 7(E and )(E. PE7 is also a ,epository ;articipant 3,;4 with 7ational (ecurities ,epository .td. 37(,.4 and also with 2entral ,epositories (ervices .td. 32,(.4. PE7 is also a (E)I 0egistered ;ortfolio Manager offering ;ortfolio Management (ervices to clients. In 5B!>H!5>>H Pen (ecurities lanches brand name as PE7 M17EQ .T,.

>e+ Comtra&e ! t2 "imite&:

+>>O subsidiary of P(. and is a member of 7ational 2ommodities K ,erivatives E"change .imited 372,ER4 and Multi 2ommodity E"change 3M2R4. PE7 operates from Dyderabad as it head office and has branches and associates in ndhra ;radesh, Tamil 7adu, Maharashtra, <arnataka, West )engal and 1rissa. The 2ompany operates from over +A> locations with over F>> trading terminals.

Ser i$es Offere& (y >e+ Se$%rities "imite&:

Investment advisory services Trading in cash market of 7(E and )(E Trading in *utures and 1ptions on 7(E and )(E Internet Trading in (tocks, futures and 1ptions both 7(E and )(E Mutual *unds advisory service ,epository (ervices in )oth 7(,. and 2,(.

5>

Trading in 2ommodities on M2R and 72,ER ;ortfolio Management (ervices 70I Investor (ervices ; 7 pplication (ervice Mutual *und <Q2 0egistration (ervice

*i"ed Income (ecurities $ *i"ed ,eposits $ 0)I )onds $ Ta" (aving )onds

)OUNDER(hri 0avindra )abu <antheti founded Pen (ecurities .td as a stock broking company and led its evolution into a highly respectable financial services company known for its ethics and values. De passionately believed that one can be successful in business without compromising on ethics. Thru Pen he demonstrated this philosophy and inspired every one of us by setting an e"ample. Dis ethical, transparent and trustworthy approach to business has inspired all of us to build a very vibrant, successful and strong organization. We at Pen totally rededicate ourselves to continue to build the organization on sound foundations of trust, values and relationship with clients, servicing their investment needs as set out by our founder (ri <.0avindra )abu.

The board of directors of Pen (ecurities .td has appointed Mr ;ratap <antheti and Mr (atish <antheti as Managing ,irector and =oint Managing ,irector, respectively, of the company. The board at its meeting on +I!>A!5>>H e"pressed sorrow at the sudden demise of Mr <. 0avindra )abu, *ounder Managing ,irector of Pen (ecurities .td. )oth Mr ;ratap and Mr (atish have been working with Pen (ecurities as ,irectors for over a decade.

-OARD O) DIRECTORS:
,irectors of Pen (ecurities .td. have considerable e"perience and e"pertise ranging over many industries such as financial services, pharmaceuticals, manufacturing, banking and Information Technology among others. They are some of the most highly respected people in their professional circles.

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Mr2 !ratap #a+t3eti= Ma+a'i+' Dire$tor

Mr. ;ratap <antheti is the Managing ,irector of the company. De is a 2hartered *inancial nalyst 32* 4 and also has a Masters in )usiness dministration 3M) 4 in *inance. De has a deep understanding of and e"posure to the financial services sector.

Mr2 Satis3 #a+t3eti= /t2 Ma+a'i+' Dire$tor

Mr. (atish <antheti looks after the ;ortfolio Management (ervices and E#uity 0esearch divisions of the 2ompany. De is a 2hartered *inancial nalyst 32* 4 and also has a Masters in )usiness dministration 3M) 4 in *inance. De oversees the E#uity 0esearch division and the ;ortfolio Management divisions.

Mr2 #2 0a+&3i= Dire$tor

Mr. <. 6andhi is one of the founder directors of the company. De holds a Masters degree in Electrical and 2ommunication Engineering from IIT )ombay. De has e"tensive e"perience in IT and 6eneral Management.

Mr2 Satya+araya+a C32 Ra i ?RS@= ,3ole Time Dire$tor

Mr. (atyanarayana 2h. 0avi has more than two decades of e"perience in the fields of Management, dministration, Manufacturing, and Marketing. De holds a )achelors degree in 2hemical Engineering.

Mr2 Sam(asi a Rao !ati(a+&la= Exe$%ti e Dire$tor

Mr. (ambasiva 0ao has worked with several multinational pharmaceuticals companies before incorporating and running a successful pharmacy business venture in 9.(. De relocated to India entered the (tock broking industry in +BBA. De is the E"ecutive ,irector of company. De has a Masters degree in ;harmacy.

Mr2 Naraya+a+ Naraya+a+= Dire$tor

Mr. 7arayanan is a very e"perienced Investment nalyst and Ta" 2onsultant possessing a deep understanding about investments and stock market dynamics.

Mr2 A8ay #%mar Mi..ili+e+i= Dire$tor

Mr. :ay <umar Mikkilineni has over a decade of e"perience in senior positions of the ;harmaceutical industry and also has twelve years of e"perience in the banking sector. De holds a Masters degree in griculture.

55

Mr2 #2Ve+.at Re&&y= Dire$tor

Mr. <.?enkat 0eddy is a chemical engineer. De worked in reputed industrial houses in ;aper K ;ower sectors for +I years and in financial markets for +> years. De has e"tensive e"perience in the areas of pro:ect management and strategic management..

Mr2 #2 Narasim3a Rao= Dire$tor

Mr. <. 7arasimha 0ao is a ;ost 6raduate in .iterature. De is the 2hief gent of .;. .I2 Mutual *und since =une 5>>5. De is an .I2 agent since +BH> and has e"tensive knowledge about the securities and insurance markets.

Mr2 Namas3i aya Re+%.%+tla= Dire$tor a+& Hea& of Complia+$e

Mr. 7amashivaya 0enukuntla has vast e"perience in the field of stock broking and has a deep understanding of the regulatory framework of the 2apital Markets. De heads the 2ommodity )roking business of the 2ompany. De holds a bachelors degree in 2ivil Engineering and a Masters in )usiness dministration 3M) .4

SERVICES: Sto$. -ro.i+'

Pen (ecurities .imited provides the following e#uity related trading services to the investorso o

2apital Market (egment of 7(E and )(E *utures K 1ptions segment of 7(E and )(E ndhra

PE7 operates from Dyderabad as it head office and has branches and associates in from over +A> locations with over F>> trading terminals.

;radesh, Tamil 7adu, Maharashtra, <arnataka, West )engal and 1rissa. The 2ompany operates

I+ter+et Tra&i+':
Internet trading is easy, convenient and reliable with PenTrSde dvantages of PenTrSde ! Internet Trading ;latform

)lexi(le a+& a& a+$e& tra&i+' platform

5@

(imple, reliable and easy to use *utures K 1ptions segment of 7(E and )(E Integrated payment gateways ' facilitates online transfer of funds from your banks 3I2I2I $ "is$2orp $ Qes bank etc.4 for instant limits 3on funds transferred4 Integrated with Pen ,; account ' seamless settlement Take full control of trading and trade with privacy from any place of your choice. 2hoice of Trading from Internet or )ranch 2hoice of )rowser based or ERE based trading

Mar.et *at$3

(treaming market #uotes Multiple market watch Integrated market watch for viewing 7(E $ )(E $ 7(E * 1 on one screen ccess to trade in 7(E $ )(E and 7(E * 1 (egments

INTRADAY a+& DE"IVERY &iffere+tiatio+

,ifferent limits for I7T0 , Q and ,E.I?E0Q uto s#uare off of all I7T0 , Q orders +F minutes before close of trading 2onvert I7T0 , Q trades to ,E.I?E0Q trades on availability of credit$margin source

A$$ess to stateme+ts

(tock (tatements ! ?iew (tocks in your ,; account and also Pen )enf account (tatements ' ?iew 2ash available in your Pen )roking account Mutual *unds ' ?iew Transaction$Dolding statements with .atest 7 ?/s 7et worth (tatement ! 7et worth statement of assets with Pen, 3(tocksT2ashTMutual funds4.

M%t%al )%+&s: >EN<S MUTUA" )UND SERVICES 4 HI0H"I0HTS

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1ne stop shop for a range of Mutual fund products from top Mutual funds such as D,*2, I2I2I ;rudential, )irla sun life, *ranklin Templeton, 0eliance , D()2, (undaram )7; ;aribas, *idelity and many more 2ost!effective, prompt and trustworthy service *acility to view your account information online 5A R C, 9pdates every day.
o o o

Qou can view your latest Dolding statement Qou can view your latest transaction statement Qou can view value of all your mutual funds in one consolidated statement

Easy and convenient application process 6ood dvice keeping your financial goals in mind 1ffline presence in various locations convenient to you for better service

A CONCE!T A OR0ANISATION O) A MUTUA" )UND A ADVANTA0ES O) MUTUA" )UNDS

CONCE!T:
Mutual *und is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual *und is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund -

5F

Or'a+i7atio+ of a M%t%al )%+&

There are many entities involved and the diagram below illustrates the organizational set- up of a mutual fund.

ADVANTA0ES O) INVESTIN0 IN MUTUA" )UNDS !rofessio+al Mo+ey Ma+a'eme+t 9 Resear$3

Mutual funds are managed by professional fund managers who regularly monitor market trends and economic trends for taking investment decisions. They also have dedicated research professionals working with them who make an in depth study of the investment option to take an informed decision.

Ris. Di ersifi$atio+
,iversification reduces risk contained in a portfolio by spreading it. It is about not putting all your eggs in one basket. s mutual funds have huge corpuses to invest in, one can be part of a large and well!diversified portfolio with very little investment.

Co+ e+ie+$e
With features like dematerialized account statements, easy subscription and redemption processes, availability of 7 ?s and performance details through :ournals, newspapers and updates and lot moreE Mutual funds are sure a convenient way of investing.

"iB%i&ity
1ne of the greatest advantages of Mutual funds investment is li#uidity. 1pen!ended funds provide option to redeem on demand, which is e"tremely beneficial especially during rising or falling Markets.

Re&%$tio+ i+ Costs

5I

Mutual funds have a pool of money that they have to invest. (o they are often involved in buying and selling of large amounts of securities that will cost much lower than when you invest on your own.

Tax A& a+ta'es

Investment in mutual funds also en:oys several ta" advantages. ,ividends from Mutual *unds are ta"!free in the hands of the investor 3This however depends upon changes in *inance ct4. lso 2apital 6ain accrued from Mutual *und investment for a period of over one year is treated as long term capital appreciation and is ta" free.

