futers and options

7/31/2019 futers and options

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INTRODUCTION

Finance is the lifeblood of business. Earlier there were many companies who use

to survive only with their owned capital, but with the passage of time and the

increased competition in the economy the companies started using borrowed capital,

in other words debt capital. And with the increased awareness among the people to

invest and improvements in the economy i.e., stock markets, financial institutions etc.,

their development and systematic regulation, the companies started raising their

capital from the primary markets, secondary markets, over-the-counter market and on-

line scrip less trading market.

The primary of new issue market deals with the offer and exchange of stocks

or bonds that have never been previously issued are traded in the secondary

markets, which include the organized stock exchanges and over-the-counter

market. The over-the-counter exchange of India (OTCEI) began its operations in

the year 1990 as a second-tier source which permits smaller companies to raise

funds. In addition to these markets, NSE has also started on-line scrip less tradingin India in the year 1994.

Due to the increased volatility and the risk involvement the derivatives market

has been developed under which futures and options have gained more popularity.

The project deals with SHAREKHAN PRIVATE LIMITED, Hyderabad as a

member of National stock exchange, the way it functions in respect to futures and

options market and also deal with the trading, clearing and settlement and the

regulations of SEBI in respect to Futures and Options.


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Need for the study:

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 fluctuation in asset

prices. The futures and options, most important part of derivative products

facilitates the stock market and the investors in the following way.

Through the use of futures and options, it is possible to partially or fully

transfer price risks by locking-in asset prices. As instruments for risk management,

these generally do not influence the fluctuations in the underlying asset prices.

However, by locking in asset prices, derivative products minimize the impactof fluctuations in asset prices on the profitability and cash flow situation of risk-

averse investors. Derivative products initially emerged as hedging devices against

fluctuations in commodity prices.

In recent year, the market for financial derivatives has grown tremendously both

in terms of variety of instruments available, their complexity and also turnover.

The following factors have been driving the growth of financial derivatives:

1. Increased volatility in asset prices in financial markets.2. Increased integration of national financial markets with the international

markets.

3. Marked improvements in communication facilities and sharp decline in theircosts.

4. Development of more sophisticated risk management tools, providingeconomic agents a wider choice of risk management strategies.

5. Innovations in the derivatives markets, which optimally combine the risksand 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.


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Methodology of the study:

The project study is mainly based on both the primary and secondary data.

Major portion of the data is collected through direct interaction with the officials

and some of the theoretical support is also added to this like Journals, Booklets etc.

which provides information with regard to the existing system of trading and

settlement of futures and options.

Sources of data:

Data for the study is collected through two sources.

1.

Primary data.2. Secondary data.

1. Primary data:Data is collected through personal discussion with the authorized members

and employees of the exchange.

2. Secondary data:

By the explanation of daily activities done from the officials and the

employees., By watching the on-line trading system., By practically taking part in

mock trading on futures and options of BAJAJ AUTOMOBILES, HCL

TECHNOLOGIES, KOTAK BANK and RANBAXY LABS and working out with

different trading operations as a part of the project. By attending the classes

conducted by Sharekhan Private Limited, Hyderabad to its staff members.


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Limitations of the study:

The following are limitations of the study.

1. The in depth study on trading system is made impossible due to constraint oftime i.e, 8 weeks as project duration.

2. There were practically many difficulties felt while collecting the primarydata.

3. A complex subject certainly cannot be dealt with in depth both in view ofconstraint of time and constraint of work.

4. The concept of Futures and options itself is new to India and the awarenesswas comparatively very less.


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INDUSTRY PROFILE

Stock exchange:

Stock exchange means anybody or individuals whether incorporated or not,

constituted for the purpose of assisting, regulating or controlling the business of

buying, selling or dealing in securities.

It is an association of member brokers for the purpose of self-regulation and

protecting the interests of its members. It can operate only if it is recognized by the

Government under the securities contracts (regulation) Act, 1956. The recognition

is granted under section 3 of the Act by the central government, Ministry of

Finance.

Bylaws:

Besides the above act, the securities contracts (regulation) rules were also

made in 1957 to regulate certain matters of trading on the stock exchanges. There

are also bylaws of the exchanges, which are concerned with the following subjects.

Opening/closing of the stock exchanges, timing of trading, regulation of

blank transfers, regulation of badla or carryover business, control of the settlement

and other activities of the stock exchange, fixation of margins, fixation of market

prices or making up prices, regulation of taravani business (jobbing), etc.,

regulation of brokers trading, brokerage charges, trading rules on the exchange,

arbitration and settlement of disputes, settlement and clearing of the trading etc.


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Regulation of stock exchanges:

The securities contracts (regulation) act is the basis for operations of the

stock exchanges in India. No exchange can operate legally without the government

permission or recognition. Stock exchanges are given monopoly in certain areas

under section 19 of the above Act to ensure that the control and regulation are

facilitated. Recognition can be granted to a stock exchange provided certain

conditions are satisfied and the necessary information is supplied to the

government. Recognition can also be withdrawn, if necessary. Where there are no

stock exchanges, the government can license some of the brokers to perform the

functions of a stock exchange in its absence.

Securities and exchange board of india(SEBI):

SEBI was set up as an autonomous regulatory authority by the Government

of India in 1988 to protect the interests of investors in securities and to promote the

development of, and to regulate the securities market and for matters connected

therewith or incidental thereto. It is empowered by two acts namely the SEBI Act,

1992 and the securities contract (regulation) Act, 1956 to perform the function of

protecting investor's rights and regulating the capital markets.


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NSE - nifty:

The national Stock Exchange on April 22, 1996 launched a new Equity

Index. The NSE-50. The new Index which replaces the existing NSE-100 Index is

expected to serve as an appropriate Index for the new segment of futures and

options.

Nifty means National Index for Fifty Stock. The NSE-50 comprises 50

companies that represent 20 broad Industry groups with an aggregate market

capitalization of around Rs.170000crores. All companies included in the index

have a market capitalization in excess of Rs.500crores each and should have traded

for 85% of trading days at an impact cost of less than 1.5%.The base period for the index is the close of prices on Nov 3,1995 which makes

one year of completion of operation of NSEs capital market segment. The base

value of the Index has been set at 1000.

NSE - midcap index:

The NSE midcap Index or the Junior Nifty comprises 50 stocks thatrepresents 21 board Industry groups and will provide proper representation of the

midcap segment of the Indian capital Market. All stocks in the Index should have

market capitalization of greater than Rs. 200 crs and should have traded 85% of the

trading days at an impact cost of less 2.5%.

The base period for the index is Nov 4, 1996, which signifies two years for

completion of operations of the capital market segment of the operations. The base

value of the Index has been set at 1000.

Average daily turn over of the present scenario 258212 (Lacs) and number

of average daily trades 2160 (Lacs).


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Defects:

1. Lack of liquidity in most of the markets in terms of depth and breadth.2. Lack of ability to develop markets for debts.3. Lack of infrastructure facilities and outdated trading system.4. Lack of transparency in the operations that effect investors confidence.5. Outdated settlement systems that are inadequate to cater to the growing

volume, leading to delays.

6. Lack of single market due to the inability of various stock exchanges tofunction cohesively with legal structure and regulatory framework.

Promoters:

1. Industrial Development Bank of India (IDBI)2. Industrial Credit and Investment Corporation of India (ICICI)3. Industrial Financing Corporation of India (IFCI)4. Life Insurance Corporation of India (LIC)5. State Bank of India (SBI)6. General Insurance Corporation (GIC)7. Bank of Baroda8. Canara Bank9. Corporation Bank10.

Indian Bank

11.Oriental Bank of Commerce12.Union Bank of India13.Punjab National Bank14.Stock Holding Corporation of India


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Membership:

The membership is based on the factors as capital adequacy, corporate

structure, Track record, Education, Experience etc. Admission is a two-stage

process with applicants required to go through a written examination followed by

an interview. A committee consisting of experienced professionals from the

industry, to assess the applicants capability to operate as an exchange member.

The exchange admits members separately to wholesale debt Market (WDM)

segment and the Capital market segment. Only corporate members are admitted to

the debt market Segment whereas individuals and firms are also eligible to the

capital market segment.Eligibility criteria for trading membership on the segment of WCM are as follows:

1. The person eligible to become trading members are bodies corporate,companies, institutions including subsidiaries of banks engaged in

financial services and such other persons or entities are may be permitted

from time to time by RBI\SEBI.

2. The whole-time Directors should possess at least two years experience inany activity related to banking or financial services.

3. The applicant must be engaged solely in the business of the securities andmust not be engaged in any fund-based activities.

4. The applicant must possess a minimum of Rs.2crores


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Eligibility criteria for the capital market segment are:

1. Individual, registered firms, corporate bodies, companies and such otherpersons may be permitted under the SCR Act, 1957.

