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    STUDY ON DERIVATIVES AS A TOOL FOR HEDGING

    Submitted in partial fulfillment of the requirements for the award of the

    Degree of Bachelor of Business Management

    Of Christ University

    By

    SNEHA JAIN

    (Reg. No. 1011263)

    Under the guidance of

    Prof. VIJAY AGAWANE

    Department of Management Studies

    CHRIST UNIVERSITY

    BANGALORE

    2013

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    CERTIFICATE (Company-Optional)

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    CERTIFICATE

    This is to certify that SNEHA JAIN, (Reg. No. 1011263) is a bonafide student

    of Bachelor of Business Management of Christ University, Bangalore and she

    has prepared and submitted the project report, titled Derivatives as a tool for

    hedging in partial fulfillment of the requirements for the award of the Degree

    of Bachelor of Business Management of Christ University, Bangalore, for theacademic year 2012-2013.

    Place: Bangalore Dr. Jain

    Mathew

    Date: 20-02-2013 HOD

    Dept. of Management

    Studies

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    CERTIFICATE

    This is to certify that the project report, titled Derivatives as a tool for

    hedging submitted to Christ University, in partial fulfillment of the

    requirements for the award of the Degree of Bachelor of Business Management,

    is a record of original research work done by Sneha Jain, during the period2012 2013 of her study in the Department of Management Studies at Christ

    University, Bangalore, under my supervision and guidance and the project

    report has not formed the basis for the award of any Degree/ Diploma/

    Associate ship/ Fellowship or other similar title of recognition to any candidate

    of any University.

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    Date: 20 - 02 - 2013 Prof. Vijay

    Agawane

    DECLARATION

    I, Sneha Jain, hereby declare that the project report, titled Derivatives as a tool

    for hedging submitted to Christ University, in partial fulfilment of the

    requirements for the award of the Degree of Bachelor of Business Management

    is a record of original and independent research work done by me during 2012

    2013 under the supervision and guidance ofProf. Vijay Agawane, Department

    of Management Studies and it has not formed the basis for the award of any

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    Degree/ Diploma/ Associate ship/ Fellowship or other similar title of

    recognition to any candidate of any University.

    Date: 20 - 02- 2013 Sneha

    Jain

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    ACKNOWLEDGEMENT

    Sneha Jain

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    INTRODUCTION TO FINANCE

    Finance is the study of funds and management. It is the study of how investors allocate

    theirassets over time under conditions of certainty and uncertainty. A key point in finance,

    which affects decisions, is the time value of money, which states that a unit of currency today

    is worth more than the same unit of currency tomorrow. Finance aims to price assets based on

    their risk level, and expected rate of return.

    The word finance was originally a French word. In the 18th century, it was adapted by

    English speaking communities to mean the management of money. Since then, it has found

    a permanent place in the English dictionary.

    Finance is nothing but an exchange of available resources. Finance is not restricted only to

    the exchange and/ormanagement ofmoney. A barter trading system is also a type of finance.

    Thus, we can say, Finance is an art of managing various available resources like money,

    assets, investments, securities, etc.

    Finance can be defined as, Finance is a simple task of providing the necessary funds

    (money) required by the business of entities like companies, firms, individuals and others on

    the terms that are most favourable to achieve their economic objectives.

    "Finance is the procurement of funds and effective utilisation of funds. It also deals with

    profits that adequately compensate for the cost and risks borne by the business."

    The general areas of finance are business finance, personal finance, and public finance. It also

    deals with the concepts of time, money, risk, and the interrelation between the given factors.

    It is basically focused on how the money is spent and budgeted. It is one of the most

    important aspects in handling business. Finance addresses the methods wherein business

    entities used their financial resources on a certain period of time. It is the application of a set

    http://en.wikipedia.org/wiki/Investorshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Time_value_of_moneyhttp://kalyan-city.blogspot.com/2011/04/what-is-management-definitions-meaning.htmlhttp://kalyan-city.blogspot.com/2011/07/what-is-money-meaning-definition.htmlhttp://en.wikipedia.org/wiki/Investorshttp://en.wikipedia.org/wiki/Assetshttp://en.wikipedia.org/wiki/Time_value_of_moneyhttp://kalyan-city.blogspot.com/2011/04/what-is-management-definitions-meaning.htmlhttp://kalyan-city.blogspot.com/2011/07/what-is-money-meaning-definition.html
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    of techniques used by organizations in managing their financial affairs. The income and

    expenditure are emphasized in finance and its differences can easily be indicated.

    Nowadays, loans have been packaged for resale. This means that the debt has been bought by

    an investor from the bank. These bonds are sold to investors by financial corporations who

    have exceeded beyond their expenditures. The investor can now collect all the interests and

    be sold again through a secondary market. Banks serve as facilitators to companies in the

    provision of credit and mutual funds. Investments are managed carefully under a financial

    risk management to control gambling chances of these financial assets. Financial instruments

    are also used to secure these assets on securities exchanges such as stock exchanges and

    bonds. A bank provokes the activities of both borrowers and lenders. Lenders pay deposits to

    banks on which it pays the interest rates. The central banks are the last resorts that handle the

    monetary funds. These banks affect the interest rates being charged such as an increase in the

    money supply will result to a decrease in the interest rates.

    Financial capital is a monetary resource that allows businesses to purchase items that will

    create goods for production and other services. The budget is the documentation of the entire

    entrepreneurship. The outline includes the objectives of the business, the target sets, resulting

    costs, required investment, planned sales, growth, financing source, and financial results. It

    can be directed on long term or on a short term basis. The capital budget is mainly concerned

    with the proposed fixed asset requirements. The financing of the expenditure is also indicated

    in the capital budget. A detailed plan of all the sources and cash usage is emphasized in the

    cash budget. It has six main sections such as the beginning cash balance, cash collections,

    cash disbursements, cash excess, cash deficiencies, financing, the ending cash balance, and

    the management of current assets. A credit comes in various forms such as of open accounts,

    instalment sales, credit cards, and supplier credits. The advantages of a credit trade are

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    gaining loyalty and goodwill amongst costumers, drawing in more customers than cash

    trades, stimulates agricultural and industrial production, and increases rates. But there are

    also disadvantages to credit trades as well such as risks of bad debt, high administration

    expenses, necessitates more working capital, risks of bankruptcy declaration, and leading to

    purchasing nonessential items. An effective credit control may lead to increase in sales,

    increase in profits, reduces bad debts, builds customer loyalty, and increases company

    capitalization. The information on creditworthiness is acquired through credit agencies, bank

    references, credit agencies, chambers of commerce, and credit application forms. Taking

    legal actions is one part of the many duties of the credit department.

    Personal finance is related to how much money is needed by an individual. It is concerned on

    financial resources and its usage. Tax policies and family assets will certainly affect personal

    decisions. It will also identify the credit score of the lender and the actual financial standing.

    Planning for a secured financial future within the environments economic stability is one

    primary concern of the personal finance as well. There are various factors that affect

    decisions in handling personal finance which are financing durable goods, paying for

    education, monthly bills, secured loans, minimal debt obligations, and health insurance, and

    retirement plans. Meanwhile, corporate finance holds a task in providing financial resources

    for certain organizations and balances risks and profitability. It is referred as SME finance for

    small enterprises. Managerial finance maximizes a companys wealth and it also values the

    stocks. Bonds are long-term funds created by ownership equity and long-term credits. Short-

    term funding comes from a line of credit given by banks as a working capital.

