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CHAPTER-1

INRODUCTION

HISTORY OF STOCK EXCHANGE

The only stock exchange operating in the 19th century were those of o!"ay set

up in 1#7$ and %h!ada"ad set up in 1#9& these were organi'ed as voluntary non(profit

!aking organi'ation of "rokers to regulate and protect interest) efore the control

insecurities trading "eca!e a central su"*ect under the constitution in 19$0+ it was a state

su"*ect and the o!"ay securities contract ,-.TR. %ct of 19$2 used to regulate

trade in securities) nder this act+ the o!"ay stock exchange in 1927 and %h!ada"adin 1937)

4uring the war "oo!+ a nu!"er of stock exchanges were organi'ed in o!"ay+

%h!ada"ad and other centers+ "ut they were not recogni'ed) 5oon after it "eca!e a

central su"*ect+ central legislation was proposed and a co!!ittee headed "y %)4) 6oral

went in to the "ill for securities regulation) .n the "asis of co!!ittees

reco!!endations and pu"lic discussions the securities contracts ,regulations %ct

"eca!e law in 19$8)

Definition of Stock Exchn!e

5tock exchange !eans any "ody or individuals whether incorporated or not+

constituted for the purpose of assisting+ regulating or controlling the "usiness of "uying+

selling or dealing in securities): ;t is an association of !e!"er "rokers for the purpose of

self < regulation and protecting the interests of its !e!"ers) ;t can operate only of it is

recogni'ed "y the govt) nder the securities contract ,regulation %ct+ 19$8) The

recognition is granted under section 3 of the %ct "y the central govern!ent+ !inistry if

finance)

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"YE#A$S

esides the a"ove act+ the securities contract ,regulations rules were also

!ade in 197$ to regulate certain !atters of trading on the stock =xchange) These are also

"yelaws of the exchanges+ which are concerned with the following su"*ects) .pening /

closing of the stock exchange+ ti!ing of trading+ regulation of "ank transfer+ regulation of

adla or carryover "usiness+ control of settle!ent+ and other activities of stock exchange+

fixations of !argin+ fixations of !arket price or !arking price+ regulation of tarlatan

"usiness ,*o""ing+ regulation of "rokers trading+ "rokerage charges+ trading rules on the

exchange+ ar"itration and settle!ent of disputes+ settle!ent and clearing of the trading

etc)

Re!%&tion' of Stock Exchn!e

The securities contract ,regulations is the "asis for operations of the stock

exchange in ;ndia) o exchange can operate legally without the govern!ent per!ission

or recognition) 5tock exchanges are give !onopoly in certain areas under section 19 of

the a"ove %ct to ensure that the control and regulation are facilitated) Recognition can "e

granted to a stock exchange provided certain are satisfied and the necessary ;nfor!ation

is supplied to the govern!ent) Recognition can also "e withdrawn+ if necessary) >here

there are no stock exchanges+ the govern!ent can license so!e to the "rokers to perfor!

the functions of a stock exchange in its a"sence)

SECURITIES AND EXCHANGE "OARD OF INDIA (SE"I)

5=; was set up as an autono!ous regulatory authority "y the 6overn!ent of ;ndia

in 19## to perfor! the interests of investors in securities and to pro!ote the

develop!ent and to regulate the securities !arket and for !atters connected there with

or incidental thereto): ;t is e!powered "y two acts na!ely the 5=; act+ 1992 and the

securities contract ,regulation %ct 19$8 to perfor! the function of protecting investors

rights and regulating the capital !arket)

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"ASIC OF DERI*ATI*ES

The ter! 4erivatives: independent value+ i)e) its value is entirely derived:

fro! the underlying asset) The underlying asset can "e securities+ co!!odities "ullion+

currency+ live stock or anything else) ;n other words+ derivative !eans a forward+ future+option or any other hy"rid contract of per deter!ined fixed duration+ linked for the

purpose of contract fulfill!ent to the value of a specified real or financial asset or to an

index of securities)

The Sec%+itie' Cont+ct' (Re!%&tion) Act 1,. Define De+i/ti/e' ' Un0e+

De+i/ti/e2 Inc&%0e'

• a securities derivatives fro! a de"t instru!ent+ share+ lone writher secured or

•

unsecured+ risk instru!ent or contract for different or any other security• a contract which derives its value fro! the prices+ or index of price of underlying

• 5ecurities

The a"ove definition conveys? Those derivatives are financial products and derive its

value fro! the underlying assets)

4erivatives is derived fro! another financial instru!ent/contract called the

nderlying) ;n the case of ifty futures+ ifty index is the underlying)

Si!nificnce of De+i/ti/e'De+i/ti/e' +e U'e0

1) "3 He0!e+' for protecting ,risk(covering against adverse !ove!ent) @edging is

a !echanis! to reduce price risk inherent in open positions) 4erivatives are

widely used for hedging) % @edge can help lock in existing profits) ;ts purpose is

to reduce the volatility of a portfolio "y reducing the risk)

2) S4ec%&to+' to !ake Auick fortune "y anticipating/forecasting future !arket

!ove!ent) @edgers with to eli!inate or reduce the price risk to which they are

already exposed) 5peculators+ on the other hand are those classes of investors

who willingly take price risks to profit fro! price change in the underlying)

>hile the need to provide hedging avenues "y !eans of derivative instru!ents is

lauda"le+ it call for the existence of speculative traders to play the role of

counter(party to the hedgers) ;t is for this reason that the role of speculators gains

pro!inence in a derivatives !arket)

3) A+5it+!e%+' to earn risk(free profits "y exploiting !arket i!portance)

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%r"itrageurs profits fro! price differential existing in two !arkets "y

si!ultaneously operating in the two different !arkets)

T34e of De+i/ti/e'

4erivatives products initially e!erged devices against fluctuations in co!!odity

price+ and co!!odity(linked derivatives re!ained the sole for! of such predicts for

al!ost three hundred years) Binancial derivatives ca!e into spotlight in the post(1970

period due to growing insta"ility in the financial !arkets) @owever+ since their

e!ergence+ these products have "eco!e very popular and "y 1990s+ they accounted for

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Auantity of the underlying asset at a given price on or "efore given date)

$++nt'? .ptions generally have lives of up to one year+ the !a*ority of option traded

on options exchanges having a !axi!u! !aturity of one !onth) onger(dated options

are called warrants and are generally traded over(counter)

#e4'7 The acrony! =%P5 !eans long(ter! eAuity anticipation securities) These are

options having a !aturity of up to three years)

"'ket'7 asket options are options on portfolios of underlying assets) The underlying

asset is usually a !oving average of a "asket of assets) =Auity index options are a for! of

"asket options)

S64'7 swaps are private agree!ents "etween two parties to exchange cash flows in the

future according to a prearranged for!ula) They can "e regarded as portfolios of forward

contracts)

The T6o Co88on&3 U'e0 S64' A+e

Inte+e't Rte S64'? these entail swapping only the interest related cash flow "etween

the parties in the sa!e currency)

C%++enc3 S64'7 These entail swapping "oth principal and interest "etween the parties+

with the case flows in one direction "eing in a different currency than those in the

opposition direction)

S64tion'7 5waptions are options to "uy or sell a swap that will "eca!e operative at the

expiry of the options) Thus a 5waptions is an option on a forward swap) Rather than have

called and puts+ the swaption !arket has receiver swaption and payer swaptions) %

receiver swaptions in an option to receiver fixed and pay floating) % player swaption is

an option to pay fixed and receive floating)

C&''ifiction of De+i/ti/e'

The De+i/ti/e' Cn 5e C&''ifie0 '

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• Fo+6+0' (C%++encie'9 Stock'9 S64' etc)

Borward contract is different fro! a spot truncation+ where pay!ent of price and

delivery of co!!odity concurrently take place i!!ediately the transaction is settled) ;n aforward contract the sale/purchase truncation of an asset is settled including the price

paya"le+ not for delivery/settle!ent at spot+ "ut at a specified future date) ;ndia has a

strong dollar(rupee forward !arket with contract "eing traded for one+ two+ and six(

!onth expiration) 4aily trading volu!e on this forward Darket is around E$00 !illion a

day) ;ndian users of hedging services are also allowed to "uy derivatives involving other

currencies on foreign !arkets)

• F%t%+e'(C%++encie'9 Stock'9 In0exe'9 Co88o0itie' etc)

% futures contract has "een defined as a standardi'ed+ exchange(traded

%gree!ent specifying a Auantity and price of a particular type of co!!odity

,5oy"eans+ gold+ oil+ etc to "e purchased or sold at a pre(deter!ined date in the

Buture) .n contract date+ delivery and physical possession take place unless the

-ontract has "een closed out futures fate also availa"le o" various financial

Products and indexes today) % futures contract is thus a forward+ contract+ which

trades on national stock exchange) This provides the! transparency+ liAuidity+

anony!ity of trades+ and also eli!inates the counter party risks due to the

guarantee provided "y national securities clearing corporation li!ited)

• O4tion' (C%++encie'9 Stock'9 In0exe' etc)

.ptions are the standardi'ed financial that allows the "uyer ,holder if the

.ptions+ i)e) the right at the cost of options pre!iu!+ not the o"ligation+ to

"ut ,call options or sell ,put options a specified asset at a set price on or "efore

a 5pecified date through exchange under stringent financial security against

default)

FORD$ARD CONTRACTS

% forward contract is an agree!ent to "uy or sell an asset on a specified date for a

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specified price) .ne of the parties to the contract assu!es a long position and agrees to

"uy the underlying asset on a certain specified future date for a certain specified price)

The other party assu!es a short position and agrees to sell the asset on the sa!e date for

the sa!e price) .ther contract details like delivery date+ the parties to the contracts

negotiate price and Auality "ilaterally) The forward contracts are nor!ally traded outside

the exchanges)

The Si&ent F%t%+e' of Fo+6+0 Cont+ct +e

The "ilateral contracts and hence exposed to counter(party risk)

