CHAPTER -1 Introduction Need and importance of the study Objectives of the study Methodology of the study Limitations of the study 1
Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
CHAPTER -1
Introduction Need and importance of the study Objectives of the study Methodology of the study Limitations of the study
1
INTRODUCTION
The past decade was a golden age for stock exchanges in India. It is
expected to continue the same system, which enhances the scope of future
corporate finance in India, thanks to the reforms in stock market. Earlier in the
initial days of secondary market, derivatives trading on stock exchange in India
used to take place through open country without use of information technology
for immediate matching or recording of trades. With the advent of technology, the
trading in securities and derivatives is done with the trading terminals. The SCRA
(Security Contracts Regulation Act) was amended in December 1999 to include
derivatives within the ambit of securities and regularity framework was developed
for governing derivatives trading.
Derivative trading commenced in India in June 2000, after SEBI
granted the final approval to this effect in May 2000. SEBI permitted the
derivative segments of stock exchanges, NSE and BSE and their clearing House/
Corporation to commence trading and settlement in approved derivatives
contracts. The scope of the study in derivatives trading is very vast.
The National Stock Exchange of India Limited (NSEIL) has been setup to
provide nation_ wide screen based trading facilities to investors. It is a significant
move towards upgrading trading facilities available in the country and Indian
financial markets in the line with international markets .NSE has been promoted
by leading financial institutions, banks insurance companies and their
subsidiaries.
NSE operations on the "NATIONAL EXCHANGE OF AUTOMATED
TRADING" (NEAT-F & O) SYSTEM, a fully automated screen based trading
system adopting the principles of an order driven market and enabling trading
members to trade directly from their offices through a sophisticated
telecommunication network.
2
NEED AND IMPORTANCE OF THE STUDY
The need for the study is felt as many as people in India are unaware of
trading process in Stock Market.
Difficulties like lack of easy access to the market, inadequacy of the market
infrastructure, and the problems in locating the right intermediaries. Lack of
guidance and advice inhabited the investors from investing in the Stock Market.
At least to have the basic knowledge about the various functions of the stock
exchanges is very important.
After liberalization in 1991, our stock markets experienced drastic changes
due to setting up SEBI in 2000. Integration of market, new technology, in trading,
introduction of derivatives trading, foreign participation etc. These led to the
development of Stock Market.
The actual process of derivatives trading which immediate accesses on the
market watch available to the client in placing the orders for buying or selling of
shares is to be known.
What are the most important considerations while selecting a share? Its past
performance? Or its price? Or its volatility? Or its profit? So how should one or
more identify the buy or sell the shares and F&O segment? We will walk through
the investment of stock market.
First one needs to think about one's investment golf rather than the
performance or price or returns. If one is looking for a very short period to more
returns in the share market and derivatives market. In this derivatives market the
risk control measurements the NSCCL has developed a comprehensive risk
containment mechanism for the F&O segment.
The emergence of the market for derivatives products, most notably
forward, futures and options can be traced back to the willingness of risk -averse
economic agent to guard themselves against certainties arising out of the
3
Fluctuations in asset prices. By their very nature, the financial markets are marked
by a very high degree of validity.
The importance of derivative trading is traded on the exchange and those
traded for one to one or over the counter and another importance in the derivative
trading is future & options.
OBJECTIVES OF THE STUDY
1. To study futures and options trading system in Steel City Securities
Limited.
2. To evaluate the risks & costs in derivatives trading.
3. To understand the process of clearing and settlement of derivatives trading
in Steel City Securities Limited and
4. To summarize and to suggest.
METHODOLOGY
The data collected for the present study is as follows:
PRIMARY DATA
1. Collecting the information from the head of the each department and from
the staff working in those departments.
2. Interacting with the operators at the compilers and at the clients trading in
Steel City Securities Limited.
3. Participating in the mock trading conducted by derivatives market in India.
4
SECONDARY DATA
1. Referring the capital market (dealers) module published by NSE's
certification in financial markets.
2. Referring the derivatives core module work book published by NSEs
certification in financial markets.
LIMITATIONS
As the subject chosen comparatively new one, the study suffers from certain
limitations.
1. Stock Exchange is an ocean and my study is an attempt to understand
which is a drop in the ocean. The activities in stock exchange and
derivatives market are vast and to understand all the activities is a
difficult task, as there are only few persons who can provide
information.
2. To know the entire activities of stock exchange is very difficult as it
takes a long period to understand.
3. Though the system, people and time were there, some information
regarding certain topics in stock trading was not collected due to non-
availability of time to the key persons from their busy schedule.
4. Because of the comprehensive nature of some information is not
disclosed though sources of information are available.
5
CHAPTER-2
Industrial profile of the stock Brokers and dealers
Profile of steel city securities ltd
6
INDUSTRY PROFILE
The Indian financial system can be varied through subject to understand.
Broadly, The Indian Financial System can be categorized into the following
systems, which are having the following priorities in the respective field.
Financial Markets:
1. Capital markets.
2. Money markets.
3. Commodity Markets.
4. Bill Markets. Financial
Institutions:
1. Banks
2. Financial Institutions.
Financial Services:
1. Brokerage Services.
2. Distribution Network
3. Incidence Advisors.
Financial Intermediaries.
All the above-mentioned segments of financial system of India Economy
have their own importance in the rapid development of the Indian Economic
Scenario. In these contents, the rural financial services are going in rapid way.
Among the services available mutual funds will also constitute a vital place.
Over the years, the stock market industry has undergone so many ups and
downs and since last few years or so, the industry looks to be settled and inching
towards a peak positions in the Indian financial services.
7
Stock market Industry has become a major vehicle for mobilization of
savings particularly forms the small end household sectors for the investment in
the stock market. In the view of growing importance in the capital market where
expanding investors based and the decisions to allow stock market to be set up in
the joint and public sector. It has become necessary to evaluate a comprehensive
set of SEBI guidelines for all round development and regulation of stock market
and for ensuring clients protection.
In India, the only stock market operating at the end of the June 1989 they
were 18 stock exchanges in India. Among the 18 stock exchanges, the first
organized setup at Bombay in 1857 are distinguished not only by its size but also it
has been recognized permanently, while the recognition for other markets is
renewed every five years. Stock markets are organized either as voluntary, non-
profit making association (Bombay, Ahmadabad, Indore) or public limited
companies (kolkata, Delhi, Banglore) or company limited by guarantee (Madras,
Hyderabad).
In India, the growth of stock exchanges has been linked to the growth of
corporate sector. Through a number of stock exchanges were setup before
independence but there was no all India legislation to regulate their working. Every
stock exchange followed its own methods of working to rectify this situation; the
SECURITY CONTRACTS (REGULATIONS) ACT was passed in 1956.
In 1965, 22 separate provincial stock exchanges were merged into three
regional stock exchanges and in 1973 these/in turn, were combined to form the
national exchange (NSE) under the title of the stock exchange that has trading
floors in many former provincial center. At present there are 21 stock exchanges in
our country. The over-the counter exchange of India began its operations in 1992.
Since 2000, trading in securities is screen based on Derivatives.
In order to carry out the derivatives market, the company must be duly
registered with SEBI and at present their number of securities Ltd. Who deals with
8
the derivatives market in India, some of the leading securities in Hyderabad are
mentioned below.
HDFC Securities
India Info line Securities Ltd.
CIL Securities Ltd.
ZEN Securities Ltd.
Share Khan Ltd.
LKP Securities.
Kotak Securities.
Keeping in mind, the rapid development of derivatives market in India, various
securities are still evaluating and keep on establishing to serve the Indian
public. With a view to making the derivatives market more popular with the share
market, the securities Ltd. Are availing so many concessions such as less
brokerage and free depositary participants accounts to their customers.
S&PCNX NIFTY:
The S & P CNX NIFTY is based upon solid economic research it was designed not
only as a barometer of market movement but also to be a foundation of the new
world of financial product on the index like index futures, index options and index
funds. A trillions calculations were expanded to evolve the rules inside the S&P
CNX Nifty index.
The result of this work is remarkably simple:
The correct size is to use is 50.
Stocks considered for the S&P CNX Nifty must be liquid by the 'Impact
cost'criterion.
The largest 50 stocks that meet the criterion go into the index.
S &P CNX Nifty is a contrast to the adopt methods that have gone into index
9
considered in the preceding years, their indexes were made out of initiation and
lacked a scientific basis. The research that leads up to S&P CNX Nifty is well
respected internationally as a pioneering effort in better understanding how to
make a stock market index.
The nifty is uniquely equipped as an index for the index market owing to its
Low market impact cost
High edging effectiveness
The good diversification of Nifty low initial margin requirement. Finally,
Nifty is calculated using NSE prices, the most liquid exchange in India, thus
making it easier to do arbitrage for index derivatives.
The derivatives market is expected to grow in futures we also, and the
industry is going to be one of the leading sectors in capital market.
COMPANY PROFILE
HISTORICAL BACKGROUND OF THE COMPANY
STEEL CITY SECURITIES LIMITED is a public limited company with its
head office located in the heart of the city of Visakhapatnam. The main office of
Steel City Securities Limited was incorporated on 22nd February 1995 as a member
of National Stock Exchange (NSE). Steel City Securities Limited raised equity of
Rs. 105 lakhs on 22.6.95 and obtained the trading membership of National Stock
Exchange (NSE) of India limited on its capital market segment.
The first VSAT for its trading workstation (TWS) at Hyderabad was
installed in 1995 and the second at Visakhapatnam in April 1996. At present there
are 63 VSATS installed at 47 centers in Andhra Pradesh, Orrisa, Karnataka and
Tamil Nadu. There are 190 computer-trading terminals connected to these VSATs
at the centers (each VSAT can have 5 TWS connected) membership of National
Stock Exchange (NSE) of India limited on its capital market segment.
10
Steel City Securities Limited (SCSL) is working with about 15 branches and
29 franchises for NSE and 8 branches and 3 franchises for BSE. Every branch is
fully equipped and independently connected to the NSE hub at Mumbai. Every
branch is having 2 to 5 trading terminals connected to VSAT. INSAT 3C satellite
is used fir trading. SCSL has bought BSE terminal also enabling the clients to
trade both in NSE and BSE.
COMPANY POLICY
The basic policy of SCSL is not to indulge in own trading. The basic
principle of SCSL is total commitment in service to all clients. The service of
SCSL is prompt and hence there are no delays in payout of funds or deliveries to
any client. SCSL collects pay-in T+l and payout in T+3 days.
Through SCSL, trade in NSE per day is 200 Crores whereas, trade in BSE
per day is 4 crores.
CAPITAL:
The base capital to set up a trade center is 1 Crore. SCSL raised equity of
Rs.105 Lakhs as base capital to NSE when it was set-up. Every trade corporation
has to maintain a reserve of some amount with NSE. At present,SCSL has 7.5 Crores as margin with NSE.
WORKING STAFF:
There is 100 to 150 staff employed in SCSL. The staff draws a salary basing
on the cadre they employed. The salaries in SCSL vary from Rs.2000 to Rs. 20000
per month basing on the cadre of the employee.
EMPLOYEE RECRUITMENT:
In SCSL the top managements selects the candidates and the letter of
appointment or rejection is sent to the Board of Directors. The Directors do the
placement in SCSL. The placement can either be in the Head Office or in any other
branches of SCSL.
11
ORGANIZATION STRUCTURE:
In SCSL, the chairman also called, as the Managing Director is the head of
the organization. There are two Executive Directors and one Operations Manager
(DP) working under him, who is responsible for systems, operations and
inspection. Three senior Managers assist the Director of operations for Finance and
Accounts, Operations and Systems. There are 2 managers for trading and
inspection.
12
13
ORGANISATION STRUCTURE Of SCSL
14
15
CHAIRMAN
Executive Director Executive Director (Surveillance)
Director (Operations)
Sr.Manager(Operations)
Sr.Manager(Finance & Accts)
(Inspection)
Manager (DP Operations) Deliveries
Sr.Manager (Systems)
Software Hardware Trading
Sr.Manager (Systems)
Manager (Systems)
Dy. Manager (Systems)
System Administrator Sr.Data Processing Manager Network(Systems) Systems Agent
Database Administrator Asst. Processing Sr.Hardware Technician Sr.Programmer
Dy.Database Administrator Jr. Data Processing Hardware Technician Programmer
Asst. Database Administrator ComputerJr. HardwareTechnician Jr.Programmer
Trainee Trainee Technician
Trainee Trainee Operator Trainee Programmer
BOARD OF DIRECTORS OF STEEL CITY SECURITIES LIMITED
Sri G. Sree Rama Murthy - Chairman and Managing Director
Sri G. Raja Gopal Reddy - Director
Sri K. Satyanarayana - Director
Sri Satish Kumar Arya - Whole-Time Director
Sri G. Satya Rama Prasad - Director
The various service departments in SCSL are:
Systems Department
Inspection Department
Personal Department
Accounts
Deliveries
Depository Participant
EMPLOYEE RELATION:
The employee relations at all levels remain cordial. Training, promotion
and transfers are done in SCSL to motivate and increase the morale of the staff.
All the employees in SCSL from top to bottom perform their services with
sincerity, hard work, dedication and with team spirit due to which SCSL is
considered as one of the best stock trading firm in India.
MARKETING ACTIVITIES:
SCSL never undertakes marketing activities, as it never felt the need to take
up marketing activities. Due to their unremarkable track record, the clients
themselves come to SCSL.
16
SCSL concentrates only on providing effective stock trading services to its
customers due to which the clients themselves approach the company.
FUNCTIONS OF SCSL:
SCSL provides stock services to its clients and members.
SCSL provides complete automated system both in trading and settlement
process. SCSL enables clients to trade both in NSE and BSE.
SCSL converts the paper shares into electronic shares through DMAT
process.
SCSL provides market information to its clients regularly enabling them to
trade in profitable stocks. It acts as clearing member for trades taking place through SCSL.
SCSL is a depository participant of NSDL & CDSL and it is a trading and
clearing member of NSE and BSE.
FACILITIES PROVIDED TO CLIENTS IN SCSL:
Gross exposure facility given in SCSL is 5 times. But up to 10 times it is
relaxed to clients. Turnover facility given in SCSL to clients is 33.33 times. But,
the restriction is not considered. Minimum of Rs. 20000 margin money is collected
from professional clients who trade for speculation purpose. For delivery purpose
no margin money is collected.
