CONTENTS

Chapter No. Name of the concept Introduction Objectives of the study I Scope of the study Methodology of the study Limitations of the study II III IV V VI Literature of Review Company Profile Data analysis Interpretation, conclusion, suggestion Bibliography

Page No. 2-3 4 4 5 6 7-35 36-42 43-57 58-61 62-63

CHAPTER I - INTRODUCTION

INTRODUCTION
Derivative is a product whose value is derived from the value of one or more basic variables, called underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, Bullion traders may wish to sell their gold at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the "underlying". The current project on Study on Derivatives with special reference to Options aims to make the investors aware of the functioning of the Options. Options act as risk hedging tools for the investors. The project helps the investor in selecting the appropriate put or call option in order to attain maximum return and to construct the portfolio. The primary objectives of the project are to study the derivatives market in India; to study the pay-off of options; to present the trading procedure of options; and to study the salient features of Committee reports The project finally explains the differences between the cash market and the derivatives market, the pros and cons of investing in derivatives market, and the different purposes for which investors are interested in derivative products. There are limitations as well for the project which include focus only on Indian derivatives market; short time period, insufficient data and the secondary data collected may not be authentic.

OBJECTIVES OF THE STUDY

To study the performance of select five companies. To study the pay-off of future. To present the trading procedure of future.

To study the salient features of Committee reports

SCOPE OF THE STUDY

The study is an overview of Derivatives markets which includes forwards, futures, options and Swaps. The Study cant be said as totally perfect. The Study has only made a humble attempt of evaluation of derivatives market only in Indian context. The study is not based on the international perspective of derivatives market, which exists in NASDAQ, CBOT etc.

METHODOLOGY
Data Collection The data collected was mainly secondary in nature and the sources were website and text books. Some primary data was also collected by interacting with guide and other personalities. Data Analysis The collected data was grouped under relevant headings. The various topics were then so arranged those give logical studies of the topics. Conclusions The suggestions and conclusions were made mainly based on the observations from the data collected.

LIMITATIONS
The study is limited to derivatives market in India. The study was carried out for a period of 45 days and due to paucity of time an in-depth study was not possible.

The derivative market is a dynamic one, contract rates strike price fluctuate on demand and supply basis. Therefore data related to last few trading months was only consider and interpreted.

Secondary information may not be authentic.

CHAPTER II LITERATURE OF REVIEW

INTRODUCTION TO DERIVATIVES The emergence of the market for derivative products, most notably forwards, futures and options, can be traced 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 products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse 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 to cheaper money and to make profit, se derivatives. Derivatives are likely to grow even at a faster rate in future.

History of Derivatives
Derivatives trading began in 1865 when the Chicago Board of Trade (CBOT) listed the first exchange traded derivatives contract in the USA. These contracts were called Futures Contracts. In 1919, the Chicago Butter and Egg Board, a spin-off of CBOT, was reorganized to allow futures trading. Its name was changed to Chicago Mercantile Exchange (CME). The first stock index futures contract was traded at Kansas City Board of Trade. Currently the most popular stock index future contract in the world is based on the Standard & Poors 500 index traded on the CME. In April 1973, the Chicago Board of Options Exchange was set up specially for the purpose of trading in options. The market for options developed so rapidly that by early 80s the number of shares traded on option contract sold each day exceeded the daily volume of shares traded on the New York Stock Exchange and there has been no looking back ever since. Derivatives Markets in India In India, derivatives markets have been functioning since the nineteenth century, with organized trading in cotton through the establishment of the Cotton Trade Association in 1875. Derivatives, as exchange traded financial instruments were introduced in India in June 2000. The National Stock Exchange (NSE) is the largest exchange in India in derivatives, trading in various derivatives contracts. The first contract to be launched on NSE was the Nifty 50 index futures contract. In a span of one and a half years after the introduction of index futures, index options, stock options and stock futures were also introduced in the derivatives segment for trading. NSEs equity derivatives segment is called the Futures & Options Segment or F&O Segment. NSE also trades in Currency and Interest Rate Futures contracts under a separate segment.

A series of reforms in the financial markets paved way for the development of exchange-traded equity derivatives markets in India. In 1993, the NSE was established as an 9

electronic, national exchange and it started operations in 1994. It improved the efficiency and transparency of the stock markets by offering a fully automated screen-based trading system with real-time price dissemination. A report on exchange traded derivatives, by the L.C. Gupta Committee, set up by the Securities and Exchange Board of India (SEBI), recommended a phased introduction of derivatives instruments with bi-level regulation (i.e., self-regulation by exchanges, with SEBI providing the overall regulatory and supervisory role). Another report, by the J.R. Verma Committee in 1998, worked out the various operational details such as margining and risk management systems for these instruments. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R) A, was amended so that derivatives could be declared as securities. This allowed the regulatory framework for trading securities, to be extended to derivatives. The Act considers derivatives on equities to be legal and valid, but only if they are traded on exchanges. The Securities and Exchange Board of India (SEBI) allowed trading in equitiesbased derivatives on stock exchanges in June 2000. Accordingly the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) introduced trading in futures on June 9, 2000 and June 12, 2000 respectively. Currently futures and options turnover on the NSE is Rs.7, 000-8,000 crores. In India stock index options were introduced from July 2, 2001.

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Milestones in the development of Indian derivative market L.C. Gupta Committee set up to draft a policy framework for introducing 18-Nov-96 derivatives 11-May-98 25-May-00 12-Jun-00 4-Jun-01 2-Jul-01 9-Nov-01 29-Aug-08 31-Aug-09 L.C. Gupta committee submits its report on the policy framework SEBI allows exchanges to trade in index futures Trading on Nifty futures commences on the NSE Trading for Nifty options commences o n the NSE Trading on Stock options commences on the NSE Trading on Stock futures commences on the NSE Currency derivatives trading commences on the NSE Interest rate derivatives trading commences on the NSE

DEFINITION
Derivative is a product whose value is derived from the value of one or more basic variables, called underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the "underlying". In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines "derivative" to include A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities. FACTORS DRIVING THE GROWTH OF DERIVATIVES 11

Over the last three decades, the derivatives market has seen a phenomenal growth. A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are: Increased volatility in asset prices in financial markets. Increased integration of national financial markets with the international markets. Marked improvement in communication facilities and sharp decline in their wider choice of risk management strategies, and Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risk as well as transactions costs as compared to individual financial assets. costs.

Development of more sophisticated risk management tools, providing economic agents a

Emergence of financial derivative products

Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total 12

transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives the world over, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease of use.

Participants in the derivatives market The participants in the derivatives market are broadly classified into three groups: Hedgers Speculators Arbitrageurs

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Hedgers Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculators Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. Arbitrageurs Arbitrageurs are in business to take advantage of a discrepancy between prices in two

different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.

