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FOR
B.V.Jagannadha Raju
BY
The results embodied in this dissertation have not been submitted to any
other university or institution for the award of any degree or diploma.
Date:
diploma.
B.V.JAGANNADHA RAJU
Acknowledgements
I thank my family and friends for being a source of inspiration and support.
B.V.JAGANNADHA RAJU
Table of Contents
Abstract
Futures and Options are new to Indian financial markets and are introduced
2001-02 Financial year . Futures are financial derivatives whose risk and return
are unlimited.On the other hind options are also financial derivatives instrument.
But where as the risk is Limited to premium and the return is unlimited.
OPTIONS S&P CNX NIFTY is based on risk return caluculations in both futures
and options. These derivative instrument will not have it’s own value. But where
as the value changes depends on the underline asset price.These underline asset
Risk and Returns are unlimited in Futures, but where as in options Risk is limited
In this research it is found that options has given 14.19% monthly returns and
It is conclusions investment is invest in the options are better than the futures.
Chapter-1
Introduction
Introduction
FUTURES
OPTIONS
An option gives the buyer or holder the right, but not the obligation, to buy or sell
an underlying financial asset or commodity. Unlike futures, where the buyer has
to fulfil the contract, an option gives the choice of whether to exercise or not. An
option contract specifies a future date on or before which it can be exercised. This
date is known as the expiry date. The price of an option the 'strike' or 'exercise'
price is the price at which it can be exercised. Options are very flexible
instruments.
They allow investors to benefit from favourable price movements while limiting
the consequence of unfavourable price movements. Options holders have to pay a
'premium' for this protection as with any insurance contract. There are two kinds
of option. A call, which gives the holder the right to buy the
underlying instrument at a set exercise price, and a put, which gives the holder the
right to sell the underlying instrument at a set strike price. More than one option
transaction can be combined to create a spread. These strategies usually involve
the simultaneous purchase and sale of options with different prices, or expiry
dates, within the same class. American style options can be exercised at any time
before the expiry date, whereas European style options can be exercised only at
the specific expiry date and not before. Options can be traded on a recognized
exchange such as the Chicago Board of Trade or over the counter (OTC).
Company Profile:
COMPANY PROFILE
• Ventura Securities Ltd., is a leading stock broking organization
Market.
• Ventura believes in philosophy that the key to their business is service which will
Ventura – PROMOTERS
India.He has nearly fifteen years of varied experience in corporate advisory structured
markets in Europe, US and the Far East and has been personally involved in international
equity offerings and cross border acquisitions. He is the CEO of Genesys International, a
of India. He has nearly fifteen years of rich experience in the capital markets
intermediation, equity research and has a wide cross section of market relationships. Mr.
Majethia is the CEO of Ventura Securities. It was his vision to create an all India network
Company's Goal
• We aim to add value and provide our clients with an unrivalled and specialized
service which reflects the expertise and efficiency of our dedicated support teams.
History
FOUNDATION OF VENTURA
Founded in 1994 by Chartered Accountants Sajid Malik and Hemant Majethia. They
are the first generation entrepreneurs and are the principal promoters of Ventura.
A dedicated and efficient team of senior managers assists Mr. Majethia the CEO of
the company.
services to Institutions (Foreign and Domestic), High Net Worth and Retail Investors
derivatives market.
Ventura has achieved a reputation for innovative and unbiased research along with
Not only has Ventura provided value-added services to the gamut of India-based
funds, it has also developed the advice-driven business of high net worth and
corporate clients.
Why Ventura?
• Ventura’s services are offered under total confidentiality and integrity with the sole
• Pan India reach - 380 terminals spread across 75 different locations, in semi urban,
• More than 100,000 retail clients serviced from the above locations
• Ventura have heavily invested in technology (customized and ready to use software)
involving front and back end operations offering seamless process and flawless
settlement mechanism
OFFERINGS
Research competency
• Along with its price forecasting capability, the Team undertakes analytical research
• The Team also publishes monographs on topics of broad interest to its customers,
management, and current hedge activities and strategic thought in the various sectors
of the market.