Due to the total commitment in service to its clients, SCSL is considered to
be one of the best stock broking companies in India.
17
CHAPTER -3
Theoretical Frame work Capital Market Primary Market Secondary Market
Derivatives Market Futures Options Risk Management
18
THEORETICAL FRAME WORK
CAPITAL MARKET:
An efficient capital is a pre-requisite of economic development. An ideal
capital market is one where finance is used as handmaid to serve the needs of
industry. The capital market must facilitate the movement of capital to the point of
highest yield.
The main components apart from financial institutions of a capital market are
PRIMARY MARKET
SECONDARY MARKET
PRIMARY MARKET:
The new issues market where new securities, i.e. shares or bonds that have
never been previously issued or offered represent the market. Both the new
companies and existing ones can rise capital inner primary market. The primary
market helps the corporate enterprises or going in for expansion, diversification,
growth or modernization.
GROWTH AND DEVLOPMENT OF PRIMARY MARKET IN INDIA:
The primary market in India is not fully developed as compared to other
countries like USA, UK, and GERMANY. But there has been tremendous growth
in the sphere of new issued activity in India in 1980's and 1990's the total amount
of capital raised during 1961 was only Rs. 74 crores which increased to Rs 301.1
crores during 1981. Subsequently the liberalization of industrial and new capital
issues policies in 1984 to 1985 gave a real short in the arm to the securities market
further the relaxation of norms relating to foreign investments and incentives
provided by the government helped to sustain the impetus of growth in the market.
19
The securities scam during 1991 costs a tremendous setback to the growing
new issue market in India. But the new economic policy of the Narasimha Rao
government and these setting up of SEBI to promote orderly has to be regarded as
one of the most important developments on the securities market of India in recent
years. During the year 1993 there has been a tremendous growth in the new issue
activity resulting into Rs.19825.65 crores of capital raised by non-government
public limited companies in India.
SECOND AY MARKET/ STOCK MARKET
Stock market represents the secondary markets where existing securities
(Shares & Debentures) are traded. Stock exchange provides an organized
mechanism for purchase and sale of existing securities.
By the end of 1993-1994, there were 23 stock exchanges in our country. The
daily turnover at these stock exchanges during 1993-94 was to tune of Rs.3877.8
million. At present, there are 24 stock exchanges in our country. Stock exchanges
provide a place where securities of different companies can be purchased and sold.
Stock exchange is a body of persons Weather incorporated OT Itfft, iOTmed
with a view to helping, regulating and controlling the business of buying and
selling of securities.
Stock exchanges are organized and regulated market for various securities
issued by corporate sector and other institutions. Stock exchange acts as
investment market for buyer and seller of securities.
The number of official Stock exchanges in India has increases from 9 in
1979-1980 to 24 as on today. India has now the largest number of organized and
recognized stock exchange in the world. All of them are regulated by the SEBI.
They are organized either as voluntary, non profit making associations (VIZ,
MUMBAI, AHMADABAD, INDORE) or public limited companies (VIZ,
KOLAKATA, DELHI, BANGALORE) or company limited by guarantee (VIZ,
CHENNAI, HYD).
20
All stock exchanges have two parts: The new issue market or primary
market & secondary market. While the primary market supplies fresh or additional
capital to the companies, the securities already issued are floated on primary
market are traded on the secondary market. The secondary market doesn't play any
direct role in making funds available to the corporate role in these industrial
securities by making them liquid, i.e. by providing facilities for continues, regular
and buying and selling those of securities. Primary market deals in new securities
while secondary market deals in already existing acquire or buy securities so
acquired among them selves on the stock market.
DERIVATIVES 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. As instruments of risk management, these generally do
not influence the fluctuations in the underlying asset prices. However, by locking-
in asset prices on the profitability and cash flow situation of risk-averse investors.
DEFINITION
Derivative is a product whose value is derived from the value of one or
more basic variables called bases (underlying asset, index, or reference rate), 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 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.
21
A contract that derives its value from the prices, or index of prices,
underlying securities.
Derivatives are securities under the SC(R)A and hence the regulatory
framework under the SC(R) A governs the trading of derivatives.
The derivatives market performs a number of economic functions.
Prices in an organized derivatives market reflect the perception of market
participants about the future and lead 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.
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.
An important incidental benefit that flows from derivatives trading is that
it acts as a catalyst for new entrepreneurial activity. The derivatives have
a history of attracting many bright, creative, well-educated people with
an entrepreneurial attitude. They often energize others to create new
businesses; new products and new employment opportunities, the
benefits of which are immense.
Derivatives markets help increase savings and investment in the long run.
Transfer of risk enables market participants to expand their volume of
activity.
22
TYPES OF DERIVATIVES
The most commonly used Derivatives contracts are
1. Forwards
2. Futures
3. Options
4. Index Derivatives
5. Interest rate Derivative
6. Swaps
7. Standard Oil's Bond Issue
8. ICON
PARTICIPANTS IN A DERIVATIVE MARKET
Derivatives attract three types of participants
Hedges
Speculators
Arbitrageurs
GLOBAL DERIVATIVES MARKETS
Futures history can be traced back to middle ages where markets were
meant to address the needs of the farmers and the merchants. The Chicago Board
Of Trade(CBOT) was established in 1848 to bring farmers and merchants together.
Initially, its main task was to standardize the quantities and qualities of the grains
that were traded. The first futures type contract developed was called " to-arrive
contract". The CBOT now offers on many different underlying assets in
commodities and financial markets.
23
Marjy other exchanges in the world now offer futures contracts. Eurex, the
German-Swiss derivatives exchange, was the world's biggest financial futures
exchange at the end of 1999, overtaking the Chicago Board Of Trade for the first
time after a huge increase in contracts traded in 1999. Eurex traded more than 379
million contracts during 1999, 53% more than in 1998. This is expected to be well
above the comparable figure for the CBOT, where officials are expecting a fall of
about 10% from the 1998 total, when record 281.2 million contracts were traded.
LIFFE, the London market, is also expecting a sharp fall in volumes to some
120 million contracts, compared with 194 million in 1998. MATIF, the French
derivatives market traded 183 million contracts in 1999, more than double its 1998
total. LIFFE lost its European lead when trading in the futures contracts on 10-year
German government bonds (bunds) migrated to the electronic Eurex system two
years ago. Like the CBOT, trading volumes are also likely to be lower at the
Chicago Mercantile Exchange, the second biggest US futures market.
Major Equity Derivative Exchanges in the World
1. Chicago Mercantile Exchange (CME)4
2. Eurex
3. Hong Kong Futures Exchange
4. The London Int. Financial Futures and Options Exchange (LIFFE)
5. Singapore Exchange
6. Sydney Futures Exchange
24
Top 10 Stock Index Contracts
Rank Index Exchange Avg. Daily
Volume
YE 98 Open
Interest
1 S&P 500 Futures CME 124,724 379062
2 DAX Cash Options Eurex 118.843 957284
3 CAC 40 Futures MONEP 65.251 273387
4 OMX Futures OMS/OML 36184 240.364
5 IBEX Futures MEFFRV 34236 72363
6 NIKKIE 225 Futures OSE 32504 217474
7 HANG SENG Futures HKFE 27737 37571
8 FTSE100 Futures LIFFE 27600 194586
9 DAX Futures Eurex 27528 55492
10 MIB 30 Futures IDEM 23398 2392
25
DERIVATIVES MARKET IN INDIA
Derivatives markets broadly can be classified into two categories, those that
are traded on the exchange and those traded one to one or 'over the counter7. They
are hence known as
Exchange Traded Derivatives
OTC Derivatives (Over The Counter)
OTC Equity Derivatives
Traditionally equity derivatives have a long history in India in the OTC
market.
Options of various kinds (called Teji and Mandi and Fatak) in
unorganized markets were traded as early as 1900 in Mumbai.
The SCRA however banned all kind of options in 1956.
APPROVAL FOR DERIVATIVES TRADING
The first step towards introduction of derivatives trading in India was the
promulgation of the Securities Laws (Amendment) Ordinance, 1995, which
withdrew the prohibition on options in securities. The market for derivatives,
however, did not take off, as there was no regulatory framework to govern trading
of derivatives. SEBI set up a 24-member committee under the Chairmanship of
Dr.L.C.Gupta on November 18,1996 to develop appropriate regulatory framework
for derivatives trading in India. The committee submitted its report on March 17,
1998 prescribing necessary pre-conditions for introduction of derivatives trading in
India. The committee recommended that derivatives should be declared as
'securities' so that regulatory framework applicable to trading of 'securities' could
also govern trading of securities.
SEBI also set up a group in June 1998 under the Chairmanship
of ProfJ.R.Varma, to recommend measures for risk containment in derivatives
market in India. The report, which was submitted in October 1998, worked out the
26
Operational details of margining system, methodology for charging initial margins,
broker net worth, deposit requirement and real-time monitoring requirements.
The SCRA was amended in December 1999 to include derivatives within
the ambit of 'securities' and the regulatory framework was developed for governing
derivatives trading.
The act also made it clear that derivatives shall be legal and valid only if
such contracts are traded on a recognized stock exchange, thus precluding OTC
derivatives.
The government also rescinded in March 2000, their three-decade old
notification, which prohibited forward trading in securities.
Derivatives trading commenced in India in June 2000 after SEBI granted the
final approval to this effect in May 2000. SEBI permitted the derivative segments
of two stock exchanges, NSE and BSE, and their clearing house/corporation to
commerce trading and settlement in approved derivatives contracts. To begin with,
SEBI approved trading in index futures contracts based on S&P CNX Nifty and
BSE-30 (Sensex) index. This was followed by approval for trading in options based
on these two indexes and options on individual securities. The trading in index
options commenced in June 2001 and trading in options on individual securities
commenced in July 2001. Futures contracts on individual stocks were launched in
November 2001. Trading and settlement in derivative contracts is done in
accordance with the rules, bylaws and regulations of the respective exchanges and
their clearing house/corporation duly approved by SEBI and notified in the official
gazette.
The following factors have been driving the growth of financial derivative:
1. Increased volatility in asset prices in financial markets.
2. Increased integration of national financial markets with the international
markets.
3. Marked improvement in communication facilities and sharp decline in their
costs.
27
4. Development of more sophisticated risk management tools, providing
economic agents a wider choice of risk management strategies.
5. 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.
FACTORS AFFECTING DERIVATIVES MARKET:
Macro Economic Factors:
Macro economic factors play an important role in every market and same is
the case with the Derivatives market.
National & International Political Stability
Wars
Petroleum Products
Government Policies
Convertibility of currencies
PLR&CRR rates set by RBI
Monsoons
Micro Economic Factors:
Industry Specific
Industry Turbulence
Competition
TYPES OF DERIVATIVES:
Forwards:
A forward contract is an agreement to buy or sell an asset on a specified
date for a specified price. One of the parties to the contract assumes a long position
and agrees to buy the underlying asset on a certain specified future date for a
certain specified price. The other party assumes a short position and agrees to sell
28
the asset on the same date for the same price. Other contract details like delivery
date, the parties to the contract negotiate price and quantity bilaterally. The forward
contracts are normally traded outside the exchanges. However forward contracts in
certain markets have become very standardized, as in the case of foreign exchange,
thereby reducing transaction costs and increasing transactions volume. This process
of standardization reaches its limit in the organized futures market. Forward
contracts are very useful in hedging and speculation.
STRATEGIES TO USE DERIVATIVES TRADING
1. Hedging
The classic hedging application would be that of an exporter who expects to
receive payment in dollars three months later. He is exposed to the risk of
exchange rate fluctuations. By using the currency forward market to sell dollars
forward, he can lock on to a rate today and reduce his uncertainty. Similarly an
importer who is required to make a payment in dollars two months hence can
reduce his exposure to exchange rate fluctuations by buying dollars forward.
Example:
An Indian exporter receives an order on 01/05/2003 for supply of one lakh
containers of oil from USA and each container of oil costs him 100/-inclusive of
taxes and freight. The due date of payment is after 3 months i.e. 01/08/2003
Total Bill Amount: 1,00,00,000
$l=Rs. 47.15 (as on 01/05/2003)
Therefore, total payment to be received by the exporter is $ 212,089.
Suppose on the due date, market crashes and the rupee to dollar rate
depreciates to 48.50, the exporter has to bare heavy losses because he will receive
only $ 206,186 instead of $ 212,089.
Total loss: [{(10000000/47.15)-(10000000/48.5)} 47.15]= Rs. 2,80,393
(approx) here forwards are used by the exporter by locking on to a currency rate.
Lock rate: 1 $=47.50
29
Therefore the maximum loss he will have to bare in any worst scenario is
[{(10000000/47.50)-(10000000/47.15)} 47.15]= Rs. 73,695
Same example if applied to an importer, he will try to hedge his currency
fluctuation by locking into a fixed rate so that if rupee to dollar appreciates in
future he doesn't has to pay anything extra but only a fixed known amount.
2. SPECULATOR
If a speculator has information or analysis, which forecasts an upturn in a
price, then he can go long on the forward market instead of the cash market. The
speculator would go long on the forward, wait for the price to rise, and then take
a reversing transaction to book profits. Speculators may well be required to
deposit a margin upfront. However, this is generally a relatively small
proportion of the value of the assets underlying the forward contract. The use of
forward markets here supplies leverage to the speculator.
They are bilateral contracts and hence exposed to counter-party risk.
Each contract is custom designed, and hence is unique in terms of
contract size, expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the
asset.
If the party wishes to reverse the contract, it has to compulsorily go to
the same counter party, which often results in high prices being charged.
FUTURES:
History
Futures markets were designed to solve the problems that exist in forward
markets. A futures contract is an agreement between two parties to buy or sell an
asset at a certain price. But unlike forward contracts, the futures contracts are
standardized and exchange traded.
30
The first exchange that traded financial derivatives was launched in Chicago
in the year 1972. A division of the Chicago Mercantile Exchange, it was called the
International Monetary Market (IMM) and traded currency futures. The brain
behind this was a man called Leo Me lamed, acknowledged as the "father of
financial futures" who was then the Chairman of the Chicago Mercantile
Exchange. Before IMM opened in 1972, the Chicago Mercantile Exchange sold
contracts whose value was counted in millions. By 1990, the underlying value of
all contracts traded at the Chicago Mercantile Exchange totaled 50 trillion dollars.
