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A STUDY ON

ANALYSIS OF DERIVATIVE
A project report submitted for the partial fulfillment
of the requirements for the award of the degree of
POST GRADUATE DIPLOMA IN BUSINESS ADMINISTRATION (FINAINCE)

BY
NAME: - HILAL AHMAD ZARGAR

REGISTRATION No.:- 201304706

SYMBIOSIS CENTRE DISTANCE


LEARNING (SCDL) PUNE-INDIA

ACADEMIC YEAR-2013
DECLARATION

This is to be declare that I have carried out this project work myself in

part fulfillment of the POST GRADUATE DIPLOMA IN

BUSEINESS ADMINISTRATION (FINANCE) program of SCDL.

This work is original, has not been copied from anywhere else and has

not been submitted to any other University/Institute for an award of

any degree/diploma.

Date: ………………………………. Signature: - …………………………..

Place: ……………………………… Name: - …………………....................


NO OBJECTION CERTIFICATE

This is to certify that……………………………………………………is


permitted to use relevant data/information of this
organization for his project in fulfillment of the POST
GRADUATE DIPLOMA IN BUSINSESS ADMINISTRATION
(FINANCE) program.

We wish him all the success.

Seal of the company

Signature of the competent authority of the institution

Place:…………………………

Date:…………………………..
ABSTRACT

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. Derivatives are risk
management instruments, which derive their value from an underlying asset. The following are
three broad categories of participants in the derivatives market Hedgers, Speculators and
Arbitragers. Prices in an organized derivatives market reflect the perception of market
participants about the future and lead the price of underlying to the perceived future level. In
recent times the Derivative markets have gained importance in terms of their vital role in the
economy. The increasing investments in stocks (domestic as well as overseas) have attracted
my interest in this area. Numerous studies on the effects of futures and options listing on the
underlying cash market volatility have been done in the developed markets. The derivative
market is newly started in India and it is not known by every investor, so SEBI has to take steps
to create awareness among the investors about the derivative segment. In cash market the
profit/loss of the investor depends on the market price of the underlying asset. The investor
may incur huge profit or he may incur huge loss. But in derivatives segment the investor enjoys
huge profits with limited downside. Derivatives are mostly used for hedging purpose. In order
to increase the derivatives market in India, SEBI should revise some of their regulations like
contract size, participation of FII in the derivatives market. In a nutshell the study throws a light
on the derivatives market.
ACKNOWLEDGEMENT

With the deep sense of gratitude, I wish to acknowledge the support and help

extended by all the people, in successful completion of this project work.

I express my gratitude to my Father for his consistent support, owner of ZARGAR

ORNAMENTS HOUSE PVT LTD. I would like to thank all the members who

have provided the guidelines and various sources in the internet which help me for

the successful completion on this project report.

HILAL AHMAD ZARGAR


201304706
CONTENTS

CONTENT PAGE NUMBERS


INTRODUCTION 1
OBJECTIVE & SCOPE 2
THEORETICAL PRESPECTIVE

RESERCH METHODOLOGY

ANALYSIS OF DATA

LIMITATIONS

CONCLUSION

SUMMARY

ANNEXURES
INTRODUCTION
The financial markets are marked by a very high degree of volatility. There are certain risk-
averse participants who are willing to protect themselves from the uncertainties arising out of
the fluctuation in asset prices. The use of derivatives products helps to partially or fully
transfer price risks by locking in the asset prices. Derivatives minimize the impact of
fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.

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. By their very nature, the financial
markets are marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk
management, these generally do not influence the fluctuations in the underlying asset prices.
However, by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset
prices on the profitability and cash flow situation of risk-averse investors.

Derivatives are risk management instruments, which derive their value from an underlying
asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc.. Banks,
Securities firms, companies and investors to hedge risks, to gain access to cheaper money and to
make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.

The primary function of the derivative instruments is not to borrow or lend funds but to
transfer price risks associated with fluctuation in asset values. The derivatives provide three important
economic functions.

1. Risk management.
2. Price discovery.
3. Transactional efficiency.

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OBJECTIVES OF THE STUDY:

 To analyze the difference between futures & forwards in various financial institutions.
 To analyze the derivative products which transfer the risk from one investor to another.
 To find the profit/loss position of futures buyer and seller and also the option writer and option
holder.
 To study about risk management with the help of derivatives.
 To study and analyses the derivative products which rectify the future possible risks.
 To study the derivative products which will reduce the time energy and money and will increase
the profits of the investor.

SCOPE OF THE STUDY:

The study is limited to “Derivatives” with special reference to futures and option in the Indian context

and the Inter-Connected Stock Exchange has been taken as a representative sample for the study. The

study can’t be said as totally perfect. Any alteration may come. The study has only made a humble

attempt at evaluation derivatives market only in India context. The study is not based on the

international perspective of derivatives markets, which exists in NASDAQ, CBOT etc.

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NEED FOR STUDY:

In recent times the Derivative markets have gained importance in terms of their vital role in
the economy. The increasing investments in derivatives (domestic as well as overseas) have
attracted my interest in this area. Through the use of derivative products, it is possible to
partially or fully transfer price risks by locking-in asset prices. As the volume of trading is
tremendously increasing in derivatives market, this analysis will be of immense help to the
investors. With the last two decades many more derivative products has been introduced.

Derivative trading commenced in India in June 2000 after SEBI granted the final approval to
this effect in May 2001 on the recommendation of L. C Gupta committee. Securities Exchange
Board of India permitted the derivative segments of two stock exchanges, NSE and BSE and
their clearing house/corporation to commence trading and settlement in approved
derivatives. The main objective of this report is to find out the importance of derivatives in the
trading of securities.

DERIVATIVES:-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. By their very
nature, the financial markets are marked by a very high degree of volatility. Through the use of
derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As
instruments of risk management, these generally do not influence the fluctuations in the underlying
asset prices. However, by locking-in asset prices, derivative product minimizes the impact of
fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.

Derivatives are risk management instruments, which derive their value from an underlying
asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc.. Banks,
Securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make
profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.
WHAT ARE DERIVATIVES?
Derivatives are financial contracts that derive their value from an underlying asset. These
could be stocks, indices, commodities, currencies, exchange rates, or the rate of interest. These
financial instruments help you make profits by betting on the future value of the underlying
asset. So, their value is derived from that of the underlying asset. This is why they are
called ‘Derivatives’.

The value of the underlying assets changes every now and then.
For example, a stock’s value may rise or fall, the exchange rate of a pair of currencies may
change, indices may fluctuate, commodity prices may increase or decrease. These changes can
help an investor make profits. They can also cause losses. This is where derivatives come
handy. It could help you make additional profits by correctly guessing the future price, or it
could act as a safety net from losses in the spot market, where the underlying assets are traded.
WHAT IS THE USE OF DERIVATIVES?
In the Indian markets, futures & options are standardized contracts, which can be freely traded
on exchanges. These could be employed to meet a variety of needs.
Benefit from arbitrage:
When you buy low in one market and sell high in the other market, it called arbitrage trading.
Simply put, you are taking advantage of differences in prices in the two markets.
Protect your securities against
Fluctuations in prices the derivative market offers products that allow you to hedge yourself
against a fall in the price of shares that you possess. It also offers products that protect you
from a rise in the price of shares that you plan to purchase. This is called hedging.
Transfer of risk:
By far, the most important use of these derivatives is the transfer of market risk from risk-
averse investors to those with an appetite for risk. Risk-averse investors use derivatives to
enhance safety, while risk-loving investors like speculators conduct risky, contrarian trades to
improve profits. This way, the risk is transferred. There are a wide variety of products
available and strategies that can be constructed, which allow you to pass on your risk.
WHO ARE THE PARTICIPANTS IN DERIVATIVES MARKETS?
On the basis of their trading motives, participants in the derivatives markets can be segregated
into four categories – hedgers, speculators, margin traders and arbitrageurs. Let's take a look at
why these participants trade in derivatives and how their motives are driven by their risk
profiles.
 Hedgers: Traders, who wish to protect themselves from the risk involved in price movements,
participate in the derivatives market. They are called hedgers. This is because they try to
hedge the price of their assets by undertaking an exact opposite trade in the derivatives
market. Thus, they pass on this risk to those who are willing to bear it. They are so keen to rid
themselves of the uncertainty associated with price movements that they may even be ready to
do so at a predetermined cost.
 Speculators: As a hedger, you passed on your risk to someone who will willingly take on
risks from you. But why someone do that? There are all kinds of participants in the market.
Some might be averse to risk, while some people embrace them. This is because, the basic
market idea is that risk and return always go hand in hand. Higher the risk, greater is the
chance of high returns. Then again, while you believe that the market will go up, there will be
people who feel that it will fall. These differences in risk profile and market views distinguish
hedgers from speculators. Speculators, unlike hedgers, look for opportunities to take on risk in
the hope of making returns.
Let's go back to our example, wherein you were keen to sell the 200 shares of company ABC
Ltd. after one month, but feared that the price would fall and eat your profits. In the derivative
market, there will be a speculator who expects the market to rise. Accordingly, he will enter
into an agreement with you stating that he will buy shares from you at Rs. 100 if the price falls
below that amount. In return for giving you relief from this risk, he wants to be paid a small
compensation. This way, he earns the compensation even if the price does not fall and you
wish to continue holding your stock.
This is only one instance of how a speculator could gain from a derivative product. For every
opportunity that the derivative market offers a risk-averse hedger, it offers a counter
opportunity to a trader with a healthy appetite for risk.
In the Indian markets, there are two types of speculators – day traders and the position traders.
 A day trader tries to take advantage of intra-day fluctuations in prices. All their trades are
settled by by undertaking an opposite trade by the end of the day. They do not have any
overnight exposure to the markets.
 On the other hand, position traders greatly rely on news, tips and technical analysis – the
science of predicting trends and prices, and take a longer view, say a few weeks or a
month in order to realize better profits. They take and carry position for overnight or a
long term.
 Margin traders: Many speculators trade using of the payment mechanism unique to the
derivative markets. This is called margin trading. When you trade in derivative products, you
are not required to pay the total value of your position up front. . Instead, you are only
required to deposit only a fraction of the total sum called margin. This is why margin trading
results in a high leverage factor in derivative trades. With a small deposit, you are able to
maintain a large outstanding position. The leverage factor is fixed; there is a limit to how
much you can borrow. The speculator to buy three to five times the quantity that his capital
investment would otherwise have allowed him to buy in the cash market. For this reason, the
conclusion of a trade is called ‘settlement’ – you either pay this outstanding position or
conduct an opposing trade that would nullify this amount.
 Arbitrageurs: Derivative instruments are valued on the basis of the underlying asset’s value
in the spot market. However, there are times when the price of a stock in the cash market is
lower or higher than it should be, in comparison to its price in the derivatives market.
Arbitrageurs exploit these imperfections and inefficiencies to their advantage. Arbitrage trade
is a low-risk trade, where a simultaneous purchase of securities is done in one market and a
corresponding sale is carried out in another market. These are done when the same securities
are being quoted at different prices in two markets.
In the earlier example, suppose the cash market price is Rs. 1000 per share, but is quoting at
Rs. 1010 in the futures market. An arbitrageur would purchase 100 shares at Rs. 1000 in the
cash market and simultaneously, sell 100 shares at Rs. 1010 per share in the futures market,
thereby making a profit of Rs. 10 per share.
Speculators, margin traders and arbitrageurs are the lifeline of the capital markets as they
provide liquidity to the markets by taking long (purchase) and short (sell) positions. They
contribute to the overall efficiency of the markets.
WHAT ARE THE DIFFERENT TYPES OF DERIVATIVE CONTRACTS?
There are four types of derivative contracts – forwards, futures, options and swaps. However,
for the time being, let us concentrate on the first three. Swaps are complex instruments that are
not available for trade in the stock markets.
 Futures and forwards: A FUTURE contract like a forward contract is an agreement between
two parties to buy or sell an asset at a certain time in the future for a certain price. While the
details of a forward contract are negotiated between the parties to the contract, future contract
are normally traded on an organized or regulated exchanges where traders used to assemble
periodically on the floor of the exchange to buy and sell future contract generally by open
outcry. The future exchanges are now shifting to online trading using a networked computer
system which facilitates screen based trading. To make such trading possible, the exchange
specifies certain standardized features for the contracts. Hence futures contracts are
standardized agreements to exchange specific types of goods, in specific amounts and at
specific future delivery or maturity dates.
A wide variety of commodities and financial assets form the underlying assets in
features Contracts. Wheat, sugar, wool, gold, aluminum, copper etc. are some of the
commodities underlying features contracts. Stock, stock indices, foreign currencies, bonds, are
the financial assets underlying futures contracts.
Forward contract is a contract for delivering goods. It is also known as a specific delivery
contracts. Forward transactions are settled in future but at a fixed date. The specific delivery
contracts are of two types:-
1. Transferable specific delivery contracts in which rights and liabilities
mentioned in contracts are transferable.
2. Non-transferable specific delivery contracts in which rights and liabilities are
not transferable.
 Options: An option is a contract conveying the right but not the obligation to buy or sell
specified financial instruments at a fixed price before or at a certain fixed date. There are two
parties in options in which the buyer receives a right for which he pays a fee called premiums
and the seller undertakes an obligation. Buyer of the option pays the premium to the option
writer to compensate him for renouncing his right and incurring his obligation. The premium
is the price fixed and negotiated when the option is bought or sold. The buyer has every
discretion to exercise his option in future. Options are used when either the amount or timing
of exposure is not known with certainty. A person who buys the option is said to be long in the
option and the other who sells is said to be short.