Introduction
There are 22 stock exchanges in India, the first being the Bombay Stock
Exchange (BSE), which began formal trading in 1875, making it one of the oldest
in Asia. Over the last few years, there has been a rapid change in the Indian
number of companies listed and total market capitalization, the Indian equity
1990 to about 10,000 by May 1998 and market capitalization has grown almost 11
The debt market, however, is almost nonexistent in India even though there has
been a large volume of Government bonds traded. Banks and financial institutions
requirement.
are still in place. A primary auction market for Government securities has been
There are six authorized primary dealers. Currently, there are 31 mutual funds,
out of which 21 re in the private sector. Mutual funds were opened to the private
sector in 1992. Earlier, in 1987, banks were allowed to enter this business,
breaking the monopoly of the Unit Trust of India (UTI), which maintains a
dominant position.
Before 1992, many factors obstructed the expansion of equity trading. Fresh
capital issues were controlled through the Capital Issues Control Act. Trading
practices were not transparent, and there was a large amount of insider trading.
were enacted to improve the fairness of the capital market. The Securities and
Exchange Board of India (SEBI) was established in 1988. Despite the rules it set,
securities market since 1992 in conjunction with overall economic and financial
reforms. In 1992, the SEBI Act was enacted giving SEBI statutory status as an
apex regulatory body. And a series of reforms was introduced to improve investor
secondary market for equity. Its equity market will most likely be comparable
with the world’s most advanced secondary markets within a year or two. The key
• No counterparty risk.
Among the processes that have already started and are soon to be fully
Before 1995, markets in India used open outcry, a trading process in which
traders shouted and hand signaled from within a pit. One major policy initiated by
SEBI from 1993 involved the shift of all exchanges to screen-based trading,
motivated primarily by the need for greater transparency. The first exchange to be
based on an open electronic limit order book was the National Stock Exchange
(NSE), which started trading debt instruments in June 1994 and equity in
November 1994. In March 1995, BSE shifted from open outcry to a limit order
electronic limit order. Before 1994, India’s stock markets were dominated by BSE
Financial industry did not have equal access to markets and was unable to
from prices in Mumbai. These pricing errors limited order flow to these markets.
market has changed this situation. NSE has established satellite communications
which give all trading members of NSE equal access to the market. Similarly,
BSE and the Delhi Stock Exchange are both expanding the number of trading
terminals located all over the country. The arbitrages are eliminating pricing
The Indian capital market still faces many challenges if it is to promote more
to adapt to internationally accept accounting practices. The court system and legal
all participants to achieve market efficiency. SEBI should also monitor more
Thirdly, India may need further integration of the national capital market through
consolidation of stock exchanges. The trend all over the world is to consolidate
and merge existing stock exchanges. Not all of India’s 22 stock exchanges may be
able to justify their existence. There is a pressing need to develop a uniform
settlement cycle and common clearing system that will bring an end to
Fourthly, the payment system has to be improved to better link the banking and
securities industries. India’s banking system has yet to come up with good
electronic funds transfer (EFT) solutions. EFT is important for problems such as
risk, and facilitating foreign institutional investment. The capital market cannot
thrive alone; it has to be integrated with the other segments of the financial
system. The global trend is for the elimination of the traditional wall between
of Government securities and a more competitive banking sector will help in the
Market Reforms and Developments Reforms in the Capital Market Over the last
few years, SEBI has announced several far-reaching reforms to promote the
Reforms in the secondary market have focused on three main areas: structure
and functioning of stock exchanges, automation of trading and post trade systems,
funds were made compulsory for stock exchanges. Stock exchanges were
computer terminals. Thus, major stock exchanges in India have started locating
Online trading systems have been introduced in almost all stock exchanges.