2. The applicant may be engaged in the business of securities and must not beengaged in any fund-based activities.

3. The minimum net worth requirements prescribed are as follows:a) Individuals and registered firms-Rs.75Lakhs.b) Corporate bodies-Rs100Lakhsc) In case of partnership firm each partner should contribute at least 5%

of the net worth of the firm.

4. A corporate trading member should consist only of individuals (maximum of4) who should directly hold at least 40% of the paid-up capital in case of

listed companies and at least 51% in case of these companies.

5. The minimum prescribed qualification of graduation and two yearsexperience of handling securities as broker, Sub-broker, authorized assistant

etc. must be fulfilled by

a) Minimum two directors in case the applicant are a corporateb) Minimum two partners in case of partnership firms

In case of individual or sole proprietary concerns. The two experienced

directors in a corporate applicant or trading member should hold minimum 5% of

the capital of the company.


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Bombay Stock Exchange:

This stock exchange, Mumbai, popularly known as BSE was established in

1875 as The Native share and stock brokers association, as a voluntary non-profitmaking association. It has an evolved over the years into its present status as the

premiere stock exchange in the country. It may be noted that the stock exchanges

the oldest one in Asia, even older than the Tokyo Stock exchange which was

founded in 1878.

The exchange, while providing an efficient and transparent market for

trading in securities, upholds the interests of the investors and ensures redressed of

their grievances, whether against the companies or its own member brokers. It also

strives to educate and enlighten the investors by making available necessary

informative inputs and conducting investor education programs.

A governing board comprising of 9 elected directors, 2 SEBI nominees, 7

public representatives and an executive director is the apex body, which decides

the policies and regulates the affairs of the exchange. The Executive director as

the chief executive officer is responsible for the day today administration of the

exchange. The average daily turnover of the exchange during the year 2000-

01(April-March) was Rs 3984.19 crs and average number of daily trades 5.69

laces. However the average daily turnover of the exchange during the year 2001-02

has declined to Rs. 1244.10 crs and number of average daily trades during the

period to 5.17 laces. The average daily turnover of the exchange during the year

2002-03 has declined and number of average daily trades during the period is also

decreased.


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The Ban on all deferral products like BLESS AND ALBM in the Indian

capital markets by SEBI i.e. July 2, 2001, abolition of account Period settlements,

introduction of compulsory rolling settlements in all scrips traded on the

exchanges i.e. Dec 31, 2001, etc., have adversely impacted the liquidity and

consequently there is a considerable decline in the daily turnover at the exchange.

The average daily turnover of the exchange present scenario is 110363 (Laces) and

number of average daily trades 1057(Laces).

BSE- indices:

In order to enable the market participants, analysts etc., to track the various

ups and downs in the Indian stock market, the Exchange has introduced in 1986 an

equity stock index called BSE-SENSEX that subsequently became the barometer

of the moments of the share prices in the Indian stock market. It is a "Market

capitalization-weighted" index of 30 component stocks representing a sample of

large, well-established and leading companies. The base year of Sensex is 1978-

79. The Sensex is widely reported in both domestic and international markets

through print as well as electronic media.

Sensex is calculated using a market capitalization weighted method. As per

this methodology, the level of the index reflects the total market value of all 30-

component stocks from different industries related to particular base period. The

total market value of a company is determined by multiplying the price of its stock

by the number of shares outstanding. Statisticians call an index of a set of

combined variables (such as price and number of shares) a composite Index. An

Indexed number is used to represent the results of this calculation in order to make


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the value easier to work with and track over a time. It is much easier to graph a

chart based on Indexed values than one based on actual values world over majority

of the well-known Indices are constructed using Market capitalization weighted

method.

In practice, the daily calculation of SENSEX is done by dividing the

aggregate market value of the 30 companies in the Index by a number called the

Index Divisor. The Divisor is the only link to the original base period value of the

SENSEX. The Divisor keeps the Index comparable over a period of time and if

the reference point for the entire Index maintenance adjustments. SENSEX is

widely used to describe the mood in the Indian Stock markets. Base year average is

changed as per the formula

New base year average = Old base year average (New market Value/old market

value)


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Recent developments in indian stock market:

Many steps have been taken in recent years to reform the Stock Market such as:

1. Regulation of Intermediaries.2. Changes in the Management Structure.3. Insistence on Quality Securities.4. Prohibition of Insider Trading.5. Transparency of Accounting Processes.6. Strict supervision of Stock Market Operations.7. Prevention of Price Rigging.8. Encouragement of Market Making.9. Discouragement of Price Manipulations.10.Introduction of Electronic Trading.11.Introducing of Depository System.12.Derivates Trading.13.International Listing.

At present, there are 24 stock exchanges recognized under the securities contract

(regulation) Act, 1956.


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List of Stock Exchanges under the securities contract Act, 1956:

NAME OF THE STOCK EXCHANGE YEAR

1. Bombay stock exchange,2. Ahmedabad share and stock brokers association3. Calcutta stock exchange association Ltd,4. Delhi stock exchange association Ltd,5. Madras stock exchange association Ltd,6. Indoor stock brokers association,7. Bangalore stock exchange,8. Hyderabad stock exchange,9. Cochin stock exchange,10.Pune stock exchange Ltd,11.U.P stock exchange association Ltd,12.Ludhiana stock exchange association Ltd,13.Jaipur stock exchange Ltd,14.Gauhathi stock exchange Ltd,15.Mangalore stock exchange Ltd,16.Maghad stock exchange Ltd, Patna,17.Bhubaneshwar stock exchange association Ltd,18.Over the counter exchange of India, Bombay,19.Saurasthra kutch stock exchange Ltd,20.Vsdodara stock exchange Ltd,21.Coimbatore stock exchange Ltd,22.The meerut stock exchange Ltd,23.National stock exchange Ltd,24.Integrated stock exchange,

1875

1875

1957

1957

1957

1957

1958

19631943

1978

1982

1982

1983

1983-84

1984

1985

1986

1989

1989

1990

1991

1991

1991

1991,1999


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COMPANY PROFILE

Sharekhan:

Sharekhan is one of India's largest and leading financial services companies.

It is an online stock trading company ofSSKI Group (S.S. Kantilal Ishwarlal

Securities Limited) which has been a provider of India-based investment banking

and corporate finance service for over 80 years.

SSKI caters to most of the prominent financial institutions, foreign and

domestic, investing in Indian equities. It has been valued for its strong research-led

investment ideas, superior client servicing track record and exceptional execution

skills.

The key features of Sharekhan are as follows:

1. You get freedom from paperwork.2. There are instant credit and money transfer facilities.3. You can trade from any net enabled PC.4. After hour orders facilities.5. You can go for online orders over the phone.6. Timely advice and research reports7. Real-time Portfolio tracking.8. Information and Price alerts.Sharekhan provides assistance and the advice like no one else could. It has

created special information tools to help answer any queries. Sharekhans first step

program, built specifically for new investors, is testament to of its commitment to

being your guide throughout your investing life cycle.
http://www.sski.co.in/http://www.sski.co.in/


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Sharekhan services:

The tag line of Sharekhan says that it is your guide to the financial jungle.

As per the tag line there are many amazing services that Sharekhan offers like

technical research, fundamental research, share shops, portfolio management, dial-

n-trade, commodities trade, online services, depository services, equity and

derivatives trading (including currency trading). With Sharekhans online trading

account, you can buy and sell shares at anytime and from anywhere you like.

With a physical presence in over 300 cities of India through more than 800

Share Shops with more than 3000 employees, and an online presence through

Sharekhan.com, India's premier, it reaches out to more than 8, 00,000 tradingcustomers.

A Sharekhan outlet online destination offers the following services:

1. Online BSE and NSE executions (through BOLT & NEAT terminals)2. Free access to investment advice from Sharekhan's Research team3. Sharekhan Value Line (a monthly publication with reviews of

recommendations, stocks to watch out for etc)

4. Daily research reports and market review (High Noon & Eagle Eye)5. Pre-market Report (Morning Cuppa)6. Daily trading calls based on Technical Analysis7. Cool trading products (Daring Derivatives and Market Strategy)8. Personalized Advice9. Live Market Information10.Depository Services: Demat Transactions11.Derivatives Trading (Futures and Options)12.Commodities Trading


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13.IPOs & Mutual Funds Distribution14.Internet-based Online Trading: Speed Trade

Sharekhan has one of the best state-of-art web portals providing fundamental

and statistical information across equity, mutual funds and IPOs. Surfing can be

done across 5,500 companies for in-depth information, details about more than

1,500 mutual fund schemes and IPO data. Other market related details such as

board meetings, result announcements, FII transactions, buying/selling by mutual

funds and much more can also be accessed.

It provides a complete life-cycle of investment solution in Equities,

Derivatives, Commodities, IPO, Mutual Funds, Depository Services, Portfolio

Management Services and Insurance. It also offers personalized wealth

management services for High Net worth individuals.

