1.

SUMMER TRAINING REPORT On Risk Management through

Derivatives At Prabhudas Lilladher Pvt. Ltd. Submitted in partial fulfillment of the requirements of the two year Post Graduate Programme (PGP). Submitted by Manisha Gupta . Roll No: PG20095670 Batch: 2009-2011 IILM Institute for Higher Education 1 2. DECLARATION FORM I hereby declare that the Project work entitled, RISK MANAGEMENT THROUGH DERIVATIVES submitted by me for the partial fulfilment of the Post Graduate Program (PGP) to IILM Institute for Higher Education, is my own original work and has not been submitted earlier either to IILM or to any other Institution for the fulfilment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part is lifted and incorporated in this report from any earlier / other work done by me or others. Place : Delhi Date : Signature of Student Name of Student: Manisha Gupta Address: _____________________________ _____________________________ Acknowledgement 2 3. I would like to thank my Mentor Mr. Shiv mishra and my Project Guide Mr. Sandeep Sharma and Mr. Satyendra Singh who have been the greatest support in completing this project. Without their constant feedback, this project would not have been a reality. This project would not have seen the light of the day without the support of our faculty mentor Mrs. Rakhi Singh. She has been of great help in guiding us through the various stages of our project. Constructive criticism and feedback would be highly appreciated. Manisha Gupta PG20095670 IILM Gurgaon Executive Summary/Preface 3 4. A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors. A transaction on a stock exchange must be made between two members of the exchange an ordinary person may not walk into the Stock Exchange and ask to trade

stock. Such an exchange must be done through a broker. Though the Indian brokerage industry has been consolidating steadily over the last 10 years, the share of the top 10 brokers has risen to only around one-fourth of the total industry revenues. In this fragmented market, leading players like Religare Securities, ICICI Direct, Kotak Securities, Indiabulls and Sharekhan, apart from many small players, compete on the basis of low brokerage fees and customer service. MajorGainz (Online trading division of Prabhudas Lilladher) is one of those small players which do not have its public share offering in Indian Capital market till now. Despite being an out and out private ownership company, Prabhudas Lilladher broking arm has many loyal and satisfied customers in Western India including states such as Gujarat and Maharashtra. In order to expend its business and awareness about this one of the oldest broker houses of country ,Company recently came to North India, opening branch offices in New Delhi and Noida. As per other competitors in north Indian market, Prabhudas Lilladher Pvt. Ltd has aim to position itself as a niche marketer in Electronic or Online Trading. Among some achievements of the company, it was the first Broking Company to computerize in 1982 and first brokerage firm to corporatize in 1989. It was rated as 8 th best Indian broking house and 3rd in generating small cap ideas by Asia Money in 2007. This topic deals with study of risk management approach on the basis of few selected technology picks. The topic is vast since it includes the various modern technologies used now a days by different kinds of brokerage firms so instead of studying the whole lot I have selected the few techniques picks. Table of Contents 4 5.

Topic.... Page No. Acknowledgement .......3 Executive Summery.....4 Industry

Study. 69 Introduction to Stock Market......10-15 Organization study..16-26 Company Profile......................................................................................................1619 Product & Services..................................................................................................2024 Competitors Analysis.......................................................................................................... .27-33 Introduction to Derivatives & Risk Management34-52 Derivatives.... 35-36 Risk Management.....3744 Risk Management Strategies....55-51 Cases ...........52 Statement of Problem..53 Objectives ....53 Research Methodology5 4 Analysis of Questionnaire.5565 Findings ........66 Limitations of the Study...67 Conclusion 68 Recommendations 69 Industry

Relevance.. .70 Learning 71 Appendix (Questionnaire)......7 2-75 References .....76 5 6. INDUSTRY STUDY The Indian retail brokerage industry consists of companies that primarily act as agents for the buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a commission or transaction fee basis. The Indian retail brokerage market is showing phenomenal growth. The total trading volume of brokerage companies has increased from US$1239.1 billion in 2004 to US$1492.1 billion in 2005, and is expected to reach US$6535.7 billion by 2015. The Indian broking industry is reasonably large and fragmented with 9,000 odd brokers in the cash segment and around 24,000 sub-brokers. The market share of the top ten brokers in India has remained largely stagnant in the past four years. The top five brokers in India still control around 15-16% of the market share. Historically, retail trading contributed around 60% of the market and FIIs averaged around 20%. Key developments in this industry included conspicuous expansion in distribution pan India with greater diversity offered in financial product offerings and an increased emphasis on proprietary research output. There was a greater than before interest towards engendering a global footprint. The average daily turnover at the exchanges has increased from Rs851crore in 1997-98 to Rs 1284crore in 1998-99 and further to Rs 2273crore in 1999-2000. NSE has around 1500 shares listed with the total market capitalization of around Rs9, 21,500crore. Increasing appetite for equities among investors, the convenience of online trading and declining brokerage fees are the major growth drivers of the Indian retail brokerage industry. Financial services: Financial services refer to services provided by the finance industry. The

finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. A stock broker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors. A transaction on a stock 6 7. exchange must be made between two members of the exchange an ordinary person may not walk into the Stock Exchange and ask to trade stock. Such an exchange must be done through a broker. A stock market or equity market is a public market (a loose network of economic transactions not a physical facility or discrete entity) for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion US at the beginning of October 2008. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Participants in the stock market range from small individual stock investors to large hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. Function and purpose: The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate. History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or be an indicator of social mood. An

economy where the stock market is on the rise is considered to be an upand-coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Relation of the stock market to the modern financial system: 7 8. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another. Stock market Index: The movements of the prices in a market or section of a market are captured in price indices called stock market indices, of which there are many, e.g., the S&P, the FTSE and the Euro next indices. Such indices are usually market capitalization weighted, with the weights reflecting the contribution of the stock to the index. The constituents of the index are reviewed frequently to include/exclude stocks in order to reflect the changing business environment. In India the index used for capturing the

price movement of market is S&P CNX Nifty. Standard & Poor's (S&P) is a division of McGraw-Hill that publishes financial research and analysis on stocks and bonds. It is well known for the stock market indexes, the USbased S&P 500, the Australian S&P/ASX 200, the Canadian S&P/TSX, the Italian S&P/MIB and India's S&P CNX Nifty. Market trend: A market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular trends for long time frames, primary trends for medium time frames, and secondary trends lasting short times. Traders identify market trends using technical analysis, a framework which characterizes market trends as a predictable price response of the market at levels of price support and price resistance, varying over time. The terms bull market and bear market describe upward and downward market trends, respectively, and can be used to describe either the market as a whole or specific sectors and securities Bull market: 8 9. A bull market is associated with increasing investor confidence, and increased investing in anticipation of future price increases (capital gains). A bullish trend in the stock market often begins before the general economy shows clear signs of recovery. It is a win-win situation for the investors. Examples India's Bombay Stock Exchange Index, SENSEX, was in a bull market trend for almost five years from April 2003 to January 2008 as it increased from 2,900 points to 21,000 points. Another notable bull market was in the 1990s and most of the 1980s when the U.S. and many other stock markets rose; this time period included the dot-com bubble. Bear market: A bear market is a general decline in the stock market over a period of time. It is a transition from high investor optimism to widespread investor fear and pessimism. "While theres no agreed-upon definition of a bear market, one generally accepted measure is a price decline of 20% or more over at least a two-month period." Examples A bear market followed the Wall Street Crash of 1929 and erased 89% (from 386 to 40) of the Dow Jones Industrial Average's market capitalization by July 1932, marking the start of the Great Depression. After regaining nearly 50% of its losses, a

longer bear market from 1937 to 1942 occurred in which the market was again cut in half. Another long-term bear market occurred from about 1973 to 1982, encompassing the 1970s energy crisis and the high unemployment of the early 1980s. Yet another bear market occurred between March 2000 and October 2002. The most recent example occurred between October 2007 and March 2009. STOCK EXCHANGE 9 10. The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. Stock Exchanges are an organized marketplace where members of the organization gather to trade company stocks and other securities. The members may act either as agents for their customers, or as principals for their own accounts. Stock exchanges also facilitate for the issue and redemption of securities and other financial instruments including the payment of income and dividends. The record keeping is central but trade is linked to such physical place because modern markets are computerized. The trade on an exchange is only by members and stock broker do have a seat on the exchange. The stock market in the United States is NYSE while in Canada; it is the Toronto Stock Exchange. Major European examples of stock exchanges include the London Stock Exchange, Paris Bourse, and the Deutsche Brse. Asian examples include the Tokyo Stock Exchange, the Hong Kong Stock Exchange, the Bombay Stock Exchange and the Karachi Stock Exchange. Indian stock exchanges: There are basically three exchanges under the Indian stock exchange - 1. Bombay stock exchange - A very common name for all traders in the stock market, BSE, stands for Bombay Stock Exchange. The oldest market not only in the country, but also in Asia.The BSE SENSEX (SENSitive indEX), also called the "BSE 30", is a widely used market index in India and Asia. In the early days, BSE was known as "The Native Share & Stock Brokers Association." It was established in the year 1875 and became the first stock exchange in the country to be recognized by the government. In the past and even now, it plays a pivotal role in the development of the

