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CHAPTER-I

INTRODUCTION

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1.1 INTRODUCTIONDerivatives are financial contracts whose values are derived from the value of an

underlying primary financial instrument, commodity or index, such as: interest rates,

exchange rates, commodities, and equities. The International Monetary Fund defines

derivatives as "financial instruments that are linked to a specific financial instrument or

indicator or commodity and through which specific financial risks can be traded in

financial markets in their own right. The value of financial derivatives derives from the

price of an underlying item, such as asset or index. Unlike debt securities, no principal

is advanced to be repaid and no investment income accrues" While some derivatives

instruments may have very complex structures, all of them can be divided into basic

building blocks of options, forward contracts or some combination thereof. Derivatives

allow financial institutions and other participants to identify, isolate and manage

separately the market risks in financial instruments and commodities for the purpose of

hedging, speculating, arbitraging the price.

The emergence of the market for derivatives products, most notable forwards, futures,

options and swaps can be traced back to the willingness of risk-averse economic agents

to guard themselves against uncertainties arising out of fluctuations in asset prices. The

financial markets can be subject to 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, derivatives products generally do not

influence the fluctuations in the underlying asset prices. However, by locking-in asset

prices, derivatives products minimize the impact of fluctuations in asset prices on the

profitability and cash flow situation.

MEANING OF DERIVATIVES

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The term "Derivative" indicates that it has no independent value, i.e. its value is

entirely "derived" from the value of the underlying asset. The underlying asset can be

securities, commodities, bullion, currency, live stock or anything else. In other words,

Derivative means a forward, future, option or any other hybrid contract of pre

determined fixed duration, linked for the purpose of contract fulfillment to the value of

a specified real or financial asset or to an index of securities.

Derivative is a product/contract which does not have any value on its own i.e. it derives

its value from some underlying. As the name suggests, derivative contracts are those

contracts which derives their value from the price of something else. Typically

derivatives contracts derive their value from underlying cash market

Derivatives are the Investments that derive their value from underlying assets such as

currencies, treasury bills, and bonds or are linked to indices such as a stock market

index that can be used to speculate on market movements or to protect investments

against major swings in market prices

Derivatives are the financial contracts that derive their value from an underlying asset

or index, such as an interest rate or foreign currency exchange rate which can be used to

manage risk, reduce cost and enhance returns.

As the name suggests, derivative contracts are those contracts which derives their value

from the price of something else. Typically derivatives contracts derive their value from

underlying cash market for e.g. derivative of the Reliance, will derive its value from the

cash market price of Reliance.

DEFINITIONS OF DERIVATIVES

“Derivatives are the Investments that derive their value from underlying assets such as

currencies, treasury bills, and bonds or are linked to indices such as a stock market

index that can be used to speculate on market movements or to protect investments

against major swings in market prices”.

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“Derivatives are the financial contracts that derive their value from an underlying asset

or index, such as an interest rate or foreign currency exchange rate which can be used to

manage risk, reduce cost and enhance returns”.

“Derivatives are the Trades that are constructed or derived from another security (stock,

bond, currency, or commodity) that can be both exchange and non-exchange traded

(known as Over the Counter or OTC)”.

Add new definitions - write author name

Derivatives are the financial contracts the value of which depends on the value of the

underlying instrument - commodity, bond, equity, currency or a combination.

Derivatives are financial instruments whose value changes in response to an underlying

variable, that require little or no net initial investment and are settled at a future date.

With Securities Laws (Second Amendment) Act, 1999, Derivatives has been included

in the definition of Securities. The term Derivative has been defined in Securities

Contracts (Regulations) Act, as:-

A Derivative includes: -

a) 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;

b) a contract which derives its value from the prices, or index of prices, of underlying

securities;

Futures Contract

Futures Contract means a legally binding agreement to buy or sell the underlying

security on a future date. Future contracts are the organized/standardized contracts in

terms of quantity, quality (in case of commodities), delivery time and place for

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settlement on any date in future. The contract expires on a pre-specified date which is

called the expiry date of the contract. On expiry, futures can be settled by delivery of

the underlying asset or cash. Cash settlement enables the settlement of obligations

arising out of the future/option contract in cash.

Option Contract

Options Contract is a type of Derivatives Contract which gives the buyer/holder of the

contract the right (but not the obligation) to buy/sell the underlying asset at a

predetermined price within or at end of a specified period. The buyer / holder of the

option purchase the right from the seller/writer for a consideration which is called the

premium. The seller/writer of an option is obligated to settle the option as per the terms

of the contract when the buyer/holder exercises his right. The underlying asset could

include securities, an index of prices of securities etc.

Under Securities Contracts (Regulations) Act, 1956 options on securities has been

defined as "option in securities" means a contract for the purchase or sale of a right to

buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a

teji mandi, a galli, a put, a call or a put and call in securities;

NOTE: An Option to buy is called Call option and option to sell is called Put option.

As in the case of futures contracts, option contracts can be also be settled by delivery of

the underlying asset or cash. However, unlike futures cash settlement in option contract

entails paying/receiving the difference between the strike price/exercise price and the

price of the underlying asset either at the time of expiry of the contract or at the time of

exercise assignment of the option contract.

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The Index Futures and Index Option Contracts

Futures contract based on an index i.e. the underlying asset is the index, are known as

Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30

Index. These contracts derive their value from the value of the underlying index.

Similarly, the options contracts, which are based on some index, are known as Index

options contract. However, unlike Index Futures, the buyer of Index Option Contracts has

only the right but not the obligation to buy / sell the underlying index on expiry. Index

Option Contracts are generally European Style options i.e. they can be exercised / assigned

only on the expiry date.

An index in turn derives its value from the prices of securities that constitute the index and

is created to represent the sentiments of the market as a whole or of a particular sector of

the economy. Indices that represent the whole market are broad based indices and those

that represent a particular sector are sectoral indices.

In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex.

Subsequently, sectoral indices were also permitted for derivatives trading subject to

fulfilling the eligibility criteria.

Derivative contracts may be permitted on an index if 80% of the index constituents are

individually eligible for derivatives trading. The index is required to fulfill the eligibility

criteria even after derivatives trading on the index have begun. If the index does not fulfill

the criteria for 3 consecutive months, then derivative contracts on such index would be

discontinued by its very nature, index cannot be delivered on maturity of the Index futures

or Index option contracts therefore, these contracts are essentially cash settled on Expiry.

GENERAL STRUCTURE OF DERIVATIVES (CHART 1.1)

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DERIVATIVES

Different Types of Derivatives

The following are the various types of derivatives. They are:

Futures:A futures contract is an agreement between two parties to buy or sell an asset at a

certain time in the future at a certain price. 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.

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.

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. Longer-dated options

are called warrants and are generally traded Over-the-counter.

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FUTURES OPTIONS

Put Option Call Option

FORWARDS

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 portfolio of underlying assets. The underlying asset is

usually a moving average of a basket of assets. Equity index options are a form of

basket options.

Swaps:Swaps are private agreement between two parties to exchange cash flows in the future

according to a pre arranged formula. They can be regarded as portfolios of forward

contracts. The two commonly used swaps are:

Interest rate swaps: The 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.

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NEED AND IMPORTENCE OF STUDY

To learn from them, you probably shouldn’t be trading commodities. One of the single

best things you can do to further your education in trading commodities is to keep

thorough records of your trades. Maintaining good records requires discipline, just like

good trading. Unfortunately, many commodity traders don’t take the time to track their

trading history, which can offer a wealth of information to improve their odds of success

most professional traders, and those who consistently make money from trading

commodities, keep diligent records of their trading activity. The same cannot be said for

the masses that consistently lose at trading commodities.

Losing commodity traders are either too lazy to keep records or they can’t stomach to look

at their miserable results. You have to be able to face your problems and start working on

some solutions if you want to be a successful commodities trader. If you can’t look at your

mistakes and put in the work necessary

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SCOPE OF THE STUDY

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

context and the National Stock Exchange has been taken as a representative sample for the

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

made a humble attempt at evaluation derivatives market only in India context. The study is not

based on the international perspective of derivatives markets, which exists in NASDAQ, CBOT

etc.

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OBJECTIVES OF THE STUDY :

To analyze the derivatives market in India.

To analyze the operations of futures and options.

