potential riskloss associated with derivatives final perfact

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A

COMPREHENSIVE PROJECT REPORT

ON

AN IN-DEPTH ANALYSIS ON POTENTIAL RISK ASSOCIATED

WITH DERIVATIVES

Submitted to

SHRI JAYSUKHLAL VADHAR INSTITUTE OF MANAGEMENT

STUDIES (COLLEGE CODE: 770)

IN PARTIAL FULFILLMENT OF THE

REQUIREMENT OF THE AWARD FOR THE DEGREE OF

MASTER OF BUSINESS ASMINISTRATION

In

Gujarat Technological University

UNDER THE GUIDANCE OF

Prof. Rajesh Faldu

Submitted by

ROHIT LALA[117700592072]

SHRI JAYSUKHLAL VADHAR INSTITUTE OF MANAGEMENT

STUDIES (JVIMS, JAMNAGAR)

MBA PROGRAMME

Affiliated to Gujarat Technological University

Ahmedabad


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Potential Risks of Derivatives Market

J.V.I.M.S, JAMNAGAR 2

PREFACE

The Indian Financial System has undergone a considerable change in the

recent past. Only a few years ago its vital aspects used to be a closed, opaque,

classified affair shaped and regulated by the bureaucrat of the finance ministry.

Today, it is very different. Since 1991, gradually, it metamorphosed into a

substantive, self-regulating system and developed as one obeying no rules or dictates

other than those consistent with its own character. It has left the backwaters and

entered the open sea and though sometimes buffeted by swift, violent and complex

happenings, it has necessarily shaped up as what a free financial system should be.

It has chosen to be competitive, market-oriented, modern, cost-effective,

trying to remain afloat and struggling to push ahead, even build a surplus for hard

times that may be in store. We may attribute this change to the winds of privatization

and liberalization blowing all over the world.

The transformation implies that the components of the Indian financial system,

that is, the institutions and markets functioning within it have chosen to be wellmanaged and growth-oriented. It has become a modern, twenty-first century system

having features such as derivatives market; new instruments such as deep discount

bonds, securitized paper, floating rate bonds; bourses such as NSE, OTCEI etc.

I have tried my best to make it lucid in expression, sufficient in content and

full of extracts and references.


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DECLARATION

We, ROHIT LALA & SATISH GANWANI, hereby declare that the

report for Comprehensive Project entitled

An In depth Analysis On Potential Risk/Loss Associated With

Derivatives

is a result of our own work and our indebtedness to other work

publications,

references, if any, have been duly acknowledged.

___________Rohit lala

En. No.:117700592072


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ACKNOWLEDGEMENT

This acknowledgement is especially for those people who have been co-

operative to me while preparing this report. My heartily thanks to all those who have

helped me in preparing this report by providing the necessary information regarding

the derivatives market which I had undergone in this research project.

I am thankful to my kind and co-operative to our Dy. DirectorDr. Ajay Shah and

associate Prof. Rajesh Faldu who suggested and helped me to make research -

associated with potential risks of derivatives market.

Date: (Signature)

Place: Jamnagar ROHIT. K. LALA


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EXECUTIVE SUMMARY

In physics, and life too, things are constantly changing. Specifically, what well be

interested with in the physics context is how physical quantities change. For example,

how does an objects velocity change over time, or how does the force acting on an

object change over a distance traveled. Such changes are described mathematically

by derivatives. A derivative is just a fancy name that describes how something is

changing with respect to something else. What follows will be a brief summary and

insight into this world of ever changing quantities called derivatives.

In this era of globalization, the world is a riskier place and exposure to risk is

growing. Risk cannot be avoided or ignored. Man, however, is risk-averse. This

risk-averse characteristic of human beings has brought about growth in derivatives.

Derivatives help the risk-averse individual by offering a mechanism for hedging risks.

Derivatives offer a sound-mechanism for insuring against various kinds of risk arising

in the world of finance. They offer a range of mechanisms to improve redistribution

of risk, which can be extended to every product existing, from coffee to cotton and

live cattle to debt instruments. The above few lines does not mean that derivatives are

the means to insured fully against the risk, there are some risk associated with trading

aspect, which we have covered in this research project and mentioned in the later

stages.

Equity derivatives trading started in India in June 2000, after a regulatory process

which stretched over more than four years. In July 2001, the equity spot market

moved to rolling settlement. Thus, in 2000 and 2001, the Indian equity market

reached the logical conclusion of the reforms program which began n 1994. It is

hence important to learn about the behavior of the equity market in this new regime.

Indias experience with the launch of equity derivatives market has been

extremely positive, by world standards. There is an increasing sense that the equity

derivatives market is playing a major role in shaping price discovery.


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Sr.

No.Contents Page

No.

1 INTRODUCTION & OVERVIEW TO DERIVATIVES 08

2 CONCEPTUAL FRAMEWORK 26

3 REVIEW OF LITERATURE. 42

4 RESEARCH METHODOLOGY. 45

5ANALYSIS, INTERPRETATION & TESTING OF

HYPOTHESIS49

6F INDI NGS, SUGGESTIONS

90

7 CONCLUSION 91

8 BIBLOGRAPHY. 93

9 APPENDIX. 95

1 0 GLOSSARY. 98


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INTRODUCTION

Derivatives are one of the most complex of instruments. The word derivative comes

from the verb to derive. It indicates that it has no independent value. A derivative is

a contract whose value is derived from the value of another asset, known as the

underlying, which could be a share, a stock market index, an interest rate, a

commodity, or a currency. The underlying is the identification fag for a derivative

contract. When the price of this underlying asset changes, then the value of the

derivative also changes. Without an underlying, derivatives do not have any meaning.

For instance, the value of a gold future contract derives from the value of the

underlying asset, that is, gold.

Derivatives are very similar to insurance. Insurance protects against specific risks,

such as fire, floods, theft, and so on. Derivatives, on the other hand, take care of

market risks volatility in interest, currency rates, commodity prices, and share

prices. Derivatives offer a sound mechanism for insuring against various kinds of risk

arising in the world of finance. They offer a range of mechanisms to improve

redistribution of risk, which can be extended to every product existing, from coffee to

cotton and live cattle to debt instruments.

In this era of globalization, the world is a riskier place and exposure to risk is

growing. Risk cannot be avoided or ignored. Man, however, is risk-averse. This

risk-averse characteristic of human beings has brought about growth in derivatives.

Derivatives help the risk-averse individual by offering a mechanism for hedging risks.

Derivatives offer a sound mechanism for insuring against various kinds of risk arising

in the world of finance. They offer a range of mechanisms to improve redistribution

of risk, which can be extended to every product existing, from coffee to cotton and

live cattle to debt instruments.

Derivatives product, several centuries ago, emerged as hedging devices against

fluctuations in commodity prices. Commodity futures and options have had a lively

existence for several centuries. Financial derivatives came into the limelight in the

post 1970 period; today they account for they account for 75 per cent of the

financial market activity in Europe, North America, and East Asia. The basic


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difference between commodity and financial derivatives lies in the nature of the

underlying instrument. In commodity derivatives, the underlying is a commodity; it

may be wheat, cotton, pepper, turmeric, corn, oats, soybeans, orange, rice, crude oil,

natural gas, gold, silver, and so on. In financial derivatives, the underlying includes

treasuries, bonds, stocks, stock index, foreign exchange, and euro-dollar deposits.

The market for financial derivatives has grown tremendously both in terms of variety

of instruments and turnover. Derivatives can be future, options, swaps, forwards, puts,

calls, swap options, index-linked derivatives, and so on.