country's capital market. This is recognized worldwide and its index, SENSEX, is also tracked worldwide. BSE provides an efficient market, upholding the interests of the investors. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion. An investor can choose from 6000 listed companies, which for easy reference, are classified into A, B, S, T and Z groups. The Bombay Stock Exchange is the largest of 22 exchanges in India. It is also the fifth largest exchange in the world, with market capitalization of $466 billion. BSE Facts - First in India to introduce Equity Derivatives 10 11. First in India to launch a Free Float Index First in India to launch US$ version of BSE Sensex First in India to launch Exchange Enabled Internet Trading Platform First in India to obtain ISO certification for Surveillance, Clearing & Settlement 'BSE On-Line Trading System (BOLT) has been awarded the globally recognised the Information Security Management System standard BS7799-2:2002. First to have an exclusive facility for financial training Hours of operation - Session Timing Beginning of the Day Session 8:00 - 9:00 Trading Session 9:00 - 15:30 Position Transfer Session 15:30 - 15:50 Closing Session 15:50 - 16:05 Option Exercise Session 16:05 - 16:35 Margin Session 16:35 - 16:50 Query Session 16:50 - 17:35 End of Day Session 17:30 BSE Indices - Till the decade of eighties, there was no measure or scale that could precisely measure the various ups and downs in the Indian stock market. BSE, in 1986, came out with a Stock Index- SENSEX- that subsequently became the barometer of the Indian stock market. The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad and Madras. 11 12. The BSE National Index was renamed BSE-100 Index from October 14, 1996 and since then, it is being calculated taking into consideration only the prices of stocks listed at BSE. BSE launched the dollar-linked version of BSE-100 index on May 22, 2006. With a view to provide a better

representation of the increasing number of listed companies, larger market capitalization and the new industry sectors, BSE launched on 27th May, 1994 two new index series viz., the 'BSE-200' and the 'DOLLEX-200'. Since then, BSE has come a long way in attuning itself to the varied needs of investors and market participants. In order to fulfill the need for still broader, segment-specific and sector-specific indices, BSE has continuously been increasing the range of its indices. BSE-500 Index and 5 sectoral indices were launched in 1999. In 2001, BSE launched BSE-PSU Index, DOLLEX-30 and the country's first free-float based index - the BSE TECK Index BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio and the Dividend Yield Percentage on dayto-day basis of all its major indices. The values of all BSE indices are updated on real time basis during market hours and displayed through the BOLT system, BSE website and news wire agencies. Members Transactions in any stock Exchange are executed by member brokers who deal with investor. A member of a stock exchange is an individual or a corporate body who holds the right to trade in the stocks listed on the exchange. An investor can buy or sell securities only through one of the members of the exchange. The Exchange at present has 852 trading members to whom the clearing number is allotted by the Exchange. Out of these there are 168 individual trading members and 684 are corporate trading members. Types of Brokers - There are five types of brokers of BSE. a) Foreign brokers b) Industrial groups c) Local bodies d) Subsidiaries of Indian financial institutions and banks: e) Subsidiaries of Stock exchanges 2. National Stock Exchange - 12 13. The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges. It recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company

unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. The following years witnessed rapid development of Indian capital market with introduction of internet trading, Exchange traded funds (ETF), stock derivatives and the first volatility index - IndiaVIX in April 2008, by NSE. August 2008 saw introduction of Currency derivatives in India with the launch of Currency Futures in USD INR by NSE. Interest Rate Futures was introduced for the first time in India by NSE on 31st August 2009, exactly after one year of the launch of Currency Futures. With this, now both the retail and institutional investors can participate in equities, equity derivatives, currency and interest rate derivatives, giving them wide range of products to take care of their evolving needs. India Index Services & Products Ltd. (IISL) - India Index Services & Products Ltd. (IISL) is a joint venture between the National Stock Exchange of India Ltd. (NSE) and CRISIL Ltd. (formerly the Credit Rating Information Services of India Limited). IISL has been formed with the objective of providing a variety of indices and index related services and products for the capital markets. IISL has a licensing and marketing agreement with Standard and Poor's (S&P), the world's leading provider of investible equity indices, for co-branding IISL's equity indices IISL Indices 13 14. Major Indices: * CNX Midcap - Introduced from a) S&P CNX Nifty July 18, 2005 ** CNX Midcap 200 - Discontinued b) CNX Nifty Junior from July 18, 2005 c) CNX 100 Services provided - d) S&P CNX 500 A transaction on a stock exchange must be made between two members of the e) CNX Midcap * exchange an ordinary person may f) Nifty Midcap 50 not walk into the Stock Exchange and ask to trade stock. Such an exchange g) S&P CNX Defty must be done through a broker. Other Indices: There are three types of stock broking a) CNX IT Index service. b) CNX Bank Index a)

Execution-only, which means that the broker will only carry out the c) CNX FMCG Index client's instructions to buy or sell. d) CNX PSE Index b) Advisory dealing, where the broker e) CNX MNC Index advises the client on which shares to buy and sell, but leaves the final f) CNX Service Sector Index decision to the investor. g) S&P CNX Industry Indices c) Discretionary dealing, where the stockbroker ascertains the client's h) Customized Indices investment objectives and then makes i) CNX Energy Index all dealing decisions on the client's behalf. j) CNX Pharma Index k) CNX Infrastructure Index l) CNX PSU BANK Index m) CNX Realty Index n) S&P CNX Nifty Shariah / S&P CNX 500 Shariah o) S&P ESG India Index 14 15. ORGANIZATION STUDY Company Profile: Prabhudas Lilladher Pvt. Ltd. provides equity research and brokerage services for the institutional and retail clients. The company offers a range of investment products and services, which include offline and online equity execution systems; trading in derivatives that include hedging and index arbitrage; online trading; portfolio management services; portfolio advisory services; and initial public offer services. It also provides depository services, such as account opening facilities, dematerialization of physical shares, re-materialization, pledging, and settlements; mutual funds; reports on select companies by research analysts, daily market reports, and economy overviews. Established 1944 (established by Prabhudas Lilladher Seth) Headquarter Worli, Mumbai Vision To be a leading financial services house providing maximum value addition by offering innovative. Principles Strong adherence to ethics, Uncompromising dedication to quality and an attitude of excellence With a team of dedicated experts and a nationwide distribution network of branches, franchisees and associates, PL provides a comprehensive gamut of financial services in the Institutional and Retail domain. Our range of services includes Equity & Derivative Broking, Investment Banking, Corporate Advisory, Wealth Management, PMS, Online Trading, Loan Against Shares, Mutual Funds, IPOs and Insurance. Drawing on our teams profound technical expertise and years of

extensive practical experience, we develop customized solutions that are unique to each of our clients, thus ensuring high levels of customer satisfaction. 15 16. Group Companies - PL Advisory Services Private Limited PL Private Limited PL Capital Markets Private Limited PL Fund Advisors Private Limited Distribution Company Private Limited Key People - Group Directors: Dhiren Sheth Dilip Bhat Arun Sheth Mihir Sheth Amisha Vora Group CFO: Rakesh Bharucha Vice President and Head of Research, Institutional Equities - Apurva Shah President and Head of Equities - Sanjeev Patni Achievements Ranked 8th Best Indian Broking House by Asia Money 2007 Rated 3rd in generating small cap ideas by Asia Money 2007 Associated Banks - ICICI and HDFC Banks Sub Brokers SRG Investment Consultants Mulki Investments & Financial Consultants (Pvt.) Ltd. Parekh Shares & Securities 16 Offline Insurance Ownership Pattern - Family owned Number of people - India- 1000-1500 Kirti Nagar(New Delhi)- about 450 Organization Structure Organization hierarchy is as below MD National Regional Heads State (North Region Mr. (Owners/Stakeholder Head Shiv Mishra) Heads Sales Executive Sales Manager Area (FOS Feet on Street) (Per Area Head) Heads (3-4) Departments Different departments are In Mumbai only not in other states 17 Online 17. Divisions - Stock broking 18. IT Finance HR Marketing Sales Operations Approach - They are committed to providing excellent customer service while maintaining the highest levels of ethical and professional conduct. At PL, integrity, transparency and accountability form the founding principles, to which we strictly adhere. They adopt a service-centric approach, providing customized and practical solutions that are most pertinent for our clients businesses. They work in close association with each individual client to provide outstanding financial insights, while maintaining complete transparency throughout the process. Their strong research capabilities

and in-depth knowledge help customers gain an edge over others in this highly aggressive and competitive market. Our approach embodies the best business practices and meets all the relevant regulatory compliances. Network - Name of the No. of State Name of the City No. of State City Branch Branch offices offices Ahemdabad 1 Gujrat Mumbai (Head office) 3 Maharashtra Bharuch 2 Gujrat Nadiad 1 Gujrat Chennai 1 Tamilnadu Nagpur 1 Maharashtra Durgapur 1 West bengal New Delhi 3 UT jaipur 1 Rajisithan Satana 1 Madhya Pradesh Kannur 1 Kerela Surat 1 Gujrat Kocchi 1 Kerela Thiruvananthapuram 1 Kerela Kolkata 1 West bengal Vadodara 1 Gujrat Vashi 1 Maharashtra 18 19. PRODUCT & SERVICES PLs Products: 1. Institutional Broking - PL is among the top Institutional brokers in India, with full-service capabilities, catering to a wide clientele comprising leading domestic and international institutional investors including pension funds, hedge funds, mutual funds, insurance companies and banks. This business division mainly covers secondary market broking and marketing of equity offerings including IPOs to domestic and FIIs. The investment philosophy is a combination of topdown and bottom- up approach. Largely bottom-up in the case of mid caps and top-down in the case of large caps. Given the largely un-institutional nature of the Indian market there are several gaps in efficient pricing knowledge, information as well as long-term trends. With our strong research capability we believe that we are best poised to leverage this position. The company has a dedicated research team comprising 19 analysts engaged in macroeconomic studies, industry and company specific equity research, ensuring consistent delivery of high quality investment ideas. The sales & trading team, comprising top equity professionals, translates the research findings into actionable advice for clients, based on their specific needs, seamlessly executing complex trades, across the entire spectrum of trading strategies. Further the research is ranked in the Top 5 domestic brokers by Asia Money for several years. 2. Retail Broking - PL offers world-class trading experience in equities, exchange traded funds, option trades and more with a personal

