share khan limited

8/3/2019 Share Khan Limited

1/96

Master of Business Administration

EXECUTIVE SUMMARY

New ideas and innovations have always been the hallmark of progress made by

mankind. At every stage of development, there have been two core factors that drive

man to ideas and innovation. These are increasing returns and reducing risk, in all

facets of life.

The financial markets are no different. The endeavor has always been to maximize

returns and minimize risk. A lot of innovation goes into developing financial productscentered on these two factors. It has spawned a whole new area called financial

engineering.

Derivatives are among the forefront of the innovations in the financial markets and aim

to increase returns and reduce risk. They provide an outlet for investors to protect

themselves from the vagaries of the financial markets. These instruments have been

very popular with investors all over the world.

Indian financial markets have been on the ascension and catching up with global

standards in financial markets. The advents of screen based trading, dematerialization,

rolling settlement have put our markets on par with international markets.

As a logical step to the above progress, derivative trading was introduced in the country

in June 2000. Starting with index futures, we have made rapid stride and have four

types of derivative products- index future, index option, stock future and stockoptions.

Today, there are 50 stocks on which one can have futures and options, apart from the

index futures and options.

This market presents a tremendous opportunity for individual investors. The markets

have performed smoothly over the last four years and have stabilized. The time is ripe

for investors to make full use of the advantage offered by this market. We have tried topresent in a lucid and simple manner, the derivatives market, so that the individual

investor is educated and equipped to become a dominant player in the market.

Gujarat Technological University, Ahmedabad Financial Derivatives And Its Benefits1


2/96


Industrial Profile

(Sharekhan pvt Ltd.)

Product Profile



3/96


INTRODUCTION OF SHAREKHAN LTD



4/96


Industrial Profile: Sharekhan Ltd

The Company

Sharekhan Limited is a retail financial services provider with a focus on equities,

derivatives and commodities brokerage execution on the National Stock Exchange of

India Ltd. (NSE), Bombay Stock Exchange Ltd. (BSE), National Commodity and

Derivatives Exchange India (NCDEX) and Multi Commodity Exchange of India Ltd.

(MCX), Sharekhan provides trade execution services through multiple channels - an

Internet platform, telephone and retail outlets and is present in 225 cities through a

network of 615 locations. The company was awarded the 2005 Most Preferred Stock

Broking Brand by Awwaz Consumer Vote.

Corporate profile

Particulars BSE NSE

Name Of

Trading

Member

Sharekhan Ltd.

Clearing No. Cash:748

Derivative: T748

Cash:10229

Derivative:F10229

Regd. Office A-206, Phoenix House,

Phoenix Mills Compound,

Senapati Bapat Marg, Lower Parel

Mumbai, Maharashtra 400013

Ph: 022-267482000

SEBI

Registration &

Trading Member

Cash INB-001073351

Derivative: INF- 001073351

Cash: INB/INF231073330

Derivative:MAPIN 100008375

Branch In charge

(Vapi)

Mr.Mitesh Prajapati

(Email: [email protected])

Main contact

personIn Regd. Off.

Mr. Kashyap Chokhwatia

(-Sr. Clint Relation)

Unique

Identification

No.

100008375 100008989

Mutual Fund ARN 20669

PMS INP00000066

DP NSDL-IN-DP-NSDL-233-2003 CDSL-IN-DP-CDSL-271-2004

Website www.sharekhan.com

E-Mail Address [email protected]

http://www.sharekhan.com/mailto:[email protected]://www.sharekhan.com/mailto:[email protected]


5/96


The Business Challenges

Easily access customer portfolio information in a secure contact centre environment.

Seamlessly integrate with back-end applications and streamline customer data to

contact Centre agents.

Easily manage upgrades and technology issues to accommodate growing customer

base.

The Solution

Sharekhan selected Aspect EnsemblePro from the Aspect Software Unified IPContact Centerproduct line, a unified contact centre solution delivering advanced

multichannel contact capabilities,Because it provided the best total value over other

solutions evaluated. It enabled Sharekhan to meet Customer service needs for inbound

call handling, voice self service, predictive outbound dialling, call Blending, call

monitoring and recording, and creating outbound marketing campaigns, among other

Capabilities.

The Results

Increased agent efficiency and productivity

Enabled company to execute proactive customer service calls and expandservices offered to customers

Enhanced call monitoring for improved service quality

The company was awarded the 2005 Most Preferred Stock Broking Brand by Awwaz

Consumer Vote.



6/96


VAPI BRANCH:

Address:

Royal Fortune,

D-101, E -101, First Floor,

Vapi - Daman Road,

Vapi - 396 191.

Telephone No: 0260 - 6452931 to 36

Email:[email protected]

Contact Person: Mr. Mitesh Prajapati



7/96


Sharekhan ServicesSharekhan is one of India's leading financial services companies. We provide a

complete life-cycle of investment solution in Equities, Derivatives, Commodities, IPO,

Mutual Funds, Depository Services, Portfolio Management Services and Insurance. We

also offer personalized wealth management services for High Net worth individuals.

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

Shops", and an online presence through Sharekhan.com, India's premier online

destination, we reach out to more than 800,000 trading customers.



8/96




9/96


Product offered by Sharekhan :

Features of Classic Accountthat enables you to invest effortlessly

Online trading account for investing in Equities and Derivatives via

sharekhan.com

Integration of: Online trading + Bank + Demat account

Instant cash transfer facility against purchase & sale of shares

Make IPO bookings



10/96


You get Instant order and trade confirmations by e-mail

Streaming Quotes

Personalised Market Scan with your own customized stock ticker!

Single screen interface for cash and derivatives

Your very own Portfolio Tracker!

Features OF Sharekhan Trade Tiger

A single platform for multiple exchange BSE & NSE (Cash & F&O), MCX,

NCDEX, Mutual Funds, IPOs



11/96


Multiple Market Watch available on Single Screen

Multiple Charts with Tick by Tick Intraday and End of Day Charting poweredwith various Studies

Graph Studies include Average, Band- Bollinger, Know SureThing, MACD,

RSI, etc

Apply studies such as Vertical, Horizontal, Trend, Retracement & Free lines

can save his own defined screen as well as graph template, that is, saving the

layout for future use

User-defined alert settings on an input Stock Price trigger

Tools available to guage market such as Tick Query, Ticker, Market

Summary, Action Watch, Option Premium Calculator, Span Calculator

Shortcut key for FAST access to order placements & reports

Online fund transfer activated with 12 Banks

Features of Dial-n-Tradethat enable you to trade effortlessly

TWO dedicated numbers for placing your orders with your cell phone or

landline. Toll free number: 1-800-22-7050. For people with difficulty in

accessing the toll-free number, we also have a Reliance number (Your Local

STD Code) 30307600 which is charged at as a local call.