    Studying finance will lead to wiser decisions making on financial funds. It can help to

    identify risks and benefits while planning to set up ones business. Finance gives you

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    optimum control over your financial assets which will certainly help you in attaining a

    financially secured life.

    Relationship of Finance with Other Discipline

    In these other discipline, we can include production and its department, marketing and its

    department and personnel and its department. Relationship shows balanced behavior of

    officers of finance department and other department's officers. They should concentrate on

    one target of company and many other things, they should know for creating good relation.

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    Relationship of Finance with Production

    Production departments main duty is to produce the goods. For producing goods, it needs

    raw material, labor and other expenses. For paying all expenses, production department needs

    money and fund which will be fulfilled by finance department. Finance department checks

    the budget of production department and allow funds for production department. With this

    view, we can understand that production department is dependent on finance departments

    decision. Now, if production department performs his duty honestly and products are

    produced and sold on time, it will be helpful for increase sale and profitability and it will

    again recycle the fund with high profit in finance department. So, we can say both are

    dependent on each other. Both are players of business team. Both should be adopt co-

    operative view for each other. After this, business team can succeed in business.

    Relationship of Finance with Marketing

    Marketing departments main duty is to sell maximum goods and satisfy the consumers. Its

    products input cost will decrease if all products are sold by marketers of company. For

    developing the product, promotion activities and distribution activities of marketing

    department need some money for paying salesmen, advertising budget and other promotional

    expenses. For this marketing department makes his marketing budget and it is cleared by

    finance department, but sometime finance department will not all specific marketing

    expenses but marketing department need that type of expenses for promotion of sales. This

    will create confliction. Good relations will be helpful for both departments. If both

    department does meeting and show behavior like good relative, the problem can easily solve.

    Both departments should think that both are the part of companys organization and co-

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    ordination between them is must. Sometime, marketing department obtains big order for

    supplying the goods, at that time finance department should help marketing department for

    arrangement of money for buying raw material and supplying quickly without any delay.

    Relationship of Finance with Human Resources

    Human Resource is that science which manages the employees of company and finance is

    that science which manages the money. If personnel department and finance department work

    together with co-operation, both departments can satisfy the objectives of company. It is the

    objective of company to satisfy employee by fulfilling their financial needs. It is also

    objective of company to reduce the misuse of fund by paying excess salary that required cost

    of doing work by employee. So, both department should understand each others objective

    and should help other department for fulfilling the objectives. One more thing, financial

    decisions are also very necessary in human resource area. Corporate are moving to the

    development of employees. They are human resource capital of company. Now, investment

    in training of employees, incentive schemes and retirement schemes etc should be calculated

    like other investment and both departments should take maximum advantages from this asset.

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    INTRODUCTION TO THE STUDY

    Derivatives are financial contracts whose value/price is dependent on the behavior of the

    price of one or more basic underlying assets (often simply known as the underlying). These

    contracts are legally binding agreements, made on the trading screen of stock exchanges, to

    buy or sell an asset in future. The asset can be a share, index, interest rate, bond, rupee dollar

    exchange rate, sugar, crude oil, soybean, cotton, coffee etc. Thus, a derivative instrument

    derives its value from some underlying variable.

    Derivatives are specialized contracts which are employed for a variety of purposes

    including reduction of funding costs by borrowers, enhancing the yield on assets and

    modifying the payment structure on assets. The most important use of derivatives is in

    transferring market risk, called hedging, which a protection against losses resulting from

    unforeseen price or volatility changes. Thus derivatives are a very important tool of risk

    management.

    Derivatives are an emerging financial product. Different types of people use

    derivatives for different purposes. They are producers, customers, traders, financial

    institutions, investors, etc. But they are using derivatives mostly for hedging their price. In

    recent years, derivatives have increasingly become important in the field of finance.

    Risk minimization is one of the measures that can be best applied in derivatives. My

    study focuses mainly on how effectively traders, investors and those dealing in the

    derivatives can minimize the risk and hedge more successfully.

    Factors driving the growth of derivatives

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    Over the last three decades, the derivatives market has seen a phenomenal growth. A large

    variety of derivative contract have been launched at exchanges across the world. Some of the

    factors driving the growth of financial derivatives are: -

    Increased volatility in asset prices in financial markets

    Increased integration of national financial markets with international markets

    Marked improvement in communication facilities and sharp decline in their costs

    Development of more sophisticated risk management tools, providing economic

    agents a wider choice of risk management strategies

    Innovations in the derivatives markets, which optimally combine the risks and returns

    over a large number of financial assets leading to higher returns, reduced risks as well

    as transactions costs as compared to individual financial assets

    HIGHLIGHTS OF THE RESEARCH PROJECT

    The main objective of the study is to analyze different strategies available for minimizing the

    risks in derivatives for different market conditions and to identify how the investor can

    reduce his risk using derivatives and speculate effectively. The title of the project is A Study

    onDerivatives as a tool for hedging

    Besides that I am also trying to gain basic knowledge about derivatives

    For studying and analyzing purpose I have used some of the most popular index of nifty

    with my company indiabulls and calculated beta value which shows the volatility of the

    stock.

    The study also includes the findings derived from the analysis and interpretation of the

    secondary data collected. On the basis of the analysis I have been able to interpret that risk

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    minimization techniques can be effectively applied in the derivatives and can be used for

    hedging the price.

    Moreover, before going for hedging the investors should have a clear idea about

    derivatives and before they implement various risk minimization strategies of derivatives it is

    important for these investors to have a thorough knowledge of about the market.

    HISTORY OF DERIVATIVES

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

    think.

    To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the

    year 1700 B.C., Jacob purchased an option costing him seven years of labor that granted

    him the right to marry Laban's daughter Rachel. His prospective father-in-law, however,

    reneged, perhaps making this not only the first derivative but the first default on a

    derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah,

    but because he preferred Rachel, he purchased another option, requiring seven more years

    of labor, and finally married Rachel, bigamy being allowed in those days. Jacob ended up

    with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel, and

    a lot of domestic friction, which is not surprising. Some argue that Jacob really had

    forward contracts, which obligated him to the marriages but that does not matter. Jacob

    did derivatives, one way or the other. Around 580 B.C., Thales the Milesian purchased

    options on olive presses and made a fortune off of a bumper crop in olives. So derivatives

    were around before the time of Christ.

    The first exchange for trading derivatives appeared to be the Royal Exchange in London,

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    which permitted forward contracting. The celebrated Dutch Tulip bulb mania, which you

    can read about in Extraordinary Popular Delusions and the Madness of Crowds by

    Charles Mackay, published 1841 but still in print, was characterized by forward

    contracting on tulip bulbs around 1637. The first "futures" contracts are generally traced

    to the Yodoya rice market in Osaka, Japan around 1650. These were evidently

    standardized contracts, which made them much like today's futures, although it is not

    known if the contracts were marked to market daily and/or had credit guarantees.