touch. The clients have access to top-quality research, expert dealing facilities, e-broking, depository services and investment advisory. Retail broking requires a highly process driven, diligent approach. At PL the clients are provided with Offline/Online trading facility, Margin Funding Facility is also available, Powerful research and analytics supported by a pool of highly skilled Research Analysts, A Single window for viewing all broking & DP back office information through Smart Account, In-house depository 19 20. with limited Power of Attorney facility and Robust Risk Management systems and practices. PL retail network has a presence in more than 150 locations across India and follows Ethical Business Practices. 3. Online Trading At PL the clients are provided with complete financial portal which serves as their personal investment guide.www.majorgainz.com an online venture promoted by Prabhudas Lilladher (PL), is supported by PLs years of collective experience of the capital markets, powerful Fundamental & Technical research and reliable state of the art technology architecture provides Online Trading in Equity, Derivatives & Mutual Funds through a web based platform. PL provides its clients with extensive information on markets and relevant data which enables them to make quick, sound and informed decisions. The clients also have access to newsletters on a Daily and Weekly basis, which will keep you abreast with market information. Apart from the above services PL also provides various tools, like portfolio tracker, sector watch and my stock list. Besides PL also provide stock & index quotes, online market commentaries, fundamental & technical details of most companies with varied research reports and much more, to help you take informed decisions and make the trading process quicker and efficient. 4. Loan Facilities Offered - To help meet the liquidity requirements of clients, PL offers Margin funding to individuals and corporate. Also providing finance for investment in primary market issues and mutual funds. The PL Group possesses expertise in financing short-term loan facility, to buy securities from secondary markets for short to medium term. 5. Investment Banking - Investment banking business is dedicated to

provide corporates and entrepreneurs, the highest quality services for transactions related to the Capital Markets. The company offers a full range of services and transaction expertise covering the management of Initial Public Offerings & Follow-on Public Offerings, Rights Issues, Qualified Institutional Placements, Buy Backs, Takeovers, Delisting and Mergers and Acquisitions. PL has a track record of successfully closing seven transactions in the last 2 years covering IPOs & FPO & QIPs involving a transaction value of over Rs 600 crores besides completing the Buy back for a listed Company. 6. Corporate Advisory - PL provides Strategic Advisors to a large number of corporate. PL is registered with SEBI as Category I Merchant Banker and has raised over US Dollar 1.3 Billion thru GDR's, FCCB's, Private Placement & IPO's. The company provides its clients with a long term perspective and 20 21. provides well researched professional advice, relevant to their business needs including expansion, divestment, acquisition and restructuring. 7. Wealth Management - Wealth Management Group takes care of Wealth Management needs of Individuals. Wealth Management provides Advice on asset allocation and creating customized financial plans ,Advisory Services comprising a mix of asset classes , Dedicated team committed to delivering our comprehensive investment management capabilities and resources to meet your individual objectives ,The strength of combined knowledge and experience provides a disciplined approach to portfolio strategy development and wealth management.PL has Dedicated Wealth Management branches across 9 cities and Personalized client service. At PL, depending on the requirement of the clients, this could include recommending and creating their investment portfolios, advising on pension strategies, retirement planning, taxation, etc. This holistic approach to wealth management automatically incorporates the services of the various specialists within the organization to ensure that you can benefit from the best experience and expertise available. 8. Portfolio Management Services - Portfolio Management Services will be ideal for those investors who appreciate capitalizing their investments with the help

of professional Portfolio Managers without feeling the burden of making day-to-day investment decisions. Portfolio Management Service main aim is to provide consistent returns in the long-term at a moderate level of risk. The key to achieve this is to identify fundamentally strong stocks with appropriate diversification to meet the stated objective of each Portfolio scheme. 9. Distribution - PL is one of Indias leading companies engaged in the activity of advisory and distribution of financial products like IPOs and Mutual Funds.PL has a team comprising of competent professionals who would help select the right solution from a range of options available. The company has Comprehensive research before recommending products / schemes to clients and Distribution team of 600+ people spread across a Pan India network gives the reach to almost any corner of India. Companys services: Retail Client - DP Charges: Prabhudas Lilladher (PL) PL has been constantly taking efforts to improve the Business and Customer Experience of all clients. In an effort to be above the current market 21 22. practices the company provides the following services which are suitable for even a middle class person who can start investing with just a very minimal charge. 1. AMC : 500 + NIL TRANSACTION CHARGES (with Easi Regn) 2. AMC : 750 + NIL TRANSACTION CHARGES (without Easi Regn) 3. 600+Lifetime NIL AMC + TRANSACTION CHARGES (with Easi Regn) Banks in collaboration- The banks with which PL has collaboration are 1. AXIS BANK 2. BANK OF INDIA 3. CITI BANK 4. CORPORATION BANK 5. HDFC BANK 6. H S B C 7. ICICI BANK 8. KARNATAKA BANK 9. IDBI BANK 10. SOUTH INDIAN BANK 11. STATE BANK OF INDIA Clients can transfer money to PL through Net or Bank Transfer and get FAST Credit*. Franchisee or Sub-broker ship - TERMS AND CONDITIONS: PROGRESS PARTNER (Sharing) Person with a good track record & reputation in financial services / other business / social circles with a good client base. Minimum 2-3 years of experience in selling financial products as a Main broker / Sub- broker /Remisier / Mutual Fund Distributor / Insurance Advisor / Financial Planner or an employee of existing Broker /

Sub-broker. The PP & his / her employee should be NCFM / BCSM certified for Cash & F&O segments. The terminal should be compulsorily operated by the certified holder only. In 22 23. cases where the terminals are operated by persons other than the certified holders, the responsibility for the trades done through the said terminals and penalty, if any levied by Exchanges / SEBI to be borne by the PP. Sub-broker / Authorized Person registration in SEBI / Exchanges through PL is compulsory. Accrued brokerage to be disbursed to the PP only on receipt of approval from SEBI or exchanges. Product Support: BSE, NSE, NSE F&O,BSE F&O, CDSL, E-Broking, PMS, Mutual Fund and Insurance. Sales Support: One Relationship Manager to be assigned to you for regular Research advice & Market Updates through Chat-PhoneEmails Marketing & Business Development support on a regular basis. Centralized Web based Back office. Support: One Customer Service Executive to be assigned to you for routine queries through Chat-PhoneEmails. Initial Glow sign flex material & Initial Visiting Card (200 in number) to be provided by PL. Real-time Charting Software Commercial Terms - PP to keep a minimum deposit of Rs. 3,00,000 /- (Interest free) for Equity & F&O in BSE & NSE Connectivity 1. Lease line / ISDN (Mumbai) OR VSAT (Rest of India) 2. Connectivity charges will be borne by PP VSAT AMC - Rs. 7,000/- p.a. 3. Monthly Recurring Expenses of Rs. 1500/- Monthly Recurring Expenses of for usage of 3 Odin licenses (extra above Rs. 3,000/- these 3 IDs will be charged Rs. 500/- per ID) Odin licenses will be charged Rs. 500/- per ID Software & other Charges 1. Particulars Amount (Rs.) Charges to be borne by 2. VSAT Installation Charges 15,000/- (One time) PL 23 24. 3. Back Office Software AMC 5,000/- Per annum PP 4. Cost of VSAT 70,000/- (One time) PL 5. ODIN license for Equity & F&O 25,000/- (One Time) PL 6. All Bad debts, punching errors of the orders, if any to be borne by PP 7. Stationery Costs to be borne by PP; Contract notes stationery to be printed by PL 8. Fees of the auditor to be borne by the PP Revenue Sharing: Ratio Sharing Pattern Monthly Brokerage Generated 1. 50:50 PL :

PP Upto 2 Lacs 2. 45:55 PL : PP From 2 Lacs to 4 Lacs 3. 40:60 PL : PP Above 4 Lacs Plans Sheet of Prabhudas Lilladher Pvt. Ltd.: Common Features Turbo 120 Turbo 60 Turbo 30 Turbo 12 Power 6 Power 3 Power 1 Power + AO Charges (Rs) 300 Demat AMC P.A. (Rs) Free As per the scheme selected Exe App Charges As per Table 1 in case of Exe Application 24 25. Default App Access Exe based application Web applet based application Trading Platform Odin/ RTGSL/ NOW(Only NSE) Odin/ RTGSL/ NOW(Only NSE) (Cash & Derv.) Trading Platform NSE NOW NSE NOW (Currency Derv.) Brokerage on Delivery (Rs) 0.10% 0.10% 0.15% 0.20% 0.25% 0.30% 0.35% 0.40% Cash Intraday & Future 0.005% 0.01% 0.015% 0.02% 0.025% 0.03% 0.035% 0.04% Trades (Rs) Min Paise Per Scrip 0.5p 1p 1.5p 2p 2.5p 3p 4p 5p Options (Rs Per Lot) 20 30 40 50 Higher of 2.5% of the premium or Rs. 75/- Initial Margin Amount in Rs Optional Optional 5000 Validity Period 12 Months 12 Months 6 Months Lifetime Free Call N Trade calls 30 Call 20 Calls Charges for Call N Trade Rs. 5/- from 31st call Rs. 5/- from 21st call Adjustable Option Cost of Subscription (Rs) 120,000 60,000 30,000 12,000 6,000 3,000 1,000 NA Adjustable # Newsletters & SMS Calls Till Scheme Period 2 Quarters 1 Quarter 1 Month Table 2 (Free) 25 26. Scheme Extension ( only if 1 Quarter renewed) Only if Adjusted amount is 75% 80% 85% 90% more than Installment option (ECS) Quarterly Half Yearly Rs.15000 for every Rs 5 reduction Reduction in Option Brokerage per lot (Min Rs.10 per lot) Common Features Turbo 120 Turbo 60 Turbo 30 Turbo 12 Early Exit Cost (5% of NA 6,000 3,000 1,500 600 Scheme Value) Non Adjustable Option Cost of Subscription (Rs) 30,000 15,000 7,500 3,000 Non Adjustable # Newsletters & SMS Calls Till Scheme Period 2 Quarter 1 Quarter (Free) Reduction in Option Rs.4000 for every Rs 5 reduction (Min Rs.10 per lot) Brokerage per lot Brokerage Generated Discount on Scheme (Rounded off to Nearest Extension(%) = 20 Times of Integer) Cost Table 1 - Exe App Charge (Rs) If Monthly Brokerage Generated (Rs) Monthly is Less than 100 750 is Less than 1000