Trading is much more transparent and quicker than in the past. Until the early
1990s, the trading and settlement infrastructure of the Indian capital market was
poor. Trading on all stock exchanges was through open outcry, settlement systems
and unfair trade practices. Since 1992, there has been intensified market reform,
market for equity. Most stock exchanges have introduced online trading and set
less trading and the regulatory structure has been overhauled with most of the
powers for regulating the capital market vested with SEBI. The Indian capital
The primary and secondary segments of the capital market expanded rapidly, with
efficiency.
PRIMARY MARKET
Since 1991/92, the primary market has grown fast as a result of the removal of
imposed by the Capital Issues Control Act. In 1991/92, Rs62.15 billion was raised
in the primary market. This figure rose to Rs276.21 billion in 1994/95. Since
1995/1996, however, smaller amounts have been raised due to the overall
downtrend in the market and tighter entry barriers introduced by SEBI for
investor protection .SEBI has taken several measures to improve the integrity of
the secondary market. Legislative and regulatory changes have facilitated the
and are being enforced. A mark-to-market margin and intraday trading limit have
also been imposed. Further, the stock exchanges have put in place circuit
short sales and long purchases is now required at the end of the day to reduce
price volatility and further enhance the integrity of the secondary market.
Under the current clearing and settlement system, if an Indian investor buys and
subsequently sells the same number of shares of stock during a settlement period,
or sells and subsequently buys, it is not necessary to take or deliver the shares.
The difference between the selling and buying prices can be paid or received. In
other words, the squaring-off of the trading position during the same settlement
period results in non delivery of the shares that the investor traded.
Thus, possible at a relatively low cost. FII’s and domestic institutional investors
broker’s daily position. The intraday trading limit is the limit to a broker’s
Each stock exchange may take any other measures to ensure the safety of the
market. BSE and NSE impose on members a more stringent daily margin,
is 100 percent of the notional loss of the stockbroker for every stock, calculated as
the difference between buying or selling price and the closing price of that stock
at the end of that day. However, there is a threshold limit of 25 percent of the base
minimum capital plus additional capital kept with the stock exchange or Rs1
million, whichever is lower. Until the notional loss exceeds the threshold limit,
released on the pay-in day for the settlement period. The margin money is held by
the exchange for 6-12 days. This cost the broker about 0.4-1.2 percent of the
notional loss, assuming that the broker’s funding cost is about 24-36 percent.
Each broker’s trading volume during a day is not allowed to exceed the intraday
trading limit. This limit is 33.3 times the base minimum capital deposited with the
exchange on a gross basis, i.e., purchase plus sale. In the event of brokers wishing
to exceed this limit, they have to deposit additional capital with the exchange and
Chapter-2
Design of the study
Methodology:
NSE NIFTY has taken for analyzing and comparing the risk return profile in
futures and options and caluculated the risk return monthly wise and yearly wise.
Futures and options data has been taken from 2002-2007 and caluculated the
profit and loss in Nifty futures and Options by taking the opening price and
Futures;
The analysis is based on absolute returns rather rate of returns, because at the end
of the month out of the money options become zero. I.e here statistics (rate of
Chapter-3
Data Processing
Data Collection:
From the NSEindia.com Data is collected related to the Futures and Options
SOURCES OF DATA:
Sources of Data: the main sources for the collected data are,
2. NSEindia.com
3. Investopedia.com
1. Primary data
2. Secondary date
Secondary data: secondary data has been taken from nseindia.com pending
Data interpretation:-
Profit & Loss Calculations on NIFTY Futures-2002
Profit/Loss
S.NO Expiry Opening Closing Rs.
1 30-May-02 1104 1032.5 -71.50
1049.1
2 27-Jun-02 1038 5 11.15
1001.2
3 25-Jul-02 1063 5 -61.75
4 29-Aug-02 1054 987.2 -66.80
5 26-Sep-02 965 968.9 3.90
6 31-Oct-02 967.8 967.8 0.00
7 28-Nov-02 953 1050.5 97.50
1095.4
8 26-Dec-02 1048.55 5 46.90
Total -40.60
Percentage return -3.68
Profit & Loss Caluculations On NIFTY Futures-2003
Profit/Lo
S.NO Expiry Opening Closing ss Rs.