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THE EXPLOSIVE GROWTH OF DERIVATIVES IN THE

DEVELOPED CENTURIES IS FUELLED BY:

The increased volatility in global financial markets.

The technological changes enabling cheaper communications and

computing power.

Breakthrough in modern financial theory, providing economic agents a

wider choice of risk management strategies and instruments that optimally

combine the risk and returns over a large number of financial assets.

Political developments, wherein the role of the government in the

economic arena has become more of a facilitator and less of a primemover. Thus, the move towards market-oriented policies and the

deregulation in financial markets has led to increase in financial risk at the

individual participants level.

Increased integration of domestic financial markets with international

markets.


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DERIVATIVES DEFINED UNDER THE SECURITIES

CONTRACTS (REGULATION) ACT, 1956

The Securities Contracts (Regulation) [Act SC(R)A], 1956, defines derivatives in the

following manner.

Derivatives include:

A security derived from a debt instrument, share, loan (whether secured or

unsecured), risk instrument, or contract for differences, or any other formof security.

A contract which derives its value from the prices or index of prices of

underlying securities.


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ECONOMIC BENEFITS OF DERIVATIVES

Derivatives reduce risk and thereby increase the willingness to hold the

underlying asset. They enable hedging, which is the prime social rational forfuture trading. Hedging is also the equivalent of insurance facility against risk

from market price fluctuations.

Derivatives enhance the liquidity of the underlying asset market. A liquid

market is a market with enough trading activity to allow traders to readily

trade goods for a price that is close to its true value. The trading volume

increases in the underlying market as derivatives enable participation by a

large number of players.

Derivatives lower transaction costs. These costs associated with trading

financial derivatives are substantially lower than the cost of trading the

underlying instrument.

Derivatives enhance the price discovery process. Price discovery is the

revealing of information about future cash market prices through the futures

market. The prices in the derivatives market reflect the perception of market

participants about the future, and lead the prices of the underlying to the

perceived future level. The prices of derivatives converge with the prices of

the underlying at the expiration of a derivatives contract. Thus, derivatives

help in the discovery of future as well as current prices.

Derivatives can help the investors to adjust the risk and return characteristics

of their stock portfolio carefully. For instance, a risky stock and a risky option

may be combined to form a risk less portfolio. They also provide a wide

choice of hedging structures each with a unique risk/return profile to meet the

exact requirements of each market participant.

Derivatives provide information on the magnitude and the direction in which

various market indices are expected to move.


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HISTORY OF DERIVATIVES TRADING

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. Romanemperors entered forward contracts to provide the masses with their supply of

Egyptian grain. These contracts were also undertaken between framers and merchants

to eliminate the risk arising out of uncertain future prices of grains. Thus, forward

contracts have existed for centuries for hedging price risk.

History of Derivatives: A Time Line

The Ancient: Derivatives

1400s Japanese rice futures

1600s Dutch tulip bulb options

1800s Puts and options

The Recent: Financial Derivatives Listed Markets

1972 Financial currency futures

1973 Stock options

1977 Treasury bond futures

1981 Eurodollar futures

1982 Index futures

1983 Stock Index options

1990 Foreign index warrants and leaps

1991 Swaps futures

1992 Insurance futures

1993 Flex options

OTC Markets

1981 Currency swaps

1982 Interest rate swaps

1983 Currency and bond options

1987 Equity derivatives markets

1988 Hybrid derivatives


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NEED FOR FINANCIAL DERIVATIVES

There are several risks inherent in financial transaction and asset liability positions.

Derivatives are risk shifting devices; they shift risk from those who have it but may

not want it to those who have the appetite and are willing to take it.

The three broad types of price risks are:

Market risk: Market risk arises when security prices go up due to reasons

affecting the sentiments of the whole market. Market risk is also referred to as

systematic risk since it cannot be diversified away because the stock marketas whole may go up or down from time to time.

Interest rate risk: This risk arises in the case of fixed income securities, such

as treasury bills, government securities, and bonds, whose market price could

fluctuate heavily if interest rates change. For example, the market price of

fixed income securities could fall if the interest rate shot up.

Exchange rate risk: In the case of import, exports, foreign loans or

investments, foreign currency is involved which gives rise to exchange rate

risk.

To hedge these risks, equity derivatives, interest rate derivatives, and currency

derivatives have emerged.


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DISTINCTIVE FEATURES OF DERIVATIVES MARKET

The derivatives market is like any other market.

It is a highly leveraged market in the sense that loss/profit can be magnified

compared to the initial margin. The investor pays only a fraction of the

investment amount to take an exposure. The investor can take large positions

even when he does not hold the underlying security.

Market view is as important in the derivatives market as in the cash market.

The profit/loss positions are dependent on the market view. Derivatives are

double-edged swords.

Derivatives contracts have a definite lifespan or a fixed expiration date.

The derivatives market is the only market where an investor can go long and

short on the same asset at the same time.

Derivatives carry risks that stocks do not. A stock loses its value in extreme

circumstances, while an option loses its entire value if it is not exercised.


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TRADERS IN DERIVATIVES MARKET

There are three types of traders in the derivatives market:

Hedger

Speculator

Arbitrageur

Hedger A hedge is a position taken in order to offset risk associated with some

other position. A hedger is someone who faces risk associated with price movement

of an asset and who uses derivatives as a means of reducing that risk. A hedger is a

trader who enters the futures market to reduce a pre-existing risk.

Speculators While hedgers are interested in reducing or eliminating risk,

speculators buy and sell derivatives to make profit and not to reduce risk. Speculators

willingly take increased risks. Speculators wish to take a position in the market by

betting on the future price movements of an asset. Futures and options contracts can

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

important to derivatives markets as they facilitate hedging, provide liquidity, ensure

accurate pricing, and help to maintain price stability. It is the speculators who keep

the market going because they bear risks which no one else is willing to bear.

ArbitrageurAn arbitrageur is a person who simultaneously enters into transactions

in two or more markets to take advantage of discrepancy between prices in these

markets. For example, if the futures price of an asset is very high relative to the cash

price, an arbitrageur will make profit by buying the asset and simultaneously selling

futures. Hence, arbitrage involves making profits from relative mispricing.

Arbitrageurs also help to make markets liquid, ensure accurate and uniform pricing,

and enhance price stability.


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DERIVATIVES MARKET IN INDIA

In India, commodity futures date back to 1875. The government banned futures

trading in many of the commodities in the sixties and seventies. Forward trading wasbanned in the 1960s by the government despite the fact that India had a long tradition

of forward markets. Derivatives were not referred to as options and futures but as

tezi-mandi.

In the case of capital markets, the indigenous 125-year-old badla system was very

popular among the broking and investor community. The advent of FIIs in the nineties

and a large number of scams led to a ban on badla. The FIIs were not comfortable

with this system and they insisted on adequate risk management tools. Hence, the

SEBI decided to introduce financial derivatives. 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 24member

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 Prof.J.R.Varma, to

recommend measures for risk containment in derivatives market in India. The report,

which was submitted in October 1998, worked out the operational details of

margining system, methodology for charging initial margins, broker net worth,

deposit requirement and realtime monitoring requirements.

Derivatives trading formally commenced in June 2000 on the two major stock

exchanges. BSE and NSE. Futures trading based on the Sensex commenced at the

BSE on June 9, 2000, while future trading based on S&P CNX Nifty commenced at

the NSE on June 12, 2000.