500 is Less than 2000 250 Is More than or = 2000 Free Table 2 Newsletter & SMS charges (Rs) 26 27. Period Newsletters SMS Combo MS WG Monthly 400 300 100 600 Quarterly 1000 750 250 1500 Yearly 3600 2700 900 5400 COMPETITOR ANALYSIS It includes company profiles of the following companies - Indiabulls Financial Services Limited India Infoline Sharekhan Securities Karvy Pvt. Ltd. Religare Securities And finally the Competitor analysis is done on the basis of - Product Comparison Pricing Comparison Service Comparison The competitive positioning of various firms is also studied on the parameters such as Website: Ease of use, Pace of transaction execution, Trading Terminal facility, Tie up with banks, Branch network and Customer service. Indiabulls HQ Region Delhi Area, India Industry Financial Services Type Public Company Status Operating Company 10,000 employees Size 2007 11,819 million [INR] (102%) Revenue Founded 2000 Website http://www.indiabulls.com 27 28. Indiabulls Group is one of Indias top Business houses with businesses spread over Real Estate, Infrastructure, Financial Services, Securities, Retail, Multiplex and Power sectors. The group companies are listed on important Indian and Overseas markets. Indiabulls has been conferred the status of a Business Superbrand by The Brand Council, Superbrands India. India Infoline The India Infoline group, comprising the holding company, India Infoline Limited and its wholly-owned subsidiaries, straddle the entire financial services space with offerings ranging from Equity research, Equities and derivatives trading, Commodities trading, Portfolio Management Services, Mutual Funds, Life Insurance, Fixed deposits and other small savings instruments to loan products and Investment banking. India Infoline also owns and manages the websites www.indiainfoline.com and www.5paisa.com The Company has a network of 976 business locations (branches and sub-brokers) spread across 365 cities and towns. It has more than 800,000customers. HQ Region Mumbai Area, India Industry Financial Services Type Public Company Status Operating Company Size 15,000 employees Founded 1995 Website

http://www.indiainfoline.com Sharekhan Sharekhan Limited offers online security broking and portfolio services to institutions and large corporate houses as well as individual investors. Sharekhan Limited was formerly known as SSKI Investor Services Private Limited. The company is based in Mumbai, India. HQ Region Mumbai Area, India 28 29. Industry Financial Services Type Privately Held Status Operating Company 1001-5000 employees Size Website http://www.sharekhan.com Karvy Karvi is a leading player in the financial services industry in India. Karvy has presence with leadership position in a wide range of financial services including Broking, Commodities, Registry Services, Merchant Banking, Realty services etc. The group also has presence in the BPO services and technology services space. ITS a professionally managed and highly focused financial intermediary in the Indian markets. HQ Region Hyderabad, India Industry Financial Services Type Public Company Status Operating Company Size 7,000 employees Founded 1981 Website http://www.karvy.com Religare Religare Enterprises Limited (REL) is a global financial services group with a presence across Asia, Africa, Middle East, Europe and the Americas. In India, RELs largest market, the group offers a wide array of products and services ranging from insurance, asset management, broking and lending solutions to investment banking and wealth management. The group has also pioneered the concept of investments in alternative asset classes such as arts and films. With 10,000 plus employees across multiple geographies, REL serves over a million clients, including corporates and institutions, high net worth families and individuals, and retail investors. 29 30. HQ Region Delhi Area, India Industry Financial Services Type Public Company Status Operating Company 10,000 employees Size Founded 2006 Website http://www.religare.in Competitive Analysis on the basis of product, Charges and Service Offered In online trading Indiabulls has mainly competition with Religare, ICICI-Direct and Sharekhan. Prabhudas Lilladher broking has an advantage of being in this industry for more than six decades. It has launched its website and was among the first players in

the online share trading. All companies have decided to spend its advertisement budget through four media i.e. Television, Print, Web and Outlets. 30 31. India- Sharekhan ICICI Direct Religare Indiabulls Karvy infoline

Account opening 750 750 and Nil 555 500 452 charges(Rs.) (Refundable) 250 Annual After one maintenance 500 Nil 250 Nil 330 year charges(Rs.) Brokerage rate 0.05% 0.10% 0.05% 0.05% 0.10% 0.50% (intraday) Delivery 0.50% 0.75% 0.20% 0.50% 0.50% 0.25% Online demat & Yes Yes Yes Yes Yes No trading facility India- Sharekhan ICICI Direct Religare Indiabulls Karvy infoline Relationship Yes No No No Yes No manager Software facility Yes On interest No Yes Yes No Tips & research Yes On Interest Yes No Yes No facility Online Interface Good Poor Average Average Good Average Comparison between Advance brokerage charging firms Religare come up with less brokerage charges but big advance brokerage . Major Ganiz here stands somewhere between religare and Sharekhan Securities( which charges less advance brokergae than Religare and much lesser brokerage charges).Here Reilance money provides option of different upfront brokerage at the same advance brokerage fee, with different trading limits.Major Gainz advance brokerage schemes come in form of two plan types: Power and Turbo Range respectively.Plan pricing is mentioned under Pricing P of service marketing in Project later. Advance Upfront Trading Plans Brokerage Validity brokerage limit fee A 750 500 1 year 2 lakhs B 750 1000 2 months 1 crore 31 32. C 750 2500 6 months 6 crore D 750 5000 12 months 7 crore E 750 10000 12 months 20 crore Fig : Advance brokerage plans at Reliance Money Fig : Advance brokerage plans at Religare Securites Certaintly if we compare different Advance brokerage plans than Reliance Money stands out as unique and chapest advance brokerage plan provider as different upfront brokerage at the same advance brokerage fee, with different trading limits make it simple and easy to prospects. On the other hand Sharekhan Securities comes up with different advance brokerge plans

which are designed considering usage rates of customers.Advance brokerage plans by Religare Securities are least complicated to understand and come in only two account type : Raily Dhanaka Plus and Raily Dhamaka Grand respectively. These two plans require lesser advance brokerage and brokerage charges than Sharekhan Securities. 32 33. Advance Brokerage 750 1000 2000 6000 18,000 30,000 60,000 1,00,000 2,00,000 AO Charges (Rs) Exe App Charges Free Annual Maintenance 400 Rs. (After one year) Charges Non Adjustable Option Brokerage on 10 Ps 9 Ps 7 Ps 5 Ps 4 Ps 3 Ps 2 Ps 1.5 Ps 1.5 Ps Intraday (Paise) Brokerage on 50 Ps 45 Ps 40 Ps 25 Ps 20 Ps 18 Ps 15 Ps 10 Ps 10 Ps Delivery (Paise) Validity Period 6 Months 6 Months 1 Year Conclusion: After comparing all the services provided by the other companies it can be inferred that Reliance Money is providing the best services as Brokerage charged is minimum and Account opening charges are also very less. Therefore according to the above comparison between the companies it is clear that Reliance money is one of the main Competitor of PL and comparing with Reliance Money PL Group is providing better services as its brokerage and other charges are comparable to Reliance Money and along with that the Client satisfaction in PL is higher as compared to other companies. Transparency, Research and accountability at PL is commendable. Thus after analysis of the competitors it can be concluded that PL is the best option for investors. 33 34. INTRODUCTION (Risk Management through Derivatives) Derivatives have vital role to play in enhancing shareholder value by ensuring access to the cheapest source of funds. Active use of derivatives instruments allows the overall business risk profile to be modified, thereby providing the potential to improve earning quality by offsetting undesired risk. Under my project report, I have studied various risk management tools. Because impression is usually given that losses arose from derivatives are extremely complex and difficult to understand financial strategies. So after interviewing with different brokers, investors and dealers, I have tried to give a solution to these complexities. 34

