Financial Study on Derivatives India-Infoline

8/12/2019 Financial Study on Derivatives India-Infoline

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FINANCIAL STUDY ON DERIVATIVES INDIA-INFOLINE

TABLE OF CONTENTS

CHAPTER NUMBER


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1. INTRODUCTION

Objectives of the Study

Scope of the study

Methodology

2 INDUSTR !RO"I#$

% COM!&N !RO"I#$

'.R$(I$) O" #IT$R&TUR$

*.D&T& &NSIS + !R$S$NT&TION

,. CONC#USIONS + SU--$STIONS

Su/0y + Suggestios

Coclusios

-#OSS&R

I#IO-R&!3


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INTRODUCTION

INTRODUCTION


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& de0iv/tive secu0ity is / secu0ity 4hose v/lue depeds o the v/lue of

togethe0 o0e b/sic ude0lyig v/0i/ble. These /0e /lso 5o4 /s

cotiget cl/is. De0iv/tives secu0ities h/ve bee ve0y successful i

iov/tio i c/pit/l /05ets.

The ee0gece of the /05et fo0 de0iv/tive p0oducts ost ot/bly

fo04/0ds6 futu0es /d optios c/ be t0/ced b/c5 to the 4illigess of

0is57/ve0se ecooic /gets to gu/0d theselves /g/ist uce0t/ities

/0isig out of fluctu/tios i /sset p0ices. y thei0 ve0y /tu0e6

fi/ci/l /05ets /0e /05et by / ve0y high deg0ee of vol/tility.

Though the use of de0iv/tive p0oducts6 it is possible to p/0ti/lly o0 fully

t0/sfe0 p0ice 0is5s by loc5ig 8 i /sset p0ices. &s ist0uet of 0is5

//geet these gee0/lly do9t ifluece the fluctu/tios i the

ude0lyig /sset p0ices.

3o4eve06 by loc5ig7i /sset p0ices6 de0iv/tive p0oducts iii:e the

ip/ct of fluctu/tios i /sset p0ices o the p0ofit/bility /d c/sh7flo4

situ/tio of 0is57/ve0se ivesto0.

De0iv/tives /0e 0is5 //geet ist0uets 4hich de0ives thei0

v/lue f0o / ude0lyig /sset. Ude0lyig /sset c/ be ullio6

Ide;6 Sh/0e6 Cu00ecy6 ods6 Ite0est6 etc.

Objectives o t!e St"#$


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To ude0st/d the cocept of the "i/ci/l De0iv/tives such /s

"utu0es /d Optios.

To e;/ie the /dv/t/ge /d the dis/dv/t/ges of diffe0et

st0/tegies /log 4ith situ/tios.

To study the diffe0et 4/ys of buyig /d sellig of Optios.

SCOPE OF THE STUDY

The study is liited to


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The study c/ot be s/id /s tot/lly pe0fect6 /y /lte0/tio /y coe.

The study h/s oly /de huble /ttept /t ev/lu/tig De0iv/tives

M/05ets oly i Idi/ Cote;t. The study is ot b/sed o the

Ite0/tio/l pe0spective of the De0iv/tives M/05ets.

RESEARCH METHODOLO%Y&

The type of 0ese/0ch /dopted is desc0iptive i /tu0e /d the d/t/

collected fo0 this study is the secod/0y d/t/ i.e. f0o Ne4sp/pe0s6

M/g/:ies /d Ite0et.


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Li'it(tio)s&

The study 4/s coducted i 3yde0/b/d oly.

&s the tie 4/s liited6 study 4/s cofied to coceptu/l

ude0st/dig of De0iv/tives /05et i Idi/.


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INDUSTRY

PROFILE

HISTORY OF STOC* E+CHAN%E

The oly stoc5 e;ch/ges ope0/tig i the 1>thcetu0y

4e0e those of ob/y set up i 1?@* /d &hed/b/d set up i 1?>'.

These 4e0e o0g/i:ed /s volut/0y o p0ofit7/5ig /ssoci/tio of


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b0o5e0s to 0egul/te /d p0otect thei0 ite0ests. efo0e the cot0ol o

secu0ities t0/dig bec/e cet0/l subject ude0 the costitutio i

1>*A6 it 4/s / st/te subject /d the ob/y secu0ities cot0/cts

Bcot0ol &ct of 1>2* used to 0egul/te t0/dig i secu0ities. Ude0 this

/ct6 the ob/y stoc5 e;ch/ge 4/s 0ecogi:ed i 1>2@ /d

&hed/b/d i 1>%@.

Du0ig the 4/0 boo6 / ube0 of stoc5 e;ch/ges 4e0e

o0g/i:ed i ob/y6 &hed/b/d /d othe0 cete0s6 but they 4e0e

ot 0ecogi:ed. Soo /fte0 it bec/e / cet0/l subject6 cet0/l

legisl/tio 4/s p0oposed /d / coittee he/ded by &.D. -o04/l/

4et ito the bill fo0 secu0ities 0egul/tio. O the b/sis of the

coittee9s 0ecoed/tios /d public discussio6 the secu0ities

cot0/cts B0egul/tio &ct bec/e l/4 i 1>*,.

DEFINITION OF STOC* E+CHAN%E


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It is / /ssoci/tio of ebe0 b0o5e0s fo0 the pu0pose of self7

0egul/tio /d p0otectig the ite0ests of its ebe0s.

It c/ ope0/te oly if it is 0ecogi:ed by the -ove0et ude0

the secu0ities cot0/cts B0egul/tio &ct6 1>*,. The 0ecogitio is

g0/ted ude0 sectio % of the &ct by the cet0/l gove0et6 Miist0y

of "i/ce.

BYLA,S

esides the /bove /ct6 the secu0ities cot0/cts B0egul/tio 0ules

4e0e /lso /de i 1>@* to 0egul/tive ce0t/i /tte0s of t0/dig o the

stoc5 e;ch/ges. The0e /0e /lso byl/4s of the e;ch/ges6 4hich /0e

coce0ed 4ith the follo4ig subjects.

Opeig closig of the stoc5 e;ch/ges6 tiig of t0/dig6

0egul/tio of bl/5 t0/sfe0s6 0egul/tio of /dl/ o0 c/00yove0

busiess6 cot0ol of the settleet /d othe0 /ctivities of the stoc5e;ch/ge6 fi;/tig of /0gi6 fi;/tio of /05et p0ices o0 /5ig up

p0ices6 0egul/tio of t/0/v/i busiess Bjobbig6 etc.6 0egul/tio of

b0o5e0s t0/dig6 b0o5e0/ge ch/0ge0s6 t0/dig 0ules o the e;ch/ge6

/0bit0/ge /d settleet of disputes6 settleet /d cle/0ig of the

t0/dig etc.

RE%ULATION OF STOC* E+CHAN%ES

The secu0ities cot0/cts B0egul/tio /ct is the b/sis fo0

ope0/tios of the stoc5 e;ch/ges i Idi/. No e;ch/ge c/ ope0/te


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leg/lly 4ithout the gove0et pe0issio o0 0ecogitio. Stoc5

e;ch/ges /0e give oopoly i ce0t/i /0e/s ude0 sectio 1> of the

/bove &ct to esu0e th/t the cot0ol /d 0egul/tio /0e f/cilit/ted.

Recogitio c/ be g0/ted to / stoc5 e;ch/ge p0ovided ce0t/i

coditios /0e s/tisfied /d the ecess/0y ifo0/tio is supplied to

the gove0et. Recogitio c/ /lso be 4ithd0/46 if ecess/0y.

)he0e the0e /0e o stoc5 e;ch/ges6 the gove0et liceses soe of

the b0o5e0s to pe0fo0 the fuctios of / stoc5 e;ch/ge i its

/bsece.

SECURITIES AND E+CHAN%E BOARD OF INDIA SEBI.

S$I 4/s set up /s / /utooous 0egul/to0y /utho0ity by the

gove0et of Idi/ i 1>?? >2 /d

the secu0ities cot0/ct B0egul/tio &ct6 1>*, to pe0fo0 the fuctioof p0otectig ivesto09s 0ights /d 0egul/tig the c/pit/l /05ets.

BOMBAY STOC* E+CHAN%E

This stoc5 e;ch/ge6 Mub/i6 popul/0ly 5o4 /s


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evolved ove0 the ye/0s ito its p0eset st/tus /s the p0eie0e stoc5

e;ch/ge i the cout0y. It /y be oted th/t the stoc5 e;ch/ges the

oldest oe i &si/6 eve olde0 th/ the To5yo stoc5 e;ch/ge6 4hich

4/s fouded i 1?@?.

The e;ch/ge6 4hile p0ovidig / efficiet /d

t0/sp/0et /05et fo0 t0/dig i secu0ities6 upholds the ite0ests of

the ivesto0s /d esu0es 0ed0essed of thei0 g0iev/ces6 4hethe0

/g/ist the cop/ies o0 its o4 ebe0 b0o5e0s. It /lso st0ives to

educ/te /d elighte the ivesto0s by /5ig /v/il/ble ecess/0y

ifo0/tive iputs /d coductig ivesto0 educ/tio p0og0/s.

& gove0ig bo/0d cop0isig of > elected di0ecto0s6 2 S$I

oiees6 @ public 0ep0eset/tives /d / e;ecutive di0ecto0 is the

/pe; body6 4hich decides is the /pe; body6 4hich decides the policies

/d 0egul/tes the /ff/i0s of the e;ch/ge.

The $;ch/ge di0ecto0 /s the chief e;ecutive offices is0esposible fo0 the d/ily tod/y /diist0/tio of the e;ch/ge.

BSE INDICES& I o0de0 to e/ble the /05et p/0ticip/ts6 //lysts etc.6 to

t0/c5 the v/0ious ups /d do4s i the Idi/ stoc5 /05et6 the

$;ch/ge h/s it0oduced i 1>?, / eEuity stoc5 ide; c/lled S$7

S$NS$F th/t subseEuetly bec/e the b/0oete0 of the oets of


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the sh/0e p0ices i the Idi/ stoc5 /05et. It is / @?7@>. The Sese; is 4idely 0epo0ted i both

doestic /d ite0/tio/l /05ets th0ough p0it /s 4ell /s elect0oic

edi/.

Sese; is c/lcul/ted usig / /05et c/pit/li:/tio 4eighted

ethod. &s pe0 this ethodology the level of the ide; 0eflects the

tot/l /05et v/lue of /ll %A7copoet stoc5s f0o diffe0et idust0ies

0el/ted to p/0ticul/0 b/se pe0iod. The tot/l /05et v/lue of / cop/y

is dete0ied by ultiplyig the p0ice of its stoc5 by the u@be0 of

sh/0ed outst/dig. St/tistici/s c/ll ide; of / set of cobied

v/0i/bles Bsuch /s p0ice /d ube0 of sh/0es / coposite Ide;. &

ide;ed ube0 is used to 0ep0eset the 0esults of this c/lcul/tio i

o0de0 to /5e the v/lue e/sie0 to go 4o05 4ith /d t0/c5 ove0 / tie.

It is uch e/sie0 to g0/ph / ch/0t b/sed o Ide;ed v/lues th/ o

b/sed o /ctu/l v/lued 4o0ld ove0 /jo0ity of the 4ell75o4 Idices

/0e cost0ucted usig


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The NS$ 4/s ico0po0/ted i Nov6 1>>2 4ith / eEuity c/pit/l

of Rs.2* c0s. The ite0/tio/l secu0ities cosult/cy BISC of 3og

og h/s helped i settig up NS$. ISC h/s p0ep/0ed the det/iled

busiess pl/s /d iiti/li:/tio of h/0d4/0e /d soft4/0e systes.

The p0ootios fo0 NS$ 4e0e fi/ci/l istitutios6 isu0/ces6

cop/ies6 b/5s /d S$I c/pit/l /05et ltd6 If0/st0uctu0e le/sig

/d fi/ci/l se0vices ltd /d stoc5 holdig co0po0/tiosJ ltd.

It h/s bee set up to st0egthe the ove to4/0ds

p0ofessio/li:/tio of the c/pit/l /05et /s 4ell /s p0ovide /tio 4ide

secu0ities t0/dig f/cilities to ivesto0s.