Online services:

The online trading account can be chosen as per trading habits and

preferences, that is the classic account for most investors and speed trade for active

day traders. Sharekhan also provides a free software called Trade tiger to all its

account holders.

The Classic Account enables you to trade online for investing in Equities

and Derivatives on the NSE via Sharekhan.com; it gives access to all the research

content and also comes with a free Dial-n-Trade service enabling to buy shares

using the telephone.


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Its features are:

1. Streaming quotes (using the applet based system)2. Multiple watch lists3. Integrated Banking, demat and digital contracts4. Instant credit and transfer5. Real-time portfolio tracking with price alerts and, of course, the assurance

of secure transactions.

Trade tiger:

The Trade Tiger is a next-generation online trading product that brings the

power of the broker's terminal to your PC. It's the perfect trading platform for

active day traders.

Its features are:

1. A single platform for multiple exchange BSE & NSE (Cash & F&O),MCX, NCDEX, Mutual Funds, IPOs

2. Multiple Market Watch available on Single Screen3. Multiple Charts with Tick by Tick Intraday and End of Day Charting

powered with various Studies

4. Graph Studies include Average, Band- Bollinger, Know Sure Thing,MACD, RSI, etc

5. Apply studies such as Vertical, Horizontal, Trend, Retracement & Freelines


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6. User can save his own defined screen as well as graph template, that is,saving the layout for future use

7. User-defined alert settings on an input Stock Price trigger8. Tools available to gauge market such as Tick Query, Ticker, Market

Summary, Action Watch, Option Premium Calculator, Span Calculator

9. Shortcut key for FAST access to order placements & reports10.Online fund transfer activated with 12 Banks11.

Sharekhan provides you the facility to trade in Commodities throughSharekhan Commodities Pvt. Ltd. a wholly owned subsidiary of its

parent SSKI. It trades on two major commodity exchanges of the

country:

12.Multi Commodity Exchange of India Ltd, Mumbai (MCX) and13.National Commodity and Derivative Exchange, Mumbai (NCDEX).For trading in any commodity, initial margin of around 10% on any

commodity is to be maintained. Sharekhan has launched its own commodity

derivatives micro-site. The site is available through the Sharekhan home

page www.Sharekhan.com. Along with the site Sharekhan has launched several

commodity derivatives products (both research and trading) too.
http://www.sharekhan.com/Commodities/www.sharekhan.comhttp://www.sharekhan.com/Commodities/www.sharekhan.com


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The products have been listed below:

1. Commodities Buzz: a daily view on precious metals and agrocommodities.

2. Commodities Beat: a summary of the days trading activity.3. Traders Corner: Under commodity trading calls, there are two types of

trading calls:

i. Rapid Fire: (short-term calls for 1 day to 5 days updated daily)ii. Medium-term Plays: (medium-term calls for 1 month to 3 months

updated weekly or in between if needed)

4. Sharekhan Xclusive: the commodity research reports and analyses(periodical).

5. Market Scan: the daily commodity market data and statistics (end ofday).

6. All these products are both e-mailed as newsletters and published on thecommodity derivatives site .


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Organization chart of Sharekhan Private Limited:

CHAIRMAN

EXECUTIVE DIRECTOR

BOARD OF DIRECTORS

NON

EXECUTIVE

DIRECTOR

INDEPENDENT

DIRECTOR

HR

MANAGER

SYSTEMS

MANAGER

CUSTOMER

RELATIONSHIP

MANAGER

EXECUTIVES


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THEORETICAL FRAME WORK

Derivatives:

A Derivative is a financial instrument whose value depends on other, more

basic, underlying variables. The variables underlying could be prices of traded

securities and stock, prices of gold or copper.

Derivatives have become increasingly important in the field of finance,

Options and Futures are traded actively on many exchanges, Forward contracts,

Swap and different types of options are regularly traded outside exchanges by

financial intuitions, banks and their corporate clients in what are termed as over-

the-counter marketsin other words, there is no single market place or organized

exchanges.

The origin of derivatives can be traced back to the need of farmers to protect

themselves against fluctuations in the price of their crop. From the time it was

sown to the time it was ready for harvest, farmers would face price uncertainty.

Through the use of simple derivative products, it was possible for the farmer to

partially or fully transfer price risks by locking-in asset prices. These were simple

contracts developed to meet the needs of farmers and were basically a means of

reducing risk.

A farmer who sowed his crop in June faced uncertainty over the price he

would receive for his harvest in September. In years of scarcity, he would probably

obtain attractive prices. However, during times of oversupply, he would have todispose off his harvest at a very low price. Clearly this meant that the farmer and

his family were exposed to a high risk of price uncertainty.


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On the other hand, a merchant with an ongoing requirement of grains too

would face a price risk that of having to pay exorbitant prices during dearth,

although favourable prices could be obtained during periods of oversupply. Under

such circumstances, it clearly made sense for the farmer and the merchant to come

together and enter into contract whereby the price of the grain to be delivered in

September could be decided earlier. What they would then negotiate happened to

be futures-type contract, which would enable both parties to eliminate the price

risk.

In 1848, the Chicago Board Of Trade, or CBOT, was established to bring

farmers and merchants together. A group of traders got together and created the to-

arrive contract that permitted farmers to lock into price upfront and deliver the

grain later. These to-arrive contracts proved useful as a device for hedging and

speculation on price charges. These were eventually standardized, and in 1925 the

first futures clearing house came into existence.

Today derivatives contracts exist on variety of commodities such as corn,

pepper, cotton, wheat, silver etc. Besides commodities, derivatives contracts also

exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc.

Meaning:

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 very high degree of

volatility. Through the use of derivative products, it is possible to partially or fully

transfer price risks by locking-in asset prices. As instruments of risk management,

these generally do not influence the fluctuations in the underlying asset prices.


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However, by locking-in asset prices, derivative products minimize the impact of

fluctuations in asset prices on the profitability and cash flow situation of risk-

averse investors.

Derivatives are risk management instruments, which derive their value from

an underlying asset. The underlying asset can be bullion, index, share, bonds,

currency, interest etc. Annual turnover of the derivatives is increasing each year

from 1986 onwards,

Year Annual turnover

1986 146 millions

1992 453 millions

1998 1329 millions

2002 & 2003 it has reached to equivalent stage of cash market.

Derivatives are used by banks, securities firms, companies and investors to

hedge risks, to gain access to cheaper money and to make profits Derivatives are

likely to grow even at a faster rate in future they are first of all cheaper to world

have met the increasing volume of products tailored to the needs of particular

customers, trading in derivatives has increased even in the over the counter

markets.

In Britain unit trusts allowed to invest in futures and options .The capital

adequacy norms for banks in the European Economic Community demand less

capital to hedge or speculate through derivatives than to carry underlying assets.

Derivatives are weighted lightly than other assets that appear on bank balance

sheets. The size of these off-balance sheet assets that include derivatives is more

than seven times as large as balance sheet items at some American banks causing

concern to regulators


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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.

In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)

A) defines derivative to include

1. A security derived from a debt instrument, share, and loan whether secured orunsecured, risk instrument or contract for differences or any other form of

security.2. A contract, which derives its value from the prices, or index of prices, of

underlying securities.

Derivatives are the securities under the SC(R)A and hence the trading of

derivatives is governed by the regulatory framework under the SC(R)A.

Participants in the derivatives market:

The following three broad categories of participants who trade in the

derivatives market:

1. Hedgers2. Speculators and3. Arbitrageurs

Hedgers: Hedgers face risk associated with the price of an asset. They use futures

or options markets to reduce or eliminate this risk.


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Speculators: Speculators wish to bet on future movements in the price of an asset.

Futures and Options contracts can give them an extra leverage; that is, they can

increase both the potential gains and potential losses in a speculative venture.

Arbitrageurs: Arbitrageurs are in business to take advantage of a discrepancy

between prices in two different markets.

For example, they see the futures price of an asset getting out of line with

the cash price; they will take offsetting positions in the two markets to lock in a

profit.

Objectives:

1. To understand the concept of the Derivatives and Derivative Trading.2. To know different types of Financial Derivatives3. To know the role of derivatives trading in India.4. To analyze the performance of Derivatives Trading since 2001with

special reference to Futures and Options.


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Types of derivatives market:

Types of derivatives market

Exchange Traded Derivatives Over The Counter Derivatives

National Stock Bombay Stock National Commodity

Exchange Exchange Derivative Exchange

Index Future Index option Stock option Stock future


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Types of derivatives

Future contract:

In finance, a futures contract is a standardized contract, traded on a futures

exchange, to buy or sell a certain underlying instrument at a certain date in the

future, at a pre-set price. The future date is called the delivery date or final

settlement date. The pre-set price is called the futures price. The price of the

underlying asset on the delivery date is called the settlement price. The settlement

price, normally, converges towards the futures price on the delivery date.