Simple and Secure Interactive Voice Response based system for authentication



12/96


No waiting time. Enter your TPIN to be transferred to our telebrokers

You also get the trusted, professional advice of our telebrokers

After hours order placement facility between 9.00 am and 9.30 am (timings to

be extended soon)

Reliable service, wherever you are



13/96


Need of Study

Research Objective

Research Design

Sources of Data collection

Benefit of Study



14/96


NEED OF THE STUDY

A financial derivative in India is a growing subject in Indian capital market. Trading in

financial derivatives started in National Stock exchange (NSE) in June 2000,with tools

like future and option. My research in this field is still in its initial stage and there is lot

of potential scope in the field of derivatives

Derivatives and its products (types) studied in this project have appeared as the most

efficient tools to facilitate an efficient risk management system as they are designed

and traded on the basis of future price movement expectations of underlying assets,thereby arranging some kind of insurance or protection from points associated with

trading in financial assets

Derivatives are recognized as the best and most cost-efficient way of meeting the felt

need for risk hedging in certain types of commercial and financial operations. Countries

not providing such globally accepted risk hedging facilities are disadvantaged in

today's rapidly integrating global economy.



15/96


RESEARCH OBJECTIVE

To understand different types of derivatives product available in market.

To understand how derivates are useful as a tool in risk management

To understand impact of derivatives product (future and option) in financial

market.

To understand future and option and their strategies of the trading in real market

To understand various determinants of option value.



16/96


RESEARCH DESIGN

The study is based on descriptive research design having protection against bais and

maximizes reliability and also has structured or well thought out instrument for

collection of data, from various websites, referred journal, articles and books.

SOURCE OF DATA COLLECTION

Secondary source

Stock Exchange : National Stock Exchange

From Web dealers: Ms. Shruti Mistri, share khan.

Report studied( mentioned in literature review)

Books referred

Websites surfed



17/96


BENEFITS OF THE STUDY

How useful are derivatives?

Derivatives are important financial instrument and perform a wide variety of functions.

These functions range from hedging and insuring against adverse change to ensuring

market efficiency.

From an investors point of view, derivatives offer a huge number of opportunities,

whether he is risk-taker or risk averse. Derivatives, especially index futures and stock

options.

Some of the important advantages are as follow:

Hedging Risk

Derivatives are use to hedge risks. They can be used as hedging devices by

retail investors, portfolio manages and borrowers hedging against interest rate

rise. Index futures can be used to hedge a portfolio against adverse movement in

the stock market. Through the process of hedging, the buyer of the instrument

implicitly transfers the risk to those who want to assume it for a consideration.

Expanding portfolio

Derivatives enable banks, traders or investors to be on price movement without

having to deal with actual assets, if the value of the underlying goes up or down,

the difference is simply settled in cash. Derivatives are more flexible than the

underlying products. the value is based on the price of the underlying product,

and most contract are settled in cash term so investor could gamble.

Power to leverage

Derivatives allow investor to take position of a large value by making a small

investment. In futures, one takes a position by paying a margin in the range of

25-30%. In case of an option, one pays a premium that is a very small amount

relative to the spot price and takes position in the markets.



18/96


Power to defer

The cash markets have a daily settlement mechanism. A speculator wanting to

take a position in a stock has to either take delivery or square off his position

the same day. Thus he is unable to take a position beyond a day.

With futures, one can take a position on a stock today, while the settlement

takes place at a future date. In this aspect, futures are similar to the erstwhile

Badla system as it enables carry forward of positions.

Power to lend or borrow from the markets

With futures, one can lend or borrow funds from the market. This will become

more effective when actual deliveries are introduced in the derivatives markets.

In case you need money for short-term requirements, you can sell your stocks in

the cash market and buy futures. You get the liquidity for some time and then

you can get your stock back when the futures are settled.

Benefits to End Users

As a result of the numerous studies of derivatives activities, there is now broad

agreement in both the private and public sectors that derivatives provide numerous and

substantial benefits to end users.

Corporations, governmental entities, and financial institutions all benefit from

derivatives through lower funding costs and more diversified funding sources. In

todays global capital market, currency and interest rate swaps, for example, give firms

the ability to borrow in the cheapest capital market, domestic or foreign, without regard

to the currency in which the debt is denominated or the form in which interest is paid,

i.e., fixed- or floating-rate. A major lender to McDonalds, for example, uses interest

rate swaps to lower its own financing costs and hence increase its capacity to lend toMcDonalds franchisees.

By using derivatives, institutional investors and portfolio managers may enhance asset

yields. For example, asset swaps enable institutions to exchange cash flows on

particular assets for other cash flows, possibly based on a different rate of interest or

exchange rate. In cases where securities trade poorly because of some undesirable

feature, derivatives can be used to neutralize the undesirable feature,



19/96


thereby creating a synthetic instrument with a higher yield than a traditional instrumentof the same credit quality. Asset swaps are popular, for example, when the issuer of a

security experiences deterioration in its credit standing, hence causing the demand for

its securities on the secondary market to dry up.

Derivatives, moreover, provide an efficient method for end users to better hedge and

manage their exposures to risk from price and interest rate fluctuations. Interest rate

swaps, for example, help banks of all sizes to manage better the asset/liability

mismatches inherent in funding long-term assets, such as mortgages, with short-term

liabilities that reprice more frequently, such as certificates of deposit. Airlines and oil

refiners can use commodity swaps to hedge their exposure to fluctuating fuel prices.

Finally, derivatives provide an effective, low-cost means for corporations and

institutional investors effectively to manage their portfolios of assets and liabilities. A

fully-invested equity fund, for example, can reduce its market exposure quickly and at a

relatively low cost without selling off part of its equity assets by using an equity swap

calling for the exchange of payments based on the total return on the S&P 500 index in

return for a receipt based on a floating rate, such as the London Interbank Offer Rate

(LIBOR).

Benefits to Dealers

Participation in derivatives activity benefits derivatives dealers in several important

ways. For example, dealing has increased both the average credit quality and the

diversity of credit risk to which dealers are exposed. Dealing also provides a profitable

and stable earnings stream that has helped banks rebuild their capital bases and

diversify their sources of earnings. Finally, improvements in risk management

techniques that first developed in derivatives have spilled over into and improved the

management of risks in the traditional lines of businesses of dealers. Banks taking

deposits and making loans, for example, have begun to make use of risk management

systems originally developed for derivatives for their balance sheet asset/liability

management. This improved risk management, in turn, has improved the safety and

profitability of these institutions.

Benefits for the Economy

The innovation and growth in derivatives activity over the past fifteen years has yielded

substantial benefits to the U.S. economy. By facilitating the access of U.S. corporations

to international capital markets, enabling them to lower their cost of funds and diversify

their funding sources, derivatives have improved the competitive position of U.S. firms

in an increasingly competitive global economy.



20/96


By providing U.S. firms with new and more effective tools for managing their exposureto interest rates, foreign exchange rates, and commodity prices, derivatives have also

reduced the likelihood of financial distress due to volatile prices and interest rates,

helping to stabilize employment. With these incidental risk exposures under control,

management is better able to focus on its core businessimproving the quality and

reducing the cost of its product. Similarly, by providing investors and issuers with a

wider array of tools for managing risks and raising capital, derivatives improve the

allocation of credit and the sharing of risk in the economy, reducing the cost of capital

formation and stimulating economic growth.

Finally, since world markets for trade and finance have become increasingly integrated

and accessible, derivatives have strengthened important linkages between markets,

increasing market liquidity and efficiency.

Benefits of Derivatives to Indian capital markets

India's financial market system will strongly benefit from smoothly functioning index

derivatives markets. The reasons in support of this statement are as follow: -

Internationally, the launch of derivatives has been associated with substantial

improvements in market quality on the underlying equity market. Liquidity and

market efficiency on India's equity market will improve once the derivatives

commence trading. Many risks in the financial markets can be eliminated by diversification. Index

derivatives are special insofar as they can be used by investors to protect

themselves from the one risk in the equity market that cannot be diversified away,

i.e. a fall in the market index. Once investors use index derivatives, they will

suffer less when fluctuations in the market index take place.