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TYPES OF FINANCIAL DERIVATIVES

In recent years, derivatives have become increasingly important in the field offinance. Forwards, futures, options, swaps, warrants, and convertible are the major

types of financial derivatives. A complex variety of composite derivatives, such as

swaptions, have emerged by combining some of the major types of financial

derivatives.

ForwardsA forward contract is a contract between two parties obligating each to

exchange a particular good or instrument at a set price on a future date. It is an OTC

agreement and has standardized market features.

FuturesFutures are standardized contracts between the buyers and sellers, which

fix the terms of the exchange that will take place between them at some fixed future

date. A futures contract is a legally binding agreement. Futures are special types of

forward contracts which are exchange traded, that is, traded on an organized

exchange. The major types of futures are stock index futures, interest rate futures, and

currency futures.

OptionsOptions are contracts between the option writers and buyers which obligate

the former and entitles (without obligation) the latter to sell/buy stated assets as per

the provisions of contracts. The major types of options are stock options, bond

options, currency options, stock index options, futures option, and options on swaps.


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DERIVATIVES

WarrantsWarrants are long term options with three to seven years of expiration. In

contract, stock options have a maximum life of nine months. Warrants are issued by

companies as means of raising finance with no initial servicing costs, such as dividend

or interest. They are like a call option on the stock of the issuing firm. A warrant is a

security with a market price of its own that can be converted into specific share at a

predetermined price and date. If warrants are exercised, the issuing firm has to create

a new share which leads to a dilution of ownership. Warrants are sweeteners attached

to bonds to make these bonds more attractive to the investor. Most of the warrants are

detachable and can be traded in their own right or separately. Warrants are also

available on stock indices and currencies.

Swaps Swaps are generally customized arrangements between counterparties to

exchange one set of financial obligations for another as per the terms of agreement.

The major types of swaps are currency swaps, and interest-rate swaps, bond swaps,

coupon swaps, and debt-equity swaps.

Options

Futures Swaps

Forwards

Commodity Security

Interest Rate CurrencyPut Call


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DERIVATIVES MARKET AT NSE

Trading Mechanisms The futures and options trading system of NSE, calledNEAT-F&O trading system, provides a fully automated screen-based trading for S&P

CNX Nifty futures on a nationwide basis and an online monitoring and surveillance

mechanism. It supports an order-driven market and is accessed by two types of users:

trading members and clearing members. The trading members (TM) have access to

the function such as order trading, order matching order and trade management while

the clearing members (CM) use trade workstation for the purpose of monitoring the

trade member(s) for whom they clear the trades. The can also enter and set limits to

positions which a trading member can take. At present, there are more than 200

derivatives members of NSE. An investor has to sign a client-broker agreement with a

member of derivatives segments for undertaking derivatives trading. A fresh is not

needed for options trading if an agreement is already signed for index futures trading.

The investor has to pay a commission to his broker-member to the value (strike price

plus premium) of his contract. Brokerage ranges between 0.1 and 0.2 per cent of the

contract values. An option buyer does not have to pay margins but an option seller has

to pay daily marked-to-market margins to the exchange. The broker-member is

required to give a contract note for all options and futures transactions done by an

investor within 48 hours of trade.

Clearing and Settlement The National Securities Clearing Corporation Limited

(NSCCL) undertakes clearing and settlement of all deals executed on the NSEs

derivatives segment. It acts as a legal counterparty to all deals on the derivatives

segment and guarantees settlement. NSCCL has developed a comprehensive risk

containment mechanism for the derivatives market. The actual margining happens on

a daily basis and online position monitoring on an intra-day basis.


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INSTRUMENT AVAILABLE IN INDIA

Products Index Futures Index

Options

Futures on

Individual

Securities

Options on

Individual

Securities

Underlying

Instrument

S&P CNX Nifty S&P CNX

Nifty

224

securities

stipulated by

SEBI

224 securities

stipulated by

SEBI

Type European American

Trading

Cycle

Maximum of 3 month trading

cycle. At any point in time,

there will be 3 contracts

available:

1.near month,

2.mid month &

3.far month duration

Same as

index

futures

Same as

index futures

Same as index

futures

Expiry Day Last Thursday of the expirymonth

Same asindex

futures

Same asindex futures

Same as indexfutures

Contract

Size

Permitted lot size is 200 &

multiples thereof

Same as

index

futures

As stipulated

by NSE (not

less than

Rs.2 lacs)

As stipulated by

NSE (not less

than Rs.2 lacs)

Price Steps Re.0.05 Re.0.05


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Base Price

First day of

trading

Previous day closing Nifty

value

Theoretical

value of the

options

contract

arrived at

based on

Black

scholes

model

Previous day

closing value

of underlying

security

Same as index

option

Base Price

Subsequent

Daily settlement price Daily close

price

Daily

settlement

price

Same as index

option

Price

Bands

Operating ranges are kept at +

10%

Operating

ranges for

are kept at

99 % of the

base price

Operating

ranges are

kept at + 20

%

Operating ranges

for are kept at 99

% of the base

price

Quantity

Freeze

20,000 units or greater 20,000 units

or greater

Lower of 1%

of market

wide position

limit

stipulated for

open position

or Rs.5

crores

Same as

individual

futures

BSE also offers similar products in the derivatives segment


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CHRONOLOGY OF EVENTS LEADING TO DERIVATIVES

TRADING

1956 Enactment of the Securities Contracts (Regulation) Act which

prohibited all options in securities

1969 Issue of Notification which prohibited forward trading in securities

1995 Promulgation of the Securities Laws (Amendment) Ordinance which

withdrew prohibition on options

1996 Setting up of L.C. Gupta Committee to develop regulatory framework

for derivatives trading in India

1998 Constitution of J.R.Varma Group to develop measure for risk

containment for derivative

1999 Enactment of the Securities Laws (Amendment) Act which defined

derivatives as securities

2000 Withdrawal of 1969 Notification

May 2000 SEBI granted approval to NSE and BSE to commence trading of

derivatives

June 2000 Trading in index futures commenced

June 2001 Trading in index options commenced

July 2001 Trading in stock options commenced

Rolling settlement introduced for active securities

Nov. 2001 Trading in stock futures commenced


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CONCEPTUAL FRAMEWORK


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FORWARDS CONTRACTS

A forward contract is a customized contract between two parties where settlement

takes place on a specific date in the future at a price agreed today. They are over-the-

counter traded contracts. Forward contract are private agreements between twofinancial institutions or between a financial institution and its corporate client.

In a forward contract, one party takes a long position by agreeing to buy the

asset at a certain specified date for a specified price and the other party takes a short

position by agreeing to sell the assets on the same date for the same price. The main

features of forward contracts are:

They are bilateral contracts wherein all the contract details, such as delivery

date, price, and quantity and so on, are negotiated bilaterally by the parties to

the contract. Being bilateral in nature, they are exposed to counter party risk.

Each contract is custom designed in the sense that the terms of a forward

contract are individually agreed between two counterparties. Hence, each

contract is unique in terms of contract size, expiration date, and the asset type

and quality.

As each contract is customized, the contract price is generally not available in

public domain.

The contract has to be settled by delivery of the asset on the expiry date.

In case, the party wishes to reverse the contract, it has to compulsorily

approach the same counterparty, which being in a monopoly situation can

command a high price.

Forward markets for some goods are highly developed and have standardized market

features. Some forward contracts do have liquid markets. In particular, the forward

foreign exchange market and the forward market for interest rates are highly liquid.