=ach contract is custo! designed+ and hence is uniAue in ter!s of contract si'e+

=xpiration date and the asset type and Auality)

The contract price is generally not availa"le in pu"lic do!ain)

.n the expiration date+ the contract has to "e settled "y delivery of the asset)

;f the party wishes to reverse the contract+ it has to co!pulsorily go the sa!e

counter Party+ which often results in high prices "eing changed)

@owever forward contracts in certain !arkets have "eco!e very standardi'ation+ as

in the case of foreign exchange+ there"y reducing transaction cost and increasing

transactions volu!e) This process of standardi'ation reaches its li!it in the organi'ed

futures !arket )Borward contracts is very useful in hedging and speculation) The classic

hedging application word is that of an exporter who expects to receive pay!ent in dollars

three Donths later he is exposed to the risk of exchange rate fluctuations) y using the

currency forward !arkets to sell dollars forward+ he can lock on to a rate today and

reduce his uncertainty) 5i!ilarly an i!porter who is reAuired to !ake a pay!ent in

dollars forward if a speculator has infor!ation or analysis+ which forecasts an upturn in a

price+ than he can go long on the forward !arket instead of the cash !arket) The

speculator would go long on the forward+ wait for the price to rise+ and then take a

reversing transaction to "ook profits) 5peculators !ay well "e reAuired to deposit a

!argin upfront) @owever+ this is generally a relatively s!all proportion of the value of

the assets underlying the forward contract) The use of forward !arkets here supplies

leverage to the speculator)

#I:ITATIONS

Fo+6+0 :+ket' $o+&0-$i0e +e Aff&icte0 53 Se/e+& P+o5&e8'

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ack of centrali'ation of trading+ iAuidity+ and -ounter party risk in the first two

of these+ the "asic pro"le! is that of too !uch flexi"ility and generality) The forward

!arket is like a real estate !arket in that any two consenting adults can for! contracts

against each other) This often !akes the! design ter!s of the deal+ which are very

convenient in that specific situation+ "ut !akes the contracts non(trada"le) -ounter party

risk arises fro! the possi"ility of default "y any one party to the transaction) >hen one

of the two sides to the transaction declares "ankruptcy+ the other suffers) =ven when

forward !arkets trade standardi'ed contracts+ and hence avoid the pro"le! of liAuidity+

still the counter party risk re!ains a very serious issue)

FUTURES

Butures !arkets were designed to solve the pro"le!s that exist in forward

!arkets) Butures -ontract is an agree!ent "etween two parties to "uy or sell an asset at a

certain ti!e in the future at a certain price) ut unlike forward contracts+ the futures

contracts are standardi'ed and exchange traded) To facilitate liAuidity in the future

contracts+ the exchange specifies certain standard Auantity and Auality of the underlying

instru!ent that can "e delivered+ ,or which can "e used for reference purposes in

settle!ent and a standard ti!ing of such settle!ent) % futures contract !ay "e offset

prior to !aturity "y entering into an eAual and opposite transaction) Dore than 99F of

futures transactions are offset this way)

The Stn0+0i;e0 Ite8' in F%t%+e' Cont+ct +e

Guantity of the underlying

Guality of the underlying

The date and !onth of delivery

The units of price Auotations and !ini!u! price changes

ocation of settle!ent)

DISTINCTION "ET$EEN FUTURES AND FRO$ARDS

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Borward contracts are often confused with futures contracts) The confusion is

pri!arily eca!e "oth serve essentially the sa!e econo!ics of allocations risk in the

presence of Buture price uncertainly) @owever futures are a significant i!prove!ent over

the forward -ontracts as they eli!inate counter party risk and offer !ore liAuidity)

FUTURES TER:INO#OGY

Spot price: The price at which an asset trades in the spot !arket)

Futures price: The price at which the futures contract trades in the futures !arket)

Contract cycle: The period over which a contract trades) The index futures contracts on

the 5= have one(!onth+ two(!onth and three(!onth expiry cycle+ which expire on the

last Thursday of the !onth) Thus Hanuary expiration contract expires on the last

Thursday of Be"ruary) .n the Briday following the last Thursday+ a new contract having

a three(!onth expiry is introduced for trading)

Expiry date: ;t is the date specified in the futures contract) This is the last day on which

the contract will "e traded+ at the end of which it will case to exist)

Contract size: The a!ount of the asset that has to "e delivered less than one contract) Bor

instance+ the contract si'e on 5=s futures !arket is 200 iftiest)

Basis: ;n the context of financial futures+ "asis can "e defined as the futures price !inus

the spot price) There will "e a different "asis for each delivery !onth for each contract)

;n a nor!al !arket+ "asis will "e positive) This reflects that futures prices nor!ally

exceed spot prices)

-ost of carry? the relationship "etween futures prices and spot prices can "e

su!!ari'ed)

;n ter!s of what is known as the cost of carry) This !easures the storage -ost

plus the interest that is paid to finance the asset less the inco!e earned on the

asset)

;nitial !argin? the a!ount that !ust "e deposited in the !argin account at the

ti!e a future contract is first entered into is known as initial !argin)

Darking(to(!arket? in the futures !arket+ at the end of each trading day+ the

!argin)

account is ad*usted to reflect the investors gain or loss depending upon the

futures -losing price) This is called !arking(to(!arket)

Daintenance !argin? this is so!ewhat lower than the initial !argin) This is set to

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ensure) That the "alance in the !argin account never "eco!es negative)

;f the "alance in the !argin account falls "elow the !aintenance !argin+ the

investor receives a Dargin call and is expected to top up the !argin account to

the initial !argin level "efore trading co!!ences on the next day)

OPTIONS

>e look at the next derivative product to "e traded on the 5=+ na!ely option)

.ptions are funda!entally different fro! forward and futures contracts) %n option gives

the holder of the option the right to do so!ething) The holder does not have to exercise

this right )in contrast+ in a forward or futures contract+ the two parties have co!!itted

the!selves to doing so!ething) whereas it costs nothing ,except !argin reAuire!entsto

enter into a futures contract+ the purchase of an option reAuires an up(front pay!ents)

OPTIONS TER:INAO#OGY

In0ex o4tion? There option has the index as the underlying) 5o!e options are

=uropean while others are %!erican) ike index+ futures+ contract+ index options

-ontracts are also cash settled)

Stock o4tion'? stock options are options on individual stocks) option currently

trade .n over $00 stocks in the nited 5tates) % contract gives the holder the

right to "uy or sell shares at the specified prices)

"%3e+ of o4tion'? the "uyer of an options is the one who "y paying the options

Pre!iu! "uys the right "ut not the o"ligation to exercise his option on the

5eller / writer)

$+ite+ of n o4tion? the writer of a call/put options is the one who receives the

option pre!iu! and is there"y o"liged to sell/"uy the asset if the "uyer exercises

on hi!)

The+e +e T6o "'ic T34e' of O4tion'9 C&& O4tion' n0 P%t O4tion'

C&& o4tion? a call option gives the holder the right "ut not the o"ligation to "uy

an %sset "y a certain date for a certain price)

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P%t o4tion? a put option gives the holder the right "ut not the o"ligation to sellan asset "y a certain date for a certain price)

O4tion 4+ice? option prices are the price+ which the option "uyer pays to option

seller) ;t is also referred to as option pre!iu!) Ex4i+tion 0te? the date specified in the options contract is known as the

expiration 4ate+ the exercise date+ the strike date or the !aturity)

St+ike 4+ice7 the price specified in the options contract is known as the strike

price or the exercise price)

A8e+icn o4tion'? %!erican options are options that can "e exercised at any

ti!e up to the expiration date) Dost exchange(traded options are %!erican)

E%+o4en o4tion'? =uropean options are options that can "e exercised only onthe =xpiration date itself) =uropean options are easier to analy'e than %!erican

options+ and Properties of %!erican options are freAuently deduced fro! those

of its =uropean -ounterpart)

In-the-8one3 o4tion? an in(the !oney ,;TD option that would lead to a

Positive cash flow to the holder if it were exercised i!!ediately) % call option

on the ;ndex is said to "e in !oney when the current index is stands at a level

higher than the strike price+ ,i)e) spot price strike price) ;f the index is !uchhigher than the strike price+ The call is said to "e deep ;TD) ;n the case of a put

is ;TD if the index is "elow the strike price)

At-the-8one3 o4tion? an at(the !oney ,%TD option is an option that would

lead to Iero cash flow if it were exercised i!!ediately) %n option on the index

is at(the

strike price)

O%t-of the 8one3 o4tion? an out(of

would lead to a negative cash flow it was exercised i!!ediately) % call option

on the index is out(of(the(!oney when the current index stands at a level+ which

is less than the strike Price ,i)e) spot price strike price) ;f the index is !uch

lower than the strike price+ the call is said to "e deep .TD )in the case of a put+

the put is .TD if the index is a"ove the 5trike price)

T+0in! St+te!ie' %'in! F%t%+e' n0 O4tion

There are a lot of practical uses of derivatives) %s we have seen+ derivatives can "e

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used for profits and hedging) >e can use derivatives as a leverage tool too)

U'e of De+i/ti/e' ' &e/e+!e

Kou can use the derivatives !arket to raise fund using your stocks) -onversely+

you can also lend funds against stocks)

Diffe+ent "et6een "0& n0 De+i/ti/e'

The derivatives product that co!es closest to adla is futures) Butures is not

"adla+ through a lot of people confuse it with "adla) The funda!ental difference is "adla

consisted of contango and "ackwardation ,undha "adla and vya* "adla in the sa!e

!arket) Butures is a different !arket seg!ent altogether) @ence derivatives is not the

sa!e as "adla+ through it is si!ilar)