Foreign investors coming into India would be more comfortable if the hedging

vehicles routinely used by them worldwide are available to them. So, the foreign

funds inflow through FIIs in Indian capital markets will be more making it easier

for the corporate to tap the funds at a cheaper rate.

The launch of derivatives is a logical next step in the development of humancapital in India. Skills in the financial sector have grown tremendously in the last

few years, thanks to the structural changes in the market, and the economy is now

ripe for derivatives as the next area for addition of skills.

The launch of futures trading has been a milestone on Indian bourses although its full

impact is yet not visible due to certain roadblocks. It is the right time, as far as India is

concerned, as for launch of derivatives in the country. As the markets are become more

volatile and complex, there is a need to hedge these risks and hence for instruments,

which allow fund managers to manage risk, better.



21/96


So, this is definitely the appropriate time. As our Indian market lacks infrastructure

available, therefore our futures market is not perfect, as it must be. For example, as welack a system of electronic fund transfer in the banking sector and we don't even have

the short-term yield curve, which can be used to calculate the fair price for the index

future. As market becomes deep, the need for these deficiencies to go will be stronger.

As our market is on retail basis therefore we requires great protection against counter-

party risk. It is the regulators that have nurtured the entire derivative initiative and have

played a very positive role. They may extend the support, guidance and advice while

derivatives have been introduced. Even the regulatory framework, which has been

designed, puts the Indian derivatives market best in the world.

However, volumes in derivatives markets are still too small to have an impact on the

cash market. The derivatives market, which gives better price discovery, can have a

positive impact on the cash market. It would increase the liquidity even in the cash

market where arbitrage takes place between the futures and the cash market.

Here, derivatives would no doubt increase the liquidity and depth. Within index futures

Indian bourses would be launching sectoral index futures like InfoTech or FMCG

index. Among other products, we would like to bring futures on foreign exchange and

fixed income instruments.

Derivative users

Hedgers

Hedgers wish to eliminate or reduce price risk to which they are already

exposed. To hedge is to enter into transaction that protects a business or assets

against change in the underlying commodity. The instrument bought a hedge,

tend to have the opposite value movement to the underlying asset. Financial and

commodity markets are used to transfer risk form an individual or corporation

to someone more willing and table to bear that risk.

To begin with, suppose a leading trader buys a large quantity of wheat that

would take two weeks to reach him. Now, he fears that the wheat prices mayfall in the coming two weeks and so wheat may have to be sold at lower prices.

The trader can sell futures (or forward) contracts with matching price, to hedge.

Thus, if wheat prices do fall, the trader would lose money on the inventory of

wheat but will profit from the futures contract, which would balance the loss.

Speculator

Speculators willing take price risk from price changes in the underlying. In

contract to hedgers, speculators buy or sell derivatives contracts in an attempt to



22/96


earn profits. They are willing to assume the risk of price fluctuation, hoping to

profits from them.Assume that a call option, with exercise price of Rs. 35 and due in one month,

on this share is available in the market at 50 paisa (per share).

Buying this option would require Rs. 50 (a call is for 100 shares) only. Now, if

the price of the share is either less than, or equal to, Rs. 35, the call shall not be

exercised and the loss would be Rs. 50 or 100% of the investment.

If, on the other hand, the price rules at Rs. 40, then a gain of 100*(Rs. 40-Rs.

35) = Rs. 500 would be made, which works out to be 900% of the investment!

With no option or other derivative available, the investor would be required to

invest Rs. 3200 (for 100 shares) and would make a profit of Rs. 800 i.e. only

24% of the amount invested.

Arbitrageurs

Arbitrageur profits from price differentials existing in two markets by

simultaneously operating in two different markets. An Arbitrageurs makers risk

less profits by exploiting the price differential on the same instrument or similar

assets, often by trading on different exchanges. He buys the instrument at the

lower price and promptly makes a resale at the higher price. Arbitrage plays a

role in ensuring markets efficiency, in that it helps so eliminate pricinganomalies. Arbitrageurs are on the lookout for market inefficiencies and quickly

look to eliminate them.

All class of investors is required for healthy functioning of the market. Hedger

and investor provide the economic substance to any financial market. Without

them, the markets would lose their purpose and become mere tools of gambling.

Speculators provide liquidity and depth to the market. Arbitrageurs bring price

uniformity and help price discovery.

Futures and options with various expiration dates are traded in the market, there

are likely to be several arbitrage opportunities in trading.

Thus, if a trader believes that the price differential between the futures contracts

on the same underlying asset with differing maturities is more or less than whathe/she perceives them to be, then appropriate positions, in them, may be taken

to make profits. The existence of well-functioning derivatives markets alters the

flow of information into the prices. This is because in a purely cash market,

speculators, feed information into the sport prices. In contrast, the presence of a

derivatives market, besides a cashmarket, ensures that a major part of the

transformation of information into prices takes place at the derivatives market,

due to lower transaction costs involved in such a market, and then it gets

transmitted to the spot markets.



23/96


Review of literature

Introduction to derivative

Risk Management

Taxation Issues



24/96


REVIEW OF LITERATURE

Report Studied:

Mitesh B. Buddhdev,Trading Strategies & accounting Procedures in Derivatives,

March 2007

The project provides significant knowledge of trading strategies and accounting

procedures in derivates and also impact of derivatives in financial market.

The project reveled importance of accounting in derivatives. It consists of all the

accounting entry made at each stage for all action in futures and option contract. Each

transaction is accounted with its complete effects from inception to financial year end.

It also provides information of reports generation for all the elements of transactions

from view point of client.

It also recognizes the basic strategies and their usage in real stock market where

besides price, various factors have influence. Thus in outline, project report establishes

knowledge of different strategies and accounting standard of derivatives

Books of national certification in financial market in dealer module were

referred

Book for national certification in financial market in option and trading

strategies were referred



25/96




26/96


History of Derivatives

Derivative instruments have been in existence for over two thousand years. Olive

farmers in ancient Greece used them. Farmers, who were unwilling to accept the risk of

low prices for their crops, when harvested month later, would enter into forward rate

agreement. In such case, a price was agreed for delivery on a specific date between the

farmer and buyer. This reduced uncertainty for both the grower and purchased of

olives.

In the middle ages, forward contracts, particularly for wheat, were traded in a kind of

secondary market in Europe. A futures market was established in Osakas rice marketsin Japan in 17th century. In Amsterdam, tulip bulb options were traded in 17th century.

In Calcutta, forward contracts in frozen potato have been in existence for a long time.

In addition, an organized derivatives trading has been prevalent in agricultural

commodities like pepper, trading in commodity futures took off in 19 th century after

Chicago board of trade (CBOT) Started regulating trading. The last 25 years have

witness an explosive growth in traded volumes, Varity of derivatives products and

range of uses and users.

Development of derivatives market in India

The first step towards introduction of derivatives trading in India was the promulgation

of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition

on options in securities.

The market for derivatives, however, did not take off, as there was no regulatory

framework to govern trading of derivatives. SEBI set up a 24-member committee under

the Chairmanship of Dr. L.C. Gupta on November 18, 1996 to develop appropriate

regulatory framework for derivatives trading in India.