HOW ARE DERIVATIVE CONTRACTS LINKED TO STOCK PRICES?


Suppose you buy a Futures contract of Infosys shares at Rs 3,000 – the stock price of the IT
Company currently in the spot market. A month later, the contract is slated to expire. At this
time, the stock is trading at Rs 3,500. This means, you make a profit of Rs. 500 per share, as
you are getting the stocks at a cheaper rate.
Had the price remained unchanged, you would have received nothing. Similarly, if the stock
price fell by Rs. 800, you would have lost Rs. 800. As we can see, the above contract depends
upon the price of the underlying asset – Infosys shares. Similarly, derivatives trading can be
conducted on the indices also. Nifty Futures is a very commonly traded derivatives contract in
the stock markets. The underlying security in the case of a Nifty Futures contract would be the
50-share Nifty index.
HOW TO TRADE IN DERIVATIVES MARKET:
Trading in the derivatives market is a lot similar to that in the cash segment of the stock
market.
 First do your research. This is more important for the derivatives market. However, remember
that the strategies need to differ from that of the stock market. For example, you may wish you
buy stocks that are likely to rise in the future. In this case, you conduct a buy transaction. In
the derivatives market, this would need you to enter into a sell transaction. So the strategy
would differ.
 Arrange for the requisite margin amount. Stock market rules require you to constantly
maintain your margin amount. This means, you cannot withdraw this amount from your
trading account at any point in time until the trade is settled. Also remember that the margin
amount changes as the price of the underlying stock rises or falls. So, always keep extra
money in your account.
 Conduct the transaction through your trading account. You will have to first make sure that
your account allows you to trade in derivatives. If not, consult your brokerage or stock broker
and get the required services activated. Once you do this, you can place an order online or on
phone with your broker.
 Select your stocks and their contracts on the basis of the amount you have in hand, the margin
requirements, the price of the underlying shares, as well as the price of the contracts. Yes, you
do have to pay a small amount to buy the contract. Ensure all this fits your budget.
 You can wait until the contract is scheduled to expiry to settle the trade. In such a case, you
can pay the whole amount outstanding, or you can enter into an opposing trade. For example,
you placed a ‘buy trade’ for Infosys futures at Rs 3,000 a week before expiry. To exit the trade
before, you can place a ‘sell trade’ future contract. If this amount is higher than Rs 3,000, you
book profits. If not, you will make losses.
Thus, buying stock futures and options contracts is similar to buying shares of the same
underlying stock, but without taking delivery of the same. In the case of index futures, the
change in the number of index points affects your contract, thus replicating the movement of a
stock price. So, you can actually trade in index and stock contracts in just the same way as you
would trade in shares.
WHAT ARE THE PRE-REQUISITES TO INVEST
As said earlier, trading in the derivatives market is very similar to trading in the cash segment
of the stock markets.
This has three key requisites:
 Demat account: This is the account which stores your securities in electronic format. It is
unique to every investor and trader.
 Trading account: This is the account through which you conduct trades. The account number
can be considered your identity in the markets. This makes the trade unique to you. It is linked
to the Demat account, and thus ensures that YOUR shares go to your Demat account.
 Margin maintenance: This pre-requisite is unique to derivatives trading. While many in the
cash segment too use margins to conduct trades, this is predominantly used in the derivatives
segment.
Unlike purchasing stocks from the cash market, when you purchase futures contracts you are
required to deposit only a percentage of the value of your outstanding position with the stock
exchange, irrespective of whether you buy or sell futures. This mandatory deposit, which is
called margin money, covers an initial margin and an exposure margin. These margins act as a
risk containment measure for the exchanges and serve to preserve the integrity of the market.
 You are expected to deposit the initial margin upfront. How much you have to deposit is
decided by the stock exchange.
It is prescribed as a percentage of the total value of your outstanding position. It varies for
different positions as it takes into account the average volatility of a stock over a specified
time period and the interest cost. This initial margin is adjusted daily depending upon the
market value of your open positions.
 The exposure margin is used to control volatility and excessive speculation in the derivatives
markets. This margin is also stipulated by the exchanged and levied on the value of the
contract that you buy or sell.
 Besides the initial and exposure margins, you also have to maintain Mark-to-Market (MTM)
margins. This covers the daily difference between the cost of the contract and its closing price
on the day of purchase. Thereafter, the MTM margin covers the differences in closing price
from day to day.
WHAT ARE FUTURES CONTRACTS?
A futures contract is an agreement between two parties – a buyer and a seller – wherein the
former agrees to purchase from the latter, a fixed number of shares or an index at a specific
time in the future for a pre-determined price. These details are agreed upon when the
transaction takes place. As futures contracts are standardized in terms of expiry dates and
contract sizes, they can be freely traded on exchanges. A buyer may not know the identity of
the seller and vice versa. Further, every contract is guaranteed and honored by the stock
exchange, or more precisely, the clearing house or the clearing corporation of the stock
exchange, which is an agency designated to settle trades of investors on the stock exchanges.
Futures contracts are available on different kinds of assets – stocks, indices, commodities,
currency pairs and so on. Here we will look at the two most common futures contracts – stock
futures and index futures.

WHAT ARE STOCK FUTURES?


Stock futures are derivative contracts that give you the power to buy or sell a set of stocks at a
fixed price by a certain date. Once you buy the contract, you are obligated to uphold the terms
of the agreement.

WHAT ARE INDEX FUTURES?

A stock index is used to measure changes in the prices of a group stocks over a period of time.
It is constructed by selecting stocks of similar companies in terms of an industry or size. Some
indices represent a certain segment or the overall market, thus helping track price movements.
For instance, the BSE Sensex is comprised of 30 liquid and fundamentally strong companies.
Since these stocks are market leaders, any change in the fundamentals of the economy or
industries will be reflected in this index through movements in the prices of these stocks on
the BSE. Similarly, there are other popular indices like the CNX Nifty 50, S&P 500, etc.
Which represent price movements on different exchanges or in different segments.
Futures contracts are also available on these indices. This helps traders make money on the
performance of the index.
WHAT IS THE COST OF CARRY MODEL

The Cost of Carry Model assumes that markets tend to be perfectly efficient. This means there
are no differences in the cash and futures price. This, thereby, eliminates any opportunity for
arbitrage – the phenomenon where traders take advantage of price differences in two or more
markets.
When there is no opportunity for arbitrage, investors are indifferent to the spot and futures
market prices while they trade in the underlying asset. This is because their final earnings are
eventually the same.
The model also assumes, for simplicity sake, that the contract is held till maturity, so that a
fair price can be arrived at.
In short, the price of a futures contract (FP) will be equal to the spot price (SP) plus the net
cost incurred in carrying the asset till the maturity date of the futures contract.
FP = SP + (Carry Cost – Carry Return)
Here Carry Cost refers to the cost of holding the asset till the futures contract matures. This
could include storage cost, interest paid to acquire and hold the asset, financing costs etc.
Carry Return refers to any income derived from the asset while holding it like dividends,
bonuses etc. While calculating the futures price of an index, the Carry Return refers to the
average returns given by the index during the holding period in the cash market. A net of these
two is called the net cost of carry.
The bottom line of this pricing model is that keeping a position open in the cash market can
have benefits or costs. The price of a futures contract basically reflects these costs or benefits
to charge or reward you accordingly.
WHAT IS THE EXPECTANCY MODEL OF FUTURES PRICING
The Expectancy Model of futures pricing states that the futures price of an asset is basically
what the spot price of the asset is expected to be in the future.
This means, if the overall market sentiment leans towards a higher price for an asset in the
future, the futures price of the asset will be positive.
In the exact same way, a rise in bearish sentiments in the market would lead to a fall in the
futures price of the asset.
Unlike the Cost of Carry model, this model believes that there is no relationship between the
present spot price of the asset and its futures price. What matters is only what the future spot
price of the asset is expected to be.
This is also why many stock market participants look to the trends in futures prices to
anticipate the price fluctuation in the cash segment.

WHAT IS BASIS?
At a practical level, you will observe that there is usually a difference between the futures
price and the spot price. This difference is called the basis. If the futures price of an asset is
trading higher than its spot price, then the basis for the asset is negative. This means, the
markets are expected to rise in the future.
On the other hand, if the spot price of the asset is higher than its futures price, the basis for the
asset is positive. This is indicative of a bear run on the market in the future.
How to buy and sell futures contracts

Buying and selling futures contract is essentially the same as buying or selling a number of
units of a stock from the cash market, but without taking immediate delivery.
In the case of index futures too, the index’s level moves up or down, replicating the movement
of a stock price. So, you can actually trade in index and stock contracts in just the same way as
you would trade in shares.
In this section, we look at how to buy and sell futures contracts:
HOW TO BUY FUTURES CONTRACTS

One of the prerequisites of stock market trading – be it in the derivative segment – is a trading
account.
Money is the obvious other requirement. However, this requirement is slightly different for the
derivatives market.
When you buy in the cash segment, you have to pay the entire value of the shares purchased –
this is unless you are a day trader utilizing margin trading. You have to pay this amount
upfront to the exchange or the clearing house.
This upfront payment is called ‘Margin Money’. It helps reduce the risk that the exchange
undertakes and helps in maintaining the integrity of the market.
Once you have these requisites, you can buy a futures contract. Simply place an order with
your broker, specifying the details of the contract like the Scrip, expiry month, contract size,
and so on. Once you do this, hand over the margin money to the broker, who will then get in
touch with the exchange.
The exchange will find you a seller (if you are a buyer) or a buyer (if you are seller).
HOW TO SETTLE FUTURES CONTRACTS

When you trade in futures contracts, you do not give or take immediate delivery of the assets
concerned. This is called settling of the contract. This usually happens on the date of the
contract’s expiry. However, many traders also choose to settle before the expiry of the
contract.
For stock futures, contracts can be settled in two ways:
On Expiry
In this case, the futures contract (purchase or sale) is settled at the closing price of the
underlying asset as on the expiry date of the contract.
Before Expiry
It is not necessary to hold on to a futures contract till its expiry date. In practice, most traders
exit their contracts before their expiry dates. Any gains or losses you’ve made are settled by
adjusting them against the margins you have deposited till the date you decide to exit your
contract. You can do so by either selling your contract, or purchasing an opposing contract
that nullifies the agreement. Here again, your profits will be returned to you or losses will be
collected from you, after adjusting them for the margins that you have deposited once you
square off your position.
Index futures contracts are settled in cash. This can again be done on expiry of the contract or
before the expiry date.
 On Expiry
When closing a futures index contract on expiry, the closing value of the index on the expiry
date is the price at which the contract is settled. If on the date of expiry, the index closes
higher than when you bought your contracts, you make a profit and vice versa. The settlement
is made by adjusting your gain or loss against the margin money you’ve already deposited.
Example: Suppose you purchase two contracts of Nifty future at 6560, say on July 7. This
particular contract expires on July 27, being the last Thursday of the contract series. If you
have left India for a holiday and are not in a position to sell the future till the day of expiry, the
exchange will settle your contract at the closing price of the nifty prevailing on the expiry day.
So, if on July 27, the Nifty stands at 6550, you will have made a loss of Rs 1,000 (difference
in index levels – 10 x2 lots x lot size of 50 units). Your broker will deduct the amount from
your margins deposited with him and forward it to the stock exchange. The exchange, in turn,
will forward it to the seller, who has made that profit. However if Nifty closes at 6570, you
would have made a profit of Rs 1,000. This will be added to your account.
 Before Expiry
You can choose to exit your index futures contract before the date of expiry if you believe that
the market will rise before the expiry of your contract period and that you’ll get a better price
for it on an earlier date. Such an exit depends solely on your judgment of market movements
as well as your investment horizons. This will also be settled by the exchange by comparing
the index levels when you bought and when you exit the contract. Depending on the profit or
loss, your margin account will be credited or debited.
WHAT ARE THE PAYOFFS AND CHARGES ON FUTURES CONTRACTS
A futures market helps individual investors and the investing community as a whole in
numerous ways.
However, it does not come for free. The main payoff for traders and investors in derivatives
trading is margin payments.
There are different kinds of margins. These are usually prescribed by the exchange as a
percentage of the total value of the derivative contracts. Without margins, you cannot buy or
sell in the futures market.
Here’s a look at the four different margins in detail:
Initial Margin:
Initial margin is defined as a percentage of your open position and is set for different positions
by the exchange or clearing house. The factors that decide the amount of initial margin are the
average volatility of the stock in concern over a specified period of time and the interest cost.
Initial margin amounts fluctuate daily depending on the market value of your open positions.
Exposure Margin:
The exposure margin is set by the exchange to control volatility and excessive speculation in
the futures markets. It is levied on the value of the contract that you buy or sell.
Mark-to-Market Margin:
Mark-to-Market margin covers the difference between the cost of the contract and its closing
price on the day the contract is purchased. Post purchase, MTM margin covers the daily
differences in closing prices.
Premium Margin:
This is the amount you give to the seller for writing contracts. It is also usually mentioned in
per-share basis. As a buyer, your pay a premium margin, while you receive one as a seller.
Margin payments help traders get an opportunity to participate in the futures market and make
profits by paying a small sum of money, instead of the total value of their contracts.
However, there are also downsides to futures trading. Trading in futures is slightly more
complex than trading in straightforward stocks or etfs. Not all futures traders are well-versed
in the nitty-gritties of the derivatives business, leading to unforeseen losses. The low upfront
payments and highly leveraged nature of futures trading can tempt traders to be reckless which
could lead to losses.
All you need to know about Options contracts

WHAT ARE OPTIONS?

