Abstract

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, Bullion traders may wish to sell their gold at a future date to eliminate the risk of a change in prices by that date. uch a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the !underlying!. The current pro"ect aims to make the investors aware of the functioning of the derivatives. Derivatives act as a risk hedging tool for the investors. The pro"ect helps the investor in selecting the appropriate derivatives instrument in order to attain maximum return and to construct the portfolio. The primary ob"ectives of the pro"ect are to study the derivatives market in #ndia$ to study the pay%off of futures and options$ to present the trading procedure of futures and options$ and to study the salient features of &ommittee reports The pro"ect finally explains the differences between the cash market and the derivatives market, the pros and cons of investing in derivatives market, and the different purposes for which investors are interested in derivative products. There are limitations as well for the pro"ect which include focus only on #ndian derivatives market$ short time period, insufficient data and the secondary data collected may not be authentic.

%'%

INTRODUCTION
Derivatives have become very important in the field of finance. They are very important financial instruments for risk management as they allow risks to be separated and traded. Derivatives are used to shift risk and act as a form of insurance. This shift of risk means that each party involved in the contract should be able to identify all the risks involved before the contract is agreed. #t is also important to remember that derivatives are derived from an underlying asset. This means that risks in trading derivatives may change depending on what happens to the underlying asset. ( derivative is a product whose value is derived from the value of an underlying asset, index or reference rate. The underlying asset can be equity, forex, commodity or any other asset. For example, if the settlement price of a derivative is based on the stock price of a stock for e.g. #nfosys, which frequently changes on a daily basis, also have an impact on the derivative risks which also changes simultaneously on a daily basis. This means that derivative risks and positions must be monitored constantly.

%)%

OBJECTIVES OF THE STUDY

To study the functioning of derivatives market in #ndia. To study the concept of Futures and options. To understand the ob"ectives of trading in derivatives. To present the trading procedure of Futures * +ptions. To study the pay%off on Futures * +ptions. To suggest recommendations for people who invest in Futures * options.

SCOPE OF THE STUDY

The scope of the study will include the analysis of the survey, which is being conducted to know the awareness of the Derivative ,arket in the city * also doing comparison of derivatives with equity. #t may include the analysis regarding the investors who use the derivatives and its awareness to them. The derivative is being regarded as the important aspect in this and may include ,utual funds, -ut , +ption, Depositories, &all , Futures , forwards etc. The &ommodity and metal indexes also become a crucial part of it and may regarded as an important separate indexes such .&D/0 and ,&0. The Derivatives may also include the evolving measures to safeguard the investors and for that ecurities and /xchange Board of #ndia is taking several measures in the day trading and also take into account all precautions.

%1%

NEED OF THE STUDY

#n less than three decades of their coming into vogue, derivatives markets have become the most important markets in the world. Today, derivatives have become part and parcel of the day%to%day life for ordinary people in ma"or part of the world. 2ntil the advent of . /, the #ndian capital market had no access to the latest trading methods and was using traditional out%dated methods of trading. There was a huge gap between the investors3 aspirations of the markets and the available means of trading. The opening of #ndian economy has precipitated the process of integration of #ndia3s financial markets with the international financial markets. #ntroduction of risk management instruments in #ndia has gained momentum in last few years thanks to 4eserve Bank of #ndia3s efforts in allowing forward contracts, cross currency options etc. which have developed into a very large market.

%5%

IMPORTANCE OF THE STUDY

Financial derivatives are a kind of risk management instrument. ( derivative6s value depends on the price changes in some more fundamental underlying assets. ,any forms of financial derivatives instruments exist in the financial markets. (mong them, the three most fundamental financial derivatives instruments are7 forward contracts, futures, and options. #f the underlying assets are stocks, bonds, foreign exchange rates and commodities etc., then the corresponding risk management instruments are7 stock futures 8options9, bond futures 8options9, currency futures 8options9 and commodity futures 8options9 etc. #n risk management of the underlying assets using financial derivatives, the basic strategy is hedging, i.e., the trader holds two positions of equal amounts but opposite directions, one in the underlying markets, and the other in the derivatives markets, simultaneously. This risk management strategy is based on the following reasoning7 it is believed that under normal circumstances, prices of underlying assets and their derivatives change roughly in the same direction with basically the same magnitude$ hence losses in the underlying assets 8derivatives9 markets can be offset by gains in the derivatives 8underlying assets9 markets$ therefore losses can be prevented or reduced by combining the risks due to the price changes. The sub"ect of this book is pricing of financial derivatives and risk management by hedging. The current pro"ect :elps to make a general study on derivatives. :elps the investors to construct a diversified portfolio. -rovide an insight on return and risk analysis. #t helps to identify and reduce by using hedging strategies and speculation.

%;%

RESEARCH METHODOLOGY
(chieving accuracy in any research requires in depth study regarding the sub"ect. (s the prime ob"ective of the pro"ect is compare various #nvestment products available in the market with the existing players in the market and the impact of entry of private players in the market, the research methodology adopted was basically based on primary data via which the most recent and accurate piece of first hand information that could be collected from all possible source. econdary data was used to support primary data wherever needed. For the purpose of study, secondary data will be collected. The observational method is used to collect the primary data. The necessary data is also been collected from official records and other published sources. The collected data is classified, tabulated, analy<ed and interpreted. Finally conclusion is draw based on the study and suggestions are offered to the company for increasing its customer base. Data Collection: There are two types of data collection '. -rimary data ). econdary data

Primary Data -rimary data is personally developed data and it gives latest information and offers much greater accuracy and reliability. There are various sources for obtaining primary data i.e., ,ail survey, personal interview, Field survey, panel research and observation approach etc.

%=%

The study is dependent on primary data to a maximum extent, which is collected by way of structures personal interview with customers.

Secondary Data econdary data is the published data. #t is already available for using and its saves time. The mail source of secondary data are published market surveys, government publications advertising research report and internal source such as sales, sales records orders, customers complaints and other business record etc. the study has also depended on secondary data to little extent, which is collected through internal source.

Sources of Secondary Data: These source were use to obtain information on, Banks and other institutions history, current issues, policies, procedures etc, wherever required. #nternet ,aga<ines .ewspapers >ournals

%?%

LIMITATIONS

The results obtained can not be generali<ed. The study in other ma"or aspects can give more accurate results. The study is done only for a period of 5; days. econdary Data may not be authentic in all the cases.

%@%

%A%