Ot3er A& a+ta'es

Indian Mutual fund industry also presents several other benefits to the investor liketransparency ! as funds have to make full disclosure of investments on a periodic basis, fle"ibility in terms of needs based choices, very well regulated by (E)I with very strict compliance re#uirements to investor friendly norms.

DE!OSITORY SERVICES: DE!OSITORY:

Pen is a depository participant offering fle"ible, cost effective and transparent depository services to its clients .Pen is a depository participant with the 7ational (ecurities ,epository .imited and 2entral ,epository (ervices 3India4 .imited for trading and settlement of dematerialized shares. Pen performs clearing services for all securities transactions through its accounts. Pen offers depository services to create a seamless transaction platform ' e"ecute trades through Pen (ecurities and settle these transactions through the Pen ,epository (ervices. Pen ,epository (ervices is a part of our value added services for our clients that creates multiple interfaces with the client and provides for a solution that takes care of all your needs

-asi$ Ser i$es !ro i&e& (y >e+ D!

ccount 1pening ccount Transfers ! Market and 1ff!Market ,ematerialization 0e!materialization ;ledge

)EATURES: 5C

Pen is a depository participant with 7ational (ecurities ,epository .imited 37(,.4 and 2entral ,epository (ervice .imited 32,(.4 offering fle"ible, cost effective and transparent depository services to its clients. 1wning a demat a$c with Pen is the ideal option as it entails

ccess to ,; account like Doldings 3With Dolding valuation4, Transactions K I(I7 details in our site. ;rovision of ;ortfolio value on account statement. .imited power of attorney 3.;1 4 facility for clients having broking $ trading Pen. $c. with Pen, eliminating the need for giving instructions every time a sale is e"ecuted l through

?ery low annual charge and transaction charges. Mailing of a regular transaction statement, free of cost to all account holders showing an opening balance, debit$credit and closing balance for securities held. *acility to log on to the 7(,. web site 3 I,E ( 4 and view your account$ transactions directly from 7(,. 37ote - This service is available on subscription to Ideas4 ccounts freeze$defreeze facility, security wise and #uantity wise.

DOCUMENTATIONS: Do$%me+tatio+ for A$$o%+t Ope+i+'

In order to open a ,emat account, you will need to provide$produce the following documents

12 INDIVIDUA"S

,uly filled 3in block letters4 ,emat greement.

ccount 1pening *orm K ,epository 2lient

photograph of each holder $ signatory to be pasted on the form and signed across. photocopy of the ; 7 card for each holder is compulsory.

!roof of i&e+tity ?a+y o+e of t3e (elo* me+tio+e&@

o o o o

;assport, ?oter I, 2ard, ,riving license, ; 7 card with ;hotograph, M ;I7 card, ;roof of Identity cum Manage ddress form 3 ttested by a scheduled commercial )ank

Identity card$document with applicant/s photo, issued by

2entral$(tate 6overnment and its ,epartments,

5H

(tatutory$ 0egulatory uthorities, ;ublic (ector 9ndertakings, (cheduled 2ommercial )anks, ;ublic *inancial Institutions, 2olleges affiliated to 9niversities, ;rofessional )odies such as I2 I, I2W I, and I2(I, )ar 2ouncil etc. to their Members 2redit cards$,ebit cards issued by )anks.

!roof of A&&ress ?a+y o+e of t3e (elo* me+tio+e&@

o o

0ation card, ;assport, ?oter I, 2ard, ,riving license, )ank passbook, ?erified copies of Electricity bills 37ot more than two months old4$ 0esidence Telephone bills 3not more than two months old4. .icense agreement $ ;roof of Identity cum Manager4 greement for sale, (elf!declaration by Digh 2ourt K ddress form 3 ttested by a scheduled commercial )ank

(upreme 2ourt :udges, giving the new address in respect of their own accounts.
o

Identity card$document with address, issued by

2entral$(tate 6overnment and its ,epartments. (tatutory$0egulatory uthorities. ;ublic (ector 9nder takings. (cheduled 2ommercial )anks. ;ublic *inancial Institutions. 2olleges affiliated to universities and ;rofessional )odies such as I2 I, I2W I, )ar 2ouncil etc., to their Members. 7omination form 3If re#uired4

Note: If the 2urrent ddress is same as in ;assport $ ?oterUs I, card $ ,riving license $ M ;I7 2ard then ;roof of ddress not re#uired.

5B

52 COR!ORATE ACCOUNTS

,uly filled 3in block letters4 ,emat greement. copy of 2ertificate of Incorporation, 2ertificate of 2ommencement of )usiness Memorandum and rticles of ssociation.

ccount 1pening *orm K ,epository 2lient

)oard 0esolution for opening of the ,emat signatories to operate the ,emat account. copy of )ank ;ass )ook.

ccount and authorising the authorised

uthorised (ignatory ;hotos, 2ompany 2ommon seal on resolution.

!ool A$$o%+ts:

7(E ;ool $c 2M $ 2lient Id2M $ 2lient 7ame2M!);!Id,; Id,; 7ame)(E ;ool $c 2M $ 2lient Id2M $ 2lient 7ame2M!);!Id,; Id,; 7ame-

+>>>>I@A Pen (ecurities .td. I7FI5@>H I7@>5HI@ Pen (ecurities .td.

+>>>FICB Pen (ecurities .td. I7I>B5FF I7@>5HI@ Pen (ecurities .td.

* K 1 )enf. $c 2lient Id-

+>>>>++I

@>

2lient 7ame,; Id,; 7ame-

Pen (ecurities .td. I7@>5HI@ Pen (ecurities .td.

"ITERATURE SURVEY DERIVATIVES:4

The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of risk!averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. )y 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. s instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. Dowever, by locking!in asset prices, derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of risk!averse investors. ,erivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, inde", share, bonds, currency, interest, etc.. )anks, (ecurities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, use derivatives. ,erivatives are likely to grow even at a faster rate in future.

INTRODUCTION TO )UTURES CONTRACTS:

In the ,erivatives market *utures contract is most actively traded contract. It has gained its momentum in recent years, after forwards contract were banned in some parts of the world. It is one of the most popular types of contracts for the traders in the world.

)UTURES CONTRACT:
*utures contract was designed to solve limitations that e"isted in forward contracts. *utures contract is an agreement between two parties to buy or sell an asset at a certain time in future at a certain price. To make it simple *utures are e"change!traded contracts to buy or sell an asset in future at a price agreed upon today. The asset can be share, inde", interest rate, bond, rupee!dollar e"change rate, sugar, crude oil, soybean, cotton, coffee etc.

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To facilitate li#uidity in the futures contract, the e"change specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument . The following are the (tandard terms in any *utures contract 8uantity of the underlying asset 8uality of the underlying asset 3not re#uired in case of financial futures4 E"piration date The unit of price #uotation 3not the price4 Minimum fluctuation in price 3tick size4 (ettlement style

Examplewhen you are dealing in March 5>>5 (atyam futures contract, you know that the market lot, i.e. the minimum #uantity you can buy or sell, is +,5>> shares of (atyam, the contract would e"piry on March 5H, 5>>5, the price is #uoted per share, the tick size is F paisa per share or 3+5>>V>.>F4 W 0s I> per contract$ market lot, the contract would be settled in cash and the closing price in the cash market on e"piry date would be the settlement price.

TERMINO"O0Y USED IN )UTURES MAR#ET:

The terminologies used in futures market are as follows-

S!OT !RICEThe price at which an asset trades in the spot market.

)UTURE !RICEThe price at which the futures contract trades in the futures market.

CONTRACT CYC"EThe period over which a contract trades.

-ASIS -

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It is the difference between future price and the spot price. ;opularly termed as spread among the trading community.

INITIA" MAR0IN:
The amount deposited in the margin account, when the future contract is first entered.

MAR#IN0 TO MAR#ETIn the futures market, at the end of each trading day, the margin account is ad:usted to reflect the investors gain or loss depending upon the futures closing price. This is called as marking to market.

MAINTENANCE MAR0INIt is the minimum margin the investor has to keep in his account, so that it never shows negative balance.

!RICIN0 )UTURES THEORYTICA"Y:

The theoretical price of a futures contract is spot price of the underlying plus the cost of carry. ;lease note that futures are not about predicting future prices of the underlying assets. In general, )%t%res !ri$e C Spot !ri$e D Cost of Carry The 2ost of 2arry is the sum of all costs incurred if a similar position is taken in cash market and carried to e"piry of the futures contract less any revenue that may arise out of holding the asset. The cost typically includes interest cost in case of financial futures 3insurance and storage costs are also considered in case of commodity futures4. 0evenue may be in the form of dividend. Though one can calculate the theoretical price, the actual price may vary depending upon the demand and supply of the underlying asset.

Example(uppose 0eliance shares are #uoting at 0s @>> in the cash market. The interest rate is about +5O per annum. The cost of carry for one month would be about 0s @. s such a 0eliance future contract with one!month maturity should #uote at nearly 0s@>@. (imilarly 7ifty level in the cash market is about ++>>. 1ne month 7ifty future should #uote at about ++++. Dowever it has been observed on several occasions that futures #uote at a discount or premium to their theoretical price, meaning below or above the theoretical price. This is due to demand!supply pressures. Every time a (tock *uture trades over and above its cost of carry i.e. above 0s. the arbitragers would step in and reduce the e"tra premium

@@

commanded by the future due to demand. E.g.- would buy in the cash market and sell the e#ual amount in the future, Dence creating a risk free arbitrage, vice!versa for the discount. When the future contract approaches e"piry date, the cost of carry reduces as the time to e"piry reducesE thus futures and cash prices start converging. 1n e"piry date, futures price should e#ual cash market price.