Ri'in! F%n0' f+o8 the De+i/ti/e' :+ket

This is fairly si!ple) 5ay+ you have ;nfosys+ which is trading at R s 3000) Kou

have shares lying with you and are in urgent need of liAuidity) ;nstead of pledging your

shares and "orrowing fro! "anks at a !argin+ you can sell the stock at R s 3000) 5uppose

you need this liAuidity only for a !onth and also do not want to party with ;nfosys) Kou

can "uy a 1 !onth future at R s 30$0

%fter a !onth you get "ack you ;nfosys at the cost of additional rs $0) This R s $0

is the financing cost for the liAuidity) The other "eauty a"out this is you have already

locked in your purchase cost at R s 30$0) This fixes your liAuidity cost also and protected

against further price losses)

#en0in! F%n0' to The :+ket

The lending into the !arket is exactly the reverse of "orrowing) Kou have !oneyto lend)

Kou can a stock and sell its future) 5ay+ you "uy ;nfosys at R s 3000 and sell a 1

!onth future at R s 3100) ;n effect what you have done is lent R s 3000 to the !arket for

a !onth and earned R s 100 on it)

U'in! S4ec%&tion to :ke P+ofit'

>hen you speculate+ you nor!ally take a view on the !arket+ either "ullish or

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"earish) >hen you take a "ullish view on the !arket+ you can always sell futures and "uy

in the spot !arket) ;f you take a "earish view on the !arket+ you can "uy futures and sell

in the sport !arket) 5i!ilarly+ in the option !arket+ if you are "ullish+ you should "uy

call options) ;f you are "earish+ you should "uy put option conversely+ if you are "ullish+

you should write put options) This is so "ecause+ in a "ull !arket+ there are lower

changes of the put option "eing exercised and you can profit fro! the pre!iu! if you are

"earish+ you should write call option) This is so "ecause+ in a "ear !arket+ there are lower

chances of the call option "eing exercised and you can profit fro! the pre!iu!)

U'in! A+5it+!e to :ke :one3 in De+i/ti/e' :+ket

%r"itrage is !aking !oney on price differential in different !arkets) Bor

exa!ple+ future is nothing "ut the future value of the spot price) This futures value is

o"tained "y factoring the interest rate) ut if there are differences in the !oney !arket

and the interest rates change than the future price should correct itself to factor the

change in interest) ut if there is no factoring of this change than it present an

opportunity to !ake !oney(an ar"itrage opportunity)

et us take an exa!ple)

Ex84&e

% stock is Auoting for Rs) 1000) The 1(!onth future of this stock is at rs 100$) the risk

free ;nterest rate is 12F) >hat should "e the trading strategyL

So&%tion

The strategy for trading should "e? 5ell 5pot and uy Butures

5ell the stock for Rs 1000) uy the future at Rs 100$)

;nvest the Rs 1000 at 12F) The interest earned on this stock will "e

1000,1M)02 ,1/12 J 1009

5o net gain the a"ove strategy is Rs 1009(rs 100$J Rs &

Thus one can !ake a risk less profit of Rs & "ecause of ar"itrage) ut an i!portant point

is that this opportunity was availa"le due to !iss(pricing and the !arket not correcting

itself) or!ally+ the ti!e taken for the !arket to ad*ust to corrections is very less) 5o the

ti!e availa"le for ar"itrage is also less) %s every one to cash in on the ar"itrage+ the

!arket corrects itself)

USING FUTURE TO HEDGE POSITION

.ne can hedge ones "y taking an opposite position in the futures !arket) Bor

exa!ple+ if you are sport price+ the risk you carry is that of price in the future) Kou can

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lock this "y selling in the futures price) =ven if the stock continues falling+ your position

is hedge as you have fir!ed the price at witch you are selling) 5i!ilarly+ you want to "uy

a stock at a later date "ut face the risk of prices rising) Kou can hedge against this rise "y

"uying futures) Kou can use a co!"ination of futures too to hedge yourself) There is

always a correlation "etween the index and individual stocks+ this correlation !ay "e

negative or positive+ "ut there is a correlation) This is given "y the "eta of the stock) ;n

si!ple ter!s+ ter!s+ what "eta indicates is the change in the price of a stock to the

change in index)

Fo+ ex84&e'

;f "eta of a stock is 0)#+ it !eans that if the index goes up "y the stock goes up "y

#) t will also fall a si!ilar level when the index falls)

% negative "eta !eans that the price of the stock falls when the index rises) 5o+ if you

have a position in a stock+ you can hedge the sa!e "y "uying the index at ti!es the

value of the stock)

Ex84&e7 The "eta of @P- is 0)#) The ifty is at 1000) ;f ; have Rs 10000 worth of

@P-+ ; can hedge !y position "y selling #00 of ifty) That is ; well sell # ifities)

Scen+io 17 ;f index rises "y 10F+ the value of the index "eco!es ##00 ; e a loss of R s

#00) The value of !y stock however goes up "y #F ; e it "eco!es R s 10#00 ; e a gain

of R s #00)Thus !y net position is 'ero and ; a! perfectly hedged)

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!arket+ we !ean the index) The sa!e strategy can "e used for individual stocks also) %

co!"ination of futures and options can "e used too+ to !ake profits)

St+te!3 fo+ n o4tion 6+ithe+ to co/e+ hi8'e&f

%n option writer can use a co!"ination strategy of futures and options to protect

his position) The risk for an option writer arises only when the option is exercised this

will "e very clear with an exa!ple)

5upposing ; sell a call option on 5atya! at a strike price of Rs 300 for a pre!iu!

of rs20) The risk arises only when the option is exercised) The option will "e exercised

when the price exceeds rs 300) ; start !aking a loss only after the price exceeds Rs 320

,5trick price plus pre!iu!)

Dore i!potently+ ; have to deliver the stock to the opposite party) 5o to ena"le

!e to deliver the stock to the other party and also !ake entire profit on pre!iu!+ ; "uy a

future of 5atya! at Rs 300) This is *ust one leg of the risk) The earlier risk was of the

called "eing exercised the risk now is that of the call not "eing exercised) ;n case the call

is not exercised+ what do ; doL

; will have to take delivery as ; have "rought a future) 5o !ini!i'e the risk+ ; "uya put option on 5atya! at Rs 300) ut ; also need to pay a pre!iu! for "uying the

option) ; pay Pre!iu! of Rs 10) ow ; a! fully covered and !y net cash flow would "e)

Pre!iu! earned fro! selling call option Rs 20)Pre!iu! paid to "uy put option ,Rs 10

et cash flow Rs 10)

ut the a"ove pay off will "e possi"le only when the pre!iu! ; a! paying for

the put .ption is lower than the pre!iu! that ; get for writing the call) 5i!ilarly+ we can

arrive at a covered position for waiting a put option two) %nother interesting o"servation

is that the a"ove strategy in itself presents an opportunity to !ake !oney) This is so

"ecause of the pre!iu! differential in the put and the call option) 5o if one tracks the

derivatives !ake on a continuous "asis+ one can chance upon al!ost risk less !oney

!aking opportunities)

Othe+ St+te!ie' U'in! De+i/ti/e'

The other strategies are also various per!utations of !ultiple puts+ call and

futures) They are also called "y exotic na!es+ "ut if one were to o"serve the! closely+

1$


16/69


they are relatively si!ple instru!ents) 5o!e of these instru!ents are

"%tte+f&3 S4+e07 ;t is the strategy of si!ultaneous "uying of put and call

C&en0+ S4+e07 %n option strategy in which a short(ter! option is sold and a longer(

ter! option is "ought "oth having the sa!e striking price) =ither puts or calls !ay "e

used)

Do%5&e O4tion7 %n option that gives the "uyers the right to "uy and/or sell a futures

contract+ at a pre!iu!+ at the strike price)

St+00&e7 The si!ultaneous purchase and sale of option of the sa!e speculation to

different periods)

Tn0e8 O4tion'7 % seAuence of options of the sa!e type+ with varia"le strike price and

period)

"e+8%0 O4tion7 ike the location of the er!udas+ this option is located so!ewhere

"etween a =uropean style option with can "e exercised only at !aturity and an %!erican

style option which can "e exercised any ti!e the option holder chooses) This option can

"e exercise only on predeter!ined dates)

RISK :ANAGE:ENT IN DERI*ATI*ES

4erivatives are high(risk instru!ent and hence the exchanges have put up a lot of

!easures to control this risk) The !ost critical aspect of risk !anage!ent is the daily

!onitoring of price and position and the !argining of those positions)

5= uses the 5P% ,5tandard Portfolio %nalysis of Risk) 5P% is a syste! that

has origins at the -hicago Dercantile =xchange+ one of the oldest derivative exchanges

in the world)

The o"*ective of 5P% is to !onitor the positions and deter!ine the !axi!u!

loss that a stock can incur in a single day) This loss is covered "y the exchange "y

i!posing !ark to !arket !argins)

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17/69


5P% evaluates risk scenarios+ which are nothing "ut !arket conditions) The

specific set of !arket conditions evaluated+ are called the risk scenarios+ and these are

defined in ter!s of

a @ow !uch the price of the underlying instru!ent is expected to change over one

trading day+ and

" @ow !uch the volatility of that underlying price is expected to change over one

trading dayL

ased on the 5P% !easure!ent+ !argins are i!posed and risk covered) %part

fro! this+ the exchange will have a !ini!u! "ase capital of Rs) $0 lacks and "rokers

need to pay additional "ase capital if they need !argins a"ove the per!issi"le li!its)

SETE##E:ENT OF FUTURES

:+k to :+ket Sett&e8ent

There is daily settle!ent for Dark to Darket) The profits/losses are co!puted as

the difference "etween the trade price or the precious days settle!ent price as the case

!ay "e and the current days settle!ent price) The parties who have suffered a loss are

reAuired to pay the !ark(to(!arket loss a!ount to exchange which is in turning passed

on to the party who has !ade a profit) This is known as daily !ark(to !arket settle!ent)

Theoretical daily settle!ent price for unexpired futures contracts+ which are not traded

during the last half on a day+ is currently the price co!puted as per the for!ula detailed

"elow)