NS$ is ot / e;ch/ge i the t0/ditio/l sese 4he0e b0o5e0s

o4 /d //ge the e;ch/ge. & t4o tie0 /diist0/tive set up

ivolvig / cop/y bo/0d /d / gove0ig /bo/0d of the e;ch/ge is

evis/ged.

NS$ is / /tio/l /05et fo0 sh/0es !SU bods6 debetu0es /dgove0et secu0ities sice if0/st0uctu0e /d t0/dig f/cilities /0e

p0ovided.

NSE-NIFTY&

The NS$ o &p0226 1>>, l/uched / e4 eEuity Ide;. The NS$7

*A. The e4 Ide; 4hich 0epl/ces the e;istig NS$71AA Ide; is

e;pected to se0ve /s / /pp0op0i/te Ide; fo0 the e4 seget offutu0e /d optio.


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/gg0eg/te /05et c/pit/li:/tio of /0oud Rs 16 @A6AAA c0s. &ll

cop/ies icluded i the Ide; h/ve / /05et c/pit/li:/tio i e;cess

of Rs. *AA c0s e/ch /d should h/ve t0/de fo0 ?*K of t0/dig d/ys /t

/ ip/ct cost of less th/ 1.*K.

The b/se pe0iod fo0 the ide; is the close of p0ice o Nov %

1>>*6 4hich /5es oe ye/0 of copletio of ope0/tio of NS$9s

c/pit/l /05et seget. The b/se v/lue of the ide; h/s bee set /t

1AAA.

NSE-MIDCAP INDE+&

NS$ /dc/p ide; o0 the juio0 ifty cop0ises *A stoc5s th/t

0ep0eset 21 bo/0d idust0y g0oups /d 4ill p0ovide p0ope0

0ep0eset/tio of the idc/p seget of the Idi/ c/pit/l /05et. &ll

stoc5s i the Ide; should h/ve /05et c/pit/li:/tio of o0e th/

Rs.2AA c0s /d should h/ve t0/ded ?*K of the t0/dig d/ys /t /

ip/ct cost of less th/ 2.*K.The b/se pe0iod fo0 the ide; is Nov '

1>>,6 4hich sigifies 2 ye/0s fo0 copletio of ope0/tios of the

c/pit/l /05et seget of the ope0/tios. The b/se v/lue of the Ide;h/s bee set /t 1AAA. &ve0/ge d/ily tu0 ove0 of the p0eset sce/0io

2*?212 B#/ces /d ube0 of /ve0/ge d/ily t0/des 21,AB#/ces.

&t p0eset the0e /0e 2' stoc5 e;ch/ges 0ecogi:ed ude0 the

secu0ities cot0/ct B0egul/tio &ct6 1>*,.


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COM!&N !RO"I#$

THE INDIA INFOLINE LIMITED

O/i0i)&

Idi/ Ifolie #td.6 4/s fouded i 1>>* by / g0oup of p0ofessio/l

4ith ipecc/ble educ/tio/l Eu/lific/tios /d p0ofessio/l c0edeti/ls.

Its istitutio/l ivesto0s iclude Itel C/pit/l B4o0ldJs le/dig


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techology cop/y6 CDC Bp0ooted by U gove0et6 ICICI6 TD&

/d Reesh//0.

Idi/ Ifolie g0oup offe0s the eti0e g/ut of ivestet p0oducts

icludig stoc5 b0o5ig6 Coodities b0o5ig6 Mutu/l "uds6 "i;ed

Deposits6 -OI Relief bods6 !ost office s/vigs /d life Isu0/ce.

Idi/ Ifolie is the le/dig co0po0/te /get of ICICI !0udeti/l #ife

Isu0/ce Co. #td.6 4hich is Idi/J No. 1 !0iv/te secto0 life isu0/ce

cop/y.

)44.idi/ifolie.co h/s bee the oly Idi/ )ebsite to h/ve

bee listed by oe othe0 th/ "o0bes i itJs Jest of the )ebJ su0vey

of glob/l 4ebsite6 ot just oce but th0ee ties i / 0o4 /d

coutig...


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soft4/0e supply se0vices6 copute0 cosult/cy se0vices6 $7

Coe0ce of /ll types icludig elect0oic fi/ci/l

ite0edi/tio busiess /d $7b0o5ig6 /05et 0ese/0ch6

busiess /d //geet cosult/cy.

2. To ude0t/5e6 coduct6 study6 c/00y o6 help6 p0oote /y 5id

of 0ese/0ch6 p0obe6 ivestig/tio6 su0vey6 developet/l 4o05 o

ecooy6 idust0ies6 co0po0/te busiess houses6 /g0icultu0/l /d

ie0/l6 fi/ci/l istitutios6 fo0eig fi/ci/l istitutios6

c/pit/l /05et o /tte0s 0el/ted to ivestet decisiosp0i/0y eEuity /05et6 secod/0y eEuity /05et6 debetu0es6

bod6 vetu0es6 c/pit/l fudig p0opos/ls6 copetitive //lysis6

p0ep/0/tios of co0po0/te idust0y p0ofile etc. /d t0/de

ivest i 0ese/0ched secu0ities

VISION STATEMENT OF THE COMPANY&


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E. Mo/t0(0es

A. E-B/o4i)0&

It 0efe0s to $lect0oic 0o5ig of $Euities6 De0iv/tives /d

Coodities ude0 the b0/d /e of *p/is/

1. $Euities

2. De0iv/tives

%. Coodities

B. Dist/ib"tio)&

1. Mutu/l fuds

2. -ovt of Idi/ bods.

%. "i;ed deposits

C. I)s"/()ce&

1. #ife isu0/ce policies

2. -ee0/l Isu0/ce

%. 3e/lth Isu0/ce !olicies.

THE CORPORATE STRUCTURE

The Idi/ Ifolie g0oup cop0ises the holdig cop/y6 Idi/

Ifolie #td6 4hich h/s * 4holly7o4ed subsidi/0ies6 eg/ged idistict yet copleet/0y busiesses 4hich togethe0 offe0 / 4hole

bouEuet of p0oducts /d se0vices to /5e you0 oey g0o4.

The co0po0/te st0uctu0e h/s evolved to coply 4ith oddities of

the 0egul/to0y f0/e4o05 but still be/utifully help /tt/i sye0gy /d

/llo4 fle;ibility to /d/pt to dy/ics of diffe0et busiesses.

The p/0et cop/y6 Idi/ Ifolie #td o4s /d //ge0s the

4eb p0ope0ties 444.Idi/ifolie.co /d 444.*p/is/.co. It /lsoude0t/5es 0ese/0ch Custoi:ed /d off7the7shelf.


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Idi/ Ifolie Secu0ities !vt. #td. is / ebe0 of S$6 NS$ /d

D! 4ith NSD#. Its busiess ecop/sses secu0ities b0o5ig !o0tfolio

M//geet se0vices.

Idi/ Ifolie.co Dist0ibutio Co. #td.6 Mobili:es Mutu/l "uds

/d othe0 pe0so/l ivestet p0oducts such /s bods6 fi;ed deposits6

etc.

Idi/ Ifolie Isu0/ce Se0vices #td. is the co0po0/te /get of ICICI

!0udeti/l #ife Isu0/ce6 eg/ged i sellig #ife Isu0/ce6 -ee0/l

Isu0/ce /d 3e/lth Isu0/ce p0oducts.

Idi/ Ifolie Coodities !vt. #td. is / 0egiste0ed cooditiesb0o5e0 MCF /d offe0s futu0es t0/dig i coodities.

Idi/ Ifolie Ivestet Se0vices !vt #td.6 is p0ovig /0gi fudig

/d N"C se0vices to the custoe0s of Idi/ Ifolie #td.6

!icto0i/l Rep0eset/tio of Idi/ Ifolie #td


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M()(0e'e)t o I)#i( I)o2i)e Lt#.5

Idi/ Ifolie is / p0ofessio/lly //ged Cop/y. The

p0oote0s 4ho 0u the cop/ys d/y7to7d/y /ff/i0s /s e;ecutive

di0ecto0s h/ve ipecc/ble /c/deic p0ofessio/l t0/c5 0eco0ds.


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Ni0/l /i6 ch/i0/ /d M//gig Di0ecto06 is / Ch/0te0ed

&ccout/t6 B&ll Idi/ R/5 2 Cost &ccout6 B&ll Idi/ R/5 l /d

h/s / post7g0/du/te //geet deg0ee f0o IIM &hed/b/d. 3e

h/d / successful c/0ee0 4ith 3idust/ #eve06 4he0e he ite0 /li/

h/dled Coodities t0/dig /d e;po0t busiess. #/te0 he 4/s C$O

of / eEuity 0ese/0ch o0g/i:/tio.

R. (e5/t/0//6 Di0ecto06 is /0ed 4ith / post7 g0/du/te

//geet deg0ee f0o IIM /g/lo0e6 /d / $lect0oics

$giee0ig deg0ee f0o IIT6 h/0/gpu0. 3e spet eight f0uitful ye/0s

i eEuity 0ese/0ch s/les /d p0iv/te eEuity 4ith the c0e/ of fi/ci/l

houses such /s ICICI g0oup6 /0cl/ys de oette /d -.$. C/pit/l

The o7e;ecutive di0ecto0s o the bo/0d b0ig / 4e/lth of

e;pe0iece /d e;pe0tise. S/tp/l 5h/tt/0 Reesh//0 ivestets6

Sig/po0e The 5ey //geet te/ cop0ises se/soed /d

Eu/lified p0ofessio/ls.

M"4es! Si)0- Di/ecto/5 I)#i( I)o2i)e Sec"/ities

Pvt Lt#.

Ses!(#/i B!(/(t!()- Di/ecto/5 I)#i( I)o2i)e. Co'Dist/ib"tio) Co Lt#

S S/i/('- Vice P/esi#e)t5 Tec!)o2o0$

S()#ee1( Vi0 A/o/(- Vice P/esi#e)t5 Po/to2io M()(0e'e)t

Se/vices

D!(/'es! P()#$(- Vice P/esi#e)t5 A2te/)(te C!())e2

To/(2 M")s!i- Vice P/esi#e)t5 Rese(/c!

A)i2 M(sc(/e)!(s- C!ie E#ito/


23/93

REVIE,

OF

LITERATURE

DERIVATIVES&-


24/93

The ee0gece of the /05et fo0 de0iv/tives p0oducts6 ost ot/bly

fo04/0ds6 futu0es /d optios6 c/ be t0/c5ed b/c5 to the 4illigess of 0is57

/ve0se ecooic /gets to gu/0d theselves /g/ist uce0t/ities /0isig

out of fluctu/tios i /sset p0ices. y thei0 ve0y /tu0e6 the fi/ci/l /05ets

/0e /05ed by / ve0y high deg0ee of vol/tility. Th0ough the use of de0iv/tive

p0oducts6 it is possible to p/0ti/lly o0 fully t0/sfe0 p0ice 0is5s by loc5ig7i

/sset p0ices. &s ist0uets of 0is5 //geet6 these gee0/lly do ot

ifluece the fluctu/tios i the ude0lyig /sset p0ices. 3o4eve06 by

loc5ig7i /sset p0ices6 de0iv/tive p0oduct iii:es the ip/ct of

fluctu/tios i /sset p0ices o the p0ofit/bility /d c/sh flo4 situ/tio of 0is57

/ve0se ivesto0s.

De0iv/tives /0e 0is5 //geet ist0uets6 4hich de0ive

thei0 v/lue f0o / ude0lyig /sset. The ude0lyig /sset c/ be bullio6

ide;6 sh/0e6 bods6 cu00ecy6 ite0est6 etc.. /5s6 Secu0ities fi0s6

cop/ies /d ivesto0s to hedge 0is5s6 to g/i /ccess to che/pe0 oey

/d to /5e p0ofit6 use de0iv/tives. De0iv/tives /0e li5ely to g0o4 eve /t /

f/ste0 0/te i futu0e.

DEFINITION

De0iv/tive is / p0oduct 4hose v/lue is de0ived f0o the v/lue of /

ude0lyig /sset i / cot0/ctu/l /e0. The ude0lyig /sset c/ be

eEuity6 fo0e;6 coodity o0 /y othe0 /sset.