Forward contracts dominance is very high for the purpose of hedging foreign

exchange exposures, particularly in Europe. Forward contracts help in hedging risks

arising out of foreign exchange rate fluctuation. For instance, an exporter who expects

to receive payments in dollars three months later can sell dollars forward and an

importer who is required to make payment in dollars can buy dollars forward, thereby

reducing their exposure to exchange-rate fluctuations.


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FUTURES CONTRACTS

Futures are exchange-traded contracts, or agreements, to buy or sell a specified

quantity of financial instrument/commodity in a designated future month at a price

agreed upon by the seller and buyer. Futures contracts have certain standardizedspecifications, such as:

Quantity of the underlying

Quality of the underlying (not required in financial futures)

Date and month of delivery

Units of price quotation (not the price itself) and minimum change in price

(tick size). A tick is a change in the price of a contract be it up or down.

Location of settlement

Futures is a type of forward contract. The structure, pay-off profile, and basic utility

for both futures and forward are the same. However, futures contracts differ contracts

differ from forward contracts in several ways:

Futures are exchange-traded contracts, while forwards are OTC contracts, not

traded on a stock exchange.

Futures contracts being traded on exchange are standardized, that is, have

terms standardized by the exchange. Only the price is negotiated. In contrast,

all elements of forward contracts are negotiated and each contract is

customized.

Futures markets are transparent while the forward market are not transparent,

forwards are OTC instruments.

Futures contracts are usually more liquid than forward contracts, because they

are standardized and traded on futures exchanges.

Futures contracts frequently involve a range of delivery dates whereas there is

generally a single delivery date in a forward contract.

The futures trading system has effective safeguards against defaults. Futures

do not carry a credit risk, as there is a clearing house, which guarantees both

payment and delivery. Forward contracts, on the other hand, are exposed to

default risk by counterparty as there is no such clearing house involved.


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HISTORY OF FUTURE MARKETS

Futures markets can be traced back to the middle ages. They were originally

developed to meet the needs of farmers and merchants. Consider the position of afarmer in April of a certain year who will harvest grain in June. The farmer is

uncertain as to the price he or she will receive for the grain. In years of scarcity, it

might be possible to obtain relatively high prices particularly if the farmer if not in

hurry to sell. On the other hand, in years of oversupply, the grain might have to be

disposed of at fire-sale prices. The farmer and the farmers family are clearly exposed

to a great deal of risk

It clearly makes sense for the farmer and the merchant to get together in April (or

even earlier) and agree on a price for the farmers anticipated production of grain in

June. In other words, it makes sense for them to negotiate a type of futures contract.

The contract provides a way for each side to eliminate the risk it faces because of the

uncertain future price of grain.

The Chicago Board of Trade

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. Within a few years, the first futures type

contract was developed. It was know as a to-arrive contract. Speculators soon became

interested in the contract and found trading the contract to be an attractive alternative

to trading the grain itself. The CBOT now offers futures contracts on many different

underlying assets, including corn, oats, soybeans meal, soybean oil, wheat, silver,

treasury bonds, treasury notes, and the Major Market Stock Index.

The Chicago Mercantile Exchange

In 1874, the Chicago Produce Exchange was established. This provided a market for

butter, eggs, poultry, and other perishable agricultural products. In 1898, the butter

and egg dealers withdrew from this exchange to form the Chicago Butter and Egg

Board. In 1919, this was renamed the Chicago Mercantile Exchange (CME) and was

reorganized for futures trading.


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NEED FOR FUTURE MARKETS

Futures markets exist for several reasons:

Futures allow hedging against adverse price changes. Hedgers transfer price

risk to speculators who willingly undertake risk to take advantage of

fluctuations in prices.

Futures help in price-discovery. By observing the current futures price,

producers and consumers can estimate what the future spot price will be or

what future supply and demand of a good will be.

Futures prices contain and reflect information which helps in optimal

allocation of resources.

Futures make transactions across time easier, speedier and less costly


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PRICING FUTURES

The study of futures prices is essential for understanding all features of the futures

market. Futures prices bear important relationships with the spot price, expectedfuture spot price, the basis, the spreads, and the cost of storage. These are fundamental

factors that affect futures prices.

Spot PriceThe price of a good for immediate delivery. It is also referred to as the

cash price or the current price.

BasisThe difference between cash price and the futures prices of particular good.

Basis = Current Cash PriceFutures Price.

As the futures contract approaches maturity, the basis narrows. At the maturity of the

futures contracts, the basis is zero. This behavior of the basis over time is known as

convergence, that is, convergence of futures price towards the spot price. The basis is

much more stable than futures price or the cash price. The futures price or the cash

price may vary widely when considered in isolation, but basis trends to be relatively

stable. Hence, basis is important for speculation and hedging. Arbitrage opportunities

can also arise if the basis during the life of a contract is incorrect.

Spread - A spread is the difference between two futures prices. Spreads may be

classified as intra-commodity spread and inter-commodity spread. If the two futures

prices that form a spread are futures prices for futures contracts on the same

underlying good but with different expiration dates, the spread is an intra-commodity

spread. An intra-commodity spread indicates the relative price differentials for a

commodity to be delivered at two points in time. If two futures prices that form a

spread are futures prices for two underlying goods, such as silver futures and gold

futures, then the spread is an inter-commodity spread.

Spreads are important for speculators. Spreads are more stable when compared to

futures prices. Arbitrage opportunities can arise if the spreads are incorrect.


31/104



Expected future spot price The expectations of market participants also help in

determining the futures prices. If market participants believe that silver will sell for Rs

7000 per kg in three months, then the price of the futures contract for delivery of

silver in three months cannot be Rs 9000 per kg.

Cost of StorageThe price for storing the good underlying the futures contract also

affects futures prices. The cost of storing is the cost of storing the underlying good

from the present to the delivery date. It is the cost of carry related arbitrage that drives

the behavior of the futures prices.


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FUTURE TRADING STRATEGIES

Strategies are game plans created by an investor. These game plans are based on

investors expectations of how the market will move. Usually, there are four viewsthat an investor can take on market movements.

Bullish: The investor anticipates a price rise.

Bearish: The investor anticipates a price decline.

Volatile: The investor anticipates a significant and rapid movement either in the

market or scrip but he is not clear of the direction of the movement

Neutral: The Investor believes that market or scrip will not move significantly in any

direction. It is opposite of the volatile view.


33/104



OPTIONS CONTRACT

Options are contracts that give the holder the option to buy/sell specified quantity of

the underlying assets at a particular (strike) price on or before a specified time period.

The word option implies that the holder of the options has the right but no t the

obligation to buy or sell underlying assets. The underlying may be physical

commodities such as wheat/rice/cotton/oilseeds/gold or financial instruments such as

equity shares, stock index, bonds and so on. In a forward or futures market, the two

parties commit to buy and sell, while the option gives the holder of the option the

right to buy or sell. However, the holder of the options has to pay the price of the

options, termed as the premium. If the holder does not exercise the option, he loses

only the premium. Hence, options are fundamentally different from forward or

futures.

It should be emphasized that an option gives the holder the right to do something. The

holder does not have to exercise this right. This fact distinguishes options from futures

contracts. The holder of a long futures contract has committed himself or herself to

buying an asset at a certain price at a certain time in the future. By contrast, the holderof call option has a choice as to whether he or she buys the asset at a certain price at a

certain time in the future. It costs nothing to enter into a futures contract. By contrast,

an investor must pay an up-front fee or price for an options contract.