DERIVATIVE PRODUCTS
Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. We take a brief look at various derivatives contracts that have come to be used. Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a 14

certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving Warrants: Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months average of a basket of assets. Equity index options are a form of basket options. 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: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating. ECONOMIC FUNCTION OF THE DERIVATIVE MARKTS In spite of the fear and criticism with which the derivative markets are commonly looked at,

these markets perform a number of economic functions. Prices in an organized derivatives 15

market reflect the perception of market participants about the future and lead the prices of underlying to the Perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in discovery of future as well as current prices. The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. Speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets. Derivatives Trading acts as a catalyst for new entrepreneurial activity. Early forward contracts in the US addressed merchants' concerns about ensuring that there were buyers and sellers for commodities. However 'credit risk" remained a serious problem. To deal with this problem, a group of Chicago businessmen formed the Chicago Board of Trade (CBOT) in 1848. The primary intention of the CBOT was to provide a centralized location known in advance for buyers and sellers to negotiate forward contracts. The CBOT and the CME remain the two largest organized futures exchanges, indeed the two largest "financial" exchanges of any kind in the world today. During the mid eighties, financial futures became the most active derivative instruments generating volumes many times more than the commodity futures. Index futures, futures on T-bills and Euro-Dollar futures are the three most popular futures contracts traded today. Other popular international exchanges that trade derivatives are LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan, MATIF in France, Eurex etc.

TYPES OF DERIVATIVES
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Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way they are traded in market: Over the counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as Swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivatives market is huge. According to the Bank for International Settlements, the total outstanding notional amount is USD 516 trillion (as of June 2009). Exchange traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a Guarantee. The worlds largest derivatives exchanges (by number of transactions) are the Korea exchange (Which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European and the Chicago Board of Trade). According to BIS, the combined turnover in the worlds derivatives exchanges totaled USD 344 trillion during Q4 2008. Some types of derivatives instruments also may trade on traditional exchanges. For instance, hybrid instructions such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants may be listed on stock or bond exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other Derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive. While both exchange-traded and OTC derivative contracts offer many benefits, the former have rigid structures compared to the latter. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in financial markets in 1998. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets.

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The OTC derivatives markets have the following features compared to exchange traded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual institutions, 2. There are no formal centralized limits on individual positions, leverage, or margining, 3. There are no formal rules for risk and burden-sharing, 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, and 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance.

Some of the features of OTC derivatives markets embody risks to financial market stability. The following features of OTC derivatives markets can give rise to instability in institutions, markets, and the international financial system: (i) The dynamic nature of gross credit exposures; (ii) Information asymmetries; (iii) The effects of OTC derivative activities on available aggregate credit; (iv) The high concentration of OTC derivative activities in major institutions; and (v) the central role of OTC derivatives markets in the global financial system. Instability arises when shocks, such as counter-party credit events and sharp movements in asset prices that underlie derivative contracts occur, which significantly alter the perceptions of current and potential future credit exposures. When asset prices change rapidly, the size and 18

configuration of counter-party exposures can become unsustainably large and provoke a rapid unwinding of positions. There has been some progress in addressing these risks and perceptions. However, the progress has been limited in implementing reforms in risk management, including counter-party, liquidity and operational risks, and OTC derivatives markets continue to pose a threat to international financial stability. The problem is more acute as heavy reliance on OTC derivatives creates the possibility of systemic financial events, which fall outside the more formal clearing house structures. Moreover, those who provide OTC derivative products, hedge their risks through the use of exchange traded derivatives. In view of the inherent risks associated with OTC derivatives, and their dependence on exchange traded derivatives, Indian law considers them illegal.

Common Derivative contract types There are three major classes of derivatives: Futures/Forwards, which are contracts to buy or sell an asset at a specified future date. Options, which are contracts that give a holder the right to buy or sell an asset at a specified future date. Swapping, where the two parties agree to exchange cash flows.

RATIONALE BEHIND THE DEVELOPMENT 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: Price or dividend (interest) Some are internal to the firm like 19

Industrial policy Management capabilities Consumers preference Labor 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 allindividual stocks to move together in the same manner. We therefore quite often find stock prices falling form time to time in spite of companys earning 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 favor for the purposes of both portfolio hedging and speculation, the introduction of a derivatives securities that is on some broader market rather than an individual security. 20

NSE's DERIVATIVES MARKET The derivatives trading on the NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. Today, both in terms of volume and turnover, NSE is the largest derivatives exchange in India. Currently, the derivatives contracts have a maximum of 3-month expiration cycles. Three contracts are available for trading, with 1 month, 2 months and 3 months expiry. A new contract is introduced on the next trading day following the expiry of the near month contract. Turnover The trading volumes on NSE's derivatives market has seen a steady increase since the launch of the first derivatives contract, i.e. index futures in June 2000. The average daily turnover at NSE now exceeds Rs. 35,000 crores. A total of 216,883,573 contracts with a total turnover of Rs.7, 356,271 crores were traded during 2006-2007. GLOBAL DERIVATIVES MARKET The global financial centers such as Chicago, New York, Tokyo and London dominate the trading in derivatives. Some of the worlds leading exchanges for the exchange-traded derivatives are: Chicago Mercantile Exchange (CME) & London International financial Futures Exchange (LIFFE) (for currency & Interest rate futures) Philadelphia Stock Exchange (PSE), London Stock Exchange (LSE) Chicago Board option Exchange (CBOE) (for currency options) New York Stock Exchange (NYSE) and London Stock Exchange (LSE) (for equity derivatives) Chicago Mercantile Exchange (CME) and London Metal Exchange (LME) These exchanges account for a larger portion of the trading volume in the respective derivatives segment.

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ELIGIBILITY OF ANY STOCK TO ENTER IN DERIVATIVES MARKET Non promoter holding (free float capitalization) not less than Rs. 750 crores form last 6 months. Daily Average Trading value not less than 5 crores in last 6 months.

At least 90% of trading days in last 6 months. Non Promoters Holding at least 30% BETA not more than 4 (pervious last 6 months)

Regulatory Framework The trading of derivatives is governed by the provisions contained in the SC(R)A, the SEBI Act, the rules and regulations framed there under and the rules and byelaws of stock exchanges. SECURITIES CONTRACTS (REGULATION) ACT, 1956 SC(R) A aims at preventing undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India. The term securities has been defined in the SC(R) A. As per Section 2(h), the Securities include:

1. Shares, scripts, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. 2. Derivative 3. Units or any other instrument issued by any collective investment scheme to the investors in 22

such schemes. 4. Government securities 5. Such other instruments as may be declared by the Central Government to be securities. 6. Rights or interests in securities. Derivative is defined to include: A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities. Section 18A provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are: traded on a recognized stock exchange settled on the clearing house of the recognized stock exchange, in accordance with the rules and byelaws of such stock exchanges.

SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India(SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) promoting the development of the securities market and (c) regulating the securities market. Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of securities, in addition 23

to all intermediaries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for: regulating the business in stock exchanges and any other securities markets. registering and regulating the working of stock brokers, subbrokers etc. promoting and regulating self-regulatory organizations. prohibiting fraudulent and unfair trade practices. calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds and other persons associated with the securities market and intermediaries and selfregulatory organizations in the securities market. performing such functions and exercising according to Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government. Regulation for Derivatives Trading: SEBI set up a 24- member committee under the Chairmanship of Dr. L. C. Gupta to develop the appropriate regulatory framework for derivatives trading in India. 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.

The provisions in the SC(R)A and the regulatory framework developed there under govern trading in securities. The amendment of the SC(R)A to include derivatives within the ambit of securities in the SC(R)A made trading in derivatives possible within the framework of that Act.