    Probably the next major event, and the most significant as far as the history of U. S.

    futures markets, was the creation of the Chicago Board of Trade in 1848. Due to its prime

    location on Lake Michigan, Chicago was developing as a major center for the storage,

    sale, and distribution of Midwestern grain. Due to the seasonality of grain, however,

    Chicago's storage facilities were unable to accommodate the enormous increase in supply

    that occurred following the harvest. Similarly, its facilities were underutilized in the

    spring. Chicago spot prices rose and fell drastically. A group of grain traders created the

    "to-arrive" contract, which permitted farmers to lock in the price and deliver the grain

    later. This allowed the farmer to store the grain either on the farm or at a storage facility

    nearby and deliver it to Chicago months later. These to-arrive contracts proved useful as

    a device for hedging and speculating on price changes. Farmers and traders soon realized that

    the sale and delivery of the grain itself was not nearly as important as the ability to

    transfer the price risk associated with the grain. The grain could always be sold and

    delivered anywhere else at any time. These contracts were eventually standardized

    around 1865, and in 1925 the first futures clearinghouse was formed. From that point on,

    futures contracts were pretty much of the form we know them today.

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    In the mid 1800s, famed New York financier Russell Sage began creating synthetic loans

    using the principle of put-call parity. Sage would buy the stock and a put from his

    customer and sell the customer a call. By fixing the put, call, and strike prices, Sage was

    creating a synthetic loan with an interest rate significantly higher than usury laws

    allowed.

    One of the first examples of financial engineering was by none other than the beleaguered

    government of the Confederate States of America, which is sued a dual currency

    optionable bond. This permitted the Confederate States to borrow money in sterling with

    an option to pay back in French francs. The holder of the bond had the option to convert

    the claim into cotton, the south's primary cash crop.

    Interestingly, futures/options/derivatives trading was banned numerous times in Europe

    and Japan and even in the United States in the state of Illinois in 1867 though the law was

    quickly repealed. In 1874 the Chicago Mercantile Exchange's predecessor, the Chicago

    Produce Exchange, was formed. It became the modern day Merc in 1919. Other

    exchanges had been popping up around the country and continued to do so.

    The early twentieth century was a dark period for derivatives trading as bucket shops

    were rampant. Bucket shops are small operators in options and securities that typically

    lure customers into transactions and then flee with the money, setting up shop elsewhere.

    In 1922 the federal government made its first effort to regulate the futures market with

    the Grain Futures Act. In 1936 options on futures were banned in the United States. All

    the while options, futures and various derivatives continued to be banned from time to

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    time in other countries.

    The 1950s marked the era of two significant events in the futures markets. In 1955 the

    Supreme Court ruled in the case of Corn Products Refining Company that profits from

    hedging are treated as ordinary income. This ruling stood until it was challenged by the

    1988 ruling in the Arkansas Best case. The Best decision denied the deductibility of

    capital losses against ordinary income and effectively gave hedging a tax disadvantage.

    Fortunately, this interpretation was overturned in 1993.

    Another significant event of the 1950s was the ban on onion futures. Onion futures do not

    seem particularly important, though that is probably because they were banned, and we

    do not hear much about them. But the significance is that a group of Michigan onion

    farmers, reportedly enlisting the aid of their congressman, a young Gerald Ford,

    succeeded in banning a specific commodity from futures trading. To this day, the law in

    effect says, "you can create futures contracts on anything but onions.

    In 1972 the Chicago Mercantile Exchange, responding to the now-freely floating

    international currencies, created the International Monetary Market, which allowed

    trading in currency futures. These were the first futures contracts that were not on

    physical commodities. In 1975 the Chicago Board of Trade created the first interest rate

    futures contract, one based on Ginnie Mae (GNMA) mortgages. While the contract met

    with initial success, it eventually died. The CBOT resuscitated it several times, changing

    its structure, but it never became viable. In 1975 the Merc responded with the Treasury

    bill futures contract. This contract was the first successful pure interest rate futures. It was

    held up as an example, either good or bad depending on your perspective, of the

    enormous leverage in futures. For only about $1,000, and now less than that, you

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    controlled $1 million of T -bills. In 1977, the CBOT created the T -bond futures contract,

    which went on to be the highest volume contract. In 1982 the CME created the

    Eurodollar contract, which has now surpassed the T -bond contract to become the most

    actively traded of all futures contracts. In 1982, the Kansas City Board of Trade launched

    the first stock index futures, a contract on the Value Line Index. The Chicago Mercantile

    Exchange quickly followed with their highly successful contract on the S&P 500 index.

    1973 marked the creation of both the Chicago Board Options Exchange and the

    publication of perhaps the most famous formula in finance, the option pricing model of

    Fischer Black and Myron Scholes. These events revolutionized the investment world in

    ways no one could imagine at that time. The Black-Scholes model, as it came to be

    known, set up a mathematical framework that formed the basis for an explosive

    revolution in the use of derivatives. In 1983, the Chicago Board Options Exchange

    decided to create an option on an index of stocks. Though originally known as the CBOE

    100 Index, it was soon turned over to Standard and Poor's and became known as the S&P

    100, which remains the most actively traded exchange-listed option.

    The 1980s marked the beginning of the era of swaps and other over-the-counter

    derivatives. Although over-the-counter options and forwards had previously existed, the

    generation of corporate financial managers of that decade was the first to come out of

    business schools with exposure to derivatives. Soon virtually every large corporation, and

    even some that were not so large, were using derivatives to hedge, and in some cases,

    speculate on interest rate, exchange rate and commodity risk. New products were rapidly

    created to hedge the now-recognized wide varieties of risks. As the problems became

    more complex, Wall Street turned increasingly to the talents of mathematicians and

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    physicists, offering them new and quite different career paths and unheard-of money. The

    instruments became more complex and were sometimes even referred to as "exotic."

    In 1994 the derivatives world was hit with a series of large losses on derivatives trading

    announced by some well-known and highly experienced firms, such as Procter and

    Gamble and Metallgesellschaft. One of America's wealthiest localities, Orange County,

    California, declared bankruptcy, allegedly due to derivatives trading, but more accurately,

    due to the use of leverage in a portfolio of short- term Treasury securities. England's

    venerable Barings Bank declared bankruptcy due to speculative trading in futures

    contracts by a 28- year old clerk in its Singapore office. These and other large losses led to a

    huge outcry, sometimes against the instruments and sometimes against the firms that

    sold them. While some minor changes occurred in the way in which derivatives were

    sold, most firms simply instituted tighter controls and continued to use derivatives.

    Early forward contracts in the US addressed merchants concerns about ensuring that there

    buyers and sellers for commodities. However credit risk remained a serious problem to deal

    with these problems a group of Chicago Board of Trade (CBOT) in 1848. The primary

    intention of CBOT was to provide a centralized location known in advance for buyers and

    sellers to negotiate forward contracts. In 1865 the CBOT went one step further and listed the

    first exchange traded derivatives contract in the US, these contracts were called futures

    contracts. In 1919, Chicago Mercantile Exchange (CME). The CBOT and the CME

    remain the two largest organized futures exchanges, indeed the two largest financial

    exchanges of any kind in the world today.