Options:

A derivative transaction that gives the option holder the right but not the

obligation to buy or sell the underlying asset at a price, called the strike price,

during a period or on a specific date in exchange for payment of a premium is

known as option. Underlying asset refers to any asset that is traded. The price at

which the underlying is traded is called the strike price.


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Forward contracts:

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 the asset on the same date for the same price. Other

contract details like delivery date, price and quantity are negotiated bilaterally

by the parties to the contract. The forward contracts are n or ma l l y traded

outside the exchanges.

Swaps:

Swaps are transactions which obligates the two parties to the contract to

exchange a series of cash flows at specified intervals known as payment or

settlement dates. They can be regarded as portfolios of forward's contracts. A

contract whereby two parties agree to exchange (swap) payments, based on some

notional principle amount is called as a SWAP. In case of swap, only the payment

flows are exchanged and not the principle amount.


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History of derivatives:

The history of derivatives is quite colorful and surprisingly a lot longer than

most people think. Forward delivery contracts, stating what is to be delivered for a

fixed price at a specified place on a specified date, existed in ancient Greece and

Rome. Roman emperors entered forward contracts to provide the masses with their

supply of Egyptian grain. These contracts were also undertaken between farmers

and merchants to eliminate risk arising out of uncertain future prices of grains.

Thus, forward contracts have existed for centuries for hedging price risk.

The first organized commodity exchange came into existence in the early

1700s in Japan. The first formal commodities exchange, the Chicago Board ofTrade (CBOT), was formed in 1848 in the US to deal with the problem of credit

risk and to provide centralized location to negotiate forward contracts. From

forward trading in commodities emerged the commodity futures. The first type

of futures contract was called to arrive at. Trading in futures began on the CBOT

in the 1860s. In 1865, CBOT listed the first exchange traded derivatives

contract, known as the futures contracts. Futures trading grew out of the need for

hedging the price risk involved in many commercial operations. The Chicago

Mercantile Exchange (CME), a spin-off of CBOT, was formed in 1919, though it

did exist before in 1874 under the names of Chicago Produce Exchange (CPE)

and Chicago Egg and Butter Board (CEBB). The first financial futures to emerge

were the currency in 1972 in the US. The first foreign currency futures were traded

on May 16, 1972, on International Monetary Market (IMM), a division of CME.

The currency futures traded on the IMM are the British Pound, the Canadian

Dollar, the Japanese Yen, the Swiss Franc, the German Mark, the Australian

Dollar, and the Euro dollar. Currency futures were followed soon by interest rate

futures. Interest rate futures contracts were traded for the first time on the CBOT

on October 20, 1975. Stock index futures and options emerged in 1982. The first


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stock index futures contracts were traded on Kansas City Board of Trade on

February 24, 1982.The first of the several networks, which offered a trading link

between two exchanges, was formed between the Singapore International

Monetary Exchange (SIMEX) and the CME on September 7, 1984.

Options are as old as futures. Their history also dates back to ancient Greece

and Rome. Options are very popular with speculators in the tulip craze of

seventeenth century Holland. Tulips, the brightly colored flowers, were a symbol

of affluence; owing to a high demand, tulip bulb prices shot up. Dutch growers and

dealers traded in tulip bulb options. There was so much speculation that people

even mortgaged their homes and businesses. These speculators were wiped out

when the tulip craze collapsed in 1637 as there was no mechanism to guarantee the

performance of the option terms.

The first call and put options were invented by an American financier,

Russell Sage, in 1872. These options were traded over the counter. Agricultural

commodities options were traded in the nineteenth century in England and the US.

Options on shares were available in the US on the over the counter (OTC) market

only until 1973 without much knowledge of valuation. A group of firms known as

Put and Call brokers and Dealers Association was set up in early 1900s to provide

a mechanism for bringing buyers and sellers together.

On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up

at CBOT for the purpose of trading stock options. It was in 1973 again that black,

Merton, and Scholes invented the famous Black-Scholes Option Formula. This

model helped in assessing the fair price of an option which led to an increased

interest in trading of options. With the options markets becoming increasingly

popular, the American Stock Exchange (AMEX) and the Philadelphia Stock

Exchange (PHLX) began trading in options in 1975.


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The market for futures and options grew at a rapid pace in the eighties and

nineties. The collapse of the Bretton Woods regime of fixed parties and the

introduction of floating rates for currencies in the international financial markets

paved the way for development of a number of financial derivatives which served

as effective risk management tools to cope with market uncertainties.

The CBOT and the CME are two largest financial exchanges in the world on

which futures contracts are traded. The CBOT now offers 48 futures and option

contracts (with the annual volume at more than 211 million in 2001).The CBOE is

the largest exchange for trading stock options. The CBOE trades options on the

S&P 100 and the S&P 500 stock indices. The Philadelphia Stock Exchange is the

premier exchange for trading foreign options.

The most traded stock indices include S&P 500, the Dow Jones Industrial

Average, the Nasdaq 100, and the Nikkei 225. The US indices and the Nikkei 225

trade almost round the clock. The N225 is also traded on the Chicago Mercantile

Exchange.


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Futures:

A future contract is an agreement between two parties to buy or sell an asset

at a certain specified time in future for certain specified price. In this, it is similar

to a forward contract. A futures contract is a more organized form of a forward

contract; these are traded on organized exchange. However, there are a no of

differences between forward and futures. These relate to the contractual futures,

the way the markets are organized, profiles of gains and losses, kinds of

participants in the markets and the ways in which they use the two instruments.

Futures contracts in physical commodities such as wheat, cotton, corn, gold,

silver, cattle, and ext. have existed for a long time. Futures in financial assets,currencies, and interest bearing instruments like Treasury bill and bonds and other

innovations like futures contracts in stock indexes are relatively new

developments.

The Futures market described as continuous auction markets and exchange

providing the latest information about supply and demand with respect to

individual commodities, financial instruments and currencies, etc. Futures

exchanges are where buyers and sellers of an expanding list of commodities;

financial instruments and currencies come together to trade. Trading has also been

initiated in options on futures contracts. Thus option buyers participate in futures

markets with different risk. The option buyer knows the exact risk, which is

unknown to the futures trader.


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Features of futures contracts:

The principal features of the contract are as follows.

Organized Exchange:

Unlike forward contracts which are traded in an over- the-counter market,

futures are traded on organized exchange with a designated physical location

where trading takes place. This provides a ready, liquid market in which futures

can be bought and sold at any time like in a stock market.

Standardization:

In the case of forward contracts the amount of commodities to be delivered

and the maturity date are negotiated between the buyer and seller and can be tailor

made tobuyers requirements. In a futures contract both these are standardized by

the exchange on which the contract is traded.

Clearing House:

The exchange acts a clearinghouse to all contract struck on the trading floor.

For instance a contract is struck between capital A and B. upon entering into the

records of the exchange, this is immediately replaced by two contracts, one

between A and the clearing house and other between B and the deal. Where it is a

buyer to seller, and seller to buyer. The advantage of this is that A and B do not

have to undertake any exercise to investigate each others credit worthiness. It alsoguarantees financial integrity of the market. The enforces the delivery for the

delivery of contracts held for until maturity and protects itself from default risk by

imposing margin requirements on traders and enforcing this through a system

called marking-to-market.


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Actual delivery is rate:

In most of the forward contracts, the commodity is actually delivered by the

seller and is accepted by the buyer. Forward contracts are entered into for

acquiring or disposing of a commodity in the future for a gain at a price known

today. In contract to this, in most futures markets, actual delivery takes place in

less than one percent of the contracts traded. Futures are used as a device to hedge

against price risk and as a way of betting against price movements rather than a

means of physical acquisition of the underlying asset. To achieve, this most of the

contract entered into are nullified by the matching contract in the opposite

direction before maturity of the first.

Margins:

In order to avoid unhealthy competition among clearing members in

reducing margins to attract customers, a mandatory minimum margins are obtained

by the members from the customers. Such insures the market against serious

liquidity crises arising out of possible defaults by the clearing members. The

members collect margins from their clients has may be stipulated by the stock

exchanges from time to time and pass the margins to the clearing house on the net

basis i.e. at a stipulated percentage of the net purchase and sale position.

The stock exchange imposes margins as follows:

1. Initial margins on both the buyer as well as the seller.

2. The accounts of buyer and seller are marked to the market daily.

The concept of margin here is same as that of any other trade, i.e. to

introduce a financial stake of the client, to ensure performance of the contract and

to cover day to day adverse fluctuations in the prices of the securities.


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The margin for future contracts has two components:

1. Initial margin2. Marking to market

1.Initial margin:

In futures contract both the buyer and seller are required to perform the

contract. Accordingly, both the buyers and the sellers are required to put in the

initial margins. The initial margin is also known as the Performance margin and

usually 5% to 15% of the purchase price of the contract. The margin is set by the

stock exchange keeping in view the volume of business and size of transactions as

well as operative risks of the market in general.