An ‘Option’ is a type of security that can be bought or sold at a specified price within a
specified period of time, in exchange for a non-refundable upfront deposit. An options
contract offers the buyer the right to buy, not the obligation to buy at the specified price or
date. Options are a type of derivative product.
The right to sell a security is called a ‘Put Option’, while the right to buy is called the ‘Call
Option’.
They can be used as:
 Leverage: Options help you profit from changes in share prices without putting down the full
price of the share. You get control over the shares without buying them outright.
 Hedging: They can also be used to protect yourself from fluctuations in the price of a share
and letting you buy or sell the shares at a pre-determined price for a specified period of time.
Though they have their advantages, trading in options is more complex than trading in regular shares.
It calls for a good understanding of trading and investment practices as well as constant monitoring of
market fluctuations to protect against losses.
ABOUT OPTIONS

Just as futures contracts minimize risks for buyers by setting a pre-determined future price for
an underlying asset, options contracts do the same however, without the obligation to buy that
exists in a futures contract.
The seller of an options contract is called the ‘options writer’. Unlike the buyer in an options
contract, the seller has no rights and must sell the assets at the agreed price if the buyer
chooses to execute the options contract on or before the agreed date, in exchange for an
upfront payment from the buyer.
There is no physical exchange of documents at the time of entering into an options contract.
The transactions are merely recorded in the stock exchange through which they are routed.

Here are some Options-related jargons you should know about.


 Premium: The upfront payment made by the buyer to the seller to enjoy the privileges of an
option contract.
 Strike Price / Exercise Price: The pre-decided price at which the asset can be bought or sold.
 Strike Price Intervals: These are the different strike prices at which an options contract can
be traded. These are determined by the exchange on which the assets are traded.
There are typically at least 11 strike prices declared for every type of option in a given month -
5 prices above the spot price, 5prices below the spot price and one price equivalent to the spot
price.
 EXPIRATION DATE:
A future date on or before which the options contract can be executed. Options contracts have three
different durations you can pick from:
o Near month (1 month)
o Middle Month (2 months)
o Far Month (3 months)
*Please note that long terms options are available for Nifty index. Futures & Options contracts
typically expire on the last Thursday of the respective months, post which they are considered
void.
 AMERICAN AND EUROPEAN OPTIONS:

The terms ‘American’ and ‘European’ refer to the type of underlying asset in an options
contract and when it can be executed. American options’ are Options that can be executed at
any time on or before their expiration date. ‘European options’ are Options that can only be
executed on the expiration date.
PLEASE NOTE THAT IN INDIAN MARKET ONLY EUROPEAN TYPE OF
OPTIONS ARE AVAILABLE FOR TRADING.
 LOT SIZE:
Lot size refers to a fixed number of units of the underlying asset that form part of a single
F&O contract. The standard lot size is different for each stock and is decided by the exchange
on which the stock is traded.
E.g. options contracts for Reliance Industries have a lot size of 250 shares per contract.
 OPEN INTEREST:
Open Interest refers to the total number of outstanding positions on a particular options
contract across all participants in the market at any given point of time. Open Interest becomes
nil past the expiration date for a particular contract.
TYPES OF OPTIONS

As described earlier, options are of two types, the ‘Call Option’ and the ‘Put Option’.
 CALL OPTION
the ‘Call Option’ gives the holder of the option the right to buy a particular asset at the strike
price on or before the expiration date in return for a premium paid upfront to the seller. Call
options usually become more valuable as the value of the underlying asset increases. Call
options are abbreviated as ‘C’ in online quotes.
 PUT OPTION:
The Put Option gives the holder the right to sell a particular asset at the strike price anytime on
or before the expiration date in return for a premium paid up front. Since you can sell a stock
at any given point of time, if the spot price of a stock falls during the contract period, the
holder is protected from this fall in price by the strike price that is pre-set. This explains why
put options become more valuable when the price of the underlying stock falls.
Similarly, if the price of the stock rises during the contract period, the seller only loses the
premium amount and does not suffer a loss of the entire price of the asset. Put options are
abbreviated as ‘P’ in online quotes.
Let’s take a look as you may be faced with any one of these scenarios while trading in
options:
 In-the-money: You will profit by exercising the option.
 Out-of-the-money: You will make no money by exercising the option.
 At-the-money: A no-profit, no-loss scenario if you choose to exercise the option.
A Call Option is ‘In-the-money’ when the spot price of the asset is higher than the strike price.
Conversely, a Put Option is ‘In-the-money’ when the spot price of the asset is lower than the
strike price.
HOW IS PREMIUM PRICING ARRIVED AT?

The price of an Option Premium is controlled by two factors – intrinsic value and time value
of the option.
 INTRINSIC VALUE
Intrinsic Value is the difference between the cash market spot price and the strike price of an
option. It can either be positive (if you are in-the-money) or zero (if you are either at-the-
money or out-of-the-money). An asset cannot have negative Intrinsic Value.
 TIME VALUE basically puts a premium on the time left to exercise an options contract. This
means if the time left between the current date and the expiration date of Contract A is longer
than that of Contract B, Contract A has higher Time Value.
This is because contracts with longer expiration periods give the holder more flexibility on
when to exercise their option. This longer time window lowers the risk for the contract holder
and prevents them from landing in a tight spot.
At the beginning of a contract period, the time value of the contract is high. If the option
remains in-the-money, the option price for it will be high. If the option goes out-of-money or
stays at-the-money this affects its intrinsic value, which becomes zero. In such a case, only the
time value of the contract is considered and the option price goes down.
As the expiration date of the contract approaches, the time value of the contract falls,
negatively affecting the option price.
UNDERSTANDING OPTIONS CONTRACTS WITH EXAMPLES:

This means, under this contract, Rajesh has the rights to buy one lot of 100 Infosys shares at
Rs 3000 per share any time between now and the month of May. He paid a premium of Rs 250
per share. He thus pays a total amount of Rs 25,000 to enjoy this right to sell.
Now, suppose the share price of Infosys rises over Rs 3,000 to Rs 3200, Rajesh can consider
exercising the option and buying at Rs 3,000 per share. He would be saving Rs 200 per share;
this can be considered a tentative profit. However, he still makes a notional net loss of Rs 50
per share once you take the premium amount into consideration. For this reason, Rajesh may
choose to actually exercise the option once the share price crosses Rs 3,250 levels. Otherwise,
he can choose to let the option expire without being exercised.
.
HOW ARE OPTIONS CONTRACTS PRICED?

We saw that options can be bought for an underlying asset at a fraction of the actual price of
the asset in the spot market by paying an upfront premium. The amount paid as a premium to
the seller is the price of entering an options contract.
To understand how this premium amount is arrived at, we first need to understand some basic
terms like In-The-Money, Out-Of-The-Money and At-The-Money.
Let’s take a look as you may be faced with any one of these scenarios while trading in
options:
 In-the-money: You will profit by exercising the option.
 Out-of-the-money: You will make no money by exercising the option.
 At-the-money: A no-profit, no-loss scenario if you choose to exercise the option.
A Call Option is ‘In-the-money’ when the spot price of the asset is higher than the strike price.
Conversely, a Put Option is ‘In-the-money’ when the spot price of the asset is lower than the
strike price.
HOW IS PREMIUM PRICING ARRIVED AT:

The price of an Option Premium is controlled by two factors – intrinsic value and time value
of the option.
WHAT ARE PUT OPTIONS:

In any market, there cannot be a buyer without there being a seller. Similarly, in the Options
market, you cannot have call options without having put options. Puts are options contracts
that give you the right to sell the underlying stock or index at a pre-determined price on or
before a specified expiry date in the future.
In this way, a put option is exactly opposite of a call option. However, they still share some
similar traits.
For example, just as in the case of a call option, the put option’s strike price and expiry date
are predetermined by the stock exchange.
Here are some key features of the put option:

 Fix the strike price -- amount at which you will buy in future
 Chose the expiry date
 Select option price

 Pay option premium to broker


 Broker transfers to exchange
 Exchange sends the amount to option seller

 Initial margin
 Exposure margin
 Premium margin/assignment margin

 Stock call options


 Index call options
 Buyer of option pays you amount through brokers and the exchange
 Helps reduce you loss or increase profit.
TYPES OF MARGIN PAYMENTS

 SQUARING OFF:
In the case of Stock options, you can buy an opposing contract. This means, if you hold a
contract to sell stocks, you purchase a contract to buy the very same stocks. This is called
squaring off. You make a profit from the difference in prices and premiums.
 SELLING:
If none of the above options seem profitable, you can simply sell the ‘put’ option you hold.
This is also a kind of squaring off method.
 PHYSICAL SETTLEMENT:
You can also exercise your option anytime on or before the expiry date of the contract. This
means, you will actually sell the underlying stocks as specified in the options contract
agreement.

For put index options, you cannot physically settle, as the index is not tangible. So, to settle
index options, you can either exit your position through an offsetting trade in the market. You
can also hold your position open until the option expires. Subsequently, the clearing house
settles the trade.
Now let’s see how this differs if you are a buyer or writer put options:
 FOR A BUYER OF A PUT OPTION: :
If you decide to square off your position before the expiry of the contract, you will have to buy
the same number of call options of the same underlying stock and maturity date. If you have
purchased two XYZ put options with a lot size 500, a strike price of Rs 100, and expiry month
of August, you will have to buy two XYZ call options contracts with an expiry month of
August. Thus, these two cancel each other. Whatever is the difference in strike prices could be
your profit or loss.
You can also settle by selling the two put options contracts you hold in order to square off
your position. This way, you will earn a premium on the contracts as the seller. The difference
between the premium at which you bought the put option and the premium at which you sold
them will be your profit or loss.
Or, you can exercise your options on or before the expiration date. The stock exchange will
calculate the profit/loss on your positions by measuring the difference between the closing
market price of the share or index and the strike price. Your account will be then credited or
debited for the amount. However, your maximum loss will be restricted to the premium paid.
 FOR THE SELLER OF A PUT OPTION:
If you have sold put options and want to square off your position, you will have to buy back
the same number of put options that you have written. These must be identical in terms of the
underlying asset (stock or index) and maturity date to the ones that you have sold.
In case the options contract gets exercised on or before the expiration date, the stock exchange
will calculate the profit/loss on your position. This will be based on the difference between the
strike price and the closing market price of the stock or index on the day of exercise.
You losses will be adjusted against the margin that you have provided to the exchange and the
balance margin will be credited to your account with the broker.
WHAT ARE COVERED AND NAKED OPTIONS?

Simply put, covered options are contracts sold by traders who actually own the underlying
shares. In contrast, naked options are those where the writer does not own the underlying
assets. Writers of naked options are thus unprotected or ‘naked’ from an unlimited loss.
COVERED OPTIONS V/S NAKED OPTIONS
WHY CHOSE COVERED OPTIONS?

In the earlier sections, we understood the profit-loss potential of options for buyers and sellers.
The buyers are not actually obligated to exercise the agreement. So, they have limited scope
for losses, as they are only subject to lose the amount they paid as premium. Sellers, on the
other hand, are obligated to uphold the contract if and when the buyer chooses. This increases
his potential liability. Also, the seller’s profit is largely limited to the premium he/she receives.
So, does this mean that an option seller must necessarily be a risk-taking speculator? Not
really.
You could sell call options in order to reduce the cost of your investments or hedge your
investments. The only requirement is that you must actually hold the underlying shares of the
calls that you sell.
For example, IT companies benefit from an undervalued rupee as they earn money in dollars.
On the other hand, importers benefit from a strong rupee as they spend in dollars. Thus, what
is suitable to one investor may not be so for another.
Thus, covered options are largely opted by hedgers and risk-evaders. They are traders who are
looking to safeguard their assets – predominantly currencies – from future fluctuations. They,
thus, aim to transfer their risk.
COVERED OPTIONS V/S NAKED OPTIONS
WHY CHOSE NAKED OPTIONS?