Buyers are referred to as having long positions; sellers are referred to as having short

positions. Selling an option is also known as writing the option.


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HISTORY OF OPTIONS MARKET

The first trading in puts and calls began in Europe and in the United States as early as

the eighteenth century. In the early years, the market got a bad name because of

certain corrupt practices. One of these involved brokers being given options on a

certain stock as an inducement for them to recommend the stock to their clients.

Put and Call Brokers and Dealer Association

In the early 1900s, a group of firms set up what was known as the Put and Call

Brokers and Dealers Association. The aim of this association was to provide 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. This firm would attempt to

find a seller or writer of the option from either 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 what was deemed to be an appropriate price. A market

created in this way is known as an over-the-counter market, since traders do not

physically meet on the floor of an exchange.

The options market of the Put and Call Brokers and Dealers Association suffered

from two deficiencies. First, there was no secondary market. The buyer of an option

did not have the right to sell it to another party prior to expiration. Second, there was

no mechanism to guarantee the writer of the option would honor the contract. If the

writer did not fulfill his or her part of the bargain when the option was exercised, the

buyer had to resort to costly lawsuits.


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The Formation of Options Exchange

In April 1973, the Chicago Board of Trade set up a new exchange, the

Chicago Board Options Exchange, specifically for the purpose of trading stock

options. Since then option markets have become increasingly popular with investors.

The American Stock Exchange (AMEX) and the Philadelphia Stock Exchange

(PHLX) began trading options in 1975. By the early 1980, the volume of trading had

grown so rapidly that the number of shares underlying the option contracts sold each

day exceeded the daily volume of shares traded on the New York Stock Exchange.

In the 1980s, market developed for options in foreign exchange, options on stock

indices, and options on futures contracts. The Philadelphia Stock Exchange is thepremier exchange for trading foreign exchange options. The Chicago Board Options

Exchange trades options on the S&P 100 and the S&P 500 stock indices while the

American Stock Exchange trades options on the Major Market Stock Index, and the

New York Stock Exchange trades options on the NYSE index. Most exchange

offering futures contracts now also offer options on these futures contracts. Thus, the

Chicago Board of Trade offers options on corn futures, the Chicago Mercantile

Exchange offers options on live cattle futures, and the International Monetary Markets

offers options on foreign currency futures, and so on.

Both options and futures markets have been outstandingly successful. One of the

reasons for this is that they have attracted many different types of traders. Three broad

categories of traders can be identified: hedgers, speculators, and arbitrageurs.


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TYPES OF OPTIONS

Options are of two basic typescall option and put option. A call option is a right

to buy an underlying asset at a specified price on or before a particular day by paying

a premium. A put option is a right to sell an underlying asset at a specified price on

or before a particular day by paying a premium.

There are two other important types of options: European-style options and

American-style options. European-style options can be exercised only on the maturity

date of the option, which is known as the expiry date. American-style options can be

exercised at any time before and on the expiry date. The American option permits

early exercise while a European option does not. Both these types are traded

throughout the world. European options are easier to analyze than American options

and properties of an American option are frequently deduced from those of its

European counterpart.

Options can be over the counter and exchange traded. Over-the-counter (OTC)

options are private agreements between two parties and are tailor-made to the

requirements of the party buying the options. Exchange-traded options are bought and

sold on an organized exchange and are standardized contracts. Most exchange-traded

options are American-style options.


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SALIENT FEATURES OF OPTIONS

1 Options have a fixed maturity date on which they expire; this is termed expiry

date. European-style option can be exercised only on the expiry date while

American-style options can be exercised on any day before the expiry date.

The expiry date is also known as the exercise date, the strike date, or the

maturity date.

2 The price at which the option is exercised is called the exercise price, or strike

price. The exercise price is specified in the contract.

3 The person who writes the option is the option writer. The seller of an option

is usually referred to as writer. The option writer is obliged to buy/sell the

shares if the holder (buyer) exercises his option. The writer of a call option is

generally bearish and writer of a put option is generally bullish. The writer of

a call option must deliver the stock and the writer of a put option must buy the

stock at the strike prices if the option buyer or seller chooses to exercise his

right. The profits/loss of options writers equals the losses/profits of the buyers.

The maximum profit for the writer in case of an option unexercised is the

premium received. The writer of a call has unlimited loss potential, while the

writer of a put has limited loss potential. Option writing is risky and hence it

requires a higher degree of understanding risk management ability and an

active, regular presence in the derivatives market regularly.

4 The option premium is the price paid for the option by the buyer to the seller.

5 The value of option (premium) depends on the exercise price, the time of

expiration, the price of the asset involved, the variance of returns of the asset

concerned, the risk free rate, and the dividends expected during the life of the

option. The value of a call generally increases as the current stock price, the

time to expiration, the volatility, and the risk free interest rate increase. The

value of a call decreases as the strike price and expected dividends increase.

The value of a put generally increases as the strike price, the time to

expiration, the volatility, and the expected dividends increase.


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OPTIONS TERMINOLOGY

In-the-money option: when the underlying asset price (S) is greater than the strike

price (X) of the call option, that is, S>X. An in-the-money option would lead to a

positive cash flow to the holder if it were exercised immediately.

Out-of-the-money option: when the underlying asset price (S) is the less than the

strike price (X of the call option) , that is, S Strike Price (S>X)

Spot price of underlying

asset < Strike Price (SX)

*When market price is very near the strike price, the option is called near-the-money

option


39/104



OPTION PREMIUM

The option premium can be broken down into two componentsintrinsic value of an

option and time value of an option.

Intrinsic value of Options: The intrinsic value of an option is the greater of zero, or

the amount that is in-the-money. Only in-the-money options have intrinsic value. It is

defined as the amount by which an option is in the money or the immediate exercise

value of the option when the underlying position is marked-to-market.

For a Call option: Intrinsic Value = Spot PriceStrike Price.

For a Put option: Intrinsic Value = Strike PriceSpot Price.

The intrinsic value of an option must be a positive number of zero (0). It cannot be

negative. For a call option, the strike price must be less than the price of the

underlying asset for the call to have an intrinsic value greater than zero. In other

words the intrinsic value of a call is max (S X, O), which means the intrinsic value

of a call is the greater of S X or O. For a put option, the strike price must be greater

than the underlying price for it to have intrinsic value. In other words, the intrinsic

value of a put is max (XS, O).

Time Value of Options: The time value of an option is the difference between its

premium and its intrinsic value. Time value is the amount option buyers are willing to

pay for the possibility that the option may become profitable prior to expiration due to

favorable change in the price of the underlying. Thus, it is a payment for the

possibility that the intrinsic value might increase prior to the expiry date. The

magnitude of the options time value reflects the potential of the option to gain

intrinsic value during its life. Prior to expiration, options will almost have some time

value; the exceptions are deep in-the-money European options. When an option is

sold, rather than exercised, time value is received in addition to the intrinsic value.

Time value cannot be negative. An option loses its time value as its expiration date

nears. Time value premium decreases at an accelerated rate as the option approaches

maturity. At expiration, an option is worth only its intrinsic value.


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A call that is out of the money or at the money has only time value. Usually, the

maximum time value exists when the option is at the money.

One of the factors that determine time value is the market expectation or price

volatility. If the market expectation of price volatility of an underlying asset is high,

the time value will also be high, reflecting the strong possibility of substantial

increases in intrinsic value.