SEBI also set up a group in June 1998 under the Chairmanship of Prof. J.R.Varma, torecommend measures for risk containment in the derivatives market in India. The

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

margining system, methodology for charging initial margins, the operational details of

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

requirement and real-time monitoring requirements.

The government also rescinded in March 2000, the three-decade old notification, which

prohibited forward trading in securities.

Derivatives trading commenced in India in June 2000 after SEBI granted the finalapproval to this effect in May 2001. SEBI permitted the derivative segments of two

stock exchanges, NSE and BSE, and their clearing house/corporation to commence



27/96


trading and settlement in approved derivatives contracts. To begin with, SEBI approved

trading in index futures contracts based on S&P CNX Nifty and BSE-30 (Sensex)index.

This was followed by approval for trading in options based on these two indexes and

options on the individual securities. The derivatives trading on NSE commenced with

S&P CNX Nifty Index futures on June 12, 2000. Single stock futures were launched on

November 9, 2001.

Trading and settlement in derivative contracts is done in accordance with the rules,

bylaws, and regulations of the respective exchanges and their clearing

house/corporation duly approved by SEBI and notified in the official gazette.

Index futures recorded a total trading value of Rs. 35, 22,264 million and the near

month index futures contract recorded the highest trading value of Rs. 28, 97,754

million during the month. The movement of Nifty as compared to Nifty futures in the

month of February 2008.

The stock futures recorded a total trading value of Rs. 42,18,381 million during

February 2008. The near month contract expiring on February 28,2008 recorded the

highest trading volume of Rs. 34,60,707 million.

The index options recorded a total national trading value of Rs. 11, 02,514 millionduring the month with the near option contract recording the highest national trading

value of Rs.5.14,602 million for call option and Rs.4,06,304 million for put options.

The total trading value of stock options during the month was Rs.1,49,011 million. The

option expiring on February 28, 2008 recorded the highest national trading value of

Rs.1,15,917 million for call options and Rs. 20,437 million for put options.



28/96


The table below indicates the growth witnessed in thederivatives market

Futures

ProductContract

No. of Trading

Open interest

(No. as at end of

month)**

Index Futures

28-Feb-2008 11,566,086 2,897,75

4

262,096

27-Mar-2008 2,467,094 617,635 852,977

24-Apr-2008 30,814 6,825 11,328

29-May-2008 217 50 86

Stock Futures

28-Feb-2008 11,256,571 3,460,70

7

251,514

27-Mar-2008 3,222,316 754,809 1,375,110

24-Apr-2008 12,575 2,831 4,441

29-May-2008 139 35 118

Option

Produc

tInterest

Contract No. of Trading

Open

(No of contractas at end

Of month)

Index

Call

28-Feb-2008 1,880,368 514,602 315,578

27-Mar-2008 302,874 84,172 149,984

24-Apr-2008 1,921 536 1,846

29-May-2008 2 1 2

Put

28-Feb-2008 1,561,626 406,304 277,697

27-Mar-2008 357,262 92,686 183,779

24-Apr-2008 15,524 4,214 15,314

29-May-2008 - - -

Stock

Call

28-Feb-2008 379,565 115,917 71,435

27-Mar-2008 47,855 11,395 25,887

24-Apr-2008 63 16 18

29-May-2008 - - -

Put

28-Feb-2008 77,026 20,437 19,482

27-Mar-2008 5,802 1,245 3,048

24-Apr-2008 4 1 3

29-May-2008 - - -

Source: - www.sharekhan.com



29/96




30/96


Distribution of F& O Volume:February 2008

Index future

39%

Stock future

47%

Index option

12%

Stock option

2%



31/96


Derivatives defined

A derivative is a financial instrument that derives its value from an underlying asset.

This underlying asset can be stocks, bonds, currency, commodities, metals and even

intangible, pseudo assets like stock indices.

Simply we can say that derives some thing from someone. e.g. we derived price of curd

from price of milk. It is derivatives.

In the Indian context the Security Contract Act, 1956 defines derivative to include:

1) A security derived from a debt instrument, shares, and loans whethersecured or unsecured, risk instrument or contract for any other from of

security.

2) A contract which derives its value from of security.

What is a derivative instrument?

It is a contract whose value depends on or derives from the value of an underlying asset

[say a share, forex, commodity or an index]. In its broadest sense a derivative attempts

to hedge against the variability of any economic variable. Thus exposures or perceived

risks to a firm arising from the variation in interest rates, exchange rates, commodityprices and equity prices can be hedged through an appropriate derivative structure.

Such a derivative structure covers a wide variety of financial contracts viz. Futures,

Forwards, Options, Swaps and different variations thereof. These contracts can be

traded on the various exchanges in a standardized manner or by custom designed for

individual requirements.

The four important types of derivatives are based on the following:

I) Bonds which vary in price according to interest rates

II) CurrenciesIII) Equities including stock indices

IV) Commodities like metals, oil and agricultural produce



32/96


The need for a derivatives market

The derivatives market performs a number of economic functions:

They help in transferring risks from risk averse people to risk oriented people.

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

They increase the volume traded in markets because of participation of risk

adverse people in greater numbers.

They increase savings and investment in the long run.

Types of Derivatives

Derivatives are complex instrument and come in various forms. Apart from the

standard instruments, which are traded on Over the Counter (OTC) markets, derivatives

can also be tailored made to suit the specific requirements of the user. Some of the most

important and widely used derivatives are as follows:

Forward

A forward contract is an agreement in which two parties agree to under take an

exchange of the underling asset at some future date at pre-determined price. Aforward contract is customized contact between two parties, where settlement take

place on a specific date the settlement date and price are agreed in advance by the

parties concerned.

Features of forward contract:-

They are bilateral contract and hence exposed to counter-party risk.

Each contract is custom designed and hence is unique in term of contract size,

expiration date and the assets type and quality.

The contract price is generally not available in public domain. The contract price has to be settled by delivery of the assets on expiration date.

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

the same counter-party.

Forward contact is popular in the foreign exchange market and agriculture

sector where commodity prices fluctuate a great deal. If the forward contract is

close before the scheduled closing date, a penalty may be charged. The draw

back of forward contract is lack standardization which prevents trading on an

exchange and the risk of default.



33/96


Futures

Futures are agreements between two parties to undertake a transaction at an

agreed price on a specific future date. Futures contract are exchanged based

instrument, which are traded on a regulated exchange. In general, future

contract are related to various underlying assets such as commodities, market

indices, interest rate and so on.

In the futures, there is an agreement to buy or sell a specified quantity of

financial instrument commodity on a designed future date a price agreed uponby the buyer and seller today.

e.g. if you buy 100 company X futures at 100 Rs. for march 31 delivery it

means that on 31 march, you would pay the seller Rs.10000 and get return 100

shares of company X. In general there is no physical delivery of the underlying

assets but the settlement is done by paying or receiving the difference of the

actual price on March 31 and contracted price. Now suppose on the 31 march

price of company X was 150 .you would get Rs. 5000 and if the price of

company x was Rs. 70 then you would to pay Rs.3000.

The standardized item in any futures contract is as follows.