When you sell a naked call or put option, you have no underlying assets or open position in
the futures market to protect you from an unlimited loss, if the market goes against you.
However, this does not necessarily mean that a naked option does not have its perks. It allows
traders to participate in the derivatives market even if they have relatively small holdings in
the cash segment.
Naked options are usually sold by speculators, who feel very strongly about the direction of an
index or the price of a stock. And, if the market does go against them, they may try to salvage
the situation by offsetting their options by purchasing identical but opposing options. They
could also consider taking up a position in the futures market that will nullify the losses made
through selling a naked call or put.
HOW TO TRADE WITH COVERED OPTIONS

As we read earlier, covered options are often used by hedgers or those looking to reduce prices
of existing shares, while naked options are predominantly used by speculators. However, this
is not necessary. Speculators can also opt for covered options. Here’s a look at how covered
options are traded:
 REDUCING THE PRICE OF EXISTING SHARES:
Suppose you actually hold 600 shares of Reliance in your demat account. If you do not expect
any major movements in the price of Reliance in the cash market and wish to reduce the cost
of these shares, you could sell a call option to the extent of the shares that you hold. This
becomes a covered call.
Here's how it works.
If you do not expect the price of Reliance to go beyond Rs 950 per share, you may sell a
Reliance call option at a strike price of Rs 950 for a premium of Rs 20. You will receive a
total premium of Rs 12,000 (Rs 20 x 600 shares).
If all goes well and the price does not increase above Rs 950, your shares are safe with you
and the premium that you receive goes towards reducing the cost of the shares that you hold
by Rs 20 each. However, if the price does go above Rs 950, you always have your shares to
fall back on. You could sell off your shares to settle off the buyer of the call. It is assumed that
you will have chosen a strike price that is above the cost at which you purchased the shares.
This helps when the option is exercised, as you do not make an actual loss. However, you do
make a notional loss. This is because you are not able to benefit from selling your shares at a
price higher than the strike price, although the market has crossed that level.
You could also use the covered call strategy to limit the risk of an open position that you have
in the futures market, by likening your long futures position to the long cash market position
explained in the covered call illustration above.
 SPECULATION:
A covered call could also benefit a speculator who does not want to take undue risks, but
merely make the most of a bearish expectation from the price of an underlying share or index.
Let's say that you expect the price of Reliance to fall.
You could purchase a put option to benefit from this situation, but that would mean that you
have to pay a premium. So, instead, you may decide to sell a Reliance call option and receive
a premium. Remember, when you sell a call option, you are actually agreeing to sell to the call
option buyer.
This is the same as buying put option. If the price of Reliance moves in your favour
– i.e. it actually falls, the call will not be exercised. However, if it rises beyond the strike price,
you could use the shares that you hold to settle off the buyer of the call option.
HOW TO SETTLE COVERED AND NAKED OPTIONS?

Covered options are commonly settled by upholding the agreements and physically selling or
buying the underlying assets. Naked options, on the other hand, could be settled
predominantly by squaring off the position.
 SQUARING OFF:
Since you do not really own the underlying assets – shares, in this case – you would need to
buy options which can nullify the trade. However, since you are actually buying the two
options at two different times, the prices will differ.
This is the opportunity to make a profit. However, it could also be a loss-making transaction.
You can also square off your open position by selling the contracts that you previously
brought. This way, you are selling your liability.
 IGNORE:
Options, unlike futures contracts, is flexible. The buyer is not under any obligation to actually
uphold the terms of the agreement and sell/buy the underlying asset. For this reason, you can
simply let the option mature without exercising it.
However, if you are the seller, and the option buyer has opted to exercise the option, you
cannot ignore it.
 In which case, you may have to borrow the underlying assets or actually buy it from the cash
segment and sell to the option buyer.
SWAPS:
Swaps are private agreements between two parties to exchange 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:
 a) Interest rate Swaps: These entail swapping only the related cash flows between the parties
in the same currency.
 b) Currency Swaps: These entail swapping both principal and interest between the parties,
with the cash flows in on direction being in a different currency than those in the opposite
direction.

SWAPTION:

Swaptions are options to buy or sell a swap that will become operative at the expiry of the options.

RATIONALE BEHIND THE DELOPMENT OF DERIVATIVES:

Holding portfolios of securities is associated with the risk of the possibility that the investor may realize
his returns, which would be much lesser than what he expected to get. There are various factors, which
affect the returns:

1. Price or dividend (interest)


2. Some are internal to the firm like-
 Industrial policy
 Management capabilities
 Consumer’s preference
 Labour strike, etc.
These forces are to a large extent controllable and are termed as non-systematic risks. An investor
can easily manage such non-systematic by having a well-diversified portfolio spread across the
companies, industries and groups so that a loss in one may easily be compensated with a gain in other.

There are yet other of influence which are external to the firm, cannot be controlled and affect large
number of securities. They are termed as systematic risk. They are:

1. Economic.

2. Political.

3. Sociological changes are sources of systematic risk.

For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all-individual stocks to
move together in the same manner. We therefore quite often find stock prices falling from time to time
in spite of company’s earnings rising and vice versa.

Rational Behind the development of derivatives market is to manage this systematic risk, liquidity in
the sense of being able to buy and sell relatively large amounts quickly without substantial price
concession.

In debt market, a large position of the total risk of securities is systematic. Debt instruments are
also finite life securities with limited marketability due to their small size relative to many common
stocks. Those factors favour for the purpose of both portfolio hedging and speculation, the introduction
of a derivatives securities that is on some broader market rather than an individual security.

REGULATORY FRAMEWORK:

The trading of derivatives is governed by the provisions contained in the SCRA, the SEBI Act, and the
regulations framed there under the rules and byelaws of stock exchanges.

Regulation for Derivative Trading:


SEBI set up a 24 member committed under Chairmanship of Dr. L. C. Gupta develop the appropriate
regulatory framework for derivative trading in India. The committee submitted its report in March 1998.
On May 11, 1998 SEBI accepted the recommendations of the committee and approved the phased
introduction of derivatives trading in India beginning with stock index Futures. SEBI also approved he
“suggestive bye-laws” recommended by the committee for regulation and control of trading and
settlement of Derivative contract.

The provision in the SCR Act governs the trading in the securities. The amendment of the SCR Act to
include “DERIVATIVES” within the ambit of securities in the SCR Act made trading in Derivatives
possible within the framework of the Act.

Eligibility criteria as prescribed in the L. C. Gupta committee report may apply to SEBI for grant of
recognition under section 4 of the SCR Act, 1956 to start Derivatives Trading. The derivative
exchange/segment should have a separate governing council and representation of trading/clearing
member shall be limited to maximum 40% of the total members of the governing council. The exchange
shall regulate the sales practices of its members and will obtain approval of SEBI before start of Trading
in any derivative contract.
1. The exchange shall have minimum 50 members.
2. The members of an existing segment of the exchange will not automatically become the members of
the derivatives segment. The members of the derivatives segment need to fulfill the eligibility
conditions as lay down by the L. C. Gupta committee.
3. The clearing and settlement of derivatives trades shall be through a SEBI approved clearing
corporation/clearing house. Clearing Corporation/Clearing House complying with the eligibility
conditions as lay down By the committee have to apply to SEBI for grant of approval.
4. Derivatives broker/dealers and Clearing members are required to seek registration from SEBI.
5. The Minimum contract value shall not be less than Rs.2 Lakh. Exchange should also submit details of
the futures contract they purpose to introduce.
6. The trading members are required to have qualified approved user and sales persons who have passed
a certification programme approved by SEBI
RESEARCH METHOLODOLOGY
MEANINING OF RESEARCH: -
Research in common parlance refers to a search for knowledge. Once can also define research
as a scientific and systematic search for pertinent information on a specific topic. In fact,
research is an art of scientific investigation. The Advanced Learner’s Dictionary of Current
English lays down the meaning of research as “a careful investigation or inquiry specially
through search for new facts in any branch of knowledge.”1 Redman and Mory define
research as a “systematized effort to gain new knowledge.”2 Some people consider research as
a movement, a movement from the known to the unknown. It is actually a voyage of
discovery. We all possess the vital instinct of inquisitiveness for, when the unknown confronts
us, we wonder and our inquisitiveness makes us probe and attain full and fuller understanding
of the unknown. This inquisitiveness is the mother of all knowledge and the method, which
man employs for obtaining the knowledge of whatever the unknown, can be termed as
research. Research is an academic activity and as such the term should be used in a technical
sense. According to Clifford Woody research comprises defining and redefining problems,
formulating hypothesis or suggested solutions; collecting, organizing and evaluating data;
making deductions and reaching conclusions; and at last carefully testing the conclusions to
determine whether they fit the formulating hypothesis. D. Slesinger and M. Stephenson in the
Encyclopedia of Social Sciences define research as “the manipulation of things, concepts or
symbols for the purpose of generalizing to extend, correct or verify knowledge, whether that
knowledge aids in construction of theory or in the practice of an art.In short ‘research’ refers
to the systematic method consisting of enunciating the problem, formulating a hypothesis,
collecting the facts or data, analyzing the facts and reaching certain conclusions either in the
form of solutions(s) towards the concerned problem or in certain generalizations for some
theoretical formulation.

Methodology of the project starts with –


The methodology behind this report is to analyze the importance of derivatives. In this report
especially focus will be on futures forwards & options on various financial institutions. The
report will focus on profit/loss of securities with the help of futures and options on HDFC, SBI
and J&K BANK.