B J 5 N e rt

>here

B J theoretical futures price

5 J value of the underlying index/stock

r J rate of interest ,D;.R( Du!"ai ;nter ank .ffer Rate

t J ti!e to expiration

Rate of interest !ay "e the relevant D;.R rate or such other rate as !ay "e

specified) %fter daily settle!ent+ all the open positions are reset to the daily settle!ent

price) The pay(in and payout of the !ark(to(!arket settle!ent is on TM1 days ,T J Trade

day) The !ark to !arket losses or profits are directly de"ited or credited to the "roker

account fro! where the "roker passes to client account)

17


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Raghavendra Page 1# 7/20/2012

Fin& Sett&e8ent

.n the expiry of the futures contracts+ exchange !arket all positions to the final

settle!ent price and the resulting profit/loss is settle!ent ; cash) The final settle!ent of

the future contract is si!ilar to the daily settle!ent process except for the !ethod of

capon of final settle!ent price) The final settle!ent profit/loss is co!pleted as the

difference "etween trade price or the previous days settle!ent price+ as the case !ay "e

and the final settle!ent price of the relevant futures contract)

Binal settle!ent loss/profit a!ount is de"ited/credited to the relevant "rokers

clearing "ank account on T M 1 day ,T J expiry day) This is then passed on the client

fro! the "roker) .pen positions in futures contracts cease to exist after their expiration

day)

SETT#E:ENT OF OPTIONS

Di&3 P+e8i%8 Sett&e8ent

Pre!iu! settle!ent is cash settled and settle!ent style is pre!iu! style) The

pre!iu! paya"le position and pre!iu! receiva"le position are netted across all option

contract for each "roker at the client level to deter!ine the net pre!iu! paya"le or

receiva"le a!ount+ at the end of each day)

The "rokers who have a pre!iu! paya"le position are reAuired to pay the

pre!iu! a!ount to exchange which is in turn passed on to the !e!"ers who have a

pre!iu! receiva"le position) This is known as daily pre!iu! settle!ent) The "rokers in

turn would take fro! their clients)

The pay(in and pay(out of the pre!iu! settle!ent is on T M 1 days ,T J Tradeday) The pre!iu! paya"le a!ount and pre!iu! receiva"le a!ount are directly de"ited

or credited to the "roker+ fro! where it is passed on to the client)

Inte+i8 Exchn!e Sett&e8ent fo+ O4tion' on In0i/i0%& Sec%+itie'

;nteri! exchange settle!ent for .ption contract on individual securities is

affected for valid exercised option at in(!oney strike price+ at the close of the trading

hours+ on the day of exercise) Oalid exercise option contracts are assigned to short

position in option contracts with the sa!e series+ on a rando! "asis) This interi!

1#


19/69


exercise settle!ent value is the difference "etween the strike price and the settle!ent

price of the relevant option contract) =xercise settle!ent value is de"ited/credited to the

relevant option "roker account on T M 3 days ,T J exercise date) Bro! there it is passed

on to clits)

Fin& Exe+ci'e Sett&e8ent

Binal =xercise settle!ent is effected for option positions at in(the(!oney strike

price existing at the close of trading hours+ on the expiration day of an option contract)

ong position at in(the !oney strike price are auto!atically assigned to short positions in

option contracts with the sa!e series+ on a rando! "asis) Bor index option individual

securities+ exercise style is %!erican style) Binal =xercise is %uto!atic on expiry of the

option contracts) =xercise settle!ent is cash settled "y de"iting/crediting of the clearing account

or the relevant "roker with the respective -learing ank+ fro! where it is passed

de"ited/credited to the relevant "roker clearing "ank account on T M 1 day ,T J expiry

day+ fro! where it is passed Binal settle!ent loss/profit a!ount for option contracts on

;ndividual 5ecurities is de"ited/credited to the relevant "roker clearing "ank account on T

M 3 days ,T J expiry day+ fro! where it is passed .pen positions+ in option contracts+

cease to exist after their expiration day)

O4tion' /&%tion %'in! "&ck Scho&e' 8o0e&

The "lack and 5choles .ption Pricing !odel didnt appear overnight+ in fact+

Bisher lack started out working to create a valuation !odel for stock warrants) This

work involved calculating a derivative to !easure how the discount rate of a warrant

varies with ti!e and stock price) The result of this calculation held a striking rese!"lance

to a well(known heat transfer eAuation) 5oon after this discovery+ Dyron 5choles *oined

lack and the result of their work is a startlingly accurate option pricing !odel) lack

and 5choles cant take all credit for their infect the !odel is actually an i!proved version

of a precious !odel developed "y %) Ha!es oness in his Ph)4) dissertation at the

niversity of -hicago) lack and scholes i!prove!ent on the ones !odel co!e in the

fro! of a proof that the risk( free interest raise is the correct discount factor+ and with the

a"sence of assu!ptions regarding investors risk preferences)

The !odel- J 5 ,d1 < e Q(rt ,d2

19


20/69


-J Theoretical call pre!iu!5J current stock pricetJ ti!e until option expirationJ option striking price

rJ risk(free interest rate J -u!ulative standard nor!al distri"ution41 J in,5 / M ,r M sS/2t

;n order to understand the !odel itself+ we divide into two parts) The first part+

5 ,d1+ derives the expected "enefit fro! acAuiring a stock outright) This is found "y

!ultiplying stock price 5U "y the change in the call pre!iu! with respect to a change in

the underlying stock price ,d1U) The second part of the !odel+ e,(rt,d2+ gives the

present value of paying the exercise price on the expiration day) The fair !arket value of

the call option is then calculated "y taking the difference "etween these two parts)

A''%84tion' of the "&ck n0 Scho&e' :o0e&

1 The 'tock 43' no 0i/i0en0' 0%+in! the o4tion=' &ife7 Dost co!panies pay

dividends to their share holders+ so this !ight see a serious li!itation to the

!odel considering the o"servation that higher dividend yields elicit lower call

pre!iu!s) % co!!on way of ad*usting the !odel for this situation is su"tract the

discounted value of a future dividend fro! the stock price)

2 E%+o4en exe+ci'e te+8' +e %'e0 7 =uropean exercise ter!s dictate that the

option can only "e exercised on the expiration date) %!erican exercise ter!

allow the option to "e exercised at any ti!e during the life of the option+ !aking

%!erican option !ore valua"le due to their greater flexi"ility) This li!itation is

not a !a*or concern "ecause very few calls are exercise "efore the last few days

of their life) This is true "ecause when you exercise a call early+ you forfeit the

re!aining ti!e value on the call and collect the intrinsic value) Towards the end

of the life of a call+ the re!aining ti!e value is very s!all+ "ut the iatric value is

the sa!e)

3 :+ket' +e efficient7 This assu!ption suggests that people cannot consistent

predict the direction of the !arket or an individual stock) The !arket operates

continuously with share price followed a continuous it process) To understand

what a continues it processes+ you !ust first known that ! Darkov process is

one where the o"servation in ti!e period at depends only on the preceding

o"servation:) %n it process is si!ply a Darko process you would do so without

picking the pen up fro! the piece of paper)

20


21/69


& No co88i''ion' +e ch+!e07 sually !arket participants do have to pay a

co!!ission to "uy or sell options) =ven floor traders pay so!e kind of free+ "ut it

is usually very s!all) The fees that ;ndividual investors pay is !ore su"stantial

and can often distort the out put of the !odel)

$ Inte+e't +te' +e8in con'tnt n0 kno67 The lack and 5choles !odel uses

the Risk(free rate to represent this constant and known rate) ;n reality there is no

such thing as the risk(free rate+ "ut the discount rate on )5) 6overn!ent

Treasury ills with 30 days left until !aturity is usually used to represent it)

4uring periods of rapidly change interest rates+ these 30 day rates are often

su"*ect to change+ there"y violating one of the assu!ptions of the !odel)

REGU#ARITY FRA:E $ORK

The trading of derivatives is governed "y the provisions contained in the 5-,R%+

the 5-; act+ the rules and regulation fra!ed there under and the rules and "ye(laws of

stock exchange)

Sec%+itie' Cont+ct' (Re!%&tion) Act9 1,.

5-,R % ai!s at preventing undesira"le transactions in securities "y regulating

the usiness of dealing therein and "y providing for certain other !atters connected

therewith) This is the principal %ct+ which governs the trading of securities in

;ndia) The ter! securities: has "een defined in the 5-,R %) as per section 2,h+ the

Vsecurities include)

1) 5hares+ scraps+ stocks+ "onds+ de"enture stock or other !arketa"le securities of a like

ature in or of any incorporated co!pany or other "ody corporate) 4erivative

2) nits or any other instru!ent issued "y any collective investors in such sche!esTo the investors in such sche!es+ risk 6overn!ent securities) 5uch other

instru!ents as !ay "e declared "y the central govern!ent to "e securities rights or

interests in securities) 4erivative: is defined to include? % security derived fro! a

de"t instru!ent+ share+ loan whether secured or unsecured instru!ent or contract for

differences or any other fro! of security)

% contracts which derives its value fro! the prices+ or index of prices+ of

nderlying 5ecurities)

5ection 1# a provides that notwithstanding anything contained in any other

21


22/69


law for the ti!e "eing in force+ contracts in derivative shall "e legal and valid

if such contracts are ?