These currency futures paved the way the way for the successful marketing
of a dizzying array of similar products at the Chicago Mercantile Exchange, the
Chicago Board of Trade, and the Chicago Board options Exchange. By the 1990's
these exchanges were trading futures and options on everything from Asian and
American stock indexes to interest –rate swaps, and their success transformed
Chicago almost overnight into the risk-transfer capital of the world.
Definition:
" A Futures contract is an agreement between two parties to buy or sell an
asset at a certain time in future for a certain price".
Futures terminology
Spot price: The price at which an asset trades in the spot market.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The period over which a contract trades. The index futures
contracts on the NSE have one-month, two-months and three-month expiry cycles,
which expire on the last Thursday of the month. Thus January expiration expires
on the last Thursday of the January and February expiration contract ceases trading
on the last Thursday of February. On the Friday following the last Thursday, a new
contract having a three-month expiry is introduced for trading.
Expiry date: it is the date specified in the futures contract. This is the last day on
which the contract will be traded, at the end of which it will cease to exist.
Contract size: The amount of asset that has to be delivered under one contract.
31
For instance, the contract size on NSE's futures market is 200 Nifties.
Basis: In the context of financial futures, basis can be defined as the futures price
minus the spot price. There will be a different basis for each delivery month for
each contract. In a normal market, basis will be positive. This reflects that futures
prices normally exceed spot prices.
Cost of carry: The relationship between futures prices and spot prices can be
summarized in terms of what is known as the cost of carry. This measures the
storage cost plus the interest that is paid to finance the asset less the income earned
on the asset.
Initial margin: The amount that must be deposited in the margin account at the
time a futures contract is first entered into is known as initial margin.
Marking-to-market: In the futures market, at the end of each trading day, the
margin account is adjusted to reflect the investor's gain or loss depending upon the
futures closing price. This is called Marking-to-market.
Maintenance margin: This is somewhat lower than the initial margin. This is set
to ensure that the balance in the margin account never becomes negative. If the
balance in the margin account falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the initial
margin level before trading commences on the next day.
Types of Futures
Commodity Futures
Index Futures
Stock Futures
Interest rate Futures
Treasury Bill Futures
Eurodollar Futures
32
Difference between Futures & Forwards
FUTURES FORWARDS
1 Traded on an Organized exchange 1 Over the Counter in nature
2 Requires Margin payments 2 No margin payments required
3 Daily settlement 3 Settlement takes place at the end of
the period
4 Standardized Contract terms 4 Customized Contract terms
5 Higher Liquidity 5 Lesser liquidity
Options
History:
Options made their first major mark in financial history during the tulip-bulb
mania in seventeenth century Holland. It was one of the most spectacular get rich
quick binges in history. The first tulip was brought into Holland by a botany
professor from Vienna. Over a decade, the tulip became the most popular and
expensive item in Dutch gardens. The more popular they became, the more tulip
bulb prices began rising. That was when options came into the picture. They were
initially used for hedging. By purchasing a call option on tulip bulbs, a dealer who
was committed to a sales contract could be assured of obtaining a fixed number of
bulbs for a set price. Similarly, tulip-bulb growers could assure themselves of
selling their bulbs at a set price by purchasing put options.
33
Later, however, speculators who found that call options were an effective
vehicle for obtaining maximum possible gains on investment increasingly used
options. As long as tulip prices continued to skyrocket, a call buyer would realize
returns far in excess of those that could be obtained by purchasing tulip bulbs
themselves. The writers of the put options also prospered as bulb prices spiraled
since writers were able to keep the premiums and the options were never exercised.
The tulip-bulb market collapsed in 1636 and a lot of speculators lost huge sums of
money. Hardest hit were put writers who were unable to meet their commitments to
purchase Tulip bulbs.
Although options have existed for a long time, they were traded OTC,
without much knowledge of valuation. The first trading in options began in Europe
and the US as early as the seventeenth century. It was only in the early 1900s that a
group of firms set up what was known as the put and call Brokers and Dealers
Association with the aim of providing a mechanism for bringing buyers and sellers
together. If someone wanted to buy an option, he or she would contact one of the
member firms. The firm would then attempt to find a seller or writer of the option
either from its own clients or those of other member firms. If no seller could be
found, the firm would undertake to write the option itself in return for a price. This
market however suffered from two deficiencies.
First, there was no secondary market and
Second, there was no mechanism to guarantee that the writer of the option
would honor the contract.
In 1973, Black, Merton and Scholes invented the famed Black-Scholes
formula. In April 1973, CBOE was set up specifically for the purpose of trading
options. The market for options developed so rapidly that by early '80s, the number
of shares underlying the option contract sold each day exceeded the daily volume
of shares traded on the NYSE. Since then, there has been no looking back.
34
CRITERIA FOR STOCKS ELIGIBLE FOR OPTIONS
TRADING
The following criteria will have to be met before a stock can be considered
eligible for options trading.
The stock should be amongst the top 200 scrips, on the basis of average
market capitalization during the last six months and the average free float market
capitalization should not be less than Rs. 750 Crore. The free float market
capitalization means the non-promoter holding in the stock. The non-promoter
holding in the company should be atleast 30%.
The stock should be amongst the top 200 scrips on the basis of average daily
volume (in value terms), during the last six months. Further, the average daily
volume should not be less than Rs. 5 Crore in the underlying cash market.
The stock should be traded on atleast 90% of the trading days in the last six
months.
The ratio of the daily volatility of the stock vis-a-vis the daily volatility of
the index should not be more than4, at any time during the previous six months.
Based on these criteria, SEBI approved trading in option contracts on 31
stocks.
Index options: These options have the index as the underlying. Some options are
European while others are American. Like indexing futures contracts, indexing
options contracts are also cash settled.
Stock options: Stock options are options on individual stocks. Options currently
trade on over 500 stocks in the United States. A contract gives the holder the right
to buy or sell shares at the specified price.
Buyer of an option: The buyer of an option is the one who by paying the option
premium buys the right but not the obligation to exercise his option on the
seller/writer.
35
Writer of an option: The writer of a call/put option is the one who receives the
option premium and is thereby obliged to sell/ buy the asset if the buyer exercises on
him.
Option price: Option price is the price, which the option buyer pays to the option
seller. It is also referred to as the option premium.
Expiration date: The date specified in the options contract is known as the
expiration date, the exercise date, the strike date or the maturity.
Strike price: The price specified in the options contract is known as the strike price
or the exercise price.
American options: American options are options that can be exercised at any time
upto the expiration date. Most exchange-traded options are American.
European options: European options are options that can be exercised only on the
expiration date itself. European options are easier to analyze than American options,
and properties of an American option are frequently deduced from those of its
European counterpart.
In-the-money option: An in-the-money (ITM) option is an option that would lead
to a positive cash flow to the holder if it were exercised immediately. A call option
on the index is said to be in-the-money when the current index stands at a level
higher than the strike price (i.e. spot price > strike price). If the index is much higher
than the strike price, the call is said to be deep ITM. In the case of a put, the put is
ITM if the index is below the strike price.
At-the-money-option: An at-the-money (ATM) option is an option that would lead
to zero cashflow if it was exercised immediately. An option on the index is at-the-
money when the current index equals the strike price (i.e. spot price = strike price).
36
Out-of-the-money option: An out-of-the-money (OTM) option is an option that
would lead to a negative cashflow it was exercised immediately. A call option on the
index is out-of-the-money when the current index stands at a level that is less than
the strike price (i.e. spot price < strike price). If the index is much lower than the
strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if
the index is above the strike price.
Intrinsic value of an option: The option premium can be broken down into two
components-intrinsic value and time value. The intrinsic value of a call is the
amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero.
Putting it another way, the intrinsic value of a call is Max [0, (St -K)] which means
the intrinsic value of a call is the greater of 0 or (St -K). Similarly, the intrinsic value
of a put is Max [0, (K -S t). K is the strike price and St is the spot price.
Time value of an option: The time value of an option is the difference between its
premium and its intrinsic value. Both calls and puts have time value. An option that
is OTM or ATM has only time value. Usually, the maximum time value exists when
the option is ATM. The longer the time to expiration, the greater is an option's time
value, all else equal. At expiration, an option should have no time value.
Differences between Futures and Options
Futures Options
1 Price is zero, Strike price moves 1 Strike price is fixed, price moves
2 Price is zero 2 Price is always positive
3 Linear pay-off 3 Non-Linear pay-off
4 Both long & short at risk 4 Only short at risk.
37
Similarities between Futures & Options
Futures & options
1 Exchange traded
2 Exchange defines the product
TYPES OF OPTIONSThere are two basic types of options, call options and put options.
Call Option: A call option gives the holder the right but not the obligation to buy
an asset by a certain date for a certain price.
Put Option: A put option gives the holder the right but not the obligation to sell an
asset by a certain date for a certain price.
There are a minimum of 5 strike prices, two 'in-the-money', one 'at-the-
money' and two 'out-of-the-money' for every call and put option. At any point of
time there are only three contracts available for trading, with 1 month, 2 months
and 3 months to expiry. These contracts expire on last Thursday of the expiry
month and have a minimum of 3 month expiration cycle.
RISK MANAGEMENT
Four steps in risk management:
Understand the nature of various risks.
Define a risk management policy for the organization and quantifying
Maximum risk that organization is willing to take if quantifiable.
Measure the risks if quantifiable and enumerate otherwise.
Build internal control mechanism to control and monitor all risks.
38
Step 1 - Understand Risks
Risks can be classified into three categories.
Price or Market Risk
Counterparty or Credit Risk
Operating Risks
Price Risks
This is the risk of loss due to change in market prices. Price risk can
increase further due to Market Liquidity Risk, which arises when large positions in
individual instruments or exposures reach more than a certain percentage of the
market, instrument or issue. Such a large position could be potentially illiquid and
be capable of being replaced or hedged out at the current market value and as a
result may be assumed to carry extra risk.
Counterparty Risks
This is the risk of loss due to a default of the Counterparty in honoring its
commitment in a transaction (Credit Risk). If the Counterparty is situated in
another country, this also involves Country Risk, which is the risk of the
Counterparty not honoring its commitment because of the restrictions imposed by
the government though counterparty itself is capable to do so.
Dealing Risk
Dealing Risk is the sum total of all unsettled transactions due for all dates in
future. If the Counterparty goes bankrupt on any day, all unsettled transactions
would have to be redone in the market at the current rates. The loss would be the
differenced between the original contract rate and the current rates. Dealing risk is
therefore limited to only the movement in the prices and is measured as a
percentage of the total exposure.
39
Settlement Risk
Settlement risk is the risk of Counterparty defaulting on the day of the
settlement. The risk in this case would be 100% of the exposure if the corporate
gives value before receiving value from the Counterparty. In addition the
transaction would have to be redone at the current market rates.
Operating Risks
Operational risk is the risk that the organization may be exposed to financial
loss either through human error, misjudgment, negligence and malfeasance, or
through uncertainty, misunderstanding and confusion as to responsibility and
authority. Following are the different kinds of operating risks:
Legal
Regulatory
Errors & Omissions
Frauds
Custodial
Systems
Legal
Legal risk is the risk that the organization will suffer financial loss either
because contracts or individual provisions thereof are unenforceable or
inadequately documented, or because the precise relationship with the counterparty
is unclear.
Regulatory
Regulatory risk is the risk of doing a transaction, which is not as per the
prevailing rules and laws of the country.
40
Errors & Omissions
Errors & Omissions are not uncommon in financial operations. These may
relate to price, amount, value date, currency, and buy/sell side or settlement
instructions.
Frauds
Some examples of frauds are:
Front running
Circular trading
Undisclosed Personal trading
Insider trader
Routing deals to select brokers
Custodial
Custodial risk is the loss of prime documents due to theft, fire, water,
termites etc. This risk is enhanced when the documents are in transit.
Systems
Systems risk is due to significant deficiencies in the design or operation
of supporting systems; or inability of systems to develop quickly enough to meet
rapidly evolving user requirements; or establishment of a great many diverse,
incompatible system configurations, which cannot be effectively linked by the
automated transmission of data and which require considerable manual
intervention.
Step 2 - Define Risk Policy
Decide the basic risk policy that the organization wants to have. This
may vary from taking no risk (cover all) to taking high risks (open all). Most
organizations would fall somewhere in between the two extremes. Risk and
reward go hand in hand.
41
Cost Center vs. Profit Center
A cost center approach looks at exposure management as insurance
against adverse movements. One is not looking for optimization of cost or
realization but meeting certain budgeted or targeted rates. In a profit center
approach, the business is taking deliberate risks to make money out of price
movements.
Step 3- Risk Measurement
There are a number of different measures of price or market risk, which is
mainly, based on historical and current market values Examples and Value At
Risk (VAR), Revaluation, modeling, Simulation, Stress Testing, Back Testing,
etc.
Step 4- Risk Control
Control of Price Risk
Position limits are established to control the level of price or market risk
taken by the organization. Diversification is used to reduce systematic risk in a
given portfolio.
Control of Credit Risk
Credit limits are established for each counterparty, for both Dealing Risk
and Settlement Risk separately depending upon the risk perception of the
counterparty.
Control of Operating Risk
Establishment of an effective and efficient internal control structure over
the trading and settlement activities, as well as implementing a timely over and
accurate management information system (MLS).
42
CHAPTER -4
Futures and options Futures and options trading system Clearing member functionality of the neat
F&O NSE risk control measures Analysis and graphs
43
INTRODUCTION ABOUT NSE
The National Stock Exchange of India Limited (NSEIL) has been setup to
provide nation-wide screen based trading facilities to investors. It is a significant
move towards upgrading trading facilities available in the country and bringing
Indian financial markets in line with international markets. NSE has been
promoted by leading financial institutions, banks, insurance companies and their
subsidiaries. NSE operates on the 'National Exchange for Automated Trading*
(NEAT-F&O) system, a fully automated screen based trading system adopting the
principles of an order driven market and enabling trading members to trade
directly from their offices through a sophisticated telecommunication network.
OBJECTIVES OF NSE
The main objectives of NSE are:
To establish a nation wide trading facility in securities
To enable investors spread all over the country to have an equal access to
the NSE through a telecommunication network
To provide a fair and efficient securities market to investors using latest
electronic trading systems
To meet international standards in securities market
To achieve shorter settlement cycles
SEGMENTS ON NSE
NSE operates three segments:
Wholesale Debt Market
Capital Market
Futures and Options Market
The Futures and Options Market segment facilitates dealings in derivative
contracts based on various securities admitted to trade on the Capital Market
segment of the Exchange.