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REVIEW OF LITERATURE


42/104



ALLAYANNIS, G.OFEK, E. (2001),

Exchange rate exposure, hedging, and the use of foreign currency derivatives,

Journal ofInternational Money and Finance, Vol. 20, pp. 273-296.

ANSON, M. J. P. (2001),Accounting and tax rules for derivatives, Wiley

and Sons, London.

BARRIEU, P.EL-KAROU, N.(2002), Optimal design of derivatives

in illiquid markets, Quantitative Finance, No. 2, Vol. 3, pp.181-188.

BHASIN, V. (1996), On the credit risk of OTC derivatives users, Board of

Governors of the Federal reserve System, Washington D.C..

BIS (1995),Issues of measurement related to market size and macroprudential

risks in derivatives markets, Basle.

BIS (1996),Macroeconomic and monetary policy issues raised by thegrowth of derivatives markets, Basle.

BREWER, E.MINTON, B.A.MOSER, J.T. (2000), Interest rate

derivatives and bank lending,Journal of Banking and Finance, Vol. 24, No.

3, pp. 353-379.

BROWN, G.W.TOFT, K.B. (2002), How firms should hedge,Review

of Financial Studies, Fall, Vol. 15, no.4, pp. 1283-1324.

COHEN, B. (1999), Derivatives, volatility and price discovery,

International Finance, Vol. 2, No. 2, pp. 167-202.

CONRAD, J. (1989),The price effect of option introduction,Journal of

Finance, vol. XLIV, N. 2, June, pp. 487-498.

DARBY, M.R. (1994), Over-The-Counter derivatives and systemic risk to

the global financial system, NBER Working Paper, No. 4801, Cambridge,

MA.

DONMEZ, C.A.

YILMAZ, M.K(1999), Do derivatives marketsconstitute a potential threat to the stability of the global financial system?,

ISE Review, Vol. 3, No. 11, pp. 51-82.

EDWARDS, F.R. (1995), Off-exchange derivatives markets andfinancial fragility, Journal of Financial Services Research, No. 9, pp. 259-290.

GARBER, P.M. (1998),Derivatives in International Capital Flow, NBER

Working Paper, No. 6623, Cambridge, MA.


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GOODHART, C.A.E. (1995),Financial globalization, derivatives,

volatility, and the challenge for the policies of central banks, Special Paper

74, ESRC Research Centre, London.

HAUGH, M.B.

LO, A.W.(2001), Asset allocation and derivatives,Quantitative Finance, Vol. 1, No. 1, pp. 45-72.

HEAT, R. (1998), The statistical measurement of financial derivatives,

IMF Working Paper, n.24, Washington D.C..

HENTSCHEL, L.KOTHARI, S.P. (2001), Are Corporations Reducing

or Taking Risks with Derivatives?,Journal of Financial and Quantitative

Analysis, March, Vol. 36, No.1, pp. 93-118.

HOGAN, A.M.B.MALMQUIST, D.H.(1999), Barriers to depository

uses of derivatives: an empirical analysis, Journal of MultinationalFinancial Management, Vol. 9, No. 3-4, pp. 419-440.

HOOYMAN, C.J. (1993), The use of foreign exchange swap by central

banks: a survey, IMF Working Paper, N. 64, Washington D.C..

HULL, J. (2002), Options, futures and other derivatives, fifth edition,

Prentice Hall.

HUNTER, W.C.MARSHALL, D. (1999), Thoughts of financial

derivatives, systemic risk, and central banking: Some recent developments,

Federal Reserve Bank of Chicago Working Paper, n. 20, Chicago.

KROSZNER, R.S. (1999), Can the financial markets privately regulate

risk? The development of derivatives clearinghouses and recent OTC

innovations,Journal of Money Credit and Banking, Vol. 31, No. 3, pp. 596-

618.

LATTER, T. (2001),Derivatives from a Central Bank Point of View,

speech at Hong Kong, 5 November 2001.


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RESEARCH METHODOLOGY


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Objectives of the study

The main aim of analysis is to find out the potential risks which are associated with

the derivatives market in India. The project report is not a research based it is based

on the secondary data and simple analysis is carried out i.e. the impact of risks on

financial derivatives segment. As each research / analysis has some or the other

objectives the following are the objectives of this analysis:

To highlight all the potential risk which have a impact on Indian stock marketor financial derivatives.

To study the effectiveness in managing or hedging the risk associated in equityinvestment.

To study the effectiveness of Derivative instruments in respect to Speculation,Hedging, Investment, Arbitrage.

To compare the risk and return with equity and derivatives.

To come out with suitable recommendations to the investors


46/104



STATEMENT OF PROBLEM

POTENTIAL RISK ASSOCIATED WITH DERIVATIVES

DATA COLLECTION

The task of data collection begins after a objective is decided, problem has been

defined and research/analysis design/plan chalked out. While designing about the

method of data collection to be used for the study. The details of data are as follows:

The underlying instruments is S&P CNX Nifty

The underlying sector are Bank, IT, FMCG, PSE, MNC, Service, Energy,

Pharma

All data collected on secondary basis i.e. fromwww.nseindia.com

RESEARCH DESIGN

Sample size 12 stocks of different sectors Data collection source is secondary data.

Scope of the study is Limited to some the of the selected stocks and for the

time period from 2008 to 2012 only.

Statistical Tool used in the study ist - Test
http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/


47/104



LIMITATION OF THE STUDY

The limitations of this study could be the many, but the main limitations which must

be one of the constraints during preparation of the Analysis Report are:

Secondary Data:o The most and crucial limitation of this study is the use of secondary

data.

Personal Bias:

o Some articles and literature may have had personal bias due to which

they may not have given the correct information and due to which the

right conclusion may not be have been derived at.

Selection Criteria:

o The sectors which are chosen may not fall under the right risk i.e.

Systematic of Unsystematic and the companies under that sector may

not have the ideal representative.

Human Constraints:

o The human constraints were also important limitation because the typeof analytical process took place in once mine may have different from

others.

Time Limit:

o The time limit taken for conducting the research was very less it could

also be one of the limitations of the study.


48/104



ANALYSIS AND INTERPRETATION

& TESTING OF HYPOTHESIS


49/104



CNX BANK INDEX

The Indian banking Industry has been undergoing major changes, sparkly a

number of essential developments. Advancement in communication and information

technology has facilitated growth in internet-banking, ATM Network, Electronic

transfer of funds and quick diffusion of information. Structural reforms in the banking

sector have improved the health of the banking sector. The reforms recently

introduced include the enactment of the Securitization Act to step up loan recoveries,

establishment of asset reconstruction companies, initiatives on improving recoveries

from Non-performing Assets (NPAs) and change in the basis of income recognition

has raised transparency and efficiency in the banking system. In order to have a good

benchmark of the Indian banking sector, India Index Service and Product Limited(IISL) has developed the CNX Bank Index.

CNX Bank Index is an index comprised of the most liquid and large capitalized

Indian Banking stocks. It provides investors and market intermediaries with a

benchmark that captures the capital market performance of Indian Banks. The index

will have 12 stocks from the banking sector which trade on the National Stock

Exchange.