Traded on a recogni'ed stock exchange < settled on the clearing hose of the

recogni'ed stock exchange+ in accordance with the rules and "ye


23/69


stock "roker is allowed to "uy+ sell or deal in securities+ unless he or she holds a

certificate of registration granted "y 5=;) % stock "roker applies for registration to

5=; through a stock exchange or stock exchanges of which he or she is ad!itted as a

!e!"er) 5=; !ay grant a certificate to a stock("roker as per 5=; ,stock rokers and

5u"(rokers Rules+ 1992U su"*ect to the conditions that+

1) @e holds the !e!"ership of stock exchange)

2) 5ell a"ide "y the rules+ regulations and "uy(laws of the stock exchange or stock

exchange of which he is a !e!"er)

3) ;n case of any change in the status and constitution+ he shall o"tain prior

per!ission of 5=; to continue to "uy+ sell or deal in securities in any stock

exchange)

&) @e shall pay the a!ount of fees for registration in the prescri"ed !anner+ and

$) @e shall take adeAuate steps for redressed of grievances of the investors within

one !onth of the date of the receipt of the co!plaint and keep 5=; infor!ed

a"out the nu!"er+ nature and other particulars of the co!plaints as per

5=;,5tock rokers Regulations+ 1992+5=; shall take into account for

considering the grant of a certificate all !atters relating to "uying+ selling+ or

dealing in securities and in particular the following na!ely+

$hethe+ the Stock "+oke+

,a ;s eligi"le to "e ad!itted as a !e!"er of a stock exchange)

," @as the necessary infrastructure like adeAuate office space+ eAuip!ent and !an

power to effectively discharge his activities)

,c @as any past experience in the "usiness of "uying+ selling or dealing in securities)

,d ;s su"*ected to disciplinary proceeding under the rules+ regulations and "uy(laws of a

stock exchange with respect to his "usiness as a stock("roker involving either hi!selfor any of his partners+ directors or e!ployees)

REGU#ATION FOR DERI*ATI*ES TRADING

5=; set up a 2&(!e!"er co!!ittee under the -hair!anship of 4r))-)6upta

to develop the appropriate regulatory fra!ework for derivatives trading in ;ndia) The

co!!ittee su"!itted its report in Darch 199#) .n Day 11+ 199# 5=; accepted the

reco!!endations of the co!!ittee and approved the phased introduction of

derivatives trading in ;ndia "eginning with stock index futures) 5=; also approved

the suggestive "ye(laws: reco!!ended "y the co!!ittee for regulation and control

23


24/69


of trading settle!ent of derivatives contracts)

The provision in the 5-,R% and the regulatory fra!ework developed there

under govern trading in securities )

The a!end!ent of the 5-,R % to included derivatives with in the a!"it of

Vsecurities in the 5-,R % !ade trading in derivatives possi"le within the fra!e work of

that %ct)

1) %ny =xchange fulfilling the eligi"ility criteria as prescri"ed in the )-)6upta

-o!!ittee report !ay apply to 5=; for grant of recognition under section & of

the 5-,R %+ 19$8 to start trading derivatives) The derivatives exchange/seg!ent

5hould have a separate governing council and representation of trading /clearing

De!"ers shall "e li!ited to !axi!u! of 30F pf the total !e!"ers and will o"tain

Prior approval of 5=; "efore start of trading in any derivatives contract)

2) The exchange shall have !axi!u! $0 !e!"ers)

3) The !e!"ers of an existing seg!ent of the exchange will not auto!atically "eco!e

the !e!"ers of derivatives seg!ent) The !e!"ers of the derivatives seg!ent need

to fulfill the eligi"ility conditions as laid down "y the )-)6upta co!!ittee)

&) The clearing and settle!ent of derivatives trades shall "e through a 5=; approved

clearing corporations/house) -learing corporation/house co!plying with the

eligi"ility conditions as laid down "y the co!!ittee have to apply to 5=; for grant of

approval)

$) 4erivatives "rokers/dealers and clearing !e!"ers are reAuired to seek registration

fro! 5=;) This is in additional top their registration as "rokers of existing stock

exchanges) The !ini!u! net worth for clearing !e!"ers of the derivatives clearing

corporation/house shall "e Rs) 300 lakh)

The Net $o+th of the :e85e+' Sh&& 5e Co84%te0 ' Fo&&o6'

-apital M Bree reserves

ess non(allowa"le assets vi'+

Bixed assets

Pledged securities

2&


25/69


De!"ers card

on(allowa"le securities ,unlisted securities

ad deliveries

4ou"tful de"ts and advances

Prepaid expenses

;ntangi"le asset

30F !arketa"le securities

8) The !ini!u! contract value shall not to "e less than Rs) 2 akh) =xchanges should

also su"!it details of the futures contract they propose to introduce)

7) The initial !argin reAuire!ent+ exposure li!its linked to capital adeAuacy and

!argin de!ands related to the risk of loss on the position shall "e prescri"ed "y

5=;/=xchange fro! ti!e to ti!e)

#) The )-) 6upta co!!ittee report reAuires strict enforce!ent of know your

custo!er: Rules and reAuires that every client shall "e registered with the derivative

"roker) The De!"ers of the derivatives seg!ent are also reAuired to !ake their clients

aware of the Risks involved in derivatives trading "y issuing to the client the risk

disclosure 4ocu!ent and o"tain a copy of the sa!e duly signed "y the client) % trading

!e!"ers are reAuired to have Aualified approved user and sales person who have passed

a certification progra!!ed approved "y 5=;)

NSE=S CERTIFICATION IN FINANCIA# :ARKETS

% critical ele!ent of financial sector refor!s is the develop!ent of a pool of

hu!an resources having right skills and expertise to provide Auality inter!ediation

services in =ach seg!ent of the !arket) ;n order to dispense Auality inter!ediation+

personnel providing services need to possess reAuisite skills and knowledge) This is

generally achieved through a syste! of testing and certification) 5uch testing and

2$


26/69


certification has assu!ed added significance in ;ndia as there is no for!al

education/training on financial Darkers+ especially in the area of operations) Taking into

account international experience and needs of the ;ndian financial Darket+ 5= offers

-BD ,5= s -ertification in Binancial Darkets to test practical knowledge and

skills that are reAuired to operate in financial !arkets in a very secure and un"iased

!anner and to certify personnel with a view to i!prove Auality of inter!ediation) -BD

offers a co!prehensive range of Dodules covering !any different areas in finance

including a !odule in derivatives) The Dodule on derivatives has "een recogni'ed "y

5=;) 5=; reAuires that derivative rokers/dealers and sales persons !ust !andatory

pass this !odule of the -BD

)

Re!%&tion Fo+ C&e+in! An0 Sett&e8ent

The ) - 6upta co!!ittee has reco!!ended that the clearing corporation

!ust perfor! full notation i)e) the clearing corporation should interpose

itself "etween "oth legs of every trade+ "eco!ing the legal counter party to

"oth or alternatively should provide an unconditional guarantee for

settle!ent of all trades)

The clearing corporation should ensure that none of the oard !e!"er has

trading interests)

The definition of net(worth as prescri"ed "y 5=; need to "e incorporated in

the c application/regulations of the clearing corporation)

The regulations relating to ar"itration need to "e incorporated in the clearing

corporation)

5pecific provision/chapter relating to declaration of default !ust "e

incorporated "y the clearing corporation in its regulations)

The regulations relating to investor protection fund for the derivatives !arket

!ust "e included in the clearing corporation application/regulations)

The clearing corporation should have the capa"ilities to segregate

upfront/initial !argins deposited "y clearing !e!"ers for trades on their

own account and on account of his clients) The clearing corporation shall

hold the clients !argin !oney in trust for the clients purposes only and

should not allow its diversion for ant other purposes) This condition !ust "e

incorporated in the clearing corporation regulations)

28


27/69


The clearing !e!"er shall collect !argins fro! his constituents

,clients/trading !e!"ers) @e shall clear and settle deals in derivative

contracts on "ehalf of the constituents only on the receipt of such !ini!u!

!argin) =xposure li!its "ased on the value at risk concept will "e used and the

exposure li!its) >ill "e continuously !onitored) These shall "e within the

li!its prescri"ed "y 5=; fro! ti!e to ti!e)

The clearing corporation !ust lay down a procedure of periodic review of

the net worth of its !e!"ers)

The clearing corporation !ust lay down a procedure for periodic review of

the net worth of its !e!"ers) The clearing corporation !ust infor! 5=; how it proposes to !onitor the

exposure of its !e!"ers in the underlying !arket)

%ny changes in the "ye(laws+ rules or regulations which are covered under

the suggestive "ye(laws for regulations and control of trading and

settle!ent of derivatives contracts: would reAuire prior approval of 5=;)

P+o0%ct S4ecifiction' "SE->? Sen'ex F%t%+e'

• -ontract si'e < R s )$0 ti!es the ;ndex

• Tick si'e < 0)1 points or R s) $

• =xpiry day < last Thursday of the !onth

• 5ettle!ent "asis < cash settled

•-ontract cycle < 3 !onths

• %ctive contracts < 3 nearest !onths

P+o0%ct S4ecifiction' S@P CNX Nift3 F%t%+e'

• -ontract si'e < R s ) 200 ti!es the ;ndex

• Tick si'e < 0)0$ points or R s) 10

• =xpiry day < last Thursday of the !onth

27


28/69


• 5ettle!ent "asis < cash settled

• -ontract cycle (3 !onths

• %ctive contracts (3 nearest !onths

:e85e+'hi4

• De!"ership for the new seg!ent in "oth the exchanges is not auto!atic and has

To "e separately applied fir)

• De!"ership is currently open on "oth the exchanges)

•

%ll !e!"ers will also have to "e separately registered with 5=; "efore they can "e accepted)

:e85e+'hi4 C+ite+i Ntion& Stock Exchn!e (NSE)

C&e+in! :e85e+ (C:)

• et worth < 300 lakh

• ;nterest < free security 4eposit < Rs)2$ lakh

• -ollateral 5ecurity 4eposit < Rs)2$ lakh

;n addition for every TD "e wishes to clear for the -D has to deposit Rs)10 lakh)

T+0in! :e85e+ (T:)

• et worth < R s )100 lakh

• ;nterest < fee security 4eposits < R s) # lakh

•

%nnul su"scription fee < R s )1 lakh

:e85e+'hi4 C+ite+i :%85i Stock Exchn!e ("SE)

C&e+in! :e85e+ (C:)

• et worth < 300 lake

• ;nterest < free 5ecurity 4eposits < R s) 2$ lakh

2#


29/69


• -ollateral 5ecurity 4eposits < R s) 2$ lakh

• on(refunda"le 4eposit < R s) $ lakh

• %nnual 5u"scription Bee < R s)$0 thousand

;n addition for every TD he wishes to clear for the -D has to deposit R s) 10 lake with

The following "reak(up)

;)-ash < R s) 2)$ lakh

;;)-ash =Auivalents < R s) 2$ lakh

;;;)-ollateral 5ecurity 4eposit < R s) $ lakh

T+0in! :e85e+ (T:)

• et worth < R s) $0 lakh

• on(refunda"le 4eposit < R s)3 lakh

• %nnual su"scription Bees < R s)2$ thousand

The non(refunda"le fees paid "y the !e!"ers are exclusive and will "e a total of R s) #

akh if the !e!"er has "oth clearing and trading rights)

T+0in! S3'te8'

• 5=s trading syste! for its futures and options seg!ent is called =%T BW.)