Quantity of the underlying

The date and month of delivery

The unit of price quotation and minimum change in price

Location of settlement



34/96


In general most futures contract is not held to expiry, and so delivery does notake place. Open positions are closed out on the last day of trading at a price

determined by the spot/cash market price of the underlying asset. The price is

called exchange delivery settlement price or EDSP.

Option

The buyer of an option has the right but not the obligation to buy or sell an

agreed amount of a commodity on or before a specified future date. An option

to buy is know as a call option while an option to sell is knows as a put

option. The rate at which the buyer of the option has the right to buy or sell is

the strike or exercise price.

An option which can be exercised at any time before it expires is described as

an American style option. One, which can only be exercised on the expiry

date, is called a European style option.

Buying an option protects against downside risk and at the same times givesupside potential. You establish the worst possible rate at which you will / sell a

commodity or stock but still have the possibility of improving on this rate. The

buyer hence, has the best of both worlds.



35/96


SWAPS

A Swaps can be defined as an exchange of obligation by two parties for

instance I an interest rate Swap(IRS), one company arrange with another to

exchange interest rate payment.

There are many types of Swaps like Assets Swap, Currency swaps and so on.

The most important one is an interest rate Swaps (IRS) and Currency Swaps.

Interest Rate swap(IRS):

One company may be paying fixed rate of interest but prefer floating

rates. Another company may be paying a floating rate but would find a

fixed rate advantageous. Thus it makes sense for both the companies to

enter into an IRS agreement.

An important advantage of IRS is that different firms can access funds at

varying rates and terms. They may not always find these terms

beneficial, they enter into Swap agreement. IRS enables them to access

sources of funding at better rates than what they would be able to

achieve on a direct basis.

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.



36/96


CAPS

An interest rate cap is a contract which allows the purchaser to set the upper

limit for interest rates payable. The buyer of the cap receives compensation if

interest rate rises above the agreed level. Capping is use in the long term

borrowing.

Floors and collars

Buyers of a cap have to pay premium, which can be a large cash payment. To

reduce this some buyer simultaneously sells a floor. Hence, they receive a premium if the interest rate falls below an agreed level; they have to

compensate the floor buyer.

The combination of selling a Floor at a low strike rate and buying a cap at a

higher strike rate is called a collar.

Warrants

Options generally have lives of up to one year; the majority of options traded onoptions exchanges have a maximum maturity of nine months. Longer-dated

options are called warrants and are generally traded over-the-counter.

Baskets

Basket options are options on portfolios of underlying assets. The underlying

asset is usually a moving average or a basket of assets. Equity index options are

a form of basket options.

Derivatives can be of different types like futures, options, swaps, caps, floor,Collars etc. The most popular derivative instruments are futures and options.



37/96


Risk Management

Four Steps in Risk Management

1. Understand the nature of various risks.

2. Define a risk management policy for the organization and quantifying

maximum risk that organization is willing to take if quantifiable.

3. Measure the risks if quantifiable and enumerate otherwise.

4. Build internal control mechanism to control and monitor all the risks.

Step 1 - Understand Risks

Risks can be classified into three categories.

Price or Market Risk

Counterparty or Credit Risk

Operating Risks

Price Risks

This is the risk of loss due to change in market prices. Price risk can increase

further due to Market Liquidity Risk, which arises when large positions in

individual instruments or exposures reach more than a certain percentage of the

market, instrument or issue. Such a large position could be potentially illiquid

and not be capable of being replaced or hedged out at the current market valueand as a result may be assumed to carry extra risk.

Counterparty Risks

This is the risk of loss due to a default of the Counterparty in honoring its

commitment in a transaction (Credit Risk). If the Counterparty is situated in

another country, this also involves Country Risk, which is the risk of the

Counterparty not honoring its commitment because of the restrictions imposed

by the government though counterparty itself is capable to do so.



38/96


Dealing Risk

Dealing Risk is the sum total of all unsettled transactions due for all dates in

future. If the Counterparty goes bankrupt on any day, all unsettled transactions

would have to be redone in the market at the current rates. The loss would be

the difference between the original contract rate and the current rates. Dealing

risk is therefore limited to only the movement in the prices and is measured as a

percentage of the total exposure.

Settlement Risk

Settlement risk is the risk of Counterparty defaulting on the day of the

settlement. The risk in this case would be 100% of the exposure if the corporate

gives value before receiving value from the Counterparty. In addition the

transaction would have to be redone at the current market rates.

Operating Risks

Operational risk is the risk that the organization may be exposed to financial

loss either through human error, misjudgment, negligence and malfeasance, orthrough uncertainty, misunderstanding and confusion as to responsibility and

authority. Following are the different kinds of operating risks:

Legal

Regulatory

Errors & Omissions

Frauds

Custodial

Systems

Legal

Legal risk is the risk that the organization will suffer financial loss either

because contracts or individual provisions thereof are unenforceable or

inadequately documented, or because the precise relationship with the

counterparty is unclear.



39/96


Regulatory

Regulatory risk is the risk of doing a transaction, which is not as per the

prevailing rules and laws of the country.

Errors & Omissions

Errors and omissions are not uncommon in financial operations. These may

relate to price, amount, value date, currency, buy/sell side or settlement

instructions.

Frauds

Some examples of frauds are:

Front running

Circular trading

Undisclosed Personal trading

Insider trading

Routing deals to select brokers

Custodial

Custodial risk is the loss of prime documents due to theft, fire, water, termites

etc. This risk is enhanced when the documents are in transit.

Systems

Systems risk is due to significant deficiencies in the design or operation ofsupporting systems; or inability of systems to develop quickly enough to meet

rapidly evolving user requirements; or establishment of a great many diverse,

incompatible system configurations, which cannot be effectively linked by the

automated transmission of data and which require considerable manual

intervention.



40/96


Step 2 - Define Risk Policy

Decide the basic risk policy that the organization wants to have. This may vary

from taking no risk (cover all) to taking high risks (open all). Most

organizations would fall somewhere in between the two extremes. Risk and

reward go hand in hand.

Cost Center vs. Profit Center

A cost centre approach looks at exposure management as insurance against

adverse movements. One is not looking for optimization of cost or realization

but meeting certain budgeted or targeted rates. In a profit centre approach, the

business is taking deliberate risks to make money out of price movements.

Step 3- Risk Measurement

There are a number of different measures of price or market risk which are

mainly based on historical and current market values Examples are Value at

Risk (VAR), Revaluation, Modeling, Simulation, Stress Testing, Back Testing,

etc.

Step 4- Risk Control

Control of Price Risk

Position limits are established to control the level of price or market risk taken

by the organization. Diversification is used to reduce systematic risk in a given

portfolio.

Control of Credit Risk

Credit limits are established for each counterparty for both dealing risk and

settlement risk separately depending upon the risk perception of the

counterparty.



41/96


Control of Operating Risk

Establishment of an effective and efficient internal control structure over the

trading and settlement activities, as well as implementing a timely and accurate

management information system (M.I.S.).

Tools to control operating risks

Comprehensive Systems and Operations Manuals

Proper Organizations structure and adequate personnel

Separation of trading function from settlement, accounting and risk

control functions.

Strict enforcement of authority and limits

Written confirmation of all verbal dealings

Voice recording

Legally binding agreements with counterparties ensuring proposed

transactions are not ultra virus.