Any Exchange fulfilling the eligibility criteria as prescribed in the L. C. Gupta committee report can apply to SEBI for grant of recognition under Section 4 of the SC(R)A, 1956 to start trading derivatives. The derivatives exchange/segment should have a separate governing council and representation of trading/clearing members shall be limited to maximum of 40% of the total members of the governing council. The 24

exchange would have to regulate the sales practices of its members and would have to obtain prior approval of SEBI before start of trading in any derivative contract. The Exchange should have minimum 50 members. The members of an existing segment of the exchange would not automatically become the members of derivative segment. The members of the derivative segment would need to fulfill the eligibility conditions as laid down by the L. C. Gupta committee. The clearing and settlement of derivatives trades would be through a SEBI approved clearing corporation/house. Clearing corporations/houses complying with the eligibility conditions as laid down by the committee have to apply to SEBI for grant of approval. Derivative brokers/dealers and clearing members are required to seek registration from SEBI. This is in addition to their registration as brokers of existing stock exchanges. The minimum net worth for clearing members of the derivatives clearing corporation/house shall be Rs.300 Lakhs. The net worth of the member shall be computed as follows: Capital + Free reserves Less non-allowable assets viz. (a) Fixed assets (b) Pledged securities (c) Members card (d) Non-allowable securities (unlisted securities) (e) Bad deliveries (f) Doubtful debts and advances (g) Prepaid expenses (h) Intangible assets (i) 30% marketable securities The minimum contract value shall not be less than Rs.2 Lakhs. Exchanges have to submit details of the futures contract they propose to introduce. 25

 The initial margin requirement, exposure limits linked to capital adequacy and margin demands related to the risk of loss on the position will be prescribed by SEBI/Exchange from time to time. The L. C. Gupta committee report requires strict enforcement of Know your customer rule and requires that every client shall be registered with the derivatives broker. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing to the client the Risk Disclosure Document and obtain a copy of the same duly signed by the client. The trading members are required to have qualified approved user and sales person who have passed a certification programmed approved by SEBI. Requirements to become authorized / approved user: Trading members and participants are entitled to appoint, with the approval of the F&O segment of the exchange authorized persons and approved users to operate the trading workstation(s). These authorized users can be individuals, registered partnership firms or corporate bodies. Authorized persons cannot collect any commission or any amount directly from the clients he introduces to the trading member who appointed him. However he can receive a commission or any such amount from the trading member who appointed him as provided under regulation. Approved users on the F&O segment have to pass a certification program which has been approved by SEBI. Each approved user is given a unique identification number through which he will have access to the NEAT system. The approved user can access the NEAT system through a password and can change such password from time to time. Introduction to Derivatives Derivative is a product/contract which does not have any value on its own i.e. it derives its value from some underlying. Forward contracts

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A forward contract is one to one bi-partite contract, to be performed in the future, at the terms decided today. (E.g. forward currency market in India). Forward contracts offer tremendous flexibility to the parties to design the contract in terms of the price, quantity, quality (in case of commodities), delivery time and place. Forward contracts suffer from poor liquidity and default risk.

Future contracts

Future contracts are organised/ standardised contracts, which are traded on the exchanges. These contracts, being standardised and traded on the exchanges are very liquid in nature. In futures market, clearing corporation/ house provides the settlement guarantee.

Every futures contract is a forward contract. They :

are entered into through exchange, traded on exchange and clearing corporation/house provides the settlement guarantee for trades. are of standard quantity; standard quality (in case of commodities). have standard delivery time and place.

Forward / Future Contracts Features Operational Mechanism Contract Specifications Counterparty Risk Forward Contract Not traded on exchange Differs from trade to trade. Exists Future Contract Traded on exchange

Contracts are standardised contracts.

Exists, but assumed by Clearing Corporation/ house.

Liquidation Profile

Poor Liquidity as contracts are tailor maid contracts.

Very high Liquidity as contracts are standardised contracts.

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Price Discovery

Poor; as markets are fragmented.

Better; as fragmented markets are brought to the common platform.

Options Options are instruments whereby the right is given by the option seller to the option buyer to buy or sell a specific asset at a specific price on or before a specific date.

Option Seller - One who gives/writes the option. He has an obligation to perform, in case option buyer desires to exercise his option. Option Buyer - One who buys the option. He has the right to exercise the option but no obligation. Call Option - Option to buy. Put Option - Option to sell. American Option - An option which can be exercised anytime on or before the expiry date. European Option - An option which can be exercised only on expiry date. Strike Price/ Exercise Price - Price at which the option is to be exercised. Expiration Date - Date on which the option expires. Exercise Date - Date on which the option gets exercised by the option holder/buyer. Option Premium - The price paid by the option buyer to the option seller for granting the option.

Introduction of futures in India

The first derivative product to be introduced in the Indian securities market is going to be "INDEX FUTURES". In the world, first index futures were traded in U.S. on Kansas City Board of Trade (KCBT) on Value Line Arithmetic Index (VLAI) in 1982.

What are Index Futures?

Index futures are the future contracts for which underlying is the cash market index. For example: BSE may launch a future contract on "BSE Sensitive Index" and NSE may launch a future contract on "S&P CNX NIFTY".

Frequently used terms in Index Futures market

Contract Size - The value of the contract at a specific level of Index. It is Index level * Multiplier. 28

Multiplier - It is a pre-determined value, used to arrive at the contract size. It is the price per index point. Tick Size - It is the minimum price difference between two quotes of similar nature. Contract Month - The month in which the contract will expire. Expiry Day - The last day on which the contract is available for trading. Open interest - Total outstanding long or short positions in the market at any specific point in time. As total long positions for market would be equal to total short positions, for calculation of open Interest, only one side of the contracts is counted. Volume - No. of contracts traded during a specific period of time. During a day, during a week or during a month. Long position- Outstanding/unsettled purchase position at any point of time. Short position - Outstanding/ unsettled sales position at any point of time. Open position - Outstanding/unsettled long or short position at any point of time. Physical delivery - Open position at the expiry of the contract is settled through delivery of the underlying. In futures market, delivery is low. Cash settlement - Open position at the expiry of the contract is settled in cash. These contracts are designated as cash settled contracts. Index Futures fall in this category. Alternative Delivery Procedure (ADP) - Open position at the expiry of the contract is settled by two parties - one buyer and one seller, at the terms other than defined by the exchange. World wide a significant portion of the energy and energy related contracts (crude oil, heating and gasoline oil) are settled through Alternative Delivery Procedure.

Concept of basis in futures market

Basis is defined as the difference between cash and futures prices: Basis = Cash prices - Future prices. Basis can be either positive or negative (in Index futures, basis generally is negative). Basis may change its sign several times during the life of the contract. Basis turns to zero at maturity of the futures contract i.e. both cash and future prices converge at maturity

Life of the contract Operators in the derivatives market 29

Hedgers - Operators, who want to transfer a risk component of their portfolio. Speculators - Operators, who intentionally take the risk from hedgers in pursuit of profit. Arbitrageurs - Operators who operate in the different markets simultaneously, in pursuit of profit and eliminate mis-pricing.

Pricing Futures Cost and carry model of Futures pricing

Fair price = Spot price + Cost of carry - Inflows FPtT = CPt + CPt * (RtT - DtT) * (T-t)/365 FPtT - Fair price of the asset at time t for time T. CPt - Cash price of the asset. RtT - Interest rate at time t for the period up to T. DtT - Inflows in terms of dividend or interest between t and T. Cost of carry = Financing cost, Storage cost and insurance cost. If Futures price > Fair price; Buy in the cash market and simultaneously sell in the futures market. If Futures price < Fair price; Sell in the cash market and simultaneously buy in the futures market. This arbitrage between Cash and Future markets will remain till prices in the Cash and Future markets get aligned.