To find the profit/loss position of futures buyer and seller and also the option writer

and option holder.

To study about risk management with the help of derivatives.

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METHODOLOGY

The data collection methods include both the Primary and Secondary Collection methods. 

1. Primary Collection Methods

This method includes the data collected from the personal discussions with the authorized

clerks and members of the Exchange.

2.  Secondary collection methods:

The Secondary Collection Methods includes the lectures of the superintend of the

Department of Market Operations EDP etc, and also the data collected from the News,

Magazines of the NSE, HSE and different books issues of this study.

DESCRIPTION OF THE METHOD :

The following are the steps involved in the study.

Selection of the script :

The scrip selection is done on a random and the scrip selected is M/S.HDFC BANK.

The lot size is 500. Profitability position of the futures buyer and seller and also the option

holder and option writer is studied.

Data Collection:

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The data of the M/S.HDFC BANK has been collected from the “National Stock

exchange” and the internet. The data consist of the December 2012 contract and the period of

data collection is from 28TH November-12 to 24th December-12.

Analysis:

The analysis consist of the tabulation of the data assessing the profitability positions of the

futures buyer and seller and also option holder and the option writer, representing the data with

graphs and making the interpretation using data.

CHAPTER-II

LITERATURE REVIEW

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LITERATURE REVIEW

AUTHOR: Danijela, faculty of business and economics

JOURNAL:MILOS SPRCIC,phD article

The paper analyses financial risk management practices and derivative usage in large

Croatian and Slovenian non-financial companies and explores if the decision to use derivatives

as risk management instruments in the analyzed companies is a function of several. Firm’s

characteristics that have been proven as relevant in making financial risk management

decisions. On the basis of the research results it can be concluded that forwards and swaps are

by far the most important derivative instruments in both countries. Futures are representatives of

standardized derivatives together with structured derivatives are more important in the

Slovenian than in the Croatian companies, while exchange traded and OTC options are

unimportant means of financial risk management in both countries. A comparative analysis

conducted to explore differences between risk management practices in Slovenian and Croatian

companies has shown evidence that Slovenian companies use all types of derivatives, especially

structured derivatives, more intensively.

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Aman Das Gupta conducted a study on a successful trading architecture, the facts determined

by the author as follows.

Online exchanges facilitate faster transactions by providing online trading portals and

brokerage houses ease and flexibility.

The Internet has indeed opened up new avenues for conducting business. Stock exchanges

worldwide now conduct a bulk of its business online through its brokers and partners, a major

shift from the traditional method. In developed countries, almost all exchange transactions are

conducted online. The trend has slowly picked up in India and two of the largest exchanges, the

National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) have been conducting

online trade successfully for some time now.

Author: Dr. Sanep Ahmed, Lecturer, Faculty of Business and Economics in University

Kebangsaan Malaysia.

Title: A Review of Forward, Futures and Options from The Shariah perspective, “From

Complexity to Simplicity.”

Abstract:

Forwards, Futures and Options are instruments that are widely used for hedging and

Speculating. Futures and Options are derivatives, which values derive from other financial

products. However, because of it complexity and speculative nature, it have not been a

mesmerizing topics to be openly discussed by Muslims academicians. Forward and Future

which are compliance to shariah law has been developed with stringent shariah rules and

regulations attached to the products but still it creates confusions amongst scholars in finance

industry because of the unavailability of the products in the market and lack of knowledge. On

the other hand, options are yet too speculative, which involve gharar and maisir, which are not

in accordance to the shariah laws. An attempt to review these derivatives from the shariah

perspectives would be the aim of this paper in order to encourage consequent papers to be

written in this area especially for the Islamic perspectives.

Article: Mr. Neeraj Thivari discussed about the perception of the people towards the trading

and also explains how investing online can be very easy, convenient and informed experience.

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Then one has very little time on hand too many option to choose from, investing can be very

daunting experience. One faces several issues while investing offline like maintaining bank and

demat accounts separately and manually, lack of proper information, tools and advice, constant

struggle with the paper work that is generated (try filling an IPO – Initial Public Offer – form

manually), lack of time to plan investments systematically and finally keeping track of your

investment portfolio and net worth.

Staking and Babbel, 1995., “The Relation between Capital Structure, Interest Rate

Sensitivity, and Market Value in the Property-Liability Insurance Industry,”

Journal of Risk and Insurance, 62:690-718.

¾ Utilizes a modification of the Taylor Separation Method to project the total cash

flows from claim payments, rather than focusing solely on loss severity. This approach

incorporates the volume and type of business written and historical loss development.

This method assumes that inflation in a given year affects all unpaid losses for a given

line equally, regardless of the accident year. The relationship between the market value

of the firm and its leverage and surplus duration is then measured.

The results of these relationships calculated for 25 insurers over 7 years are displayed

graphically by a saddle-shaped curve representing the relationship among leverage,

surplus duration, and the Tobin's Q value (which measures the ratio of market to book

value). These results suggest the need for further study on the duration measure. While

the mean value of leverage for this sample, 3.47, lies along the crest of the saddle,

suggesting that on average insurers adopt a leverage ratio that maximizes the market

value of the firm, the mean value of surplus duration, 9.68, lies near the minimum

values of the curve.

If surplus duration were any lower or higher than the average value, then the market

value of the firm would increase. Since the distribution of surplus duration values was

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not bimodal, this suggests that insurers were operating at a surplus duration level that

minimized the firm's value. This finding suggests either that surplus duration is not

measured accurately, or that insurers need to look at duration much more closely.

Chapman and Pearson, 2001, “What Can Be Learned from Recent Advances in

Estimating Models of the Term Structure,” forthcoming. ¾ Provides a

comprehensive review of term structure models.

They conclude that volatility increases with the level of the short term interest rate and,

within normal interest rate ranges, mean reversion is weak. They also point out that the

appropriate measure for volatility depends on whether the period 1979-1982 (when the

Federal Reserve shifted policy from focusing on interest rates to inflation rates) is

treated as an aberration or included in the sample period. They also conclude that more

research is needed to determine which interest rate model is best.

Chapman and Pearson, 2001., “Recent Advances in Estimating Term-Structure

Models,” Financial Analysts Journal (July/August), 77-95.

¾ Provides a summary of term structure literature and contrasts the issues that have

been resolved with those areas that require further research. They point out that mean

reversion of interest rates is weak and that absolute volatility appears to be related to

rate levels. Unfortunately, the specific nature of volatility is currently unresolved.

Cox, Ingersoll, and Ross, 1985,

“A Theory of the Term Structure of Interest Rates,” Econometric, 53: 385-407.

¾ Using a general equilibrium framework, CIR develop a process for the short-term

interest rate.

THE NASDAQ STOCK MARKET EDUCATIONAL FOUNDATION,

INC.DONATES

GRANT TO NYU STERN’S DERIVATIVE RESEARCH PROGRAM

NEW YORK, NY – AUGUST 15, 2005 –

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The NASDAQ Stock Market Educational Foundation, Inc. has awarded a three-year

grant totaling $300,000 to the Derivatives Research Program, a leading program

dedicated exclusively to the study of derivatives and risk management, at New York

University’s Stern School of Business. The NASDAQ Foundation will support the

program, now renamed The NASDAQ Derivatives Research Program in recognition of

the grant, to more firmly establish it at the forefront of derivatives inquiry.

“The NASDAQ Stock Market Educational Foundation, Inc. fosters education about

financial markets and entrepreneurship through innovative programs,” said Chris

Concannon, EVP, The NASDAQ Stock Market, Inc. and Board Member of The

NASDAQ Stock Market Educational Foundation, Inc. “The grant will expand Stern’s

high quality Derivatives Research Program by drawing academics and practitioners

closer together, bringing more certainty to the complex world of derivatives.”

Operating within NYU Stern’s Salomon Center for the Study of Financial

Institutions, the Derivatives Research Program was founded in 1996 to advance greater

understanding of derivatives among wide audiences; support theoretical and applied

research on derivative instruments and markets, risk management and financial

engineering; and promote interaction between academics and practitioners in these

rapidly growing areas. The Program supports the top practitioner journal in derivatives,

Journal of Derivatives, which was founded and is edited by the Program’s director,

Professor Stephen Figlewski, in concert with Institutional Investor.