25/93

1 Secu0ities Cot0/cts BRegul/tio &ct6 1>*, BSCR &ct

defies


26/93

PARTICIPANTSL

The follo4ig th0ee b0o/d c/tego0ies of p/0ticip/ts i the de0iv/tives

/05et.

HED%ERSL

3edge0s f/ce 0is5 /ssoci/ted 4ith the p0ice of / /sset. They use futu0es

o0 optios /05ets to 0educe o0 elii/te this 0is5.

SPECULATORS&

Specul/to0s 4ish to bet o futu0e oveets i the p0ice of / /sset.

"utu0es /d optios cot0/cts c/ give the / e;t0/ leve0/ge th/t is6 they

c/ ic0e/se both the poteti/l g/is /d poteti/l losses i / specul/tive

vetu0e.

ARBITRA%ERSL

&0bit0/geu0s /0e i busiess to t/5e of / disc0ep/cy bet4ee p0ices i

t4o diffe0et /05ets6 if6 fo06 e;/ple6 they see the futu0es p0ice of / /sset

gettig out of lie 4ith the c/sh p0ice6 they 4ill t/5e offsettig positio i the

t4o /05ets to loc5 i / p0ofit.


27/93

FUNCTIONS OF DERIVATIVE MAR*ETS&

The follo4ig /0e the v/0ious fuctios th/t /0e pe0fo0ed by the

de0iv/tives /05ets. They /0eL

!0ices i / o0g/i:ed de0iv/tives /05et 0eflect the

pe0ceptio of /05et p/0ticip/ts /bout the futu0e /d le/d the p0ice of

ude0lyig to the pe0ceived futu0e level.

De0iv/tives /05et helps to t0/sfe0 0is5s f0o those 4ho

h/ve the but /y ot li5e the to those 4ho h/ve / /ppetite fo0 the.

De0iv/tives t0/dig /cts /s / c/t/lyst fo0 e4

et0ep0eeu0i/l /ctivity.

De0iv/tives /05ets help ic0e/se s/vig /d ivestet i

log 0u.

TYPES OF DERIVATIVES&

The follo4ig /0e the v/0ious types of de0iv/tives. They /0eL

FOR,ARDSL

& fo04/0d cot0/ct is / custoi:ed cot0/ct bet4ee t4o etities6 4he0e

settleet t/5es pl/ce o / specific d/te i the futu0e /t tod/y9s p0e7/g0eed

p0ice.

FUTURES&


28/93

& futu0es cot0/ct is / /g0eeet bet4ee t4o p/0ties to buy o0 sell /

/sset i / ce0t/i tie /t / ce0t/i p0ice they /0e st/d/0di:ed /d t0/ded

o e;ch/ge.

OPTIONS&

Optios /0e of t4o types7c/lls /d puts. C/lls give the buye0 the 0ight but

ot the oblig/tio to buy / give Eu/tity of the ude0lyig /sset6 /t / give

p0ice o o0 befo0e / give futu0e d/te. !uts give the buye0 the 0ight6 but ot

the oblig/tio to sell / give Eu/tity of the ude0lyig /sset /t / give p0ice

o o0 befo0e / give d/te.

,ARRANTS&

Optios gee0/lly h/ve lives of up to oe ye/0 the /jo0ity of optios

t0/ded o optios e;ch/ges h/vig / /;iu /tu0ity of ie oths.

#oge07d/ted optios /0e c/lled 4/00/ts /d /0e gee0/lly t0/ded ove07the

coute0.

LEAPS&

The /c0oy #$&!S e/s log7te0 $Euity &ticip/tio secu0ities. These

/0e optios h/vig / /tu0ity of up to th0ee ye/0s.

BAS*ETS&

/s5et optios /0e optios o po0tfolios of ude0lyig /ssets. The ude0lyig

/sset is usu/lly / ovig /ve0/ge of / b/s5et of /ssets. $Euity ide; optios

/0e / fo0 of b/s5et optios.


29/93

S,APS&

S4/ps /0e p0iv/te /g0eeets bet4ee t4o p/0ties to e;ch/ge c/sh floes

i the futu0e /cco0dig to / p0e/00/ged fo0ul/. They c/ be 0eg/0ded /s

po0tfolios of fo04/0d cot0/cts. The t4o cooly used S4/ps /0eL

/ Ite0est 0/te S4/psL

These et/il s4/ppig oly the 0el/ted c/sh flo4s bet4ee the p/0ties i

the s/e cu00ecy.

b Cu00ecy S4/psL

These et/il s4/ppig both p0icip/l /d ite0est bet4ee the p/0ties6

4ith the c/sh flo4s i o di0ectio beig i / diffe0et cu00ecy th/ those i

the opposite di0ectio.

S,APTION&

S4/ptios /0e optios to buy o0 sell / s4/p th/t 4ill becoe ope0/tive /t

the e;pi0y of the optios. Thus / s4/ptio is / optio o / fo04/0d s4/p.

RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES&

3oldig po0tfolios of secu0ities is /ssoci/ted 4ith the 0is5 of the possibility

th/t the ivesto0 /y 0e/li:e his 0etu0s6 4hich 4ould be uch lesse0 th/

4h/t he e;pected to get. The0e /0e v/0ious f/cto0s6 4hich /ffect the 0etu0sL

1. !0ice o0 divided Bite0est

2. Soe /0e ite0/l to the fi0 li5e7

%. Idust0i/l policy


30/93

'. M//geet c/p/bilities

*. Cosue09s p0efe0ece

,. #/bou0 st0i5e6 etc.

These fo0ces /0e to / l/0ge e;tet cot0oll/ble /d /0e te0ed /s o

syste/tic 0is5s. & ivesto0 c/ e/sily //ge such o7syste/tic by

h/vig / 4ell7dive0sified po0tfolio sp0e/d /c0oss the cop/ies6 idust0ies

/d g0oups so th/t / loss i oe /y e/sily be copes/ted 4ith / g/i i

othe0.

The0e /0e yet othe0 of ifluece 4hich /0e e;te0/l to the fi06 c/ot be

cot0olled /d /ffect l/0ge ube0 of secu0ities. They /0e te0ed /s

syste/tic 0is5. They /0eL

1. $cooic

2. !olitic/l

%. Sociologic/l ch/ges /0e sou0ces of syste/tic 0is5.

"o0 ist/ce6 ifl/tio6 ite0est 0/te6 etc. thei0 effect is to c/use p0ices of

e/0ly /ll7idividu/l stoc5s to ove togethe0 i the s/e /e0. )e

the0efo0e Euite ofte fid stoc5 p0ices f/llig f0o tie to tie i spite of

cop/y9s e/0ig 0isig /d vice ve0s/.

R/tio/l ehid the developet of de0iv/tives /05et is to //ge this

syste/tic 0is56 liEuidity i the sese of beig /ble to buy /d sell 0el/tively

l/0ge /outs Euic5ly 4ithout subst/ti/l p0ice cocessio.


31/93

I debt /05et6 / l/0ge positio of the tot/l 0is5 of secu0ities is

syste/tic. Debt ist0uets /0e /lso fiite life secu0ities 4ith liited

/05et/bility due to thei0 s/ll si:e 0el/tive to /y coo stoc5s. Those

f/cto0s f/vou0 fo0 the pu0pose of both po0tfolio hedgig /d specul/tio6 the

it0oductio of de0iv/tives secu0ities th/t is o soe b0o/de0 /05et 0/the0

th/ / idividu/l secu0ity.

RE%ULATORY FRAME,OR*&

The t0/dig of de0iv/tives is gove0ed by the p0ovisios cot/ied i the SC

R &6 the S$I &ct6 /d the 0egul/tios f0/ed the0e ude0 the 0ules /d

byel/4s of stoc5 e;ch/ges.

Regul/tio fo0 De0iv/tive T0/digL

S$I set up / 2' ebe0 coitted ude0 Ch/i0/ship of D0. #. C.

-upt/ develop the /pp0op0i/te 0egul/to0y f0/e4o05 fo0 de0iv/tive t0/dig i

Idi/. The coittee subitted its 0epo0t i M/0ch 1>>?. O M/y 116 1>>?

S$I /ccepted the 0ecoed/tios of the coittee /d /pp0oved the

ph/sed it0oductio of de0iv/tives t0/dig i Idi/ begiig 4ith stoc5

ide; "utu0es. S$I /lso /pp0oved he


32/93

secu0ities i the SCR &ct /de t0/dig i De0iv/tives possible 4ith i the

f0/e4o05 of the &ct.

1. $ligibility c0ite0i/ /s p0esc0ibed i the #. C. -upt/

coittee 0epo0t /y /pply to S$I fo0 g0/t of 0ecogitio ude0 sectio '

of the SCR &ct6 1>*, to st/0t De0iv/tives T0/dig. The de0iv/tive

e;ch/geseget should h/ve / sep/0/te gove0ig coucil /d

0ep0eset/tio of t0/digcle/0ig ebe0 sh/ll be liited to /;iu 'AK

of the tot/l ebe0s of the gove0ig coucil. The e;ch/ge sh/ll 0egul/te

the s/les p0/ctices of its ebe0s /d 4ill obt/i /pp0ov/l of S$I befo0e

st/0t of T0/dig i /y de0iv/tive cot0/ct.

2. The e;ch/ge sh/ll h/ve iiu *A ebe0s.

%. The ebe0s of / e;istig seget of the

e;ch/ge 4ill ot /uto/tic/lly becoe the ebe0s of the de0iv/tives

seget. The ebe0s of the de0iv/tives seget eed to fulfill the

eligibility coditios /s l/y do4 by the #. C. -upt/ coittee.

'. The cle/0ig /d settleet of de0iv/tives t0/des

sh/ll be th0ough / S$I /pp0oved cle/0ig co0po0/tiocle/0ig house.

Cle/0ig Co0po0/tioCle/0ig 3ouse coplyig 4ith the eligibility coditios

/s l/y do4 y the coittee h/ve to /pply to S$I fo0 g0/t of /pp0ov/l.

*. De0iv/tives b0o5e0de/le0s /d Cle/0ig ebe0s

/0e 0eEui0ed to see5 0egist0/tio f0o S$I.


33/93

,. The Miiu cot0/ct v/lue sh/ll ot be less th/

Rs.2 #/5h. $;ch/ge should /lso subit det/ils of the futu0es cot0/ct they

pu0pose to it0oduce.

@. The t0/dig ebe0s /0e 0eEui0ed to h/ve

Eu/lified /pp0oved use0 /d s/les pe0sos 4ho h/ve p/ssed / ce0tific/tio

p0og0/e /pp0oved by S$I

I)t/o#"ctio) to "t"/es ()# o1tio)s

I 0ecet ye/0s6 de0iv/tives h/ve becoe ic0e/sigly ipo0t/t i the

field of fi/ce. )hile futu0es /d optios /0e o4 /ctively t0/ded o

/y e;ch/ges6 fo04/0d cot0/cts /0e popul/0 o the OTC /05et. I

this ch/pte0 4e sh/ll study i det/il these th0ee de0iv/tive cot0/cts.

Fo/6(/# co)t/(cts

& fo04/0d cot0/ct is / /g0eeet to buy o0 sell / /sset o /

specified futu0e d/te fo0 / specified p0ice. Oe of the p/0ties to the

cot0/ct /ssues / log positio /d /g0ees to buy the ude0lyig

/sset o / ce0t/i specified futu0e d/te fo0 / ce0t/i specified p0ice.

The othe0 p/0ty /ssues / sho0t positio /d /g0ees to sell the /sset

o the s/e d/te fo0 the s/e p0ice. Othe0 cot0/ct det/ils li5e

delive0y d/te6 p0ice /d Eu/tity /0e egoti/ted bil/te0/lly by the


34/93

p/0ties to the cot0/ct. The fo04/0d cot0/cts /0e o0/lly t0/ded

outside the e;ch/ges. The s/liet fe/tu0es of fo04/0d cot0/cts /0eL

They /0e bil/te0/l cot0/cts /d hece e;posed to coute08p/0ty 0is5.

$/ch cot0/ct is custo desiged6 /d hece is uiEue i te0s of

cot0/ct si:e6 e;pi0/tio d/te /d the /sset type /d Eu/lity.