1 30-Jan-03 1092.75 1034.8 -57.95
2 27-Feb-03 1046.85 1053.6 6.75
3 27-Mar-03 1068.55 1002.8 -65.75
4 24-Apr-03 1002.5 929.7 -72.80
1002.2
5 29-May-03 931.25 5 71.00
1116.3
6 26-Jun-03 984.5 5 131.85
7 31-Jul-03 1114.15 1186 71.85
1341.2
8 28-Aug-03 1188 5 153.25
9 25-Sep-03 1355.8 1357.5 1.70
10 30-Oct-03 1390.5 1516.8 126.30
11 27-Nov-03 1563.5 1598 34.50
12 24-Dec-03 1624.35 1810 185.65
Total 586.35
Percentage return 53.66
Profit & Loss Caluculations On NIFTY Futures-2004
Profit/Loss
Option Strike & Type Opening Closing Rs.
1850 63 0 -63.00
1850 45 0 -45.00
1800 52 0 -52.00
1750 47.45 60 12.55
1800 41 0 -41.00
1500 49.45 0 -49.45
1450 67 170 103.00
1600 54.3 10.5 -43.80
1600 35.5 146 110.50
1750 49 51.9 2.90
1800 29.75 102.7 72.95
1950 41.5 115 73.50
Total 574.95 656.1 81.15
Percentage
returns 14.11
Profit & Loss caluculations on NIFTY options-2005
R ET U R N S 2 0 0 2
1 5 0 .0 0
1 0 0 .0 0
RATEOF RETURNS
5 0 .0 0
0 .0 0
- 5 0 .0 0 1 2 3 4 5 6 7 8
- 1 0 0 .0 0
M O NT HS
GRAPH-2
S.NO MONTH FUTURES OPTIONS
1 30-May-02 -71.50 -19.00
2 27-Jun-02 11.15 -19.95
3 25-Jul-02 -61.75 -23.95
4 29-Aug-02 -66.80 -3.00
5 26-Sep-02 3.90 -23.00
6 31-Oct-02 0.00 -23.80
7 28-Nov-02 97.50 79.00
8 26-Dec-02 46.90 28.50
TOTAL -40.60 -5.20
AVERAGE -0.46 -0.38
RETURNS-2003
200.00
150.00
RATEOFRETURN
100.00
50.00
0.00
1 2 3 4 5 6 7 8 9 10 11 12
-50.00
-100.00
MONTHS
GRAPH-3
RETURNS2004
200.00
150.00
100.00
RATEOF RETURN
50.00
0.00
-50.00 1 2 3 4 5 6 7 8 9 10 11 12
-100.00
-150.00
-200.00
-250.00
MONTHS
GRAPH-4
RETURNS20 05
400.00
300.00
RATEOF RETURN
200.00
100.00
0.00
-100.00 1 2 3 4 5 6 7 8 9 10 11 12
-200.00
-300.00
M ONT HS
GRAPH-5
RETURNS 2006
500.00
400.00
300.00
RATEOF RETURN
200.00
100.00
0.00
-100.00 1 2 3 4 5 6 7 8 9 10 11 12
-200.00
-300.00
-400.00
M ONTHS
GRAPH-6
RETURNS2007
200.00
150.00
RATEOF RETURNS
100.00
50.00
0.00
-50.00 1 2 3
-100.00
-150.00
M ONTHS
Findings
Risk and Returns are unlimited in Futures, but where as in options Risk is limited
In this research it is found that options has given 14.19% monthly returns and
It is conclusions investment is invest in the options are better than the futures.