Among these 12 stocks the major Banks covered under these research projects are:

STATE BANK OF INDIA (SBI)

HDFC BANK LTD.,

Systematic Risk Associated with Bank Index or (Banking Sector) is:

MARKET RISK

INTEREST RATE RISK

Unsystematic Risk Associated with Bank Index or (Banking Sector) is:

BUSINESS RISK


50/104



STATE BANK OF INDIA (SBI)

S&P CNX Nifty SBI Bank

Date One Week Change % Change

One Week

Change % Change4-Jan-11 114.4 1.86 -172.8 -7.12

11-Jan-11 -81 -1.29 -2 -0.08

18-Jan-11 -474 -7.63 -90 -3.6

25-Jan-11 181.1 3.48 88 3.79

1-Feb-11 52 0.98 -196.65 -8.15

8-Feb-11 -361 -6.63 -76 -3.33

15-Feb-11 475 9.99 267 13.09

22-Feb-11 -181 -3.44 -145 -6.39

29-Feb-11 0 0 -19 -0.9

7-Mar-11 -168 -3.43 -73 -3.82

14-Mar-11 20 0.42 -161 -8.57

Per Centage Comparison

-10

-5

0

5

10

15

4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar

Date

Gain/Losein%

S&P CNX Nifty SBI Bank


51/104



T-TEST

Null hypothesis (Ho): There is no significant difference between portfolio

return and benchmark return.

Alternative hypothesis (H1): There is significant difference between portfolio


t-Test: Two-Sample Assuming Unequal Variances

Variable

1

Variable

2

Mean -2.28

-

0.51727

Variance 39.93814 24.1

Observations 11 11

Hypothesized Mean

Difference 0

df 19

t Stat -0.73057

P(T


52/104



HDFC BANK LTD.

S&P CNX Nifty HDFC Bank

DateOne WeekChange % Change

One WeekChange

%Change

4-Jan 114.4 1.86 0 0

11-Jan -81 -1.29 0 0

18-Jan -474 -7.63 0 0

25-Jan 181.1 3.48 0 0

1-Feb 52 0.98 0 0

8-Feb -361 -6.63 -126.4 -8.05

15-Feb 475 9.99 153.9 10.87

22-Feb -181 -3.44 -88.4 -5.67

29-Feb 0 0 30.85 2.16

7-Mar -168 -3.43 -106 -7.68

14-Mar 20 0.42 6.25 0.48


-10

-5

0

5

10

15

4-Jan 11-

Jan

18-

Jan

25-

Jan

1-Feb 8-Feb 15-

Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Losein%

S&P CNX Nifty HDFC Bank


53/104



T-TEST



Alternative hypothesis (H1): There is significant difference between portfolio return

and benchmark return.


Variable

1

Variable

2

Mean -0.71727

-

0.51727

Variance 27.33274 24.1

Observations 11 11

Hypothesized Mean

Difference 0

df 20

t Stat -0.09249

P(T


54/104



CNX IT INDEX

Information Technology (IT) industry has played a major role in the Indian economy

during the last few years. A number of large, profitable Indian companies today

belong to the IT sector and a great deal of investment interest is now focused on the

IT sector. In order to have a good benchmark of the Indian IT sector, IISL hasdeveloped the CNX IT sector index. CNX IT provides investors and market

intermediaries with an appropriate benchmark that captures the performance of the IT

segment of the market.

Companies in this index are those that have more than 50% of their turnover from IT

related activities like software development, hardware manufacture, vending, support

and maintenance.

Among these highly turnover stocks the major companies covered under these

research projects are:

TCS

INFOSYS

Systematic Risk Associated with IT Index or (Information Technology Sector) is:

EXCHANGE RATE

Unsystematic Risk Associated with IT Index or (Information Technology Sector) is:

OPERATIONAL RISK

FINANCIAL RISK

BUSINESS RISK


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TCS

S&P CNX Nifty TCS

Date One Week Change % Change One Week Change

4-Jan 114.4 1.86 0 0

11-Jan -81 -1.29 -143 -12.6

18-Jan -474 -7.63 -54.5 -5.59

25-Jan 181.1 3.48 82 9.94

1-Feb 52 0.98 30 3.31

8-Feb -361 -6.63 -82 -8.39

15-Feb 475 9.99 -29 -3.21

22-Feb -181 -3.44 48 5.64

29-Feb 0 0 -34.95 -3.87

7-Mar -168 -3.43 -2 -0.23

14-Mar 20 0.42 -27 -3.24


-15

-10

-5

0

5

10

15

4-Jan 11-

Jan

18-

Jan

25-

Jan

1-Feb 8-Feb 15-

Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Losein%

S&P CNX Nifty TCS


56/104



T-TEST


return and benchmark return.Alternative hypothesis (H1): There is significant difference between portfolio return



Variable1

Variable2

Mean -1.65818

-

0.51727

Variance 40.75558 24.1

Observations 11 11

Hypothesized Mean

Difference 0

df 19

t Stat -0.46987

P(T


57/104



INFOSYS

S&P CNX Nifty INFOSYS

Date One Week Change

%

Change One Week Change

%

Change

4-Jan 114.4 1.86 194 12.59

11-Jan -81 -1.29 -45 -2.71

18-Jan -474 -7.63 -76 -4.87

25-Jan 181.1 3.48 113 8.01

1-Feb 52 0.98 134 9.16

8-Feb -361 -6.63 -92 -5.59

15-Feb 475 9.99 13 0.89

22-Feb -181 -3.44 27 1.74

29-Feb 0 0 -85 -5.27

7-Mar -168 -3.43 -26 -1.78

14-Mar 20 0.42 -52 -3.64


-10

-5

0

5

10

15

4-Jan 11-

Jan

18-

Jan

25-

Jan

1-Feb 8-Feb 15-

Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Lose

in%

S&P CNX Nifty INFOSYS


58/104



T-TEST






Variable

1

Variable

2

Mean 9.545455 -38.4091

Variance 9512.673 68092.87

Observations 11 11

Hypothesized Mean

Difference 0

df 13

t Stat 0.570926

P(T


59/104



CNX FMCG INDEX

FMCGs (Fast Moving Consumer Goods) are those goods and products, which are

non-durable, mass consumption products, available off the shelf. The CNX FMCG

Index is a 15 stock Index from the FMCG sector that trade on the National Stock

Exchange.

Among these 15 stocks the major companies covered under these research projects

are:

DABUR

ITC

Systematic Risk Associated with FMCG Index or (FMCG Sector) is:

GOVERNMENT POLICIES

BUDGET


BUSINESS RISK

FINANCIAL RISK


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DABUR

S&P CNX Nifty Dabur


%


%

Change

4-Jan 114.4 1.86 0 0

11-Jan -81 -1.29 0 0

18-Jan -474 -7.63 0 0

25-Jan 181.1 3.48 0 0

1-Feb 52 0.98 -13.5 -11.79

8-Feb -361 -6.63 -0.1 -0.1

15-Feb 475 9.99 1.05 1.11

22-Feb -181 -3.44 5.45 5.65

29-Feb 0 0 -1.5 -1.48

7-Mar -168 -3.43 0.6 0.6114-Mar 20 0.42 -0.35 -0.35


-15

-10

-5

0

5

10

15

4-Jan 11-

Jan

18-

Jan

25-

Jan

1-Feb 8-Feb 15-

Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Losein%

S&P CNX Nifty Dabur


61/104



T-TEST






Variable

1

Variable

2Mean -0.75909 -38.4091

Variance 20.94591 68092.87

Observations 11 11

Hypothesized Mean

Difference 0

df 10

t Stat 0.478458

P(T


62/104



ITC

S&P CNX Nifty ITC


%


%

Change

4-Jan 114.4 1.86 0 0

11-Jan -81 -1.29 0 0

18-Jan -474 -7.63 0 0

25-Jan 181.1 3.48 -2.3 -1.17

1-Feb 52 0.98 10.9 5.59

8-Feb -361 -6.63 -10.7 -5.18

15-Feb 475 9.99 19.6 10.65

22-Feb -181 -3.44 -9.48 -4.55

29-Feb 0 0 -1.8 -0.88

7-Mar -168 -3.43 -0.5 -0.2614-Mar 20 0.42 1.55 0.81


-10

-5

0

5

10

15

4-Jan 11-

Jan

18-

Jan

25-

Jan

1-Feb 8-Feb 15-

Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Losein

S&P CNX Nifty ITC


63/104



T-TEST



Alternative hypothesis (H1): There is significant difference between portfolio returnand benchmark.