Set of assumptions

No seasonal demand and supply in the underlying asset. Storability of the underlying asset is not a problem. The underlying asset can be sold short. No transaction cost; No taxes. No margin requirements, and so the analysis relates to a forward contract, rather than a futures contract.

Index Futures and cost and carry model In the normal market, relationship between cash and future indices is described by the cost and carry model of futures pricing. Expectancy Model of Futures pricing

30

S - Spot prices. F - Future prices. E(S) - Expected Spot prices.

Expectancy model says that many a times it is not the relationship between the fair price and future price but the expected spot and future price which leads the market. This happens mainly when underlying is not storable or may not be sold short. For instance in commodities market. E(S) can be above or below the current spot prices. (This reflects markets expectations) Contango market- Market when Future prices are above cash prices. Backwardation market - Market when future prices are below cash prices.

Relationship between forward & future markets

Analyze the different dimensions of Forward and Future Contracts: (Risk; Liquidity; Leverage; Margining etc....) Assign value to each factor to arrive at the contract price. (Perception plays a crucial role in price determination) Any substantial difference in the Forward and Future prices will trigger arbitrage.

Risk management through Futures Which risk are we going to manage through Futures ?

Basic objective of introduction of futures is to manage the price risk. Index futures are used to manage the systemic risk, vested in the investment in securities.

Hedge terminology

Long hedge- When you hedge by going long in futures market. Short hedge - When you hedge by going short in futures market. Cross hedge - When a futures contract is not available on an asset, you hedge your position in cash market on this asset by going long or short on the futures 31

for another asset whose prices are closely associated with that of your underlying. Hedge Contract Month- Maturity month of the contract through which hedge is accomplished. Hedge Ratio - Number of future contracts required to hedge the position.

Some specific uses of Index Futures

Portfolio Restructuring - An act of increasing or decreasing the equity exposure of a portfolio, quickly, with the help of Index Futures. Index Funds - These are the funds which imitate/replicate index with an objective to generate the return equivalent to the Index. This is called Passive Investment Strategy.

Speculation in the Futures market

Speculation is all about taking position in the futures market without having the underlying. Speculators operate in the market with motive to make money. They take: Naked positions - Position in any future contract. Spread positions - Opposite positions in two future contracts. This is a conservative speculative strategy.

o o

Speculators bring liquidity to the system, provide insurance to the hedgers and facilitate the price discovery in the market. Arbitrageurs in Futures market Arbitrageurs facilitate the alignment of prices among different markets through operating in them simultaneously. Margining in Futures market
o o o

Whole system dwells on margins: Daily Margins Initial Margins Special Margins Compulsory collection of margins from clients including institutions. Collection of margins on the Portfolio basis not allowed by L. C. Gupta committee.

Daily Margins 32

Daily margins are collected to cover the losses which have already taken place on open positions. Price for daily settlement - Closing price of futures index. Price for final settlement - Closing price of cash index. For daily margins, two legs of spread positions would be treated independently. Daily margins should be received by CC/CH and/or exchange from its members before the market opens for the trading on the very next day. Daily margins would be paid only in cash.

o o

Initial Margins
o o

Margins to cover the potential losses for one day. To be collected on the basis of value at risk at 99% of the days. Different initial margins on: Naked long and short positions. Spread positions.

Naked positions Short positions 100 [exp (3st ) - 1] Long positions 100 [1 - exp (3st)] Where (st)2 = l(st-1)2 + (1-l)(rt2)

st is todays volatility estimates. st-1 is the volatility estimates on the previous trading day. l is decay factor which determines how rapidly volatility estimates change and is taken as 0.94 by Prof. J. R. Verma. rt is the return on the trading day [log(It/It-1)] Because volatility estimate st changes everyday, Initial margin on open position will change every day. (for first 6 months of futures trading, minimum initial margin on naked positions shall be 5%)

Spread positions

Flat rate of 0.5% per month of spread on the far month contract. Min. margin of 1% and maximum margin of 3% on spread positions. A calendar spread would be treated as open position in the far month contract as the near month contract approaches maturity. Over the last five days of trading of the near month contract, following percentages of the spread shall be treated as naked position in the far month contract:

33

o o o o o

100% on the day of expiry 80% one day before the expiry 60% two days before the expiry 40% three days before the expiry 20% four days before the expiry

Margins on the calendar spread is to be reviewed after 6 months of futures trading. Liquid assets and Brokers net worth
o o

Liquid assets Cash, fixed deposits, bank guarantee, government securities and other approved securities. 50% of Liquid assets must be cash or cash equivalents. Cash equivalents means cash, fixed deposits, bank guarantee and government securities. Liquid net-worth = Liquid asset - Initial margin Continuous requirement for a clearing member: Minimum liquid net-worth of Rs. 50 Lacs. The mark to market value of gross open position shall not exceed 33.33 times of members liquid net worth.

o o

Basis for calculation of Gross Exposure:

For the purpose of the exposure limit, a calendar spread shall be regarded as an open position of one third of the mark to market value of the far month contract. As the near month contract approaches expiry, the spread shall be treated as a naked position in the far month contract in the same manner as defined in slide no. 49.

Margining in Futures market Initial Margin (Value at risk at 99% of the days) Daily Margin Special Margins

34

Striking an intelligent balance between safety and liquidity while determining margins, is a million dollar point.

Position limits in Index Futures Customer level

No position limit. Disclosure to exchange, if position of people acting in concert is 15% or more of open interest.

Trading member level

15% of open interest or 100 crore whichever is higher. to be reviewed after 6 months of futures trading.

Clearing member level

No separate position limit. However, C.M. should ensure that his own positions (if C.M. is a T.M. also) and the positions of the T.Ms. clearing through him are within the limits specified above for T.M.

Market level

No limit. To be reviewed after 6 months of trading in futures.

Expected advantages of derivatives to the cash market

o o

Higher liquidity Availability of risk management products attracts more investors to the cash market. Arbitrage between cash and futures markets fetches additional business to cash market. Improvement in delivery based business. Lesser volatility Improved price discovery.

What makes a contract click

Risk in the underlying market. Presence of both hedgers and speculators in the system. Right product specifications. Proper margining.

Future 35

Multiple indices trading on the same exchange even the same index with different contract designs Dedicated funds o Future funds o Options funds o Hybrid funds

CHAPTER-3

36

COMPANY PROFILE

Today's world of advanced technology and blink-of-an-eye communication has opened a magic box full of opportunities and wealth fulfillment formulae. PCS is here to offer you some such opportunities which help you stretch your investment horizonand unleash the true potential of your wealth. PCS Securities Ltd. adds the dynamic growth factor to your savings and investments by guiding you through the land of opportunities and maximizing your returns. PCS is a fourth generation stock broking powerhouse - one among the top 100 national brokerage firms in India and has served thousands of investors over the past six decades. PCS is now present at over 340 locations across the Nation and one of the top CDSL Participants in South India. PCS was born out of the aspirations of Late Mr. K. C. Shrimal - founder member of Hyderabad Stock Exchange - and nurtured through generations by Late Mr. S. C. Shrimal and his son Mr. P. C. Shrimal, Promoter and Chairman of PCS Securities Ltd., twice President of HSE, who has also served as theChairman of the FISE - Federation of Indian Stock Exchanges. He is currently assisted by his son, Mr. Prashant Shrimal. The Board consists not only of the highly experienced generational hierarchy, but alsoindustry stalwarts with a wealth of expertise 37

including Whole-time Director Mr. Paresh Shah and Director Mr. Jagdish Ahuja (Ex-President, Bangalore Stock Exchange). PCS achieved yet another landmark and received industry recognition when it was awarded The Fastest Growing Equity Broking House (Mid-Size Firms) 09 Award presented by Dun & Bradstreet. PCS has always been a pioneer in adopting newer technologies to increase efficiencies in providing state-of-the-art software to customers like SMS Alerts to customers notifying balances, Market In Your Pocket - Live quotes and charts delivered directly to your mobile phone, a robust Intranet based software for PCS dealers to enable instant communication and accurate informationLife only gets easier with PCS on your side.