Settleme+t i+ )%t%res mar.ets:

;resently both stock and inde" futures are settled in cash. The closing price in the cash segment is considered as the settlement price. The difference between the trade price and the settlement price is ultimately your profit$loss. In case of delivery based settlement (tock!based derivatives are e"pected to be settled in delivery. 1n e"piry of the futures contract, the buyer$seller of the future would receive a long$short position at the closing price in the cash segment on the ne"t trading day. This position in the cash segment would merge with any other position the buyer$seller has. In case the buyer$seller wants he can s#uare up this position by selling$buying the shares. 1r else he would be re#uired to deliver$receive the underlying shares on the settlement day 3e.g. TT54 in the cash segment. The aforesaid methodology is not final yet. (ebi guidelines in this regard are awaited. Qou can call e"changes and me to know the e"act methodology once the regulator. Inde" based ,erivatives would continue to be settled in cash

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USA0E of )%t%res $o+tra$ts:

Qou can do directional trading using futures. In case you are bullish on the underlying stock or inde", you can simply buy futures on stock$inde". (imilarly if you are bearish on the underlying, you can sell futures on stock$inde". There are eight basic modes of trading on the inde" futures market-

Dedging

D+ .ong stock, short 7ifty futures D5 (hort stock, long 7ifty futures D@ Dave portfolio, short 7ifty futures DA Dave funds, long 7ifty futures

(peculation
(+ )ullish inde", long 7ifty futures (5 )earish inde", short 7ifty futures

rbitrage + Dave funds, lend them to market 5 Dave securities, lend to the market

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A& a+ta'es of tra&i+' i+ I+&ex f%t%res:

fter listening to the news and other happenings in the economy, you take a view that the market would go up. Qou substantiate your view after talking to your near and dear ones. When the market opens, you e"press your view by buying price of was correct, its e"pression was wrong. 9sing 7ifty$(ense" futures you can e"press your view on the market as a whole. In this case you take only market risk without e"posing yourself to any company specific risk. Though trading on 7ifty or (ense" might not give you a very high return as trading in stock can, yet at the same time your risk is also limited as inde" movements are smooth, less volatile with unwanted swings. When trading futures in cash the biggest advantage of futures is that you can short sell without having stock and you can carry your position for a long time, which is not possible in the cash segment because of rolling settlement. 2onversely you can buy futures and carry the position for a long time without taking delivery, unlike in the cash segment where you have to take delivery because of rolling settlement. *urther futures positions are leveraged positions, meaning you can take an 0s +>> position by paying 0s 5F margin and daily mark!to!market loss, if any. This can enhance the return on capital deployed. *or e"ample, you e"pect an 0s +>> stock to go up by 0s +>. 1ne way is to buy the stock in the cash segment by paying 0s +>>. Qou make 0s +> on investment of 0s +>>, giving about +>O returns. lternatively you )2 stock. The whole market goes up as you e"pected but the )2 stock falls due to some bad news related to the company. This means that while your view

@I

take futures position in the stock by paying about 0s @> toward initial and mark!to!market margin. Qou make 0s +> on investment of 0s @>, i.e. about @@O returns. ;lease note that taking leveraged position is very risky, you can even lose your full capital in case the price moves against your position. Qou can s#uare up your future at any time once you have initiated the position, you need not wait until its e"piry you can book profits or cut losses. 1ne can use volume and open interest rates to predict the movement of the market this is done like this, the total outstanding position in the market is called open interest. In case volumes are rising and the open interest is also increasing, it suggests that more and more market participants are keeping their positions outstanding. This implies that the market participants are e"pecting a big move in the price of the underlying. Dowever to find in which direction this move would be, one needs to take help of charts. In case the volumes are sluggish and the open interest is almost constant, it suggests that a lot of day trading is taking place. This implies sideways price movement in the underlying.

,3e+ Corporate Di i&e+&s are a++o%+$e&:

In the event of such corporate announcements, the e"changes ad:ust the position such that economical value of your position on cum!benefit and on e"!benefit day is the same. While calculating the theoretical price of a futures contract, the interest rate should be taken as net of dividend yield. (o on announcement of the dividend, the futures price should be discounted by the dividend amount. Dowever as per the policy of (ebi and stock e"changes, if the dividend is more than +>O of the market price of the stock on the day of dividend announcement, the futures price is ad:usted. The e"changes roll over the positions from last!cum!dividend day to the e"!dividend day by reducing the settlement price by dividend. In such a case, the announcement of such e"ceptional dividends does affect the price of futures. (uppose 0eliance is trading at 0s @>> and a two!month 0eliance future which has AF days to maturity is trading at 0s @>A. 0eliance declares F>O dividend, i.e. 0s F. The dividend amount is less than +>O of the market price of 0eliance, so the e"change would not ad:ust the position. s such the market ad:usts this dividend in the market price and the futures price goes down by 0s F to 0s 5BB. In case of )onus the lot size of the stock that gives bonus gets ad:usted according to the ratio of the bonus. The position is transferred from cum!bonus to e"!bonus day by ad:usting the settlement price to neutralize the effect of bonus.

)or example: @C

The current lot size of 2ipla is 5>>. (uppose 2ipla announces a bonus of +-+. Qou are long on 5>> shares of 2ipla and the settlement price of 2ipla on cum!bonus day is 0s +,>>>. 1n e"!bonus day your position becomes long on A>> shares at 0s F>>. Thereafter the lot size of 2ipla would be A>>.

He&'i+' of sto$. positio+s %si+' f%t%res:

(uppose you are holding a stock that has futures on it and for two to three weeks the stock does not look good to you. Qou do not want to lose the stock but at the same time you want to hedge against the e"pected adverse price movement of the stock for two to three weeks. 1ne option is to sell the stock and buy it back after two to three weeks. This involves a heavy transaction cost and issue of capital gain ta"es. lternatively you can sell futures on the stock to hedge your position in the stock. In case the stock price falls, you make profit out of your short position in the futures. 9sing stock futures you would virtually sell your stock and buy it back without losing it. This transaction is much more economical as it does not involve cost of transferring the stock to and from depository account. Qou might say that if the stock had moved up, you would have made profit without hedging. Dowever it is also true that in case of a fall, you might have lost the value too without hedging. ;lease remember that a hedge is not a device to ma"imize profits, it is a device to minimize losses. s they say, a hedge does not result in better outcome but in predictable outcome. Qou can hedge your cash market position in stocks that do not have stock futures by using inde" futures. )efore we go any further, we need to understand the term called beta. )eta of a stock is nothing but the movement of the stock relative to the inde". (o suppose a stock R moves up by 5O when the 7ifty moves up by +O and it goes down by 5O when the 7ifty falls by +O, the beta of this stock is 5. )eta is crucial in deciding how much position should be taken in inde" futures to hedge the cash market position. (uppose you have a long position in )) worth 0s 5 lakh. The beta of )) is +.+. To hedge this position in the cash market you need to take an opposite position in 7ifty futures worth +.+ " 5, i.e. worth 0s 5.5 lakh. (uppose 7ifty futures are trading at ++>> and the market lot for 7ifty futures is 5>>. Then each market lot of 7ifty is worth 0s 5.5 lakh. Therefore to hedge your position in )) you need to sell one contract of 7ifty futures. Dedging with inde" futures are not perfect, Dedging is like marriage and one should not e"pect it to be perfect. The beta taken in the calculation of the position of 7ifty futures is historical and there is no guarantee that it will be the same in future. (o, any deviation of beta makes the hedge imperfect. (uppose you want to hedge your position in )) for +F days and during those +F days )) becomes very volatile and the beta goes up as high as +.F. In this case your hedging position of one contract is not

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sufficient and you will be under hedged. It is very difficult 3in fact impossible4 to get perfect hedge but one can improve the perfection by ad:usting the position in 7ifty futures from time to time.

Demystifyi+' Sto$. )%t%res

Dere we try to solve some myths about futures When some li#uid money is available to you and you are trying to buy future stocks for risk free interest. 9sing stock futures you can deploy this money to earn risk!free interest. (uppose (atyam is #uoting at 0s @>> in the cash segment and one!month future is #uoting at @>F, you can earn risk!free interest by following the steps mentioned below )uy (atyam in cash market at 0s @>> and simultaneously sell (atyam future at 0s @>F. ;ay 0s @>> to take delivery of (atyam stock in cash market. 1n e"piry of (atyam future contract, the short position would be transferred to your account in the cash segment and a delivery order would be issued against you. ,eliver the (atyam stock. Whatever happens to the price of (atyam, you earn 0s @>F ! @>> W F on 0s @>> for one month. 7eed to have mark!to!mark margins in your account, incase (atyam moves up. If re#uired the future position can be rolled over to the ne"t month position with a difference of 0s A!F. This roll!over process can continue till you want to get your money back. The above e"ample was about how earn risk free interest when li#uid cash is available with you, when the futures stock is going down in futures market but going up in the cash segment then we can do the following(uppose one!month ()I future is #uoting at 5>> while ()I is #uoting at 0s 5>F in the cash segment. *ollow the steps mentioned below to make risk!free money. (ell ()I in the cash market at 0s 5>F and simultaneously buy ()I future at 5>>. 0eceive 0s 5>F and make delivery of ()I stock in the cash market. 1n e"piry of the ()I future contract, the long position would be transferred to your account in the cash segment and a receive order would be issued to you. 6et your ()I stock back. Whatever happens to the price of ()I, you earn 0s 5>F ' 5>> W F on your stock.

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 rrow against the future stock and that is the advantage of futures. Instead of going to the banker and complying with a whole lot of formalities, you can in fact :ust call me to help you raise money against your shares using futures. (uppose 22 is #uoting at 0s +F> in the cash segment and one!month 22 futures are #uoting at +F5. *ollow the steps mentioned below to raise money against your 22 shares. (ell 22 in the cash market at 0s +F> and simultaneously buy 22 futures at +F5. 0eceive 0s +F> and make delivery of 22 stock in the cash market. 1n e"piry of the 22 futures contract, the long position would be transferred to your account in the cash segment and a receive order would be issued to you. 6et your 22 stock back. Whatever happens to the price of shares as cost. 22, you lose 0s +F5 ' +F> W 5 to raise money against your

Qou might have seen that spot price and future price varies in the intra day trading, in that

case you can do arbitrage to raise money in that situations. When the futures are #uoting at a premium to their theoretical price, one can buy cash and short futures. When the prices come in line, that is when the difference between the futures and cash prices comes down, reverse the positions. 2onversely when the futures are #uoting at a discount to the theoretical price, one can sell cash and buy futures. When the prices come in line, that is the difference between the futures and cash prices goes up, reverse the positions. This way it is possible to take advantage of fluctuations in the basis. ;lease note that there is the risk of e"ecution of order. you bear. lso you need to decide the arbitration band depending on the transaction cost

INTRODUCTION TO O!TIONS MAR#ET:

In this section, we look at the ne"t ,erivative product to be traded at 7(E, namely 1ptions. 1ptions are fundamentally different from *orward and *utures contracts. right do somethingE the holder does not have to e"ercise this price. n option gives the holder the

O!TIONS MAR#ET:
1ptions are contracts that give the buyers the right 3but not the obligation4 to buy or sell a specified #uantity of certain underlying asset at a specified price on or before a specified date. 1n the other hand, the seller is under obligation to perform the contract 3buy or sell the underlying4. The

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underlying asset can be share, inde", interest rate, bond, rupee!dollar e"change rate, sugar, crude oil, soybean, cotton, coffee etc.