• ;t is "ased on the =%T syste! for the cash seg!ent)

• 5=s trading syste! for its derivatives seg!ent is called 4T55) ;t is "uilt on aPlatfor! different fro! the .T syste! though !ost of the features areco!!on

T5&e 1B1

#OT SIE OF DIFFERENT CO:PANIES

CODE LOTSIZE

COMPANY NAME

ACC 188 ASSOCIATES CEMENT COMPANIESLTD.

ANDHRA BANK 2300 ANDHRA BAKS.

29


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ARIVENDMILLS 4300 ARIVENDMILLS LTD

BAJAJAUTO 200 BAJA AUTOMOBILES LTD.

BANK BARODA 700 BANK OF BRODA.

BANK INDIA 950 BANK OF INDIA.

BEL 138 BHARAT ELECTRICALS LTD.

BHEL 75 BHARAT HEAVY ELECTRICALS LTE.

BPCL 550 BHARAT PETROL CORPORATION LTD.

CANBK 800 CANARABANK

CIPLA 1250 CIPLA LTD.

CNXIT 1200 IT INDEX

DABUR 2700 DABUR LTD.

DRREDDY 400 DR. REDDY’S LABORATORIES LTD.

GAIL 1125 GAS AUTHORITY OF INDIA.

GRASIM 88 GRASIM AMBUJA CEMENTS LTD.

GUJAMBCEMENT 4125 GUJRAT AMBUJA CEMENTS LTD.

HCLTECH 650 HINDISTAN CORPORATION LTDTECNO.

HDFC 75 HOUSING DEVELOPMENT FINACECORP.

HDFE BANK 200 HDFE BANK

HERO HONDA 400 HEROHONDA MOTARS LTD.

HINDALCO 1759 HINDUSTAN ALUMINIUM COMPANY.

HINDLEVER 2000 HINDUSTAN LEVER LTD.

HINDPETROL 1300 HINDUSTAN PETROLEUMCORPORATIONLTD.

I-FLEX 600 I-FLEX SOLUTIONS

ICICI BANK 175 ICICI BANKING CORPORATION LTD.

INFOSYSTECH 200 INFOSYS TECHNOLOGIES LTD.

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CHAPTER-<

INDUSTA# PROFI#E

31

ID"I 1


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"O:"AY STOCK EXCHANGE

This stock exchange+ Du!"ai+ popularly known as 5=: was esta"lished in

1#7$ as The ative share and stock "rokers association: as a voluntary non(profitDaking association) ;t has an evolved over the year into its present status as the pre!iere

5tock exchange in the country )it !ay "e noted that the stock exchange the oldest one in

%sia+ even older than the Tokyo stock exchange+ which was founded in 1#7#)

The exchange+ while providing an efficient and transparent !arket for trading in

securities+ upholds the interests of the investors and insurers dressed of their grievances+

whether against the co!panies or its own !e!"er "rokers) ;t also strives to educate and

enlighten the investors "y !aking availa"le necessary infor!ative inputs and conductinginvestor education progra!!ers)

% governing "oard co!prising of 9 elected directors+ 2 5=; no!inees+ 7 pu"lic

representatives and an executive director is the apex "ody+ which decides the policies and

regulates the affairs of the exchange)

The executives directors as the chief executive officer are responsi"le for the day

today ad!inistration of the exchange) The average daily turnover of the exchange during

the year 2000(01,%pril(Darch was Rs 39#&)19 corers and average nu!"er of 4aily

trades $)89 lakhs)

@owever the average daily turn over of the exchange during the year 2001(02 has

declined to R s) 12&& )10 cores and nu!"er of average daily trades during the period to

$)17 lakes)

The average daily turnover of the exchange during the year 2002(03 has declined

and nu!"er of average daily trades during the period is also decreased)

The an on all deferral products like =55 %4 %D in the ;ndian capital

!arkets "y 5=; with effect fro! Huly 2+ 2001+ a"olition of account period settle!ents+

introduction of co!pulsory rolling settle!ents in all scripts traded on the exchange with

effect fro! 4ec 31+ 2001+ etc)+ have adversely i!precated the liAuidity and conseAuently

there is a considera"le decline in the daily turn over of the exchange present scenario is

110383 ,laces and nu!"er of average daily trades 107$ ,laces

"SE INDICES

;n order to ena"le the !arket participants+ analysts etc)+ to track the various ups and

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downs in the ;ndian stock !arket+ the exchange has introduced in 19#8 an eAuity stock

index called 5=( 5=5=X that su"seAuently "eca!e the "aro!eter of the !ove!ents

of the share prices in the ;ndian stock !arket) ;t is a Darket capitali'ation weighted:

index of 30 co!ponent stocks representing a sa!ple of large+ well(esta"lished and

leading co!panies) The "ase year of sensex is 197#(79) The sensex is widely reported in

"oth do!estic and international !arkets through print as well as electronic !edia)

5ensex is calculated using a !arket capitali'ation weighted !ethod) %s per this

!ethodology+ the level of the index reflects the total !arket value of all 30(co!ponent

stocks fro! different industries related to particular "ase period) The total !arket value

of a co!pany is deter!ined "y !ultiplying the price of its stocks "y the nu!"er of shares

outstanding) 5tatisticians call an all index of a set of co!"ined varia"les ,such as price

and nu!"er of shares a co!posite index) %n indexed nu!"er is used to represent the

results of this calculation in order to !arket the value easier to work with and track over

a ti!e) ;t !uch easier to graph a chart "ased on indexed values than one "ased on actual

values world over !a*ority of the well(known indices are constructed using Darket

capitali'ation weighted !ethod:)

;n practice+ the daily calculation of 5=5=X is done "y dividing the aggregate

!arket value of the 30 co!panies in the index "y a nu!"er called the index 4ivisor) The

4ivisor is the only link to the original "ase period value of the 5=5=X) The 4ivisor

eeps the ;ndex co!para"le over a period or ti!e and if the reference point for the entire

index !aintenance ad*ust!ents) 5=5=X is widely used to descri"e the !ood in the

;ndian stock !arkets) ase year average is changed has per the for!ula new "ase year

average Jold "ase year average N,new !arket value/old !arket value)

NATIONA# STOCK EXCHANGE

The 5= was incorporated in ow 1992 with an eAuity capital of R s 2$ -rs)The international securities consultancy ,;5- of @ong ong has helped in setting up

5=) ;5= has prepared the detailed "usiness plans and installation of hardware and

software syste!s) The pro!otions for 5= were financial institutions+ insurances

co!panies+ "anks and 5=; capital !arket td+ infrastructure leasing and financial

services ltd and stock holding corporation ltd)

;t has "een set up to strengthen the !ove towards professionalisation of the capital

!arket as well provided nation wide securities trading facilities to investors)5= is not

an exchange in the traditional sense where "rokers own and !anage the exchange) % two

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tier ad!inistrative set up involving a co!pany "oard and a governing a"oard of the

exchange envisaged) 5= is a national !arket for shares P5 "onds+ de"entures and

govern!ent securities since infrastructure and trading facilities are provided)

NSE-NIFTY

The 5= on %pril 22+ 1998 launched a new eAuity index) The 5=($0) The new

index+ which replaces the existing 5=(100 index+ is expected+ to serve as an appropriate

index for the new seg!ent of futures and options): ifty: !eans national index for fifty

stocks)

The 5=($0 co!prises $0 co!panies that represent 20 "road industry groups with

%n aggregate !arket capitali'ation of around R s )1+70+000 crs) %ll co!panies included

in the index have a !arket capitali'ation in excess of R s $00 crs each and should have

traded for #$F of trading days at an i!pact cost of less than 1)$F)

The "ase period for the index is the close of prices on ov 3+ 199$+ which !akes

one year of co!pletion of operation of 5=Vs capital !arket seg!ent) The "ase value of

the index has "een set at 1000)

NSE :IDCAP INDEX

The 5= !adcap index or the *unior nifty co!prises $0 stocks that represent 21

a "oard industry groups and will provide proper representation of the !adcap seg!ent of

the ;ndian capital !arket) %ll stocks in the index should have !arket capitali'ation of

greater than R s list of 200 cores and should have traded #$F of the trading days at an

i!pact cost of less 2)$F)

The "ase period for the index is ov&+ 1998+ which signifies two years for

co!pletion of operations of the capital !arket seg!ent of the operations) The "ase value

of the ;ndex has "een set at 1000)

%verage daily turnover of the present scenario 2$#212,laces and nu!"er of

averages daily trades 2180,laces %t present+ there are 2& stocks exchanges recogni'ed

under the securities contracts ,regulations %ct+ 19$8) They are

T5&e No7


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"o853 'tock exchn!e9 1

Ah8050 'h+e n0 'tock 5+oke+' ''ocition9 1,

C&c%tt 'tock exchn!e ''ocition' #t09 1,

De&hi 'tock exchn!e ''ocition #t09 1,

:0+' 'tock exchn!e ''ocition #t09 1,

In0oo+ 'tock 5+oke+' ''ocition #t09 1,

"n!&o+e 'tock exchn!e9 1,.>

H30e+50 'tock exchn!e9 1,>

Cochin 'tock exchn!e9 1,

P+%ne 'tock exchn!e9 1,<

UBPB 'tock exchn!e9 1,<

#%0hin 'tock exchn!e9 1,>

i4%+ 'tock exchn!e #t09 1,

G%hti 'tock exchn!e #t09 1,

:n!&o+e 'tock exchn!e9 1,

:!h0 'tock exchn!e #t09 4tn9 1,.