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    The first stock index futures index futures contract was traded at Kansas City Board

    of Trade. Currently the most popular stock index futures contract in the world is based on

    S&P 500 index, traded on Chicago Mercantile Exchange. During the mid eighties, financial

    futures became the most active derivatives instruments generating volumes many times more

    than the commodity futures. Index futures, futures on t-bills and Euro Dollar futures are the

    most popular futures contracts traded today.

    Derivative products initially emerged as hedging devices against fluctuations in

    commodity prices, and commodity linked derivatives remained the sole form of such

    products for almost three hundred years. Financial derivatives came into spotlight in the post

    1970 periods due to growing instability in the financial markets. However, since their

    emergence these products have become very popular and by 1990s, they accounted for about

    two-thirds of total transactions in derivative products.

    In recent years, the market for financial derivatives has grown tremendously in terms

    of variety of instruments available, their complexity and also turnover. In the class of equity

    derivatives all over the world, futures and options on stocks, especially among institutional

    investors, are major users of index-linked derivatives. Even small investors find the easeful

    due to high correlation of the popular indexes with various portfolios and ease of use. The

    lower costs associated with index derivatives vis--vis derivative products based on

    individual securities is another reason for their growing use.

    They will innovate as a way of life.

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    They will compete on value in meeting member needs, not on price.

    They will achieve leadership in related niche markets.

    1.1.6 Quantitative Analysis

    One of the concepts used in risk and return calculations is standard deviation, which

    measures the dispersion of actual returns around the expected return of an investment. Since

    standard deviation is the square root of the variance, this is another crucial concept to know.

    The variance is calculated by weighting the dispersion by its relative probability (take the

    difference between the actual return and the expected return, then square the number).

    The standard deviation of an investment's expected return is considered a basic measure of

    risk. If two potential investments had the same expected return, the one with the lower

    standard deviation would be considered to have less potential risk.

    Standard deviation takes into account both systematic risk and unsystematic risk and is

    considered to be a measure of an investment's total risk.

    http://www.investopedia.com/terms/s/standarddeviation.asphttp://www.investopedia.com/terms/v/variance.asphttp://www.investopedia.com/terms/s/standarddeviation.asphttp://www.investopedia.com/terms/v/variance.asp
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    Risk measures

    There are many statistical risk measures used to predict volatility and return such as:

    Beta: measures stock-price volatility based solely on general market movements.

    Beta is a relative measure of systematic risk. Typically, the market as a whole is

    assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is

    predicted to have a higher risk, and potentially, a higher return than the market.

    Conversely, if a stock (or fund) had a beta of 0.85, this would indicate that if the

    market increased by 10%, this stock (or fund) would likely return only 8.5%.

    However, if the market dropped 10%, this stock would likely drop only 8.5%.

    Alpha:measures stock-price volatility based on the specific characteristics of the

    particular security. As with beta, the higher the number, the higher the risk.

    R-Squared: Measures the percentage of an investment's movement that are

    attributable to movements in its benchmark index

    Standard Deviation: Measures how much return on an investment is deviating from

    the expected normal or average returns

    http://www.investopedia.com/terms/b/beta.asphttp://www.investopedia.com/terms/a/alpha.asphttp://www.investopedia.com/terms/b/beta.asphttp://www.investopedia.com/terms/a/alpha.asp
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    DERIVATIVES MARKET AT NSE

    The derivatives trading on the exchange commenced with S&P CNX Nifty Index

    futures on June 12, 2000. The trading in Index options commenced on June 4, 2001

    and trading in options on individual securities commenced on July 2, 2001. Single

    stock futures were launched on November 9, 2001. The index futures and option

    contract on NSE are based on S&P CNX Nifty Index. Currently, the futures contracts

    have a maximum of 3-month expiration cycles. Three contracts are available for

    trading with 1 month, 2 months and 3 months expiry. A new contract is introduced

    on the next trading day following the expiry of near month contract.

    The futures and options trading system of NSE, called NEAT-F&O trading

    system, provides a fully automated screen-based trading for Nifty futures & options

    and stock futures and options on a national wide basis and an online monitoring and

    surveillance mechanism. It supports an anonymous order driven market which

    provides complete transparency of trading operations and operates on strict price-

    time priority. It is similar to that of trading of equities in cash market segment.

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    INDUSTRY PROFILE

    One of the key features of financial markets are extreme volatility. Prices of foreign

    currencies, petroleum and other commodities, equity shares and instruments fluctuate all the

    time, and poses a significant risk to those whose businesses are linked to such fluctuating

    prices . To reduce this risk, modern finance provides a method called hedging. Derivatives

    are widely used for hedging. Of course, some people use it to speculate as well although in

    India such speculation is prohibited.

    Derivatives are products whose val ue is derived from one or more basic variables called

    underlying assets or base . In simpler form, derivatives are financial security such as an

    option or future whose value is derived in part from the value and characteristics of another

    an underlying asset. The primary objectives of any investor are to bring an element of

    certainty to returns and minimise risks. Derivatives are contracts that originated from the

    need to limit risk. Derivative contracts can be standardized and traded on the stock exchange.

    Such derivatives are called exchange-traded derivatives. Or they can be customised as per the

    needs of the user by negotiating with the other party involved. Such derivatives are called

    over-the-counter (OTC) derivatives.

    A Derivative includes :

    (a) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk

    instrument or contract for differences or any other form of security ;

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    (b) a contract which derives its value from the prices, or index of prices, of underlying

    securities.

    Advantages of Derivatives:

    1. They help in transferring risks from risk adverse people to risk oriented people.

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

    3. They catalyze entrepreneurial activity.

    4. They increase the volume traded in markets because of participation of risk adverse

    people in greater numbers.

    5. They increase savings and investment in the long run.

    Types of Derivative Instruments:

    Derivative contracts are of several types. The most common types are forwards, futures,

    options and swap.

    Forward Contracts

    A forward contract is an agreement between two parties a buyer and a seller to purchase or

    sell something at a later date at a price agreed upon today. Forward contracts, sometimes

    called forward commitments , are very common in everyone life. Any type of contractual

    agreement that calls for the future purchase of a good or service at a price agreed upon today

    and without the right of cancellation is a forward contract.

    Future Contracts

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    A futures contract is an agreement between two parties a buyer and a seller to buy or sell

    something at a future date. The contact trades on a futures exchange and is subject to a daily

    settlement procedure. Future contracts evolved out of forward contracts and possess many of

    the same characteristics. Unlike forward contracts, futures contracts trade on organized

    exchanges, called future markets. Future contacts also differ from forward contacts in that

    they are subject to a daily settlement procedure. In the daily settlement, investors who incur

    losses pay them every day to investors who make profits.

    Options Contracts

    Options are of two types calls and puts. Calls give the buyer the right but not the obligation

    to buy a given quantity of the underlying asset, at a given price on or before a given future

    date. Puts give the buyer the right, but not the obligation to sell a given quantity of the

    underlying asset at a given price on or before a given date.

    Swaps

    Swaps are private agreements between two parties to exchange cash flows in the future

    according to a prearranged formula. They can be regarded as portfolios of forward contracts.

    The two commonly used swaps are interest rate swaps and currency swaps.