The NASDAQ Derivatives Research Program represents the School’s latest effort to

extend its longstanding commitment to creating and disseminating knowledge with

practical implications for today’s global marketplace.

“We are honored to partner with the NASDAQ Educational Foundation,” said Thomas

F. Cooley, dean of NYU Stern. “The Educational Foundation’s contribution to the

School is both valuable and timely as the importance of derivatives continues to

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command attention in the investment world. This program will also further enhance

Stern’s reputation as a global leader in finance research and teaching.”

CHAPTER-III

INDUSTRY PROFILE

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COMPANY PROFILE

Evolution

Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200

years ago. The earliest records of security dealings in India are meager and obscure. The

East India Company was the dominant institution in those days and business in its loan

securities used to be transacted towards the close of the eighteenth century.

By 1830's business on corporate stocks and shares in Bank and Cotton presses took place

in Bombay. Though the trading list was broader in 1839, there were only half a dozen

brokers recognized by banks and merchants during 1840 and 1850.

The 1850's witnessed a rapid development of commercial enterprise and brokerage

business attracted many men into the field and by 1860 the number of brokers increased

into 60.

In 1860-61 the American Civil War broke out and cotton supply from United States of

Europe was stopped; thus, the 'Share Mania' in India begun. The number of brokers

increased to about 200 to 250. However, at the end of the American Civil War, in 1865, a

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disastrous slump began (for example, Bank of Bombay Share which had touched Rs 2850

could only be sold at Rs. 87).

At the end of the American Civil War, the brokers who thrived out of Civil War in 1874,

found a place in a street (now appropriately called as Dalal Street) where they would

conveniently assemble and transact business. In 1887, they formally established in

Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known

as " The Stock Exchange "). In 1895, the Stock Exchange acquired a premise in the same

street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was

consolidated.

Other leading cities in stock market operations

Ahmadabad gained importance next to Bombay with respect to cotton textile industry.

After 1880, many mills originated from Ahmadabad and rapidly forged ahead. As new

mills were floated, the need for a Stock Exchange at Ahmadabad was realized and in 1894

the brokers formed "The Ahmadabad Share and Stock Brokers' Association".

What the cotton textile industry was to Bombay and Ahmadabad, the jute industry was to

Calcutta. Also tea and coal industries were the other major industrial groups in Calcutta.

After the Share Mania in 1861-65, in the 1870's there was a sharp boom in jute shares,

which was followed by a boom in tea shares in the 1880's and 1890's; and a coal boom

between 1904 and 1908. On June 1908, some leading brokers formed "The Calcutta Stock

Exchange Association".

In the beginning of the twentieth century, the industrial revolution was on the way in India

with the Swadeshi Movement; and with the inauguration of the Tata Iron and Steel

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Company Limited in 1907, an important stage in industrial advancement under Indian

enterprise was reached.

Indian cotton and jute textiles, steel, sugar, paper and flourmills and all companies

generally enjoyed phenomenal prosperity, due to the First World War.

In 1920, the then demure city of Madras had the maiden thrill of a stock exchange

functioning in its midst, under the name and style of "The Madras Stock Exchange" with

100 members. However, when boom faded, the number of members stood reduced from

100 to 3, by 1923, and so it went out of existence.

In 1935, the stock market activity improved, especially in South India where there was a

rapid increase in the number of textile mills and many plantation companies were floated.

In 1937, a stock exchange was once again organized in Madras - Madras Stock Exchange

Association (Pvt) Limited. (In 1957 the name was changed to Madras Stock Exchange

Limited).

Lahore Stock Exchange was formed in 1934 and it had a brief life. It was merged with the

Punjab Stock Exchange Limited, which was incorporated in 1936.

Indian Stock Exchanges - An Umbrella Growth

The Second World War broke out in 1939. It gave a sharp boom which was followed by a

slump. But, in 1943, the situation changed radically, when India was fully mobilized as a

supply base.

On account of the restrictive controls on cotton, bullion, seeds and other commodities,

those dealing in them found in the stock market as the only outlet for their activities. They

were anxious to join the trade and their number was swelled by numerous others. Many

new associations were constituted for the purpose and Stock Exchanges in all parts of the

country were floated.

The Uttar Pradesh Stock Exchange Limited (1940), Nagpur Stock Exchange Limited

(1940) and Hyderabad Stock Exchange Limited (1944) were incorporated.

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In Delhi two stock exchanges - Delhi Stock and Share Brokers' Association Limited and

the Delhi Stocks and Shares Exchange Limited - were floated and later in June 1947,

amalgamated into the Delhi Stock Exchange Association Limited.

Post-independence Scenario

Most of the exchanges suffered almost a total eclipse during depression. Lahore Exchange

was closed during partition of the country and later migrated to Delhi and merged with

Delhi Stock Exchange.

Bangalore Stock Exchange Limited was registered in 1957 and recognized in 1963.

Most of the other exchanges languished till 1957 when they applied to the Central

Government for recognition under the Securities Contracts (Regulation) Act, 1956. Only

Bombay, Calcutta, Madras, Ahmadabad, Delhi, Hyderabad and Indore, the well

established exchanges, were recognized under the Act. Some of the members of the other

Associations were required to be admitted by the recognized stock exchanges on a

concessional basis, but acting on the principle of unitary control, all these pseudo stock

exchanges were refused recognition by the Government of India and they thereupon

ceased to function.

Thus, during early sixties there were eight recognized stock exchanges in India (mentioned

above). The number virtually remained unchanged, for nearly two decades. During

eighties, however, many stock exchanges were established: Cochin Stock Exchange

(1980), Uttar Pradesh Stock Exchange Association Limited (at Kanpur, 1982), and Pune

Stock Exchange Limited (1982), Ludhiana Stock Exchange Association Limited (1983),

Gauhati Stock Exchange Limited (1984), Kanara Stock Exchange Limited (at Mangalore,

1985), Magadh Stock Exchange Association (at Patna, 1986), Jaipur Stock Exchange

Limited (1989), Bhubaneswar Stock Exchange Association Limited (1989), Saurashtra

Kutch Stock Exchange Limited (at Rajkot, 1989), Vadodara Stock Exchange Limited (at

Baroda, 1990) and recently established exchanges - Coimbatore and Meerut. Thus, at

present, there are totally twenty one recognized stock exchanges in India excluding the

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Over The Counter Exchange of India Limited (OTCEI) and the National Stock Exchange

of India Limited (NSEIL).

The Table given below portrays the overall growth pattern of Indian stock markets since

independence. It is quite evident from the Table that Indian stock markets have not only

grown just in number of exchanges, but also in number of listed companies and in capital

of listed companies. The remarkable growth after 1985 can be clearly seen from the Table,

and this was due to the favoring government policies towards security market industry.

Trading Pattern of the Indian Stock Market

Trading in Indian stock exchanges are limited to listed securities of public limited

companies. They are broadly divided into two categories, namely, specified securities

(forward list) and non-specified securities (cash list). Equity shares of dividend paying,

growth-oriented companies with a paid-up capital of at least Rs.50 million and a market

capitalization of at least Rs.100 million and having more than 20,000 shareholders are,

normally, put in the specified group and the balance in non-specified group.

Two types of transactions can be carried out on the Indian stock exchanges: (a) spot

delivery transactions "for delivery and payment within the time or on the date stipulated

when entering into the contract which shall not be more than 14 days following the date of

the contract" : and (b) forward transactions "delivery and payment can be extended by

further period of 14 days each so that the overall period does not exceed 90 days from the

date of the contract". The latter is permitted only in the case of specified shares. The

brokers who carry over the outstandings pay carry over charges (cantango or

backwardation), which are usually determined by the rates of interest prevailing.

A member broker in an Indian stock exchange can act as an agent, buy and sell securities

for his clients on a commission basis and also can act as a trader or dealer as a principal,

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buy and sell securities on his own account and risk, in contrast with the practice prevailing

on New York and London Stock Exchanges, where a member can act as a jobber or a

broker only.

The nature of trading on Indian Stock Exchanges are that of age old conventional style of

face-to-face trading with bids and offers being made by open outcry. However, there is a

great amount of effort to modernize the Indian stock exchanges in the very recent times.