Variable 1 Variable 2

Mean 0.660909 -38.4091

Variance 71.37081 68092.87

Observations 11 11

Hypothesized Mean Difference 0

df 10

t Stat 0.49632

P(T


64/104



CNX PSE INDEX

As part of its agenda to reform the Public Sector Enterprises (PSE), the Government

has selectively been disinvesting its holdings in public sector enterprises since 1991.

With a view to provide regulators, investors and market intermediaries with an

appropriate benchmark that captures the performance of this segment of the market,as well as to make available an appropriate basis for pricing forthcoming issues of

PSEs, IISL has developed the CNX PSE Index, comprising of 20 PSE stocks. The

CNX PSE Index includes only those companies that have over 51% of their

outstanding share capital held by the Central Government and/or State Government,

directly or indirectly.


are:

NTPC

ONGC

Systematic Risk Associated with PSE Index or (Public Sector) is:

GOVERNMENT POLICIES

MARKET RISK

Unsystematic Risk Associated with PSE Index or (Public Sector) is:

BUSINESS RISK

FINANCIAL RISK


65/104


66/104



T-TEST



Alternative hypothesis (H1): There is significant difference between portfolio returnand benchmark.


Variable

1

Variable

2

Mean -0.835 -53.69

Variance 23.20281 72804.78

Observations 10 10

Hypothesized Mean

Difference 0

df 9

t Stat 0.619351

P(T


67/104



ONGC

S&P CNX Nifty ONGC


%


%

Change

4-Jan 114.4 1.86 47.25 3.71

11-Jan -81 -1.29 -43 -3.23

18-Jan -474 -7.63 -60 -4.65

25-Jan 181.1 3.48 -76 -7

1-Feb 52 0.98 36.4 3.6

8-Feb -361 -6.63 -70.85 -6.74

15-Feb 475 9.99 104.05 11.32

22-Feb -181 -3.44 -20.8 -2.07

29-Feb 0 0 -9.9 -0.98

7-Mar -168 -3.43 -23.9 -2.48

14-Mar 20 0.42 35.95 3.72


-10

-5

0

5

10

15

4-Jan 11-

Jan

18-

Jan

25-

Jan

1-Feb 8-Feb 15-

Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Losein

S&P CNX Nifty ONGC


68/104



T-TEST




and benchmark.


Variable

1

Variable

2

Mean -7.34545 -38.4091

Variance 3242.94 68092.87

Observations 11 11

Hypothesized Mean

Difference 0

df 11

t Stat 0.38574

P(T


69/104



CNX MNC INDEX

The CNX MNC Index comprises 50 listed companies in which the foreign

shareholding is over 50% and / or the management control is vested in the foreign

company.

Among these stocks the major companies covered under these research projects are:

SESA GOA

MARUTI

Systematic Risk Associated with MNC Index or (Multinational Companies Sector) is:

GOVERNMENT POLICIES

MARKET RISK


BUSINESS RISK

FINANCIAL RISK


70/104



SESA GOA

S&P CNX Nifty SESA GOA


%


%

Change

4-Jan 114.4 1.86 0 0

11-Jan -81 -1.29 0 0

18-Jan -474 -7.63 -473.4 -12.62

25-Jan 181.1 3.48 0 0

1-Feb 52 0.98 795 32.99

8-Feb -361 -6.63 -200.75 -6.17

15-Feb 475 9.99 340 11.93

22-Feb -181 -3.44 -39.65 -1.18

29-Feb 0 0 242.65 7.6

7-Mar -168 -3.43 -104.65 -3.16

14-Mar 20 0.42 0 0


-20

-10

0

10

20

30

40

4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-

Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Losein

S&P CNX Nifty SESA GOA


71/104



T-TEST




and benchmark.


Variable

1

Variable

2

Mean 50.83636 -38.4091

Variance 105500.8 68092.87

Observations 11 11

Hypothesized Mean

Difference 0

df 19

t Stat 0.71042

P(T


72/104



MARUTI

S&P CNX Nifty MARUTI


%


%

Change

4-Jan 114.4 1.86 0 0

11-Jan -81 -1.29 0 0

18-Jan -474 -7.63 0 0

25-Jan 181.1 3.48 0 0

1-Feb 52 0.98 25 2.87

8-Feb -361 -6.63 -108 -11.8

15-Feb 475 9.99 8.3 1.02

22-Feb -181 -3.44 -43 -5.3

29-Feb 0 0 68.6 8.57

7-Mar -168 -3.43 52 5.99

14-Mar 20 0.42 -58 -6.48


-15

-10

-5

0

5

10

15


Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Losein

S&P CNX Nifty M ARUTI


73/104



T-TEST




and benchmark.


Variable

1

Variable

2

Mean -5.00909 -38.4091

Variance 2470.485 68092.87

Observations 11 11

Hypothesized Mean

Difference 0

df 11

t Stat 0.417016

P(T


74/104



CNX SERVICE SECTOR INDEX

The Indian Economy has seen structural changes in the last couple of years.

According to RBI data, the services sector remained the principal driver of the Indian

economy, contributing 57 per cent of the growth of real GDP in 2003-04. The key

driver for the growth of the service sector has been industries like IT, Banks, Tourism,Telecommunication etc. Going forward, the service sector will grow manifold mainly

on account of the Indias low cost advantage, increasing demand for Customer

services and the booming knowledge economy. To capture the performance of the

companies belonging to this sector, IISL has developed CNX Service Sector Index to

capture the performance of the companies in this sector.

The CNX Service Sector Index is 30 stocks index and includes companies belonging

to services sector like Computers Software, Banks, Telecommunication services,

Financial Institutions, Power, Media, Courier, Shipping etc.


are:

RCOM

MTNL

Systematic Risk Associated with Service Sector Index or (Service Sector) is:

GOVERNMENT POLICIES

MARKET RISK

Unsystematic Risk Associated with Service Sector Index or (Service Sector) is:

BUSINESS RISK

FINANCIAL RISK


75/104



RCOM

S&P CNX Nifty RCOM


%


%

Change

4-Jan 114.4 1.86 10 1.303

11-Jan -81 -1.29 3 0.37

18-Jan -474 -7.63 -106 -12.911

25-Jan 181.1 3.48 56 8.99

1-Feb 52 0.98 -24 -3.73

8-Feb -361 -6.63 -49 -7.05

15-Feb 475 9.99 28.3 4.81

22-Feb -181 -3.44 -33.8 -5.48

29-Feb 0 0 -20.7 -3.48

7-Mar -168 -3.43 -1.25 -0.23

14-Mar 20 0.42 -40.3 -7.2


-15

-10

-5

0

5

10

15


Feb

22-

Feb

29-

Feb

7-Mar 14-

Mar

Date

Gain/Losein

S&P CNX Nifty RCOM

potential riskloss associated with derivatives final perfact

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