)or examplerailway ticket is an option in daily life. 9sing the ticket, a passenger has an option to travel. In case he decides not to travel, he can cancel the ticket and get a refund. )ut he has to pay a cancellation fee, which is analogous to the premium paid in an option contract. The railways on the other hand have an obligation to carry the passenger if he decides to travel and refund his money if he decides not to travel. In case the passenger decides to travel the railways get the ticket fare. In case he does not then they get the cancellation fee. The passenger on the other hand, by booking ticket he has hedged his position in case he has to travel as anticipated. In case the travel does not materialize, he can get out of the position by canceling the ticket at a cost, which is the cancellation fee .

Example 5(uppose you have a right to buy +,>>> shares of Dindustan .ever at 0s 5F> per share on or before March 5H, 5>>5. In other words you are a buyer of a call option on Dindustan .ever. The option gives you the right to buy +,>>> shares. Qou have the right to buy Dindustan .ever shares at 0s5F> per share. The seller of this call option who has given you the right to buy from him is under obligation to sell +,>>> shares of Dindustan .ever at 0s5F> per share on or before March 5H, 5>>5 whenever asked.

Optio+ Termi+olo'yThere are some basic terminologies used in options, they are as followsInde" option- These options have the inde" as the underlying. (ome options are European options while others are merican options. Inde"ed option contracts settled in cash.

Sto$. optio+:
(tock options are options on individual stocks. 1ptions currently traded on more than F>> stocks in the 9nited (tates. The contract gives the holder the right to buy or sell shares.

Optio+ 3ol&er: )uyer if the option who has the right. Optio+ *riter: (eller of the option who has the obligation. !remi%m: The consideration paid by the buyer for the right. Call optio+: 1ption that gives the holder the right to buy. !%t optio+: The option that gives the holder the right to sell.

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 Ameri$a+ optio+: These are options that are e"ercised at any point till the e"piration date. E%ropea+ optio+- These are option that can be e"ercised only on the e"piration date. I+ t3e mo+ey: It is an option that would lead to profits if it were e"ercised immediately. O%t of mo+ey: It is an option that would lead to loss if e"ercised immediately. At t3e mo+ey: It is an option that would even the holder/s option if e"ercised immediately. Ho* mo+ey is ma&e i+ t3e optio+ mar.etE
The money made in the option market is known as option pay off. There can be two types of option pay off. 2all option ;ut option

Call optio+:
call option gives the holder the right to buy shares. The option holder will make money if the spot price is higher than the strike price. The pay off assumes that the option holder will buy at the strike price and sell immediately at the spot price. )ut if the spot price is lower than the strike price the holder can simply ignore the option. Dere the profits for the option holder are unlimited while the losses are limited.

Example1(uppose you have a right to buy +,>>> shares of Dindustan .ever at 0s5F> per share on or before March 5H, 5>>5. In other words you are a buyer of a call option on Dindustan .ever. The option gives you the right to buy +,>>> shares. Qou have the right to buy Dindustan .ever shares at 0s5F> per share. The seller of this call option who has given you the right to buy from him is under obligation to sell +,>>> shares of Dindustan .ever at 0s5F> per share on or before March 5H, 5>>5 whenever asked.

Example5ssume you have the right to buy 5>> 7ifty units at ++>>. In other words, you are a buyer of a call option on 7ifty. The option gives you the right to buy 5>> 7ifty units. Qou have the right to buy 5>> units of 7ifty at ++>>. The seller of this call option who has given you the right to buy from him is under obligation to sell 5>> units of 7ifty.

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!%t Optio+:
The put option gives the right to sell. The option holder will make money if the spot price is lower than the strike price. The pay off assumes that the option holder will buy at spot price and sell at strike price. )ut if the spot price is higher than the strike price, the option holder will simply ignore the option, it will be beneficial to sell it in the market. )ut if the spot price falls dramatically then he can make wind fall profits. Thus the profits of the option holder are unlimited and his losses are capped to the e"tent of the premium.

Example1(uppose you have the right to sell +,I>> shares of )harat Deavy Electrical at 0s +A> per share on or before March 5H, 5>>5. In other words you are a buyer of a put option on )harat Deavy Electrical. The option gives you the right to sell +,I>> shares. Qou have the right to sell )harat Deavy Electrical shares at 0s+A> per share. The seller of this put option who has given you the right to sell to him is under obligation to buy +,I>> shares of )harat Deavy Electricals at 0s+A> per share on or before March 5H, 5>>5 whenever asked.

Example5(uppose you have the right to sell 5>> 7ifty units at +5>>. In other words you are a buyer of a put option on 7ifty. The option gives you the right to sell 5>> 7ifty units. Qou have the right to sell 5>> units of 7ifty at +5>>. The seller of this call option who has given you the right to sell to him is under obligation to buy 5>> units of nifty. 1ption contracts have an e"piry date specified by e"changes. The buyer en:oysthe right and the seller is under obligation to fulfill the right till the option contract e"pires. March 5H, 5>>5 is the e"piry date in the aforesaid e"ample. 7ormally as per the contract specifications of options given by the 7ational (tock E"change and )ombay (tock E"change, last Thursday of the contract month is the e"piry day. In case the last Thursday of a month is a holiday, the previous business day is considered as the e"piry day. Dowever you must check with the dealer about the e"piry date before placing the order for buying or selling options. There are one!, two! and three!month contracts available presently. It is e"pected that once these contracts become li#uid, the e"changes would introduce contracts of longer!term e"piry$maturity.

,3o &e$i&es t3e stri.e pri$eE

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The e"changes decide the strike price at which call and put options are traded. 6enerally to simplify matters, the e"changes specify the strike price interval for different levels of underling prices, meaning the difference between one strike price and the ne"t strike price over and below it. )or example The strike price interval for )harat Deavy Electricals is 0s+>. This means that there would be strike prices available with an interval of 0s+>. Typically you can see options on )harat Deavy Electricals with strike prices of 0s+F>, 0s+I>, 0s+C>, 0s+H>, and 0s+B> etc.

Stri.e pri$e i+ter als spe$ifie& (y t3e ex$3a+'es:

(trike price intervals specified by the e"changes are as follows;rice level of 9nderlying .ess than or e#ual to F> bove F> to 5F> bove 5F> to F>> bove F>> to +>>> bove +>>> to 5F>> bove 5F>> (trike ;rice Interval 3in 0s4 5.F F.> +>.> 5>.> @>.> F>.>

Optio+s Mar.et !ro$ess:

2all and put options are traded on!line on the trading screens of the 7ational (tock E"change and )ombay (tock E"change like any other securities. The price of options is decided between the buyers and sellers on the trading screens of the e"changes in a transparent manner. Qou can see the best five orders by price and #uantity. Qou can place market, limit and stop loss order etc. Qou can modify or delete your pending orders. The whole process is similar to that of trading in shares. Qou are not compelled to wait till e"piry of the option once you have bought or sold an option. Instead you can buy an option and s#uare up the position by selling the identical option 3same e"piry and same strike4 at any time before the contract e"pires. Qou can sell an option and s#uare up the position by buying an identical option. Qou can buy first and sell later or you can initiate your position by selling and then buyingXthere is no restriction on direction. The difference between the selling and buying prices is your profit$loss. The process is similar to that of trading in shares.

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)a$tors affe$ti+' t3e pri$e of optio+:

There are five fundamental factors that affect the price of an option. These are+. ;rice of the underlying stock or inde" 5. (trike price$e"ercise price of the option @. Time to e"piration of the option A. 0isk!free rate of interest F. ?olatility of the price of underlying stock or inde" d:ust the price for dividend e"pected during the term of the option to arrive at fine prices. 2onsider this suppose a stock is trading at 0sC>. There is A>O probability that the stock price would move to 0sH>. (imilarly the probabilities of the price being 0sB>, 0s+>>, 0s++> and 0s+5> are 5FO, +FO, +>O and FO respectively. What would be your e"pected return if you were the buyer of a call option with a strike price of 0s+>>Y If the stock price were to finish at 0sH>, 0sB> and 0s+>>, the call option would e"pire worthless. If the stock price were to finish at 0s++> or 0s+5>, you would gain 0s+> and 0s5> respectively. Qour e"pected return from the call would be3A>OV>4T 35FOV>4 T 3+FOV>4 T 3+>OV+>4 T 3FOV5>4 W ++. This means that you would like to pay anything less than 0s++ for this option to make a profit and the seller would always like to get anything more than 0s++ for giving you this option.

Settleme+t:
;resently stock options are settled in cash. This means that when the buyer of the option e"ercises an option, he receives the difference between the spot price and the strike price in cash. The seller of the option pays this difference. It is e"pected that stock options would be settled by delivery of the underlying stock. This means that on e"ercise of a call option, a long position of the underlying stock effectively at the strike price would be transferred in the cash segment in the account of the buyer of the call option who has the right to buy. n opposite short position at effectively the strike price would be transferred in the cash segment in the account of the seller of the call option who has obligation to sell. (imilarly on e"ercise of a put option, a short position in the underlying stock effectively at the strike price would be transferred in the cash segment in the account of the buyer of the put option who has the right to sell. n opposite long position at effectively the strike price would be transferred in the cash segment in the account of the seller of the put option who has the obligation to buy. Dowever guidelines in this regard are awaited from (E)I. ;lease check the e"act method of delivery!based settlement once the regulator and e"changes announce it.

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Varyi+' time al%e for at4= i+4 a+& o%t4of4t3e4mo+ey optio+sE

The following graph shows how the premium of @>!day maturity, 0s5I> strike price call option on 0eliance varies with the movement of the spot price of 0eliance. (tudy the price movement of the option carefully. Qou would find that the time value is the highest when the spot price is e#ual to the strike priceE the option is at the money. s the spot price rises above the strike price, the option becomes in the money and its intrinsic value increases but its time value decreases. In the same way as the spot price falls below the strike price, the option becomes out of the money and its intrinsic value becomes zero while its time value decreases.

!remi%m Varyi+' *it3 t3e !ri$e of t3e Optio+:

The buyers of longer maturity options en:oy the right to longer duration and the sellers are sub:ect to risk of price movement of the underlying during a longer term, since the price of both call and put options increases as the time to e"piry increases. The following graph shows the prices of +F! and @>!day maturity, 0s5I> strike price call options on 0eliance when the spot price of 0eliance is 0s5I>.