MANGEMENT & BOARD OF DIRECTORS: Di rector of M/s P.C.S. Securities Ltd. (Member NSE, BSE) & M/s P.C.S Commodities Pvt. Ltd. Since its inception 12th January 1995 & 05th July 2004. Has a vast experience in Securities Market. With vast experience in Securities Market, has set up M/s P.C.S Securities Ltd. Corporate Company which is fetching Crores of Rkupees of Profit. And acquired Membership with MCX & NCDEX and setup M/s. P.C.S Commodities Pvt. Ltd. With great knowledge which is fetching good profits. Member of Hyderabad Stock Exchange since 1974. SEBI Regn. No: INB060141711 was on the Governing Board of Hyderabad Stock Exchange since 21 years. Has played an active role for the computerization of Hyderabad Stock of Accounts & Trading. And also currently chair person of the Computerization Committee of Hyderabad Stock Exchange. Having a Bachelors Degree in Engineering and high growth in Securities Market shows the talent.

38

Managing the Financial Division of M/s P.C.S Securities Ltd. On day to day basis and also very active to form the systems and to implement the same on a daily basis. He has also played an active role for the automation of Securities Payin & Payout of the Company.

39

Contact Us As Clients are the key for our enterprise,we are providing round the clock services for their growth.And you may also send your comments on the products and servies handled by us.Suggestions for improving them are always welcome.

Head Office: PCS House, #3-1-336, Esamia Bazar, Hyderabad - 500 027 Tel : +91 40 24656587, 30687711 Fax: +91 40 24651079 Email:contactus@pcssecurities.co. in Corporate Office: Kimtee Square, Road #12, Banjara Hills, Hyderabad - 500 034 Tel: +91 40 66102247-52 Fax: +91 40 23323895

40

Balance Sheet of PCS Industries

------------------- in Rs. Cr. -------------------

41

42

Jun '06 15 mths Sources Of Funds Total Share Capital Equity Share Capital Share Application Money Preference Share Capital Reserves Revaluation Reserves Networth Secured Loans Unsecured Loans Total Debt Total Liabilities

Jun '07 12 mths

Jun '08 12 mths

Jun '09 12 mths

Mar '10 9 mths

21.02 21.02 0.00 0.00 40.46 9.13 70.61 35.77 23.75 59.52 130.13 Jun '06 15 mths

21.02 21.02 0.00 0.00 43.84 8.62 73.48 30.49 46.19 76.68 150.16 Jun '07 12 mths

21.02 21.02 0.00 0.00 47.30 8.24 76.56 32.66 59.10 91.76 168.32 Jun '08 12 mths

21.02 21.02 0.00 0.00 50.73 42.55 114.30 37.27 57.60 94.87 209.17 Jun '09 12 mths

21.02 21.02 0.00 0.00 52.74 41.80 115.56 36.82 61.10 97.92 213.48 Mar '10 9 mths

Application Of Funds Gross Block Less: Accum. Depreciation Net Block Capital Work in Progress Investments Inventories Sundry Debtors Cash and Bank Balance Total Current Assets Loans and Advances Fixed Deposits Total CA, Loans & Advances Deffered Credit Current Liabilities Provisions Total CL & Provisions Net Current Assets Miscellaneous Expenses Total Assets Contingent Liabilities BOOKValue (Rs)

56.72 32.13 24.59 0.94 5.17 21.33 118.86 5.67 145.86 19.34 6.40 171.60 0.00 71.19 0.98 72.17 99.43 0.00 130.13 0.00 29.35

58.68 34.34 24.34 0.53 5.18 15.78 161.44 7.29 184.51 19.35 6.36 210.22 0.00 89.11 1.00 90.11 120.11 0.00 150.16 5.03 30.96

67.39 37.73 29.66 1.33 6.66 11.75 146.73 8.23 166.71 19.11 5.86 191.68 0.00 59.39 1.62 61.01 130.67 0.00 168.32 5.74 32.61

109.25 37.72 71.53 0.53 6.57 12.63 147.24 5.17 165.04 15.42 5.14 185.60 0.00 53.86 1.20 55.06 130.54 0.00 209.17 5.77 34.25

113.03 42.76 70.27 8.01 6.57 10.37 161.72 4.44 176.53 19.36 5.00 200.89 0.00 71.11 1.17 72.28 128.61 0.00 213.46 0.49 35.21

43

CHAPTER-4

44

DATA ANALYSIS
ANALYSIS
The objective of this analysis is to evaluate the profit or loss position. This analysis is based on sample data taken of OIL AND NATURAL GAS CORPORATION LIMITED scrip The lot size of ONGC is 250, the time period in which this analysis don is from 21/11/2010 to 22/12/2010
Historical Security-wise Price Volume Data
Data for ONGC - ALL from 21-11-2010 to 22-12-2010
Symbol ONGC ONGC ONGC ONGC ONGC ONGC ONGC ONGC ONGC Series EQ EQ EQ EQ EQ EQ EQ EQ EQ Date Prev Close Open Price 1260.05 1290.00 1280.00 1247.65 1235.00 1253.05 1244.00 1250.00 1336.00 High Price 1305.00 1295.00 1282.50 1266.00 1249.45 1253.05 1249.65 1303.70 1354.65 Low Price 1245.05 1248.50 1235.00 1205.55 1192.00 1226.25 1226.35 1246.50 1305.25 Last Price 1295.00 1274.00 1245.10 1238.00 1238.00 1247.50 1246.05 1289.00 1313.50 Close Price 1296.75 1272.65 1247.45 1226.80 1240.95 1243.05 1245.30 1286.25 1313.95 Average Price Total Traded Quantity Turnover in Lacs 10148.26 11421.85 7109.89 18039.88 12137.62 5468.82 8750.97 11644.08 25661.63

22-Nov1263.60 2010 23-Nov1296.75 2010 24-Nov1272.65 2010 25-Nov1247.45 2010 26-Nov1226.80 2010 29-Nov1240.95 2010 30-Nov1243.05 2010 01-Dec1245.30 2010 02-Dec- 1286.25

1281.69 791785 1272.35 897695 1263.08 562903 1238.14 1457018 1221.77 993446 1239.26 441299 1240.85 705238 1283.30 907355 1322.29 1940694