44
TYPES OF DERIVATIVES MARKET:
Futures.
Index futures
One-month
Two-month
Three-month
Individual Stock Futures
One-month
Two-month
Three-month Options
Call Option
Index Options
One-month
Two-month
Three-month
Individual Stock options
One-month
Two-month
Three-month
Put Option
Index Options
One-month
Two-month
Three-month
Individual Stock options
One-month
Two-month
Three-month
45
A. FUTURES:
A future contract is an agreement between two parties to buy or sell an asset
at certain time. In the future at a certain price. Future contrasts are special types of
forward contrasts, in the sense that the former are standardized exchange-trade
contrasts.
a. INDEX FEATURES.
b. INDIVIDUAL STOCK FEATURES.
a. INDEX FUTURES:
NSE trades nifty futures contract having expiry cycle for index futures. All
the contrasts expiry date is last Thursday of every month.
1. One - Month
2. Two - Month
3. Three - Month
b. INDIVIDUAL STOCK FUTURES:
Trading in individual stock futures commenced on the NSE November
2001. These contrasts are cash settled on T+l basis.
Expiry cycle for stock futures
1. One - month
2. Two -month
3. Three – month
A new contract is introduced on the trading day following the expiry
of the near month contrast.
B. OPTIONS:
Options are fundamentally different from towards and futures contracts. An
options dues the holder of the option the right to do some thing. The holder dose
not have to exercise this right. In contrast, in a forward or futures contract, the two
parties have committed them selves to doing some thing.
46
47
OPTIONS ARE TWO TYPES
a. Call option
b. Put option
A. CALL OPTION: A call option means gives the holder the right but not the
obligation to sell an asset by a certain date for certain price.
1. INDEX OPTION
2. INDIVIDUAL STOCK OPTION
1. INDEX OPTION: these options have index as the underlying. Some options
are European while others are American.
Expiry cycle for index option:
1. One - Month
2. Two - Month
3. Three -Month
2. INDIVIDUAL STOCK OPTION:
Stock options are options on individual stocks. Options currently trade
on over 500 stocks in the United States. A contact gives the holder the right to buy
or sell a share at the specified price.
Expiry cycle for stock options:
1. One -Month
2. Two -Month
3. Three –Month
B. PUT OPTIONS:
A put option gives the holder the right but not the obligation to sell and
asse5t y a certain date for a certain price.
The put option is two types:
a. INDEX OPTION
b. INDIVIDUAL STOCK OPTION
48
A. INDEX OPTION:
On NSE index option market, contracts at different strikes.
Expiry cycle for index option:
1. One -Month
2. Two -Month
3. Three -Month
B .INDIVIDUAL STOCK OPTION:
Trading in stock option commence on the NSE from July 2001 these contracts
are American style and or settled in cash.
Expiry cycle for stock option:
1. One - Month
2. Two -Month
3. Three -Month
TYPES OF DERIVATIVES TRADING IN SCSL:
I. INTRA DAY TRADING:
Intra day trading means buying in the morning and selling before
market Close. They need not pay any money.
II. DELIVERY TRADING:
Delivery trading means people will buy today they will not sell today. They
pay the money.
FUTURES AND OPTIONS MARKET TRADING SYSTEM
The software for Futures and Options Market has
been developed to facilitate efficient and transparent trading in futures and options
instruments. Keeping in view the familiarity of trading members with the current
Capital market trading system, modifications have been performed in the existing
capital market trading system so as to make it suitable for trading futures and
options.
49
FUTURES AND OPTIONS MARKET INSTRUMENTS
Futures and Options Market segment of NSE will provide trading facilities
for the following derivative instruments in a phased manner:
Phase One
• Futures - Index based futures
Phase Two
• Options - Index based options
Phase Three
• Options - Individual stock options
ENTITIES IN THE TRADING SYSTEM
There are three entities recognised by the system viz. Trading Members,
Clearing members and Participants.
Trading Members
Trading Members are members of NSE. They can trade either on their own
account or on behalf of their clients including participants.
Clearing Member
Clearing Members are members of NSCCL. They will be able to carry out risk
management activities and confirmation / enquiry of trades through the trading
system.
Participants
A participant is a client of trading members like financial institutions. These
clients may trade through multiple trading members but settle through a single
clearing member.
TELECOMMUNICATION NETWORK
The communication requirements consist of two elements:
Interactive
Broadcast connections
50
The interactive element of communication requirement refers to
message/information flow from a specific Trader Workstation to the NSE mainframe
computer and vice-versa. The transactions included in the interactive element are
input order, edit order, order confirmation & trade confirmation. The secbnd element
is broadcast of information viz. latest market information, price information etc.
which is sent to all Trader Workstations from the NSE mainframe computer.
Telecommunication links would be established between the NSE mainframe
computer and the office of each Trading Member using communication media such
as leased lines, VSATs (Very Small Aperture Terminals) etc. VSATs use the latest
satellite communication technology for providing reliable connectivity between the
NSE mainframe computer and
Trader Workstations. The equipment consists of a small dish antenna, radio
frequency receiver (Outdoor Unit - ODU) and radio frequency modem (Indoor Unit -
IDU) installed at the Trading Members premises. The Indoor Unit at Trading
Members office is connected to Trader Workstation. The Hub installed at NSE
communicates with all VSATs using INSAT - II series of Satellites.
The leased lines are high-speed lines provided by MTNL/DoT which use latest
techniques for establishing error free connectivity. Each Trader Workstation has an
EICON card, which is connected to the Data Terminating Unit/ modem, which in turn
is connected to the high speed leased line. The NSE network uses standard X.25
protocol between mainframe at NSE and the Trader Workstation for providing
reliable and error free data transmission.
Keyboard/MouseFunctions
STANDARD KEY FUNCTIONS
The system uses a standard IBM-PC/AT compatible 101 key keyboard.
Additional functions are supported by a combination of [Shift], [Ctrl] and [Alt]
keys and appropriate function keys. Mouse support is also provided to change the
Focus from one screen to another. Keyboard mapping for the major functions is as
follows:
51
MAJOR KEYBOARD FUNCTIONS
Keys Functions Shift + Key Functions
Fl Buy Open Fl Order Cancellation
F2 Sell Open F2 Order Modification
F3 Outstanding Orders F3 Quick Order Cancellation
F4 Market Watch setup F4 Trade Cancellation
Keys Functions Shift + Key Functions
F5 Market by Order F5 Trade Modification
F6 Market by Price F6 Regular Lot Match
F7 Activity Log F7 Contract List/ Portfolio Setup
F8 Previous Trades F8 Contract Description
F9 Snap Quote F9 Online Offline Order Entry
F10 Message log F10 Market Movement
Fll Market Inquiry Fll Multiple Index Inquiry
F12 Supplementary Menu F12 Order Status
Page Up Index and Contract price grap
Page down Liquidity Schedule
Alt + Key Functions Control +
Key
Functions
Fl Help Fl Ex/Pi
F2 Activity Log for Spread Order F2 Offline Ex/Pi
F3 Portfolio Offline order entry F3 Spread order entry screen
F4 Sign off F5 Client Master Maintenance
F5 Alphabetical Sorting of Contrac F8 Order status of spread order
F6 Net Position F10 Full Message display
F7 Online backup Page up Options Calculator
52
F8 Ticker Selection
F10 Net Position Upload
Fll Buy Close
F12 Sell Close
Page up Calculate new index
GENERIC USER NAVIGATIONIn addition to the standard keys as defined above, the following keys are provided
Keys Functions[Esc] Exit the current window[Print Screen] Print the current screen[*] on Numeric Keypad [Erase AI Clear data from all the fields on the current wine
[Tab] To move to the next field
[Shift + Tab] To move to the previous field[Send] Numeric pad Enter Send the data to the systemRight [Ctrl] To confirm orders[Home] Move to the first page of display[End] Move to the last page of display[Page Up] (Pg. Up) Move up by one page[Page Down] (Pg. Dn.) Move down by one page[Shift + Insert] To insert a blank line in the Market Watch[Shift + Delete] To delete a blank line in the Market Watch[Arrow] For cursor movement|/1 on Numeric keypad To change the price to Market in the price fieldii] Decrement price by one tick in order modificatiom Increment price tick by one tick in order modifier
Cursor movement keys can be used wherever appropriate. The [Del] key and the
[Backspace] key functions as in DOS.
Press [F12] key to invoke the Supplementary Menu list. The options available
under
53
Supplementary Menu are:
Choose ToReport Selection Print or select reportsOrder Entry Default Screen To use for setting the order entry default parameters
(like book, quantity, pro/cli, etc.Full Message Display Enable a full display of messagesColour Selection Select background and foreground colour for
screensPrint System Messages On/Off
Toggle between allowing / not allowing the printing of
System messages. Use spacebar key to togglebetweenOptions.
Print Order/Trade Confirmati Slips On/Off
Toggle between allowing / not allowing on-line printing of Order/Trade Confirmation Slip. Use spacebar key to toggle between options.
Ticker Selection Set up Securities which should appear in the tickerMost Active Securities To view most active securities on the NEAT-F&O
systemReprintOrder/Trade/Exercise /PLConfirmation Slips
Reprints order and Trade Confirmation slips
Branch Order Value / Position Limit Setup
The Corporate manager can setup Branch OrderValueLimits for various BranchesThe Corporate manager of a Clearing firm can setupthe Position Limit Setup for the trading membersclearing through him.
User Order Value Limit Setup The Corporate manager can setup User Order Value Limits for various Users
One Line/Tabular slips To select the format for printing of Confirmation slips. Use Spacebar key to toggle between the options.
Upload Net Position The purpose of this functionality is to provide the user to update Opening Net Positions of Client Accounts after reconciliation.
54
Give up Trades To provide the clearing member users to confirm or reject the trades, on orders entered by other trading members, on behalf of Participants, clearing through the clearing member. This functionality is provided only to the corporate managers of the clearing member.
Offline Order entry To upload an order entry file into the system for possible execution of the orders.
Order Limits Each user of a trading member can set order limits in terms of value of a trade and quantity of a trade.
About Gives information about NEAT-F&O version currently in use.
NAVIGATION USING MOUSE
The user to access the icons from the toolbar can use Mouse. Accessing
functions using mouse is faster as the selection screens take default values and detail
screens are presented to the user. Mouse can also be used to scroll through the
window like Market Watch. Cursor can be placed on a specific field of data entry
screen using mouse. The user can access the following functions available on the
toolbar with the help of mouse: Market By Order (MBO)
Market By Price (MBP)
Market Movement (MM)
Market Inquiry (MI)
Market Watch (MW)
Snap Quote (SQ)
Buy Order
Sell Order
Order Modification (OM)
Order Cancellation (OC)
Outstanding Orders (OO)
Order Status (OS)
55
Activity Log (AL)
Previous Trade (PT)
Net Position
On Line Backup
Supplementary Menu
Security List
Multiple Index Inquiry
Exercise/Pos. Liquidation
Spread Order Entry
Help (Futures and Options Market)
To select any of the above options, position the cursor on the desired button and
click the left button of the mouse. The detailed screen for the respective inquiries
is defaulted to, by passing the selection screen for the inquiries.
By clicking on the Help button, the user gets more information about the relevant
functionality.
Mouse Functionality table
Action ResultRight double click any where in Market Watch Market Watch is alphabetically sort
Right click on the status line of any inquiry screen Label Help appearsRight Click on the Activity Log Icon in Market Watch Screen
Activity Log of Spread Order
Right Click on the Order Status Icon in Market Watcl Screen
Order Status of Spread Order
Left click on the Outstanding Order screen Order Cancellation
Left click on the Previous Trades screen Trade Cancellation
Left double click on any of the security in the Trader workstation
Security Description
Right Click on the Net position icon Upload Client details.
56
Basic Trading Terminology
BASIS OF TRADING
The NEAT-F&O system supports an order driven market, wherein orders
match automatically. Order matching is essentially on the basis of security, its
price, time and quantity. All quantity fields are in units and price in rupees. The
Exchange will notify the regular lot size and ticks size for each of the contracts traded
on this segment from time to time.
When any order enters the trading system, it is an active order. It tries to find
a match on the other side of the book. If it finds a match, a trade is generated. If it does
not find a match, the order becomes passive and goes and sits in the respective
outstanding order book in the system.
Member type
1. TM
2. CM+TM
3. PCM + TM
4. PCM
Case (I): Clearing Member Corporate Manager:
(i) Can view outstanding orders, previous trades and Net position of his client
Trading Members by putting the TM ID and leaving the Branch Id and dealer id
blank.
Case (II): Clearing Member and Trading Member Corporate Manager:
(i) Can view outstanding orders, previous trades and Net position of his client
Trading Members by putting the TM ID and leaving the Branch Id and dealer id
blank.
(ii) Can view outstanding orders, previous trades and Net positions entered for
himself by entering his own TMID, Branch Id and User Id. This is his default
screen.
57
(iii) Can view outstanding orders, previous trades and Net position entered for his
branch by entering his TM Id and Branch Id fields.
(iv) Can view outstanding orders, previous trades and Net positions by entering his
TMId, Branch Id and User Id fields.
Case (III): Clearing Member and Trading Member Dealer:
(1) Can only view requests entered by him.
Case (IV): Trading Member Corporate Manager:
1. Can view outstanding requests and activity log for requests entered by him
by entering his own Branch and User Ids. This is his default screen.
2. Can view outstanding requests entered by his dealers and/or branch
managers by either entering the Branch and/or User Ids or leaving them
blank.
Case (V): Trading Member Branch Manager:
1. Can view outstanding requests and activity log for requests entered by him
by entering his own Branch and User Ids. This is his default screen.
2. Can view outstanding requests entered by his users either by filling the User
Id field with a specific user or by leaving the User Id field blank.
Case (VI): Trading Member Dealer:
1. Can only view requests entered by him.
In all the above cases requests may be viewed either for:
1. All (AllPro + AllCLI)
2. All Pro
3. A11CLI
4. Specific CLI
MARKET TYPE
• The Futures and Options Market system has one type of market i.e. the
Normal Market
58
Normal Market
Normal market consists of various book types wherein orders are segregated as
Regular lot orders and Stop Loss orders depending on their order attributes. All
orders have to be of regular lot size or multiples thereof.
ORDER BOOKS
As and when valid orders are entered or received by the system, they are
first numbered, time stamped and then scanned for a potential match. This means
that each order has a distinctive order number and a unique time stamp on it. If a
match is not found, then the orders are stored in the books as per price/time
priority.