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Differe+$e (et*ee+ Optio+s a+& )%t%resIn case of futures, both the buyer and the seller are under obligation to fulfill the contract. They have unlimited potential to gain if the price of the underlying moves in their favour. 1n the contrary, they are sub:ect to unlimited risk of losing if the price of the underlying moves against their views. In case of options, however, the buyer of the option has the right and not the obligation. Thus he en:oys an asymmetric risk profile. De has unlimited potential to profit if the price of the underlying moves in his favour. )ut a limited potential to lose, to the e"tent of the premium paid, in case the price of the underlying moves against the view taken. (imilarly the seller of the option is under obligation. De has limited potential to profit, to the e"tent of the premium received, in case the price of the underlying moves in his favour. )ut an unlimited risk of losing in case the price of the underlying moves against the view taken.

!RICE -EHEVIOUR O) AN O!TION OR 0REE# O!TION:

We need to understand and appreciate various option 6reeks like delta, gamma, theta, ?ega and rho to completely comprehend the behavior of option prices.

DE"TA of a+ Optio+ a+& its Si'+ifi$a+$es:

*or a given price of underlying, risk!free interest rate, strike price, time to maturity and volatility, the delta of an option is a theoretical number. If any of the above factors changes, the value of delta also changes. The delta of an option tells you by how much the premium of the option would increase or decrease for a unit change in the price of the underlying. *or e"ample, for an option with delta of >.F, the premium of the option would change by F> paisa for an 0s+ change in the price of the underlying. ,elta is about >.F for near$at the! money options. s the option becomes in the money, the value of delta

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increases. 2onversely as the option becomes out of the money, the value of delta decreases. In other words, delta measures the sensitivity of options with respect to change in the price of the underlying. ,eep out!of!the!money options are less sensitive in comparison to at!the!money and deep in!the!money options. ,elta is positive for a bullish position 3long call and short put4 as the value of the position increases with rise in the price of the underlying. ,elta is negative for a bearish position 3short call and long put4 as the value of the position decreases with rise in the price of the underlying. ,elta varies from > to + for call options and from '+ to > for put options. (ome people refer to delta as > to +>> numbers. The ,elta is an important piece of information for a option )uyer because it can tell him much of an option K buyer he can e"pect for short!term moves by the underlying stock. This can help the )uyer of an option which call $ ;ut option should be bought. The factors that can change the ,elta of an option are (tock price, ?olatility and 7umber of days.

THETA of a+ optio+ a+& its Si'+ifi$a+$e:

The theta of an option is an e"tremely significant theoretical number for an option trader. .ike the other 6reek terms you can calculate theta using option calculator. Theta tells you how much value the option would lose after one day, with all the other parameters remaining the same. (uppose the theta of Infosys @>!day call option with a strike price of 0s@, B>> is A.F when Infosys is #uoting at 0s@,B>>, volatility is F>O and the risk!free interest rate is HO. This means that if the price of Infosys and the other parameters like volatility remain the same and one day passes, the value of this option would reduce by 0sA.F.

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Theta is always negative for the buyer of an option, as the value of the option goes down each day if his view is not realized. 2onversely theta is always positive for the seller of an option, as the value of the position of the seller increases as the value of the option goes down with time. 2onsider options as depreciating assets because of time decay and appreciating due to *avorable price movements. If the rate of appreciation is more than that of depreciation hold the option, else sell it off. *urther, time decay of option premium is very steep near e"piry of the option. The following graph would make it clearer.

VE0A of a+ Optio+ a+& its Si'+ifi$a+$e?ega is also a theoretical number that can be calculated using an option calculator for a given set of values of underlying price, time to e"piry, strike price, volatility and interest rate etc. ?ega indicates how much the option premium would change for a unit change in annual volatility of the underlying. (uppose the ?ega of an option is >.I and its premium is 0s+F when volatility of the underlying is @FO. s the volatility increases to @IO, the premium of the option would change upward to 0s+F.I. ?ega is positive for a long position 3long call and long put4 and negative for a short position 3short call and short put4. (imply put, for the buyer it is advantageous if the volatility increases after he has bought the option. 1n the other hand, for the seller any increase in volatility is dangerous as the probability of his option getting in the money increases with any rise in volatility. (ometimes you might have observed that though seven to ten days have passed after you bought an option, the underlying price is almost in the same range while the premium of the option has increased. This clearly indicates that volatility of the underlying might have increased.

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0AMMA of a+ optio+ a+& its Si'+ifi$a+$es:

6amma is a sophisticated concept. Qou need patience to understand it, as it is important too. .ike delta, the gamma of an option is a theoretical number. *eeding the price of underlying, risk!free interest rate, strike price, time to maturity and volatility, the gamma of an option tells you how much the delta of an option would increase or decrease for a unit change in the price of the underlying. *or e"ample, assume the gamma of an option is >.>A and its delta is >.F. *or a unit change in the price of the underlying, the delta of the option would change to >.F T >.>A W >.FA. The new delta of the option at changed underlying price is >.FAE so the rate of change in the premium has increased.

If I *ere to explai+ i+ ery simple termsIf delta is velocity, then gamma is acceleration. ,elta tells you how much the premium would changeE gamma changes delta and tells you how much the ne"t premium change would be for a unit price change in the price of the underlying. 6amma is positive for long positions 3long call and long put4 and negative for short positions 3short call and short put4. 6amma does not matter much for options with long maturity. Dowever for options with short maturity, gamma is high and the value of the options changes very fast with swings in the underlying prices.

STRATE0Y IN THE O!TION MAR#ET: ,3e+ -%llis3

When you are very bullish, buy a call option. When you are very bullish on the market as a whole, buy a call option on indices 37ifty$(ense"4. When you are very bullish on a particular stock, buy a call option on that stock. The more bullish you are, the more out of the money 3higher strike price4 should be the option you buy. 7o other position gives you as much leveraged advantage in a rising market with limited downside.

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Upsi&e pote+tial:
The price of the option increases as the price of the underlying rises. Qou can book profit by selling the same option at higher price whenever you think that the underlying price has come to the level you e"pected. t e"piration the break!even underlying price is the strike price plus premium paid for buying the option.

Do*+si&e ris.:
Qour loss is limited to the premium you have paid. The ma"imum you can lose is the premium, if the underlying price is below the strike price at e"piry of the option.

Time &e$ay $3ara$teristi$:

1ptions are wasting assets in the hands of a buyer. s time passes, the value of the position erodes. If volatility increases, erosion slows downE if volatility decreases, erosion hastens.

,3e+ NO Rise
When you firmly believe that the underlying is not going to rise, sell a call option. When you firmly believe that inde" 37ifty$(ense"4 is not going to rise, sell a call option on inde". When you firmly believe that a particular stock is not going to rise, sell call option on that stock. (ell out!of!the!money 3higher strike price4 options if you are only somewhat convincedE sell at!the!money options if you are very confident that the underlying would remain at the current level or fall.

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Upsi&e pote+tial:
Qour profit is limited to the premium received. t e"piration the break!even is strike price plus premium. Ma"imum profit is realized if the underlying price is below the strike price.

Do*+si&e ris.:
The price of the option increases as the underlying rises. Qou can cut your losses by buying the same option if you think that your view is going wrong. .osses keep on increasing as the underlying rises and are virtually unlimited. (uch a position must be monitored closely.

Time &e$ay $3ara$teristi$:

1ptions are growing assets in the hands of a seller. s time passes, the value of position increases as the option loses its time value. Qou get ma"imum profit if the option is at the money.

,3e+ -earis3
When you are very bearish, buy a put option. When you are very bearish on the market as a whole, buy put option on indices 37ifty$(ense"4. When you are very bearish on a particular stock, buy put option on that stock. The more bearish you are, the more out of the money 3lower strike price4 should be the option you buy. 7o other position gives you as much leveraged advantage in a falling market with limited down side.

F5

Upsi&e pote+tial:
The price of the option increases as the price of the underlying falls. Qou can s#uare up your position by selling the same option at a higher price whenever you think that the underlying price has come to the level you e"pected. t e"piration the break!even underlying price is the strike price minus premium paid for buying the option.

Do*+si&e ris.:
Qour loss is limited to the premium you have paid. The ma"imum you can lose is the premium, if the underlying price is above the strike price at e"piry of the option.

Time &e$ay $3ara$teristi$:

1ptions are wasting assets in the hands of a buyer. s time passes, the value of the position erodes. If the volatility increases, erosion slowsE if the volatility decreases, erosion hastens.

,3e+ NO )all
When you firmly believe that the underlying is not going to fall, sell a put option. When you firmly believe that inde" 37ifty$(ense"4 is not going to fall, sell a put option on the inde". When you firmly believe that a particular stock is not going to fall, sell put option on that stock. (ell out!of!the! money 3lower strike price4 options if you are only somewhat convincedE sell at!the!money options if you are very confident that the underlying would remain at the current level or rise.

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Upsi&e pote+tial:
Qour profit is limited to the premium received. t e"piration the break!even is strike price minus premium. Ma"imum profit is realized if the underlying price is above the strike price.

Do*+si&e ris.:
The price of the option increases as the underlying falls. Qou can cut your losses by buying the same option if you think that your view is going to be wrong. .osses keep on increasing as the underlying falls and are virtually unlimited. (uch a position must be monitored closely. Time decay characteristic- options are growing assets in the hands of a seller. the money. s time passes, the value of the position increases as the option loses its time value. Ma"imum profit is realized if the option is at

Mo&erately -%llis3
When you think the underlying inde" or stock will go up somewhat or is at least more likely to rise than fall, )ull (pread is the best strategy.

Strate'y impleme+tatio+:
call option is bought with a lower strike price and another call option is sold with a higher strike price, producing a net initial debit. 1r a put option is bought with a lower strike price and another put sold with a higher strike price, producing a net initial credit.

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Upsi&e pote+tial: profit is limited. Calls: ,ifference between strikes minus initial debit . !%ts- 7et initial credit. Ma"imum profit if underlying price at e"piry is above the
higher strike.

Do*+si&e ris.: loss is limited. Calls- net initial debit. !%ts- ,ifference between strikes minus initial credit.
Ma"imum loss if the underlying price at e"piry is below the lower strike.