    1. Interest rate swaps: These involve swapping only the interest related cash flows

    between the parties in the same currency.

    2. Currency swaps: These entail swapping both principal and interest between the

    parties, with the cash flows in one direction being in a different currency than those in

    the opposite direction.

    PLAYERS OF DERIVATIVES MARKET

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    There are three types of players in the derivatives market. They are

    Hedgers

    Hedgers are the traders who wish to eliminate the risk (of price change) to which

    they are already exposed. The main objective of these kinds of traders is to reduce

    the risk and not for making profits. Again traders dealing in exports and imports are

    subject to fluctuations in the exchange rates called forex risk. So, apart from the

    equity markets, hedging is also common in the foreign exchange market where

    fluctuations in the exchange rate have to be taken care as transactions are in the

    foreign currency. It could also be used in the commodities market where spiraling oil

    prices have to be tamed using the derivative instrument.

    Speculators

    Hedgers are the people who wish to avoid the price risk and speculators are those

    who are willing to take such risk. These people take positions in the market and

    assume risks to profit from fluctuations in prices. They consume information, make

    forecasts about the prices and put their money in these forecasts. By taking

    positions, they are bet whether the market would go up or down.

    Arbitrageurs

    Arbitrageurs thrive on market imperfections. They earn profits by trading a given

    commodity or other item for different prices in different markets. Thus arbitrage

    involves making risk-less profit by simultaneously entering into transactions into

    two or more markets.

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    For example, if a certain share is quoted at a lower rate on the Delhi stock exchange

    (DSE) and at a higher rate at Bombay stock exchange (BSE), an arbitrageur would

    profit by buying the share at DSE and simultaneously selling it at BSE.

    They could be making money even without putting their own money in and such

    opportunities often come up in the market but last for very shot time frames. This is

    because as soon as this si tuation arises arbitrageurs take the advantage before

    demand-supply forces drive the market back to the normal.

    SEBI Guidelines:

    SEBI has laid the eligibility conditions for Derivative Exchange/Segment and its Clearing

    Corporation/House to ensure that Derivative Exchange/Segment and Clearing

    Corporation/House provide a transparent trading environment, safety and integrity and

    provide facilities for redressal of investor grievances. Some of the important eligibility

    conditions are :

    1. Derivative trading to take place through an on-line screen based Trading System.

    2. The Derivatives Exchange/Segment shall have on-line surveillance capability to

    monitor positions, prices, and volumes on a real time basis so as to deter market

    manipulation.

    3. The Derivatives Exchange/ Segment should have arrangements for dissemination of

    information about trades, quantities and quotes on a real time basis through at least

    two information vending networks, which are easily accessible to investors across the

    country.

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    4. The Derivatives Exchange/Segment should have arbitration and investor grievances

    redressal mechanism operative from all the four areas/regions of the country.

    5. The Derivatives Exchange/Segment should have satisfactory system of monitoring

    investor complaints and preventing irregularities in trading.

    6. The Derivative Segment of the Exchange would have a separate Investor Protection

    Fund.

    7. The Clearing Corporation/House shall perform full novation, i.e., the Clearing

    Corporation/House shall interpose itself between both legs of every trade, becoming

    the legal counterparty to both or alternatively should provide an unconditional

    guarantee for settlement of all trades.

    8. The Clearing Corporation/House shall have the capacity to monitor the overall

    position of Members across both derivatives market and the underlying securities

    market for those Members who are participating in both.

    9. The level of initial margin on Index Futures Contracts shall be related to the risk of

    loss on the position. The concept of value-at-risk shall be used in calculating required

    level of initial margins. The initial margins should be large enough to cover the one-

    day loss that can be encountered on the position on 99 per cent of the days.

    10. The Clearing Corporation/House shall establish facilities for electronic funds transfer

    (EFT) for swift movement of margin payments.

    11. In the event of a Member defaulting in meeting its liabilities, the Clearing

    Corporation/House shall transfer client positions and assets to another solvent

    Member or close-out all open positions.

    12. The Clearing Corporation/House should have capabilities to segregate initial margins

    deposited by Clearing Members for trades on their own account and on account of his

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    client. The Clearing Corporation/House shall hold the clients margin money in trust

    for the client purposes only and should not allow its diversion for any other purpose.

    13. The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the

    trades executed on Derivative Exchange/Segment.

    SEBI has specified measures to enhance protection of the rights of investors in the Derivative

    Market. These measures are as follows:

    1. Investors money has to be kept separate at all levels and is permitted to be used only

    against the liability of the Investor and is not available to the trading member or

    clearing member or even any other investor.

    2. The Trading Member is required to provide every investor with a risk disclosure

    document which will disclose the risks associated with the derivatives trading so that

    investors can take a conscious decision to trade in derivatives.

    3. Investor would get the contract note duly time stamped for receipt of the order and

    execution of the order. The order will be executed with the identity of the client and

    without client ID order will not be accepted by the system. The investor could also

    demand the trade confirmation slip with his ID in support of the contract note. This

    will protect him from the risk of price favour, if any, extended by the Member.

    4. In the derivative markets all money paid by the Investor towards margins on all open

    positions is kept in trust with the Clearing House /Clearing Corporation and in the

    event of default of the Trading or Clearing Member the amounts paid by the client

    towards margins are segregated and not utilised towards the default of the member.

    However, in the event of a default of a member, losses suffered by the Investor, if

    any, on settled/closed out position are compensated from the Investor Protection

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    Fund, as per the rules, bye-laws and regulations of the derivative segment of the

    exchanges.

    COMPANY PROFILE

    Indiabulls security limited is a premier brokerage house in India on the fast growth

    trackIndiabulls Securities Limited is part of the indiabulls group of companies. Indiabulls

    group is leading financial services and Real estate player with a pan India presence. ISL offer

    ease, convenience and reliability in all our products ranging from securities trading to

    customers finance, mortgages to real estates development. Started functioning in the stock

    market in 2000. Over the years, the company has grown from strength to strength to become

    a major player in India's financial services sector.

    Today Indiabull Securities limitedis Indias leading capital markets company with All-

    India Presence and an extensive client base. Indiabulls Securities is the first and only

    brokerage house in India to be assigned the highest rating BQ 1 by CRISIL. Indiabulls

    Securities Ltd is listed on NSE, BSE & Luxembourg stock exchange., the National Securities

    Depository Ltd and Central Depository Services (India) Limited.

    To help the clients better Indiabull Securities limited has located their offices in major

    towns, and placed highly qualified and experienced financial experts to man them. A team of

    dynamic finance professionals with decades of experience leads them. These professionals

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    share a common vision not only to transform the company into a highly professional

    organization, but also make their clients earn the maximum from their hard-earned money.

    HISTORY

    In middle of 1999, when e-commerce was just about starting in India, Sameer Gehlaut and

    his close IIT Delhi friend Rajiv Rattan got together and bought a defunct securities company

    with a NSE membership and started offering brokerage services . A Few months later, their

    friend Saurabh Mittal also joined them. By December 1999, the company embarked on its

    journey to build one of the first online platforms in India for offering internet brokerage

    services. In January 2000, the 3 founders incorporated Indiabulls Financial Services and

    made it as the flagship company.