Price priority means that if two orders are entered into the system, the order
having the best price gets priority. Time priority means if two orders having the
same price are entered; the order entered first gets priority.
Best price for a sell order is the lowest price and for a buy order, it is the highest
price.
The Futures and Options Market segment has following types of books:
Regular Lot Book
The Regular Lot Book contains all regular lot orders. The system first
attempts to match an active regular lot order against passive orders in this book.
Stop-Loss Book
Stop Loss orders are stored in this book till the trigger price specified in the
order is reached or surpassed. When the trigger price is reached or surpassed, the
order is queued for entry into the Regular lot book.
The stop loss condition is met under the following circumstances:
Sell Order - A sell order in the Stop Loss book gets triggered when the last traded
price in the normal market reaches or falls below the trigger price of the order.
59
Buy Order - A buy order in the Stop Loss book gets triggered when the last traded
price in the normal market reaches or exceeds the trigger price of the order.
ORDER TYPES AND CONDITIONS
The system allows the trading members to enter orders with various
conditions attached to them as per their requirements. These conditions are broadly
divided into the following categories:
Time Conditions
Price Conditions
Other Conditions
Several combinations of the above are allowed thereby providing enormous
flexibility to the users. The order types and conditions are summarized below.
Time Conditions
DAY ORDER - A DAY order, as the name suggests is an order which is valid for
the day on which it is entered. If the order is not executed during the day, the
system cancels the order automatically at the end of the day.
GTC - A Good Till Cancelled (GTC) order remains in the system until the user
cancels it. Consequently, it spans trading days, if not traded on the day the order is
entered. The maximum number of days an order can remain in the system is
notified by the Exchange from time to time after which the order is automatically
cancelled by the system. Each day counted is a calendar day inclusive of holidays.
The days-counted are inclusive of the day on which the order is placed and the order
is cancelled from the system at the end of the day of the expiry period.
GTD - A Good Till Days/Date (GTD) order allows the user to specify the number
of days/date till which the order should stay in the system if not executed. The
maximum days allowed by the system are same as in GTC order. At the end of this
day/date, the order is cancelled from the system. Each day/date counted is a
60
calendar day and inclusive of holidays. The days/date counted are inclusive of the day/date
on which the order is placed and the order is cancelled from system at the end of the
day/date of the expiry period.
IOC - An Immediate or Cancel (IOC) order allows the user to buy or sell a
contract as soon as the order is released into the system, failing which the order
is cancelled from the system. Partial match is possible for the order, and the
unmatched portion of the order is cancelled immediately.
Price Condition
STOP-LOSS - This facility allows the user to release an order into the system,
after the market price of the security reaches or crosses a threshold price e.g. If
for stop loss buy order, the trigger is 1027.00, the limit price is 1030.00 and the
market (last traded) price is 1023.00, then this order is released into the system
once the market price reaches or exceeds 1027.00. This order is added to the regular lot
book with time of triggering as the time stamp / as a limit order of 1030.00. For the
stop loss sell order, the trigger price has to be greater than the limit price.
Other Conditions
Market Price - Market orders are orders for which no price is specified at the time the
order is entered (i.e. price is Market price). For such orders, the system determines the
price.
At Opening Price (ATO) - ATO price is the price arrived at by the system after the
pre-open phase is over.
Trigger Price - Price at which an order gets triggered from the Stop Loss book.
Limit Price - Price of the orders after triggering from Stop Loss book.
Pro - Pro means that the orders are entered on the trading member's own account.
Cli - Cli means that the trading member enters the orders on behalf of a client.
61
THE TRADING DAY
The system is normally made available for trading on all days except
Saturdays, Sundays and other Exchange notified holidays.
A trading day typically consists of a number of discrete stages as explained below:
PRE-OPEN PHASE
The Pre-Open period is applicable only to regular lot orders in the normal
market. At the start of Pre-Open session, market watch and messages are
downloaded at the trader workstations. For the trading member, all functions are
available except quick order cancellation. Order matching takes place based on
which a potential opening price is computed and displayed although no trades are
generated.
The Trading Member can carry out the following activities at this stage:
Set up Market Watch (contracts which the user would like to view on
screen)
Inquiries
Order Entry
Order Cancellation (Quick Order Cancellation is not allowed)
Order Modification
At the start of the Pre-Open phase, a message is displayed indicating that the
market is in Pre-Open phase.
OPENING
This is a transition phase between pre-open and open phases. This phase
immediately follows the end of market pre-open phase. A user who does not login
before the end of pre-open period will not be able to do so until normal market
opens for trading. Users can enter orders during the opening phase. However, the
system confirms these orders only after the normal market opens for trading.
62
During this phase the system generates actual trades across all contracts
from various buy / sell orders present in the system. All the trades in a given
contract will be executed at the opening price of that contract. The opening price
will be the LTP value calculated when the pre-open phase ends. The start and end
of the opening phase is indicated by the following system messages:
Start Message: The Pre-open period has ended. Please wait for contracts to
be opened for trading.
End Message: The Normal market has opened.
OPEN PHASE
The open period indicates the commencement of trading activity. To signify
the start of trading, a message is sent to all trader workstations. Order entry is
allowed when all contracts have been opened. During this phase, orders are
matched on a continuous basis. Trading in all instruments is allowed unless
Exchange specifically prohibits them.
The following activities are allowed at this stage:
Inquiries
Order Entry
Order Modification
Order Cancellation (Including quick order cancellation)
Trade Cancellation Requests
NORMAL MARKET CLOSE
When market closes, normal trading in all instruments for that market
comes to an end. No further orders are accepted, but the user is permitted to
perform activities like inquiries, report requests and trade cancellation/
modification requests.
63
CLOSING PRICE GENERATION
During this period of the market, closing prices for all contracts are
generated. These prices are then updated in the market watch overwriting the field
displaying the Last Traded Price. At the end of this period, a Market Statistics
report is also sent to all users of the system. Users can request for trade reports and
trade cancellation/modification during this period.
HOW TO START
TWO TYPES OF SOFTWARE
There are two types of software in the system:
NEAT-F&O
NEAT-F&O Help
These software are in a group called F&O or Futures & Options Market under
Program Manager in Windows. NEAT-F&O is the main trading software. NEAT
Help offers a quick way to seek information on various features of the NEAT-F&O
system.
Starting the application is simple.
Open the window that contains the applications program-item icon
Choose the program-item icon and press [Enter] key or double click on it
using the mouse
On starting NEAT-F&O, the logon screen appears.
On starting NEAT Help, a contents page appears for further selection.
LOGGING ON
On starting NEAT-F&O application, the logon screen appears with the following
details:
User ID
Trading Member ID
Password
New Password
64
In order to logon to the system, the user must specify a valid User ID, Trading
Member ID and corresponding password. A valid combination of User ID, Trading
Member ID and password is needed to access the system.
Press [Tab] key to move to the next field. [Shift+Tab] keys can be used to move to
the previous field(s).
After entering IDs and password, press the [Enter] key to complete the logon
procedure.
Logon Screen
User ID
Each Trading Member can have more than one user. The number of users allowed
for each Trading Member is notified by the Exchange from time to time. Each user
of a Trading Member must be registered with the exchange and is assigned an
unique user ID. 65
• Trading Member ID
The exchange assigns a Trading Member ID to each Trading Member. The Trading
Member ID is unique and functions as a reference for all orders/trades of different
users. This ID is common for all users of a particular Trading Member. The Trading
Member ID and User ID form a unique and valid combination.
• Password
When a user logs in for the first time, he has to enter the default password provided
by the exchange. On entering this password, the system requests the user to enter a
new password in the 'New Password' field. On entering the new password, the
system requests for a confirmation of this new password. The user knows this new
password only. The password should contain minimum of six characters and
maximum of eight characters. A combination of characters and numbers is
allowed in the password. The password can be changed if the user desires so and a
new password can be entered. The new password must be different from the old
password. Password appears in the encrypted form and thus complete secrecy is
maintained.
The system ensures that the change in password for all users (password expiry
period is parameterised by the Exchange). The user can logon by entering a new
password as per the procedure outlined above.
In the event of a user forgetting his password, the Trading Member is required to
request the exchange in writing to reset the password of that user id. On receiving
this, the user password is reset to the default password set by the exchange (i.e.
NEAT-F&O). The user can then logon by entering a new password as per the
procedure outlined above.
LOG OFF/EXIT FROM THE APPLICATION
Press [Alt+F4] keys or select the [Exit] button to log off/exit the application.
At the Log-on Screen
One can exit from the application by pressing [AU+F4] keys at the log-on screen.
66
Within the Application
Press [Alt+F4] keys to invoke the log-off screen. The log-off screen displays the
following options:
Permanent sign off
Temporary sign off and
Cancel
Selection can be made by using [Tab] or [Shift+Tab] keys to highlight the choice
and then press the [Enter] key.
Permanent Sign Off:
As the name suggests, a user can log-off permanently from the trading system by
selecting this option. The user is logged-off and the log-on screen appears.
Temporary Sign-Off
Temporary sign-off is a useful feature which allows a user to disallow temporary
access to the trading software without actually logging out of the trading system.
During a temporary sign-off period, the application continues to receive all market
updates in the background. However, the user cannot enter orders or make
inquiries. This allows the user to leave the trading system temporarily inactive and
prevent unauthorized access to the system.
On selecting the temporary sign-off option, a password entry screen is displayed.
The use of the NEAT-F&O system is enabled on entering the correct password.
Cancel
On selection of this option, the user comes out of Sign off screen.
FUTURES AND OPTIONS TRADING SYSTEM:
In SCSL the futures and options trading systems in NSE called NEAT -f &
O trading system provides a fully automated screen - based trading for Nifty
futures 7 options on a national wide basis as well as online monitoring and
surveillance mechanism. It supports an order driven market and provides
67
Complete transparency of trading operations. It is similar to that of trading of
equities in the cash market segment.
The software for the F&O market has been developed to facilitate efficient
and transparent trading in futures and options instruments. Keeping in view the
familiarity of trading numbers with the current capital market trading system,
modifications have been performed in the existing capital market trading system so
as to make it suitable for trading futures and options.
CONTRACT SPECIFICATIONS FOR INDEX FUTURES:
NSE trades Nifty futures contracts having one - month, two - month and
three - month expiry circles. All contracts expire on the last Thursday of every
month. Thus a January expiration contracts would expire on the last Thursday of
January and February expiry contracts would cease trading on the last Thursday of
February. On the Friday following the last Thursday a new contract having three -
month expiry would be introduced for trading.
68
CONTRACT SPECIFICATIONS FOR S&P CNX NIFTY FUTURES
Underlying index
Exchange of trading
Security of descriptor
Contract size
Price steps
Price bands
Trading cycle
S&P CNX Nifty
National stock
Exchange of India
Limited
NFUTIDX NIFTY
Permitted lot size
shall be 200 and
multiples
there of (min value
RS 2 lakhs)
Rupees 0.05
not applicable
the future contracts
will have a maximum of
3-Months trading
cycle the near
month(one)the Next month (two) and the far
month (three) new contract will be
Introduced on the next trading day
following the expiry of near month contract
Expiry date
Settlement basis
Settlement price
69
the last Thursday of
expiry month or the
previous trading
day if the last Thursday
is
trading holiday.
mark to market and final settlement cash
settled on T+l basis.
Daily settlement price will be the closing price
of The future contracts for the trading day
and the final settlement price shall be the
closing value of the underlying index of the
last trading day.
Jan feb mar apr may
Jan 30 contract
-------------------►
Feb 27 contract
----------------------------►
Mar 27 contract
◄-------------------------------------------------------------------
Apr 24 contract
◄---------------------------------------------------------
May 29 contract
◄---------------------------------------------------
June 26 contract
The figure shows the contract cycle for future contracts on NSE 's
derivatives market. As can be seen, at any given point of time, three contracts are
available for trading - a near - a month, a middle -month and a far - month as the
70
January contract expires on the last Saturday of the month a new three month
contract starts from the trading from the following day, once more making
available three 9index future contracts for trading.
CONTRACT SPECIFICATIONS FOR INDEX OPTIONS:
On NSE index options market, contracts at different strikes, having one-
month, two-month expiry cycles are available for trading there are typically one-
month two-month & three-month options each with five different strikes available
for trading hence at a given point in time there are minimum 3 * 5 * 2 or 30 options
products. Options contracts are specified as follows DATE - EXPIRY MONTH -
YEAR - CALL / PUT - AMERICAN OR EUROPIAN - STRIKES.
CONTRACT SPECIFICATIONS FOR S&P CNX NIFTY OPTIONS
Underlying index S&P CNX Nifty
Exchange of trading National stock Exchange of India Limited
Security descriptor NOPTIDXNIFTY
Contract size Permitted lot size shall be 200 and multiples of
(min RS 2 lakhs)
Price steps Rupees 0.05
Price bands not applicable
Trading cuycle the options contracts will have a maximum of
3 months Trading cycle- near month (one) the
next month (two) and the far month(three).New
contract will be introducedon the next trading day
following the expiry of near month contract.
Expiry date the last Thursday of expiry month or the previous
trading day if the last Thursday is trading holiday.
Settlement basis Cash settled on T+l basis
Style of option European
Strike price interval 20
Daily settlement prices premium value (net)
Final settlement price Closing value of the index on the last trading day.
CONTRACTS SPECIFICATIONS FOR STOCK FUTURES:
Trading in stock futures commenced on the NSE November 2001. These
contracts are cash settled on T+1 basis. The expression cycle for stock futures in
the same as for index futures, index options and stock options. A new contract is
introduced on the trading day following the expiry of the near month contract.
CONTRACT SPECIFICATIONS FOR STOCK FUTURES:
Underlying index
Exchange of trading
Individual securities
National stock Exchange of India
Limited
Security descriptor
Contract size
Price steps
Price bands
Trading cycle
Expiry date
NFUTIDX
100 multiples there of
(min value RS 2
lakhs)
Rupee 0.05
not applicable
the future contracts
will have a maximum
of 3-month trading
cycle -the near month
(one) the next
month(two) and the
far month (three) new
contract will be
Introduced on the next
trading day following
the expiry of near
month contract
the last Thursday of expiry month or the
previous trading day if the last Thursday day is
trading holiday.