Time &e$ay $3ara$teristi$- time value erosion is not too significant because of balanced position. Mo&erately -earis3
When you think the underlying inde" or stock will go down somewhat or is at least more likely to fall than rise, )ear (pread is the best strategy.

Strate'y impleme+tatio+:
call option is sold with a lower strike price and another call option is bought with a higher strike price, producing a net initial credit or a put option is sold with a lower strike price and another put bought with a higher strike, producing net initial debit.

FF

Upsi&e pote+tial: ;rofit is limited. Calls: 7et initial credit. !%ts- ,ifference between strikes minus initial debit.
Ma"imum profit if the market is below the lower strike at e"piry.

Do*+si&e ris.- profit is limited. Calls: ,ifference between strikes minus initial credit. !%ts: 7et initial debit
Ma"imum loss if the market is above the higher strike at e"piry.

Time &e$ay $3ara$teristi$- Time value erosion is not too significant because of balanced position.

Air De$$a+ )%t%re Co+tra$t 2alculation of 0eturns

DATES +!*eb!+5 5!*eb!+5 @!*eb!+5 A!*eb!+5 F!*eb!+5 I!*eb!+5 H!*eb!+5 B!*eb!+5 +>!*eb!+5 Ope+ !ri$e FF.>F >.>> FA.@> FA.@> AH.A> F+.+> F@.HF F5.I> F5.AF $lose pri$e FF.>F FF.>F FA.@> F+.BF F>.B> F5.5F F>.HF F5.I> F>.HF Ret%r+s >.>> !FF.>F >.>> 5.@F !5.F> !+.+F @.>> >.>> +.I>

FI

++!*eb!+5 +F!*eb!+5 +I!*eb!+5 +C!*eb!+5 +H!*eb!+5 +B!*eb!+5 55!*eb!+5 5@!*eb!+5 5A!*eb!+5 5F!*eb!+5 5I!*eb!+5 5!Mar!+5 @!Mar!+5 A!Mar!+5 F!Mar!+5 H!Mar!+5 B!Mar!+5 +>!Mar!+5 ++!Mar!+5 +5!Mar!+5 +F!Mar!+5 +I!Mar!+5 +C!Mar!+5 +H!Mar!+5 +B!Mar!+5 55!Mar!+5 5@!Mar!+5 5F!Mar!+5

F5.HF F5.+F F5.I> F5.FF F5.@F F+.>> F+.5> F>.>> AB.IF F+.+> AB.FF F>.+> F5.IF F@.@> FA.5F FA.IF FA.I> F@.B> F@.5F F@.5> F+.IF F>.>> F5.F> F>.F> F>.@F AB.A> F>.A> AH.@>

F+.C> F+.5F F5.I> F5.A> F+.AF F>.B> F>.@> AB.@F F>.FF AB.AF AB.IF F5.@F F@.@> F@.C> FA.+> FA.IF F@.I> F@.A> F@.5> F+.B> F>.HF F5.+F F>.5> F>.5> F>.5> AB.+> AH.A> AH.>> Total verage

+.+F >.B> >.>> >.+F >.B> >.+> >.B> >.IF !>.B> +.IF !>.+> !5.5F !>.IF !>.A> >.+F >.>> +.>> >.F> >.>F +.@> >.H> !5.+F 5.@> >.@> >.+F >.@> 5.>> >.@> !A5.IF !+.+F

0ET907 W

open price ' closing price 2alculation of 0isk

Ret%r+s ?X@ >.>> !FF.>F >.>> 5.@F !5.F> !+.+F @.>> >.>> +.I> +.+F >.B> >.>> >.+F >.B> >.+> Expe$te& Ret%r+?x@ !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F X4exp?x@C & +.+F !F@.B> +.+F @.F> !+.@F >.>> A.+F +.+F 5.CF 5.@> 5.>F +.+F +.@> 5.>F +.5F D5 +.@55F 5B>F.5+ +.@55F +5.5F +.H55F > +C.555F +.@55F C.FI5F F.5B A.5>5F +.@55F +.IB A.5>5F +.FI5F

FC

>.B> >.IF !>.B> +.IF !>.+> !5.5F !>.IF !>.A> >.+F >.>> +.>> >.F> >.>F +.@> >.H> !5.+F 5.@> >.@> >.+F >.@> 5.>> >.@>

!+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F !+.+F

5.>F +.H> >.5F 5.H> +.>F !+.+> >.F> >.CF +.@> +.+F 5.+F +.IF +.5> 5.AF +.BF !+.>> @.AF +.AF +.@> +.AF @.+F +.AF total

A.5>5F @.5A >.>I5F C.HA +.+>5F +.5+ >.5F >.FI5F +.IB +.@55F A.I55F 5.C55F +.AA I.>>5F @.H>5F + ++.B>5F 5.+>5F +.IB 5.+>5F B.B55F 5.+>5F @>@C.5

(.,. 3Z4 W [\d5$7 (.,. 3Z4 W B.>I>+FB

FH

INTER!RETATION: The above table shows *utures 2ontract return K risk associated with the price movement of I0 ,E22 7 for a month of *ebruary K March 5>+5. It has an average return of !+.+F that is !++F.>> and risk is B.>I>+FB.

!%t Optio+ 2alculation of 0eturns

Date +!*eb!+5 5!*eb!+5 @!*eb!+5 A!*eb!+5 F!*eb!+5 I!*eb!+5 H!*eb!+5 B!*eb!+5 +>!*eb!+5 ++!*eb!+5 +F!*eb!+5 +I!*eb!+5 +C!*eb!+5 +H!*eb!+5 +B!*eb!+5 55!*eb!+5 5@!*eb!+5 5A!*eb!+5 5F!*eb!+5 5I!*eb!+5 5!Mar!+5 @!Mar!+5 A!Mar!+5 F!Mar!+5 H!Mar!+5 B!Mar!+5 +>!Mar!+5 Stri.e !ri$e F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> Close !ri$e 5I.AF 5@.B> 5F.>> 5+.CF 5F.AF 5I.BF 5C.F> 5C.5> 5F.C> 5I.FF 5I.@F 5C.A> 5C.@F 5I.@> 5F.H> 5F.+F 5A.+F 5F.5> 5A.@> 5A.I> 5C.5> 5H.@> 5H.CF 5H.B> 5B.FF 5H.FF 5H.@F Ret%r+s AC@.FF ACI.+> ACF.>> ACH.5F ACA.FF AC@.>F AC5.F> AC5.H> ACA.@> AC@.AF AC@.IF AC5.I> AC5.IF AC@.C> ACA.5> ACA.HF ACF.HF ACA.H> ACF.C> ACF.A> AC5.H> AC+.C> AC+.5F AC+.+> AC>.AF AC+.AF AC+.IF

FB

++!Mar!+5 +5!Mar!+5 +F!Mar!+5 +I!Mar!+5 +C!Mar!+5 +H!Mar!+5 +B!Mar!+5 55!Mar!+5 5@!Mar!+5 5F!Mar!+5

F>> F>> F>> F>> F>> F>> F>> F>> F>> F>>

5H.>> 5I.H> 5F.IF 5I.BF 5F.+F 5F.>> 5F.>> 5A.>> 5@.@F 5C.CF Total verage

AC5.>> AC@.5> ACA.@F AC@.>F ACA.HF ACF.>> ACF.>> ACI.>> ACI.IF AC5.5F +CF5B.C> AC@.CH

0ET907 W

strike price ' closing price 2alculation of 0isk

E"pected returns3"4 AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH AC@.CH R!e"p3"4 W , !>.5@ 5.@5 +.55 A.AC >.CC !>.C@ !+.5H !>.BH >.F5 !>.@@ !>.+@ !+.+H !+.+@ !>.>H >.A5 +.>C 5.>C +.>5 +.B5 +.I5 !>.BH !5.>H !5.F@ !5.IH !@.@@ !5.@@ !5.+@ !+.CH !>.FH >.FC !>.C@ +.>C +.55 +.55 ,5 >.>F5B F.@H5A +.AHHA +B.BH>B >.FB5B >.F@5B +.I@HA >.BI>A >.5C>A >.+>HB >.>+IB +.@B5A +.5CIB >.>>IA >.+CIA +.+AAB A.5HAB +.>A>A @.IHIA 5.I5AA >.BI>A A.@5IA I.A>>B C.+H5A ++.>HHB F.A5HB A.F@IB @.+IHA >.@@IA >.@5AB >.F@5B +.+AAB +.AHHA +.AHHA

0eturns 3R4 AC@.FF ACI.+> ACF.>> ACH.5F ACA.FF AC@.>F AC5.F> AC5.H> ACA.@> AC@.AF AC@.IF AC5.I> AC5.IF AC@.C> ACA.5> ACA.HF ACF.HF ACA.H> ACF.C> ACF.A> AC5.H> AC+.C> AC+.5F AC+.+> AC>.AF AC+.AF AC+.IF AC5.>> AC@.5> ACA.@F AC@.>F ACA.HF ACF.>> ACF.>>

I>

ACI.>> ACI.IF AC5.5F

AC@.CH AC@.CH AC@.CH

5.55 5.HC !+.F@ Total

A.B5HA H.5@IB 5.@A>B ++>.FC@H

(.,. 3Z4 W [\d5$7 (.,. 3Z4 W +.C5HC55

INTER!RETATION: The above table shows put option contract return K risk associated with the price movement of I0 ,E22 7 for a month of *ebruary K March 5>+5. It has an average return of AC@.CHthat is AC@CH.>> and risk is +.C5HC55.