Over The Counter Exchange of India (OTCEI)

The traditional trading mechanism prevailed in the Indian stock markets gave way to many

functional inefficiencies, such as, absence of liquidity, lack of transparency, unduly long

settlement periods and benami transactions, which affected the small investors to a great

extent. To provide improved services to investors, the country's first ringless, scripless,

electronic stock exchange - OTCEI - was created in 1992 by country's premier financial

institutions - Unit Trust of India, Industrial Credit and Investment Corporation of India,

Industrial Development Bank of India, SBI Capital Markets, Industrial Finance

Corporation of India, General Insurance Corporation and its subsidiaries and CanBank

Financial Services.

Trading at OTCEI is done over the centres spread across the country. Securities traded on

the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed on the OTC

can be bought or sold at any OTC counter all over the country and they should not

be listed anywhere else

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Permitted Securities - Certain shares and debentures listed on other exchanges and

units of mutual funds are allowed to be traded

Initiated debentures - Any equity holding at least one lakh debentures of a

particular scrip can offer them for trading on the OTC.

OTC has a unique feature of trading compared to other traditional exchanges. That is,

certificates of listed securities and initiated debentures are not traded at OTC. The original

certificate will be safely with the custodian. But, a counter receipt is generated out at the

counter which substitutes the share certificate and is used for all transactions.

In the case of permitted securities, the system is similar to a traditional stock exchange.

The difference is that the delivery and payment procedure will be completed within 14

days.

Compared to the traditional Exchanges, OTC Exchange network has the following

advantages:

OTCEI has widely dispersed trading mechanism across the country which provides

greater liquidity and lesser risk of intermediary charges.

Greater transparency and accuracy of prices is obtained due to the screen-based

scripless trading.

Since the exact price of the transaction is shown on the computer screen, the

investor gets to know the exact price at which s/he is trading.

Faster settlement and transfer process compared to other exchanges.

In the case of an OTC issue (new issue), the allotment procedure is completed in a

month and trading commences after a month of the issue closure, whereas it takes a

longer period for the same with respect to other exchanges.

26

Thus, with the superior trading mechanism coupled with information transparency

investors are gradually becoming aware of the manifold advantages of the OTCEI.

National Stock Exchange (NSE)

With the liberalization of the Indian economy, it was found inevitable to lift the Indian

stock market trading system on par with the international standards. On the basis of the

recommendations of high powered Pherwani Committee, the National Stock Exchange

was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and

Investment Corporation of India, Industrial Finance Corporation of India, all Insurance

Corporations, selected commercial banks and others.

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

Wholesale debt market operations are similar to money market operations - institutions

and corporate bodies enter into high value transactions in financial instruments such as

government securities, treasury bills, public sector unit bonds, commercial paper,

certificate of deposit, etc.

There are two kinds of players in NSE:

(a) trading members and

(b) participants.

Recognized members of NSE are called trading members who trade on behalf of

themselves and their clients. Participants include trading members and large players like

banks who take direct settlement responsibility.

Trading at NSE takes place through a fully automated screen-based trading mechanism

which adopts the principle of an order-driven market. Trading members can stay at their

27

offices and execute the trading, since they are linked through a communication network.

The prices at which the buyer and seller are willing to transact will appear on the screen.

When the prices match the transaction will be completed and a confirmation slip will be

printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges. They are as follows:

NSE brings an integrated stock market trading network across the nation.

Investors can trade at the same price from anywhere in the country since inter-

market operations are streamlined coupled with the countrywide access to the

securities.

Delays in communication, late payments and the malpractice’s prevailing in the

traditional trading mechanism can be done away with greater operational efficiency

and informational transparency in the stock market operations, with the support of

total computerized network.

Unless stock markets provide professionalized service, small investors and foreign

investors will not be interested in capital market operations. And capital market being one

of the major source of long-term finance for industrial projects, India cannot afford to

damage the capital market path. In this regard NSE gains vital importance in the Indian

capital market system.

Preamble

Often, in the economic literature we find the terms ‘development’ and ‘growth’ are used

interchangeably. However, there is a difference. Economic growth refers to the sustained

increase in per capita or total income, while the term economic development implies

sustained structural change, including all the complex effects of economic growth. In other

words, growth is associated with free enterprise, where as development requires some sort

of control and regulation of the forces affecting development. Thus, economic

development is a process and growth is a phenomenon.

28

Economic planning is very critical for a nation, especially a developing country like India

to take the country in the path of economic development to attain economic growth.

Why Economic Planning for India?

One of the major objective of planning in India is to increase the rate of economic

development, implying that increasing the rate of capital formation by raising the levels of

income, saving and investment. However, increasing the rate of capital formation in India

is beset with a number of difficulties. People are poverty ridden. Their capacity to save is

extremely low due to low levels of income and high propensity to consume. Therefore, the

rate of investment is low which leads to capital deficiency and low productivity. Low

productivity means low income and the vicious circle continues. Thus, to break this

vicious economic circle, planning is inevitable for India.

The market mechanism works imperfectly in developing nations due to the ignorance and

unfamiliarity with it. Therefore, to improve and strengthen market mechanism planning is

very vital. In India, a large portion of the economy is non-monitised; the product, factors

of production, money and capital markets is not organized properly. Thus the prevailing

price mechanism fails to bring about adjustments between aggregate demand and supply

of goods and services. Thus, to improve the economy, market imperfections has to be

removed; available resources has to be mobilized and utilized efficiently; and structural

rigidities has to be overcome. These can be attained only through planning.

In India, capital is scarce; and unemployment and disguised unemployment is prevalent.

Thus, where capital was being scarce and labour being abundant, providing useful

employment opportunities to an increasing labour force is a difficult exercise. Only a

centralized planning model can solve this macro problem of India.

Further, in a country like India where agricultural dependence is very high, one cannot

ignore this segment in the process of economic development. Therefore, an economic

development model has to consider a balanced approach to link both agriculture and

industry and lead for a paralleled growth. Not to mention, both agriculture and industry

cannot develop without adequate infrastructural facilities that only the state can provide

29

and this is possible only through a well carved out planning strategy. The government’s

role in providing infrastructure is unavoidable due to the fact that the role of private sector

in infrastructural development of India is very minimal since these infrastructure projects

are considered as unprofitable by the private sector.

Further, India is a clear case of income disparity. Thus, it is the duty of the state to reduce

the prevailing income inequalities. This is possible only through planning.

Planning History of India

The development of planning in India began prior to the first Five Year Plan of

independent India, long before independence even. The idea of central directions of

resources to overcome persistent poverty gradually, because one of the main policies

advocated by nationalists early in the century. The Congress Party worked out a program

for economic advancement during the 1920’s, and 1930’s and by the 1938 they formed a

National Planning Committee under the chairmanship of future Prime Minister Nehru. The

Committee had little time to do anything but prepare programs and reports before the

Second World War, which put an end to it. But it was already more than an academic

exercise remote from administration. Provisional government had been elected in 1938,

and the Congress Party leaders held positions of responsibility. After the war, the Interim

government of the pre-independence years appointed an Advisory Planning Board. The

Board produced a number of somewhat disconnected Plans itself. But, more important in

the long run, it recommended the appointment of a Planning Commission.

The Planning Commission did not start work properly until 1950. During the first three

years of independent India, the state and economy scarcely had a stable structure at all,

while millions of refugees crossed the newly established borders of India and Pakistan,

and while ex-princely states (over 500 of them) were being merged into India or Pakistan.

The Planning Commission as it now exists, was not set up until the new India had adopted

its Constitution in January 1950.

Objectives of Indian Planning

30

The Planning Commission was set up the following Directive principles :

To make an assessment of the material, capital and human resources of the country,

including technical personnel, and investigate the possibilities of augmenting such

of these resources as are found to be deficient in relation to the nation’s

requirement.

To formulate a plan for the most effective and balanced use of the country’s

resources.

Having determined the priorities, to define the stages in which the plan should be

carried out, and propose the allocation of resources for the completion of each

stage.

To indicate the factors which are tending to retard economic development, and

determine the conditions, which in view of the current social and political situation,

should be established for the successful execution of the Plan.

To determine the nature of the machinery this will be necessary for securing the

successful implementation of each stage of Plan in all its aspects.

To appraise from time to time the progress achieved in the execution of each stage

of the Plan and recommend the adjustments of policy and measures that such

appraisals may show to be necessary.