45

2010 ONGC ONGC ONGC ONGC ONGC ONGC ONGC ONGC ONGC ONGC ONGC ONGC EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ 03-Dec1313.95 2010 06-Dec1319.60 2010 07-Dec1320.50 2010 08-Dec1337.95 2010 09-Dec1345.30 2010 10-Dec1321.60 2010 13-Dec1322.00 2010 14-Dec1328.10 2010 15-Dec1331.90 2010 16-Dec1323.75 2010 20-Dec1329.95 2010 21-Dec1304.45 2010 22-Dec1301.00 2010 1320.00 1334.80 1330.00 1345.00 1351.70 1329.00 1329.00 1335.85 1341.90 1334.00 1319.90 1307.90 1332.85 1336.00 1346.00 1363.85 1355.85 1329.50 1334.15 1341.55 1343.85 1338.00 1324.00 1309.90 1310.00 1318.00 1325.00 1340.00 1294.60 1315.35 1318.20 1326.20 1309.50 1304.00 1296.00 1296.00 1322.00 1322.00 1335.00 1341.00 1327.00 1320.00 1328.50 1333.00 1325.00 1329.10 1307.00 1298.00 1319.60 1320.50 1337.95 1345.30 1321.60 1322.00 1328.10 1331.90 1323.75 1329.95 1304.45 1301.00 1320.84 1262075 1325.73 558223 1335.47 1474154 1350.34 1842408 1330.21 1275853 1323.01 956369 1323.66 961770 1334.08 647916 1325.90 701516 1325.75 1964396 1303.91 1349595 1302.01 611839 16669.94 7400.53 19686.94 24878.76 16971.55 12652.87 12730.55 8643.74 9301.41 26042.94 17597.56 7966.21

ONGC

EQ

1308.00

1318.00

1302.60

1303.00

1305.20

1309.05 646615

8464.51

46

FINDING:

PROFIT/LOSS COMPUTATION BUYER 22/11/2010 22/12/2010 PROFIT PROFIT 47.95*250=11987.5, 1260.05 1308 47.95 SELLER 1260.05 1308 LOSS 47.95

LOSS 47.95*250=11987.5 47

Because future price (closeing price) is more,the buyer gets a profit . in case of seller the closeing price is more so he get a loss .In case of seller the closeing price should be less than selling price to make a frofit The closeing price of ONGC at end of the contract period is 1308 and this is considard as settlement prise .The profit and losses of both the seller and buyer will chang because of transaction charges.

ANALYSIS The objective of this analysis is to evaluate the profit or loss position futures. This analysis is based on sample data taken of COALINDIA scrip The lot size of ONGC is 500 , the time period in which this analysis don is from 21/11/2010 to 22/12/20

Historical Security-wise Price Volume Data

Data for COALINDIA - ALL from 21-11-2010 to 22-12-2010

48

Symbol COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA COALINDIA

Series EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ

Date 22-Nov-2010 23-Nov-2010 24-Nov-2010 25-Nov-2010 26-Nov-2010 29-Nov-2010 30-Nov-2010 01-Dec-2010 02-Dec-2010 03-Dec-2010 06-Dec-2010 07-Dec-2010 08-Dec-2010 09-Dec-2010 10-Dec-2010 13-Dec-2010 14-Dec-2010 15-Dec-2010 16-Dec-2010 20-Dec-2010 21-Dec-2010 22-Dec-2010

Prev Close 333.55 333.35 320.15 310.80 313.20 312.70 317.45 317.25 320.95 324.85 321.95 320.40 320.00 318.85 313.20 317.30 323.15 325.30 327.85 320.70 316.00 313.30

Open Price 336.00 330.50 329.35 314.00 315.00 311.40 315.00 317.00 322.20 318.10 321.00 320.50 318.60 318.00 312.00 318.00 324.45 325.60 326.75 323.00 318.80 315.10

High Price 337.00 332.40 329.35 318.35 316.00 319.70 319.00 322.50 325.95 325.70 324.90 322.75 322.70 320.00 322.00 324.35 331.00 330.00 327.00 323.00 318.80 319.70

Low Price 315.00 317.50 310.00 311.10 301.00 308.20 312.00 315.00 321.15 318.10 318.50 317.25 317.25 309.00 312.00 317.00 322.75 323.00 317.40 315.05 311.20 312.70

Last Price 333.40 320.00 310.70 313.75 313.50 319.00 318.40 321.30 324.50 322.90 320.30 320.00 318.50 313.60 316.45 323.55 325.30 328.10 320.50 315.15 312.75 313.20

Close Price 333.35 320.15 310.80 313.20 312.70 317.45 317.25 320.95 324.85 321.95 320.40 320.00 318.85 313.20 317.30 323.15 325.30 327.85 320.70 316.00 313.30 314.05

Average Price 334.26 325.22 314.45 314.49 309.30 314.03 315.44 319.53 324.09 321.80 321.82 320.36 318.73 312.44 317.81 321.02 327.29 327.66 321.06 317.60 314.05 315.48

Total Traded Quantity

Turnover in Lacs

11494521 38422.08 13147667 42758.39 16243562 51077.34 6489260 20407.86 13657322 42242.44 6493219 20390.73 6050064 19084.30 5053942 16149.11 6143344 19909.66 2453815 7896.47 2895539 9318.36 3484977 11164.32 2877153 9170.42 5313081 16600.27 5799900 18432.83 2809522 9019.22 7075931 23158.72 5380352 17629.06 2893052 9288.29 2905355 9227.49 4427901 13905.74 5425074 17115.02

49

FINDING:
PROFIT/LOSS COMPUTATION
BUYER 22/11/2010 22/12/2010 LOSS PROFIT 20.90*500=10450, 336.00 315.10 20.90 SELLER 336.00 315.10 PROFIT 20.90

LOSS 20.90*500=10450

Because future price (closeing price) is low,the seller gets a profit . in case of buyer the closeing price is low so he get a loss .In case of seller the closeing price should be less than selling price to make a frofit The closeing price of COALINDIA at end of the contract period is 315.10 and this is considard as settlement prise .The profit and losses of both the seller and buyer will chang because of transaction charges.

50

ANALYSIS
The objective of this analysis is to evaluate the profit or loss position futures. This analysis is based on sample data taken of CHENNPETRO scrip The lot size of ONGC is 300, the time period in which this analysis don is from 02/12/2010 to 31/12/2010
Historical Security-wise Price Volume Data
Data for CHENNPETRO - ALL from 02-12-2010 to 31-12-2010
Average Price 238.69 237.76 242.43 239.74 239.39 231.39 228.83 229.99 232.32 236.61 242.84 245.53 247.38 246.70 243.18 244.06 248.92 246.91 245.55 246.85 248.55 Total Turnover Traded in Lacs Quantity 81899 195.49 35348 84.04 94066 228.05 46692 111.94 65023 155.66 85104 196.93 68246 156.17 21080 48.48 25884 60.13 118494 280.36 186469 452.82 153244 376.26 36413 90.08 19993 49.32 11831 28.77 67739 165.32 117848 293.35 38196 94.31 19717 48.42 39074 96.46 30130 74.8

Symbol CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO CHENNPETRO

Series EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ

Date 02-Dec-2010 03-Dec-2010 06-Dec-2010 07-Dec-2010 08-Dec-2010 09-Dec-2010 10-Dec-2010 13-Dec-2010 14-Dec-2010 15-Dec-2010 16-Dec-2010 20-Dec-2010 21-Dec-2010 22-Dec-2010 23-Dec-2010 24-Dec-2010 27-Dec-2010 28-Dec-2010 29-Dec-2010 30-Dec-2010 31-Dec-2010

Prev Close 243.15 238.65 238.45 242.65 239.80 236.35 230.05 231.45 231.55 231.55 238.65 243.00 246.85 246.20 245.80 242.75 246.95 249.00 245.20 245.85 247.65

Open Price 245.00 235.20 237.30 243.05 240.00 238.00 229.40 232.75 232.20 232.20 237.95 244.80 246.90 246.20 245.05 241.05 247.00 250.00 244.80 246.30 254.00