The cot0/ct p0ice is gee0/lly ot /v/il/ble i public do/i.

O the e;pi0/tio d/te6 the cot0/ct h/s to be settled by delive0y of

the /sset.

If the p/0ty 4ishes to 0eve0se the cot0/ct6 it h/s to copulso0ily go to

the s/e coute0p/0ty6 4hich ofte 0esults i high p0ices beig

ch/0ged.

3o4eve0 fo04/0d cot0/cts i ce0t/i /05ets h/ve becoe ve0y

st/d/0di:ed6 /s i the c/se of fo0eig e;ch/ge6 the0eby 0educig

t0/s/ctio costs /d ic0e/sig t0/s/ctios volue. This p0ocess of

st/d/0di:/tio 0e/ches its liit i the o0g/i:ed futu0es /05et.

"o04/0d cot0/cts /0e ve0y useful i hedgig /d specul/tio. The

cl/ssic hedgig /pplic/tio 4ould be th/t of / e;po0te0 4ho e;pects

to 0eceive p/yet i doll/0s th0ee oths l/te0. 3e is e;posed to the

0is5 of e;ch/ge 0/te fluctu/tios. y usig the cu00ecy fo04/0d

/05et to sell doll/0s fo04/0d6 he c/ loc5 o to / 0/te tod/y /d

0educe his uce0t/ity. Siil/0ly / ipo0te0 4ho is 0eEui0ed to /5e


35/93

/ p/yet i doll/0s t4o oths hece c/ 0educe his e;posu0e to

e;ch/ge 0/te fluctu/tios by buyig doll/0s fo04/0d.

If / specul/to0 h/s ifo0/tio o0 //lysis6 4hich fo0ec/sts / uptu0

i / p0ice6 the he c/ go log o the fo04/0d /05et iste/d of the

c/sh /05et. The specul/to0 4ould go log o the fo04/0d6 4/it fo0 the

p0ice to 0ise6 /d the t/5e / 0eve0sig t0/s/ctio to boo5 p0ofits.

Specul/to0s /y 4ell be 0eEui0ed to deposit / /0gi upf0ot.

3o4eve06 this is gee0/lly / 0el/tively s/ll p0opo0tio of the v/lue of

the /ssets ude0lyig the fo04/0d cot0/ct. The use of fo04/0d

/05ets he0e supplies leve0/ge to the specul/to0.

Li'it(tio)s o o/6(/# '(/4ets

"o04/0d /05ets 4o0ld74ide /0e /fflicted by seve0/l p0oblesL

#/c5 of cet0/li:/tio of t0/dig6

IlliEuidity6 /d

Coute0p/0ty 0is5

I the fi0st t4o of these6 the b/sic p0oble is th/t of too uch

fle;ibility /d gee0/lity. The fo04/0d /05et is li5e / 0e/l est/te

/05et i th/t /y t4o cosetig /dults c/ fo0 cot0/cts /g/ist

e/ch othe0. This ofte /5es the desig te0s of the de/l 4hich /0e

ve0y coveiet i th/t specific situ/tio6 but /5es the cot0/cts o7

t0/d/ble.


36/93

Coute0p/0ty 0is5 /0ises f0o the possibility of def/ult by /y oe p/0ty to

the t0/s/ctio. )he oe of the t4o sides to the t0/s/ctio decl/0es

b/50uptcy6 the othe0 suffe0s. $ve 4he fo04/0d /05ets t0/de

st/d/0di:ed cot0/cts6 /d hece /void the p0oble of illiEuidity6 still the

coute0p/0ty 0is5 0e/is / ve0y se0ious

I)t/o#"ctio) to "t"/es

"utu0es /05ets 4e0e desiged to solve the p0obles th/t e;ist i

fo04/0d /05ets. & futu0es cot0/ct is / /g0eeet bet4ee t4o

p/0ties to buy o0 sell / /sset /t / ce0t/i tie i the futu0e /t /

ce0t/i p0ice. ut uli5e fo04/0d cot0/cts6 the futu0es cot0/cts /0e

st/d/0di:ed /d e;ch/ge t0/ded. To f/cilit/te liEuidity i the futu0es

cot0/cts6 the e;ch/ge specifies ce0t/i st/d/0d fe/tu0es of the

cot0/ct. It is / st/d/0di:ed cot0/ct 4ith st/d/0d ude0lyig

ist0uet6 / st/d/0d Eu/tity /d Eu/lity of the ude0lyig

ist0uet th/t c/ be delive0ed6 Bo0 4hich c/ be used fo0 0efe0ece

pu0poses i settleet /d / st/d/0d tiig of such settleet. &

futu0es cot0/ct /y be offset p0io0 to /tu0ity by ete0ig ito /

eEu/l /d opposite t0/s/ctio. Mo0e th/ >>K of futu0es t0/s/ctios

/0e offset this 4/y.


37/93

Distictio bet4ee futu0es /d fo04/0ds

"o04/0d cot0/cts /0e ofte cofused 4ith futu0es cot0/cts. The cofusio

is p0i/0ily bec/use both se0ve esseti/lly the s/e ecooic fuctios of

/lloc/tig 0is5 i the p0esece of futu0e p0ice uce0t/ity. 3o4eve0 futu0es

/0e / sigific/t ip0oveet ove0 the fo04/0d cot0/cts /s they elii/te

coute0p/0ty 0is5 /d offe0 o0e liEuidity /s they /0e e;ch/ge t0/ded.

&bove t/ble lists the distictio bet4ee the t4o

D$"INITIONL & "utu0es cot0/ct is / /g0eeet bet4ee t4o p/0ties to

buy o0 sell / /sset / ce0t/i tie i the futu0e /t / ce0t/i p0ice. To

f/cilit/te liEuidity i the futu0es cot0/ct6 the e;ch/ge specifies ce0t/i

st/d/0d fe/tu0es of the cot0/ct. The st/d/0di:ed ites o / futu0es

cot0/ct /0eL

Pu/tity of the ude0lyig

Pu/lity of the ude0lyig


38/93

The d/te /d the oth of delive0y

The uits of p0ice Euot/tios /d iiu p0ice ch/ge

#oc/tio of settleet

FEATURES OF FUTURES&

"utu0es /0e highly st/d/0di:ed.

The cot0/ctig p/0ties eed to p/y oly /0gi oey.

3edgig of p0ice 0is5s.

They h/ve secod/0y /05ets to.

TYPES OF FUTURES&

O the b/sis of the ude0lyig /sset they de0ive6 the fi/ci/l futu0es /0e

divided ito t4o typesL

Stoc5 futu0es

Ide; futu0es

P(/ties i) t!e "t"/es co)t/(ct&

The0e /0e t4o p/0ties i / futu0e cot0/ct6 the buye0 /d the selle0. The

buye0 of the futu0es cot0/ct is oe 4ho is #ON- o the futu0es cot0/ct /d

the selle0 of the futu0es cot0/ct is 4ho is S3ORT o the futu0es cot0/ct.

The p/y off fo0 the buye0 /d the selle0 of the futu0es of the cot0/cts /0e

/s follo4sL

PAY-OFF FOR A BUYER OF FUTURES&


39/93

p0ofit

"! "

A S2 S1

"#

loss

C&S$ 1L7The buye0 bought the futu0es cot0/ct /t B" if the futu0e

p0ice goes to S1 the the buye0 gets the p0ofit of B"!.

C&S$ 2L7The buye0 gets loss 4he the futu0e p0ice goes less the B"6 if the

futu0e p0ice goes to S2 the the buye0 gets the loss of B"#.

!&7O"" "OR & S$##$R O" "UTUR$SL

p0ofit

"#

S2 " S1

"!


40/93

loss

" 8 "UTUR$S !RIC$ S16 S2 8 S$TT#$M$NT !RIC$

C&S$ 1L7 The selle0 sold the futu0e cot0/ct /t B" if the futu0e goes to

S1 the the selle0 gets the p0ofit of B"!.

C&S$ 2L7 The selle0 gets loss 4he the futu0e p0ice goes g0e/te0 th/ B"6 if

the futu0e p0ice goes to S2 the the selle0 gets the loss of B"#.

MAR%INS&

M/0gis /0e the deposits 4hich 0educe coute0 p/0ty 0is56 /0ise i / futu0es

cot0/ct. These /0gis /0e collected i o0de0 to elii/te the coute0

p/0ty 0is5. The0e /0e th0ee types of /0gisL

7 I)iti(2 M(/0i)s&

)heeve0 / futu0es cot0/ct is siged6 both buye0 /d selle0 /0e 0eEui0ed to

post iiti/l /0gis. oth buye0 /d selle0 /0e 0eEui0ed to /5e secu0ity

deposits th/t /0e iteded to gu/0/tee th/t they 4ill i f/ct be /ble to fulfill

thei0 oblig/tio. These deposits /0e iiti/l /0gis.

8 M(/4i)0 to '(/4et '(/0i)s&

The p0ocess of /djustig the eEuity i / ivesto09s /ccout i o0de0 to

0eflect the ch/ge i the settleet p0ice of futu0es cot0/ct is 5o4 /s

MTM /0gi.


41/93

9 M(i)te)()ce '(/0i)&

The ivesto0 ust 5eep the futu0es /ccout eEuity eEu/l to o0 g0e/te0 th/

ce0t/i pe0cet/ge of the /out deposited /s iiti/l /0gi. If the eEuity

goes less th/ th/t pe0cet/ge of iiti/l /0gi6 the the ivesto0 0eceives /

c/ll fo0 / /dditio/l deposit of c/sh 5o4 /s /ite/ce /0gi to b0ig

the eEuity up to the iiti/l /0gi.

PRICIN% THE FUTURES&

The "/i0 v/lue of the futu0es cot0/ct is de0ived f0o / odel 5o4s /s the

cost of c/00y odel. This odel gives the f/i0 v/lue of the cot0/ct.

Cost o C(//$&

"GS B1Q07E t

)he0e

"7 "utu0es p0ice

S7 Spot p0ice of the ude0lyig

07 Cost of fi/cig

E7 $;pected Divided yield

t 7 3oldig !e0iod.

FUTURES TERMINOLO%Y&


42/93

S1ot 1/iceL

The p0ice /t 4hich / /sset t0/des i the spot /05et.

F"t"/es 1/ice&

The p0ice /t 4hich the futu0es cot0/ct t0/des i the futu0es /05et.

Co)t/(ct c$c2e&

Cot0/ct cycle is the pe0iod ove0 4hich cot0/ct t0/des. The ide; futu0es

cot0/cts o the NS$ h/ve oe7 oth6 t4o 8oth /d th0ee7oth e;pi0y

cycle 4hich e;pi0e o the l/st Thu0sd/y of the oth. Thus / /u/0y

e;pi0/tio cot0/ct e;pi0es o the l/st Thu0sd/y of /u/0y /d / "eb0u/0y

e;pi0/tio cot0/ct ce/ses t0/dig o the l/st Thu0sd/y of "eb0u/0y. O the

"0id/y follo4ig the l/st Thu0sd/y6 / e4 cot0/ct h/vig / th0ee7oth

e;pi0y is it0oduced fo0 t0/dig.

E:1i/$ #(te&

It is the d/te specifies i the futu0es cot0/ct. This is the l/st d/y o 4hich

the cot0/ct 4ill be t0/ded6 /t the ed of 4hich it 4ill ce/se to e;ist.

Co)t/(ct si;eL

The /out of /sset th/t h/s to be delive0ed ude0 oe cot0/ct. "o0

ist/ce6 the cot0/ct si:e o NS$9s futu0es /05et is 1AA ifties.

B(sis&

I the cote;t of fi/ci/l futu0es6 b/sis c/ be defied /s the futu0es p0ice

ius the spot p0ice. The 4ill be / diffe0et b/sis fo0 e/ch delive0y oth fo0


43/93

e/ch cot0/ct6 I / o0/l /05et6 b/sis 4ill be positive. This 0eflects th/t

futu0es p0ices o0/lly e;ceed spot p0ices.

Cost o c(//$L

The 0el/tioship bet4ee futu0es p0ices /d spot p0ices c/ be su/0i:ed

i te0s of 4h/t is 5o4 /s the cost of c/00y. This e/su0es the sto0/ge

cost plus the ite0est th/t is p/id to fi/ce the /sset less the icoe e/0ed

o the /sset.