    In mid 2000, Indiabulls Financial Services received venture capital funding from Mr L.N.

    Mittal & Mr Harish Fabiani. In late 2000, Indiabulls Securities, a subsidiary of Indiabulls

    Financial Services started offering online brokerage services and simultaneously opened

    physical offices across India. By 2003, Indiabulls securities had established a strong pan

    India presence and client base through its offices and on the internet.

    In September 2004, Indiabulls Financial Services went public with an IPO at Rs 19 a share.

    In late 2004, Indiabulls Financial Services started its financing business with consumer loans.

    In March 2005, Indiabulls Properties Private Ltd, a subsidiary of Indiabulls Financial

    Services, participated in government auction of Jupiter Mills, a defunct 11 acre textile mill

    owned by NTC in Lower Parel, Mumbai. Indiabulls Properties private Ltd won the mill in

    auction and that purchase started Indiabulls real estate business. A few months later,

    Indiabulls Real Estate company pvt ltd bought Elphinstone mill in Lower Parel, another

    textile mill auctioned by NTC.

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    With real estate business gaining size, Indiabulls Financial Services demerged the real estate

    business under Indiabulls Real Estate and each shareholder of Indiabulls Financial Services

    received additional share of Indiabulls Real Estate through the demerger. Subsequently,

    Indiabulls Financial Services also demerged Indiabulls Securities and each shareholder of

    Indiabulls Financial Services also received a share of Indiabulls Securities.

    In year 2007, Indiabulls Real Estate incorporated a 100% subsidiary, Indiabulls Power, to

    build power plants and started work on building Nashik & Amrawati thermal power plants.

    Indiabulls Power went public in September 2009.

    Today, Indiabulls Group has a networth of Rs 16,796 Crore & has a strong presence in

    important sectors like financial services, power & real estate through independently listed

    companies and Indiabulls Group continues its journey of building businesses with strong cash

    flows.

    BUSINESSES

    Indiabulls Group is one of the country's leading business houses with business interests in

    Power, Financial Services, Real Estate and Infrastructure. Indiabulls Group companies are

    listed in Indian and overseas financial markets. The Net worth of the Group is Rs 16,844

    Crore and the total planned capital expenditure of the Group by 2013-14 is Rs 35,000 Crore.

    Indiabulls Power is currently developing Thermal Power Projects with an aggregate

    capacity of 5400 MW. The first unit is expected to go on stream in May 2012. The net worth

    of Indiabulls Power is Rs 3,919 Crore. The company has a total capital expenditure of Rs

    27,500 Crore. The company has been assigned 'BBB' rating.

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    Indiabulls Financial Services is one of Indias leading non-banking finance companies

    providing Home Loans, Commercial Vehicle Loans and Secured SME Loans. The company

    has a net worth of Rs 4,661 crore with an asset book of Rs 23,792 Crore. The company has

    disbursed loans over Rs 50,000 Crore to over 3,00,000 customers till date. Amongst its

    financial services and banking peers, Indiabulls Financial Services ranks amongst the top few

    companies both in terms of net worth and capital adequacy. Indiabulls Financial Services has

    been assigned AA+ rating and has presence in over 87 cities and towns with a total branch

    network of 170 branches.

    Indiabulls Real Estate is among India's top Real Estate companies with development

    projects spread across residential complexes, integrated townships, commercial office

    complexes, hotels, malls, Special Economic Zones (SEZs) and infrastructure development.

    Indiabulls Real Estate partnered with Farallon Capital Management LLC of USA to bring the

    first FDI into real estate in the country. The company has a networth of Rs 7,505 Crore and

    has purchased prime land, mostly in the metros and other Tier 1 cities worth Rs 4,000 Crore

    in government auctions alone. Indiabulls Real Estate is currently developing 64.32 million

    sqft into premium quality, high-end commercial, residential and retail spaces. The company

    has been assigned 'A+' rating.

    Indiabulls Securities is one of India's leading capital markets companies providing securities

    broking and advisory services. Indiabulls Securities also provides depository services, equity

    research services and IPO distribution to its clients and offers commodities trading through a

    separate company. These services are provided both through on-line and off-line distribution

    channels. Indiabulls Securities is a pioneer of on-line securities trading in India. Indiabulls

    Securities in-house trading platform is one of the fastest and most efficient trading platforms

    in the country. Indiabulls Securities has been assigned the highest rating BQ-1 by CRISIL.

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    Vision:

    Indiabulls Securities Limited was born out of a vision to explore the immense investment

    opportunities in the Indian financial market, to benefit the investors. The vision of the

    Indiabulls Securities Limited is to be a Financial Super Market. It aims to provide all types of

    financial services to its clients at one place to save them from going from place to place to

    meet their investment needs. Creating a world of smart investors.

    Products or Services:

    Equity and Derivatives

    Depository Services

    Margin Trading

    Equity Analysis

    IPO Financing

    Loan Against Shares

    Trading Platforms

    - Power Indiabulls (PIB)

    - Browser Based

    Indiabulls Securities Limited

    Indiabulls Securities Limited is a big player financial market that has put the brokerage

    business on fast growth track over the years. They are providing through indiabulls

    o Equity Research

    o Commodities

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    o Internet Trading

    o NRI Online Trading

    Competitors:

    Major competitors for India bulls Securities Limited Include:

    o ICICI Direct

    o Share khan

    o India infoline Limited

    o Indian Angels

    o Mothilal Oswol

    Indiabulls Securities Ltd. : Board of Directors

    1 Brig.Labh Singh Sitara Director

    2 Mr.Karan Singh Director

    3 Mr.Ashok Sharma Director

    4 Mr.Aishwarya Katoch Director

    5 Mr.Prem Prakash Mirdha Director

    6 Mr.Divyesh B Shah Director

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    Securities Limited

    SENIOR VICE PRESIDENT

    BRANCH MANAGER/

    Support

    System

    Sales Hierarchy & Branch Structure

    Securities Limited

    Sales

    Current Position of the Company

    SENIOR VICE PRESIDENT

    BRANCH MANAGER/

    SupportSystem

    SalesFunctions

    Back officeExecutive

    LocalCompliance

    Officer

    RM/SRM

    Dealer ARM

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    On March 2011, the company earned an after tax profit of Rs. 37.75 crores

    as compared to Rs. 58.51crores during the previous year. The total revenue earned by the

    company in 2011 march is Rs 325.45 the company raised its funds through the issue 46.22

    Crores equity. ISL, which is into capital market operations generate a volume of Rs 40000

    through commodity futures transactions.

    Indiabulls Securities Ltd. : Capital Structure

    From To Class of

    Shares

    Auth.