High Price 245.00 241.25 244.40 243.75 243.40 239.00 234.90 234.45 234.50 240.35 245.45 249.00 249.80 248.95 246.85 247.50 250.00 250.50 249.00 249.00 255.00

Low Price 237.10 235.20 237.30 237.00 235.55 228.00 221.10 226.55 230.15 232.00 235.95 238.20 245.00 245.05 241.95 239.00 244.65 244.15 242.15 244.75 246.10

Last Price 238.25 240.00 242.10 240.00 236.20 230.05 231.05 233.70 231.00 238.40 243.05 246.50 247.40 246.45 242.20 245.50 249.00 246.00 245.25 247.75 247.00

Close Price 238.65 238.45 242.65 239.80 236.35 230.05 231.45 231.55 231.55 238.65 243.00 246.85 246.20 245.80 242.75 246.95 249.00 245.20 245.85 247.65 247.25

51

FINDING:
PROFIT/LOSS COMPUTATION
BUYER 01/12/2010 31/12/2010 245.00 254.00 SELLER 245.00 254.00

PROFIT

9.00

LOSS

9.00

PROFIT 9.00*300=2700,

LOSS 9.00*300=2700

Because future price (closeing price) is more,the buyer gets a profit . in case of seller the closeing price is more so he get a loss .In case of seller the closeing price should be less than selling price to make a frofit The closeing price of CHENNPETRO at end of the contract period is 254.00 and this is considard as settlement prise .The profit and losses of both the seller and buyer will chang because of transaction charges.

ANALYSIS
The objective of this analysis is to evaluate the profit or loss position futures. This analysis is based on sample data taken of TCS scrip The lot size of TCS is 1000, the time period in which this analysis don is from 02/12/2010 to 31/12/2010

Historical security wise price volume Data

52

Data for TCS-all from 01-12-2010to31-12-2010

53

Symbol TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS

Seri es EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ

Date 02-Dec-2010 03-Dec-2010 06-Dec-2010 07-Dec-2010 08-Dec-2010 09-Dec-2010 10-Dec-2010 13-Dec-2010 14-Dec-2010 15-Dec-2010 16-Dec-2010 20-Dec-2010 21-Dec-2010 22-Dec-2010 23-Dec-2010 24-Dec-2010 27-Dec-2010 28-Dec-2010 29-Dec-2010 30-Dec-2010 31-Dec-2010

Prev Close

Open Price

High Price 1099.20 1113.00 1110.00 1100.00 1092.95 1097.30 1083.85 1080.70 1089.60 1108.40 1144.00 1177.00 1172.25 1169.00 1159.55 1148.80 1159.45 1150.90 1162.00 1174.80 1180.00

Low Price 1075.0 5 1091.1 5 1095.3 0 1082.1 0 1071.2 5 1068.1 0 1057.0 0 1048.4 0 1064.1 5 1081.5 0 1104.1 5 1114.8 5 1154.0 0 1137.7 5 1132.1 0 1125.7 5 1138.2 0 1140.0 5 1147.0 5 1152.5 0 1161.8 0

Last Price 1099.20 1094.55 1103.20 1089.90 1081.00 1073.80 1073.50 1072.00 1080.00 1101.15 1143.00 1168.00 1159.00 1151.00 1140.00 1140.95 1141.05 1147.60 1159.90 1172.30 1164.00

Close Price 1095.8 0 1097.3 5 1101.7 0 1087.5 0 1079.1 5 1072.6 0 1074.9 0 1076.1 0 1080.9 5 1103.6 5 1140.7 0 1166.7 0 1160.8 0 1149.7 5 1140.0 0 1141.1 0 1141.2 0 1146.3 5 1156.9 5 1170.2 0 1165.6 5

Average Total Traded Price Quantity 1089.0 8 1101.6 1 1104.6 1 1089.2 2 1078.9 9 1083.6 0 1070.8 5 1066.7 1 1078.9 0 1095.7 5 1132.0 1 1149.1 2 1160.3 5 1147.7 8 1141.0 3 1139.1 1 1148.3 3 1145.5 5 1153.0 9 1166.8 2 1168.9 1 2047858 1015056 965477 1079162 992066 1289951 1122812 1057533 1307670 1286017 2257852 2257023 1405321 1593418 1425462 812320 832468 506438 521185 1922776 766490

Turnover in Lacs 22302.79 11182.00 10664.71 11754.44 10704.29 13977.91 12023.66 11280.76 14108.46 14091.51 25559.19 25935.90 16306.58 18288.99 16264.98 9253.25 9559.45 5801.50 6009.73 22435.36 8959.58

1081.90 1091.00 1095.80 1093.05 1097.35 1100.00 1101.70 1100.00 1087.50 1090.95 1079.15 1083.70 1072.60 1067.00 1074.90 1071.00 1076.10 1073.20 1080.95 1085.10 1103.65 1109.00 1140.70 1134.80 1166.70 1169.00 1160.80 1167.00 1149.75 1150.00 1140.00 1134.00 1141.1 1145.00 1141.20 1141.20 1146.35 1149.00 1156.95 1152.50 1170.2 1172.50

54

FINDING:
PROFIT/LOSS COMPUTATION
BUYER 01/12/2010 31/12/2010 PROFIT PROFIT 81.50*1000=81500, 1091.00 1172.50 81.50 SELLER 1091.00 1172.50 LOSS 81.50

LOSS 81.50*1000=81500

Because future price (closeing price) is more,the buyer gets a profit . in case of seller the closeing price is more so he get a loss .In case of seller the closeing price should be less than selling price to make a frofit The closeing price of TCS at end of the contract period is 1172.50and this is considard as settlement prise .The profit and losses of both the seller and buyer will chang because of transaction charges.

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ANALYSIS
The objective of this analysis is to evaluate the profit or loss position futures. This analysis is based on sample data taken of UNITECH scrip The lot size of is 1500, the time period in which this analysis don is from 02/12/2010 to 31/12/2010
Historical Security-wise Price Volume Data
Data for UNITECH - ALL from 02-12-2010 to 31-12-2010

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Symbol UNITEC UNITEC UNITEC UNITEC UNITEC UNITEC

Series

Date 02-Dec2010 2010 06Dec2010 07Dec2010 08-Dec2010 09-Dec2010 10-Dec2010 13-Dec2010 14-Dec2010 15Dec2010 16-Dec2010 20-Dec2010 21-Dec2010 22-Dec2010 23-Dec2010 24-Dec2010 27-Dec2010 28-Dec2010 29-Dec2010 30-Dec2010 31-Dec2010

Prev Close

Open Price

High Price

Low Price

Last Price

Close Price

Average Price 65.59 64.31 64.20 64.56 65.18 62.60 62.46 62.85 62.78 62.24 62.49 62.48 63.20 63.91 63.26 62.67 62.51 62.97 63.48 64.29 65.68

Total Traded Quantity

Turnover in Lacs

H H H H H H

EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ EQ

64.70 65.65 64.10 63.15 66.10 65.05 60.95 63.15 63.10 63.35 62.00 62.65 61.95 63.40 63.15 62.95 63.05 61.80 63.05 63.55 64.80

65.60 66.45 65.45 65.80 64.15 65.40 63.00 67.00 66.00 66.85 65.00 65.05 61.00 63.50 63.50 63.80 63.00 64.00 63.45 63.45 61.50 63.10 63.00 63.30 62.25 63.80 64.00 65.10 63.15 63.95 62.95 63.65 63.20 63.90 62.00 63.50 63.20 63.80 62.10 65.10 64.70 66.60