O1e) I)te/est&

Ope Ite0est is the tot/l outst/dig log o0 sho0t positio i the /05et /t

/y specific tie. &s tot/l log positios i the /05et 4ould be eEu/l to

sho0t positios6 fo0 c/lcul/tio of ope ite0est6 oly oe side of the cot0/ct

is coute0.

INTRODUCTION TO OPTIONS&

DEFINITIONL Optio is / type of cot0/ct bet4ee t4o pe0sos 4he0e oe

g0/ts the othe0 the 0ight to buy / specific /sset /t / specific p0ice 4ithi /

specific tie pe0iod. &lte0/tively the cot0/ct /y g0/t the othe0 pe0so

the 0ight to sell / specific /sset /t / specific p0ice 4ithi / specific tie


44/93

pe0iod. I o0de0 to h/ve this 0ight. The optio buye0 h/s to p/y the selle0 of

the optio p0eiu

The /ssets o 4hich optio c/ be de0ived /0e stoc5s6 coodities6 ide;es

etc. If the ude0lyig /sset is the fi/ci/l /sset6 the the optio /0e

fi/ci/l optio li5e stoc5 optios6 cu00ecy optios6 ide; optios etc6 /d if

optios li5e coodity optio.

PROPERTIES OF OPTION&

Optios h/ve seve0/l uiEue p0ope0ties th/t set the /p/0t f0o othe0

secu0ities. The follo4ig /0e the p0ope0ties of optioL

#iited #oss

3igh leve0/ges poteti/l

#iited #ife

PARTIES IN AN OPTION CONTRACT&

1. uye0 of the optioL

The buye0 of / optio is oe 4ho by p/yig optio p0eiu buys the 0ight

but ot the oblig/tio to e;e0cise his optio o selle040ite0.

2. )0ite0selle0 of the optioL

The 40ite0 of the c/ll put optios is the oe 4ho 0eceives the optio

p0eiu /d is thei0 by oblig/ted to sellbuy the /sset if the buye0 e;e0cises

the optio o hi


45/93

TYPES OF OPTIONS&

The optios /0e cl/ssified ito v/0ious types o the b/sis of v/0ious

v/0i/bles. The follo4ig /0e the v/0ious types of optios.

1. O the b/sis of the ude0lyig /ssetL

O the b/sis of the ude0lyig /sset the optio /0e divided i to t4o typesL

INDE+ OPTIONS

The ide; optios h/ve the ude0lyig /sset /s the ide;.

STOC* OPTIONS&

& stoc5 optio gives the buye0 of the optio the 0ight to buysell stoc5 /t /

specified p0ice. Stoc5 optio /0e optios o the idividu/l stoc5s6 the0e /0e

cu00etly o0e th/ 1*A stoc5s6 the0e /0e cu00etly o0e th/ 1*A stoc5s

/0e t0/dig i the seget.

II. O) t!e b(sis o t!e '(/4et 'ove'e)ts&

O the b/sis of the /05et oveets the optio /0e divided ito t4o

types. They /0eL

CALL OPTION&

& c/ll optio is bought by / ivesto0 4he he sees th/t the stoc5 p0ice

oves up4/0ds. & c/ll optio gives the holde0 of the optio the 0ight

but ot the oblig/tio to buy / /sset by / ce0t/i d/te fo0 / ce0t/i p0ice.


46/93

PUT OPTION&

& put optio is bought by / ivesto0 4he he sees th/t the stoc5 p0ice

oves do44/0ds. & put optios gives the holde0 of the optio 0ight but

ot the oblig/tio to sell / /sset by / ce0t/i d/te fo0 / ce0t/i p0ice.

III. O) t!e b(sis o e:e/cise o o1tio)&

O the b/sis of the e;e0cisig of the optio6 the optios /0e cl/ssified ito

t4o c/tego0ies.

AMERICAN OPTION&

&e0ic/ optios /0e optios th/t c/ be e;e0cised /t /y tie up to the

e;pi0/tio d/te6 /ll stoc5 optios /t NS$ /0e &e0ic/.

EUOROPEAN OPTION&

$u0ope/ optios /0e optios th/t c/ be e;e0cised oly o the e;pi0/tio

d/te itself. $u0ope/ optios /0e e/sie0 to //ly:e th/ &e0ic/ optios./ll

ide; optios /t NS$ /0e $u0ope/.

PAY-OFF PROFILE FOR BUYER OF A CALL OPTION&

The p/y7off of / buye0 optios depeds o / spot p0ice of / ude0lyig /sset.

The follo4ig g0/ph sho4s the p/y7off of buye0 of / c/ll optio.


47/93

!0ofit

ITM

SR

A $2 S

$1

S! OTM &TM

loss

S 7 St0i5e p0ice OTM 7 Out of the oey

S! 7 !0eiu #oss &TM 7 &t the oey

$1 7 Spot p0ice 1 ITM 7 I the oey

$27 Spot p0ice 2

SR7 p0ofit /t spot p0ice $1

C&S$ 1L BSpot p0ice St0i5e p0ice

&s the spot p0ice B$1 of the ude0lyig /sset is o0e th/ st0i5e p0ice BS.

the buye0 gets p0ofit of BSR6 if p0ice ic0e/ses o0e th/ $1 the p0ofit /lso

ic0e/se o0e th/ SR.


&s / spot p0ice B$2 of the ude0lyig /sset is less th/ st0i5e p0ice Bs


48/93

The buye0 gets loss of BS!6 if p0ice goes do4 less th/ $2 the /lso his

loss is liited to his p0eiu BS!

PAY-OFF PROFILE FOR SELLER OF A CALL OPTION&

The p/y7off of selle0 of the c/ll optio depeds o the spot p0ice of the

ude0lyig /sset. The follo4ig g0/ph sho4s the p/y7off of selle0 of / c/ll

optioL

p0ofit

SR

OTM S$1 ITM &TM $2

S!


49/93

loss

S 7 St0i5e p0ice ITM 7 I the oey

S! 7 !0eiu p0ofit &TM 7 &t the oey

$1 7 Spot p0ice 1 OTM 7 Out of the oey

$2 7 Spot p0ice 2

SR 7 #oss /t spot p0ice $2


&s the spot p0ice B$1 of the ude0lyig is less th/ st0i5e p0ice BS. the

selle0 gets the p0ofit of BS!6 if the p0ice dec0e/ses less th/ $1 the /lso

p0ofit of the selle0 does ot e;ceed BS!.


&s the spot p0ice B$2 of the ude0lyig /sset is o0e th/ st0i5e p0ice BS

the selle0 gets loss of BSR6 if p0ice goes o0e th/ $2 the the loss of the

selle0 /lso ic0e/se o0e th/ BSR.

PAY-OFF PROFILE FOR BUYER OF A PUT OPTION&


50/93

The p/y7off of the buye0 of the optio depeds o the spot p0ice of the

ude0lyig /sset. The follo4ig g0/ph sho4s the p/y7off of the buye0 of /

c/ll optio.

!0ofit

!0ofit

S!

$1 S OTM $2

ITM SR &TM

loss


S! 7 !0eiu p0ofit OTM 7 Out of the oey

$1 7 Spot p0ice 1 &TM 7 &t the oey

$2 7 Spot p0ice 2

SR 7 !0ofit /t spot p0ice $1


&s the spot p0ice B$1 of the ude0lyig /sset is less th/ st0i5e p0ice BS.

the buye0 gets the p0ofit BSR6 if p0ice dec0e/ses less th/ $1 the p0ofit /lso

ic0e/ses o0e th/ BSR.


51/93


&s the spot p0ice B$2 of the ude0lyig /sset is o0e th/ st0i5e p0ice Bs6

the buye0 gets loss of BS!6 if p0ice goes o0e th/ $2 th/ the loss of the

buye0 is liited to his p0eiu BS!

PAY-OFF PROFILE FOR SELLER OF A PUT OPTION&

The p/y7off of / selle0 of the optio depeds o the spot p0ice of the

ude0lyig /sset. The follo4ig g0/ph sho4s the p/y7off of selle0 of / put

optioL

p0ofit

S!

$1 S ITM $2

OTM &TM


52/93

SR

#oss


S! 7 !0eiu p0ofit &TM 7 &t the oey

$1 7 Spot p0ice 1 OTM 7 Out of the oey

$2 7 Spot p0ice 2

SR 7 #oss /t spot p0ice $1


&s the spot p0ice B$1 of the ude0lyig /sset is less th/ st0i5e p0ice BS6

the selle0 gets the loss of BSR6 if p0ice dec0e/ses less th/ $1 th/ the loss

/lso ic0e/ses o0e th/ BSR.


&s the spot p0ice B$2 of the ude0lyig /sset is o0e th/ st0i5e p0ice BS6

the selle0 gets p0ofit of BS!6 if p0ice goes o0e th/ $2 th/ the p0ofit of

selle0 is liited to his p0eiu BS!.

"/cto0s /ffectig the p0ice of / optioL


53/93


54/93


55/93

d1 G# BSF Q B0Q v22t

d2 G d17 v

O1tio)s Te/'i)o2o0$&

St/i4e 1/ice&

The p0ice specified i the optios cot0/ct is 5o4 /s st0i5e p0ice o0

$;e0cise p0ice.

O1tio)s 1/e'i"'&

Optio p0eiu is the p0ice p/id by the optio buye0 to the optio selle0.

E:1i/(tio) D(te&

The d/te specified i the optios cot0/ct is 5o4 /s e;pi0/tio d/te.

I7the7oey optioL

& I the oey optio is / optio th/t 4ould le/d to positive c/sh iflo4

to the holde0 if it e;e0cised iedi/tely.

At-t!e-'o)e$ o1tio)L

&t the oey optio is / optio th/t 4ould le/d to :e0o c/sh flo4 if it is

e;e0cised iedi/tely.

O"t-o-t!e-'o)e$ o1tio)L

& out7of7the7oey optio is / optio th/t 4ould le/d to eg/tive c/sh

flo4 if it is e;e0cised iedi/tely.

I)t/i)sic v(2"e o 'o)e$L


56/93

The it0isic v/lue of / optio is ITM6 If optio is ITM. If the optio is OTM6

its it0isic v/lue is :e0o.

Ti'e v(2"e o () o1tio)&

The tie v/lue of / optio is the diffe0ece bet4ee its p0eiu /d

its it0isic v/lue


57/93

ANALYSIS

ANALYSIS OF ICICIL

The objective of this //lysis is to ev/lu/te the p0ofitloss positio of

futu0es /d optios. This //lysis is b/sed o s/ple d/t/ t/5e of

ICICI &N sc0ip. This //lysis coside0ed the / 2AA? cot0/ct of

ICICI &N. The lot si:e of ICICI &N is 1@*6 the tie pe0iod i

4hich this //lysis doe is f0o 2?71272AA@ to %1.A1.A?.


58/93

Date Market price Future price

28-Dec-07 1226.7 1227.05

31-Dec-07 1238.7 1239.7

1-Jan-08 1228.75 1233.75

2-Jan-08 1267.25 1277

3-Jan-08 1228.95 1238.75

4-Jan-08 1286.3 1287.55

7-Jan-08 1362.55 1358.9

8-Jan-08 1339.95 1338.5

9-Jan-08 1307.95 1310.810-Jan-08 1356.15 1358.05

11-Jan-08 1435 1438.15

14-Jan-08 1410 1420.75

15-Jan-08 1352.2 1360.1

16-Jan-08 1368.3 1375.75

17-Jan-08 1322.1 1332.1

18-Jan-08 1248.85 1256.45

21-Jan-08 1173.2 1167.85

22-Jan-08 1124.95 1127.8523-Jan-08 1151.45 1156.35

24-Jan-08 1131.85 1134.5

25-Jan-08 1261.3 1265.6

28-Jan-08 1273.95 1277.3

29-Jan-08 1220.45 1223.85

30-Jan-08 1187.4 1187.4

31-Jan-08 1147 1145.9


59/93

GRAPH SHOWING THE PRICE MOVEMENTS OF ICICI FUTURES

10001050

1100115012001250

130013501400

14501500

28

-Dec

-07

1-Jan-08

3-Jan-08

7-Jan-08

9-Jan-08

11-Ja

n-08

15-Ja

n-08

17-

Jan-08

21-Jan-08

23-

Jan-08

25-

Jan-08

29-

Jan-08

31-Ja

n-08

CONTRACT DATES

PRICE

Future price

Graph:1

OBSERVATIONS AND FINDIN%S&

If / pe0so buys 1 lot i.e. 1@* futu0es of ICICI &N o 2?th Dec6 2AA@

/d sells o %1st/6 2AA? the he 4ill get / loss of 11'*.>[email protected]* G

7?1.1* pe0 sh/0e. So he 4ill get / loss of 1'2A1.2* i.e. 7?1.1* H 1@*

If he sells o 1'th/6 2AA@ the he 4ill get / p0ofit of 1'2A.@*[email protected]*

G 1>%.@ i.e. / p0ofit of 1>%.@ pe0 sh/0e. So his tot/l p0ofit is %%?>@.* i.e.