    Capital

    Issued

    Capital

    Paid-up Shares

    (No's)

    Face Value

    (Rs)

    Paid-up

    Capital

    2006 2007 Equity Share 19.00 17.83 17834099 10 17.83

    2007 2008 Equity Share 100.00 50.69 253426989 2 50.69

    2008 2009 Equity Share 100.00 50.69 253426989 2 50.69

    2009 2010 Equity Share 100.00 45.99 229940648 2 45.99

    2010 2011 Equity Share 100.00 46.22 231112511 2 46.22

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    Indiabulls Securities Ltd. : Share Holding

    Share Holding Pattern

    as on :

    30/09/2011 30/06/2011 31/03/2011

    FaceValue 2.00 2.00 2.00

    Share Holder No. Of

    Shares

    %

    Holding

    No. Of

    Shares

    %

    Holding

    No. Of

    Shares

    %

    Holding

    PROMOTER'S HOLDING

    Foreign Promoters 0 0.00 0 0.00 0 0.00

    Indian Promoters 68713425 29.73 68713425 29.73 68713425 29.73

    Person Acting in

    Concert

    0 0.00 0 0.00 0 0.00

    Sub Total 68713425 29.73 68713425 29.73 68713425 29.73

    NON PROMOTER'S HOLDING

    Institutional Investors

    Mutual Funds and UTI 0 0.00 0 0.00 0 0.00

    Banks Fin. Inst. and

    Insurance

    345724 0.15 395254 0.17 382320 0.17

    FII's 23247349 10.06 24127109 10.44 24732792 10.70

    Sub Total 23593073 10.21 24522363 10.61 25115112 10.87

    Other Investors

    Private Corporate

    Bodies

    30868583 13.36 30873758 13.36 33163095 14.35

    NRI's/OCB's/Foreign

    Others

    14753231 6.38 14664216 6.35 14556410 6.30

    GDR/ADR 4188982 1.81 4688982 2.03 4688982 2.03Directors/Employees 0 0.00 0 0.00 0 0.00

    Government 0 0.00 0 0.00 0 0.00

    Others 335671 0.15 300189 0.13 465950 0.20

    Sub Total 50146467 21.70 50527145 21.86 52874437 22.88

    General Public 88659546 38.36 87349578 37.80 84409537 36.52

    GRAND TOTAL 231112511 100.00 231112511 100.00 231112511 100.00

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    Indian stock Market: An Introduction

    The Indian securities market has a long history going back 130 years. The

    Bombay Stock Exchange, the iconic trademark of our securities market, is one of the

    oldest stock exchanges in the world, having been set up in 1875. A pioneer in

    organized stock broking activity, this exchange was the brainchild of a group of

    enterprising brokers. Over the years, the Indian securities market has evolved

    gradually to become one of the Asias most modern and efficient markets, setting

    international standards in technology and settlement systems.

    Stock markets have a stellar role to play in the economic growth of every

    country. Needless to mention, the Indian stock market too is inextricably entwined in

    the business fabric of our country. At the end of 2003, S&P has ranked the Indian

    market 17th in terms of market capitalization on a global scale, 16 th in terms of

    turnover and 6 th in terms of turnover ratio. India has the highest number of listed

    securities in the world surpassing even the US which is the worlds largest equity

    market in terms of market capitalization.

    The Indian securities market has two fundamental segments the primary

    market and the secondary market. The primary market is the market for new

    issues where resources get mobilized either through public issues or through private

    placements. The secondary market provides liquidity to participants holdings by

    enabling them to buy and sell securities according to their risk return assessments.

    This market is further divided into the over the counter (OTC) market and the

    exchange traded market. The OTC markets are informal markets where

    transactions are negotiated over the telephone and/or computer network of dealers.

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    The two most tracked indices in India are the BSE Sensex and the S&P CNX

    Nifty. Originally complied in 1986, the Sensex is a basket of 30 constituent stocks of

    companies that figure in the top 100 in terms of market capitalization. The S&P

    CNX Nifty is an S&P endorsed index, owned and managed by the Indian Index

    Services Ltd. (IISL). It is an index of 50 stocks representing 24 sectors of the

    economy.

    Apart from being a popular avenue of investments, Indian stock market is

    today an important source of financing for both the industry as well as the

    government. It registers the pulse of the Indian markets and is indeed the most

    publicized barometer of the economy.

    Indian Capital Market

    The Indian capital markets have witnessed a transformation over the last decade. India now

    finds its place amongst some of the most sophisticated and largest markets of the world. With

    over 20 million shareholders, India has the third largest investor base in the world after the

    USA and Japan. Over 9,000 companies are listed on Indian stock exchanges. The Indian

    capital market is significant in terms of the degree of development, volume of trading and its

    tremendous growth potential.

    Over the past few years, the capital markets have also witnessed substantial reforms in

    regulation and supervision. Reforms, particularly the establishment and empowerment of

    SEBI, market-determined prices and allocation of resources, screen-based nation-wide

    trading, dematerialization and electronic transfer of securities, rolling settlement and

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    derivatives trading have greatly improved both the regulatory framework and efficiency of

    trading and settlement. There are 23 recognized stock exchanges in India, including the

    OTCEI for small and new companies and the NSE, which was set up as a model exchange to

    provide nation-wide services to investors.

    During 2002-03 the NSE and the BSE were ranked third and sixth respectively

    amongst all exchanges in the world with respect to the number of transactions. The year

    2003, also witnessed setting up of the NCDEX, an online multi-commodity exchange for

    trading of various commodities.

    The entry of new players has resulted in a more sophisticated range of financial

    services being offered to corporate and retail customers which has compelled the existing

    players to upgrade their product offerings and distribution channels. This is particularly

    evident in the non banking financial services sector, such as brokerage industry, where

    innovative products combined with new delivery methods have helped the sector achieve

    high growth rates.

    Over the last 7 years, the market share of the top 5 brokers has increased from 6%

    (1996-97) to 15% (December, 2005), with most of the consolidation coming in the last 2

    years. The consolidation in the online business is even greater, with the top 5 players owning

    more than 90% of the market. This consolidation is expected to continue, and provide an

    opportunity for the top broker to own 15% market share or more over the next 3-4 years.

    Key initiatives in recent years include:

    Depository and share de-materialization process have enhanced the efficiency of the

    transaction cycle.

    Replacing the flexible, but often exploited, long settlement cycles with rolling settlement,

    to bring about transparency.

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    IT driven stock exchanges (NSE and BSE) with a national presence (for the benefit of

    investors across locations) and other initiatives to enhance the quality of financial disclosures

    by the listed companies.

    Empowering SEBI with powers to impose higher penalties and establish itself as an

    independent regulator with adequate statutory powers.

    NSE, which in the recent past has accounted for the largest trading volumes, has a fully

    automated screen based system (NEAT and BOLD) that operates in the wholesale debt

    market segment as well as the capital market segment.

    Many new instruments have been introduced in the markets, including index futures,

    index options, derivatives and options and futures in select stocks.

    Porters Five Forces Analysis

    Buyer Power

    Lack of Expertise Curtails Bargaining Power.

    Retail investors often lack the knowledge and expertise in the financial sector that calls

    them to approach the broking houses.

    Low Product Differentiation Proves Beneficial.

    The retail broking services provided by the various companies are homogeneous with very

    low product differentiation. This allows customers to enjoy a greater bargaining power.

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    Supplier Power

    Increased Dependence on IPOs

    There is a growing dependence of corporate on broking houses with the rising number of

    IPOs coming to the market.

    Intensity of Competition

    Move towards consolidation-Lot of brokerage companies are moving towardsconsolidation with the smaller ones becoming either franchisees for the larger brokers or

    closing operations.