"h%/ne'h6+ 'tock exchn!e ''ocition #t09 1,,

O/e+ the co%nte+ exchn!e of In0i9 "o8539 1,,

S%+'t+ k%th 'tock exchn!e #t09 1,,?

*'0o0+0 'tock exchn!e #t09 1,,1

Coi85to+e 'tock exchn!e #t09 1,,1

The :ee+%t 'tock exchn!e9 1,,1

I Ntion& 'tock exchn!e9 1,,1

Inte!+te0 'tock exchn!e9 1,,,

CO:PANY PROFI#E

THE INDIA INFO#INE #I:ITED

3$


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O+i!in

;ndia ;nfoline td)+ was founded in 199$ "y a group of professional with

i!pecca"le educational Aualifications and professional credentials) ;ts institutional

investors include ;ntel -apital ,worldYs leading technology co!pany+ -4- ,pro!oted "y

govern!ent+ ;-;-;+ T4% and Reeshanar)

;ndia ;nfoline group offers the entire ga!ut of invest!ent products including

stock "roking+ -o!!odities "roking+ Dutual Bunds+ Bixed 4eposits+ 6.; Relief "onds+

Post office savings and life ;nsurance) ;ndia ;nfoline is the leading corporate agent of

;-;-; Prudential ife ;nsurance -o) td)+ which is ;ndiaY o) 1 Private sector life

insurance co!pany)

www)indiainfoline)co! has "een the only ;ndia >e"site to have "een listed "y

none other than Bor"es in itYs Yest of the >e"Y survey of glo"al we"site+ not *ust once "ut

three ti!es in a row and counting))) % !ust read for investors in south %sia: is how they

choose to descri"e ;ndia ;nfoline) ;t has "een rated as o)l the category of usiness ews

in %sia "y %lexia rating)

5tock and -o!!odities "roking is offered under the trade na!e $paisa) ;ndia

;nfoline -o!!odities Pvt td)+ a wholly owned su"sidiary of ;ndia ;nfoline td)+ holds

!e!"ership of D-X and -4=X

:in O5ect' of the Co84n3

Dain o"*ects as contained in its De!orandu! or %ssociation are?

1) To engage or undertake software and internet "ased services+ data processing ;T

ena"led services+ software develop!ent services+ selling advertise!ent space on the site+

we" consulting and related services including we" designing and we" !aintenance+

software product develop!ent and !arketing+ software supply services+ co!puter

consultancy services+ =(-o!!erce of all types including electronic financial

inter!ediation "usiness and =("roking+ !arket research+ "usiness and !anage!ent

consultancy)

2) To undertake+ conduct+ study+ carry on+ help+ pro!ote any kind of research+ pro"e+

investigation+ survey+ develop!ental work on econo!y+ industries+ corporate "usiness

houses+ agricultural and !ineral+ financial institutions+ foreign financial institutions+

capital !arket on !atters related to invest!ent decisions pri!ary eAuity !arket+

secondary eAuity !arket+ de"entures+ "ond+ ventures+ capital funding proposals+

co!petitive analysis+ preparations of corporate / industry profile etc) and trade / invest in

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researched securities

*ISION STATE:ENT OF THE CO:PANY

“Our vision is to be the most respected company in the financial services space In India”.

Products? the ;ndia ;nfoline Pvt ltd offers the following products

%) =("roking)

) 4istri"ution

-) ;nsurance

4) PD5

=) Dortgages

%) E-"+okin!

;t refers to =lectronic roking of =Auities+ 4erivatives and -o!!odities under the

"rand na!e of $paisa

1) =Auities

2) 4erivatives

3) -o!!odities

) Di't+i5%tion

1) Dutual funds

2) 6ovt of ;ndia "onds)

3) Bixed deposits

-) In'%+nce

1) ife insurance policies

2) 6eneral ;nsurance)

3) @ealth ;nsurance Policies)

THE CORPORATE STRUCTURE

The ;ndia ;nfoline group co!prises the holding co!pany+ ;ndia ;nfoline td+

which has $ wholly(owned su"sidiaries+ engaged in distinct yet co!ple!entary

"usinesses which together offer a whole "ouAuet of products and services to !ake your

!oney grow)

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The corporate structure has evolved to co!ply with oddities of the regulatory

fra!ework "ut still "eautifully help attain synergy and allow flexi"ility to adapt to

dyna!ics of different "usinesses)

The parent co!pany+ ;ndia ;nfoline td owns and !anagers the we" properties

www);ndiainfoline)co! and www)$paisa)co!) ;t also undertakes research -usto!i'ed

and off(the(shelf)

;ndian ;nfoline 5ecurities Pvt) td) is a !e!"er of 5=+ 5= and 4P with

54) ;ts "usiness enco!passes securities "roking Portfolio Danage!ent services)

;ndia ;nfoline)co! 4istri"ution -o) td)+ Do"ili'es Dutual Bunds and other

personal invest!ent products such as "onds+ fixed deposits+ etc)

;ndia ;nfoline ;nsurance 5ervices td) ;s the corporate agent of ;-;-; Prudential

ife ;nsurance+ engaged in selling ife ;nsurance+ 6eneral ;nsurance and @ealth

;nsurance products)

;ndia ;nfoline -o!!odities Pvt) td) is a registered co!!odities "roker D-X and

offers futures trading in co!!odities)

;ndia ;nfoline ;nvest!ent 5ervices Pvt td)+ is proving !argin funding and B-

services to the custo!ers of ;ndia ;nfoline td)+

Ch+t No7


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Pictorial Representation of ;ndia ;nfoline td

:n!e8ent of In0i Info&ine #t0B9

;ndia ;nfoline is a professionally !anaged -o!pany) The pro!oters who run theco!pany/s day(to(day affairs as executive directors have i!pecca"le acade!ic

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Raghavendra Page &0 7/20/2012

professional track records)

ir!al Hain+ chair!an and Danaging 4irector+ is a -hartered %ccountant+ ,%ll

;ndia Rank 2Z -ost %ccount+ ,%ll ;ndia Rank l and has a post(graduate !anage!ent

degree fro! ;;D %h!ada"ad) @e had a successful career with @industan ever+ where

he inter alia handled -o!!odities trading and export "usiness) ater he was -=. of an

eAuity research organi'ation)

R) Oenkatara!an+ 4irector+ is ar!ed with a post( graduate !anage!ent degree

fro! ;;D angalore+ and an =lectronics =ngineering degree fro! ;;T+ haragpur) @e

spent eight fruitful years in eAuity research sales and private eAuity with the crea! of

financial houses such as ;-;-; group+ arclays de Ioette and 6)=) -apital

The non(executive directors on the "oard "ring a wealth of experience and

expertise)

5atpal khattar (Reeshanar invest!ents+ 5ingapore The key !anage!ent tea!

co!prises seasoned and Aualified professionals)

:%ke'h Sin!- Di+ecto+9 In0i Info&ine Sec%+itie' P/t #t0B

Se'h0+i "h+thn- Di+ecto+9 In0i Info&ineB Co8 Di't+i5%tion Co #t0

S S+i+8- *ice P+e'i0ent9 Techno&o!3

Sn0ee4 *i! A+o+-*ice P+e'i0ent9 Po+tfo&io :n!e8ent Se+/ice'

Dh+8e'h Pn03- *ice P+e'i0ent9 A&te+nte Chnne&

To+& :%n'hi- *ice P+e'i0ent9 Re'e+ch

Ani& :'c+enh'- Chief E0ito+

Pinke'h Soni Finnci& cont+o&&e+

H+'h0 A4te Chief :+ketin! Office+

H%8n Re'o%+ce'

IB Gene+&7 Danage!ent is co!!itted to provide necessary resources which

are reAuired as identified in docu!ents like Guality syste! procedures+ work

instructions and Auality for!s / other docu!ents etc)

&0


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category four identified levels are present) They are Danger+ %sst) Danager+ officer W

%ssistant) Dini!u! co!petence details are given in the chart)

;n the technical category -)=).) is -hief lead a technical and a "usiness

Aualification) ;n the top(!anage!ent category 6) Danager+ 4y) 6en) Danager+ and %sst)

6en) Danager levels are there+ these report to -)=).) ;n the !iddle !anage!ent category

the levels are Danager+ %sst) Danager+ 5ales !anager + tea! !anager+ relationship

!anagers+ dealers are in the Hunior Danage!ent category)

The work force of consists of operators ,experienced and skilled+ apprentice+ and

helper) The details are given in organi'ation chart)

TRADING IN DERI*ATI*ES

;ndian securities !arket has indeed waited for too long for derivatives trading to

e!erge) Dutual fund+ B;;s and other inventors who are deprived of hedging opportunities

will now have a derivatives !arket to "ank on) Birst to e!erge are the glo"ally popular

variety < index futures)

>hile derivatives !arkets flourished in the developed world ;ndian !arkets re!ain

deprived of financial derivatives to the "eginning of this !illenniu!) >hile the rest of

the world progressed "y leaps and "ounds on the derivatives front+ ;ndian !arket lagged

"ehind) @aving e!erging in the !arket of the developed nations in the 1970s+ derivatives

!arkets grew fro! strength to strength) The trading volu!es nearly dou"led in every