The concept being used by NSE to compute initial margin on the futures

transactions is called Value-at-Risk (VAR) where as the options market had SPAN

based margin system.

2.Marking to Market:

Marking to market means, debiting or crediting the clients equity accounts

with the losses/profits of the day, based on which margins are sought.

It is important to note that through marking to market process, die

clearinghouse substitutes each existing futures contract with a new contract that

has the settle price or the base price. Base price shall be the previous days closing

Nifty value. Settle price is the purchase price in the new contract for the next

trading day.


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Futures terminology:

1. Spot price: The price at which an asset trades in spot market.2. Futures price: The price at which the futures contract trades in the futures

market.

3. Expiry Date: It is the date specified in the futures contract. This is the lastday on which the contract will be traded, at the end of which it will cease

to exist.

4. Contract Size: The amount of asset that has to be delivered less than onecontract. For instance contract size on NSE futures market is 100 Nifties.

5.

Basis/Spread: In the context of financial futures basis can be defined asthe futures price minus the spot price. There will be a different basis for

each delivery month for each contract. In normal market, basis will be

positive. This reflects that futures prices normally exceed spot prices.

6. Cost of Carry: The relationship between futures prices and spot prices canbe 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.

7. Multiplier: It is a pre-determined value, used to arrive at the contract size.It is the price per index point.

8. Tick Size: It is the minimum price difference between two quotes ofsimilar nature.

9. Open Interest: Total outstanding long/short positions in the market in anyspecific point of time. As total long positions for market would be equal to

total short positions for calculation of open interest, only one side the

contract is counted.

10.Long position: Out standing/Unsettled purchase position at any point oftime.


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11.Short position: Out standing/Unsettled sales position at any point of time.12.Contract Month: The month in which the contract will expire.13.Volume: No of contracts traded during a specific period of time. During a

day during a week or during a month.

14.Physical delivery: Open position at the expiry of the contract is settledthrough delivery of the underlying. In futures market, delivery is low.

15.Cash settlement: Open position at the expiry of the contract is settled incash. These contracts are designated as cash settled contracts. Index

futures full in this category.

Stock index futures:

Stock index futures are most are most popular financial futures, which have

been used to hedge or manage the systematic risk by the Investors of the stock

market. They are called Hedgers, who own portfolio of securities and exposed to

systematic risk. Stock index is the apt hedging asset since, the rise or fall due to

systematic risk is accurately shown in the stock index. Stock index futures contract

is an agreement to buy or sell a specified amount of an underlying stock index

traded on a regulated futures exchange for a specified price at a specified time in

future.

Stock index futures will require lower capital adequacy and margin

requirement as compared to margins on carry forward of individual scrips. The

brokerage cost on index futures will be much lower. Savings in cost is possible

through reduced bid- ask spreads where stocks are traded in packaged forms. The

impact cost will be much lower in case of stock index futures as opposed to dealing

in individual scraps. The market is conditioned to think in terms of the index and


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therefore, would refer trade in stock index futures. Futures, the chances of

manipulation are much lesser.

The stock index futures are expected to be extremely liquid, given the

speculative nature of the markets and overwhelming retail predication expected to

be fairly high. In the near future stock index futures will definitely see incredible

volumes in India. It will be a blockbuster product and is pitched to become the

most liquid contract in the world in terms of contract traded. The advantage to the

equity or cash market is in the fact that they would become less volatile as most of

the speculative activity would shift to stock index futures. The stock index futures

market should ideally have more depth, volumes and act a stabilizing factor for the

cash market. However, it is too early to base any conclusions on the volume are to

form any firm trend. The difference between stock index futures and most other

financial futures contracts is that settlement is made at the value of the index at

maturity of the contract.

Example: If BSE Sensex is at 6800 and each point in the index equals to Rs. 30, a

contract struck at this level could work Rs. 204000 (6800*30). If at the expiration

of the contract, the BSE Sensex is at 6850, a cash settlement of Rs. 1500 is

required (6850-6800)*30).

Stock futures:

With the purchase of futures on a security, the essentially makes a legally

binding promise or obligation to buy the underlying security at some point in the

future (the expiration date of the contract). Security futures do not represent

ownership in a corporation and the holder is therefore not regarded as a

shareholder.

A futures contract represents a promise to transact at some point in the

future. In this light, a promise to sell security is just as easy to make as a promise


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to buy security. Selling security futures without previously owning them simply

obligates the trader to sell a certain amount of the underlying security at some

point in the future. It can be done just as easily as buying futures, which obligates

the trader to buy a certain amount of the underlying security at some in future.

Example: If the current price of the ACC share is Rs. 170 per share. We believe

that in one month it will touch Rs. 200 and we buy ACC shares. If the price really

increases to Rs.200, we made a profit of Rs.30 i.e. a return of 18%.

If we buy ACC futures instead, we get the same position as Acc in the cash

market, but we have to pay the margin not the entire amount. In the above example

if the margin were 20% we would pay only Rs.34 initially to enter into the futures

contract. If ACC share goes up to Rs. 200 as expected, we still earn Rs.30 as profit.

Payoff for futures contracts:

Futures contracts have liner payoffs. In simple words, it means that the

losses as well as profits for the buyer and the seller of a futures contract are

unlimited. These liner payoffs are fascinating as they can be combined with

options and the underlying to generate various complex payoffs.

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 upside as well as

potentially unlimited downside.

Take the case of a speculator who buys a two-month Nifty index futures

contract when Nifty stands at 1220. The underlying asset in this case is Nifty

portfolio. When the index moves up, the long futures position starts making profits,

and when index moves down it starts making losses.


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Payoff for buyer of futures: Long futures

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 potentially unlimited upside as well as

potentially unlimited downside.

Payoff for buyer of futures: Short futures

Profit

Loss

Nifty

1220

0


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Take the case of a speculator who sells a two-month Nifty index futures

contract when the Nifty stands at 1220. The underlying asset in this case is the

Nifty portfolio. When the index moves down, the short futures position starts

making profits, and when index moves up, it starts making losses.

Pricing futures:

Cost of carry model:

We use fair value calculation of futures to decide the no arbitrage limits on

the price of the futures contract. This is the basis for the cost-of carry model where

the price of the contact is defined as follows.F=S+C

Where

F - Futures price S - Spot price C - Holding cost or Carry cost

This can also be expressed as

F=S (1+r) T

Where

R - Cost of financing T - Time till expiration

Pricing index futures given expected dividend amount

The pricing of index futures is also based on the cost of carry model where

the carrying cost is the cost of financing the purchase of the portfolio underlying

the index, minus the present value of the dividends obtained from the stocks in the

index portfolio.

Example:

Nifty futures trade on NSE as one, two and three month contracts. Money

can be barrowed at a rate of 15% per annum. What will be the price of a new two-

month.


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Futures contract on nifty:

1. Let us assume that ACC will be declaring a dividend of Rs. 10/-per shareafter 15 days of purchasing of contract.

2. Current value of Nifty is 1200 and Nifty trade with a multiplier of 2003. Since Nifty is traded in multiples of 200 value of the contract is

200*1200=240000

4. If ACC as weight of 7% in nifty, its value in Nifty is Rs.16800 i.e.(240000*0.07)

5. If the market price of ACC is Rs.140, than a traded unit of Nifty involves120 shares of ACC i.e. (16800/140).

6. To calculate the futures price we need to reduce the cost of carry to theextent of dividend received is Rs.1200 i.e. (120*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 for unit of Nifty. Hence, we divided the compounded

figure by 200.

7. Thus futures pricesF=1200(1.15) 60/365-(120*10(1.15) 45/365)/200=Rs.1221.80

Pricing 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.


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F=S (1+r-q) T

Where

F - Futures price S - spot index value R - Cost of financing

Q Expected dividend yield T - Holding period

Example: A two-month futures contract trades on the NSE. The cost of financing is

15% and the dividend yield on Nifty is 2% annualized. The spot value of Nifty is

1200. What is the fair value of the futures contract?

Fair value=1200(1+0.15-0.02) 60/365=Rs.1224.35.

Pricing stock futures:

A futures contract on a stock gives its owner the right and the obligation to

buy or sell the stocks. Like index futures, stock futures are also cash settled: There

is no delivery of the underlying stock. Pricing stock futures when no dividend is

expected

The pricing of stock futures is also based on the cost carry model, where the

carrying cost is the cost of financing the purchase of the stock, minus the present

value of the dividends obtained from the stock. If no dividends are expected during

the life of the contract, pricing futures on that stock is very simple. It simply

involves the multiplying the spot price by the cost of carry.

Example: SBI futures trade on NSE as one, two and three month contracts. Money

can be barrowed at 15% per annum. What will be the price of a unit new two-

month futures contract on SEBI if no dividends are expected during the period?