To make such interim or auxiliary recommendations as appear to it to be

appropriate either for facilitating the discharge of the duties assigned to it or on a

consideration of the prevailing economic conditions, current policies, measures and

development programs; or on an examination of such specific problems as may be

referred to it for advice by Central or State Governments.

The long-term general objectives of Indian Planning are as follows:

Increasing National Income

31

Reducing inequalities in the distribution of income and wealth

Elimination of poverty

Providing additional employment; and

Alleviating bottlenecks in the areas of : agricultural production, manufacturing

capacity for producer’s goods and balance of payments.

Economic growth, as the primary objective has remained in focus in all Five Year Plans.

Approximately, economic growth has been targeted at a rate of five per cent per annum.

High priority to economic growth in Indian Plans looks very much justified in view of

long period of stagnation during the British rule

32

COMPANY PROFILE

Background:

Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely

towards attaining diverse goals of the customer through varied services. Creating a

plethora of opportunities for the customer by opening up investment vistas backed by

research-based advisory services. Here, growth knows no limits and success recognizes no

boundaries. Helping the customer create waves in his portfolio and empowering the

investor completely is the ultimate goal.

Stock Broking Services

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high success

rate as a wealth management and wealth accumulation option. The difference between

unpredictability and a safety anchor in the market is provided by in-depth knowledge of

market functioning and changing trends, planning with foresight and choosing one's

options with care. This is what we provide in our Stock Broking services.

We offer services that are beyond just a medium for buying and selling stocks and shares.

Instead we provide services, which are multi dimensional and multi-focused in their scope.

There are several advantages in utilizing our Stock Broking services, which are the reasons

why it is one of the best in the country.

We offer trading on a vast platform National Stock Exchange and Bombay Stock

Exchange. More importantly, we make trading safe to the maximum possible extent, by

accounting for several risk factors and planning accordingly. We are assisted in this task

by our in-depth research, constant feedback and sound advisory facilities. Our highly

skilled research team, comprising of technical analysts as well as fundamental specialists,

secure result-oriented information on market trends, market analysis and market

predictions. This crucial information is given as a constant feedback to our customers,

through daily reports delivered thrice daily ; The Pre-session Report, where market

33

scenario for the day is predicted, The Mid-session Report, timed to arrive during lunch

break , where the market forecast for the rest of the day is given and The Post-session

Report, the final report for the day, where the market and the report itself is reviewed. To

add to this repository of information, we publish a monthly magazine "Karvy The

Finapolis", which analyzes the latest stock market trends and takes a close look at the

various investment options, and products available in the market, while a weekly report,

called "Karvy Bazaar Baatein", keeps you more informed on the immediate trends in the

stock market. In addition, our specific industry reports give comprehensive information on

various industries. Besides this, we also offer special portfolio analysis packages that

provide daily technical advice on scrips for successful portfolio management and provide

customized advisory services to help you make the right financial moves that are

specifically suited to your portfolio.

Our Stock Broking services are widely networked across India, with the number of our

trading terminals providing retail stock broking facilities. Our services have increasingly

offered customer oriented convenience, which we provide to a spectrum of investors, high-

networth or otherwise, with equal dedication and competence.

But true to our spirit, this success is not our final destination, but just a platform to launch

further enhanced quality services to provide you the latest in convenient, customer-

friendly stock management.

Over the years we have ensured that the trust of our customers is our biggest returns.

Factors such as our success in the Electronic custody business has helped build on our

tradition of trust even more. Consequentially our retail client base expanded very fast.

To empower the investor further we have made serious efforts to ensure that our research

calls are disseminated systematically to all our stock broking clients through various

delivery channels like email, chat, SMS, phone calls etc.

Our foray into commodities broking has been path breaking and we are in the process of

converting existing traders in commodities into the more organized mainstream of trading

in commodity futures, both as a trading and risk hedging mechanism.

34

In the future, our focus will be on the emerging businesses and to meet this objective, we

have enhanced our manpower and revitalized our knowledge base with enhances focus on

Futures and Options as well as the commodities business.

Depository Participants

The onset of the technology revolution in financial services Industry saw the emergence of

Karvy as an electronic custodian registered with National Securities Depository Ltd

(NSDL) and Central Securities Depository Ltd (CSDL) in 1998. Karvy set standards

enabling further comfort to the investor by promoting paperless trading across the country

and emerged as the top 3 Depository Participants in the country in terms of customer

serviced.

Offering a wide trading platform with a dual membership at both NSDL and CDSL, we

are a powerful medium for trading and settlement of dematerialized shares. We have

established live DPMs, Internet access to accounts and an easier transaction process in

order to offer more convenience to individual and corporate investors. A team of

professional and the latest technological expertise allocated exclusively to our demat

division including technological enhancements like SPEED-e, make our response time

quick and our delivery impeccable. A wide national network makes our efficiencies

accessible to all.

Karvy Consultants Limited was started in the year 1981, with the vision and enterprise of a

small group of practicing Chartered Accountants. Initially it was started with consulting

and financial accounting automation, and carved inroads into the field of registry and share

accounting by 1985. Since then, it has utilized its experience and superlative expertise to

go from strength to strength…to better its services, to provide new ones, to innovate,

diversify and in the process, evolved as one of India’s premier integrated financial service

enterprise.

Today, Karvy has access to millions of Indian shareholders, besides companies,

banks, financial institutions and regulatory agencies. Over the past one and half decades,

Karvy has evolved as a veritable link between industry, finance and people. In January

35

1998, Karvy became the first Depository Participant in Andhra Pradesh. An ISO 9002

company, Karvy's commitment to quality and retail reach has made it an integrated

financial services company.

An Overview:KARVY, is a premier integrated financial services provider, and ranked among the top

five in the country in all its business segments, services over 16 million individual

investors in various capacities, and provides investor services to over 300 corporates,

comprising the who is who of Corporate India. KARVY covers the entire spectrum of

financial services such as Stock broking, Depository Participants, Distribution of financial

products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities

Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance,

placement of equity, IPOs, among others. Karvy has a professional management team and

ranks among the best in technology, operations and research of various industrial

segments.

Today, Karvy service over 6 lakhs customer accounts spread across over 250 cities/towns

in India and serves more than 75 million shareholders across 7000 corporate clients and

makes its presence felt in over 12 countries across 5 continents. All of Karvy services are

also backed by strong quality aspects, which have helped Karvy to be certified as an ISO

9002 company by DNV.

ACHIEVEMENTS :

Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the top 3 Depository Participants

Largest Network of Branches & Business Associates

ISO 9001:2000 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

36

Full Fledged IT driven operations

First ISO-9002 Certified Registrars in India

Ranked as “The Most Admired Registrar” by MARG

Largest mobilize of funds as per PRIME DATABASE

First depository participant from Andhra Pradesh.

Handled over 500 public issues as Registrars.

Handling the Reliance account, which accounts for nearly 10 million account

holders?

Range of services:

Stock broking services

Distribution of Financial Products (investments & loan products)

Depository Participant services

IT enabled services

Personal finance Advisory Services

Private Client Group

Debt market services

Insurance & merchant banking

Mutual Fund Services

Corporate Shareholder Services

Other global services

Besides these, they also offer special portfolio analysis packages that provide daily

technical advice on scrips for successful portfolio management and provide customized

advisory services to help customers make the right financial moves that are specifically

suited to their portfolio. They are continually engaged in designing the right investment

portfolio for each customer according to individual needs and budget considerations.

37

Karvy Consultants limited deals in Registrar and Investment Services. Karvy is one of the

early entrants registered as Depository Participant with NSDL (National Securities

Depository Limited), the first Depository in the country and then with CDSL (Central

Depository Services Limited).

Karvy stock broking is a member of National Stock Exchange (NSE), The Bombay Stock

Exchange (BSE), and The Hyderabad Stock Exchange (HSE). The services provided are

multi dimensional and multi-focused in their scope: to analyze the latest stock market

trends and to take a close looks at the various investment options and products available in

the market. Besides this, they also offer special portfolio analysis packages.

The paradigm shift from pure selling to knowledge based selling drives the

business today. The monthly magazine, Finapolis, provides up-dated market information

on market trends, investment options, opinions etc. Thus empowering the investor to base

every financial move on rational thought and prudent analysis and embark on the path to

wealth creation.