Contingency Planning

Internal Audits

Daily reconciliation

Ethical standards and codes of conduct

Dealing discipline



42/96


Taxation Issues

Taxation of Derivative Transactions in Index Futures

This Note seeks to provide information on the taxation aspects of index futures

transactions. The contents of this Note should not be treated as advice or guidance or

authoritative pronouncements. Readers are advised to consult their tax advisors before

taking any action relating to their tax computations or planning. This Note is notintended for any such purpose.

In the absence of special provisions, the current provisions, which are inadequate to

handle the complexities involved, are reviewed in this Note. It is expected that the

Central Board of Direct Taxes (CBDT) will shortly provide guidelines for taxation

aspects of Derivative transactions.

Definition of Speculative Transactions

Section 43(5) defines speculative transactions as those which are periodically or

ultimately settled otherwise than by actual delivery or transfer. By this definition all

index futures transactions will qualify prima facie as speculative transactions, as

delivery of such futures is not possible.

Exceptions are provided to this definition to cover cases where contracts are entered

into in respect of stocks and shares by a dealer or investor to guard against loss in

holdings of stocks and shares through price fluctuations. Another exception is providefor contracts entered into by a member of a forward market or a stock exchange in the

course of any transaction in the nature of jobbing or arbitrage to guard against loss

which may arise in the ordinary course of his business as such member.

The CBDT has issued a Circular No 23 dated 12th September 1960 on this area. The

important provisions of this Circular are summarized below:



43/96


Hedging sales can be taken to be genuine only to the extent the total of

such transactions does not exceed the ready stock, the loss arising from

excess

transactions should be treated as total stocks of raw material or merchandise

in hand. If forward sales exceed speculative losses.

Hedging transactions in connected, though not the same, commodities

should not be treated as speculative transactions.

It cannot be accepted that a dealer or investor in stocks or shares can

enter into hedging transactions outside his holdings. By this interpretation,transactions in index futures will not be covered under the definition of

hedging.

Speculation loss, if any carried forward from earlier years, could first be

adjusted against speculation profits of the particular year before allowing

any other loss to be adjusted against those profits.

Deemed Speculation

As per Explanation to Section 73, where any part of the business of a company consistsin the purchase and sale of shares of other companies, such company shall, for the

purposes of this Section, be deemed to be carrying on a speculation business to the

extent to which the business consists of purchase and sale of such shares.

The CBDT has issued a Circular No 23 dated 12th September 1960 on this area. The

important provisions of this Circular are summarized below:

Company whose Gross Total Income consists mainly of Income

chargeable under the heads Interest on Securities, Income from House

Property, Capital Gains and Income from Other Sources

Company whose principal business is Banking

Company whose principal business is granting of loans and advances

Most brokers and dealers are currently caught within the mischief of this explanation,

especially after the wave of corporatization of brokers businesses.

The Explanation however does not cover index futures.

Speculation Losses Cannot be set off



44/96


Losses from speculation business can be set off only against profits of another

speculation business. If speculation profits are insufficient, such losses can be carried

forward for eight years, and will be set off against speculation profits in these futureyears.

Possibility of Speculation treatment

In view of the above provisions, it appears that the possibility of the Income Tax

department treating index futures transactions to be speculative and taxed accordingly,

is high as far as assesses carrying on business are concerned, unless a clarification is

issued by the Central Board of Direct Taxes.

Another possible view (as far as non-business assesses are concerned) could be that

gains and losses from index futures be treated as short term capital gains. This view can

gain support from the fact that such assesses are not covered within the ambit of

Sections 43 and 73 referred to above.

Possible Arguments:

It is possible to argue that index futures transactions are not speculative transactions.

Some lines of argument are explored below.

1. Section 43(5) speaks of purchase and sale of any commodity,

including shares and stocks. Index futures are not commodities.

Further, index futures are also not stocks and shares. Hence, section

43(5) does not apply to futures transactions. The question of examining

the provisos (exceptions) does not arise.

2. Exceptions to speculative transactions as provided in Section 43(5)

also include hedging transactions undertaken in respect of stocks and

shares. Proviso (b) to Section 43(5) sates a contract in respect of

stocks and shares entered into by a dealer or investor therein to guard

against loss in his holdings of stocks and shares through pricefluctuations. It however remains to be seen whether index futures can

be covered under stocks and shares.

To our mind, it appears that if index futures are considered to be part of

stocks and shares as per the wording of Section 43(5), then the proviso

will also become applicable and hence hedging contracts through the

mechanism of index futures will not be considered speculative. On the

other hand, if index futures are not part of stocks and shares, then neither

Section 43(5) nor the proviso apply and hence the entire gamut of index

futures transactions will remain out of the purview of speculative

transactions.



45/96


3. Explanation to Section 73 speaks of purchase and sale of shares of other

companies. Index futures are not shares. Hence, this Explanation does

not apply to futures transactions.

It is believed and understood that foreign exchange forward transactions are currently

not being caught within the mischief of Sections 43 and 73. This lends more comfort to

the possibility of index futures also being left out of this net, though only experience

will indicate the stand the Income tax department will take.

Other Possible Controversies:

1. The Income tax department may take a stand that profits and losses

accrue on a day to day basis, in view of the daily settlement procedure.

This could be contrary to the accounting guidelines, which (as it

currently appears) may advocate profit (loss) recognition at the expiry of

the contract.

2. It appears currently that accounting guidelines will require recognition

of unrealized losses at financial year-end, but not unrealized profits. The

Income tax department may not agree with this conservative treatment



46/96


Data Analysis & Interpretations

Introduction to Futures

Introduction to Options

Option Strategies

Swaps

Actions of Investors to MarketFluctuations

Investors Reactions

Swot analysis



47/96


INTRODUCTION TO FUTURE

Future, as the name indicates, is a trade whose settlement is going to take place in the

future. However, before we take a look at futures, it will be beneficial for us to take a

look at forward rate agreements

What is a forward rate agreement?

A forward rate agreement is one in which a buyer and a seller enter into a contract at a

specified quantity of an asset at a specified price on a specified date.

An example for this is the exporters getting into forward rate agreements on currencies

with banks.

But there is always a risk of one of the parties defaulting. The buyer may not pay up or

the seller may not be able to deliver. There may not be any redressal for the aggrieved

party as this is a negotiated contract between two parties.

What is a future?

A future is similar to a forward rate agreement, except that it is not a negotiated

contracted but a standard instrument.

A future is a contract to buy or sell an asset at a specified future date at a Specified

price. These contracts are traded on the stock exchanges and it can

Change many hands before final settlement is made.

The advantage of a future is that it eliminates counterparty risk. Since there is an

exchange involved in between, and the exchange guarantees each trade, the buyer or

seller does not get affected with the opposite party defaulting.

Futures Forwards

There are two kinds of futures traded in the market- index futures and stock

Futures.

There are three types of futures, based on the tenure. They are 1, 2 or 3-month future.

They are also known as near and far futures depending on the tenure.



48/96


What are Index futures?

Index futures are futures contract on the index itself. One can buy a 1, 2 or 3- month

index future. If someone wants to take a call on the index, then index futures are the

ideal instruments for him.

Let us try and understand what an index is. An index is a set of numbers that represent

a change over a period of time.

A stock index is similarly a number that gives a relative measure of the stocks that

constitutes the index. Each stock will have a different weight in the index. The Nifty

comprises of 50 stocks. BSE Sensex comprises of 30 stocks.