OBJECTIVES OF RESEARCH
The purpose of research is to discover answers to questions through the application of
scientific procedures. The main aim of research is to find out the truth which is hidden and
which has not been discovered as yet. Though each research study has its own specific
purpose, we may think of research objectives as falling into a number of following broad
groupings:
1. To gain familiarity with a phenomenon or to achieve new insights into it (studies with this
object in view are termed as exploratory or formulative research studies);
2. To portray accurately the characteristics of a particular individual, situation or a group
(studies with this object in view are known as descriptive research studies);
3. To determine the frequency with which something occurs or with which it is associated
with something else (studies with this object in view are known as diagnostic research
studies);
4. To test a hypothesis of a causal relationship between variables (such studies are known as
hypothesis-testing research studies).
Significance of Research
“All progress is born of inquiry. Doubt is often better than overconfidence, for it leads to
inquiry, and inquiry leads to invention” is a famous Hudson Maxim in context of which the
significance of research can well be understood. Increased amounts of research make progress
possible. Research inculcates scientific and inductive thinking and it promotes the
development of logical habits of thinking and organization. The role of research in several
fields of applied economics, whether related to business or to the economy as a whole, has
greatly increased in modern times. The increasingly complex nature of business and
government has focused attention on the use of research in solving operational problems.
Research, as an aid to economic policy, has gained added importance, both for government
and business. Research provides the basis for nearly all government policies in our economic
system. For instance, government’s budgets rest in part on an analysis of the needs and desires
of the people and on the availability of revenues to meet these needs. The cost of needs has to
be equated to probable revenues and this is a field where research is most needed. Through
research we can devise alternative policies and can as well examine the consequences of each
of these alternatives. Decision-making may not be a part of research, but research certainly
facilitates the decisions of the policy maker. Government has also to chalk out programmes for
dealing with all facets of the country’s existence and most of these will be related directly or
indirectly to economic conditions. The plight of cultivators, the problems of big and small
business and industry, working conditions, trade union activities, the problems of distribution,
even the size and nature of defence services are matters requiring research. Thus, research is
considered necessary with regard to the allocation of nation’s resources. Another area in
government, where research is necessary, is collecting information on the economic and social
structure of the nation. Such information indicates what is happening in the economy and what
changes are taking place. Collecting such statistical information is by no means a routine task,
but it involves a variety of research problems. These day nearly all governments maintain
large staff of research technicians or experts to carry on this work. Thus, in the context of
government, research as a tool to economic policy has three distinct phases of operation, viz.,
(i) investigation of economic structure through continual compilation of facts; (ii) diagnosis of
events that are taking place and the analysis of the forces underlying them; and (iii) the
prognosis, i.e., the prediction of future developments. Research has its special significance in
solving various operational and planning problems of business and industry. Operations
research and market research, along with motivational research, are considered crucial and
their results assist, in more than one way, in taking business decisions. Market research is the
investigation of the structure and development of a market for the purpose of formulating
efficient policies for purchasing, production and sales. Operations research refers to the
application of mathematical, logical and analytical techniques to the solution of business
problems of cost minimization or of profit maximization or what can be termed as
optimization problems. Motivational research of determining why people behave as they do is
mainly concerned with market characteristics. In other words, it is concerned with the
determination of motivations underlying the consumer (market) behavior. All these are of
great help to people in business and industry who are responsible for taking business
decisions. Research with regard to demand and market factors has great utility in business.
Given knowledge of future demand, it is generally not difficult for a firm, or for an industry to
adjust its supply schedule within the limits of its projected capacity. Market analysis has
become an integral tool of business policy these days. Business budgeting, which ultimately
results in a projected profit and loss account, is based mainly on sales estimates which in turn
depends on business research. Once sales forecasting is done, efficient production and
investment programmes can be set up around which are grouped the purchasing and financing
plans. Research, thus, replaces intuitive business decisions by more logical and scientific
decisions.
Research Process
before embarking on the details of research methodology and techniques, it seems appropriate
to present a brief overview of the research process. Research process consists of series of
actions or steps necessary to effectively carry out research and the desired sequencing of these
steps.
1. Formulating the research problem: There are two types of research problems, viz., those
which relate to states of nature and those which relate to relationships between variables. At
the very outset the researcher must single out the problem he wants to study, i.e., he must
decide the general area of interest or aspect of a subject-matter that he would like to inquire
into. Initially the problem may be stated in a broad general way and then the ambiguities, if
any, relating to the problem be resolved. Then, the feasibility of a particular solution has to be
considered before a working formulation of the problem can be set up. The formulation of a
general topic into a specific research problem, thus, constitutes the first step in a scientific
enquiry. Essentially two steps are involved in formulating the research problem, viz.,
understanding the problem thoroughly, and rephrasing the same into meaningful terms from
an analytical point of view.
The best way of understanding the problem is to discuss it with one’s own colleagues or with
those having some expertise in the matter. In an academic institution the researcher can seek
the help from a guide who is usually an experienced man and has several research problems in
mind. Often, the guide puts forth the problem in general terms and it is up to the researcher to
narrow it down and phrase the problem in operational terms. In private business units or in
governmental organizations, the problem is usually earmarked by the administrative agencies
with whom the researcher can discuss as to how the problem originally came about and what
considerations are involved in its possible solutions. The researcher must at the same time
examine all available literature to get himself acquainted with the selected problem. He may
review two types of literature—the conceptual literature concerning the concepts and theories,
and the empirical literature consisting of studies made earlier which are similar to the one
proposed. The basic outcome of this review will be the knowledge as to what data and other
materials are available for operational purposes which will enable the researcher to specify his
own research problem in a meaningful context. After this the researcher rephrases the problem
into analytical or operational terms i.e., to put the problem in as specific terms as possible.
This task of formulating, or defining, a research problem is a step of greatest importance in the
entire research process. The problem to be investigated must be defined unambiguously for
that will help discriminating relevant data from irrelevant ones. Care must, however, be taken
to verify the objectivity and validity of the background facts concerning the problem.
2. Extensive literature survey: Once the problem is formulated, a brief summary of it should
be written down. It is compulsory for a research worker writing a thesis for a Ph.D. degree to
write a synopsis of the topic and submit it to the necessary Committee or the Research Board
for approval. At this juncture the researcher should undertake extensive literature survey
connected with the problem. For this purpose, the abstracting and indexing journals and
published or unpublished bibliographies are the first place to go to. Academic journals,
conference proceedings, government reports, books etc., must be tapped depending on the
nature of the problem. In this process, it should be remembered that one source will lead to
another. The earlier studies, if any, which are similar to the study in hand should be carefully
studied. A good library will be a great help to the researcher at this stage.
3. Development of working hypotheses: After extensive literature survey, researcher should
state in clear terms the working hypothesis or hypotheses. Working hypothesis is tentative
assumption made in order to draw out and test its logical or empirical consequences. As such
the manner in which research hypotheses are developed is particularly important since they
provide the focal point for research. They also affect the manner in which tests must be
conducted in the analysis of data and indirectly the quality of data which is required for the
analysis. In most types of research, the development of working hypothesis plays an important
role. Hypothesis should be very specific and limited to the piece of research in hand because it
has to be tested. The role of the hypothesis is to guide the researcher by delimiting the area of
research and to keep him on the right track. It sharpens his thinking and focuses attention on
the more important facets of the problem. It also indicates the type of data required and the
type of methods of data analysis to be used. How does one go about developing working
hypotheses? The answer is by using the following approach:
(a) Discussions with colleagues and experts about the problem, its origin and the objectives in
seeking a solution;
(b) Examination of data and records, if available, concerning the problem for possible trends,
peculiarities and other clues;
(c) Review of similar studies in the area or of the studies on similar problems; and
(d) Exploratory personal investigation which involves original field interviews on a limited
scale with interested parties and individuals with a view to secure greater insight into the
practical aspects of the problem. Thus, working hypotheses arise as a result of a-priori
thinking about the subject, examination of the available data and material including related
studies and the counsel of experts and interested parties. Working hypotheses are more useful
when stated in precise and clearly defined terms. It may as well be remembered that
occasionally we may encounter a problem where we do not need working Hypotheses,
specially in the case of exploratory or formulate researches which do not aim at testing
the hypothesis. But as a general rule, specification of working hypotheses in another basic step
of the research process in most research problems.
4. Preparing the research design: The research problem having been formulated in clear cut
terms, the researcher will be required to prepare a research design, i.e., he will have to state
the conceptual structure within which research would be conducted. The preparation of such a
design facilitates research to be as efficient as possible yielding maximal information. In other
words, the function of research design is to provide for the collection of relevant evidence
with minimal expenditure of effort, time and money. But how all these can be achieved
depends mainly on the research purpose. Research purposes may be grouped into four
categories, viz., (i) Exploration, (ii) Description, (iii) Diagnosis, and (iv) Experimentation. A
flexible research design which provides opportunity for considering many different aspects of
a problem is considered appropriate if the purpose of the research study is that of exploration.
But when the purpose happens to be an accurate description of a situation or of an association
between variables, the suitable design will be one that minimizes bias and maximizes the
reliability of the data collected and analyzed. There are several research designs, such as,
experimental and non-experimental hypothesis testing. Experimental designs can be either
informal designs (such as before-and-after without control, after-only with control, before-
and-after with control) or formal designs (such as completely randomized design, randomized
block design, Latin square design, simple and complex factorial designs), out of which the
researcher must select one for his own project.
5. Determining sample design: All the items under consideration in any field of inquiry
constitute a ‘universe’ or ‘population’. A complete enumeration of all the items in the
‘population’ is known as a census inquiry. It can be presumed that in such an inquiry when all
the items are covered no element of chance is left and highest accuracy is obtained. But in
practice this may not be true. Even the slightest element of bias in such an inquiry will get
larger and larger as the number of observations increases. Moreover, there is no way of
checking the element of bias or its extent except through a resurvey or use of sample checks.
Besides, this type of inquiry involves a great deal of time, money and energy. Not only this,
census inquiry is not possible in practice under many circumstances. For instance, blood
testing is done only on sample basis. Hence, quite often we select only a few items from the
universe for our study purposes. The items so selected constitute what is technically called
a sample. The researcher must decide the way of selecting a sample or what is popularly
known as the sample design. In other words, a sample design is a definite plan determined
before any data are actually collected for obtaining a sample from a given population. Thus,
the plan to select 12 of a city’s 200 drugstores in a certain way constitutes a sample design.
Samples can be either probability samples or non-probability samples. With probability
samples each element has a known probability of being included in the sample but the non-
probability samples do not allow the researcher to determine this probability. Probability
samples are those based on simple random sampling, systematic sampling, stratified sampling,
cluster/area sampling whereas non-probability samples are those based on convenience
sampling, judgment sampling and quota sampling techniques.
6. Collecting the data: In dealing with any real life problem it is often found that data at hand
are inadequate, and hence, it becomes necessary to collect data that are appropriate. There are
several ways of collecting the appropriate data which differ considerably in context of money
costs, time and other resources at the disposal of the researcher. Primary data can be collected
either through experiment or through survey. If the researcher conducts an experiment, he
observes some quantitative measurements, or the data, with the help of which he examines the
truth contained in his hypothesis. But in the case of a survey, data can be collected by any one
or more of the following ways:
(i) By observation: This method implies the collection of information by way of investigator’s
own observation, without interviewing the respondents.
(ii) Through personal interview: The investigator follows a rigid procedure and seeks answers
to a set of pre-conceived questions through personal interviews.
(iii) Through telephone interviews: This method of collecting information involves contacting
the respondents on telephone itself.
(iv) By mailing of questionnaires: The researcher and the respondents do come in contact
with each other if this method of survey is adopted.
v) Through schedules: Under this method the enumerators are appointed and given training.
They are provided with schedules containing relevant questions.
7. Execution of the project: Execution of the project is a very important step in the research
process. If the execution of the project proceeds on correct lines, the data to be collected
would be adequate and dependable. The researcher should see that the project is executed in a
systematic manner and in time. If the survey is to be conducted by means of structured
questionnaires, data can be readily machine-processed. In such a situation, questions as well as
the possible answers may be coded. If the data are to be collected through interviewers,
arrangements should be made for proper selection and training of the interviewers. The
training may be given with the help of instruction manuals which explain clearly the job of the
interviewers at each step. Occasional field checks should be made to ensure that the
interviewers are doing their assigned job sincerely and efficiently. A careful watch should be
kept for unanticipated factors in order to keep the survey as much realistic as possible. This, in
other words, means that steps should be taken to ensure that the survey is under statistical
control so that the collected information is in accordance with the pre-defined standard of
accuracy. If some of the respondents do not cooperate, some suitable methods should be
designed to tackle this problem. One method of dealing with the non-response problem is to
make a list of the non-respondents and take a small sub-sample of them, and then with the
help of experts vigorous efforts can be made for securing response.
8. Analysis of data: After the data have been collected, the researcher turns to the task of
analyzing them. The analysis of data requires a number of closely related operations such as
establishment of categories, the application of these categories to raw data through coding,
tabulation and then drawing statistical inferences. The unwieldy data should necessarily be
condensed into a few manageable groups and tables for further analysis. Thus, researcher
should classify the raw data into some purposeful and usable categories. Coding operation is
usually done at this stage through which the categories of data are transformed into symbols
that may be tabulated and counted. Editing is the procedure that improves the quality of the
data for coding. With coding the stage is ready for tabulation. Tabulation is a part of the
technical procedure wherein the classified data are put in the form of tables. The mechanical
devices can be made use of at this juncture. A great deal of data, specially in large inquiries, is
tabulated by computers. Computers not only save time but also make it possible to study large
number of variables affecting a problem simultaneously. Analysis work after tabulation is
generally based on the computation of various percentages, coefficients, etc., by applying
various well defined statistical formulae. In the process of analysis, relationships or
differences supporting or conflicting with original or new hypotheses should be subjected to
tests of significance to determine with what validity data can be said to indicate any
conclusion(s). For instance, if there are two samples of weekly wages, each sample being
drawn from factories in different parts of the same city, giving two different mean values, then
our problem may be whether the two mean values are significantly different or the difference
is just a matter of chance. Through the use of statistical tests we can establish whether such a
difference is a real one or is the result of random fluctuations. If the difference happens to be
real, the inference will be that the two samples come from different universes and if the
difference is due to chance, the conclusion would be that the two samples belong to the same
universe. Similarly, the technique of analysis of variance can help us in analyzing whether
three or more varieties of seeds grown on certain fields yield significantly different results or
not. In brief, the researcher can analyze the collected data with the help of various statistical
measures.
9. Hypothesis-testing: After analyzing the data as stated above, the researcher is in a position
to test the hypotheses, if any, he had formulated earlier. Do the facts support the hypotheses or
they happen to be contrary? This is the usual question which should be answered while testing
hypotheses. Various tests, such as Chi square test, t-test, F-test, have been developed by
statisticians for the purpose. The hypotheses may be tested through the use of one or more of
such tests, depending upon the nature and object of research inquiry. Hypothesis-testing will
result in either accepting the hypothesis or in rejecting it. If the researcher had no hypotheses
to start with, generalizations established on the basis of data may be stated as hypotheses to be
tested by subsequent researches in times to come.
10. Generalizations and interpretation: If a hypothesis is tested and upheld several times, it
may be possible for the researcher to arrive at generalization, i.e., to build a theory. As a
matter of fact, the real value of research lies in its ability to arrive at certain generalizations. If
the researcher had no hypothesis to start with, he might seek to explain his findings on the
basis of some theory. It is known as interpretation. The process of interpretation may quite
often trigger off new questions which in turn may lead to further researches.
11. Preparation of the report or the thesis: Finally, the researcher has to prepare the report
of what has been done by him. Writing of report must be done with great care keeping in view
the following:
1. The layout of the report should be as follows: (i) the preliminary pages; (ii) the main text,
and (iii) the end matter. In its preliminary pages the report should carry title and date followed
by acknowledgements and foreword. Then there should be a table of contents followed by a
list of tables and list of graphs and charts, if any, given in the report. The main text of the
report should have the following parts:
(a) Introduction: It should contain a clear statement of the objective of the research and an
explanation of the methodology adopted in accomplishing the research. The scope of the study
along with various limitations should as well be stated in this part.
(b) Summary of findings: After introduction there would appear a statement of findings and
recommendations in non-technical language. If the findings are extensive, they should be
summarized.
(c) Main report: The main body of the report should be presented in logical sequence and
broken-down into readily identifiable sections.
(d) Conclusion: Towards the end of the main text, researcher should again put down the
results of his research clearly and precisely. In fact, it is the final summing up. At the end of
the report, appendices should be enlisted in respect of all technical data. Bibliography, i.e., list
of books, journals, reports, etc., consulted, should also be given in the end. Index should also
be given specially in a published research report.
2. Report should be written in a concise and objective style in simple language avoiding vague
expressions such as ‘it seems,’ ‘there may be’, and the like.
3. Charts and illustrations in the main report should be used only if they present the
information more clearly and forcibly.
4. Calculated ‘confidence limits’ must be mentioned and the various constraints experienced
in conducting research operations may as well be stated.
WHAT IS A RESEARCH PROBLEM?
A research problem, in general, refers to some difficulty which a researcher experiences in the
context of either a theoretical or practical situation and wants to obtain a solution for the same.
SELECTING THE PROBLEM
The research problem undertaken for study must be carefully selected. The task is a difficult
one, although it may not appear to be so. Help may be taken from a research guide in this
connection. Nevertheless, every researcher must find out his own salvation for research
problems cannot be borrowed. A problem must spring from the researcher’s mind like a plant
springing from its own seed. If our eyes need glasses, it is not the optician alone who decides
about the number of the lens we require. We have to see ourselves and enable him to prescribe
for us the right number by cooperating with him. Thus, a research guide can at the most only
help a researcher choose a subject.
Methods of Data Collection
The task of data collection begins after a research problem has been defined and research
design/plan chalked out. While deciding about the method of data collection to be used for the
study, the researcher should keep in mind two types of data viz., primary and secondary. The
primary data are those which are collected afresh and for the first time, and thus happen to be
original in character. The secondary data, on the other hand, are those which have already
been collected by someone else and which have already been passed through the statistical
process. The researcher would have to decide which sort of data he would be using (thus
collecting) for his study and accordingly he will have to select one or the other method of data
collection. The methods of collecting primary and secondary data differ since primary data are
to be originally collected, while in case of secondary data the nature of data collection work is
merely that of compilation. We describe the different methods of data collection, with the pros
and cons of each method.
COLLECTION OF PRIMARY DATA
We collect primary data during the course of doing experiments in an experimental research
but in case we do research of the descriptive type and perform surveys, whether sample
surveys or census surveys, then we can obtain primary data either through observation or
through direct communication with respondents in one form or another or through personal
interviews. There are several methods of collecting primary data, particularly in surveys and
descriptive researches. Important ones are: (i) observation method, (ii) interview method, (iii)
through questionnaires, (iv) through schedules, and (v) other methods which include (a)
warranty cards; (b) distributor audits; (c) pantry audits; (d) consumer panels; (e) using
mechanical devices; (f) through projective techniques; (g) depth interviews, and (h) content
analysis.
COLLECTION OF DATA THROUGH QUESTIONNAIRES
This method of data collection is quite popular, particularly in case of big enquiries. It is being
adopted by private individuals, research workers, private and public organisations and even by
governments. In this method a questionnaire is sent (usually by post) to the persons concerned
with a request to answer the questions and return the questionnaire. A questionnaire consists
of a number of questions printed or typed in a definite order on a form or set of forms. The
questionnaire is mailed to respondents who are expected to read and understand the questions
and write down the reply in the space meant for the purpose in the questionnaire itself. The
respondents have to answer the questions on their own. The method of collecting data by
mailing the questionnaires to respondents is most extensively employed in various economic
and business surveys. The merits claimed on behalf of this method are as follows:
1. There is low cost even when the universe is large and is widely spread geographically.
2. It is free from the bias of the interviewer; answers are in respondents’ own words.
3. Respondents have adequate time to give well thought out answers.
4. Respondents, who are not easily approachable, can also be reached conveniently.
5 Large samples can be made use of and thus the results can be made more dependable and
reliable.
COLLECTION OF DATA THROUGH SCHEDULES
This method of data collection is very much like the collection of data through questionnaire,
with little difference which lies in the fact that schedules (proforma containing a set of
questions) are being filled in by the enumerators who are specially appointed for the purpose.
These enumerators along with schedules, go to respondents, put to them the questions from
the proforma in the order the questions are listed and record the replies in the space meant for
the same in the proforma. In certain situations, schedules may be handed over to respondents
and enumerators may help them in recording their answers to various questions in the said
schedules. Enumerators explain the aims and objects of the investigation and also remove the
difficulties which any respondent may feel in understanding the implications of a particular
question or the definition or concept of difficult terms. This method requires the selection of
enumerators for filling up schedules or assisting respondents to fill up schedules and as such
enumerators should be very carefully selected. The enumerators should be trained to perform
their job well and the nature and scope of the investigation should be explained to them
thoroughly so that they may well understand the implications of different questions
put in the schedule. Enumerators should be intelligent and must possess the capacity of cross
examination in order to find out the truth. Above all, they should be honest, sincere, and
hardworking and should have patience and perseverance. This method of data collection is
very useful in extensive enquiries and can lead to fairly reliable results. It is, however, very
expensive and is usually adopted in investigations conducted by governmental agencies or by
some big organizations. Population census all over the world is conducted through this
method.
COLLECTION OF SECONDARY DATA
Secondary data means data that are already available i.e., they refer to the data which have
already been collected and analyzed by someone else. When the researcher utilizes secondary
data, then he has to look into various sources from where he can obtain them. In this case he is
certainly not confronted with the problems that are usually associated with the collection of
original data. Secondary data may either be published data or unpublished data. Usually
published data are available in: (a) various publications of the central, state are local
governments; (b) various publications of foreign governments or of international bodies and
their subsidiary organizations; (c) technical and trade journals; (d) books, magazines and
newspapers; (e) reports and publications of various associations connected with business and
industry, banks, stock exchanges, etc.; (f) reports prepared by research scholars, universities,
economists, etc. in different fields; and (g) public records and statistics, historical documents,
and other sources of published information. The sources of unpublished data are many; they
may be found in diaries, letters, unpublished biographies and autobiographies and also may be
available with scholars and research workers, trade associations, labour bureaus and other
public/ private individuals and organizations. Researcher must be very careful in using
secondary data. He must make a minute scrutiny because it is just possible that the secondary
data may be unsuitable or may be inadequate in the context of the problem which the
researcher wants to study.
WHAT IS A HYPOTHESIS?
Ordinarily, when one talks about hypothesis, one simply means a mere assumption or some
supposition to be proved or disproved. But for a researcher hypothesis is a formal question
that he intends to resolve. Thus a hypothesis may be defined as a proposition or a set of
proposition set forth as an explanation for the occurrence of some specified group of
phenomena either asserted merely as a provisional conjecture to guide some investigation or
accepted as highly probable in the light of established facts. Quite often a research hypothesis
is a predictive statement, capable of being tested by scientific methods, that relates an
independent variable to some dependent variable. For example, consider statements like the
following ones:
“Students who receive counselling will show a greater increase in creativity than students not
receiving counselling” Or “the automobile A is performing as well as automobile B.”
These are hypotheses capable of being objectively verified and tested. Thus, we may conclude
that a hypothesis states what we are looking for and it is a proposition which can be put to a
test to determine its validity.
Characteristics of hypothesis: Hypothesis must possess the following characteristics:
(i) Hypothesis should be clear and precise. If the hypothesis is not clear and precise, the
inferences drawn on its basis cannot be taken as reliable.
(ii) Hypothesis should be capable of being tested. In a swamp of untestable hypotheses, many
a time the research programmers have bogged down. Some prior study may be done by
researcher in order to make hypothesis a testable one. A hypothesis “is testable if other
deductions can be made from it which, in turn, can be confirmed or disproved by
observation.”
(iii) Hypothesis should state relationship between variables, if it happens to be a relational
hypothesis.
(iv) Hypothesis should be limited in scope and must be specific. A researcher must remember
that narrower hypotheses are generally more testable and he should develop such hypotheses.
(v) Hypothesis should be stated as far as possible in most simple terms so that the same is
easily understandable by all concerned. But one must remember that simplicity of hypothesis
has nothing to do with its significance.
(vi) Hypothesis should be consistent with most known facts i.e., it must be consistent with a
substantial body of established facts. In other words, it should be one which judges accept
as being the most likely.
(vii) Hypothesis should be amenable to testing within a reasonable time. One should not use
even an excellent hypothesis, if the same cannot be tested in reasonable time for one
cannot spend a life-time collecting data to test it.
(viii) Hypothesis must explain the facts that gave rise to the need for explanation. This means
that by using the hypothesis plus other known and accepted generalizations, one should be
able to deduce the original problem condition. Thus hypothesis must actually explain what
it claims to explain; it should have empirical reference.
BASIC CONCEPTS CONCERNING TESTING OF HYPOTHESES
Basic concepts in the context of testing of hypotheses need to be explained.
(a) Null hypothesis and alternative hypothesis: In the context of statistical analysis, we often
talk about null hypothesis and alternative hypothesis. If we are to compare method A with
method B about its superiority and if we proceed on the assumption that both methods are
equally good, then this assumption is termed as the null hypothesis.
ALTERNATIVE HYPOTHESIS IS VICE-VERSA OF NULL HYPOTHSIS.
PROCEDURE FOR HYPOTHESIS TESTING
To test a hypothesis means to tell (on the basis of the data the researcher has collected)
whether or not the hypothesis seems to be valid. In hypothesis testing the main question is:
whether to accept the null hypothesis or not to accept the null hypothesis? Procedure for
hypothesis testing refers to all those steps that we undertake for making a choice between the
two actions i.e., rejection and acceptance of a null hypothesis. The various steps involved in
hypothesis testing are stated below:
(i) Making a formal statement: The step consists in making a formal statement of the null
hypothesis (H0) and also of the alternative hypothesis (Ha). This means that hypotheses
should be clearly stated, considering the nature of the research problem
DATA ANALYSIS AND
INTERPRETATION