1. Assume that the spot price of SBI is Rs.228.

2. Thus, futures price F=228(1.15) 60/365=Rs.233.30

Pricing stock futures when dividends are expected.

When dividends are expected during the life of futures contract, pricing

involves reducing the cost of carrying to the extent of the dividends. The net


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carrying cost is the cost of financing the purchase of the stock, minus the present

value of the dividends obtained from the stock.

Example: HDFC futures trade on NSE as one, two and three month contracts.

What will be the price of a unit of new two-month futures contract on HDFC if

dividends are expected during the period?

1) Let us assume that HDFC will be declaring a dividend of Rs. 10 per shareafter 15 days purchasing contract.

2) Assume that the market price of HDFC is Rs.140/-3) To calculate the futures price, we need to reduce the cost of carrying to

the extent of dividend received. The amount of dividend received is

Rs.10 .The dividend is received 15 days later and hence, compounded

only for the remaining 45 days.

4) Thus, the futures price5) F=140(1.15) 60/365-10(1.15) 45/365=Rs.133.08


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Options:

Stock markets by their very nature are fickle. While fortunes can be made in

a jiffy more often than not the scenario is the reverse. Investing in stocks has two

sides to it

a) Unlimited profit potential from any upside (remember Infosys, HFCL etc)

b) A downside which could make you a pauper.

Derivative products are structured precisely for this reason to curtail the risk

exposure of an investor. Index futures and stock options are instruments that enable

you to hedge your portfolio or open positions in the market. Option contracts allow

you to run your profits while restricting your downside risk.Apart from risk containment, options can be used for speculation and

investors can create a wide range of potential profit scenarios.

We have seen in the Derivatives School how index futures can be used to

protect oneself from volatility or market risk. Here we will try and understand

some basic concepts of options.

Some people remain puzzled by options. The truth is that most people have

been using options for some time, because options are built into everything from

mortgages to insurance.

An option is a contract, which gives the buyer the right, but not the

obligation to buy or sell shares of the underlying security at a specific price on or

before a specific date.

Option, as the word suggests, is a choice given to the investor to either

honour the contract; or if he chooses not to walk away from the contract.

To begin, there are two kinds of options: Call Options and Put Options.

A Call Option is an option to buy a stock at a specific price on or before a

certain date. In this way, Call options are like security deposits. If, for example,

you wanted to rent a certain property, and left a security deposit for it, the money


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would be used to insure that you could, in fact, rent that property at the price

agreed upon when you returned. If you never returned, you would give up your

security deposit, but you would have no other liability. Call options usually

increase in value as the value of the underlying instrument rises.

When you buy a Call option, the price you pay for it, called the option

premium, secures your right to buy that certain stock at a specified price called the

strike price. If you decide not to use the option to buy the stock, and you are not

obligated to, your only cost is the option premium.

Put Options are options to sell a stock at a specific price on or before a

certain date. In this way, Put options are like insurance policies

If you buy a new car, and then buy auto insurance on the car, you pay a

premium and are, hence, protected if the asset is damaged in an accident. If this

happens, you can use your policy to regain the insured value of the car. In this way,

the put option gains in value as the value of the underlying instrument decreases. If

all goes well and the insurance is not needed, the insurance company keeps your

premium in return for taking on the risk.

With a Put Option, you can "insure" a stock by fixing a selling price. If

something happens which causes the stock price to fall, and thus, "damages" your

asset, you can exercise your option and sell it at its "insured" price level. If the

price of your stock goes up, and there is no "damage," then you do not need to use

the insurance, and, once again, your only cost is the premium. This is the primary

function of listed options, to allow investors ways to manage risk.

Technically, an option is a contract between two parties. The buyer receives

a privilege for which he pays a premium. The seller accepts an obligation for

which he receives a fee.

We will dwelve further into the mechanics of call/put options in subsequent

lessons.


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Put option:

Put Options are options to sell a stock at a specific price on or before a

certain date. In this way, Put options are like insurance policies.

Put Options-Long & Short Positions:

When you expect prices to fall, then you take a long position by buying Puts.

You are bearish.

When you expect prices to rise, then you take a short position by selling

Puts. You are bullish.


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Summary:

CALL OPTION BUYER CALL OPTION WRITER (Seller)

Pays premium Right to exercise and buy the

shares

Profits from rising prices Limited losses, Potentially

unlimited gain

Receives premium Obligation to sell shares if

exercised

Profits from falling prices orremaining neutral

Potentially unlimited losses,limited gain

PUT OPTION BUYER PUT OPTION WRITER (Seller)

Pays premium Right to exercise and sell shares Profits from falling prices Limited losses, Potentially

unlimited gain

Receives premium Obligation to buy shares if

exercised

Profits from rising prices or

remaining neutral Potentially unlimited losses,

limited gain

CALL OPTIONS PUT OPTIONS

If you expect a fall in

price(Bearish)

Short Long

If you expect a rise in price

(Bullish)

Long Short


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DATA ANALYSIS AND INTERPRETATION

1. STATEMENT SHOWING MOVEMENT OF FUTURE STOCKS OFBAJAJ AUTOMOBILES DURING THE PERIOD FROM 17-05-2010

TO 24-06-2010:

Table No: 1

Symbol Date Expiry Open High Low Close LTP

Settle

Price

No. of

contracts

Turnover

in Lacs

Open

Int

Change

in OI

Un

in

Va

BAJAJ-AUTO

17-May-10 24-Jun-10 2152 2175 2115 2168.2 2165.95 2168.2 95 408.27 106000 3200 21

BAJAJ-

AUTO

18-May-

10 24-Jun-10 2165 2184 2150 2179.65 2180.5 2179.65 70 304.04 107000 1000 21

BAJAJ-

AUTO

19-May-

10 24-Jun-10 2170 2170.1 2122.7 2134.8 2137.05 2134.8 103 442.6 112400 5400 21

BAJAJ-

AUTO

20-May-

10 24-Jun-10 2150 2170 2130 2139 2136 2139 130 559.73 121400 9000 21

BAJAJ-

AUTO

21-May-

10 24-Jun-10 2012.65 2130 2012.65 2106 2108.1 2106 152 641.63 126000 4600 20

BAJAJ-

AUTO

24-May-

10 24-Jun-10 2120 2149.25 2050 2061.1 2060 2061.1 575 2428.47 140400 14400 20

BAJAJ-

AUTO

25-May-

10 24-Jun-10 2050 2050.85 2010 2033 2033 2033 1013 4107.92 213000 72600 20

BAJAJ-

AUTO

26-May-

10 24-Jun-10 2040.2 2109.9 2024 2089.3 2087.6 2089.3 1316 5407.28 376800 163800 20

BAJAJ-

AUTO

27-May-

10 24-Jun-10 2090 2130 2071 2117.8 2115 2117.8 1233 5170.14 427200 50400 21

BAJAJ-

AUTO

28-May-

10 24-Jun-10 2140 2179 2125.65 2166.45 2169 2166.45 1000 4302.69 426200 -1000 21

BAJAJ-

AUTO

31-May-

10 24-Jun-10 2173.2 2220 2160.1 2206.55 2213.2 2206.55 715 3133.7 424400 -1800 22

BAJAJ-AUTO 1-Jun-10 24-Jun-10 2212.2 2213 2162 2168.4 2170 2168.4 1094 4784.24 424800 400 21

BAJAJ-AUTO 2-Jun-10 24-Jun-10 2177.9 2218 2170.35 2210.55 2213.35 2210.55 781 3425.53 446000 21200 22


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BAJAJ-

AUTO 3-Jun-10 24-Jun-10 2220 2246.7 2202.2 2209.25 2213.7 2209.25 1002 4462.36 464600 18600 21

BAJAJ-AUTO 4-Jun-10 24-Jun-10 2224 2229.9 2191.5 2197.95 2197.1 2197.95 557 2454.76 475000 10400 21

BAJAJ-AUTO 7-Jun-10 24-Jun-10 2160 2199 2156.15 2187.55 2184.4 2187.55 599 2610.09 461400 -13600 21

BAJAJ-

AUTO 8-Jun-10 24-Jun-10 2187 2218.95 2186.1 2195.65 2192.4 2195.65 754 3324.31 450200 -11200 21

BAJAJ-AUTO 9-Jun-10 24-Jun-10 2209 2218.65 2194 2203.8 2209 2203.8 428 1888.31 460000 9800 21

BAJAJ-AUTO 10-Jun-10 24-Jun-10 2209.1 2285 2200 2259.85 2280 2259.85 992 4440.45 505800 45800 22

BAJAJ-

AUTO 11-Jun-10 24-Jun-10 2275 2310 2256 2301.5 2306 2301.5 1037 4741 548200 42400 22

BAJAJ-AUTO 14-Jun-10 24-Jun-10 2310 2313.25 2280 2291 2288.5 2291 841 3858.04 542400 -5800 22