I+

,ipro )%t%res 2alculations of the 0eturns

Date +!*eb!+5 5!*eb!+5 @!*eb!+5 A!*eb!+5 F!*eb!+5 I!*eb!+5 H!*eb!+5 B!*eb!+5 +>!*eb!+5 ++!*eb!+5 +F!*eb!+5 +I!*eb!+5 +C!*eb!+5 +H!*eb!+5 +B!*eb!+5 55!*eb!+5 5@!*eb!+5 5A!*eb!+5 5F!*eb!+5 5I!*eb!+5 5!Mar!+5 @!Mar!+5 A!Mar!+5 F!Mar!+5 H!Mar!+5 B!Mar!+5 +>!Mar!+5 ++!Mar!+5 +5!Mar!+5 +F!Mar!+5 +I!Mar!+5 +C!Mar!+5 +H!Mar!+5 +B!Mar!+5 55!Mar!+5 5@!Mar!+5 5F!Mar!+5 Ope+ !ri$e I@C.C IHB.F II+.C IIH.FF IA5.+ IAF IAF.BF IA> C>B.5 IF@.HF IIA.B II>.FF ICA.BF IIH.+F II5.FF IC5 IIB.B ICH.C ICA.F IC5.B ICB.H C>@.5 IBI.HF IBH IB+.C C>> C>+ C>+.I C+@.+ C++.+F C@> C@5.+F C5+.+F C@H.H C5@ C@5 C55.F Close !ri$e IC5.@ IFF.+ IC+.CF IF@.F IAI IAB I@C.A IFA.HF IAI.A IFC.C II+.AF IC>.IF IC+.@ IIB.H III.A IC>.AF ICH IC@.H IC+.C ICH.@ C>>.I IBH.+F IBA.@F IHI.@F IBI.H C>+.+F IBC.5F C+5 C++.A C5C.IF C@>.+ C@B.B C@5.+F C5B.B C@>.A C55.H C+H.B Total verage Ret%r+s !@A.I @A.A !+>.>F +F.>F !@.B !A H.FF !+A.HF I5.H !@.HF @.AF !+>.+ @.IF !+.IF !@.HF +.FF !H.+ A.B 5.H !F.A !5>.H F.>F 5.F ++.IF !F.+ !+.+F @.CF !+>.A +.C !+I.F !>.+ !C.CF !++ H.B !C.A B.5 @.I 5.BF >.>CBC@

0ET907 W

opening price ' closing price 2alculation of 0isk

E"pected 0eturn 3"4 >.>CBC@ R!e"p3"4W, !@A.ICBC@ ,5 +5>5.IH

0eturns3R4 !@A.I

I5

@A.A !+>.>F +F.>F !@.B !A H.FF !+A.HF I5.H !@.HF @.AF !+>.+ @.IF !+.IF !@.HF +.FF !H.+ A.B 5.H !F.A !5>.H F.>F 5.F ++.IF !F.+ !+.+F @.CF !+>.A +.C !+I.F !>.+ !C.CF !++ H.B !C.A B.5 @.I

>.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@ >.>CBC@

@A.@5>5C !+>.+5BC@ +A.BC>5C !@.BCBC@ !A.>CBC@ H.AC>5C !+A.B5BC@ I5.C5>5C !@.B5BC@ @.@C>5C !+>.+CBC@ @.FC>5C !+.C5BC@ !@.B5BC@ +.AC>5C !H.+CBC@ A.H5>5C 5.C5>5C !F.ACBC@ !5>.HCBC@ A.BC>5C 5.A5>5C ++.FC>5C !F.+CBC@ !+.55BC@ @.IC>5C !+>.ACBC@ +.I5>5C !+I.FCBC@ !>.+CBC@ !C.H5BC@ !++.>CBC@ H.H5>5C !C.ACBC@ B.+5>5C @.F5>5C Total

++CC.HH +>5.I+ 55A.++ +F.HA +I.IA C+.CF 555.B> @B@@.H@ +F.AA ++.@I +>@.I@ +5.CF 5.BB +F.AA 5.+I II.B+ 5@.5A C.A> @>.>@ A@F.BI 5A.C> F.HI +@@.HC 5I.H@ +.F+ +@.AC +>B.H5 5.I@ 5CA.HB >.>@ I+.@> +55.CI CC.H> FF.BF H@.+H +5.@B HC>5.FA

(.,. 3Z4 W [\d5$7 (.,. 3Z4 W +F.@A

I@

INTER!RETATION: The above table shows *utures 2ontract return K risk associated with the price movement of WI;01 for a month of *ebruary K March 5>+5. It has an average return of >.>CBC@ that is C.BC@ and risk is +F.@A.

!%t Optio+s 2alculation of 0eturns

,ate +!*eb!+5 5!*eb!+5 @!*eb!+5 A!*eb!+5 F!*eb!+5 I!*eb!+5 H!*eb!+5 B!*eb!+5 +>!*eb!+5 (trike ;rice F>> F>> F>> F>> F>> F>> F>> F>> F>> 2lose ;rice 5@+.F> 5+I.A> 5@A.IF 5+H.5F 5>C.+F 5+>.BF +BB.>F 5+C.>> 5+>.@> 0eturns 5IH.F> 5H@.I> 5IF.@F 5H+.CF 5B5.HF 5HB.>F @>>.BF 5H@.>> 5HB.C>

IA

++!*eb!+5 +F!*eb!+5 +I!*eb!+5 +C!*eb!+5 +H!*eb!+5 +B!*eb!+5 55!*eb!+5 5@!*eb!+5 5A!*eb!+5 5F!*eb!+5 5I!*eb!+5 5!Mar!+5 @!Mar!+5 A!Mar!+5 F!Mar!+5 H!Mar!+5 B!Mar!+5 +>!Mar!+5 ++!Mar!+5 +5!Mar!+5 +F!Mar!+5 +I!Mar!+5 +C!Mar!+5 +H!Mar!+5 +B!Mar!+5 55!Mar!+5 5@!Mar!+5 5F!Mar!+5

F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>>

5+H.5> 555.+F 5@5.+F 5@@.F> 55B.B> 55C.H> 5@>.>> 5@C.HF 5@@.IF 5@>.H> 5@H.B> 5A5.F> 5FB.IF 5FA.HF 5FI.BF 5FH.I> 5I5.BF 5FC.5> 5C>.5F 5C>.HF 5HB.5F 5HH.5F 5BB.I> 5HB.A> 5HI.B> 5HH.5> 5H>.A> 5@I.CF Total verage

5H+.H> 5CC.HF 5IC.HF 5II.F> 5C>.+> 5C5.5> 5C>.>> 5I5.+F 5II.@F 5IB.5> 5I+.+> 5FC.F> 5A>.@F 5AF.+F 5A@.>F 5A+.A> 5@C.>F 5A5.H> 55B.CF 55B.+F 5+>.CF 5++.CF 5>>.A> 5+>.I> 5+@.+> 5++.H> 5+B.I> 5I@.5F BA5C.@> 5FA.CB

0ET907 W

strike price ' closing price 2alculation of 0isk

Expe$te& Ret%r+ ?x@ 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB X4Exp?x@CD +@.C+ 5H.H+ +>.FI 5I.BI @H.>I @A.5I AI.+I 5H.5+ @A.B+ 5C.>+ 5@.>I +@.>I ++.C+ +F.@+ +C.A+ D5 +HC.BI H@>.>5 +++.F+ C5I.HA +AAH.FI ++C@.CF 5+@>.CF CBF.H> +5+H.C+ C5B.FA F@+.CI +C>.FI +@C.+5 5@A.A> @>@.++

Ret%r+s?X@ 5IH.F 5H@.I 5IF.@F 5H+.CF 5B5.HF 5HB.>F @>>.BF 5H@ 5HB.C 5H+.H 5CC.HF 5IC.HF 5II.F 5C>.+ 5C5.5

IF

5C> 5I5.+F 5II.@F 5IB.5 5I+.+ 5FC.F 5A>.@F 5AF.+F 5A@.>F 5A+.A 5@C.>F 5A5.H 55B.CF 55B.+F 5+>.CF 5++.CF 5>>.A 5+>.I 5+@.+ 5++.H 5+B.I 5I@.5F

5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB 5FA.CB

+F.5+ C.@I ++.FI +A.A+ I.@+ 5.C+ !+A.AA !B.IA !++.CA !+@.@B !+C.CA !++.BB !5F.>A !5F.IA !AA.>A !A@.>A !FA.@B !AA.+B !A+.IB !A5.BB !@F.+B H.AI total

5@+.@A FA.+C +@@.I@ 5>C.IF @B.H5 C.@A 5>H.F+ B5.B@ +@C.H@ +CB.5B @+A.C+ +A@.CI I5C.>> IFC.A+ +B@B.F5 +HF5.AA 5BFH.5C +BF5.CI +C@H.>I +HAH.+A +5@H.@A C+.FC 5C@IA.HB

(.,. 3Z4 W [\d5$7 (.,. 3Z4 W 5C.+BF

II

INTER!RETATION: The above table shows put option contract return K risk associated with the price movement of I0 ,E22 7 for a month of *ebruary K March 5>+5. It has an average return of 5FA.CB that is 5FACB.>> and risk is 5C.+BF.

-3arat3i Airtel )%t%resCo+tra$t 2alculations of 0eturns

Date +!*eb!+5 5!*eb!+5 @!*eb!+5 A!*eb!+5 F!*eb!+5 I!*eb!+5 H!*eb!+5 B!*eb!+5 +>!*eb!+5 ++!*eb!+5 +F!*eb!+5 +I!*eb!+5 +C!*eb!+5 +H!*eb!+5 +B!*eb!+5 55!*eb!+5 5@!*eb!+5 5A!*eb!+5 5F!*eb!+5 5I!*eb!+5 5!Mar!+5 @!Mar!+5 A!Mar!+5 F!Mar!+5 H!Mar!+5 B!Mar!+5 +>!Mar!+5 Ope+ pri$e @>C.>> @+A.H> @>B.I> @>C.BF 5BF.>> @>+.BF 5BB.>> @>C.HF @+@.F> @+>.HF @+A.>> 5HC.C> 5CA.+> 5H>.HF 5CH.@> 5H+.F> 5CI.+> 5H>.>> 5CI.>> 5CH.+> 5H5.A> 5B5.>> 5B5.>> 5BA.C> @>+.>> 5B5.5> 5B+.>> Close pri$e @+5.AF @>C.I @>B.I @>5.CF @>>.@ @>+.+F @>B.+F @+A.+ @+A.C @+@.F 5HI.A 5C@.@F 5CB.@F 5H+.CF 5CB.5 5CC.A 5H>.AF 5CF.HF 5CC.5 5CB.FF 5B>.@ 5B+.CF 5B@.IF 5BH.+F 5B+.BF 5B>.F 5HH.FF Ret%r+s !F.AF C.5> >.>> F.5> !F.@> >.H> !+>.+F !I.5F !+.5> !5.IF 5C.I> +A.@F !F.5F !>.B> !>.B> A.+> !A.@F A.+F !+.5> !+.AF !C.B> >.5F !+.IF !@.AF B.>F +.C> 5.AF

IC

++!Mar!+5 +5!Mar!+5 +F!Mar!+5 +I!Mar!+5 +C!Mar!+5 +H!Mar!+5 +B!Mar!+5 55!Mar!+5 5@!Mar!+5 5F!Mar!+5