ANALYSIS OF HDFC:
The objective of this analysis is to evaluate the profit/loss position of futures and options. This
analysis is based on sample data taken of HDFC BANK scrip. This analysis considered the
Jan 2008 contract of HDFC BANK. The lot size of HDFC BANK is 175, the time period in
which this analysis done is from 27-12-2007 to 31.01.08.

DATE MARKET PRICE FUTURE PRICE

28-Dec-07 1226.7 1227.05

31-Dec-07 1238.7 1239.7

1-Jan-08 1228.75 1233.75


2-Jan-08 1267.25 1277
3-Jan-08 1228.95 1238.75
4-Jan-08 1286.3 1287.55
7-Jan-08 1362.55 1358.9
8-Jan-08 1339.95 1338.5
9-Jan-08 1307.95 1310.8
10-Jan-08 1356.15 1358.05
11-Jan-08 1435 1438.15
14-Jan-08 1410 1420.75
15-Jan-08 1352.2 1360.1
16-Jan-08 1368.3 1375.75
17-Jan-08 1322.1 1332.1
18-Jan-08 1248.85 1256.45
21-Jan-08 1173.2 1167.85
22-Jan-08 1124.95 1127.85
23-Jan-08 1151.45 1156.35
24-Jan-08 1131.85 1134.5
25-Jan-08 1261.3 1265.6
28-Jan-08 1273.95 1277.3
29-Jan-08 1220.45 1223.85
30-Jan-08 1187.4 1187.4
31-Jan-08 1147 1145.9
TABLE-1

GRAPH SHOWING THE PRICE MOVEMENTS OF ICICI FUTURES

1500
1450
1400
1350
PRICE

1300
1250 Future price
1200
1150
1100
1050
1000
08

08

08

08
7

15 -08

17 -08

21 -08

23 -08

25 -08

29 -08

31 -08

8
-0

-0
n-

n-

n-

n-
ec

an

an

an

an

an

an

an

an
Ja

Ja

Ja

Ja
-D

-J

-J

-J

-J

-J

-J

-J

-J
1-

3-

7-

9-

11
28

CONTRACT DATES

GRAPH-1

OBSERVATIONS AND FINDINGS:

If a person buys 1 lot i.e. 175 futures of HDFC BANK on 28th Dec, 2007 and sells on 31st Jan,
2008 then he will get a loss of 1145.9-1227.05 = -81.15 per share. So he will get a loss of
14201.25 i.e. -81.15 * 175

If he sells on 14th Jan, 2007 then he will get a profit of 1420.75-1227.05 = 193.7 i.e. a profit of
193.7 per share. So his total profit is 33897.5 i.e. 193.7 * 175
The closing price of HDFC BANK at the end of the contract period is 1147 and this is considered
as settlement price.

The following table explains the market price and premiums of calls.

 The first column explains trading date


 Second column explains the SPOT market price in cash segment on that date.
 The third column explains call premiums amounting at these strike prices; 1200, 1230, 1260,
1290, 1320 and 1350.
 Call options:
Date Market 1200 1230 1260 1290 1320 1350
price
28-Dec- 1226.7 67.85 53.05 39.65 32.25 24.2 18.5
07
31-Dec- 1238.7 74.65 58.45 44.05 32.75 23.85 19.25
07
1-Jan- 1228.75 62 56.85 39.2 30 22.9 18.8
08
2-Jan- 1267.25 100.9 75.55 63.75 49.1 36.55 27.4
08
3-Jan- 1228.95 75 60.1 45.85 34.5 26.4 22.5
08
4-Jan- 1286.3 109.6 91.05 68.25 51.35 38.6 29.15
08
7-Jan- 1362.55 170 143.3 120 100 79.4 62.35
08
8-Jan- 1339.95 140 119.35 100 85 59.2 42.85
08
9-Jan- 1307.95 140 101 74.35 62.05 46.65 33.15
08
10-Jan- 1356.15 160.6 131 110 95.45 70.85 53.1
08
11-Jan- 1435 250.7 151.8 188.9 164.7 130.9 104.55
08
14-Jan- 1410 240 213.5 148 134.9 96 88.2
08
15-Jan- 1352.2 155 150.05 107.5 134.9 66 52.65
08
16-Jan- 1368.3 128.4 140 90 63 78.2 60.95
08
17-Jan- 1322.1 128.4 140 95 67.5 50.2 39.15
08
18-Jan- 1248.85 128.4 60 54 37.95 29.15 19.3
08
21-Jan- 1173.2 52 36.5 26.3 24.45 14.55 9.95
08
22-Jan- 1124.95 44.15 31.05 22.55 12.45 10.35 6.7
08
23-Jan- 1151.45 50.25 39.3 23.25 17 16.35 8.6
08
24-Jan- 1131.85 40.4 22 17.05 12.1 9.45 5.1
08
25-Jan- 1261.3 80.5 62 40.85 24.55 16.15 9.75
08
28-Jan- 1273.95 91.85 61.65 44.8 31.4 20.25 11.35
08
29-Jan- 1220.45 46 25.95 17.45 10.5 4.05 2.95
08
30-Jan- 1187.4 18.65 9.05 4.5 1.4 0.75 0.2
08
31-Jan- 1147 0.45 0.5 1 1.4 0.1 0.2
08
STRIKE PRICE
TABLE-2

CALL OPTION

BUYERS PAY OFF:


 Those who have purchase call option at a strike price of 1260, the premium payable is
39.65
 On the expiry date the spot market price enclosed at 1147. As it is out of the money
for the buyer and in the money for the seller, hence the buyer is in loss.
 So the buyer will lose only premium i.e. 39.65 per share.
So the total loss will be 6938.75 i.e. 39.65*175

SELLERS PAY OFF:

 As Seller is entitled only for premium if he is in profit.