    Increased Focus of Banks in Retail Broking-Various foreign banks like ABN Amro and

    others are planning to enter the Indian retail brokerage industry.

    Online Trading Competes with Traditional Brokerage-There is an increasing demand for

    online trading due to consumers growing preference for internet as compared to approaching

    the brokers.

    Threat of New Entrants

    Entry of Foreign Players

    New forms of trading including T+2 settlement system, dematerialization etc are

    strengthening the retail brokerage market and attracting foreign companies to enter the Indian

    industry.

    Threat of Substitutes

    Alternative Investment Options-Various alternative forms of investment including fixeddeposits with banks and post offices etc act as substitutes to retail broking products and

    services

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    Growth Drivers

    Constantly tapping new business areas to drive growth

    IPO financing

    Consumer loans to a large lower and middle class client base

    Mortgages & Loans against Property

    Financial Overview of the Company

    a) Financial Services Revenue Contribution

    FY 06 Rs 6,135 million

    3.8 b) Increasing Market share of Indiabulls in NSE trading volumes

    Other

    Rs 1,175

    Brokerage

    Rs 2,555

    FinancingRs 2,405

    42%

    39%

    19%

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    c) Growing Customer Base

    Increasing Number of Customers

    22.3%

    17.5%

    18.8%21.9%

    30.7%

    2.2%

    5.5%3.4%

    1.1% 1.9%

    0%

    5%

    10%

    15%

    20%

    25%

    30%

    35%

    FY2002 FY2003 FY2004 FY2005 FY2006

    Share in Online Trading Share in Total Trading

    (1)

    (1) Source: NSE data from NSE website (Equity Segment)

    Increasing Market share of Indiabulls in NSE trading volumes

    16,455 30,498

    79,9321,08,324 1,44,000

    1,78,800

    2,35,000

    4,50,000

    0

    50,000

    1,00,000

    1,50,000

    2,00,000

    2,50,000

    3,00,000

    3,50,000

    4,00,000

    4,50,000

    5,00,000

    37681 38047 38412 38504 Sep -05 Dec -05 Mar -06 2007 Jan

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    d) High Revenue Growth

    Brokerage and Tax break up

    Remarks Delivery Intraday Futures

    Buy Sell Buy Sell Buy Sell

    Brokerage 0.5 0.5 0.1 0.1 0.1 0.1

    Service

    tax(@12.24%

    on

    0.0612 0.0612 0.01224 0.01224 0.01224 0.01224

    0

    1,000

    2,000

    3,000

    4,000

    5,000

    6,000

    7,000

    FY03 FY04 FY05 FY06

    Rs mm

    Brokerage Financing Insuranc

    266.7

    719.5

    1,684.1

    6131.5

    CAGR

    (03-0

    6):

    CAGR

    (03-0

    6):

    184%

    184%

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    brokerage)

    Security

    transaction

    tax (STT) 0.125 0.125 0 0.025 0 0.017

    Turnover

    Tax (T oT) 0.018 0.018 0.018 0.018 0.018 0.018

    Stamp duty 0.0112240.0112240.0022450.0022450.0022450.002245

    Total 0.7154240.7154240.1324850.1574850.1324850.149485

    Products and Services

    The products of Indiabulls are:-

    Trading Platform for Equity and Derivatives

    Depository Services

    Commodities

    Equity Analys is

    IPO Financing

    Loan Against Shares

    Margin Trading

    Indiabulls offers

    Broker assisted trade execution

    Automated online investing

    Access to all IPOs

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    Sales of Equity, Derivatives and commodities instruments listed on

    NSE, BSE, NCDEX and MCX

    There are 3 mediums of using / accessing Indiabulls Trading Services.

    Click

    Power Indiabulls (PIB)

    Indiabulls Signature Account

    Call Indiabulls

    Visit the nearest branch

    Depository Services

    Value added Services for seamless delivery.

    Depository Participant with:

    Central Depository Services (India) Limited [CDSL]

    National Securities Depository Limited [NSDL]

    Execute trades through Indiabulls Securities and settle these transactions

    through Indiabulls Depository services.

    RESEARCH DESIGN

    TITLE

    A study on Derivatives as a tool for hedging.

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    STATEMENT OF PROBLEM

    India is a developing country. It is prone to frequent changes in the market due to political,

    social, economic changes. As a result this leads to high volatility in the stock market. The

    players in the Indian stock market are prone to various kinds of risks and level of risk. This

    may be due to lack of information regarding trading practices in stock exchange. This study

    attempts to provide the derivatives as a hedging tool to reduce the various risks in the stock

    market.

    NEEDS FOR OR IMPORTANCE OF THE STUDY

    B u s i n e s s c o n c e r n s a n d c o r p o r a t e i n v e s t o r s w o r l d w i d e a r e u s i n g v a r i o u s

    fin anc ia l instruments to hedge the r isks. Derivat ives effectively to reduce

    substant ia l loss have proved that these instruments can effectively reduce risk.

    OBJECTIVES OF THE RESEARCH

    To study the trading practices in the derivative market.

    To study the various risk associated with derivatives.

    To study the financial derivatives as a hedging tool in the stock market

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    SCOPE OF THE STUDY

    This study is done to know the derivative markets in India. There are various

    types of derivatives instruments like commodities, cash market, futures, stock futures but in

    this study mainly it is concentrated on the stock futures for finding the risk

    involved in the stock futures.

    Statistical tools for analysis

    Beta Analysis

    Beta is calculated using historical data for the benchmark index and historical data for the

    same period for the instrument for which you are trying to calculate the beta. First, the data

    has to be retrieved then second step is to normalize the data by calculating the percent change

    from one period to another. Then the data has to be calculated as the percent change for each

    day to another for the benchmark index and for the instrument for which beta is being

    calculated. Once the data is normalized begin with the calculation of the relationship of the

    two instruments. Excel's slope function lets you calculate this relationship. Excel's slope

    function takes two arguments:

    the array of dependent variables (daily percent change of instrument)

    the array of independent variables and returns the rate of change along the regression

    line (daily percent change of the benchmark index)

    FORMULA USING BETA

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    Beta = Covariance of stock ,nifty index

    --------------------------------------------

    Variance of Nifty index

    DATA COLLECTION

    The report is prepared by using secondary data. The secondary data are collected

    from reports, magazines, and journals and also from websites. Market moveme nts were

    observed for one month with Nifty Index Futures, observation on the price

    movement of derivative market for the purpose of analysis of data were collected

    from the official websites of National

    Stock e x c h a n g e a n d D e r i v a t i v e s I n d i a ( www.nseindia.com& derivative

    sindia.com) Theobservation period was from 1st November to 30th November.

    The data collec ted from websites were used to analyze the strategies and for calculations.

    PLAN OF ANALYSIS

    In this study I have used figures, tables, charts, and beta formula for finding the analysis

    LIMITATIONS OF THE RESEARCH

    http://www.nseindia.com/http://www.nseindia.com/
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    A)Availability of data because the data used for calculating beta is only one

    month

    B)In the stock market various options are available like commodities, cash

    marke t, options except from this I have used stock futures for calculation.

    DATA COLLECTION AND ANALYSIS

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