Settlement basis
Settlement price
Mark to market and
final settlement cash
settled on T+1 basis
Daily settlement price will be the closing price of
the future contracts for the trading day
CONTRACTS SPECIFICATIONS FOR STOCK OPTIONS
STRENGTHHedgingRisk can be quantified amongCall & Put
WEAKNESSMinimum lot size is Two lakhHigh fluctuationsless liquidityComplex system when comparedto stock marketAdequate margin
OPPORTUNITY
Hedging
Opportunity for big money
THREATSLack of knowledge amonginvestorsCash market
Trading in stock options commence on the NSE from
July 2001 these contacts are American style and are settled in cash .The
expiry cycle for stock options is the same as for index futures and index
options. A new contract is introduced on the trading day following the expiry
of the near month contract's provides a nunimum of five strike prices for
every option type(that is call & put).During the trading month there are at
least two in-the-money contracts, two out-of-the-money contracts and one at-
the-money contracts available for trading.
SWOT ANALYSIS
PROCESS OF TRADING:
SCSL stock broking limited provides derivative trading
services to its clients and members.
It enables the clients to trade in both NSE &BSE. Through the
computer trading terminals in SCSL the client places and order to buy or sell the
derivatives. After the trading is confirmed, the client receives the settlement net
position. SCSL collects the margin brokerage service tax and commission from the
clients for the trading taking place in SCSL
SCSL converts the paper shares into the electronic shares
through Demat process. Clearing and settlement of trades dematerialization of
shares and derivatives, providing market information to the clients or the daily
chores in SCSL apart of trading.
OPENING A/C:
If the two types of opening A/C are there
1. Demat Account
2. Stock Broking Account
DEMAT ACCOUNT:
Demat A/C means an A/C where shares and Derivatives are kept in
electronic form.
STOCK BROKING ACCOUNT:
To open a stock broking account you need two pass port size
photographs and identity proof and address proof and dank account
CONTRACT SPECIFICATIONS FOR STOCK OPTIONS
Underlying index
Security descriptor
Style of option
Individual securities
available for trading in
cash market Exchange
of trading National
stock Exchange of
India Limited
NOPTIDX
American
Contract size
Price steps
Price bands
Trading cycle
Expiry date
Settlement basis
Daily settlement prices Final settlement
Settlement day
100 or multiples there
of (min value 2 lakhs)
Rupees 0.05
not applicable
the options contracts
will have a maximum
of 3-months trading
cycle the near month
one the next month
(two) and the far month
(three). New contract
will be introduced on the next trading day
following the expiry of near month contract.
The last Thursday of expiry month or the
previous trading day if the last Thursday day is
trading holiday
Cash settled on T+l basis and final option
exercise settlement on T+3basis.
Premium value (net)
Closing value of the index on the last trading
day
last trading.
DOCUMENTATION
The trading member or stockbroker shall enter into an agreement in
the specified format provided by NSE with client before accepting orders on letters
behalf. The said agreement shall be executed on non- judicial stamp paper of
adequate value, duly signed by both the parties on all the pages. This agreement is
known as "member constraint agreement. Copy of this agreement is to be kept with
the trading member permanently.
In addition to the agreement, the stock broker shall seek information
form the clients in the "client registration application form" obtaining information
like investor risk profile, financial profile, social profile, investors identification
details, family, income, PAN number employment, age investment, other assets
financial liabilities etc.
A stockbroker shall not deal knowingly directly or indirectly, with a
client who defaults to another stockbroker.
Similarly the sub broker shall enter into an agreement before placing
order, which shall be, executed non-judicial stamp paper. The client should provide
information to the sub brokers in the "client registration application form".
DERIVATIVES TRADING:
The trading system for NSE's future and options market. However, the best
way to get to of the trading system is to actually watch the screen and observe how
it operates.
ENTITLES IN THE TRADING SYSTEM:
There are four entitles in the trading system. Trading members, clearing
member's professional clearing members and participants.
TRADING MEMBERS:
Trading members are members of NSE. They can trade either on their own
account or on behalf of their client including participants. The exchange assigns a
trading ID to each trading member. Each trading members can have more than one
user. Each user member of trading member must be registered with the exchange
and is assigned a unique user ID. The unique trading member ID functions as a
reference for all orders/ trades of different users. The ID is common for all users of
a particular trading member. It is the responsibility of the trading member to
maintain adequate control over persons having access to the forms user ID's.
CLEARING MEMBER:
Clearing members are the members of NSCCL. They carry out risk
management activities and confirmation / inquiry of trades to the trading system.
PROFFESSIONAL CLEARING MEMBER:
Professional Clearing Member is a clearing member who is not a trading
member. Typically banks and custodians become professional clearing member
and clear member and settle for their trading member.
PARTICIPANTS:
A participants is a client for trading members like financial institutions.
These clients may trade through multiple trading members but settle through a
single clearing member.
MARKET PHASE:
The system is normally made available for trading all day except Saturdays,
Sundays and other holiday.
PRE - OPEN PHASE:
The Pre - open period is relevant only in the normal market. Order matching
takes place at the end of the season, based on which an opening price if computed
and assigned to all trades of pre - opened.
OPENING:
In this period, all orders that have been enter in the pre - open phase are
matched. During these phase, the trading member cannot log in of the system. If
the member is already logged in he cannot perform trading activities till market is
opened.
OPEN - PHASE:
The open period indicates the commitment of trading activity. To signify
the start of trading, a message is sent to all the trade workstations. Order entry is
allowed when all the securities have been opened. During this phase, orders are
matched on a continuous basis.
Trading in all the instruments is allowed unless they are specifically
prohibited by the exchange. The activities that are allowed at this stage are:
INQUIRY:
Inquiry about the market status, the shares and derivatives and their prices.
ORDER ENTRY:
Placing an order to buy or sell the scripts by coating the price and quantity
of the shares and derivatives.
ORDER MODIFICATION:
Modifying the order that has been already placed. The modification may be
with respect to price or quantity.
ORDER CANCELLATION:
The order placed already can also be cancelled if the price or the quantity of
scrip is not satisfactory. Order cancellation also includes quick order cancellation.
MARKET CLOSE:
Where the market closes, trading in all instruments for that market comes to
an end. No further orders are accepted, but the user is permitted to perform
activities like inquiries.
SURCON:
Surveillance and control (SURCON) is the period after the market close
during which the user have inquiry access only. After the end of SURCON period
the system processes the data for making the system available for the next trading
day. When the system start processing data, the interactive connection with the
NEAT system is lost and then message to that effect is displaye3d at the trader
work station.
NEAT system enables members from across the country to trade
simultaneously with enormous ease and efficiency. A number punches into the c is
executed through the mainframe computer of the exchange as soon as the order
from punched by him finds a matching sell or busty order from a counter party.
Computer quantity of securities and the price at which he wants and the transaction
The NSE opens at 9:55 AM and the trading starts at 10:00 AM 5 min is
given for the stock brokers to quote their prices and to get a recap of the yesterday
prices of different scrip's, the trading ends at 3:30 PM. The auction market starts
at 4:00 PM. And continues till 4:30PM after normal trading and derivatives trading.
In BSE the trade starts at 9:55AM and end at 3:30 PM. A grace time of 20
min from 3:40PM to 4:00 PM is given in BSE as "end of the section" for trading.
MOCK TRADING:
NSE conducts mock trading for all its trading members. The mock trading
usually takes place once in a month or in two months
Mock trading is the process where the regular d3erivatives trading to done at
all the wok stations, which are registered with NSE. Though the derivatives trading
are done payments of funds and deliveries don't take place. Though the trade
results in turn over in crores there is no transfer of funds or shares or derivatives
certificates. The Mock-trading process is similar to the regular trading process.
Mock trading is generally done on Saturday as it is not a working day for
the stock exchange and it doesn't affect the daily trade in NSE.
Mock -trading enables the operators operate efficiently and to adjust to the
changes made if any in the trading system.
REQUIREMENTS FOR OPENING THE ACCOUNT:
The following requirements for opening the account
Photo
Identification proof (like driving license, passport, voter identity card,
PAN card)
Address proof (telephone bill, electricity bill)
Bank account (must be compulsory attestation of the bank manager)
PUTTING THE ORDER:
There are two types of orders in derivatives market
Selling order
Buying order
SELLING ORDER:
If selling order means how many scrip's will in the share market.
BUYING ORDER:
If buying order means how much scrip will buy in the share market.
MARGINS:
The margin of SCSL stock broking limited is RS 10,000,00 and derivatives
market margin is RS 2 lack minimum. The exposure we give four times.
CLIENT CODE:
The SCSL stock broking limited the client code is five digits. One alphabet
and four digits.
TRANSACTION PERIOD FOR PAYMENT:
In the derivatives market transaction period same day settlement. In the
cash market transaction period is T+2 settlements.
TRANSACTION PERIOD FOR DELIVERY:
In the derivatives market the transaction period T+l settlement. In the cash
market transaction period is T+2 settlement.
COST OF TRADING:
1. Brokerage
2. Service tax
3. Stamp duty
BROKERAGE:
BROKERAGE IS OF TWO TYPES:
1. SPECULATIOIN BROKERAGE OR INTRA DAY COMMISSION:
This brokerage is charged where buying and selling derivatives is done in
one day only. At the end of the day's trade, the position is zero. The speculation
brokerage is charged from total value of 0.6%.
The speculation brokerage of NSE is charged for 0.05% and also BSE is
charged 0.05% as per SEBI rules.
2. DELIVER BROKERAGE: This brokerage is charged where there may be
buying or selling, lot remaining at the end of the trade. The delivery brokerage is
charged from 0.5%.
As per the SEBI rules maximum brokerage shouldn't exceed 2.5% both in
charge 2.5% from the client to sell or buy the shares and derivatives out of which,
SCSL charges 2% from the sub broker.
SERVICE TAX:
In SCSL 8% service tax on brokerage is collected from the clients and turn
over tax is 0.005%.
STAMP DUTY:
If the stamp dut6y of 0.005% and turn over is Rs 30/- or more, only Rs. 30/-
is collected in NSE. In BSE, the minimum is one rupee and maximum stamp duty
is unlimited.
PAY - OFFS FOR FUTURES:
What is a pay-off?
A payoff is the likely profit/loss that would accrue to a market participant
with change in the price of the underlying asset. This is generally depicted in the
form of payoff diagrams, which show the price of the underlying asset on the X-
axis and the profit/losses on the Y-axis.
1. Payoff for buyer of futures: Long futures
The payoff for a person who buys a futures contract is similar to the payoff
for a person who holds an asset. He has a potentially unlimited downside. Take the
case of the speculator who buys a 2-month NIFTY index futures contract when the
NIFTY stands at 1220. The underlined asset in this case is the NIFTY portfolio.
When the index moves up, the long futures position starts making profits, and
when the index moves down it starts making losses.
Profit
1220
Nifty
Loss
Graph shows the profit and losses for a long futures position. The investor
bought futures when the index was 1220. If the index goes up, his futures position
starts making profit. If the index falls , his futures position starts showing losses.
Payoff for seller of futures: Short futures
The payoff for a person who sells a futures contract is similar to the payoff
for a person who shorts an asset. He has a potentially unlimited upside as well as a
potentially unlimited downside. Take the case of a speculator who sells a two
months NIFTY index futures contract when the NIFTY stands at 1220.
Profit
1220
Nifty
Loss
The underlying asset in this case is NIFTY portfolio. When the index
moves down, the short futures position starts making profits, and when the index
moves up it starts making losses.
The graph shows the profits or losses for a short futures position. The
investor sells futures when the index was 1220 if the index goes down.
PRICING OF FUTURES
1. PRICING: COMMODITY FUTURES
The trading in futures has been on a constant growth and this leads to close
watch on the pricing of the futures and the curiosity among the people to know
whether the prices quoted are the true reflection of the price of the underlying stock
or index.
The cost of carry model would enable investors to know the true prices of
the futures.
Stock index futures in NSE started on 12th June 2000 and the stock futures
started on 9th November 2001 .The volumes and open interest on this market has
been steadily growing.
COST OF CARRY MODEL
An investor needs to know the cost of carry to understand the dynamics of
pricing that constitute the estimation of fair value of futures.
F=S+C or F=S(l+r)powt
Where
F = futures price
S = spot price
C = holding cost or carry cost
r = cost of financing
t = time till expiration
Example: The spot price of gold is Rs.5500 per Kg. If the cost of financing is 15 %
annually, what should be the futures price of lOOgms of gold Imonth down the
line?
Let us assume that we're on 1st may 2003. Assume there is no cost of holding.
a) How would we compute the price of gold futures contract expiring on 13 th may
2003?
b) What is the futures price of the gold after 3months expiring on 30th July 2003?
Ans. a) spot price = Rs 5500 per Kg
Cost of financing for Imonth at the rate of 15% is (1+ 0.15) pow30/365
Therefore the value of futures price is Rs.556.38
(5500*0.100)(1+0.15) pow 30/365 = 556.38
Ans.b) Spot price = Rs.5500 per Kg
Cost of financing for 3months at the rate of 15% is (1+0.15) POW 90/365
Therefore the value of futures price will be rs.569.28
(5500*0.100)(1+0.15) pow 90/365 = 569.28
EQUITY INDEX FUTURES
A futures contract on the stock market index gives its owner the right and
obligation to buy or sell the portfolio of stocks characterized by the index. Stock
index futures are cash settled; there is no delivery of the underlying stocks. In their
short history of trading, index futures have had a great impact on the world's
securities markets. Indeed, index futures trading have been accused of making the
world's stock markets more volatile than ever before. The critics claim that
individual investors have been driven out to the equity markets because the actions
of institutional trader5s in both the spot and futures markets cause stock values to
gyrate with no links to their fundamental values. Whether stock index futures
trading are a blessing or a curse is debatable. It is certainly true, however, that its
existence had revolutionized the art and science of institutional equity portfolio
management.
The main differences between commodity and equity index futures are that:
A).There are no costs of storage involved in holding equity.
b) Equity comes with a dividend stream, which is a negative cost if you
are long
the stock and a positive cost if you are short the stock.
Therefore, Cost of carry = Financing cost- Dividends. Thus, a crucial aspect
of dealing with equity futures as opposed to commodity futures is an accurate
forecasting of dividends. The better the forecast of dividend offered by a security,
the better is the estimate of the futures price.