1>%.@ H 1@*


60/93

The closig p0ice of ICICI &N /t the ed of the cot0/ct pe0iod is 11'@

/d this is coside0ed /s settleet p0ice.

The follo4ig t/ble e;pl/is the /05et p0ice /d p0eius of c/lls.

The fi0st colu e;pl/is t0/dig d/te

Secod colu e;pl/is the S!OT /05et p0ice i c/sh seget o th/t

d/te.

The thi0d colu e;pl/is c/ll p0eius /outig /t these st0i5e

p0ices 12AA6 12%A6 12,A6 12>A6 1%2A /d 1%*A.

C(22 o1tio)s&


61/93

Table:

OBSERVATIONS AND FINDIN%S

CALL OPTION

BUYERS PAY OFF&

Date Market price 1200 1230 1260 1290 1320 1350

28-Dec-07 1226.7 67.85 53.05 39.65 32.25 24.2 18.5

31-Dec-07 1238.7 74.65 58.45 44.05 32.75 23.85 19.25

1-Jan-08 1228.75 62 56.85 39.2 30 22.9 18.8

2-Jan-08 1267.25 100.9 75.55 63.75 49.1 36.55 27.4

3-Jan-08 1228.95 75 60.1 45.85 34.5 26.4 22.5

4-Jan-08 1286.3 109.6 91.05 68.25 51.35 38.6 29.15

7-Jan-08 1362.55 170 143.3 120 100 79.4 62.35

8-Jan-08 1339.95 140 119.3

5

100 85 59.2 42.85

9-Jan-08 1307.95 140 101 74.35 62.05 46.65 33.15

10-Jan-08 1356.15 160.6 131 110 95.45 70.85 53.1

11-Jan-08 1435 250.7 151.8 188.9 164.7 130.9 104.55

14-Jan-08 1410 240 213.5 148 134.9 96 88.2

15-Jan-08 1352.2 155 150.0

5

107.5 134.9 66 52.65

16-Jan-08 1368.3 128.4 140 90 63 78.2 60.9517-Jan-08 1322.1 128.4 140 95 67.5 50.2 39.15

18-Jan-08 1248.85 128.4 60 54 37.95 29.15 19.3

21-Jan-08 1173.2 52 36.5 26.3 24.45 14.55 9.95

22-Jan-08 1124.95 44.15 31.05 22.55 12.45 10.35 6.7

23-Jan-08 1151.45 50.25 39.3 23.25 17 16.35 8.6

24-Jan-08 1131.85 40.4 22 17.05 12.1 9.45 5.1

25-Jan-08 1261.3 80.5 62 40.85 24.55 16.15 9.75

28-Jan-08 1273.95 91.85 61.65 44.8 31.4 20.25 11.35

29-Jan-08 1220.45 46 25.95 17.45 10.5 4.05 2.9530-Jan-08 1187.4 18.65 9.05 4.5 1.4 0.75 0.2

31-Jan-08 1147 0.45 0.5 1 1.4 0.1 0.2

Strike prices


62/93

Those 4ho h/ve pu0ch/se c/ll optio /t / st0i5e p0ice of 12,A6

the p0eiu p/y/ble is %>.,*

O the e;pi0y d/te the spot /05et p0ice eclosed /t 11'@. &s it

is out of the oey fo0 the buye0 /d i the oey fo0 the

selle06 hece the buye0 is i loss.

So the buye0 4ill lose oly p0eiu i.e. %>.,* pe0 sh/0e.

So the tot/l loss 4ill be ,>%?.@* i.e. %>.,*H1@*

SELLERS PAY OFF&

&s Selle0 is etitled oly fo0 p0eiu if he is i p0ofit.

So his p0ofit is oly p0eiu i.e. %>.,* H 1@* G ,>%?.@*

P"t o1tio)s&


63/93

Table: 3


Strike prices

Date Market

price

1200 1230 1260 1290 1320 1350

28-Dec-07 1226.7 39.05 181.05 178.8 197.15 190.85 191.8

31-Dec-07 1238.7 34.4 181.05 178.8 197.15 190.85 191.8

1-Jan-08 1228.75 32.1 181.05 178.8 197.15 190.85 191.8

2-Jan-08 1267.25 22.6 25.50 178.8 41.55 190.85 191.8

3-Jan-08 1228.95 32 38.00 178.8 82 190.85 191.8

4-Jan-08 1286.3 17.65 25.00 37.05 82 190.85 191.8

7-Jan-08 1362.55 12.4 12.60 20.15 34.85 43.95 191.8

8-Jan-08 1339.95 10.15 12.00 20.05 30 42 191.8

9-Jan-08 1307.95 11.9 15.00 26.5 36 51 191.8

10-Jan-08 1356.15 9 11.00 15 25.2 33.7 47.8

11-Jan-08 1435 3.75 11.00 10 8.9 12.75 18.35

14-Jan-08 1410 3.75 11.00 8.5 12 12.4 22.45

15-Jan-08 1352.2 6.45 7.00 10 17.45 23.1 38.3

16-Jan-08 1368.3 8 8.00 11.25 13.3 22.55 35.35

17-Jan-08 1322.1 7.3 8.00 17.8 25.45 38.25 56.4

18-Jan-08 1248.85 18.15 36.60 35 67.85 76.05 112.2

21-Jan-08 1173.2 103.5 70.00 69.65 135.05 151.35 223.422-Jan-08 1124.95 110 138.90 138.6 170.05 210 280

23-Jan-08 1151.45 71 138.90 135 150 210 200

24-Jan-08 1131.85 99 138.90 135 150 210 200

25-Jan-08 1261.3 15.9 26.35 33 50.05 210 200

28-Jan-08 1273.95 16.7 19.00 30 45 55 81.45

29-Jan-08 1220.45 18 38.00 50 45 100 145

30-Jan-08 1187.4 27.5 60.00 85.2 120 145.05 145

31-Jan-08 1147 50 60.00 85.2 120 145.05 145


64/93

PUT OPTION

BUYERS PAY OFF&

&s b0ought 1 lot of ICICI th/t is 1@*6 those 4ho buy fo0 12AA

p/id %>.A* p0eiu pe0 sh/0e.

Settleet p0ice is 11'@

St0i5e p0ice 12AA.AA

Spot p0ice 11'@.AA

*%.AA

!0eiu B7 %>.A*

1%.>* ; 1@*G 2''1.2*

uye0 !0ofit G Rs. 2''1.2*

ec/use it is positive it is i the oey cot0/ct hece buye0 4ill get

o0e p0ofit6 ic/se spot p0ice dec0e/ses6 buye09s p0ofit 4ill ic0e/se.

SELLERS PAY OFF&


65/93

It is i the oey fo0 the buye0 so it is i out of the oey fo0

the selle06 hece he is i loss.

The loss is eEu/l to the p0ofit of buye0 i.e. 2''1.2*.

GARPH SHOWING THE PRICE MOVEMNTS OF SPOT & FUTURE

100010501100

11501200125013001350

140014501500

28-D

ec-07

1-Jan-08

3-Jan-08

7-Jan-08

9-Jan-08

11-Jan

-08

15-Jan

-08

17-Jan

-08

21-Jan

-08

23-Jan

-08

25-Jan

-08

29-Jan

-08

31-Jan

-08

CONTRACT DATES

PRICE

Market price

Future price

Graph:2


The futu0e p0ice of ICICI is ovig /log 4ith the /05et p0ice.

If the buy p0ice of the futu0e is less th/ the settleet p0ice6

th/ the buye0 of / futu0e gets p0ofit.

If the sellig p0ice of the futu0e is less th/ the settleet p0ice6

th/ the selle0 icu0 losses.


66/93

ANALYSIS OF SBI&-



SI sc0ip. This //lysis coside0ed the / 2AA@ cot0/ct of SI. The

lot si:e of SI is 1%26 the tie pe0iod i 4hich this //lysis doe is

f0o 2?71272AA@ to %1.A1.A?.


67/93

Date Market Price Future price

28-Dec-07 2377.55 2413.7

31-Dec-07 2371.15 2409.2

1-Jan-08 2383.5 2413.452-Jan-08 2423.35 2448.45

3-Jan-08 2395.25 2416.35

4-Jan-08 2388.8 2412.5

7-Jan-08 2402.9 2419.15

8-Jan-08 2464.55 2478.55

9-Jan-08 2454.5 2473.1

10-Jan-08 2409.6 2411.15

11-Jan-08 2434.8 2454.4

14-Jan-08 2463.1 2468.415-Jan-08 2423.45 2421.85

16-Jan-08 2415.55 2432.3

17-Jan-08 2416.35 2423.05

18-Jan-08 2362.35 2370.35

21-Jan-08 2196.15 2192.3

22-Jan-08 2137.4 2135.2

23-Jan-08 2323.75 2316.95

24-Jan-08 2343.15 2335.35

25-Jan-08 2407.4 2408.928-Jan-08 2313.35 2305.5

29-Jan-08 2230.7 2230.5

30-Jan-08 2223.95 2217.25

31-Jan-08 2167.35 2169.9


68/93

Table: 4

GRAPH SHOWING THE PRICE MOVEMENTS OF SBI FUTURES

2000

2050

21002150

2200

2250

2300

2350

2400

2450

2500

28-D

ec-07

1-Jan-08

3-Jan-08

7-Jan-08

9-Jan-08

11-Jan

-08

15-Jan

-08

17-Jan

-08

21-Jan

-08

23-Jan

-08

25-Jan

-08

29-Jan

-08

31-Jan

-08

CONTRACT DATES

PRICE

Future price

Graph: 3


If / pe0so buys 1 lot i.e. %*A futu0es of SI o 2? thDec6 2AA@ /d sells

o %1st/6 2AA? the he 4ill get / loss of 21,>.>72'1%.@ G 2'%.? pe0

sh/0e. So he 4ill get / p0ofit of %21?1.,A i.e. 2'%.? H 1%2

If he sells o 1*th/6 2AA? the he 4ill get / p0ofit of 2',?.'72'1%.@ G

*'.@ i.e. / p0ofit of *'.@ pe0 sh/0e. So his tot/l p0ofit is @22A.'A i.e. *'.@

H 1%2

The closig p0ice of SI /t the ed of the cot0/ct pe0iod is 21,@.%* /d

this is coside0ed /s settleet p0ice.



69/93



d/te.


p0ices 2%'A6 2%@A6 2'AA6 2'%A6 2',A /d 2'>A.