Three years !arking it a trillion(dollar "usiness) They "eca!e so u"iAuitous that+ now+

one cannot think of the existence of financial !arkets without derivatives) Two "road

approaches of 5=; is integrate the securities !arket at the national level+ %nd also to

diversify the trading products+ so that !ore nu!"er of traders including anks+ financial

institutions+ insurance co!panies+ !utual fund+ pri!ary dealers etc) -hoose to transact

through the ex change) ;n this context the introduction of derivatives trading through

;ndian stock exchange per!itted "y 5=; ; 2000 %4 is a real land!ark)

5=; first appointed the )- 6upta -o!!ittee in 199# to reco!!end the regulatory

Bra!e work for derivatives trading and to reco!!end suggestive "ye(laws for regulation

%nd control of trading and settle!ent of derivatives contracts) The "road of 5=; in its

Deeting held on Day 11+199# accepted the reco!!endations of the 4r )- 6upta

-o!!ittee and approved the phased introduction of derivatives trading in ;ndia

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"eginning with 5tock ;ndex Butures) The oard also approved the 5uggestive ye(

laws: reco!!ended "y the co!!ittee for regulation and control of trading and

settle!ent of 4erivatives -ontracts)

5=; su"seAuently appointed the H) R) Oarna -o!!ittee to reco!!end Risk

contain!ent Deasures in the ;ndian stock index Butures Darket) The report was

su"!itted in the sa!e year ,199# in the !onth of ove!"er "y the said co!!ittee)

@owever the 5ecurities -ontracts ,R=6%T;. %ct+ 19$8 ,5-R%0 need

a!end!ent to include: derivatives: in the definition of securities to ena"le 5=; to

introduce trading in derivatives) The govern!ent in the year 1999 carried out the

necessary a!end!ent) The securities laws ,a!end!ent "ill 1999 was introduced to "ring a"out the !uch(needed changes) ;n 4ece!"er 1999 the new fra!ework has "een

approved) 4erivatives have "een accorded the statues of Vsecurities) The "an i!posed on

trading in derivatives way "ack in 1989 under a notification issued "y the central

govern!ent has "een revoked) Therefore 5=; for!ulated the necessary regulation/"ye(

laws and inti!ated the stock exchange in year 2000+ while derivative trading started in

;ndia at 5= in the sa!e Kear and 5= started trading in the year 2001) ;n this !odule

we are covering the different types of derivative products and their features+ which aretraded in the stock exchanges in ;ndia)

EUITY DERI*ATI*ES EXCHANGES IN INDIA

• ) ;n the eAuity !arkets "oth the national stock exchange of ;ndia td) ,5=

and The stock exchange+ Du!"ai ,5= was Auick to apply to 5=; for setting

p There derivatives seg!ent)

• 5= as stated earlier co!!ends derivatives trading in the sa!e year i)e) 2000

%4+ while 5= followed after a few !onths in 2001)

• oth the exchange have set(up an in(house seg!ent instead of setting up a

5eparate exchange for derivates)

• 5=s Butures W .ptions 5eg!ent was launched with ifty futures as the first

Production)

• 5=s 4erivatives 5eg!ent+ started with sensex futures as its first product)

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Raghavendra Page && 7/20/2012

• 5tock options and stock futures were introduced in "oth the =xchange in the year

2001)

Thus started trading in 4erivatives in ;ndia 5tock =xchanges ,"oth 5= W 5=-overing index options+ ;ndex Butures+ and 5tock .ptions W Butures in the wake of the

new !illenniu! in a short span of three years the volu!e traded in the derivatives

Darket has outstripped the turnover of the cash !arket)

De+i/ti/e' T+0in! in Finnci& :+ket'

4erivatives were not traded in the financial !arkets of the world up to the period

a"out there decades "acks+ through 5tock =xchange trading in securities in the cash!arket ca!e to "e in vogue !ore than a century ago) ;n ;ndian the first 5tock =xchange+

5= was esta"lished in1#7$) ut 5= co!!enced trading in derivatives only fro!

2001)=ven in the international finance/securities !arket the advent of derivatives as

trading products was a concurrent(effect with the process of glo"ali'ation and integration

the national econo!ies of the develop!ent countries "eginning fro! the 5eventies of the

last -entury) %s volu!es traded increased and as co!petition on turned+ trade W "usiness

"eca!e !ore co!plex in the new environ!ent) The new opportunities were !atched "y

fresh challenges and unpredicta"le volatility of the trading environ!ent) -orporate for

the first ti!e sensed the for!ida"le risks inherent in "usiness transactions and the

unpredicta"ility of the !arkets to which they are exposed) Bacing !ultiple risks the

"usiness organi'ation+ were induced to search for new re!edies+ i)e) risk contain!ent

devices/instru!ent) 4erivatives ca!e to "e the natural re!edy in this context) To Auote

an international professional authority)

%s capital !arkets "eco!e increasingly integrated+ shocks trans!it easily fro!

one !arket to another) The proliferation of new instru!ents with has "eco!e darling of

corporate+ "anks+ institutions alike is V4erivatives) To have a touch of the tree tops

view+ 4erivatives transaction is defined as a "ilateral contract whose value is derived+

fro! the value of an underlying asset+ or reference rate+ or index)

4erivative transaction have evolved in the past twenty years to cover a "road

range of products which include instru!ents like Vforward+ Vfuture+ Voptions+ Vswaps

covering a "road spectru! of underlying assets including exchange rates+ interest rate+

co!!odities+ and eAuities):

Through recent in origin derivates instru!ent issued over the years have grown

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Raghavendra Page &$ 7/20/2012

"y leaps and "ounds and the total a!ount issued glo"ally is esti!ated to approach E#0

trillion "y the advent of the new !illenniu!) 4erivatives position has growth at

co!pounding rate 20F since 1990) ;n ;ndian through derivatives were introduced very

recently in2001+ the trading turnover has already surpassed that of the eAuity seg!ent) ;n

5= alone as per a report on ors we"site the total turnover of the derivates seg!ent for

the !onth of Day 2003 stood at Rs) $3&2& crores) 4uring the !onth of Day 2003+ the

percentage of derivatives seg!ent as a percentage of the cash seg!ent was 97)8#F)

@owever in the earlier two !onth the turnover of 4erivatives was higher than that of the

cash seg!ent)

De/e&o48ent' #e0in! to T+0in! of Finnci& De+i/ti/e' in the

USA The pace of innovation in derivatives !arkets increased re!arka"ly in the 1970s)

The first !a*or innovation occurred in Be"ruary 1972+ when the -hicago

!ercantile =xchange -D= "egan trading futures on currencies in its ;nternational

Doney Darket ,;DD division) This !arked the first ti!e a futures contract was

written on anything other than a physical co!!odity)

The second was in %pril 1973+ when the -T for!ed -hicago oard .ptions

=xchange ,-.= to trade options on co!!on stocks) This !arked the first

ti!e an option was traded on an exchange)

The third !a*or innovation occurred in .cto"er 197$+ when the -T introduced

The first futures contract on an interest rare instru!ent < 6overn!ent ational

Dortgage %ssociation futures)

;n Hanuary 1978+ the -D= launched Treasury "ill futures and+ in %ugust 1977+

the -T launched Treasury "ond futures)

The 19#0s "rought yet another round of i!portant innovations) The first was the

use of cash settle!ent) ;n 4ece!"er 19#1+ the ;DD launched the first cash

5ettle!ent contracts+ the 3(!onths =urodollar futures) %t expiration+ the

=urodollar future is settled in cash "ased on the interest rate prevailing for a

three !onth =urodollar ti!e deposit)

-ash settle!ent !ade feasi"le the introduction of derivatives on stock index

futures+ the second !a*or innovation of the 19#0s) in Be"ruary 19#2+ the

ansas -ity oard of Trade ,-T listed futures on the Oalue ine -o!posite

stock index+ and+ in %pril 19#2+ the -D= listed futures on the 5WP $00)these

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contract introductions !arked the first ti!e future that contracts were written on

stock indexes)

The third !a*or innovation of the 19#0s was the introduction of exchange(traded

option contracts written on V4=RK;6 other than individual co!!onstocks) The -.= and %D=X listed interest rate options in .cto"er 19#2 and the

Philadelphia 5tock =xchange ,P@;X listed currency options in 4ece!"er 19#2

as also options and gold futures)

;n Hanuary 19#3+ the -D= and year ew Kork Butures =xchanges ,KB= "egan

to list options directly on stock index futures+ and+ Darch 19#3+ the -.= "egan

to list options on stock indexes)

These two decades if innovation has transfor!ed the nature of derivatives

trading activates on exchanges) >hile derivatives exchange were originally

developed to help !arket participants !anage the price risk of physical co!!odities+

todays trading activates is focused on hedging the financial risks associated with

unanticipated price !ove!ent in stock+ "onds+ and currencies)

CHAPTER->

RESARESH :ETHOD#GY

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NEED FOR THE STUDY

To 5tudy the various trends in derivative !arket)

To study the role of derivative in ;ndian Binancial Darket)

To study in detail the role of features and options)

To find out profit/loss of the option holder and option writer)

To study a"out risk Danage!ent with the help of derivatives)

O"ECTI*ES

The o"*ective of this analysis is to evaluate the profit/loss position of option

@older/writer) This analysis is done "ased on the sa!ple data) The sa!ple is taken as

;-;-; W TP- scripts of H= 2008) The lot si'e of the scrip is 17$W182$) The option

contract starting period is 01/08/09 and its !aturity date is on 29/08/09) %s the scripts of

;-;-; % W TP- -o!panies are volatile+ they are chosen as the sa!ple for

analysis) The data is collected fro! various news papers+ like =cono!ic Ti!es+ usiness

standard and usiness ine off course fro! the @ydera"ad stock exchange)

:ETHODO#OGY

To achieve the o"*ect of studying the stock !arket data has "een collected fro!

1) Pri!ary

2) 5econdary

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Raghavendra Page 7/20/2012

PR:ARY

The pri!ary data collected fro! the original trade in ti!e to ti!e process and the

data is taken fro! ;;B staff and fro! !y pro*ect guide)

Project Abhijeet

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