35. The need for derivatives as hedging tool was first felt in the

commodities market. Agricultural F&O helped farmers and Processor hedge against commodity price risk. After the fallout of Britain Wood Agreement, the financial markets in the world started undergoing radical changes, which give rise to the risk factor. This situation led to development of derivatives as effective "Risk Management tools". Derivative trading in financial market started in 1972 when "Chicago Mercantile Exchange opened its International Monetary Market Division (IIM). The IMM provided an outlet for currency speculators and for those looking to reduce their currency risks. Trading took place on currency. Futures, which were contracts for specified quantities of given currencies, the exchange rate was fixed at time of contract later on commodity future contracts was introduced then followed by interest rate futures. Looking at the liquidity market, derivatives allow corporate and institutional investors to effectively manage their portfolios of assets and liabilities through instruments like stock index futures and options. An equity fund e.g. can reduce its exposure to the stock market and at a relatively low cost without selling of part of its equity assets by using stock index futures or index options. Therefore the stock index futures first emerged in U.S.A. in 1982. Derivative: Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. Rationale behind the development of derivatives market is to manage this systematic risk, liquidity and liquidity in the sense of being able to buy and sell relatively large amounts quickly without substantial price concessions. Economic Functions of Derivative Market The following are the various functions that are performed by the derivative markets: Prices in an organized derivative market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. Derivative market helps to transfer risk from those who are exposed to it but may like to mitigate it to those who have an appetite for risk. Derivative market helps increase savings and investment in the long run. Commencement of Derivative Trading in India - The derivatives segment

on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The F&O segment of NSE provides trading facilities for the following derivative segment: 1. Index Futures 2. Index Options 3. Stock Futures 4. Stock Options 5. Forex Futures (started most recently) Participants of Derivative Market - 35 36. The following are the three broad categories of participants who trade in derivative market segment: Hedgers - Hedgers face risk associated with the price of an asset. They use futures & options markets to reduce or eliminate this risk. Speculators - Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. If hedgers are the people who wish to avoid price risk, speculators are those who are willing to take such risk. Speculators are those who do not have any position and simply play with the others money. They only have a particular view on the market, stock, commodity etc. In short, speculators put their money at risk in the hope of profiting from an anticipated price change. Here if speculators view is correct he earns profit. In the event of speculator not being covered, he will loose the position. They consider various factors such as demand supply, market positions, open interests, economic fundamentals and other data to take their positions. Arbitrageurs Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets at the same time to lock in a guaranteed profit. Arbitrageurs thrive on market imperfections. Arbitrageur is intelligent and knowledgeable person and ready to take the risk. He is basically risk averse. He enters into those contracts where he can earn risk less profits. When markets are imperfect, buying in one market and simultaneously selling in other market gives risk less profit. Arbitrageurs are always in the look out for such imperfections. Types of Derivatives The following are

the various types of derivative products. However at present in India only few of them are exchange traded and popular. 36 37. Function of Derivatives - 1. Risk management - It involves structuring of financial contracts too produce grains or losses that counter balance the losses or gains arising from movements in financial prices. Thus risks are reduced and profit is increased of a financial enterprises. 2. Price discovery - this represents the ability to achieve and disseminate price information without price information investors; consumers an producers cannot make decision. Derivatives are well suited for providing price information. 3. Transactional efficiency - transitional efficiency is the product of liquidity. Inadequate liquidity results in high transaction costs. These incases investment and causes accumulation of capital. Derivatives increases market liquidity, as a result transitional costs are lowered, and the efficiency in doing business is increased. Risk and Risk Management: Risk - Uncertainty of the outcome. Risk can bring unexpected gains. It can also cause unforeseen losses, even catastrophes. Risks are common and inherent in the financial markets and commodity markets: asset risk (stocks), interest rate risk, foreign exchange risk, credit risk, commodity risk and so on. 37 38. Risk Management (Using derivatives and other techniques to alter risk and protect profitability) A risk management system is integral to an efficient clearing and settlement system. NSE introduced for the first time in India, risk containment measures that were common internationally but were absent from the Indian securities markets. Risk containment measures include capital adequacy requirements of members, monitoring of member performance and track record, stringent margin requirements, position limits based on capital, online monitoring of member positions and automatic disablement from trading when limits are breached, etc. Mathematical modeling and Methods of Option pricing underlying assets Many forms of financial derivatives instruments exist in the financial markets. Among them, the three most fundamental financial derivatives instruments are: forward contracts, futures, and options. If the underlying

assets are stocks, bonds, foreign exchange rates and commodities etc., then the corresponding risk management instruments are: stock futures (options), bond futures (options), currency futures (options) and commodity futures (options) etc. In risk management of the underlying assets using financial derivatives, the basic strategy is hedging, i.e., the trader holds two positions of equal amounts but opposite directions, one in the underlying markets, and the other in the derivatives markets, simultaneously. This risk management strategy is based on the following reasoning: it is believed that under normal circumstances, prices of underlying assets and their derivatives change roughly in the same direction with basically the same magnitude; hence losses in the underlying assets (derivatives) markets can be offset by gains in the derivatives (underlying assets) markets; therefore losses can be prevented or reduced by combining the risks due to the price changes. Forward contract - An agreement to buy or sell at a specified future time a certain amount of an underlying asset at a specified price. A forward contract is an agreement to replace a risk with a certainty. The buyer in the contract is said to hold a long position, and the seller is said to hold a short position. The specified price in the contract is called the delivery price and the specified time is called maturity. Forward Contracts are generally traded OTC (over-the-counter). Let K-delivery price, and Tmaturity, then a forward contract's Payoff VT at maturity is - VT = ST - K, (long position) VT = K - ST, (short position) Where ST denotes the price of the underlying asset at maturity t = T. K- Call option & put option Illustration: On 1st march 2004 Mukesh has entered into a forward contract with Anil In this Mukesh takes a long position(buy) on the scrip and Anil takes a short position(short) on the scrip. Here Mukesh agrees to purchase 100 shares of RELIANCE ENERGY from the Anil for a predetermined price of Rs.400.The contract is three months forward. Thus on future Anil will deliver the shares to Mukesh while in return Mukesh will pay the amount of Rs.40, 000 (400*100). 38 39. Specified Price Mukesh Anil Specified Asset Suppose during the maturity date Mukesh may default for the transaction he refuses to make

the payment for the shares or Anil refuse to deliver the shares. Therefore in this there is a counter party risk one party may default due to this other party suffers because there is no standardized exchange between the parties and the contract is OTC in nature and also prices are decided by the buyers and sellers. Finally forward contract is settled at maturity. The holder of the short position delivers the asset to the holder of the long position in return for cash at the agreed upon rate. Therefore, a key determinant of the value of the contract is the market price of the underlying asset. A forward contract can therefore, assume a positive or negative value depending on the movements of the price of the asset. For example, if the price of the asset rises sharply after the two parties have entered into the contract, the party holding the long position stands to benefit, i.e. the value of the contract is positive for her. Conversely, the value of the contract becomes negative for the party holding the short position. Futures - Same as a forward contract, an agreement to buy or sell at a specified future time a certain amount of an underlying asset at a specified price. Futures have evolved from standardization of forward contracts. Futures differ from forward contracts in the following respects a. Futures are generally traded on an exchange. b. A future contract contains standardized articles. c. The delivery price on a future contract is generally determined on an exchange, and depends on the market demands. Illustration: The current market price of INFOSYS COMPANY is Rs.1650. There are two parties in the contract i.e. Hitesh and Kishore. Hitesh is bullish and Kishore is bearish in the market. The initial margin is 10%, paid by the both parties. Here the Hitesh has purchased the one month contract of INFOSYS futures with the price of Rs.1650.The lot size of Infosys is 300 shares. Suppose the stock rises to 2200 Profit 20 39 40. 2200 10 0 1400 1500 1600 1700 1800 1900 -10 -20 Loss Unlimited profit for the buyer (Hitesh) = Rs.1, 65,000 [(2200-1650*3oo)] and notional profit for the buyer is 550. Unlimited loss for the buyer because the buyer is bearish in the market. Suppose the stock falls to Rs.1400 Profit 20 10 0 1400 1500 1600 1700 1800 1900 -10 -20 Loss Unlimited profit for the

seller = Rs.75,000.[(1650-1400*300)] and notional profit for the seller is 250. Unlimited loss for the seller because the seller is bullish in the market. Types of futures: On the basis of the underlying asset they derive, the futures are divided into two types: 1. Index futures - Index futures are the futures, which have the underlying asset as an Index. The Index futures are also cash settled. The settlement price of the Index futures shall be the closing value of the underlying index on the expiry date of the contract. 40 41. 2. Stock futures - The stock futures are the futures that have the underlying asset as the individual securities. The settlement of the stock futures is of cash settlement and the settlement price of the future is the closing price of the underlying security. Parties to Futures Contract - There are two parties in a future contract, the Buyer and the Seller. The buyer of the futures contract is one who is LONG on the futures contract and the seller of the futures contract is one who is SHORT on the futures contract. Options - An agreement that the holder can buy from, or sell to, the seller of the option at a specified future time a certain amount of an underlying asset at a specified price. But the holder is under no obligation to exercise the contract. The holder of an option has the right, but not the obligation, to carry out the agreement according to the terms specified in the agreement. In an options contract, the specified price is called the exercise price or strike price, the specified date is called the expiration date, and the action to perform the buying or selling of the asset according to the option contract is called exercise. According to buying or selling an asset, options have the following types: 1. Call option: is a contract to buy at a specified future time a certain amount of an underlying asset at a specified price. A call option gives the holder (buyer/ one who is long call), the right to buy specified quantity of the underlying asset at the strike price on or before expiration date. The seller (one who is short call) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy. To acquire this right the buyer pays a premium to the writer (seller) of the contract. Illustration: Suppose in this option there are two parties one is Mahesh (call buyer) who is bullish in the