Glossary
FUTURES
A financial contract obligating the buyer to purchase an asset (or the seller to sell
predetermined future date and price. Futures contracts detail the quality and
futures exchange. Some futures contracts may call for physical delivery of the
asset, while others are settled in cash. The futures markets are characterized by
Futures can be used either to hedge or to speculate on the price movement of the
underlying asset. For example, a producer of corn could use futures to lock in a
certain price and reduce risk (hedge). On the other hand, anybody could speculate
OPTIONS
An option gives the buyer or holder the right, but not the obligation, to buy or sell
an underlying financial asset or commodity. Unlike futures, where the buyer has
to fulfil the contract, an option gives the choice of whether to exercise or not. An
option contract specifies a future date on or before which it can be exercised. This
date is known as the expiry date. The price of an option the 'strike' or 'exercise'
price is the price at which it can be exercised. Options are very flexible
holders have to pay a 'premium' for this protection as with any insurance contract.
There are two kinds of option. A call, which gives the holder the right to buy the
underlying instrument at a set exercise price, and a put, which gives the holder the
right to sell the underlying instrument at a set strike price. More than one option
the simultaneous purchase and sale of options with different prices, or expiry
dates, within the same class. American style options can be exercised at any time
before the expiry date, whereas European style options can be exercised only at
the specific expiry date and not before. Options can be traded on a recognized
exchange such as the Chicago Board of Trade or over the counter (OTC)
Strike Price
The stated price per share for which underlying stock may be purchased (for a
call) or sold (for a put) by the option holder upon exercise of the option contract.
When you exercise your option, this is the value that you get the shares for.
The period of time between the opening and closing of some future markets
An option contract giving the owner the right (but not the obligation) to buy a
time.
In some exchanges, the call period is an important time in which to match and
A call becomes more valuable as the price of the underlying asset (stock)
appreciates.
Put option
An option contract giving the owner the right, but not the obligation, to sell a
specified amount of an underlying asset at a set price within a specified time. The
buyer of a put option estimates that the underlying asset will drop below the
exercise price before the expiration date.The possible payoff for a holder of a put
in price. They would then profit by either selling the put options at a profit, or by
exercising the option. If an individual writes a put contract, they are estimating
the stock will not decline below the exercise price, and will not increase
Consider if an investor purchased one put option contract for 100 shares
of ABC Co. for Rs1, or Rs100 (Rs1*100). The exercise price of the shares is Rs10
and the current ABC share price is Rs12. This contract has given the investor the
If ABC shares drop to Rs8, the investor's put option is in-the-money and he can
close his option position by selling his contract on the open market. On the other
hand, he can purchase 100 shares of ABC at the existing market price of Rs 8,
then exercise his contract to sell the shares for Rs10. Excluding commissions, his
total profit for this position would be Rs100 [100*(Rs10 - Rs8 - Rs1)]. If the
investoralready
owned 100 shares of ABC, this is called a "married put" position and serves as a
Hedge
contract stating that you will sell your stock at a set price, therefore avoiding
Investors use this strategy when they are unsure of what the market will do.
Market inflation perfect hedge reduces your risk to nothing (except for the cost of
the hedge).
Index
representing a particular market or a portion of it. Each index has its own
base value. Thus, the percentage change is more important than the actual
numeric value. For example, knowing that a stock exchange is at, say, 5,000
doesn't tell you much. However, knowing that the index has risen 30% over the
500 is one of the world's best known indexes, and is the most commonly used
benchmark for the stock market. Technically, you can't actually invest in an
Index Futures
A futures contract on a stock or financial index. For each index there may be a
For example, the S&P 500 index is one of the most widely traded index futures
contracts in the U.S. Often stock portfolio managers who want to hedge risk over
a certain period of time will use the S&P 500 index future to do so. By shorting
these contracts, stock portfolio managers can protect themselves from downside
price risk of the broader market. However, by using this hedging strategy, if
perfectly done, the manager's portfolio will not participate in any gains on the
index; instead the portfolio will lock in gains equivalent to the risk-free rate of
interest.