Karvy is recognized as a leading merchant banker in the country, Karvy is registered with

SEBI as a Category I merchant banker. This reputation was built by capitalizing on

opportunities in corporate consolidations, mergers and acquisitions and corporate

restructuring.

38

Karvy has a tie up with the world’s largest transfer agent, the leading Australian

company, Computer share Limited. It has attained a position of immense strength as a

provider of across-the-board transfer agency services to AMCs, Distributors and Investors.

Besides providing the entire back office processing, it also provides the link between

various Mutual Funds and the investor.

Karvy global services limited covers Banking, Financial and Insurance Services

(BFIS), Retail and Merchandising, Leisure and Entertainment, Energy and Utility and

Healthcare sectors.

Karvy comtrade limited trades in all goods and products of agricultural and mineral

origin that include lucrative commodities like gold and silver and popular items like oil,

pulses and cotton through a well-systematized trading platform.

Karvy Insurance Broking Pvt. Ltd. provides both life and non-life insurance products

to retail individuals, high net-worth clients and corporates. With Indian markets seeing a

sea change, both in terms of investment pattern and attitude of investors, insurance is no

more seen as only a tax saving product but also as an investment product.

39

Karvy Inc. is located in New York to provide various financial products and

information on Indian equities to potential foreign institutional investors (FIIs) in the

region. This entity would extensively facilitate various businesses of Karvy viz., stock

broking (Indian equities), research and investment by QIBs in Indian markets for both

secondary and primary offerings.

.Quality Policy:

To achieve and retain leadership, Karvy shall aim for complete customer satisfaction, by

combining its human and technological resources, to provide superior quality financial

services. In the process, Karvy will strive to exceed Customer's expectations.

Quality Objectives

As per the Quality Policy, Karvy will:

Build in-house processes that will ensure transparent and harmonious relationships

with its clients and investors to provide high quality of services.

Establish a partner relationship with its investor service agents and vendors that will

help in keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with

adequate knowledge & skills so as to respond to customer's needs.

Continue to uphold the values of honesty & integrity and strive to establish

unparalleled standards in business ethics.

Use state-of-the art information technology in developing new and innovative

financial products and services to meet the changing needs of investors and clients.

Strive to be a reliable source of value-added financial products and services and

constantly guide the individuals and institutions in making a judicious choice.

Strive to keep all stake-holders (shareholders, clients, investors, employees, suppliers and

regulatory authorities) proud and satisfied

40

CHAPTER-IV

DATA ANALYSES AND INTERPRETATION

Contract Specifications for Futures & Options:

41

(Table4.1)

Parameter Index Futures Index Options

Futures on Individual Securities

Options on Individual Securities

Mini Index Futures

Mini Index Options

Underlying 6 Indices 6 Indices 225 securities 225 securities

S&P CNX Nifty

S&P CNX Nifty

Security Descriptor :Instrument

Underlying Symbol

FUTIDX

Symbol of Underlying Index

OPTIDX

Symbol of Underlying Index

FUTSTK

Symbol of Underlying Security

OPTSTK

Symbol of Underlying Security

FUTIDX

MINIFTY

OPTIDX

MINIFTY

Expiry Date DD-MMM-YYYY

DD-MMM-YYYY

DD-MMM-YYYY

DD-MMM-YYYY

DD-MMM-YYYY

DD-MMM-YYYY

Option type Strike Price

--

CE / PEStrike Price

--

CA / PAStrike Price

--

CE / PEStrike Price

Trading Cycle

3 month trading cycle – the near month (one), the next month (two) and the far month (three)

Expiry Day Last Thursday of the expiry month. If the last Thursday is a trading holiday, then the expiry day is the previous trading day.

Strike Price Intervals

Permitted Lost Size

-

Underlying Specific

Depending on underlying price Underlying Specific

-

Underlying Specific

Depending on underlying price Underlying Specific

-

20

Depending on underlying price 20

Price Bands

Operating range of 10% of the base price

Upper Operating Range + 99% of base price or Rs.20, whichever is higher; Lower Operating RangeRs. 0.05

Operating range of 20% of the base price

Upper Operating Range +99% of base price or Rs.20, whichever is higher; Lower Operating Range Rs. 0.05

Operating range of 10% of the base price

Upper Operating Range +99% of base price or Rs.20, whichever is higher; Lower Operating Range Rs. 0.05

42

Settlement Statistics (2011-2012)

Monthly Settlement Statistics of Derivatives Traded for the Year 2011-

2012 (Table 4.2) (All figures in Rs. Crores)

Month/Year Index / Stock Futures Index / Stock Options Total

MTM

Settlement

Final

Settlement

Premium

Settlement

Exercise

Settlement

Apr-2011 4162.90 41.96 385.58 188.36 4778.80

May-2011 3251.10 94.92 294.13 211.43 3851.58

Jun-2011 3794.50 72.59 367.07 92.24 4326.39

Jul-2011 4935.20 71.64 498.15 247.67 5752.66

Aug-2011 11299.00 107.60 599.84 143.88 12150.33

Sep-2011 5300.00 103.42 569.62 583.62 6556.65

Oct-2011 15924.00 222.61 918.41 669.84 17734.85

Nov-2011 16248.00 282.38 615.11 327.17 17472.66

Dec-2011 14125.00 77.17 478.38 203.60 14884.14

Jan-2012 39768.00 105.11 777.95 767.43 41418.49

43

Interest Rate Derivatives Clearing and Settlement

National Securities Clearing Corporation Limited (NSCCL) is the clearing and

settlement agency for all deals executed on the Derivatives (Futures & Options)

segment. NSCCL acts as legal counter-party to all deals on NSE's F&O.

A Clearing Member (CM) of NSCCL has the responsibility of clearing and settlement

of all deals executed by Trading Members (TM) on NSE, who clear and settle such

deals through them.

1. Settlement Procedure & Settlement Price

Daily Mark to Market Settlement and Final settlement for Interest Rate Futures

Contract

Daily Mark to Market settlement and Final Mark to Market settlement in

respect of admitted deals in Interest Rate Futures Contracts shall be cash

settled by debiting/ crediting of the clearing accounts of Clearing Members

with the respective Clearing Bank.

All positions (brought forward, created during the day, closed out during

the day) of a F&O Clearing Member in Futures Contracts, at the close of

trading hours on a day, shall be marked to market at the Daily Settlement Price

(for Daily Mark to Market Settlement) and settled.

All positions (brought forward, created during the day, closed out during

the day) of a F&O Clearing Member in Futures Contracts, at the close of

trading hours on the last trading day, shall be marked to market at Final

Settlement Price (for Final Settlement) and settled.

Daily Settlement Price shall be the closing price of the relevant Futures

contract for the Trading day.

44

Daily Settlement Price

Daily settlement price for an Interest Rate Futures Contract shall be the closing price of

such Interest Rate Futures Contract on the trading day. The closing price for an interest

rate futures contract shall be calculated on the basis of the last half an hour weighted

average price of such interest rate futures contract. In absence of trading in the last half

an hour, the theoretical price would be taken or such other price as may be decided.

Theoretical daily settlement price for unexpired futures contracts shall be the futures

prices computed using the (price of the notional bond) spot prices arrived at from the

applicable ZCYC Curve. The Zero Coupon Yield Curve (ZCYC) shall be computed

by the Exchange or by any other agency as may be nominated in this regard from the

prices of Government securities traded on the Exchange or reported on the Negotiated

Dealing System of RBI or both taking trades of same day settlement(i.e. t = 0).

In respect of coupon bearing notional bond, the present value shall be obtained as the

sum of present value of the principal payment discounted at the relevant zero coupon

yield and the present values of the coupons obtained by discounting each notional

coupon payment at the relevant zero coupon yield for that maturity. For this purpose the

notional coupon payment date shall be half yearly and commencing from the date of

expiry of the relevant futures contract.

For computation of futures prices from the price of the notional bond (spot prices) thus

arrived, the rate of interest may be the relevant MIBOR rate or such other rate as may

be specified from time to time.

Final Settlement Price for Mark To Market Settlement Of Interest Rate Futures

Contracts

Final settlement price for an Interest rate Futures Contract on zero coupon notional

bond and coupon bearing bond shall be based on the price of the notional bond

45

determined using the zero coupon yield curve computed as explained above. In respect

of notional T-bill it shall be 100 minus the annualized yield for the specified period.