market and other is Rakesh (call seller) who is bearish in the market. The current market price of RELIANCE COMPANY is Rs.600 and premium is Rs.25. A. CALL BUYER Here the Mahesh has purchase the call option with a strike price of Rs.600.The option will be exercised once the price went above 600. The premium paid by the buyer is Rs.25.The buyer will earn profit once the share price crossed to Rs.625 (strike price + premium). Suppose the stock has crossed Rs.660 the option will be exercised the buyer will purchase the RELIANCE scrip from the seller at Rs.600 and sell in the market at Rs.660. Profit 30 20 41 42. 10 0 590 600 610 620 630 640 650 -10 -20 -30 Loss Unlimited profit for the buyer = Rs.35 {(spot price strike price) premium} Limited loss for the buyer up to the premium paid. B. CALL SELLER: In another scenario, if at the tie of expiry stock price falls below Rs. 600 say suppose the stock price fall to Rs.550 the buyer will choose not to exercise the option. Profit 30 20 10 0 590 600 610 620 630 640 650 -10 -20 -30 Loss Profit for the Seller limited to the premium received = Rs.25 Loss unlimited for the seller if price touches above 600 say 630 then the loss of Rs.30 Finally the stock price goes to Rs.610 the buyer will not exercise the option because he has then lost the premium of Rs.25.So he will buy the share from the seller at Rs.610. 42 American options can be exercised on or prior to the expiration date. A Put option gives the holder (buyer/ one who is long Put), the right to sell specified quantity of the underlying asset at the strike price on or before an expiry date. The seller of the put option (one who is short put) however, has the obligation to buy the underlying asset at the strike price if the buyer decides to exercise his option to sell. Illustration: Suppose in this option there are two parties one is Dinesh (put buyer) who is bearish in the market and other is Amit (put seller) who is bullish in the market. The current market price of TISCO COMPANY is Rs.800 and premium is Rs.20. A. PUT BUYER (Dinesh): Here the Dinesh has purchase the put option with a strike price of Rs.800.The option will be exercised once the price went below 800. The premium paid by the buyer is Rs.20.The buyers breakeven

point is Rs.780 (Strike price Premium paid). The buyer will earn profit once the share price crossed below to Rs.780. Suppose the stock has crossed Rs.700 the option will be exercised the buyer will purchase the RELIANCE scrip from the market at Rs.700 and sell to the seller at Rs.800. Profit 20 10 43 European options can be exercised only on the expiration date. 43. Thus from the above example it shows that option contracts are formed so to avoid the unlimited losses and have limited losses to the certain extent. Thus call option indicates two positions as follows: Long Position - If the investor expects price to rise i.e. bullish in the market he takes a long position by buying call option. Short Position - If the investor expects price to fall i.e. bearish in the market he takes a short position by selling call option. 2. Put option: is a contract to sell at a specified future time a certain amount of an underlying asset at a specified price. According to terms on exercise in the contract, options have the following types: 44. 0 600 700 800 900 1000 1100 -10 -20 Loss Unlimited profit for the buyer = Rs.80 {(Strike price spot price) premium} Loss limited for the buyer up to the premium paid = 20. B. PUT SELLER (Amit): In another scenario, if at the time of expiry, market price of TISCO is Rs. 900. The buyer of the Put option will choose not to exercise his option to sell as he can sell in the market at a higher rate. Profit 20 10 0 600 700 800 900 1000 1100 -10 -20 Loss Unlimited loses for the seller if stock price below 780 say 750 then unlimited losses for the seller because the seller is bullish in the market = 780 - 750 = 30 Limited profit for the seller up to the premium received = 20 Thus Put option also indicates two positions as follows: Long Position - If the investor expects price to fall i.e. bearish in the market he takes a long position by buying Put option. Short Position - If the investor expects price to rise i.e. bullish in the market he takes a short position by selling Put option. Define S- strike price and T- expiration date, and then an option's payoff (value) VT at expiration date is - VT = (ST - K) +, (call option) VT = (K -ST) +, (put option) Where ST denotes the price of the underlying asset at the expiration date K- Call option & put option 44

Among all Derivative Products, Futures and Options are highly popular among investors and generate large turnover. RISK MANAGEMENT STRATEGIES Hedging (to invest on both sides to avoid loss) - Most producers and trading companies enter the derivatives markets to shift or reduce the price risks in the underlying asset markets to secure anticipated profits. 4545. 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: 1. Interest Rate Swaps - These entail 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. Swaption Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a Swaption is an option on a forward swap. For example, an option to enter into an interest rate swap where a specified fixed rate is exchanged for floating

46. You own a stock and you are confident about the prospects of the company. However at the same time you feel that overall market may not perform as good and therefore price of your stock may also fall in line with overall marked trend. You expect that some adverse economic or political event might affect the market sentiments, though fundamentals of the company will remain good, therefore, it is good to retain the stock. In both these situations you would like to insure your portfolio against any such market fall. Such insurance is known as hedging. Hedging is a tool to reduce the inherent risk in an investment. Various strategies designed to reduce investment risk using call option, put options, short selling, and futures are used for hedging. The basic purpose of a hedge is to reduce the risk of loss. Illustration: A US company will pay 1 million British Pound to a British supplier in 90 d Differential taxation across countries (shift income across countries) Bankruptcy and distress costs Costly external financing 46 Capital gains taxation (defer taxation of capital gains)

Treatment of losses ays. Now it faces a currency risk due to the uncertain USD/Pound exchange rates. If the Pound goes up, it will cost the company more for the payment, thus will hurt the company's profits. Suppose the exchange rate is currently 1.6 USD/Pound, and the Pound may go up, the company may consider the following hedging plans - Plan 1 - Purchase a forward contract to buy 1 million Pound with 1,650,000 Yuan 90 days later and thus lock the cost of the payment in USD. Plan 2 - Purchase a call option to buy 1 million Pound with 1,600,000 USD 90 days later. The company pays a premium of 64, 000 USD (Assuming a 4% fee) for the option. One can see from this example: If the company adopts no hedging plan, its payment will increase if the Pound rate goes up, and thus will hurt its total profits. If the company signs a forward contract to lock the cost of the 90 days later payment, it has avoided a loss if the Pound goes up, but it has also given up the opportunity of gaining if the Pound goes down. If the company purchases a call option, it can prevent loss if the Pound goes up, and it can still gain if the Pound goes down, but it must pay a premium for the option. Reasons to hedge - Taxes Incorporates a series of decisions into the business strategy Reasons not to hedge - Transactions costs in derivatives Requires derivatives expertise which is costly Managerial controls Tax and accounting consequences 2. Speculation - An action characterized by willing to risk with one's money by frequently buying and selling derivatives (futures, options) for the prospect of gaining from the frequent price changes. A speculator assumes the price risk, hoping to gain risky profits by holding certain positions (long or short). Speculators are indispensable for the existence of hedging business, and they came into markets as a necessary result of the growth of the hedging business. It is speculators who take over the price risks shifted from the hedgers, and thus become the major bearers of the risks in the derivatives markets. Speculation is an indispensable lubricant in the derivatives markets. Indeed, frequent speculative transactions make hedging strategies workable. Comparing to investing in an underlying asset, investments in its options are

characterized by high profits and high risk, since an investment in options markets provides a much higher level of leverage than an investment in the spot markets. Such an investor invests only a small amount of money (To pay the premium) but can speculate on assets valued dozens of times higher than that of the invested money. Speculation in the Futures Market Speculation is all about taking position in the futures market without having the underlying. Speculators operate in the market with motive to make money. They take: Naked positions - Position in any future contract. Spread positions - Opposite positions in two future contracts. This is a conservative speculative strategy. Speculators bring liquidity to the system, provide insurance to the hedgers and facilitate the price discovery in the market. Speculaters System Existing New 47 Reducing riskiness of future cash flows may enable the firm to borrow more money Managerial risk aversion Nonfinancial risk management 47. Increase debt capacity 48. Approach Peril & Price Approach Peril & Price 1. Delivery based 1. Both P&L to extent 1. Buy & Sell stocks 1. Maximum loss & Margin trading, of price change on delivery basis possible to Forward transactions premium paid 2. Buy Index Future 2. Buy Call & Put by hold till expiry paying premium Advantages - Greater Leverage as to pay only the premium. Greater variety of strike price options at a given time. Illustration: Here the Speculator believes that stock market will go to appreciate. Current market price of PATNI COMPUTERS = 1500 Strategy: Buy February PATNI futures contract at 1500 Lot size = 100 shares Contract value = 1, 50,000 (1500*100) Margin = 15000 (10% of 150000) Market action = rise to 1550 Future Gain: Rs. 5000 [(1550-1500)*100] Market action = fall to 1400 Future loss: Rs.-10000 [(1400-1500)*100] Thus the Speculator has a view on the market and accepts the risk in anticipating of profiting from the view. He studies the market and plays the game with the stock market. Speculating With Options - A speculator has a definite outlook about future price, therefore he can buy put or call option depending upon his perception about future price. If speculator has a