Alternatively stock portfolio managers can use index futures to increase their
portfolio.
Index Option
nvestors trading index options are essentially betting on the overall movement of
the stock market as represented by a basket of stocks. Options on the S&P 500
Nifty 50
The 50 stocks that were most favored by institutional investors in the 1960s and
The nifty-50 stocks got their notoriety in the bull markets of the 1960s and early
1970s. They became known as "one-decision" stocks because investors were told
However, part of this list included companies that have been troubled in the last
Equity
On the balance sheet, the amount of the funds contributed by the owners (the
"shareholder’s equity".
In the context of margin trading, the value of securities in a margin account minus
In the context of real estate, the difference between the current market value of
the property and the amount the owner still owes on the mortgage. Thus, it is the
amount, if any, the owner would receive after selling a property and paying off
the mortgage.
Equity is a term whose meaning depends very much on the context. In general,
you can think of equity as ownership in any asset after all debts associated with
that asset are paid off. For example, a car or house with no outstanding debt is
considered the owner's equity since he or she can readily sell the items for
cash. Stocks are equity because they represent ownership of a company, whereas
bonds are classified as debt because they represent an obligation to pay and not
ownership of assets.
Market Value
The current quoted price at which investors buy or sell a share of common stock
The market capitalization plus the market value of debt. Sometimes referred to as
In the context of securities, market value is often different from book value
because the market takes into account future growth potential. Most investors who
use fundamental analysis to pick stocks look at a company's market value and
then determine whether or not the market value is adequate or if it's undervalued
Stock
There are two main types of stock: common and preferred. Common stock usually
Preferred stock generally does not have voting rights, but has a higher claim on
assets and earnings than the common shares. For example, owners of preferred
stock receive dividends before common shareholders and have priority in the
"shares" or "equity".
outstanding and one person owns 100 shares, that person would own and have
claim to 10% of the company's assets. Stocks are the foundation of nearly every
portfolio. Historically, they have outperformed most other investments over the
long run.
Shareholder
Any person, company, or other institution that owns at least 1 share in a company.
Shareholders are the owners of a company. They have the potential to profit if the
company does well, but that comes with the potential to lose if the company does
poorly.
Shares
shares in a business does not mean that the shareholder has direct control over the
an equal distribution in any profits, if any are declared in the form of dividends.
The two main types of shares are common shares and preferred shares.
In the past, shareholders received a physical paper stock certificate that indicated
that they owned "x" shares in a company. Today, brokerages have electronic
share makes conducting trades a simpler and more streamlined process, which is a
far cry from the days were stock certificates needed to be taken to a
brokerage before a trade could be conducted. .While shares are often used to refer
A privilege, sold by one party to another, that gives the buyer the right, but not the
American options can be exercised anytime between the date of purchase and the
expiration date. European options may only be redeemed at the expiration date.
Security
option, future, swap, right, warrant, or virtually any other financial asset.
Commodity
the same type. Commodities are most often used as inputs in the production of
other goods or services. The quality of a given commodity may differ slightly, but
commodities must also meet specified minimum standards, also known as a basis
grade. Any good exchanged during commerce, which includes goods traded on a
commodity exchange.
The basic idea is that there is little differentiation between a commodity coming
from one producer and the same commodity from another producer - a barrel of
oil is basically the same product, regardless of the producer. Compare this to, say,
electronics, where the quality and features of a given product will be completely
include grains, gold, beef, oil and natural gas. More recently, the definition has
indexes. Technological advances have also led to new types of commodities being
exchanged in the marketplace: for example, cell phone minutes and bandwidth.
The sale and purchase of commodities is usually carried out through futures
contracts on exchanges that standardize the quantity and minimum quality of the
commodity being traded. For example, the Chicago Board of Trade stipulates that
one wheat contract is for 5,000 bushels and also states what grades of wheat (e.g.
1. NSEindia.com/
2. Investopedia.com
3. Glossary.reuters.com