Settlement Value In Respect Of Notional T-Bill

Since the T-bills are priced at 100 minus the relevant annualized yield, the settlement value shall be arrived at using the relevant multiplier factor.

Settlement Schedule:

Settlement schedule for Interest Rate Futures Contracts

(Table 4.3)Product Settlement Schedule

Interest Rate Futures Contracts

Daily Mark-to-Market Settlement

Pay-in: T+1 working day on or after 11:30 a.m

Pay-in: T+1 working day on or after 12:00 p.m

(T is trading day)

Interest Rate Futures Contracts

Final Settlement Pay-in: T+1 working day on or after 11:30 a.m

Pay-in: T+1 working day on or after 12:00 p.m

(T is trading day)

Initial Margins

Initial margin shall be payable on all open positions of Clearing Members, up to client

level, at any point of time, and shall be payable upfront by Clearing Members in

accordance with the margin computation mechanism and/ or system as may be adopted

by Clearing Corporation from time to time. Presently, the initial margins would be

based on the zero coupon yield curve computed at the end of the day as explained

46

above with trades of same day settlement (t =0). However, in case of large deviation

between the yields generated using only t = 0 trades and all trades, initial margins

revised accordingly may be computed and collected by the Clearing corporation from

the members at its discretion.

Initial Margin shall include SPAN margins and such other additional margins

that may be specified by Clearing Corporation from time to time.

Computation of Initial Margin

Clearing Corporation will adopt SPAN (Standard Portfolio Analysis of Risk) system or

any other system for the purpose of real time initial margin computation. Initial margin

requirements shall be based on 99% value at risk over a one day time horizon.

Provided, however, in the case of futures contracts, where it may not be possible to

collect mark to market settlement value, before the commencement of trading on the

next day, the initial margin may be computed over a two day time horizon, applying the

appropriate statistical formula.

Analysis

The Objective of this analysis is to evaluate the profit/loss position of the futures and

options.

The aim of conducting the analysis is to determine whether the Investor

who brought the derivatives of the company has incurred Profit or loss.

The other cause of conducting the analysis is to find out the nature of the

behavior of the derivatives of the company along the period of

observation.

This analysis is based on sample data taken of HDFC Scrip.

This analysis considered the MARCH contract of HDFC

HDFC BANK FUTURES & OPTIONS

DATE PRICE CALL OPTION

SPOT FUTURE 900 930 960

NOV/WED/28 922.75 921.85 100.05 85.75 73.10

47

NOV/THU/29 898.85 898.90 79.20 66.25 47.00

NOV/FRI/30 885.90 885.15 68.40 56.25 45.85

DEC/SAT/01 TRADING HOLIDAY

DEC/SUN/02 TRADING HOLIDAY

DEC/ MON /03 880.40 882.10 35.55 49.90 40.00

DEC/ TUE /04 911.95 914.60 54.90 62.35 50.45

DEC/WED/05 901.58 902.32 51.25 55.69 49.36

DEC/THU/06 898.00 902.55 46.00 45.10 34.50

DEC/FRI/07 TRADING HOLIDAY

DEC/SAT/08 TRADING HOLIDAY

DEC/SUN/09 TRADING HOLIDAY

DEC/ MON /10 923.75 926.80 52.00 52.85 40.30

DEC/TUE/11 918.55 918.10 60.00 46.55 34.55

DEC/WED/12 919.95 921.55 54.00 43.70 31.70

DEC/THU/13 944.25 946.85 60.10 49.50 35.05

DEC/FRI/14 984.95 985.40 95.15 74.35 45.00

DEC/SAT/15 TRADING HOLIDAY

DEC/SUN/16 TRADING HOLIDAY

DEC/MON/17 1002.20 997.60 109.35 84.75 63.15

DEC/TUE/18 1058.65 1062.05 125.00 133.10 106.55

DEC/WED/19 1052.10 1056.15 153.95 125.35 98.35

DEC/THU/20 1018.50 1022.05 119.05 89.70 62.00

DEC/FRI/21 979.80 981.55 112.60 51.20 26.25

DEC/SAT/22 TRADING HOLIDAY

DEC/SUN/23 TRADING HOLIDAY

DEC/MON/24 912.32 902.54 89.32 75.64 55.21

48

ANALYSISThe Objective of this analysis is to evaluate the profit/loss position futures and options.

This analysis is based on sample data taken of HDFC BANK LIMITED scrip. This

analysis considered the December contract of HDFC Bank. The lot size of HDFC is 200,

the time period in which this analysis done is from 28-11-2012 to 25-11-2012.

DATE PRICE

FUTURE

NOV/WED/28 921.85

NOV/THU/29 898.90

NOV/FRI/30 885.15

DEC/ MON /03 882.10

DEC/ TUE /04 914.60

DEC/WED/05 902.32

DEC/THU/06 902.55

DEC/ MON /10 926.80

DEC/TUE/11 918.10

DEC/WED/12 921.55

DEC/THU/13 946.85

DEC/FRI/14 985.40

DEC/MON/17 997.60

DEC/TUE/18 1062.05

DEC/WED/19 1056.15

DEC/THU/20 1022.05

DEC/FRI/21 981.55

DEC/MON/24 984.20

49

FUTURE MARKET

BUYER SELLER

28/11/2012 (Buying) 921.85 921.85

24/12/2012(Cl., period) 984.20 984.20

Profit 62.35 Loss 62.35

Profit 200 x 62.35=12470, Loss 200 x 62.35=12470

Because buyer future price will increase so, he can get Profit. Seller future price also

increase so, loss also increase, Incase seller future will decrease, and he can get profit.

The closing price of HDFC Bank at the end of the contract period is 984.20 and this is

considered as settlement price.

The first column explains TRADING DATE.

Second Column explains the SPOT MARKET PRICE in cash segment on that date.

The third column explains the FUTURE MARKET PRICE in cash segment on that

date.

The Fourth column explains call premiums amounting 900, 930, 960.

50

CALL PRICES HDFC BANK FUTURES & OPTIONS

DATE PRICE CALL OPTIONSPOT FUTURE 900 930 960

NOV/WED/28 922.75 921.85 100.05 85.75 73.10

NOV/THU/29 898.85 898.90 79.20 66.25 47.00

NOV/FRI/30 885.90 885.15 68.40 56.25 45.85

DEC/SAT/01 TRADING HOLIDAYDEC/SUN/02 TRADING HOLIDAYDEC/ MON /03 880.40 882.10 35.55 49.90 40.00

DEC/ TUE /04 911.95 914.60 54.90 62.35 50.45

DEC/WED/05 901.58 902.32 51.25 55.69 49.36

DEC/THU/06 898.00 902.55 46.00 45.10 34.50

DEC/FRI/07 TRADING HOLIDAYDEC/SAT/08 TRADING HOLIDAYDEC/SUN/09 TRADING HOLIDAYDEC/ MON /10 923.75 926.80 52.00 52.85 40.30

DEC/TUE/11 918.55 918.10 60.00 46.55 34.55

DEC/WED/12 919.95 921.55 54.00 43.70 31.70

DEC/THU/13 944.25 946.85 60.10 49.50 35.05

DEC/FRI/14 984.95 985.40 95.15 74.35 45.00

DEC/SAT/15 TRADING HOLIDAYDEC/SUN/16 TRADING HOLIDAYDEC/MON/17 1002.20 997.60 109.35 84.75 63.15

DEC/TUE/18 1058.65 1062.05 125.00 133.10 106.55

DEC/WED/19 1052.10 1056.15 153.95 125.35 98.35

DEC/THU/20 1018.50 1022.05 119.05 89.70 62.00

DEC/FRI/21 979.80 981.55 112.60 51.20 26.25

DEC/SAT/22 TRADING HOLIDAYDEC/SUN/23 TRADING HOLIDAYDEC/MON/24 912.32 902.54 89.32 75.64 55.21

INTERPRETATIONCALL OPTION:

51

BUYERS PAY OFF:

As brought 1 lot of HDFC Bank that is 200, those who buy for 900, paid 100.05 Premium

per share.