BAJAJ-

AUTO 15-Jun-10 24-Jun-10 2281 2306.5 2272 2291.6 2286.15 2291.6 758 3474.48 526400 -16000 22

BAJAJ-

AUTO 16-Jun-10 24-Jun-10 2308.75 2313.8 2275 2288.75 2289 2288.75 450 2061.09 514400 -12000 22

BAJAJ-

AUTO 17-Jun-10 24-Jun-10 2288 2295 2260 2291 2288.1 2291 645 2945.49 485800 -28600 22

BAJAJ-AUTO 18-Jun-10 24-Jun-10 2295.05 2304 2277.7 2281.8 2287 2281.8 666 3053.5 452200 -33600 22

BAJAJ-

AUTO 21-Jun-10 24-Jun-10 2300 2325 2300 2312.35 2312.5 2312.35 778 3601.38 413000 -39200 23

BAJAJ-

AUTO 22-Jun-10 24-Jun-10 2306 2340 2298.25 2331.2 2336 2331.2 919 4262.8 352200 -60800 23

BAJAJ-AUTO 23-Jun-10 24-Jun-10 2328.9 2367.1 2323.25 2355.05 2366 2355.05 975 4567.19 286600 -65600 23

BAJAJ-

AUTO 24-Jun-10 24-Jun-10 2366 2433.9 2342 2410 2410 2409 1887 8954.35 122600 -164000 24

Data analysis:

From the above table it is analysed that on 17th

may 2010 the Bajaj

automobiles future stock price opened with 2152 and increased to 2366 on 24rd

june 2010. Because of Bajaj vehicles demand increased continuously in positive

way.


56/95

56

Interpretation:

Bajaj automobiles future stock price opened with a negative index and

fluctuated up and down during the period and ended with a positive index at the

end of the contract period.

Graph No: 1

1800

1900

2000

2100

2200

2300

2400

17-May-10

19-May-10

21-May-10

23-May-10

25-May-10

27-May-10

29-May-10

31-May-10

2-Jun-10

4-Jun-10

6-Jun-10

8-Jun-10

10-Jun-10

12-Jun-10

14-Jun-10

16-Jun-10

18-Jun-10

20-Jun-10

22-Jun-10

24-Jun-10

P

r

i

c

e

s

Dates

Open Price


57/95

57

2. STATEMENT SHOWING MOVEMENT OF CALL OPTION STOCKS

OF BAJAJ AUTOMOBILES DURING THE PERIOD FROM 17-05-

2010 TO 24-06-2010:

Table No: 2

Symbol Date Expiry

Strike

Price Open High Low Close LTP

Settle

Price

No. of

contracts

Turnover

in Lacs

Open

Int

Change

in OI

Underlying

Value

BAJAJ-

AUTO

17-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 99.75 0 0 0 0 2166.95

BAJAJ-

AUTO

18-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 105.4 0 0 0 0 2182.2

BAJAJ-

AUTO

19-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 82.4 0 0 0 0 2141.65

BAJAJ-

AUTO

20-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 76.05 0 0 0 0 2136.4

BAJAJ-

AUTO

21-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 57.75 0 0 0 0 2098.75

BAJAJ-

AUTO

24-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 38.65 0 0 0 0 2052.45

BAJAJ-

AUTO

25-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 27.4 0 0 0 0 2018.55

BAJAJ-AUTO

26-May-10

24-Jun-10 2150 0 0 0 43.85 0 52.6 0 0 0 0 2082.75

BAJAJ-

AUTO

27-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 64.45 0 0 0 0 2114.8

BAJAJ-AUTO

28-May-10

24-Jun-10 2150 0 0 0 43.85 0 89.5 0 0 0 0 2163.4

BAJAJ-

AUTO

31-May-

10

24-Jun-

10 2150 0 0 0 43.85 0 113.6 0 0 0 0 2209.35

BAJAJ-

AUTO 1-Jun-10

24-Jun-

10 2150 0 0 0 43.85 0 85.15 0 0 0 0 2163.6

BAJAJ-

AUTO 2-Jun-10

24-Jun-

10 2150 0 0 0 43.85 0 108.9 0 0 0 0 2205.35

BAJAJ-

AUTO 3-Jun-10

24-Jun-

10 2150 0 0 0 43.85 0 100.6 0 0 0 0 2198.5

BAJAJ-

AUTO 4-Jun-10

24-Jun-

10 2150 0 0 0 43.85 0 88.65 0 0 0 0 2185.1


58/95

58

BAJAJ-

AUTO 7-Jun-10

24-Jun-

10 2150 0 0 0 43.85 0 80.95 0 0 0 0 2184.3

BAJAJ-

AUTO 8-Jun-10

24-Jun-

10 2150 0 0 0 43.85 0 84.2 0 0 0 0 2194.65

BAJAJ-

AUTO 9-Jun-10

24-Jun-

10 2150 0 0 0 43.85 0 80.9 0 0 0 0 2194.4

BAJAJ-

AUTO

10-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 115.2 0 0 0 0 2242.7

BAJAJ-

AUTO

11-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 158.05 0 0 0 0 2294.95

BAJAJ-

AUTO

14-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 143 0 0 0 0 2283.3

BAJAJ-

AUTO

15-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 145.5 0 0 0 0 2288.1

BAJAJ-

AUTO

16-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 141.25 0 0 0 0 2285.3

BAJAJ-AUTO

17-Jun-10

24-Jun-10 2150 0 0 0 43.85 0 144.4 0 0 0 0 2290.1

BAJAJ-

AUTO

18-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 135.05 0 0 0 0 2281.55

BAJAJ-AUTO

21-Jun-10

24-Jun-10 2150 0 0 0 43.85 0 168 0 0 0 0 2316.85

BAJAJ-

AUTO

22-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 181.4 0 0 0 0 2330.65

BAJAJ-

AUTO

23-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 201.85 0 0 0 0 2351.45

BAJAJ-

AUTO

24-Jun-

10

24-Jun-

10 2150 0 0 0 43.85 0 0 0 0 0 0 2409

Data analysis:

rom the above table it is analysed that on 17th

may 2010 the Bajaj

automobiles call option stock settle priced open 99.75 and increased to 201.85 on

23rd

june 2010.


59/95

59

Interpretation:

Bajaj automobiles call option stock settle price opened with positive settle

price and fluctuated up and down during the period and settled on maturity date.

Graph No: 2

0

50

100

150

200

250

17-M

ay-10

19-M

ay-10

21-M

ay-10

23-M

ay-10

25-M

ay-10

27-M

ay-10

29-M

ay-10

31-M

ay-10

2-Jun-10

4-Jun-10

6-Jun-10

8-Jun-10

10-Jun-10

12-Jun-10

14-Jun-10

16-Jun-10

18-Jun-10

20-Jun-10

22-Jun-10

24-Jun-10

Pr

i

c

e

s

Dates

Settle Price


60/95

60

3. STATEMENT SHOWING MOVEMENT OF PUT OPTION STOCKS OF

BAJAJ AUTOMOBILES DURING THE PERIOD FROM 17-05-2010

TO 24-06-2010:

Table No: 3

Symbol Date Expiry

Strike

Price Open High Low Close LTP

Settle

Price

No. of

contracts

Turnover in

Lacs

Open

Int

Change in

OI

Unde

Valu

BAJAJ-

AUTO

17-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 50.75 0 0 0 0 2166

BAJAJ-

AUTO

18-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 43 0 0 0 0 2182

BAJAJ-

AUTO

19-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 56.95 0 0 0 0 2141

BAJAJ-

AUTO

20-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 55.7 0 0 0 0 2136

BAJAJ-

AUTO

21-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 71.5 0 0 0 0 2098

BAJAJ-

AUTO

24-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 94.6 0 0 0 0 2052

BAJAJ-AUTO

25-May-10

24-Jun-10 2100 0 0 0 244.8 0 114.85 0 0 0 0 2018

BAJAJ-

AUTO

26-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 82.8 0 0 0 0 2082

BAJAJ-AUTO

27-May-10

24-Jun-10 2100 0 0 0 244.8 0 66.05 0 0 0 0 2114

BAJAJ-

AUTO

28-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 47.4 0 0 0 0 2163

BAJAJ-

AUTO

31-

May-10

24-Jun-

10 2100 0 0 0 244.8 0 30.8 0 0 0 0 2209

BAJAJ-

AUTO

1-Jun-

10

24-Jun-

10 2100 0 0 0 244.8 0 43.5 0 0 0 0 2163

BAJAJ-

AUTO

2-Jun-

10

24-Jun-

10 2100 0 0 0 244.8 0 30.1 0 0 0 0 2205

BAJAJ-

AUTO

3-Jun-

10

24-Jun-

10 2100 0 0 0 244.8 0 28.85 0 0 0 0 2198

BAJAJ-

AUTO

4-Jun-

10

24-Jun-

10 2100 0 0 0 244.8 0 29.65 0 0 0 0 2185

BAJAJ-AUTO

7-Jun-10

24-Jun-10 2100 0 0 0 244.8 0 24.2 0 0 0 0 2184


61/95


62/95

62

Interpretation:

Hcl technologies call option stock settle price opened with a positive settle

price and fluctuated up and down during the period and settled on expiry date.