To calculate the futures price we need to reduce the cost-of-carry to the
extent of dividend received. The amount of dividend received is Rs. 370i.e. (37
*10). The dividend is received 15 days later and hence compounded only for the
remainder of 45 days. To calculate the futures price we need to compute the
amount of dividend received per unit of Nifty. Hence we divide the compounded
dividend figure by 200.
Thus, futures price F=370 (1.15) pow 60/365 - [37*10 (1.15)pow45/365]/200 =
378.60-1.88 = 376.72
2. Pricing of Index Futures given Expected Dividend Yield
If the dividend flow throughout the year is generally uniform, i.e. if there
are few historical cases of clustering of dividends in any particular month, it is
useful to calculate the annual dividend yield.
F=S (1+r-q) POW t
Where
F=Futures Price
S= Spot Index Value
r =Cost of Financing
q = Expected Dividend Yield
t = Holding Period
VARIATION OF BASIS OVER TIME
This figure shows how the basis changes over time. As the time to
expiration of a contract reduces the gasps reduces. Towards the close of the trading
on the day of settlement, the futures price and the spot price converge. The closing
price of any futures price on the expiry day is the nifty on that day.
Example
A two-month futures contract trades on the a NSE. The cost of financing is
15% and the dividend yield on Nifty is 2% annualized. The spot value of Nifty
1000. What is the fair value of th4e future contract?
Fair Value= 1000(1+015-0.02) pow60/365 = 1040.29
OPTION PAYOFFS
The optiotnality characteristic of options results in a non-linear payoff for
options. In simple words, it means that the losses for the buyer of an option are
limited; however the profits are potentially unlimited. For a writer, the pay off is
exactly the opposite. His profits are limited to the option premium; however his
losses are potentially unlimited. These non-linear payoffs generate various payoffs
by using combinations of options and the underlying. We look here at the six basic
payoffs.
PAYOFF: LONG NIFTY
profit
60
0 1160 1220
60
loss
Payoff profile of buyer of asset: Long asset
In this basic position an investor buys the underlying asset, Nifty for
instance, for 1220, and sells it at a future date at an unknown prices, St Once it is
purchased the investor is said to be "long" the asset.
PAYOFF: SHORT NIFTY
profit
60 1160 1220 1230 0 nifty
-60
loss
Payoff profile for seller of asset: Short asset
In this basic position, an investor shorts the underlying asset, Nifty for
instance, for 1220, and buy6s it back at a future date at an unknown price St Once
it is sold the investor is said to be "short" the asset.
Payoff profile for buyer of call options: Long call
A call option gives the buyer the right to buy the underlying asset at the
strike price specified in the option. The profit/loss that the buyer makes on the
option depends on the spot price exceeds the strikes price he makes a profit. Higher
the spot price more is the profit he makes. If the spot price of the underlying is less
than the strike price he lets his options expire un-exercised. His loss in this case is
the premium he paid for buying the option.
Profit
1250 0
86.60 Nifty
Loss
The graph shows the profits/losses for the buyer of a three-month Nifty 1250
call option. As can be seen, as the spot Nifty rises, the call option is in-the-money.
If upon expiration, Nifty closes above the strike of 1250, the buyer would exercise
his options and profit to the extent of the difference between the Nifty-close and
the strike price. The profit possible on this option is potentially unlimited.
However if Nifty falls below the strike of 1250 he lets the option expire. His losses
are limited to the extent of the premium he paid for buying the option
Payoff profiles for writer of call options: Short call
A call option gives the buyer the right to buy the underlying asset at the
strike price specified in the option. For selling the option, the writer of the option
changes a premium. The profit/loss that the buyer makes on the option depends on
the spot price of the underlying. Whatever is the buyer's profit is the seller's loss. If
upon expiration the spot price exceeds the strike price, the buyer will exercise the
option on the writer. Hence as the spot price increases the writer of the option starts
making losses. Higher the spot price more is the loss he makes. If upon expiration
the spot price of the underlying is less than the strike price, the buyer lets his option
expire unexercised and the writer gets to keep the premium.
Profit
86.60
1250 0
Nifty
Loss
The graph shows the profits/losses for the seller of a three-month Nifty 1250 call
option., as the spot Nifty rises, the call option is in-the money and the writers starts
making losses. If upon expiration, Nifty closes above the strike of 1250 the buyer
would exercise his option on the writer who would suffer a loss to the extent of the
difference between the Nifty-close and the strike price. The loss that can be
incurred by the writer of the option in potentially unlimited, whereas the maximum
profit is limited to the extent of the up-front option premium of Rs.86.69 charged
by him.
Payoff profile for buyer of put options: Long put
A put option gives the buyer the right to sell the underlying asset at the
strike price specified in the option. The profit/loss that the buyer makes on the
option depends on the spot price of the underlying. If upon expiration, the spot
price is below the strike price, he makes a profit. Lower the sport price more is the
profit he makes. If the spot price of the underlying is higher than the strike price, he
lets his option expire un-exercised. His loss in this case is the premieum; he paid
for buying the option.
Profit
0
1250 61.70
Nifty
Loss
The graph shows the profits/losses for the buyer of a three-month Nifty 1250
put option. As can be seen, as the spot Nifty falls, the put option is in the money. If
upon expiration, Nifty closes below the strike of 1250 the buyer would exercise his
Option and profit to the extent of the difference between the strike price and Nifty-
close. The profits possible on this option can be as high as the strike price.
However if Nifty rises above the strike of 1250 he lets the option expire. His losses
are limited to the extent of the premium he paid for buying the option.
Payoff profile for writer of put options: Short put
A put option gives the buyer the right to sell the underlying asset at the
specified in the option. For selling the option, the writer of the option changes a
premium. The profit/loss that the buyer makes on the option depends on the spot
price of the underlying. Whatever is the buyer's profit is the seller's loss. If upon
expiration, the spot price happens to be below the strike price, the buyer will
exercise the option on the writer.
Profit
1250 61.70
Nifty
0
Loss
The graph shows the profits/losses for seller of a three-month Nifty 1250 put
option. As the spot Nifty falls, the put option is in the money and the writer starts
making losses. If upon expiration, Nifty closes below the strike of 1250 the
Buyer would exercise his option on the writer who would suffer a loss to the extent
of the difference between the strike price and Nifty-close.
MARKET INFORMATION:
In SCSL the daily research analyst collects the market information and it is
analyzed. The market information is used to forecast the index moment, price moment
of the share and enables the client to make use of information in trading
to get better results.
The research analyst in forecasting the market moment follows the technical
analysis fundamental analysi8s and efficient market hypothesis and derivatives market
and risk management. The research analyst collects the information about the company,
the industry, economy and the economy through different media to know the company,
the industry, economy and the economy through different media to know the company's
position.
The research analyst follows the market closely by watching the price moment of
the shares and derivatives in the market. The technical analysis is very helpful in making
industry decisions. The research analyst follows different tools of technical analysis
Japanese candlestick method ELLIBOT were theory, Dow theory, price trends and
volume trends, volatility, floating stock and volume of trade etc., to access the market.
Technical analysis reveals the moment of the scrip. It explains when to buy share and
derivative and when to sell. So, the resear5ch analyst gives must to the importance to the
technical analysis to forecast the price moment of the script accurately. Since, the NSE
& BSE are markets with strong from efficiency as the market discounts the information
itself very quickly and changes as per the information the research analyst has only
fewer jobs to do here.The research analyst not only analysis the marketing information
but, everyday in SCSL an edition of research analyst's suggestions on scrip's that have to
be bought an sold is also printed which help the clients of SCSL to invest in shares that
are profitable. Mostly, the predictions of the research analyst about the market
movement prove to be accurate. So market information in SCSL is trust worthy.
CLEARING AND SETTLEMENT
NATIONAL STOCK EXCHANGE (NSE)
The futures and Options trading system at NSE is called NEAT - F & O
trading system (National Stock Exchange Automated Trading for Nifty futures &
Options and stock futures & Options on a nationwide basis and an online
monitoring and surveillance mechanism. It support an anonymous order driven
market which provides complete transparency of trading operations and operates on
strict price-time priority. The NEAT - two types of users access F& O trading
system.
1. Trading Members
2. Clearing Member.
MEMBERSHIP CRITERIA
NSE and BSE admit members on its derivatives market in accordance with
the rules & regulations of their respective exchanges and the norms specified by
SEBI. These are SEBI guidelines for a membership to trade in derivatives market.
NSE
Clearing Member (CM)
Net worth-300 lakh
Interest - free Security Deposits - Rs. 25 lakh
Collateral Security Deposit - Rs. 25 lakh
In addition for every TM he wishers to clear for the CM has to deposit Rs. 10 lakh
Trading Member (TM) Net
worth -Rs. 100 lakh
Interest - Free Security Deposit - Rs. 8 lakh
Annual Subscription free - Rs. 25 thousand
The Non-refundable fee paid by the members is exclusive and will be a total of Rs.
8 lakhs if the member has both Clearing and Trading rights.
CLASSIFICATION OF MEMBERS FOR DERIVATIVE SEGMENT:
As on April 30, 2003, there are 569 SEBI registered members in F&O
segment of which 510 members are enabled on F & O segment of exchange. The
details are as follows
1. PCM-Clear for others
2. CM+TM -Traders and Clear for Self and Others
3. TM +SCM- Traders and Clear for self
4. TM-Trades for Self and clear through others.
NCCL undertake clearing and settlement of all deal executed on the NSE s
F&O segment. It acts as legal counter party to all deal on the F&O segment and
guarantees settlement.
All futures and options contr45acts are cash settle., i.e. through exchange of
cash. The underlying for index futures/options of the Nifty index cannot be
delivere4d. These contracts, therefore have to be settled in cash. Futures and
options on individual securities can be delivered as in the spot market. However, it
has been currently mandated that stock opt9ions and futures would also be cash
settled. The settlement amount for a clear ingmemember /clients in respect of
MTM, premium, and final exercise settlement.
CATEGORY SEBI
REGISTERED
ENABLED
ON F&OPCM 13 6
CM+TM 144 127
TM+SCM 32 19
TM 380 358
TOTAL 569 510
NSE RISK CONTROL MEASURES
The NSCCL rias developed a comprehensive risk containment mechanism
for the F&O segment. The salient features of risk containment mechanism on F&O
segment are:
1. CM and whenever a TM exceed the limits, it stops that particular TM from
further trading.
2. A member is alerted of his position to enable him to adjust his exposure or
bring in additional capital. Position violations result in withdrawal of trading
facility for all TMs of a CM in case of a violation by the CM.
3. A separate settlement guarantee fund for this segment has been created out
of the capital members. The fund had a balance of Rs.648 crore at the end of
March 2002. the most critical component of risk containment mechanism for
F&O segment is the margining system and on-line position monitoring. The
actual position monitoring and margining is carried out on-line through
parallel Risk Management System (PRISM). PRISM uses SPAN ®
(Standard Portfolio Analysis of Risk) system for the purpose of computation
of on-line margins, based on the parameters defined by SEBI.
NSE - SPAN
The objective of NSE-SPAN is to identify overall risk in a portfolio of all
futures and options contracts for each member. The system treats futures and
options contracts uniformly while at the same time recognizing the unique
exposures associated with options portfolios, like extremely deep out -of- the -
money short positions and inter-month risk. Its over-riding objective is to determine
the largest loss that a portfolio might reasonably be expected to suffer
from one day to the next day based on 99% VaR methodology. SPAN considers
uniqueness
The financial soundness of the members is the key to risk management.
Therefore, the requirements for membership in terms of capital adequacy
(net worth, security deposits) are quite stringent.
NSCCL charges an upf
ront initial margin for all the open position of a CM. It specifies the initial
margin requirements for each futures/options contract on a daily basis. It
also follows value-at risk (VaR) based margining through SPAN. The CM in
turn collects the initial margin from the TM and their respective clients.
The open position of the members are marked to market based on contract
settlement price for each contract. The difference is settled in cash on a T+l
basis.
NSCCL's on-line position monitoring system monitors a CMs open positions
on a real-time basis. Limits are set for each CM based on his capital
deposits. The on-line position monitoring system generates alerts whenever
a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs
for MTM value violation while TMs are monitored for contractO-wise
position limit violation.
CMs are provided a trading terminal for the purpose of monitoring the
open position of all the TM s clearing and setting through him. A CM may
set exposure limits for a TM clearing and settling through him. NSCCL
assists the CM to monitor the intra-day exposure limits set up by a of
options portfolios.
The following factors affect the value of an option:
1. Underlying market price
2. Strike price
3. Volatility (variability) of underlying instrument
4. Time to expiration
5. Interest rate
As these factors change, the value of options maintained within a portfolio
also changes. Thu8s, SPAN constructs scenarios of probable changes underlying
prices and volatilities in order to identify the largest loss a portfolio might suffer
from one day to" the next. It then sets the margin requirement to cover this one-day
loss. The complex calculations (e.g. the pricing of options) in SPAN are executed
by NSCCL. The results of these calculations are called risk arrays. Risk arrays, and
other necessary data inputs for margin calculations are provided to members daily
in a file called the SPAN risk parameter file. Members can apply the data contained
in the risk parameter files, to their specific portfolios of futures and options
contracts to determine their SPAN margin requirements. Hence, members need not
execute a complex option pricing calculation, which is performed by NSCCL.
SPAN has the ability to estimate risk for5 combined futures and options portfolios,
and also re-value the same under various scenario of changing market condition.
BUSSINESS GROWTH IN DERIVATIVES SEGMENTYear Index
FuturesStock Futures
Index Options
Stock Options
Total Average Daily Turnover (Rs. cr.)
No. of contracts
No. of contracts
No. of contracts
Notional Turnover (Rs. cr.)
No. of contracts
Notional Turnover (Rs. cr.)
No. of contracts
2008-09 23224599 32294791 10444191 262631 1606298 36905 67569879 39108
2007-08 157000000 204000000 55366038 1362111 9460631 359137 425000000 52153
2006-07 81487424 105000000 25157438 791906 5283310 193795 217000000 29543
2005-06 58537886 80905493 12935116 338469 5240776 180253 158000000 19220
2004-05 21635449 47043066 3293558 121943 5045112 168836 77017185 10107
2003-04 17191668 32368842 1732414 52816 5583071 217207 56886776 8388
2002-03 2126763 10676843 442241 9246 3523062 100131 16768909 1752
2001-02 1025588 1957856 175900 3765 1037529 25163 4196873 410
2000-01 90580 - - - - - 90580 11
Error! Not a valid link.