5@+.AF 5BF.A> 5BB.@F 5BH.+F 5BI.H> 5BB.F> @>+.+> @>I.+> @+F.>> @>A.C>

5BA.FF 5BH.+ 5BH.HF 5BF.@F 5BH.B @>>.HF @+@.>F @+I.>F @>C.AF @+A.A Total verage

!I@.+> !5.C> >.F> 5.H> !5.+> !+.@F !++.BF !B.BF C.FF !B.C> !C+.5> !+.B5

0ET907 W

open price ' closing price 2alculation of 0isk

E"pected 0eturn3"4 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 !+.B5 R!E"p3"4W, !@.F@ B.+5 +.B5 C.+5 !@.@H 5.C5 !H.5@ !A.@@ >.C5 !>.C@ 5B.F5 +I.5C !@.@@ +.>5 +.>5 I.>5 !5.A@ I.>C >.C5 >.AC !F.BH 5.+C >.5C !+.F@ +>.BC @.I5 A.@C !I+.+H !>.CH 5.A5 A.C5 !>.+H >.FC ,5 +5.AI>B H@.+CAA @.IHIA F>.IBAA ++.A5AA C.@BHA IC.C@5B +H.CAHB >.F+HA >.F@5B HC+.A@>A 5IA.C+5B ++.>HHB +.>A>A +.>A>A @I.5A>A F.B>AB @I.HAAB >.F+HA >.55>B @F.CI>A A.C>HB >.>C5B 5.@A>B +5>.@A>B +@.+>AA +B.>BIB @CA5.BB5 >.I>HA F.HFIA 55.5CHA >.>@5A >.@5AB

0eturns3R4 !F.AF C.5> >.>> F.5> !F.@> >.H> !+>.+F !I.5F !+.5> !5.IF 5C.I> +A.@F !F.5F !>.B> !>.B> A.+> !A.@F A.+F !+.5> !+.AF !C.B> >.5F !+.IF !@.AF B.>F +.C> 5.AF !I@.+> !5.C> >.F> 5.H> !5.+> !+.@F

IH

!++.BF !B.BF C.FF !B.C>

!+.B5 !+.B5 !+.B5 !+.B5

!+>.>@ !H.>@ B.AC !C.CH Total

+>>.I>>B IA.AH>B HB.IH>B I>.F5HA FCIH.55A

(.,. 3Z4 W [\d5$7 (.,. 3Z4 W 5C.+BF

INTER!RETATION: The above table shows *utures 2ontract return K risk associated with the price movement of )D 0 TDI I0TE. for a month of *ebruary K March 5>+5. It has an average return of !+.B5 that is !+B5.>> and risk is 5C.+BF.

IB

!%t Optio+s 2alculation of the 0eturn

,ate +!*eb!+5 5!*eb!+5 @!*eb!+5 A!*eb!+5 F!*eb!+5 I!*eb!+5 H!*eb!+5 B!*eb!+5 +>!*eb!+5 ++!*eb!+5 +F!*eb!+5 +I!*eb!+5 +C!*eb!+5 +H!*eb!+5 +B!*eb!+5 55!*eb!+5 5@!*eb!+5 5A!*eb!+5 5F!*eb!+5 5I!*eb!+5 5!Mar!+5 @!Mar!+5 A!Mar!+5 F!Mar!+5 H!Mar!+5 B!Mar!+5 +>!Mar!+5 ++!Mar!+5 +5!Mar!+5 +F!Mar!+5 +I!Mar!+5 +C!Mar!+5 +H!Mar!+5 +B!Mar!+5 55!Mar!+5 5@!Mar!+5 5F!Mar!+5 (trike ;rice F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> F>> close ;rice ++5.FF +>H.BF ++>.@> +>F.@F +>+.@> +>+.I> +>B.FF ++A.@F ++I.AF ++F.I> HC.>> B5.C> +>>.+F +>5.H> BB.C> BC.C> +>>.CF BI.FF BI.HF BB.BF ++>.C> ++5.AF ++A.>F ++H.B> ++A.>> +++.C> +>H.A> ++A.@> ++B.AF ++B.CF ++F.>F ++H.5F +5>.I@ +@5.>F +@I.AF +5C.C> CH.I> Total verage 0eturns @HC.AF @B+.>F @HB.C> @BA.IF @BH.C> @BH.A> @B>.AF @HF.IF @H@.FF @HA.A> A+@.>> A>C.@> @BB.HF @BC.5> A>>.@> A>5.@> @BB.5F A>@.AF A>@.+F A>>.>F @HB.@> @HC.FF @HF.BF @H+.+> @HI.>> @HH.@> @B+.I> @HF.C> @H>.FF @H>.5F @HA.BF @H+.CF @CB.@C @IC.BF @I@.FF @C5.@> A5+.A> +AAFC.A5 @B>.CA

0ET907 W

strike price ' closing price 2alculation of 0isk

C>

0eturns3R4 @HC.AF @B+.>F @HB.C> @BA.IF @BH.C> @BH.A> @B>.AF @HF.IF @H@.FF @HA.A> A+@.>> A>C.@> @BB.HF @BC.5> A>>.@> A>5.@> @BB.5F A>@.AF A>@.+F A>>.>F @HB.@> @HC.FF @HF.BF @H+.+> @HI.>> @HH.@> @B+.I> @HF.C> @H>.FF @H>.5F @HA.BF @H+.CF @CB.@C @IC.BF @I@.FF @C5.@> A5+.A>

E"pected 0eturn3"4 @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA @B>.CA

R!E"p3"4W, !@.5B >.@+ !+.>A @.B+ C.BI C.II !>.5B !F.>B !C.+B !I.@A 55.5I +I.FI B.++ I.AI B.FI ++.FI H.F+ +5.C+ +5.A+ B.@+ !+.AA !@.+B !A.CB !B.IA !A.CA !5.AA >.HI !F.>A !+>.+B !+>.AB !F.CB !H.BB !++.@C !55.CB !5C.+B !+H.AA @>.II Total

,5 +>.H5 >.+> +.>H +F.5B I@.@I FH.IH >.>H 5F.B+ F+.C> A>.5> ABF.F+ 5CA.5@ H5.BB A+.C@ B+.@B +@@.I@ C5.A5 +I+.FA +FA.>+ HI.IH 5.>C +>.+H 55.BA B5.B@ 55.AC F.BF >.CA 5F.A> +>@.HA ++>.>A @@.F5 H>.H5 +5B.5H F+B.@H C@B.@> @A>.>@ BA>.>A F>A>.5H

(.,. 3Z4 W [\d5$7 (.,. 3Z4 W ++.IC

C+

INTER!RETATION: The above table shows 2all option contract return K risk associated with the price movement of )D 0 TDI I0TE. for a month of *ebruary K March 5>+5. It has an average return of @B>.CAthat is @B>CA.>> and risk is ++.IC.

Compariso+ of )%t%res Co+tra$t Compa+ies ir ,eccan Wipro )harathi irtel C5 Ret%r+ !+.+F >.>CB !+.B5 Ris. B.>I +F.@A 5C.+B

I+terpretatio+: )y the above graph we can understand that in *uture contract 0isk is more than the return for three companies. (o we suggest to those three companies to discontinue the future contract to avoid risk.

Compariso+ of !%t Optio+ $o+tra$t Compa+ies ir ,eccan Wipro )harathi irtel Ret%r+ AC@.CH 5FA.CB @B>.CA Ris. +.C5 5C.+B ++.IC

C@

I+terpretatio+: )y the bove graph we can understand that the risk is so less in the ;ut option for the three companies i.e. ir ,eccan, )harathi irtel, and Wipro so we recommend to those companies to continue with their contract.

)INDIN0S
0isk and 0eturns are Wipro, ir ,eccan, and )harathi irtel in futures, but where as in options risk is limited to premium and the profits are Wipro, ir ,eccan, and )harathi irtel. In this research it is found that Wipro futures are generated positive returns of >.>CB. Where as in Wipro call option it is found that the returns are positive 5FA.CB. In this research it is found that +.+F. ir ,eccan futures are generated negative returns of '

Where as in ir ,eccan call option it is found that the returns are positive AC@.CH. In this research it is found that )harathi +.B5. irtel futures are generated negative returns of '

CA

 Where as in )harathi irtel call option it is found that the returns are positive @B>.CA. In bullish market the call options writers will get more profit so the investors are suggested to go for a call options holder the options holders get more profit. In bearish market the call options holders will get more profit so the investors are suggested to go for a call options writer and in put options the option writer get more losses so investors suggested opting as a put option holder. In cash market the investors has to pay the total money but in derivatives the investors has to pay premium or margin which are some percentage of total money. *utures and options are mostly used for hedging purpose. In this research we found that the options are better to invest than futures. In options contract the risk is minimum to the premium.

SU00ESTIONS

The derivative market is newly started in India and it is not know about the futures and options for many people so (E)I should take actions to create the awareness to the people about the derivative markets. The contract size should minimize because the small investors cannot afford this much of huge premiums. In order to increase the derivatives market in India the (E)I should revise some of their regulations like contract size, participations of *II in the derivative market. In bullish market investors are suggested to go for purchase of futures or purchase of call options.

CF

 In bearish market investors are suggested to go for sale of futures or purchase of put options The investors are suggested to invest on options because the risk is limited and returns are unlimited rather than futures. In futures the risk and returns are unlimited.

CONC"USIONS
derivative is an instrument available in financial market which reduces the risk to a ma"imum e"tent. The risk associated with individual security will be very high to minimize this risk portfolio construction has been evolved. Mostly portfolios reduce the risk but not to a great e"tent. Then in the evolution process these instruments known as derivatives emerged. ,erivates are of four types out of these futures and options become famous these days the investors are showing much interest in this instrument these futures and options can be traded to minimize the risk .9sing these instrument the present pro:ect work has been analyzed to verify whether actually these futures and options reduce the risk or not. In practical futures and options are working to the e"pectations of investors satisfactorily.

CI

BIBILOGRAPHY

-OO#S

AUTHOR NAME

Indian financial system *inancial management ;ublications of national stock e"change ,erivatives 2ore Module Workbook *inancial Markets and (ervices

M.Q.<han ;rasanna 2handra

72*M material 6ordan and 7atra:an

,E- SITES:
www.nseindia.com$futures K options$historical data www.bseindia.com www.indian capital market.com www.investopedia.com www.monrycontrol.com www.capitaline.com www.glossary.reuters.com www.derivativesindia.com www.sebi.gov.in www.moneycontrol.com www.hseindia.org

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