C(22 o1tio)s&

Strike prices


70/93

Table: 5


CALL OPTION

BUYERS PAY OFF&

Date Market

Price

2340 2370 2400 2430 2460 2490

28-Dec-07 2377.55 145 92 104.35 108 79 68

31-Dec-07 2371.15 145 92 102.95 108 72 59

1-Jan-08 2383.5 134 92 101.95 108 69.85 59

2-Jan-08 2423.35 189.8 92 123.25 105.8 90.25 76.55

3-Jan-08 2395.25 189.8 92 98.45 93.6 76.6 60.05

4-Jan-08 2388.8 189.8 92 100.95 86 74.8 60.05

7-Jan-08 2402.9 189.8 92 95.55 88.15 76.15 61.18-Jan-08 2464.55 190 92 128.55 118.3 99.85 84.8

9-Jan-08 2454.5 170 92 126.75 121 92.15 77.45

10-Jan-08 2409.6 170 190 84 72.25 58.8 51.85

11-Jan-08 2434.8 160 190 108.85 94.95 74.65 64.85

14-Jan-08 2463.1 218.5 190 110.8 90.2 81.5 64.8

15-Jan-08 2423.45 218.5 190 87.85 75 62.65 55.3

16-Jan-08 2415.55 96 98 102.15 95.45 68.5 61.95

17-Jan-08 2416.35 96 190 91.85 80 66 55

18-Jan-08 2362.35 96 190 62.1 50.55 44 3021-Jan-08 2196.15 22.25 190 25.3 15 11.7 29

22-Jan-08 2137.4 22.25 190 21.05 15 11.7 10

23-Jan-08 2323.75 22.25 190 47.05 15 32.65 29.3

24-Jan-08 2343.15 104 190 48.2 40 26.45 26.3

25-Jan-08 2407.4 113.7 190 61.65 48.75 39.8 27.65

28-Jan-08 2313.35 0 0 0 0 0 0

29-Jan-08 2230.7 13 15 9 0 0 0

30-Jan-08 2223.95 13 15 9 0 0 0

31-Jan-08 2167.35 13 15 9 0 0 0


71/93

Those 4ho h/ve pu0ch/sed c/ll optio /t / st0i5e p0ice of 2'AA6

the p0eiu p/y/ble is 1A'.%*

O the e;pi0y d/te the spot /05et p0ice eclosed /t 21,@.,*.

&s it is out of the oey fo0 the buye0 /d i the oey fo0 the


So the buye0 4ill lose oly p0eiu i.e. 1A'.%* pe0 sh/0e.

So the tot/l loss 4ill be 1%@@'.2 i.e. 1A'.%*H1%2

SELLERS PAY OFF&


So his p0ofit is oly p0eiu i.e. 1A'.%* H 1%2 G 1%@@'.2

P"t o1tio)s&


72/93

Table: 6

Date Market

Price

2340 2370 2400 2430 2460 2490

28-Dec-07 2377.55 362.75 306.9 90 303 218.05 221.95

31-Dec-07 2371.15 362.75 306.9 90.6 303 218.05 221.95

1-Jan-08 2383.5 362.75 306.9 84.95 303 218.05 221.95

2-Jan-08 2423.35 60 40 73.55 303 218.05 221.95

3-Jan-08 2395.25 60 40 86 303 218.05 221.95

4-Jan-08 2388.8 60 40 87.35 303 218.05 221.95

7-Jan-08 2402.9 60 150 79 303 218.05 221.958-Jan-08 2464.55 60 150 50.7 303 100 221.95

9-Jan-08 2454.5 60 150 56.8 303 75.3 221.95

10-Jan-08 2409.6 60 150 74.25 303 112.8 100

11-Jan-08 2434.8 60 150 53.15 41 78.3 125

14-Jan-08 2463.1 60 150 44.25 59.95 71.35 100

15-Jan-08 2423.45 40 150 69.6 78 100 128

16-Jan-08 2415.55 75.9 150 65.05 78 135 150

17-Jan-08 2416.35 75.9 150 70.45 78 96.55 150

18-Jan-08 2362.35 75.9 70 95.05 118 96.55 15021-Jan-08 2196.15 170 139.3 223.8 118 299 150

22-Jan-08 2137.4 170 139.3 300 118 299 150

23-Jan-08 2323.75 170 139.3 150 118 299 150

24-Jan-08 2343.15 170 139.3 117.7 118 120 150

25-Jan-08 2407.4 33.9 139.3 52.45 118 120 150

28-Jan-08 2313.35 0 0 0 0 0 0

29-Jan-08 2230.7 61.6 80.8 88 0 0 0

30-Jan-08 2223.95 61.6 80.8 88 0 0 0

31-Jan-08 2167.35 61.6 80.8 88 0 0 0

Strike prices


73/93


PUT OPTION

BUYERS PAY OFF&

&s b0ought 1 lot of SI th/t is 1%26 those 4ho buy fo0 2'AA p/id

>A p0eiu pe0 sh/0e.

Settleet p0ice is 21,@.%*

Spot p0ice 2'AA.AA

St0i5e p0ice 21,@.%*

2%2.,*

!0eiu B7 >A.AA

1'2.,* ; 1%2G 1??2>.?

uye0 !0ofit G Rs. 1??2>.?


o0e p0ofit6 ic/se spot p0ice ic0e/se buye0 p0ofit /lso ic0e/se.


74/93

SELLERS PAY OFF&



The loss is eEu/l to the p0ofit of buye0 i.e. 1??2>.?.

GRAPH SHOWING THE PRICE MOVEMENTS OF SPOT AND FUTURE

2000

2050

21002150

2200

22502300

2350

2400

2450

2500

28-D

ec-07

1-Jan-08

3-Jan-08

7-Jan-08

9-Jan-08

11-Jan

-08

15-Jan

-08

17-Jan

-08

21-Jan

-08

23-Jan

-08

25-Jan

-08

29-Jan

-08

31-Jan

-08

CONTRACT DATES

PRICE

Market Price

Future price

Graph:4


The futu0e p0ice of SI is ovig /log 4ith the /05et p0ice.



If the sellig p0ice of the futu0e is less th/ the settleet p0ice6th/ the selle0 icu0 losses


75/93

ANALYSIS OF YES BAN*&-



$S &N sc0ip. This //lysis coside0ed the / 2AA? cot0/ct of $S

&N. The lot si:e of $S &N is 11AA6 the tie pe0iod i 4hich this

//lysis doe is f0o 2?71272AA@ to %1.A1.A?.


76/93

Date Market price future price

28-Dec-07 249.85 252.5

31-Dec-07 249.3 251.151-Jan-08 258.35 260.85

2-Jan-08 265.75 268.1

3-Jan-08 260.7 262.85

4-Jan-08 260.05 261.55

7-Jan-08 263.4 264.4

8-Jan-08 260.2 261.1

9-Jan-08 260.1 262.2

10-Jan-08 259.4 260.2

11-Jan-08 258.45 260.35

14-Jan-08 257.7 259.95

15-Jan-08 258.25 260.25

16-Jan-08 250.75 254

17-Jan-08 252.3 254.25

18-Jan-08 248 248.05

21-Jan-08 227.3 225.4

22-Jan-08 209.95 209.85

23-Jan-08 223.15 218.1

24-Jan-08 220.65 216.75

25-Jan-08 232.6 230.5

28-Jan-08 243.7 242.35

29-Jan-08 244.45 242.95

30-Jan-08 244.45 241.4

31-Jan-08 251.45 250.35


77/93

Table:7

GRAPH SHOWING THE PRICE MOVEMENTS OF YES BANK FUTURES

200

210

220

230

240

250

260270

280

28-D

ec-07

1-Jan-08

3-Jan-08

7-Jan-08

9-Jan-08

11-Jan

-08

15-Jan

-08

17-Jan

-08

21-Jan

-08

23-Jan

-08

25-Jan

-08

29-Jan

-08

31-Jan

-08

CONTRACT DATES

PRICE

Future price

Graph: 5



78/93

If / pe0so buys 1 lot i.e. 11AA futu0es of $S &N o 2? thDec6 2AA@

/d sells o %1st/6 2AA? the he 4ill get / loss of 2*A.%*72*2.*A G

72.1* pe0 sh/0e. So he 4ill get / loss of 2%,*.AA i.e. 72.1* H 11AA

If he sells o 1*th/6 2AA? the he 4ill get / p0ofit of 2,A.2*72*2.*A G

@.@* i.e. / p0ofit of 1,.1* pe0 sh/0e. So his tot/l loss is ?*2*.AA i.e. @.@*

H 11AA

The closig p0ice of $S &N /t the ed of the cot0/ct pe0iod is 2*1.'*

/d this is coside0ed /s settleet p0ice.




d/te.


p0ices 2%A6 2'A6 2*A6 2,A6 2@A /d 2?A.

Call options:


79/93

Table: 8


CALL OPTION

BUYERS PAY OFF&


28-Dec-07 249.85 17.05 32.45 13.1 9 18.55 15

31-Dec-07 249.3 16.45 32.45 12.45 9 18.55 15

1-Jan-08 258.35 22.15 32.45 16.3 11.6 18.55 152-Jan-08 265.75 31.45 32.45 24.9 16 14.5 15

3-Jan-08 260.7 31.45 32.45 21.5 13 5.1 3

4-Jan-08 260.05 31.45 32.45 21.5 12.2 5.15 3

7-Jan-08 263.4 31.45 32.45 21.5 12.2 9.25 3

8-Jan-08 260.2 31.45 32.45 21.5 9.95 7.45 3

9-Jan-08 260.1 31.45 32.45 21.5 10.95 6.45 3

10-Jan-08 259.4 31.45 32.45 21.5 17.5 8 8

11-Jan-08 258.45 31.45 32.45 21.5 10.75 5.05 8

14-Jan-08 257.7 31.45 32.45 21.5 9 5.05 8

15-Jan-08 258.25 31.45 32.45 21.5 14 8.25 8

16-Jan-08 250.75 31.45 32.45 21.5 5.7 4 8

17-Jan-08 252.3 31.45 32.45 21.5 7.5 5.5 2

18-Jan-08 248 31.45 32.45 9.5 7.5 5.5 2

21-Jan-08 227.3 6 32.45 9.5 7.5 1.5 2

22-Jan-08 209.95 6 32.45 9.5 8 1.5 4

23-Jan-08 223.15 6 32.45 9.5 8 4.5 4

24-Jan-08 220.65 6 32.45 9.5 2.1 2.9 4

25-Jan-08 232.6 6 32.45 9.5 2.1 2.9 4

28-Jan-08 243.7 15.95 32.45 9.5 2.1 2.9 429-Jan-08 244.45 15.95 32.45 9.5 2.1 2.9 4

30-Jan-08 244.45 15.95 32.45 5 2.1 2.9 4

31-Jan-08 251.45 29.15 32.45 4.7 5 0.8 0.5

Strike prices


80/93

&s b0ought 1 lot of $S &N th/t is 11AA6 those 4ho buy fo0

2?A p/id [email protected]* p0eiu pe0 sh/0e.

Settleet p0ice is 2*1.'*

Spot p0ice 2*1.'*

St0i5e p0ice 2%A.AA

21.'*

!0eiu B7 [email protected]*

'.'A ; 11AAG '?'A

uye0 !0ofit G Rs. '?'A


o0e p0ofit6 ic/se spot p0ice ic0e/se buye0 p0ofit /lso ic0e/se.

SELLERS PAY OFF&



The loss is eEu/l to the p0ofit of buye0 i.e. '?'A.

P"t o1tio)s&


81/93

Table: 9


Strike prices


28-Dec-07 249.85 6.95 10.55 15.15 20.75 27.25 34.5

31-Dec-07 249.3 6.2 9.75 14.35 20 26.6 34.1

1-Jan-08 258.35 4.3 7.05 10.75 15.5 21.25 27.9

2-Jan-08 265.75 3 5.1 8.1 12.1 17.1 23.1

3-Jan-08 260.7 3.45 5.9 9.3 13.75 19.3 25.84-Jan-08 260.05 3.15 5.5 8.9 13.4 19 25.65

7-Jan-08 263.4 2.1 3.95 6.85 10.9 16.15 22.55

8-Jan-08 260.2 2.2 4.25 7.4 11.75 17.45 24.25

9-Jan-08 260.1 1.85 3.8 6.85 11.2 16.9 23.8

10-Jan-08 259.4 1.65 3.5 6.55 10.95 16.75 23.8

11-Jan-08 258.45 1.5 3.3 6.3 10.8 16.8 24.05

14-Jan-08 257.7 1.1 2.7 5.6 10.15 16.35 23.95

15-Jan-08 258.25 0.8 2.2 4.95 9.35 15.55 23.2

16-Jan-08 250.75 1.6 3.85 7.8 13.6 20.95 29.5517-Jan-08 252.3 1.15 3.05 6.65 12.15 19.4 27.95

18-Jan-08 248 1.5 3.95 8.3 14.7 22.75 31.8

21-Jan-08 227.3 9.75 16.2 24.1 33 42.5 52.25

22-Jan-08 209.95 22.15 30.8 40.1 49.8 59.65 69.6

23-Jan-08 223.15 13 20 28.25 37.25 46.8 56.55

24-Jan-08 220.65 13.8 21.3 30 39.4 49.1 59

25-Jan-08 232.6 7 12.6 19.85 28.3 37.6 47.25

28-Jan-08 243.7 1.6 4.6 10 17.55 26.6 36.25

29-Jan-08 244.45 0.75 3.05 8.3 16.2 25.6 35.4530-Jan-08 244.45 0.15 1.65 6.95 15.65 25.5 35.5

31-Jan-08 251.45 0 0 0 0 0 0


82/93

PUT OPTION

BUYERS PAY OFF&

Those 4ho h/ve pu0ch/se put optio /t / st0i5e p0ice of 2*A6 the

p0eiu p/y/ble is 1*.1*

O the e;pi0y d/te the spot /05et p0ice eclosed /t 2*1.'*. &s

it is out of the oey fo0 the buye0 /d i the oey fo0 the


So the buye0 4ill lose oly p0eiu i.e. 1*.1* pe0 sh/0e.