Graph No: 3

0

20

40

60

80

100

120

140

17-May-10

19-May-10

21-May-10

23-May-10

25-May-10

27-May-10

29-May-10

31-May-10

2-Ju

n-10

4-Ju

n-10

6-Ju

n-10

8-Ju

n-10

10-Ju

n-10

12-Ju

n-10

14-Ju

n-10

16-Ju

n-10

18-Ju

n-10

20-Ju

n-10

22-Ju

n-10

24-Ju

n-10

P

r

i

c

e

s

Dates

Settle Price


63/95

63

4. STATEMENT SHOWING MOVEMENT OF FUTURE STOCKS OF

HCL TECHNOLOGIES DURING THE PERIOD FROM 17-05-2010 TO

24-06-2010:

Table No: 4

Symbol Date Expiry Open High Low Close LTP

Settle

Price

No. of

contracts

Turnover in

Lacs

Open

Int

Change

in OI

Und

ng V

HCLTECH17-May-10

24-Jun-10 398.05 398.95 394 395.85 395 395.85 66 339.84 174200 11700 394.

HCLTECH

18-May-

10

24-Jun-

10 398.3 403 395.95 397.35 398 397.35 62 322.04 183300 9100 396.

HCLTECH

19-May-

10

24-Jun-

10 393.3 393.3 366 373.6 372.05 373.6 174 858.88 271700 88400 371.

HCLTECH

20-May-

10

24-Jun-

10 378 379 358 363 366 363 108 516.73 301600 29900 361.

HCLTECH21-May-10

24-Jun-10 356 371.4 351.2 369.1 371 369.1 161 758.97 266500 -35100 367.

HCLTECH

24-May-

10

24-Jun-

10 374 374 360 369.95 369.65 369.95 390 1869.97 520000 253500 371

HCLTECH

25-May-

10

24-Jun-

10 361.25 365.3 352 355.5 358 355.5 843 3931.54 856700 336700 355

HCLTECH

26-May-

10

24-Jun-

10 364.95 368.9 356.45 365.25 366.2 365.25 869 4087.27

142350

0 566800 366.

HCLTECH

27-May-

10

24-Jun-

10 365.4 372.3 361 366.85 365.1 366.85 1423 6761.5

223860

0 815100 370.

HCLTECH

28-May-

10

24-Jun-

10 371.5 376.45 367.7 374.05 372.65 374.05 788 3812.38

236340

0 124800 377.

HCLTECH31-May-10

24-Jun-10 374.5 383.3 366.45 380.05 380.3 380.05 1017 4947.76

2527200 163800 382.

HCLTECH 1-Jun-10

24-Jun-

10 378.25 379.1 363.3 365.3 363.4 365.3 702 3394.5

262210

0 94900 364.

HCLTECH 2-Jun-10

24-Jun-

10 365.5 373.7 365.5 371.05 371.9 371.05 772 3712.91

268060

0 58500 369.

HCLTECH 3-Jun-10

24-Jun-

10 378 381.85 376.2 380.05 380.5 380.05 597 2947.55

266370

0 -16900 378.

HCLTECH 4-Jun-10

24-Jun-

10 381 389.8 376.3 387.9 387.35 387.9 901 4510.75

268060

0 16900 386.

HCLTECH 7-Jun-1024-Jun-10 379.2 379.35 370.9 375.4 375 375.4 664 3229.58

2652000 -28600 373.


64/95

64

HCLTECH 8-Jun-1024-Jun-10 376.15 377.85 364.75 365.5 365.5 365.5 850 4095.13

2741700 89700 365.

HCLTECH 9-Jun-10

24-Jun-

10 362.5 368.8 360.2 364.05 365.5 364.05 654 3098.25

277550

0 33800 363.

HCLTECH

10-Jun-

10

24-Jun-

10 363 369.9 361.05 368.55 368.85 368.55 424 2017.36

277680

0 1300 366.

HCLTECH

11-Jun-

10

24-Jun-

10 373 373.5 367.9 370.4 369.95 370.4 455 2191.88

280280

0 26000 369.

HCLTECH

14-Jun-

10

24-Jun-

10 371.65 382.9 371.1 381.9 382.45 381.9 1259 6207.85

275080

0 -52000 380.

HCLTECH15-Jun-10

24-Jun-10 381 390.9 381 385.8 384.8 385.8 1175 5899.46

2659800 -91000 384.

HCLTECH

16-Jun-

10

24-Jun-

10 390.7 390.7 381.3 382.8 382 382.8 483 2409.53

267280

0 13000 382.

HCLTECH

17-Jun-

10

24-Jun-

10 382 389.8 375.25 387.2 385.55 387.2 863 4288.85

257270

0 -100100 385.

HCLTECH

18-Jun-

10

24-Jun-

10 385.2 396.7 384.6 388.75 386.1 388.75 1721 8774.89

253500

0 -37700 389.

HCLTECH21-Jun-10

24-Jun-10 391 393.5 385.1 388.45 388.7 388.45 1099 5560.25

2314000 -221000 388.

HCLTECH

22-Jun-

10

24-Jun-

10 387 395.05 378.75 380.95 379.15 380.95 1452 7343.29

175630

0 -557700 380.

HCLTECH

23-Jun-

10

24-Jun-

10 375.2 382.15 371.65 374.1 375 374.1 1360 6663.37

118430

0 -572000 372.

HCLTECH24-Jun-10

24-Jun-10 367 367 353.05 364 364 364.15 3639 17001.84 687700 -496600 364.

Data analysis:

From the above table it is analysed that on 17th

may 2010 the Hcl

technologies future price opened with 398.95 and decreased to 367 on 24th

june

2010.


65/95

65

Interpretation:

Hcl technologies future settle price opened with a positive index and

fluctuated up and down during the period and ended with a negative index at the

end of the contract period.

Graph No: 4

330

340

350

360

370

380

390

400

410

17-May-10

19-May-10

21-May-10

23-May-10

25-May-10

27-May-10

29-May-10

31-May-10

2-Jun-10

4-Jun-10

6-Jun-10

8-Jun-10

10-Jun-10

12-Jun-10

14-Jun-10

16-Jun-10

18-Jun-10

20-Jun-10

22-Jun-10

24-Jun-10

P

r

i

c

e

s

Dates

Open Price


66/95

66

5. STATEMENT SHOWING MOVEMENT OF CALL OPTION STOCKS

OF HCL TECHNOLOGIES DURING THE PERIOD FROM 17-05-

2010 TO 24-06-2010:

Table No: 5

Symbol Date ExpiryStrikePrice Open High Low Close LTP

SettlePrice

No. ofcontracts

Turnoverin Lacs

OpenInt

Changein OI

UnderlyingValue

HCLTECH

17-

May-10

24-Jun-10 380 0 0 0 21.05 0 30.4 0 0 0 0 394.35

HCLTECH

18-May-

10

24-Jun-

10 380 0 0 0 21.05 0 30.75 0 0 0 0 396.2

HCLTECH

19-

May-10

24-Jun-10 380 0 0 0 21.05 0 20.5 0 0 0 0 371.85

HCLTECH

20-

May-

10

24-Jun-

10 380 0 0 0 21.05 0 15.55 0 0 0 0 361.4

HCLTECH

21-

May-10

24-Jun-10 380 0 0 0 21.05 0 17.4 0 0 0 0 367.45

HCLTECH

24-

May-

10

24-Jun-

10 380 0 0 0 21.05 0 17.45 0 0 0 0 371

HCLTECH

25-

May-

10

24-Jun-

10 380 0 0 0 21.05 0 11.6 0 0 0 0 355

HCLTECH

26-

May-

10

24-Jun-

10 380 0 0 0 21.05 0 16.1 0 0 0 0 366.5

HCLTECH

27-

May-

10

24-Jun-

10 380 0 0 0 21.05 0 16.8 0 0 0 0 370.15

HCLTECH

28-

May-

10

24-Jun-

10 380 0 0 0 21.05 0 19.5 0 0 0 0 377.1

HCLTECH

31-

May-

10

24-Jun-

10 380 0 0 0 21.05 0 20.7 0 0 0 0 382.35

HCLTECH 1-Jun-10 24-Jun-10 380 0 0 0 21.05 0 13.15 0 0 0 0 364.95

HCLTECH2-Jun-10

24-Jun-10 380 0 0 0 21.05 0 14.45 0 0 0 0 369.9

HCLTECH

3-Jun-

10

24-Jun-

10 380 0 0 0 21.05 0 18.05 0 0 0 0 378.6

HCLTECH4-Jun

futers and options

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