bullish outlook, he will buy calls or sell (write) put. In case of bearish perception, the speculator will put r write calls. If speculators view is correct he earns profit. In the event of speculator not being covered, he will loose the position. A Speculator will buy call or put if his price outlook in a particular direction is very strong but if is either neutral or not so strong. He would prefer writing call or put to earn premium in the event of price situations. Illustration - Suppose the price of a certain stock is 66.6 USD on April 30, and the stock may go up in August. The investor may consider the following investing strategies: Plan1 - The investor spends 666, 000 USD in cash to buy 10, 000 shares on April 30. Plan2 - The investor pays a premium of 39,000 USD to purchase a call option to buy 10, 000 shares at the strike price 68.0 USD per share on August 22. Now examine the investor's profits and returns in two scenarios (ignoring the interests). 48 49. Situation I -The stock goes up to 73.0 USD on August 22. Strategy A: The investor sells the stocks on August 22 to get 730,000 USD in cash return = 730,000 666,000 100% = 9.6%; 666,000 Strategy B: The investor exercises the option to receive a payoff: Payoff = 730 000 - 680 000 = 50,000 USD Return = 50 000 - 39 000 39 000 x 100% = 28.2%. Situation I1 - The stock goes down to 66,O USD on August 22. Strategy A: The investor suffers a loss: Loss = 666 000 - 660 000 = 6000USD, Strategy B: The investor receives a payoff: Payoff = (660 000 - 680 000) + 2000 = 0. The investor loses the entire invested 39, 000 USD, hence a loss of 100%. TYPES - Position Traders - These traders have a view on the market an hold positions over a period of as days until their target is met. Day Traders - Day traders square off the position during the curse of the trading day and book the profits. Scalpers - Scalpers in anticipation of making small profits trade a number of times throughout the day. 3. Arbitrage - Based on observations of the same kind of risky assets, taking advantage of the price differences between markets, the arbitrageur trades simultaneously at different markets to gain riskless instant profits. Arbitrage is not the same as speculation: speculation is to seek profits promised by predictions of the future prices, and is thus risky. Arbitrage is to snatch

profits originated in the reality of the price differences between markets, and is therefore riskless. Arbitrage is the concept of simultaneous buying of securities in one market where the price is low and selling in another market where the price is higher. In the futures market one can take advantages of arbitrage opportunities by buying from lower priced market and selling at the 49 50. higher priced market. JM Morgan introduced EQUITY DERIVATIVES FUND called as ARBITRAGE FUND where the investor buys the shares in the cash market and sell the shares in the future market. Arbitrageur System Existing New Approach Peril & Price Approach Peril & Price 1. Buying stock in one 1.Make money whichever 1. B group more promising 1. Risk free and selling in another, way the markets move as still in weekly settlement game exchange. Forward transactions 2. If future contract more 2. Cash & Carry Or less than Fair price arbitrage continues Fair Price = Cash Price + Cost of Carry. Illustration Current market price of ONGC in BSE= 500 Current market price of ONGC in NSE= 510 Lot size = 100 shares Thus the Arbitrageur earns the profit of Rs.1000 (10*100) Strategies: BUY SPOT, SELL FUTURES - In this the investor observing that futures have been overpriced, how can the investor cash in this opportunity to earn risk less profits. Say for instance ACC = 1000 and One month ACC futures = 1025. This shows that futures have been overpriced and therefore as an Arbitrageur, investor can make risk less profits entering into the following set of transactions. On day one, borrow funds, buy security on the spot market at 1000 Simultaneously, sell the futures on the security at1025 Take delivery of the security purchased and hold the security for a month On the futures expiration date, the spot and futures converge. Now unwind the position Say the security closes at Rs.1015. Sell the security Futures position expires with the profit f Rs.10 The result is a risk less profit of Rs.15 on the spot position and Rs.10 on the futures position Return the Borrow funds. 50 51. Finally if the cost of borrowing funds to buy the security is less than the arbitrage profit possible, it makes sense for the investor to enter into the

arbitrage. This is termed as cash and- carry arbitrage. BUY FUTURES, SELL SPOT - In this the investor observing that futures have been under priced, how the investor can cash in this opportunity to earn riskless profits. Say for instance ACC = 1000 and One month ACC futures = 965. This shows that futures have been under priced and therefore as an Arbitrageur, investor can make risk less profits entering into the following set of transactions. On day one, sell the security on the spot market at 1000 Mae delivery of the security Simultaneously, buy the futures on the security at 965 On the futures expiration date, the spot and futures converge. Now unwind the position Say the security closes at Rs.975. Sell the security Futures position expires with the profit f Rs.10 The result is a risk less profit of Rs.25 the spot position and Rs.10 on the futures position Finally if the returns get investing in risk less instruments is less than the return from the arbitrage it makes sense for the investor to enter into the arbitrage. This is termed as reverse cash and- carry arbitrage. Arbitrage with NIFTY Futures - Arbitrage is the opportunity of taking advantage of the price difference between two markets. An arbitrageur will buy at the cheaper market and sell at the costlier market. It is possible to arbitrage between NIFTY in the futures market and the cash market. If the futures price is any of the prices given below other than the equilibrium price then the strategy to be followed is If F > S + C If F < S + C Buy Spot Buy Futures Sell Futures Risk Sell Spot Free Wait till expiration Illustration A - Profit Wait till expiration Spot Price of INFOSEYS = 1650 Future Price of INFOSEYS = 1675 In this case the arbitrageur will buy INFOSEYS in the cash market at Rs.1650 and sell in the futures at Rs.1675 and finally earn risk free profit Of Rs.25. Illustration B - Future Price of ACC = 675 51 52. Spot Price of ACC = 700 In this case the arbitrageur will buy ACC in the Future market at Rs.675 and sell in the Spot at Rs.700 and finally earn risk free profit Of Rs.25. Margins - Margins are the deposits, which reduce counter party risk that arise in a futures contract. These margins are collected in advance at the time of entering into the contract in order to

eliminate the counter party risk. It is this concept of margins which differentiates a Futures contract from a Forward contract. There are three types of margins in a Futures contract: Initial Margin - Whenever a futures contract is signed, both buyer and seller are required to deposit initial margin. Both buyer and seller are required to make security deposits that are intended to guarantee that they will in fact be able to fulfill their obligation. These deposits are Initial margins and they are often referred as performance margins. The amount of margin is varies from 5% to 15% of total contract value of futures contract. Maintenance Margin - The investor is allowed to withdraw any balance in the margin account in excess of the initial margin. To ensure that the balance in the margin account never becomes negative a maintenance margin, which is somewhat lower than the initial margin, is set. After depositing the initial margin, if the mark to marking loss occurs, it is made sure that the money in the initial margin account never falls below the maintenance margin. Variation Margin - If the balance in the margin account falls below or touches the maintenance margin level, the investor receives a margin call from his broker and he is told to top up the margin account up to the initial margin level the next day. The top up money deposited is known as Variation Margin. If the investor does not provide the variation margin, the broker has the right to close out the open position by selling/buying the contract without even informing the investor. Marking to Market - The process of adjusting the amount in an investors margin account in order to reflect the change in the settlement price of futures contract on a daily basis is known as Marking to Market. CASES 1. An Indian Garments company has received an order to supply 1, 00,000 units of shirts from USA. The price of $ 500,000 is receivable after six months. The current exchange rate is Rs.39.76/$. At the current exchange rate, the company would get: 39.76 500,000 = Rs 1, 98, 52 53. 80,000. But the company anticipates appreciation of Indian rupee over time. Does the company loose/gain due to appreciation in the Indian Rupee? How does company minimize the risk? Illustration - The Company can lock in the exchange rate by entering into an advance contract and

forget about any fluctuation in the exchange rate. Suppose, the six-month forward exchange rate is Rs39.00/$. The company can make an agreement at spot rate at 39.76 in the spot market or at a lesser price. At the time of receiving dollar, it will exchange $500,000 at Rs39.76= Rs 1, 98, 80,000 or agreed price. 2. You have imported machinery for $ 100,000 on 180 days credit at zero interest. The dollar quotes at Rs 39. Is this deal risk free? Illustration - This deal is not free of risk because after six months when you pay the loan, if the dollar quotes anything more than Rs39. say Rs 40, you will end up paying more [Rs 1 extra for every $ 1, which is equivalent to Rs 100,000 additional cost]. On the other hand, if the dollar quotes anything less than Rs 39, you will stand to gain. The question here is not whether you stand to gain or loose it is the risk you are taking 3. You have surplus cash for investment. You think of investing in Wipro, currently quoting at Rs 3,500, which you believe will rise to Rs 3,950 in six months. Is this deal risk free? Illustration - This deal is not free of risk because there is no guarantee that Wipros shares would touch Rs 3,950 in six months time. The share prices could rise beyond Rs 3,950 or could also fall below Rs 3,500 giving you no return on investment and you could stand to loose some portion of your investment. STATEMENT OF PROBLEM Prabhudas Lilladher is recently entered into Delhi market. It is necessary to know how other brokerage firms managing risk through derivatives in Delhi and what strategies they are 53 54. following to mitigate risk. With a vision of prevailing company for any loss in future due to derivatives and risk management factor, this research was made. OBJECTIVES Primary Objectives 1. To find out extent to which risk can be reduced by applying different strategies. 2. To find out methods and techniques available in the modern market to evaluate and lay off the risk. 3. To know the awareness & familiarity investors, dealers and brokers hold regarding Risk management and derivatives market. Secondary Objectives 1. Current trends followed by various financial / brokerage firms. 2. To explore the possible opportunities to further mitigate the risk factors. 3. To know the experience of dealers, investors and