For example, Nifty was formed in 1995 and given a base value of 1000. The value of

Nifty today is 1550. What it means in simple terms is that, if Rs 1000 was invested in

the stocks that form in the index, in the same proportion in which they are weighted in

the index, and then Rs 1000 would have become Rs 1550 today.

There are two popular methods of computing the index. They are price weighted

method like Dow Jones Industrial Average (DJIA) or the market capitalization methodlike Nifty or Sensex.

What is Stock Future?

Stock future means dealing in specific scrip. E.g. if you buy or sell Reliance future it

called stock future.

National Stock exchange fixed lot size for each and every stock future. It means one

can buy or sell that size of lot. Lit is given below



49/96


Permitted Lot Sizes of Contracts

No. Underlying Symbol Market Lot

1 S&P CNX Nifty NIFTY 50

2 CNX IT CNXIT 50

Derivatives on Individual Securities

1 Associated Cement Co. Ltd. ACC 188

2 Andhra Bank ANDHRABANK 2300

3 Arvind Mills Ltd. ARVINDMILL 4300

4 Bajaj Auto Ltd. BAJAJAUTO 200

5 Bank of Baroda BANKBARODA 700

6 Bank of India BANKINDIA 950

7 Bharat Electronics Ltd. BEL 138

8 Bharat Heavy Electricals Ltd. BHEL 75

9 Bharat Petroleum Corporation Ltd. BPCL 550

10 Canara Bank CANBK 800

11 Cipla Ltd. CIPLA 1250

12 Dr. Reddy's Laboratories Ltd. DRREDDY 400

13 GAIL (India) Ltd. GAIL 750

14 Grasim Industries Ltd. GRASIM 85

15 Gujarat Ambuja Cement Ltd. GUJAMBCEM 1100

16 HCL Technologies Ltd. HCLTECH 650

17Housing Development Finance

Corporation Ltd.HDFC 75

18 HDFC Bank Ltd. HDFCBANK 200

19 Hero Honda Motors Ltd. HEROHONDA 400

20 Hindalco Industries Ltd. HINDALC0 1595

21 Hindustan Lever Ltd. HINDLEVER 1000

22 Hindustan Petroleum Corporation Ltd. HINDPETRO 1300

http://opt/scribd/conversion/tmp/scratch2799/fo_NIFTY.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_CNXIT.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ACC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ANDHRABANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ARVINDMILL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BAJAJAUTO.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BANKBARODA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BANKINDIA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BEL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BHEL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BPCL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BSES.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_CIPLA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_DRREDDY.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_GAIL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_GRASIM.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_GUJAMBCEM.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HCLTECH.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HDFC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HDFC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HDFCBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HEROHONDA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HINDALC0.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HINDLEVER.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HINDPETRO.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_NIFTY.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_CNXIT.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ACC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ANDHRABANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ARVINDMILL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BAJAJAUTO.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BANKBARODA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BANKINDIA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BEL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BHEL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BPCL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BSES.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_CIPLA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_DRREDDY.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_GAIL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_GRASIM.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_GUJAMBCEM.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HCLTECH.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HDFC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HDFC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HDFCBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HEROHONDA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HINDALC0.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HINDLEVER.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_HINDPETRO.htm


50/96


23 ICICI Bank Ltd. ICICIBANK 75

24 I-FLEX Solutions Ltd. I-FLEX 150

25 Infosys Technologies Ltd. INFOSYSTCH 200

26 Indian Petrochemicals Corps. Ltd. IPCL 1100

27 Indian Oil Corporation Ltd. IOC 600

28 ITC Ltd. ITC 300

29 Mahindra & Mahindra Ltd. M&M 312

30 Maruti Udyog Ltd. MARUTI 400

31 Mastek Ltd. MASTEK 1600

32 Mahanagar Telephone Nigam Ltd. MTNL 1600

33 National Aluminium Co. Ltd. NATIONALUM 1150

34 Oil & Natural Gas Corp. Ltd. ONGC 225

35 Oriental Bank of Commerce ORIENTBANK 1200

36 Punjab National Bank PNB 600

37 Polaris Software Lab Ltd. POLARIS 2800

38 Ranbaxy Laboratories Ltd. RANBAXY 800

39 Reliance Energy Ltd. REL 138

40 Reliance Industries Ltd. RELIANCE 75

41 Satyam Computer Services Ltd. SATYAMCOMP 600

42 State Bank of India SBIN 132

43 Shipping Corporation of India Ltd. SCI 1600

44 Syndicate Bank SYNDIBANK 1900

45 Tata Power Co. Ltd. TATAPOWER 20046 Tata Tea Ltd. TATATEA 275

47 Tata Motors Ltd. TATAMOTORS 412

48 Tata Iron and Steel Co. Ltd. TISCO 382

49 Union Bank of India UNIONBANK 2100

50 Wipro Ltd. WIPRO 600

Source:www.nseindia.c

om

http://opt/scribd/conversion/tmp/scratch2799/fo_ICICIBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_IFLEX.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_INFOSYSTCH.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_IPCL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_IOC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ITC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_M&M.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_MARUTI.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_MASTEK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_MTNL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_NATIONALUM.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ONGC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ORIENTBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_PNB.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_POLARIS.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_RANBAXY.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BSES.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_RELIANCE.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_SATYAMCOMP.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_SBIN.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_SCI.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_SYNDIBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_TATAPOWER.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_TATATEA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_TELCO.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_TISCO.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_UNIONBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_WIPRO.htmhttp://www.nseindia.com/http://www.nseindia.com/http://opt/scribd/conversion/tmp/scratch2799/fo_ICICIBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_IFLEX.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_INFOSYSTCH.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_IPCL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_IOC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ITC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_M&M.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_MARUTI.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_MASTEK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_MTNL.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_NATIONALUM.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ONGC.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_ORIENTBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_PNB.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_POLARIS.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_RANBAXY.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_BSES.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_RELIANCE.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_SATYAMCOMP.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_SBIN.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_SCI.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_SYNDIBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_TATAPOWER.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_TATATEA.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_TELCO.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_TISCO.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_UNIONBANK.htmhttp://opt/scribd/conversion/tmp/scratch2799/fo_WIPRO.htmhttp://www.nseindia.com/http://www.nseindia.com/


51/96


What are the terminologies used in a Futures contract?

The terminologies used in a futures contract are

Spot Price: The current market price of the scrip/index

Future Price: The price at which the futures contract trades in the futures market

Tenure: The period for which the future is traded

Expiry date: The date on which the futures contract will be settle

Basis : The difference between the spot price and the future price

Contact size: the amount of assets will be delivered under one contract. For

instances contract size of NSEindex future is 200 Nifties.

Initial margin: The amount that must be deposited in the margin account at the

time of the future contract it is known as initial margin.

Mark-to-market: in the future market, at the end of each day, the margin account isadjusted to reflect the investors gain or loss depending upon future closing price.

This is called mark-to-market.

Why are index futures more popular than stock futures?

Globally, it has been observed that index futures are more popular as compared to stock

futures. This is because the index future is a relatively low risk product compared to a

stock future. It is easier to manipulate prices for individual stocks but very difficult to

manipulate the whole index. Besides, the index is less volatile as compared to

individual stocks and can be better predicted than individual stock.