64.65 63.25 62.50 62.00 63.65 59.65 59.60 61.50 60.30 61.00 61.40 61.65 62.05 62.75 62.55 61.90 61.40 61.60 62.85 62.10 64.30

65.95 64.55 62.75 66.90 64.85 61.55 63.10 63.10 62.80 61.85 62.40 61.70 63.45 63.05 63.15 63.30 61.85 63.05 63.60 64.70 66.05

65.65 64.10 63.15 66.10 65.05 60.95 63.15 63.10 63.35 62.00 62.65 61.95 63.40 63.15 62.95 63.05 61.80 63.05 63.55 64.80 66.30

1995269 13087.47 7 2101975 13517.36 4 1267156 8135.33 8 2801037 18083.95 6 3407873 22211.94 9 3132356 19609.38 2 2479766 15489.41 6 1791864 11261.09 7 1772804 11129.28 6 2137789 13306.51 6 1409757 8810.24 6 8397870 5247.32 1155034 7299.33 0 1175468 7512.45 6 7649157 4838.83 1334597 8363.75 5 1016231 6352.81 0 1066723 6717.09 6 5689266 3611.27 1595536 10258.11 2 1160567 7622.38 6

UNITECH UNITECH UNITECH UNITEC UNITEC UNITEC UNITEC

H H H H

UNITECH UNITECH UNITEC UNITEC

H H

UNITECH UNITECH UNITEC

UNITECH

57

FINDING:

PROFIT/LOSS COMPUTATION
BUYER 01/12/2010 31/12/2010 LOSS PROFIT 0.90*1500=1350, 65.60 64.70 0.90 LOSS 0.90*1500=1350 SELLER 65.60 64.70 PROFIT 0.90

. Because future price (closeing price) is low,the seller gets a profit . in case of buyer the closeing price is low so he get a loss .In case of seller the closeing price should be less than selling price to make a frofit The closeing price of UNITECH at end of the contract period is 64.70 and this is considard as settlement prise .The profit and losses of both the seller and buyer will chang because of transaction charges.

58

Top 10 Stock Future Contracts in NSE with Highest Open Interest 31dec 2010

NSE Code

Expiry

Close Vol

Open Interest

Change in Open Interest -74700

ISPATIND

31-dec22.25 10 31-dec53.85 10 31-dec85.5 10 31-dec87.4 10 31-dec44.05 10 31-dec66.5 10 31-dec57.8 10 31-dec71.9 10 31-dec36.8 10 31-dec51.95 10

1726

84560400

IFCI

1395

82432680

-2442800

UNITECH

10559

65740500

-3852000

SUZLON

9291

61440000

-1875000

GTLINFRA

5933

43470550

-5024600

GMRINFRA

2363

37527500

670000

IDEA

1929

36379800

642600

RNRL

2053

34798056

-894000

FSL

1815

31454500

76000

LITL

1176

28665340

-803880

59

Online Trading, Trade Online

Online trading is the process of buying and selling financial securities, commodities and currencies through the Internet. In order to trade online, investors need to exercise patience and use the right proprietary softwares provided by various brokers.

How to Trade Online

In online trading, orders are implemented with the help of online trading platforms offered by various brokers. Investors place the orders directly on a brokers site. The broker executes the orders on the stock exchange and makes payments on behalf of his clients. Brokers also provide their clients with market data, news and charts through their online platforms. This is done to help them in taking informed decisions. They charge software usage fees and trading commissions for their services. An investor can trade in more than one product or market through the same account and software.

Benefits of Online Trading

Transparency: Online traders have complete information from the time of order placement till the final settlement. Every stage of online trading is subject to scrutiny, as this provides transparency to thetrading process.

Best prices: Investors can get the best quotes for securities due to high transparency in the system.

Added convenience and liquidity: Online trading can be carried out anytime during business hours. This provides liquidity to investors.

60

Low commissions: Investors can make transactions frequently, without worrying about the burden of commissions. This makes day trading and short-term trading more feasible.

Dangers of Online Trading

Technology problems: This includes delays in transactions due to Internet connection outages or power failures.

A mentors absence: Lack of guidance from an experienced broker may lead to formulation of improper trading strategies, resulting in huge losses.

Overtrading: Online traders generally have a long term strategy before investing. However, the lure of capitalizing on short term movements makes them buy and sell more frequently. The low level of commission in online trading further lures the investors into day trading. This takes the traders away from their well-researched long term trading strategy, causing losses in the long run.

Tips for Online Trading

Set limit orders on the trading of stocks.

Avoid overtrading. Do not trade a large number of stocks at once.

Do not base decisions on daily ups and downs. Observe the long term trends. Avoid trading based on rumors.

Online trading is a good tool to earn a living as well as to supplement regular income. However, before venturing into online trading, an investor should carefully research on the risks associated with it and prepare for them. 61

CHAPTAR-5

62

FINDING
The future price of ONGC, COALINDIA, CHENNPETRO, TCS, UNITCH is moving along with the market price. If buy price of the future is less than the settlement price, then the buyer of future gets profit. If seller price of future is less than the future price, then the seller incur loss. The profit and losses of both the buyer and seller will change because of transaction charges.

The change in the future price of ONGC, CHENNPETRO, TCS moves in to positive, then buyer gets a profit on this companies. The change in the future price of COALINDIA, UNITECH moves in to negative, , then seller gets a profit on this companies.

63

CONCLUSIONS
1. Derivatives market is an innovation to cash market. Approximately its daily turnover is five times of cash market. The average daily turnover in NSE derivatives segment is 40000 to 50000 crotes . 2. In cash market the profit/loss of the investor depend on the market price of the underlying asset. The investor may incur huge profit or may be huge loss. But in derivatives segment the investor enjoy huge profits with limited downside. 3. In cash market the investor has t pay the total money, but in derivatives the investor has to pay premiums or margins, which are some percentage of total money 4. Derivatives are mostly used for hedging purpose. 5. In derivatives segment the profit/loss of the option writer is purely depend on the fluctuations of the underlying asset.

64

SUGGESTIONS
1. In bullish market the call option writer more losses so the investor is suggested to go for a call option to hold, where as the put option holder suffer in a bullish market, so he is suggested t write a put option. 2. In bearish market the call option holder will incur more losses so the investor is the investor is suggested to go for a call option to write, where as the put option writer will get more losses, so he suggested to hold a put option. 3. 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 investor about the derivative segment. 4. In order to increase the derivative market in India, SEBI should revise some of their regulation like contract size, participation of FII in the derivative market.

5. Contract size should be minimized because small investor cannot afford this mush of huge premiums. 6. SEBI has take further steps in the risk management mechanism.

7. SEBI has to take measures to use effectively the derivatives segment as a tool of hedge.

65

BIBLIOGRAPHY
BOOKS:1. Derivatives moduleork book-NCFM 2.Financial Management-PRASANNA CHANDRA
3. Financial market&services-

GORDON&NATARAJAN 4. Indian financial systemM.Y.Khan 5. Futures-R.MAHAJAN 6. Financial Risk Management-V.K.Bhalla

NEWS PAPERS: Economic times

Times of India Business Standard

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WEBSITES

1. www.derivativesindia.com 2. www.nseindia.com 3. www.bseindia.com 4. www.sebi.gov.in 5. www.analytics.com

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