So the tot/l loss 4ill be 1,,,* i.e. 1*.1*H11AA

SELLERS PAY OFF&


So his p0ofit is oly p0eiu i.e. 1*.1* H 11AA G 1,,,*


83/93

GRAPH SHOWING THE PRICE MOVEMENTS OF SPOT & FUTURES

200

210

220

230

240250

260

270

280

28-D

ec-07

1-Jan-08

3-Jan-08

7-Jan-08

9-Jan-08

11-Jan

-08

15-Jan

-08

17-Jan

-08

21-Jan

-08

23-Jan

-08

25-Jan

-08

29-Jan

-08

31-Jan

-08

CONTRACT DATES

PRICE Market price

Future price

Graph: 6


The futu0e p0ice of $S &N is ovig /log 4ith the /05et

p0ice.



If the sellig p0ice of the futu0e is less th/ the settleet p0ice6

th/ the selle0 icu0 losses.


84/93

SUMMARY

De0iv/tives /05et is / iov/tio to c/sh /05et.

&pp0o;i/tely its d/ily tu0ove0 0e/ches to the eEu/l st/ge of

c/sh /05et. The /ve0/ge d/ily tu0ove0 of the NS$ de0iv/tive

segets

I c/sh /05et the p0ofitloss of the ivesto0 depeds o the

/05et p0ice of the ude0lyig /sset. The ivesto0 /y icu0

huge p0ofits o0 he /y icu0 huge losses. ut i de0iv/tives

seget the ivesto0 ejoys huge p0ofits 4ith liited do4side.

I c/sh /05et the ivesto0 h/s to p/y the tot/l oey6 but i

de0iv/tives the ivesto0 h/s to p/y p0eius o0 /0gis6 4hich

/0e soe pe0cet/ge of tot/l cot0/cts.

De0iv/tives /0e ostly used fo0 hedgig pu0pose.

I de0iv/tive seget the p0ofitloss of the optio 40ite0 pu0ely

depeds o the fluctu/tios of the ude0lyig /sset.


85/93

SU%ESSTIONS

The de0iv/tives /05et is e4ly st/0ted i Idi/ /d it is ot

5o4 by eve0y ivesto06 so S$I h/s to t/5e steps to c0e/te

/4/0eess /og the ivesto0s /bout the de0iv/tive

seget.

I o0de0 to ic0e/se the de0iv/tives /05et i Idi/6 S$I

should 0evise soe of thei0 0egul/tios li5e cot0/ct si:e6

p/0ticip/tio of "II i the de0iv/tives /05et.

Cot0/ct si:e should be iii:ed bec/use s/ll ivesto0s

c/ot /ffo0d this uch of huge p0eius.

S$I h/s to t/5e fu0the0 steps i the 0is5 //geet

ech/is.

S$I h/s to t/5e e/su0es to use effectively the de0iv/tives

seget /s / tool of hedgig.


86/93

CONCLUSION

I bullish /05et the c/ll optio 40ite0 icu0s o0e losses so the

ivesto0 is suggested to go fo0 / c/ll optio to hold6 4he0e /s the

put optio holde0 suffe0s i / bullish /05et6 so he is suggested

to 40ite / put optio.

I be/0ish /05et the c/ll optio holde0 4ill icu0 o0e losses so

the ivesto0 is suggested to go fo0 / c/ll optio to 40ite6 4he0e

/s the put optio 40ite0 4ill get o0e losses6 so he is suggested

to hold / put optio.

I the /bove //lysis the /05et p0ice of $S b/5 is h/vig lo4

vol/tility6 so the c/ll optio 40ite0 ejoys o0e p0ofits to holde0s


87/93

%LOSSARY

De/iv(tives7 De0iv/tives /0e ist0uets th/t de0ive thei0 v/lue /d

p/yoff f0o /othe0 /sset6 c/lled ude0lyig /sset.

C(22 O1tio)8 the optio to buy / /sset is 5o4 /s / c/ll optio

P"t o1tio)8 the optio to / /sset is c/lled / put optio.

E:e/cise P/ices8 The p0ice /t 4hich optio c/ be e;e0cised is c/lled

/ e;e0cise p0ice o0 / st0i5e p0ice.

E"/o1e() o1tio)8 )he0e / optio is /llo4ed to be e;e0cised oly

o the /tu0ity d/te6 it is c/lled / $u0ope/ optio

A'e/ic() o1tio)8 )he the optio c/ be e;e0cised /y tie befo0e

its /tu0ity6 it is c/lled / &e0ic/ Optio.

I)-t!e-'o)e$ o1tio)8 & put o0 / c/ll optio is s/id to i7the7optio

4he it is /dv/t/geous fo0 the ivesto0 to e;e0cise it. I the c/se of

i7the7oey c/ll optio6 the e;e0cise p0ice is less th/ the cu00et

v/lue of the ude0lyig /sset6 4hile i the c/se of the i7the7oey

put optios the e;e0cise p0ice is highe0 th/ the cu00et v/lue of

st/ge ude0lyig /sset.

O"t-o-t!e 'o)e$ o1tio)8 & put o0 c/ll optio is out7of7the7oey

if it is ot /dv/t/geous fo0 the ivesto0 to e;e0cise it. I the c/se of

the out7of7the7oey c/ll optio6 the e;e0cise p0ice is less th/ the


88/93

cu00et v/lue of the ude0lyig /sset6 )hile i the c/se of the out 8 of7

the7oey put optio6 the e;e0'cise p0ice is lo4e0 th/ the cu00et

v/lue of the ude0lyig /sset.

At-t!e-o1tio)8 )he the holde0 of / put o0 / c/ll optio does ot

lose of g/i 4hethe0 of ot he e;e0cises his optio6 the optio is s/id

to be /t7the7oey. I the c/se of the out7of7the7oey optio the

e;e0cise p0ice is eEu/l to the cu00et v/lue of the ude0lyig /sset.

St/(##2e 8 The ivesto0 c/ /lso c0e/te / po0tfolio of / c/ll /d / put

4ith the s/e e;e0cise p0ice. This is c/lled / st0/ddle.

S1/e(#8 If c/ll /d put 4ith diffe0et e;e0cise p0ice /0e cobied6 it

is c/lled / sp0e/d.

St/i18 & st0ips is / cobi/tio of t4o puts /d oe c/ll 4ith the

s/e e;e0cise p0ice /d the e;pi0/tio d/te.

St/(18 & st0/p6 o the othe0 h/d6 et/ils cobig t4o c/lls /d oe

put.

S,APS 8 S4/ps /0e siil/0 to futu0es /d fo04/0ds cot0/cts i

p0ovidig hedge /g/ist fi/ci/l 0is5. & s4/p is / /g0eeet

bet4ee t4o p/0ties6 c/lled coute0p/0ties6 to t0/de c/sh flo4s ove0 /

pe0iod of tie.

C"//e)c$ S6(1s 8 Cu00ecy s4/ps ivolves / e;ch/ge of

p/yets i oe cu00ecy fo0 c/sh p/yets i /othe0 cu00ecy.


89/93

B"tte/2$ S1/e(#8 & log butte0fly sp0e/d ivolves buyig / c/ll 4ith

/ lo4 e;e0cise' p0ice6 buyig / c/ll 4ith / high e;e0cise p0ice /d

sellig to4 c/lls 4ith / e;e0cise p0ice i bet4ee the t4o. & sho0t

butte0fly sp0e/d ivolves the opposite positio th/t is sellig c/ll 4ith

lo4 e;e0cise p0ice6 sellig / c/ll 4ith / high e;e0cise p0ice /d buyig

t4o c/lls 4ith / e;e0cise p0ice i bet4ee the t4o.

Co22(/s 8 & coll/0s ivolves / st0/tegy of liitig / po0tfolio9s v/lue

bet4ee to bouds.

B"22is! s1/e(# 8 & ivesto0 /y be e;pectig the p0ice of /

ude0lyig sh/0e to 0ise. ut he /y ot li5e to t/5e highe0 0is5.

Be(/is! S1/e(#8 & ivesto06 4ho is e;pectig / sh/0e of ide; to

f/ll6 /y sell the highe07Hp0iced optio /d buy the lo4e07p0ice optio.

I)#e: o1tio)s8 Ide; optios /0e c/ll o0 put optios o the stoc5

/05ets idices. I Idi/6 the0e /0e optios o the ob/y Stoc5$;ch/ge6 Sese; /d the /tio/l Stoc5 $;ch/ge6 Nifty.

P/e'i"' 8 The p0ice of / optio cot0/ct6 dete0ied o the

e;ch/ge 4hich the buye0 of the optio p/ys to the optios 40ite0 fo0

the fights to the optio cot0/ct.

F"t"/es8 "utu0es is / fi/ci/l cot0/ct 4hich de0ives its v/lue fo0 theude0lyig /sset.


90/93

Fi)()ci(2 F"t"/es 8 "utu0es /0e t0/ded i / 4ide v/0iety of

cooditiesL 4he/t6 sug/06 gold6 silve06 coppe06 o0/ges6 coco6 oil

soybe/ etc.

Fo/6(/# 8 I / fo04/0d cot0/ct6 t4o p/0ties /g0ee to buy o0 sell

soe ude0lyig /sset o soe futu0e d/te /t / st/ted p0ice /d

Eu/tity.

I)#e: "t"/es8 Ide; futu0es is oe of the ost successful fi/ci/l

iov/tio of the fi/ci/l /05et. I 1>?26 the stoc5 ide; futu0e 4/s

it0oduced.

M(/0i) 8 Depedig upo the /tu0e of the buye0 /d selle0 the

/0gi 0eEui0eet to deposit 4ith the stoc5 e;ch/ge is fi;ed.

M(/4et to M(/4et8 & p0ocess of v/luig / ope positio o /

futu0es /05et /g/ist the 0ulig p0ice of the cot0/ct /t th/t tie6 i

o0de0 to dete0ie the si:e of the /0gi c/ll.

B(#2(8 /dl/ is / p/0t of the c/sh /05et. It p0ovided the f/cility of

bo00o4ig /d ledig of sh/0es /d fuds.

He#0i)0 8 3edgig is the te0 used fo0 0educig 0is5 by usig

de0iv/tives.

Nit$8 Nifty h/s bee selected /s the b/se fo0 the stoc5 ide; futu0es.

Nifty cot/is / 4ell7dive0sified po0tfolio of *A stoc5s.


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BIBLIOG!"#$

Boo4s&-

De0iv/tives De/le0s Module )o05 oo5 7 NC"M

"i/ci/l "eb5et /d Se0vices 7 -ORD&N + N&TR&&N

"i/ci/l M//geet 7 !R&S&NN& C3&NDR&

Ne6s P(1e/s&-

T3$ "IN&NCI $F!R$SSUSIN$SS)OR#D

$CONOMIC TIM$S

,EB SITES&-

,,,.i)#i(i)o2i)e.co'

,,,.!sei)#i(.o/0

,,,.)sei)#i(.co'

,,,.bsei)#i(.Co'

,,,.#e/iv(tives.co'


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Financial Study on Derivatives India-Infoline

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