Settlement price is 984.20

Spot price 984.20

Strike price 900.00

Amount 84.20

Premium paid (-) 100.05

Net Loss 15.85 x 200 = -3170

Buyer Loss = Rs.3170 (Loss)

Because it is negative it is in the money contract, hence buyer will get more loss, incase spot

price decrease buyer loss also increase.

SELLERS PAY OFF:

It is in the money for the buyer, so it is in out of the money for seller; hence his profit is also

increase.

Strike price 900.00

Spot price 984.20

Amount +84.20

Premium Received 100.05

Net profit 15.85 x 200 = +3170

Seller Profit = Rs.3170 (Net Amount)

Because it is positive it is out of the money, hence seller will get more profit, incase spot price

increase in below strike price, seller get loss in premium level.

PUT PRICES

HDFC BANK FUTURES & OPTIONS

52

DATE PRICE CALL OPTION

SPOT FUTURE 900 930 960NOV/WED/28 922.75 921.85 100.05 85.75 73.10

NOV/THU/29 898.85 898.90 79.20 66.25 47.00

NOV/FRI/30 885.90 885.15 68.40 56.25 45.85

DEC/SAT/01 TRADING HOLIDAYDEC/SUN/02 TRADING HOLIDAYDEC/ MON /03 880.40 882.10 35.55 49.90 40.00

DEC/ TUE /04 911.95 914.60 54.90 62.35 50.45

DEC/WED/05 901.58 902.32 51.25 55.69 49.36

DEC/THU/06 898.00 902.55 46.00 45.10 34.50

DEC/FRI/07 TRADING HOLIDAYDEC/SAT/08 TRADING HOLIDAYDEC/SUN/09 TRADING HOLIDAYDEC/ MON /10 923.75 926.80 52.00 52.85 40.30

DEC/TUE/11 918.55 918.10 60.00 46.55 34.55

DEC/WED/12 919.95 921.55 54.00 43.70 31.70

DEC/THU/13 944.25 946.85 60.10 49.50 35.05

DEC/FRI/14 984.95 985.40 95.15 74.35 45.00

DEC/SAT/15 TRADING HOLIDAYDEC/SUN/16 TRADING HOLIDAYDEC/MON/17 1002.20 997.60 109.35 84.75 63.15

DEC/TUE/18 1058.65 1062.05 125.00 133.10 106.55

DEC/WED/19 1052.10 1056.15 153.95 125.35 98.35

DEC/THU/20 1018.50 1022.05 119.05 89.70 62.00

DEC/FRI/21 979.80 981.55 112.60 51.20 26.25

DEC/SAT/22 TRADING HOLIDAYDEC/SUN/23 TRADING HOLIDAYDEC/MON/24 912.32 902.54 89.32 75.64 55.21

INTERPRETATION

PUT OPTION:

BUYERS PAY OFF:

53

Those who have purchase put option at a strike price of 900, the premium payable is 71.10

On the expiry date the spot market price enclosed at 984.20

Strike price 900.00

Spot price 984.20

Net pay off 84.20

Premium Paid 71.10

Net profit 13.10 x 200 = 2620

Already, premium paid 71.10, so it can get profit is 2620

Because it is Positive, out of the money contract, hence buyer will get more profit, incase spot

price increase buyer get loss in premium level.

SELLERS PAY OFF:

As seller is entitled only for premium so, if he is in profit and also seller has to borne total

profit.

Spot price 984.20

Strike price 900.00

Amount -84.20

Premium Received 71.10

Net profit 13.10 x 200 = -2620

Already premium received 71.10 so, it can get loss is 2620

Because it is negative, in the money contract, Hence seller gets more loss, incase spot price

increase in above strike price seller can get profit in premium level.

DATA OF HDFC BANK – THE FUTURES & OPTIONS OF THE DECEMBER MONTH

DATE SPOT PRICE FUTURE PRICE

NOV/WED/28 922.75 921.85

NOV/THU/29 898.85 898.90

54

NOV/FRI/30 885.90 885.15

DEC/ MON /03 880.40 882.10

DEC/ TUE /04 911.95 914.60

DEC/WED/05 890.30 889.80

DEC/THU/06 898.00 902.55

DEC/ MON /10 923.75 926.80

DEC/TUE/11 918.55 918.10

DEC/WED/12 919.95 921.55

DEC/THU/13 944.25 946.85

DEC/FRI/14 984.95 985.40

DEC/MON/17 1002.20 997.60

DEC/TUE/18 1058.65 1062.05

DEC/WED/19 1052.10 1056.15

DEC/THU/20 1018.50 1022.05

DEC/FRI/21 979.80 981.55

DEC/MON/24 984.20 984.20

55

INTERPRETATION

The future price of M/S. HDFC Bank is moving along with the market price.

If the buy price of the future is less than the settlement price, than the buyer of a future gets

profit.

If the selling price of the future is less than the settlement price, than the seller incur losses.

Graph Showing the Price Movement of Spot & Future Price

0200400600800

10001200

Contract Dates

Pr ic e Spot Price

Future Price

56

CHAPTER-V

FINDINGS

CONCLUSIONS

LIMITATIONS

SUGGESTIONS

BIBLIOGRAPHY

57

FINDINGS

In the month of Nov-09 there exists very high risk i.e (97.42) when compared to

other months.

In the period Jan-09 to Dec-09 of Stock options there exists high return in the

month of Nov (14.24), less return in the month of Dec (0.82) and negative returns

in the month of February and March.

In the month of Nov there exists high risk when compared to all other 11 months.

In the period Jan-09 to Dec-09 there exists high positive Correlation ie (0.96)

between Index options and Stock option, So all data points tilts upward towards

right direction. In the month of Feb there exists low correlation ie(0.28)

58

CONCLUSIONS

Derivates market is an innovation to cash market. Approximately its daily turnover reaches

to the equal stage of cash market. The average daily turnover of the NSE derivative

segments. In cash market the profit/loss of the investor depend the market price of the

underlying asset. The investor may incur huge profits or he may incur huge profits or he may

incur huge loss. But in derivatives segment the investor the investor enjoys huge profits with

limited downside. In cash market the investor has to pay the total money, but in derivatives

the investor has to pay premiums or margins, which are some percentage of total money.

Derivatives are mostly used for hedging purpose. In derivative segment the profit/loss of the

option writer is purely depend on the fluctuations of the underlying asset.

59

LIMITATIONS OF THE STUDY :

The following are the limitation of this study.

The scrip chosen for analysis is M/S.HDFC BANK and the contract taken is

December 2012 ending one –month contract.

The data collected is completely restricted to the M/S.HDFC BANK of December

2012; hence this analysis cannot be taken universal.

As the futures and options are only taken for making the analysis and the

outcome may not be applicable to other components of derivatives.

A full study of the hedging strategies may not be overviewed

60

SUGGESTION

In bullish market the call option writer incurs more losses so the investor is suggested to

go for a call option to hold, where as the put option holder suffers in a bullish market, so

he is suggested to write a put option.

In bearish market the call option holder will incur more losses so the investor is suggested

to go for a call option to write, where as the put option writer will get more losses, so he is

suggested to hold a put option.

In the above analysis the market price of M/S. HDFC is having low volatility, so the call

option writers enjoy more profits to holders.

The derivative market is newly started in India and it is not known by every investor, so

SEBI has to take steps to create awareness among the investors about the derivative

segment.

In order to increase the derivatives market in India, SEBI should revise some of their

regulations like contract size, participation of FII in the derivatives market.

Contract size should be minimized because small investors cannot afford this much of

huge premiums.

SEBI has to take further steps in the risk management mechanism.

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

61

Bibliography

Books:Financial Institutions & Markets, Meir Kohn, Oxford University Press

Financial Management; 2nd Edition, Prasanna Chandra, Tata Mc Graw Hill

Financial Markets and Services, Gordan and Natrajan, Tata Mc Graw Hill

Security Analysis & Portfolio Management, Donald E Fischer &Ronald R Jordan,

Prentice Hall Of India

Derivatives Core Module Work book, Advisors of National Stock Exchange of India,

NSE Press

Websites:www.derivativesindia.com

www.indianinfoline.com

www.nseindia.com

www.bseindia.com

www.5paisa.com

Journals: “Journal of FINANCE”, 2011

“Journal of EMPIRICAL FINANCE IMPACT FACTOR”, 2012

62