FUTURE INDEX - NIFTY FORM 02-05-2008 TO 29-05-2008
Date Expiry Ope High Low Close No. of Turnover Open Int Change
n contracts in lacs in OI
2-May-08 29-05-08 5249 5267 5211 5247 389549 1020418 30218050 -129600
5-May-08 29-05-08 5250 5272 5188 5200 345198 902731 30468100 250050
6-May-08 29-05-08 5203 5210 5132 5163 372378 963528 31138550 670450
7-May-08 29-05-08 5141 5175 5110 5151 396844 1020120 31299500 160950
8-May-08 29-05-08 5110 5118 5072 5093 338593 862426 31487300 187800
9-May-08 29-05-08 5052 5100 4970 4990 429394 1082972 32111150 623850
12-May-08 29-05-08 4985 5037 4923 5022 534998 1330445 31630900 -480250
13-May-08 29-05-08 5040 5080 4951 4966 502323 1260079 32793450 1162550
14-May-08 29-05-08 4945 5039 4933 5018 429322 1071668 31465250 -1328200
15-May-08 29-05-08 5035 5122 5035 5113 462523 1175083 29790350 -1674900
16-May-08 29-05-08 5142 5168 5100 5152 437782 1123820 29215150 -575200
20-May-08 29-05-08 5112 5133 5065 5100 394706 1006328 28602250 -612900
21-May-08 29-05-08 5036 5146 5036 5127 409124 1043222 27408800 -1193450
22-May-08 29-05-08 5064 5069 5000 5018 555170 1395638 26010700 -1398100
23-May-08 29-05-08 5015 5047 4932 4942 466771 1163767 26258700 248000
26-May-08 29-05-08 4917 4917 4860 4875 454456 1109875 25704200 -554500
27-May-08 29-05-08 4900 4925 4828 4842 441012 1076670 23947300 -1756900
28-May-08 29-05-08 4855 4940 4830 4931 515722 1257767 19849100 -4098200
29-May-08 29-05-08 4952 4959 4825 4841 375097 919741 16710100 -3139000
FUTURE INDEX - NIFTY CLOSING
4600
4700
4800
4900
5000
5100
5200
5300
2-M
ay-
20
08
4-M
ay-
20
08
6-M
ay-
20
08
8-M
ay-
20
08
10-M
ay-
200
8
12-M
ay-
200
8
14-M
ay-
200
8
16-M
ay-
200
8
18-M
ay-
200
8
20-M
ay-
200
8
22-M
ay-
200
8
24-M
ay-
200
8
26-M
ay-
200
8
28-M
ay-
200
8
Close
Interpretation:
In this month market rise up to 7thMay and from 8thMay, there is a
down fall and get, back to the positive trends in the market. The reason for the
Nifty down fall and rise after 15th May was due to the weak currency and the
banking shares performed well.
OPTION INDEX - NIFTY CE FORM 02-05-2008 TO 29-05-2008 Error! Not a valid link.
Interpretation:
In this month market down fall up to 20th May and from 21thMay,
there is a rise up to 23th may and again there is down fall in the market. The
reason for the option down fall and rise after 25th May was due to the weak
currency and the banking shares performed well.
OPTION INDEX - NIFTY PE FORM 02-05-2008 TO 29-05-2008 Error! Not a valid link.
Interpretation:
In this month market down fall up to 7 th May and from 10thMay,
there is a rise up to 15th may and again there is down fall in the market. The
reason for the option down fall and rise after 20th May was due to the weak
currency.
APTECH Scrip Movements from 02-05-2008 TO 29-05-2008Error! Not a valid link.
Interpretation:
In this month aptech market has rise in the beginning and later there
is a down fall and again from 15th may there is a rise in the market. The reason
for the down fall and rise after 20th May was due to the weak currency.
Date Expiry Open High Low Close LTP Settle
Price
contr
acts
Change
in OI
2-May-08 29-05-08 2839.9 2873 2768.5 2782 2793 2782 4087 -19725
5-May-08 29-05-08 2801 2834 2710 2727 2717 2727 4534 21750
6-May-08 29-05-08 2681 2746.9 2657 2734 2724 2734 4413 18075
7-May-08 29-05-08 2721 2767 2717.3 2737 2733 2737 3394 4125
8-May-08 29-05-08 2711 2739 2711 2725.7 2728 2725.7 1927 -33900
9-May-08 29-05-08 2715 2720 2640 2652.4 2640 2652.4 2841 3600
12-May-08 29-05-08 2630 2724.7 2622 2706.8 2690 2706.8 3287 15675
13-May-08 29-05-08 2721 2742 2620 2662.1 2670 2662.1 3522 16800
14-May-08 29-05-08 2674.4 2780 2673.5 2736.5 2722 2736.5 4430 14850
15-May-08 29-05-08 2740 2819.1 2711 2800.2 2798 2800.2 3789 -36075
16-May-08 29-05-08 2818.9 2824 2751 2765.1 2760 2765.1 2552 -12375
20-May-08 29-05-08 2741 2798 2730 2775.4 2765 2775.4 2774 -27825
21-May-08 29-05-08 2749 2760 2671 2699.5 2698 2699.5 3578 35325
22-May-08 29-05-08 2655 2669 2608.1 2630.4 2643 2630.4 3560 -27000
23-May-08 29-05-08 2645 2712.8 2643.1 2675.3 2690 2675.3 3599 -32325
26-May-08 29-05-08 2649 2675 2540 2576.2 2589 2576.2 6583 -219450
27-May-08 29-05-08 2595.4 2600 2482.2 2517.9 2510 2517.9 5500 -158925
28-May-08 29-05-08 2534 2550 2480 2524.3 2520 2524.3 5224 -55125
29-May-08 29-05-08 2528 595 2402.1 2435.8 2433 2433 7658 -254100
HDFC Scrip Movements from 02-05-2008 TO 29-05-2008
Interpretation:
In this month hdfc market has rise in the beginning and that rise in
the market is continued till 21th may and later there is a down fall in the
market. The reason for the down fall and rise after 20 th May was due to the
weak currency.
HERO HONDA Scrip Movements from 02-05-2008 TO 29-05-2008Date Expiry Open High Low Close LTP Settle
Pricecontracts
Change in OI
2-May-08 29-May-08 865 865.05 844 850.45 850 850.45 1175 -158800
5-May-08 29-May-08 845.1 846 816.5 820.85 821.5 820.85 873 -75600
6-May-08 29-May-08 825.95 833.95 813.1 819.8 818.1 819.8 795 -53200
7-May-08 29-May-08 810.05 826.8 804 819.4 820 819.4 586 -4000
8-May-08 29-May-08 816.8 818 804.3 810.2 809.3 810.2 329 -16800
9-May-08 29-May-08 805 815.7 802 808.35 808.5 808.35 404 -30000
12-May-08 29-May-08 725 826.4 725 802.2 802.9 802.2 833 33600
13-May-08 29-May-08 807.9 808 793 798.7 801.2 798.7 435 -2000
14-May-08 29-May-08 781 824 781 820.35 818.8 820.35 513 -4000
15-May-08 29-May-08 821 821.85 803.55 807.25 808 807.25 381 -25200
16-May-08 29-May-08 811 812.8 802 805.05 803.6 805.05 219 -8800
20-May-08 29-May-08 795.5 810 795.5 799.7 798.3 799.7 419 -23600
21-May-08 29-May-08 791 793 777.5 787.7 785.1 787.7 358 -800
22-May-08 29-May-08 778 793.2 767 781.55 785 781.55 516 -24000
23-May-08 29-May-08 779 792.3 776 788.75 792 788.75 381 -9200
26-May-08 29-May-08 786.1 791.9 775 780.75 782 780.75 621 -54800
27-May-08 29-May-08 776.15 783.9 761.55 773.25 776.1 773.25 666 -140400
28-May-08 29-May-08 775 803 766.45 799.4 797.9 799.4 958 -104800
29-May-08 29-May-08 796 798.45 770.4 779.15 778.5 777.95 823 -116400
Error! Not a valid link.
Interpretation:
In this month hero Honda market has a high rise in the beginning
and later the market has a down fall lightly. The reason for the down fall and
rise will occur due to the weak currency.
CHAPTER -5
Summary
Findings
Suggestions
SUMMARY
The past decade has a golden age of stock exchange of India. It is raised to
dominate the future of corporate finance in India, thanks to the reforms in stock
market. Earlier in the initial days of secondary market, derivatives trading on stock
exchange in India used to take place through open outery without use of
information technology for immediate matching or recording of trades.
The need for the study is felt as many as people in India are aware of
trading process in stock market.
After liberalization in 1991, our stock markets experienced drastic
changes due to setting up SEBI in 2000. Integration of market, new technology, in
trading, introduction of derivatives trading, foreign participation etc. These led to
the development of Stock Market.
In order to carry out the derivatives market, the company must be
duly registered with SEBI and at present their number of securities Ltd. Who deals
with the derivatives market in India, some of the leading securities in Hyderabad
are mentioned below.
HDFC Securities, India Info Line Securities Ltd., CIL Securities Ltd., ZEN
Securities Ltd., Share Khan Ltd., LKP Securities., Kotak Securities.
The emergence of the market for derivatives 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.
Derivative is a product whose value are derivatives from the value of
one or more basic variables called bases (underlying asset, index, or reference rate,
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 the 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.
The NSE opens at 9:55 AM and the trading starts at 10:00 AM. 5 min is
given for the stock brokers to quote their prices and to get a recap of the yesterday
prices of different scrip's. The trading ends at 3:30 PM. The auction market starts
at 4:00 PM and continues till 4:30 PM after normal trading and derivatives trading.
In BSE, the trade starts at 9:55 AM and ends at 3:30 PM. A grace time of 20
min from 3:40 to 4:00 PM is given in BSE as "end of the section" for trading.
There are two types of orders in derivatives market Selling order, Buying order.
If selling order means how many scrip's will sell in the share market.
If buying order means how many scrip's will buy in the share market.
The new issues market where new securities, i.e. shares or bonds that have
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.
A futures contract on the stock market index gives its owner the right and
obligation to buy or sell the portfolio of stocks characterized by the index. Stock
index futures are cash settled; there is no delivery of the underlying stocks. In their
short history of trading, index futures have had a great impact on the world's
securities markets. Indeed, Index futures trading have been accused of making the
world's stock markets more volatile than ever before. The critics claim that
individual investors have been driven out to the equity markets because the actions
of institutional traders in both the spot and futures markets cause stock values to
gyrate with no links to their fundamental values.
Options made their first major mark in financial history during the tulip-bulb
mania in seventeenth century Holland. It was one of the most spectacular get rich
quick binges in history. The first tulip was brought into Holland by a botany
professor from Vienna. Over a decade, the tulip became the most popular and
expensive item in Dutch gardens. The more popular they became, the more tulip
bulb prices began rising. That was when options came into the picture. They were
initially used for hedging. By purchasing a call option on tulip bulbs, a dealer who
was committed to a sales contract could be assured of obtaining a fixed number of
bulbs for a set price. Similarly, tulip-bulb growers could assure themselves of
selling their bulbs at a set price by purchasing put options. Later, however,
speculators who found that call options were an effective vehicle for obtaining
maximum possible gains on investment increasingly used options. As along as
tulip prices continued to skyrocket, a call buyer would realize returns far in excess
of those that could be obtained by purchasing tulip bulbs themselves. The writers
of the put options also prospered as bulb prices spiraled since writers were able to
keep the premiums and the options were never exercised. The tulip-bulb market
collapsed in 1636 and a lot of speculators lost huge sums of money. Hardest hit
were put writers who were unable to meet their commitments to purchase tulip
bulbs.
There are two basic types of options, call options and put options.
Call option: A call option gives the holder the right but not the obligation
to buy an asset by a certain date for a certain price.
Put option: A put option gives the holder the right but not the obligation to
sell an asset by a certain date for a certain price.
There are minimum of 5 strike prices, two 'in-the-money', one 'at-the-
money' and two 'out-of-the-money for every call and put option. At any point of
the time there are only three contracts available for trading with 1 month, 2 months
and 3 months to expiry. These contracts expire on last Thursday of the expiry
month and have a maximum of 3-month expiration cycle.
FINDINGS
Steel City securities Limited established in the year 1995 is a stock
broking operating in Andhra Pradesh, Orissa, Karnataka and Tamilnadu.
Its main service is online trading of securities. It is a trading member of
NSE and BSE.
In SCSL, trading in NSE and BSE is done on different terminals. Trading
in NSE is done through NEAT system.
Derivatives trading, the orders placed are matched and confirmed
through S & P CNX NIFTY. Today in INDIA, there is no trading floor as
all exchanges operate through derivatives trading.
As soon as the trade ends, back office system is done in SCSL to know
the trade positions.
The derivatives market based on S &P CNX NIFTY index. Currently the
futures contracts have a minimum of three- month’s expiration cycles.
The contracts are available for trading with one - month and three month
expiry.
The steel city is the sub brokerage of the clients and members converts
the paper shares into the electronic shares through demat process.
Bills are prepared and the brokerage commissions, service tax and stamp
duties are charged to the clients in the process.
Apart from derivatives trading, demat of securities is also done in the DP
block of SSCSL through Dematerializations and rematerialzations
process.
Daily market information is collected and up dated to enable the
investors to invest in profitable shares, all the activities related to
derivatives trading on F & O segments is furnished in the study.
SUGGESTIONS
In order to increase its customer base SCSL. Has to educate the existing and
new investors through awareness programs, which can be conducted
periodically.
For an effective trading process SCSL should provide more and perfect
sources of information for the investors or traders.
There is a need to create awareness in the female investors in order to make
the capable of entering into the securities market.
SCSL can increase its business by reaching more potential investors by
appointing sales persons and proper advertisements and setting up new
branches in potential areas.
It would be more advantageous for SCSL if it can explore global stock markets
like NASDAQ by introduction of a terminal.
BIBLIOGRAPHY
I. BOOKS
1. Derivatives core module workbook - National stock exchange
2. Future, options and other derivatives
products - John.C.hull
II. REPORTS
1. STEEL CITY SECURITIES LTD - Annual Report
III. JOURNALS & MAGAZINES
1. Business line
2. Hindu
3. India today
IV. WEB-SITES
1. www.nseindia.com
2. www.bseindia.com
3. www.moneycontrol.com
4. www.scsl.com
5. www.sebi.gov.in
6. www.derivativesindia.com
Related Documents