52/96


How is the future price arrived at?

Future price is nothing but the current market price plus the interest cost for the tenure

of the future.

This interest cost of the future is called as cost of carry.

If F is the future price, S is the spot price and C is the cost of carry or opportunity cost,

then

F=S+C

F = S + Interest cost, since cost of carry for a finance is the interest costThus,

F=S (1+r) T

Where r is the rate of interest and T is the tenure of the futures contract.

The rate of interest is usually the risk free market rate.

Example:The spot price of Reliance is Rs 300. The bank rate prevailing is 10%. What will be the

price of one-month future?

SolutionThe price of a future is F= S (1+r) T

The one-month Reliance future would be the spot price plus the cost of carry.

Since the bank rate is 10 %, we can take that as the market rate. This rate is an

annualized rate and hence we recalculate it on a monthly basis.

F=300(1+0.10) (1/12)

F= Rs 302.39

Example:

The shares of Infosys are trading at 3000 rupees. The 1-month future of Infosys is Rs

3100. The returns expected from the Govt. security funds for the same period is 10 %.

Is the future of Infosys overpriced or under priced?

Solution

The 1-month Future of Infosys will be

F= 3000(1+0.10) (1/12)

F= Rs 3023.90

But the price at which Infosys is traded is Rs 3100. Thus it is overpriced by Rs 76.



53/96


Pay-Off Profile of Future

Payoff profile for a buyer of Futures:

The payoff profile for Futures is linear. As the spot price increases, the profit from

having bought a Future increases. Similarly, as spot price decreases, the profit from

having sold Futures increases and is a mirror image of the profit from buying. The

point where the spot price and the Futures price are same is the breakeven point.

Payoff for a writer of future:

The payoff for a person who sells a future contact is similar to the payoff for a

person who shorts assets. He has a potentially unlimited upside as well as potentially

unlimited downside. From the diagram we can able to understand that when the index

moves down the short future position starts making profit, and when the index moves

up, it starts making losses.


Profit

Loss

0

1220

Nifty

Payoff profile for writer of future


54/96


What happens if dividend is going to be declared?

Dividend is an income to the seller of the future. It reduces his cost of carry to that

extent. If dividend is going to be declared, the same has to be deducted from the cost of

carry

Thus the price of the future in this case becomes, F= S (1+r-d) T Where d is the

dividend.

Example:

The spot price of Reliance is Rs 300. The bank rate prevailing is 10%. Whatwill be the price of one-month future? Reliance will be paying a dividend of 50

paise per share

Solution:

Since Reliance is paying 50 paisa per share and the face value of reliance is Rs

10, the dividend rate is 5%.

So while calculating futures,

F=300(1+0.10-0.05) (1/12)

F= Rs. 301.22

What happens if dividend is declared after buying a future?

If the dividend is declared after buying a one-month future, the cost of carry will be

reduced by a pro rata amount. For example, if there is a one-month future ending June

30th and dividend is declared on June 15th, then dividend benefit will be reduced from

the cost of carry for 15 days.

Since the seller is holding the shares and will transfer the shares to the buyer

only after a month, the dividend benefit goes to the seller. The seller will enjoy the

benefit to the extent of interest on dividend.

Thus net cost of carry = cost of carry dividend benefits



55/96


Example:

The spot price of Reliance is Rs 300. The bank rate prevailing is 10%. Reliance

declares a dividend of 5%. What will be the price of one-month future?

Solution:

The benefit accrued due to the dividend will be reduced from the cost of the

future.

One month future will be priced at

F= 300(1+0.10) (1/12)F = 302.39

Cost of Carry = Rs 302.39-Rs 300 = Rs 2.39

The interest benefit of the dividend is available for 15 days, ie 0.5 months.

Dividend for 15 days = 300(1+0.05) (0.5/12)

Dividend Benefit = Rs300.61- Rs 300= Rs0.61

Therefore, net cost of the carry is, Rs2.39-Rs0.61 = Rs 1.78

Therefore the price of the future is Rs 300+Rs 1.78 = Rs 301.78

In practice, the market discounts the dividend and the prices are automatically adjusted.

The exchange steps into the picture if the dividend declared is more than 10 % of themarket price. In such cases, there is an official change in the price. In other cases, the

market does the adjustment on its own.

What happens in case a bonus/ stock split is declared on the stock in

which have futures positions?

If a bonus is declared, the settlement price is adjusted to reflect the bonus. For example,

if you have 200 Reliance at Rs 300 and there is a 1:1 bonus, then the position becomes

400 Reliance at Rs 150 so that the contract value is unaffected.



56/96


Comparison of spot price and future price

Future prices lead the spot prices. The spot prices move towards the future Prices and

the gap between the two are always closing with as the time to settlement decreases. On

the last day of the future settlement, the spot price equals the future price.

The futures price can be lower than the spot price too. This depends on the

fundamentals of the stock. If the stock is not expected to perform well and the market

takes a bearish view on them, then the futures price can be lower than the spot price.

Future prices can fall also due to declaration of dividend.



57/96


What happens if buy an index future and there is a dividend declaredon a stock that comprises the index?

Practically speaking, the index is corrected for these things in case there is a dividend

declared for such a stock. Theoretically, dividend is adjusted in the following manner:

1. The contribution of the stock to the index is calculated. The index, as

discussed earlier, is a market capitalization index.

2. Then the number of shares in the index is calculated. This is obtained by

dividing the contribution to the index by the market price.

3. The dividend on the index is the dividend on the number of shares of the

stock in the index.

4. The interest earned on the dividend is calculated and reduced from the cost of

carry to obtain the net cost of carry.

Example:

The index is at 1000. There is a dividend of Rs 5 per share on HLL. HLL

contributes to 15 % of the index. The market price of HLL is Rs 150. What willbe the cost of the 1-month future if the bank rate is 10%?

Solution:

The future will be priced at

F= 1000(1+0.10) (1/12)

F= 1008

The weight of HLL in the index is 15% i.e. 0.15*1000=150.

The market price of HLL is Rs 150

Therefore, the number of shares of HLL in the index=1The dividend earned on this is Rs 5

Dividend benefit on Rs 5 is 5(1+0.10) (1/12)

Dividend benefit = Rs 0.04

Cost of the future will be Rs 1008-Rs 0.05= Rs 1007.95

But in practice, the market discounts the dividends and price adjustment is made

accordingly.



58/96


What happens in the real world?

In the real world, derivatives are highly volatile instruments and there have been lots of

losses in the various financial markets. The classic examples have been Long Term

Capital Markets (LTCM) and Barings.

As a result, the regulators have decided that a minimum of Rs 2 lacs should be the

contract size. This is done primarily to keep the small investors away from a volatile

market till enough experience and understanding of the markets is acquired. So the

initial players are institutions and high net worth individuals who have a risk taking

capacity in these markets.

Because of this minimum amount, lots are decided on the market price such that the

value is Rs 2 lacs. As a result one has to buy a minimum of 200 Nifties or in case of

Sensex, 50.

Similarly minimum lots are decided for individual stocks too. Thus you will find

different stock futures having different market lots. The lots decided for each stock was

such that the contract value was Rs 2 lakhs. This was at the point of introduction of

these instruments. However the lot size has remained the same and has not been

adjusted for the price changes. Hence the value of the contract may be slightly lower in

share khan limited

Documents