 So his profit is only premium i.e. 39.65 * 175 = 6938.75

PUT OPTION

STRKE PRICES

Date Market 1200 1230 1260 1290 1320 1350


price
28-Dec- 1226.7 39.05 181.05 178.8 197.15 190.85 191.8
07
31-Dec- 1238.7 34.4 181.05 178.8 197.15 190.85 191.8
07
1-Jan- 1228.75 32.1 181.05 178.8 197.15 190.85 191.8
08
2-Jan- 1267.25 22.6 25.50 178.8 41.55 190.85 191.8
08
3-Jan- 1228.95 32 38.00 178.8 82 190.85 191.8
08
4-Jan- 1286.3 17.65 25.00 37.05 82 190.85 191.8
08
7-Jan- 1362.55 12.4 12.60 20.15 34.85 43.95 191.8
08
8-Jan- 1339.95 10.15 12.00 20.05 30 42 191.8
08
9-Jan- 1307.95 11.9 15.00 26.5 36 51 191.8
08
10-Jan- 1356.15 9 11.00 15 25.2 33.7 47.8
08
11-Jan- 1435 3.75 11.00 10 8.9 12.75 18.35
08
14-Jan- 1410 3.75 11.00 8.5 12 12.4 22.45
08
15-Jan- 1352.2 6.45 7.00 10 17.45 23.1 38.3
08
16-Jan- 1368.3 8 8.00 11.25 13.3 22.55 35.35
08
17-Jan- 1322.1 7.3 8.00 17.8 25.45 38.25 56.4
08
18-Jan- 1248.85 18.15 36.60 35 67.85 76.05 112.2
08
21-Jan- 1173.2 103.5 70.00 69.65 135.05 151.35 223.4
08
22-Jan- 1124.95 110 138.90 138.6 170.05 210 280
08
23-Jan- 1151.45 71 138.90 135 150 210 200
08
24-Jan- 1131.85 99 138.90 135 150 210 200
08
25-Jan- 1261.3 15.9 26.35 33 50.05 210 200
08
28-Jan- 1273.95 16.7 19.00 30 45 55 81.45
08
29-Jan- 1220.45 18 38.00 50 45 100 145
08
30-Jan- 1187.4 27.5 60.00 85.2 120 145.05 145
08
31-Jan- 1147 50 60.00 85.2 120 145.05 145
08
TABLE -3

OBSERVATIONS AND FINDINGS

PUT OPTION

BUYERS PAY OFF:

 As brought 1 lot of HDFC that is 175, those who buy for 1200 paid 39.05 premium per
share.
 Settlement price is 1147
Strike price 1200.00

Spot price 1147.00

53.00

Premium (-) 39.05

13.95 x 175= 2441.25

Buyer Profit = Rs. 2441.25

Because it is positive it is in the money contract hence buyer will get more profit, incase spot
price decreases, buyer’s profit will increase.

SELLERS PAY OFF:

 It is in the money for the buyer so it is in out of the money for the seller, hence he is
in loss.
 The loss is equal to the profit of buyer i.e. 2441.25.
GARPH SHOWING THE PRICE MOVEMNTS OF SPOT & FUTURE

1500
1450
1400
1350
PRICE

1300 Market price


1250
1200 Future price
1150
1100
1050
1000
08

08

08

08
7

15 -08

17 -08

21 -08

23 -08

25 -08

29 -08

31 -08

8
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CONTRACT DATES

GRAPH-2

OBSERVATIONS AND FINDINGS

 The future price of HDFC is moving along with the market price.
 If the buy price of the future is less than the settlement price, than the buyer of a future
gets profit.
 If the selling price of the future is less than the settlement price, than the seller incur
losses.

ANALYSIS OF SBI:-

The objective of this analysis is to evaluate the profit/loss position of futures and options. This

analysis is based on sample data taken of SBI scrip. This analysis considered the Jan 2007

contract of SBI. The lot size of SBI is 132, the time period in which this analysis done is from

28-12-2007 to 31.01.08.

Date Market Price Future price

28-Dec-07 2377.55 2413.7


31-Dec-07 2371.15 2409.2
1-Jan-08 2383.5 2413.45
2-Jan-08 2423.35 2448.45
3-Jan-08 2395.25 2416.35
4-Jan-08 2388.8 2412.5
7-Jan-08 2402.9 2419.15
8-Jan-08 2464.55 2478.55
9-Jan-08 2454.5 2473.1
10-Jan-08 2409.6 2411.15
11-Jan-08 2434.8 2454.4
14-Jan-08 2463.1 2468.4
15-Jan-08 2423.45 2421.85
16-Jan-08 2415.55 2432.3
17-Jan-08 2416.35 2423.05
18-Jan-08 2362.35 2370.35
21-Jan-08 2196.15 2192.3
22-Jan-08 2137.4 2135.2
23-Jan-08 2323.75 2316.95
24-Jan-08 2343.15 2335.35
25-Jan-08 2407.4 2408.9
28-Jan-08 2313.35 2305.5
29-Jan-08 2230.7 2230.5
30-Jan-08 2223.95 2217.25
31-Jan-08 2167.35 2169.9
TABLE-4

GRAPH SHOWING THE PRICE MOVEMENTS OF SBI FUTURES

2500
2450
2400
2350
PRICE

2300
2250 Future price
2200
2150
2100
2050
2000
08

08

08

08
7

8
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25

29

31
28

CONTRACT DATES

GRAPH-3
OBSERVATIONS AND FINDINGS:

If a person buys 1 lot i.e. 350 futures of SBI on 28th Dec, 2007 and sells on 31st Jan, 2008 then he
will get a loss of 2169.9-2413.7 = 243.8 per share. So he will get a profit of 32181.60 i.e. 243.8 *
132

If he sells on 15th Jan, 2008 then he will get a profit of 2468.4-2413.7 = 54.7 i.e. a profit of 54.7 per
share. So his total profit is 7220.40 i.e. 54.7 * 132

The closing price of SBI at the end of the contract period is 2167.35 and this is considered as
settlement price.

The following table explains the market price and premiums of calls.

 The first column explains trading date


 Second column explains the SPOT market price in cash segment on that date.
 The third column explains call premiums amounting at these strike prices; 2340, 2370, 2400,
2430, 2460 and 2490.
 Call options:

STRIKE PRICE
Date Market 2340 2370 2400 2430 2460 2490
Price
28-Dec- 2377.55 145 92 104.35 108 79 68
07
31-Dec- 2371.15 145 92 102.95 108 72 59
07
1-Jan-08 2383.5 134 92 101.95 108 69.85 59
2-Jan-08 2423.35 189.8 92 123.25 105.8 90.25 76.55
3-Jan-08 2395.25 189.8 92 98.45 93.6 76.6 60.05
4-Jan-08 2388.8 189.8 92 100.95 86 74.8 60.05
7-Jan-08 2402.9 189.8 92 95.55 88.15 76.15 61.1
8-Jan-08 2464.55 190 92 128.55 118.3 99.85 84.8
9-Jan-08 2454.5 170 92 126.75 121 92.15 77.45
10-Jan- 2409.6 170 190 84 72.25 58.8 51.85
08
11-Jan- 2434.8 160 190 108.85 94.95 74.65 64.85
08
14-Jan- 2463.1 218.5 190 110.8 90.2 81.5 64.8
08
15-Jan- 2423.45 218.5 190 87.85 75 62.65 55.3
08
16-Jan- 2415.55 96 98 102.15 95.45 68.5 61.95
08
17-Jan- 2416.35 96 190 91.85 80 66 55
08
18-Jan- 2362.35 96 190 62.1 50.55 44 30
08
21-Jan- 2196.15 22.25 190 25.3 15 11.7 29
08
22-Jan- 2137.4 22.25 190 21.05 15 11.7 10
08
23-Jan- 2323.75 22.25 190 47.05 15 32.65 29.3
08
24-Jan- 2343.15 104 190 48.2 40 26.45 26.3
08
25-Jan- 2407.4 113.7 190 61.65 48.75 39.8 27.65
08
28-Jan- 2313.35 0 0 0 0 0 0
08
29-Jan- 2230.7 13 15 9 0 0 0
08
30-Jan- 2223.95 13 15 9 0 0 0
08
31-Jan- 2167.35 13 15 9 0 0 0
08
TABLE-5
OBSERVATIONS AND FINDINGS

CALL OPTION
BUYERS PAY OFF:

 Those who have purchased call option at a strike price of 2400, the premium payable is
104.35
 On the expiry date the spot market price enclosed at 2167.65. As it is out of the money
for the buyer and in the money for the seller, hence the buyer is in loss.
 So the buyer will lose only premium i.e. 104.35 per share.
So the total loss will be 13774.2 i.e. 104.35*132

SELLERS PAY OFF:

 As Seller is entitled only for premium if he is in profit.


 So his profit is only premium i.e. 104.35 * 132 = 13774.2
Put options:
Date Market 2340 2370 2400 2430 2460 2490
Price
28-Dec- 2377.55 362.75 306.9 90 303 218.05 221.95
07
31-Dec- 2371.15 362.75 306.9 90.6 303 218.05 221.95
07
1-Jan- 2383.5 362.75 306.9 84.95 303 218.05 221.95
08
2-Jan- 2423.35 60 40 73.55 303 218.05 221.95
08
3-Jan- 2395.25 60 40 86 303 218.05 221.95
08
4-Jan- 2388.8 60 40 87.35 303 218.05 221.95
08
7-Jan- 2402.9 60 150 79 303 218.05 221.95
08
8-Jan- 2464.55 60 150 50.7 303 100 221.95
08
9-Jan- 2454.5 60 150 56.8 303 75.3 221.95
08
10-Jan- 2409.6 60 150 74.25 303 112.8 100
08
11-Jan- 2434.8 60 150 53.15 41 78.3 125
08
14-Jan- 2463.1 60 150 44.25 59.95 71.35 100
08
15-Jan- 2423.45 40 150 69.6 78 100 128
08
16-Jan- 2415.55 75.9 150 65.05 78 135 150
08
17-Jan- 2416.35 75.9 150 70.45 78 96.55 150
08
18-Jan- 2362.35 75.9 70 95.05 118 96.55 150
08
21-Jan- 2196.15 170 139.3 223.8 118 299 150
08
22-Jan- 2137.4 170 139.3 300 118 299 150
08
23-Jan- 2323.75 170 139.3 150 118 299 150
08
24-Jan- 2343.15 170 139.3 117.7 118 120 150
08
25-Jan- 2407.4 33.9 139.3 52.45 118 120 150
08
28-Jan- 2313.35 0 0 0 0 0 0
08
29-Jan- 2230.7 61.6 80.8 88 0 0 0
08
30-Jan- 2223.95 61.6 80.8 88 0 0 0
08
31-Jan- 2167.35 61.6 80.8 88 0 0 0
08
STRIKE PRICE
TABLE-6
OBSERVATIONS AND FINDINGS
PUT OPTION
BUYERS PAY OFF:
 As brought 1 lot of SBI that is 132, those who buy for 2400 paid 90 premium per
share.
 Settlement price is 2167.35
Spot price 2400.00

Strike price 2167.35

232.65

Premium (-) 90.00

142.65 x 132= 18829.8

Buyer Profit = Rs. 18829.8

Because it is positive it is in the money contract hence buyer will get more profit, incase spot
price increase buyer profit also increase.

SELLERS PAY OFF:

 It is in the money for the buyer so it is in out of the money for the seller, hence he is in
loss.
 The loss is equal to the profit of buyer i.e. 18829.8.
GRAPH SHOWING THE PRICE MOVEMENTS OF SPOT AND FUTURE

2500
2450
2400
2350
PRICE

2300 Market Price


2250
2200 Future price
2150
2100
2050
2000
08

08

08

11 -08
7

15 -08

17 -08

21 -08

23 -08

25 -08

29 -08

31 -08

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CONTRACT DATES

GRAPH=

OBSERVATIONS AND FINDINGS

 The future price of SBI is moving along with the market price.
 If the buy price of the future is less than the settlement price, than the buyer of a future
gets profit.
 If the selling price of the future is less than the settlement price, than the seller incur
losses

ANALYSIS OF J&K BANK:-

The objective of this analysis is to evaluate the profit/loss position of futures and options. This
analysis is based on sample data taken of J&K BANK scrip. This analysis considered the Jan
2008 contract of J&K BANK. The lot size of J&K BANK is 1100, the time period in which
this analysis done is from 28-12-2007 to 31.01.08.

Date Market price future price

28-Dec-07 249.85 252.5


31-Dec-07 249.3 251.15

1-Jan-08 258.35 260.85

2-Jan-08 265.75 268.1

3-Jan-08 260.7 262.85

4-Jan-08 260.05 261.55

7-Jan-08 263.4 264.4

8-Jan-08 260.2 261.1

9-Jan-08 260.1 262.2

10-Jan-08 259.4 260.2

11-Jan-08 258.45 260.35

14-Jan-08 257.7 259.95

15-Jan-08 258.25 260.25

16-Jan-08 250.75 254

17-Jan-08 252.3 254.25

18-Jan-08 248 248.05

21-Jan-08 227.3 225.4

22-Jan-08 209.95 209.85

23-Jan-08 223.15 218.1


24-Jan-08 220.65 216.75

25-Jan-08 232.6 230.5

28-Jan-08 243.7 242.35

29-Jan-08 244.45 242.95

30-Jan-08 244.45 241.4

31-Jan-08 251.45 250.35

GRAPH SHOWING THE PRICE MOVEMENTS OF YES BANK FUTURES

280
270
260
250
PRICE

240 Future price


230
220
210
200
08

08

08

08
7

8
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25

29

31
28

CONTRACT DATES

OBSERVATIONS AND FINDINGS:

If a person buys 1 lot i.e. 1100 futures of J&K BANK on 28th Dec, 2007 and sells on 31st Jan, 2008
then he will get a loss of 250.35-252.50 = -2.15 per share. So he will get a loss of 2365.00 i.e. -2.15
* 1100

If he sells on 15th Jan, 2008 then he will get a profit of 260.25-252.50 = 7.75 i.e. a profit of 16.15
per share. So his total loss is 8525.00 i.e. 7.75 * 1100

The closing price of J&K BANK at the end of the contract period is 251.45 and this is considered
as settlement price.
The following table explains the market price and premiums of calls.

 The first column explains trading date


 Second column explains the SPOT market price in cash segment on that date.
 The third column explains call premiums amounting at these strike prices; 230, 240, 250, 260,
270 and 280.
Call options:

Date Market 230 240 250 260 270 280


price
28-Dec- 249.85 17.05 32.45 13.1 9 18.55 15
07
31-Dec- 249.3 16.45 32.45 12.45 9 18.55 15
07
1-Jan- 258.35 22.15 32.45 16.3 11.6 18.55 15
08
2-Jan- 265.75 31.45 32.45 24.9 16 14.5 15
08
3-Jan- 260.7 31.45 32.45 21.5 13 5.1 3
08
4-Jan- 260.05 31.45 32.45 21.5 12.2 5.15 3
08
7-Jan- 263.4 31.45 32.45 21.5 12.2 9.25 3
08
8-Jan- 260.2 31.45 32.45 21.5 9.95 7.45 3
08
9-Jan- 260.1 31.45 32.45 21.5 10.95 6.45 3
08
10-Jan- 259.4 31.45 32.45 21.5 17.5 8 8
08
11-Jan- 258.45 31.45 32.45 21.5 10.75 5.05 8
08
14-Jan- 257.7 31.45 32.45 21.5 9 5.05 8
08
15-Jan- 258.25 31.45 32.45 21.5 14 8.25 8
08
16-Jan- 250.75 31.45 32.45 21.5 5.7 4 8
08
17-Jan- 252.3 31.45 32.45 21.5 7.5 5.5 2
08
18-Jan- 248 31.45 32.45 9.5 7.5 5.5 2
08
21-Jan- 227.3 6 32.45 9.5 7.5 1.5 2
08
22-Jan- 209.95 6 32.45 9.5 8 1.5 4
08
23-Jan- 223.15 6 32.45 9.5 8 4.5 4
08
24-Jan- 220.65 6 32.45 9.5 2.1 2.9 4
08
25-Jan- 232.6 6 32.45 9.5 2.1 2.9 4
08
28-Jan- 243.7 15.95 32.45 9.5 2.1 2.9 4
08
29-Jan- 244.45 15.95 32.45 9.5 2.1 2.9 4
08
30-Jan- 244.45 15.95 32.45 5 2.1 2.9 4
08
31-Jan- 251.45 29.15 32.45 4.7 5 0.8 0.5
08
STRIKE PRICE

OBSERVATIONS AND FINDINGS


CALL OPTION
BUYERS PAY OFF:
 As brought 1 lot of J&K BANK that is 1100, those who buy for 280 paid 17.05
premium per share.
 Settlement price is 251.45
Spot price 251.45

Strike price 230.00

21.45

Premium (-) 17.05

4.40 x 1100= 4840

Buyer Profit = Rs. 4840

Because it is positive it is in the money contract hence buyer will get more profit, incase spot
price increase buyer profit also increase.

SELLERS PAY OFF:

 It is in the money for the buyer so it is in out of the money for the seller, hence he is in
loss.
 The loss is equal to the profit of buyer i.e. 4840.

Put options:

Date Market 230 240 250 260 270 280


price
28-Dec- 249.85 6.95 10.55 15.15 20.75 27.25 34.5
07
31-Dec- 249.3 6.2 9.75 14.35 20 26.6 34.1
07
1-Jan- 258.35 4.3 7.05 10.75 15.5 21.25 27.9
08
2-Jan- 265.75 3 5.1 8.1 12.1 17.1 23.1
08
3-Jan- 260.7 3.45 5.9 9.3 13.75 19.3 25.8
08
4-Jan- 260.05 3.15 5.5 8.9 13.4 19 25.65
08
7-Jan- 263.4 2.1 3.95 6.85 10.9 16.15 22.55
08
8-Jan- 260.2 2.2 4.25 7.4 11.75 17.45 24.25
08
9-Jan- 260.1 1.85 3.8 6.85 11.2 16.9 23.8
08
10-Jan- 259.4 1.65 3.5 6.55 10.95 16.75 23.8
08
11-Jan- 258.45 1.5 3.3 6.3 10.8 16.8 24.05
08
14-Jan- 257.7 1.1 2.7 5.6 10.15 16.35 23.95
08
15-Jan- 258.25 0.8 2.2 4.95 9.35 15.55 23.2
08
16-Jan- 250.75 1.6 3.85 7.8 13.6 20.95 29.55
08
17-Jan- 252.3 1.15 3.05 6.65 12.15 19.4 27.95
08
18-Jan- 248 1.5 3.95 8.3 14.7 22.75 31.8
08
21-Jan- 227.3 9.75 16.2 24.1 33 42.5 52.25
08
22-Jan- 209.95 22.15 30.8 40.1 49.8 59.65 69.6
08
23-Jan- 223.15 13 20 28.25 37.25 46.8 56.55
08
24-Jan- 220.65 13.8 21.3 30 39.4 49.1 59
08
25-Jan- 232.6 7 12.6 19.85 28.3 37.6 47.25
08
28-Jan- 243.7 1.6 4.6 10 17.55 26.6 36.25
08
29-Jan- 244.45 0.75 3.05 8.3 16.2 25.6 35.45
08
30-Jan- 244.45 0.15 1.65 6.95 15.65 25.5 35.5
08
31-Jan- 251.45 0 0 0 0 0 0
08
STRIKE PRICE

OBSERVATIONS AND FINDINGS

PUT OPTION
BUYERS PAY OFF:
 Those who have purchase put option at a strike price of 250, the premium payable is
15.15
 On the expiry date the spot market price enclosed at 251.45. As it is out of the money
for the buyer and in the money for the seller, hence the buyer is in loss.
 So the buyer will lose only premium i.e. 15.15 per share.
So the total loss will be 16665 i.e. 15.15*1100

SELLERS PAY OFF:

 As Seller is entitled only for premium if he is in profit.


 So his profit is only premium i.e. 15.15 * 1100 = 16665

GRAPH SHOWING THE PRICE MOVEMENTS OF SPOT & FUTURES

280
270
260
250
PRICE

Market price
240
Future price
230
220
210
200
08

08

08

08
7

21 -08

29 -08

8
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23

25

31
28

CONTRACT DATES

OBSERVATIONS AND FINDINGS


 The future price of J&K BANK is moving along with the market price.
 If the buy price of the future is less than the settlement price, than the buyer of a future
gets profit.
 If the selling price of the future is less than the settlement price, than the seller incur
losses.

LIMITATIONS OF THE STUDY:


The following are the limitation of this study.

 The scrip chosen for analysis is HDFC BANK, SBI & J&K BANK and the contract taken is

January 2008 ending one –month contract.

 The data collected is completely restricted to HDFC BANK, SBI & J&K BANK of January

2008; hence this analysis cannot be taken universal.

 Analysis is done on past data so that with the changes in technologies in derivative market some

things cannot be analyzes.

 The data is collected from secondary data sources on the various sites, so data may not be in

original in nature.

 The share prices may not be the same as the dates which are mentioned in this report because

of market fluctuations.
SUGESSTIONS

 The derivatives market is newly started in India and it is not known by every
investor, so SEBI has to take steps to create awareness among the investors about
the derivative segment.
 In order to increase the derivatives market in India, SEBI should revise some of their
regulations like contract size, participation of FII in the derivatives market.
 Contract size should be minimized because small investors cannot afford this much
of huge premiums.
 SEBI has to take further steps in the risk management mechanism.
 SEBI has to take measures to use effectively the derivatives segment as a tool of
hedging.
 With the fast growing innovations in derivative market investors are not fully aware
of the derivative products, SEBI regularly provide the knowledge of new innovations
to the investors so that investors will use these innovation for the promotion of
derivative market.
 Derivative market is always done to those companies which are listed in BSE/ NSE,
SEBI has promoted the derivative market in mini stock exchanges so that small
investors will also use derivative products.
 SEBI has also introduced so many new products in the derivative market so that
investors will minimize the risk and will maximize the profits through these
products.
CONCLUSION

 In bullish market the call option writer incurs more losses so the investor is suggested
to go for a call option to hold, where as the put option holder suffers in a bullish market,
so he is suggested to write a put option.
 In bearish market the call option holder will incur more losses so the investor is
suggested to go for a call option to write, where as the put option writer will get more
losses, so he is suggested to hold a put option.
 In the above analysis the market price of J&K bank is having low volatility, so the call
option writer enjoys more profits to holders.

SUMMARY
 Derivatives are very helpful for the maximization of profit & minimization of losses.
 Derivatives market is an innovation to cash market. Approximately its daily turnover
reaches to the equal stage of cash market. The average daily turnover of the NSE
derivative segments
 In cash market the profit/loss of the investor depends on the market price of the
underlying asset. The investor may incur huge profits or he may incur huge losses. But
in derivatives segment the investor enjoys huge profits with limited downside.
 In cash market the investor has to pay the total money, but in derivatives the investor
has to pay premiums or margins, which are some percentage of total contract.
 Derivatives are mostly used for hedging purpose.
 In derivative segment the profit/loss of the option writer purely depends on the
fluctuations of the underlying asset.
 Derivatives lower down the cost of capital formation and stimulate the economic growth.
In the present times the world markets for trade and finance have become more
integrated, derivatives have strengthened the importance linkages between global
markets. Derivatives have changed the world of finance through the creation of
innovative ways to measure & manage risks.
 Derivatives allow for free trading of risk components and that leads to improving market
efficiency. Traders can use a position in one or more financial derivatives as a substitute
for a position in the underlying instruments. In many instances, traders find derivatives
to be more attractive instrument than the underlying security. This is mainly because of
the greater amount of liquidity in the market offered by derivatives as well as the lower
transaction costs associated with trading a financial derivatives as compared to the costs
of trading the underlying instrument in cash market.
 Derivatives are considered to be risky. If not used properly, these can lead to financial
destruction in an organization. However, these instruments act as a powerful instrument
for knowledgeable traders to expose themselves to calculate and well understood risks
in search of a reward that is, profit.
 Another important application of derivatives is the price discovery which means
revealing information about future cash market prices through the futures market.
Derivatives market provide a mechanism by which diverse and scattered opinions of
future are collected into one readily discernible which provides a consensus of
knowledgeable thinking.
 Derivative market helps to keep a stabilizing influence on spot prices by reducing the
short-term fluctuations. In other words derivatives reduces both peak and depths and
leads to price stabilization effect in the cash market for underlying assets.
 Trading in futures is a leveraged activity because the investor is required to pay a small
fraction of the value of the total contract as margins. The investor is able to contract the
total of the contract with a relatively small amount of margin. Thus the leverage enables
the traders to make a larger profit with a comparatively small amount of capital.
The premium price will save the future fluctuations of securities. We know that future is
uncertain but with the help of derivatives we capture the future today with the use of derivative
especially futures & options.
BIBILOGRAPHY

 BOOKS :-
 Derivatives Dealers Module Work Book - NCFM (October 2005)
 Gordon and Natarajan, (2006) ‘Financial Markets and Services’ (third
edition) Himalaya publishers
 Security Market Operation- Pooja Miglani
 Security analysis & portfolio management- S. K. GUPTA
 Security Analysis portfolio management- S-KEVIN
 WEBSITES :-
 http://www.nseindia/content/fo/fo_historicaldata.htm
 http://www.nseindia/content/equities/eq_historicaldata.htm
 http://www.derivativesindia/scripts/glossary/indexobasic.asp
 http://www.bseindia/about/derivati.asp#typesofprod.htm
 http://www.sebi.gov.in
 http://www.kotaksecurities.com/ksweb/Research/investment-
Knowledge-Bank