brokers with derivatives till date. 4. To get knowledge about shortcomings in risk management through derivatives. 5. To know how derivatives are used in covering risk and give a safe exposure. RESEARCH METHODOLOGY Assumptions: The research was based on the following assumption: 54 55. The methodology used for this purpose is survey and questionable method. It is assumed that this method is more suitable for collection of data. It is assumed that the respondent have sufficient knowledge to ensure questionable. It is assumed that the respondent have filled right and correct option according to their view. Research Design: Different type of research designs is available depending upon the nature of research project, availability of able manpower and circumstances. The study about Risk management through derivatives " is descriptive in nature. So survey method is used for the study. Descriptive research includes surveys and facts-findings enquiries of different kinds. Sampling Procedure: Sample Selection Specific department (Offline department) of Brokerage firms Elements- 1. Employees doing offline services of the brokerage firms 2. Number of brokerage firms available in the city which provide these offline services Sampling Units - Employees of offline department working in the brokerage firms Sampling Frame - Brokerage firms of Delhi (NCR) Sampling Technique - The technique used for sampling by us is nonprobability sampling technique; under this we are using convenience sampling. Sample Size - The survey was circulated to 50 employees (brokers, dealers and investors) of different firms. Time Frame 3rd may 2010 3rd June 2010 Sources of Data: The sources of data include primary and secondary data sources. Primary Sources - Primary data is collected by structured questionnaire administered by sitting with guide and discussing problems. Secondary Sources - The secondary data is collected from newspaper, magazine, and internet. Data collection instruments For survey respective questionnaire were prepared analyzing various aspects through which a conclusive deduction could be made. The survey was

circulated over to offline department employees working in different organizations. ANALYSIS OF QUESTIONNAIRE 55 56. In today's era, it is very necessary for employees or customers to take decision very carefully while online or offline work happens. Risk management is one of the most influential way of offline department. Now employees evaluate the risk and use the various approach of risk management on the basis of various attributes. Risk management and other online or offline services create an image in the mind of customers and employees which helps in building brokerage firms reputation in the Indian economy. So these services can be an effective tool to attract customers. The above observation is made on 50 employees of different brokerage firm in Delhi. I have done an analysis of the questionnaire filled by them and try to draw conclusion .On the basis of analysis of employees the following conclusion has been drawn from the study - 1. Trading Period in Derivatives From my sample of 50, 32% brokers and investors investing in derivatives from last 1 year and 20% less than one year. 26% are investing from last 2 years, 12% are investing from last 3 years and only 10% have experience of more than 3 years of investment in derivatives. 2. Purpose for Derivatives Trading 56 57. Reasons behind adoption of derivatives are different by brokers,

investors and dealers e.g., hedging, investor demand (speculation) etc. Out of 50 brokers, investors dealing in derivatives 36% adopt it due to characteristics of hedging, 20% due to , 32% for investor (client's) demand (speculation) and remaining 12% due to others reason. 3- Experience with Derivatives Out of my sample size 50, only 38% find derivatives as quite profitable investment. 22% find that derivatives cant give big profits in future. 30% feels that equities are better option for investment than derivatives. Remaining 10% have other opinion that only those investors, brokers can derive good return from derivatives those have surplus funds and patience for long period because derivative requires huge investment and risk also. 4. Relationship with Cash Market - 57

58. Out of 50 brokers, dealers 48% have the positive response toward the relation between derivative and cash market and remaining 8% has negative response. 44% are not able to say anything because they dont have proper knowledge about stock market. They are investing with the guidance of brokers and with the support of their close relatives those are investing for last many years. 5. Broker's Perception towards Indian Investors - Out of total 50, 62% of investors and dealers are saying it hasn't settled in Indian investor psyche and 38% are saying it has. 6. Shortcomings in Indian Derivative System 58 59. Out of total 50, 44% brokers, investors respond towards shortage of domestic technical expertise. 52% feel lack of awareness in investor about derivatives and remaining 4% market failure. 7. Media preferred for investor education- Out of total 50, 32% brokers and investor said they would prefer TV most for investor education, 48% said newspaper, 14% said magazines while 6% said other mediums like internet etc. 8. Impact on Customer Base - 59 60. Out of 50 brokers and investors, 6% of brokers said that it doesn't increase their customer base because introducing small savings as investment, but derivatives increases customer base of 70% which is more than half. It is basically beneficial for those who are investing from last 2 or more years. In investment sector need minimum of Rs. 2,00,000 as investment so it is basically for corporate and investment sector only not for small investors. 24% said their customer base remain same because they have started just now for investing in derivatives, in future it will increase their customer base. 9. Suggestions to make with regard to investor education in derivatives market in India Most of the respondent said there should more education media for derivative trading and there should be new software for accurate update. 10. Importance of Different Factor in Decision not to Use Derivatives Given that firms not using derivatives are as prevalent as firms using derivatives. I once again asked firms that did not 60

61. use derivative to provide some information on why they choose not to use them to do this; I asked the non users of derivatives to rank the three primary factors in their decision not to use derivatives. The responses to this question are shown in above figure- The figure reveals that the majority of firms (60%) dont use derivatives because their responses are too small. An additional14% of non users with potentially large exposures indicated that the most important reason they dont use derivatives is that they can manage their exposures effectively by other means such as operational diversification on risk shifting/sharing arranged, Another group of nonusers indicated that they did not perceive the benefits of derivative use to exceed the costs, making their use a poor business decision. This was the most important reason for not using derivatives for 12% of non users but a secondary reason for nearly an additional 40% of non users. The only other concern receiving much weight was the concern about perceptions of derivatives use by others such as investors/analysts. 10% of the firms indicated that this was the primary reason in their mind for not using derivatives with an additional 31% citing it as a supporting explanation. The other 3 specifically mentioned issues, difficulty pricing & valuing derivatives concerns over disclosure requirements of SEC & concerns over the new FASB accounting treatment issues all generated only taken measures of concerns from the respondents. Among the other issues that more than one firm mentioned for not using derivatives were corporate prohibition on their use. 61 62. 11. Firm Transact to Currency Derivative Market S.N. NA Never Sometimes Frequently 1 Hedge foreign repatriation(dividends, 82% 12% - royalties, interest payments) 2 Hedge contractual commitments 72% 16% - A On-balance sheet transaction(account 50% 26% 10% 1% receivables/payables) B Off-balance sheet transaction(Unfilled or 54% 26% 8% 2% pending contract) 3 Hedge anticipated transactions one year 50% 24% 12% - or less 4 Hedge anticipated transactions over one 48% 24% 10% 1% year 5 Hedge transaction of foreign accounting 44% 26% 8% - statements 6 Hedge economic/competitive exposure 46% 28% 12% 1% 7

Arbitrage borrowing rates across 60% 18% 2% - currencies(currencies swaps in association with foreign currency borrowings) The table reveals that there is not much information about transaction to currency derivative market. 62 63. 12- Average percentage of exposure hedged Not much known about the extent to which firms hedge their various exposures, so in this survey we asked firms to indicate the percentage of the perceived exposures that they typically hedge across various categories of currency exposure. The responses were aggregate into four classes, firms that hedge 0-25%%, 2550%, 50-75%, 75%-100% of that particular exposure. Table displays the percentage of firms responded in each of the four groups for each of seven different categories of exposure. 25%-50 50%-7 75%-1 Average % % 5% 00% of exposure S.N. % of exposure typically hedged <25% Hedged 1 Onbalance sheet transactions 40% 13% 12% 35% 49% 2 Off-balance sheet transactions 72% 11% 5% 13% 23% 3 Anticipated transactions one year 78% 22% 9% 27% 42% or less 4 Anticipated transactions over one 98% 11% 4% 6% 16% year 5 Economic/competitive exposure 84% 6% 2% 3% 7% 6 Foreign repatriations 50% 14% 5% 31% 40% 7 Transaction of foreign accounts 84% 6% 3% 8% 12% The table reveals that with the exception of 3 types of exposure, even for three heavily hedged exposures, the average proportion hedged shown in the final column of the table is less than 50%. Thus partial hedging appears to be normal practice for these firms. Even in the case of three type exposures, only a third of firms indicate that they hedged more than 75% of total exposure. Again, these three were more identifiable near term, transaction based exposure. For longer term exposure such as anticipated transact beyond one year and economic/competitive exposure, less than 10% of firms indicated that they hedged as much as 75% of the perceived exposure. These results suggest that foreign currency hedging rather than eliminating exposures, generally only reduces the exposure, but typically by less than half of original outstanding exposure. 13. Maturity Structure of Hedging 63

64. S.N. % foreign currency Zero 1%-25% 25%-50% 50%-75% 75%-100% hedging activity with maturities of: 1 90 days or less 18% 23% 26% 13% 21% 2 91 -180 days 23% 44% 26% 3% 4% 3 181 days to 1 year 31% 41% 22% 3% 3% 4 1year to 3 year 63% 26% 6% - 5% 5 Beyond 3 year 88% 9% 2% - 2% We know the most firm use derivatives with short maturities. The percentage of firms using derivatives at longer maturities decreased significantly with the maturities of derivatives; only 30% of firms reported any use of derivatives ten or greater than 3 yrs. So we asked firms to provide some information on the maturity structure of their foreign currency hedging. The above table displays the results of above enquiry asking firms to indicate the percentage of their foreign currency hedging done with instruments of various original maturities. There are several interesting things to note about table. First short term derivatives are used by a vast majority of firms. 82% of firms utilize foreign currency derivates with an original maturity of 91-180 day for less while only12% foreign currency derivatives of more than 3 years. Second, firms tend to concentrate most of their foreign currency derivatives uses at short horizons especially 90 days or less. In fact when we combine the responses in the first two rows, nearly one quarter of the firms do all of their foreign currency derivatives activity in instrument with original maturity of 180 days or less. Finally the intensity of usage drops of dramatically with the lengthening of the derivates. Very few firms use any instruments with maturity over one year. There is a small group, 7% of firms, all large firms which concentrate their foreign currency derivates usage in the long horizon instruments. 14. Benchmark for Evaluating Foreign currency Risk Management 64 65. For foreign currency risk management we ask firms about the

.benchmark they use for evaluating foreign currency risk management over the budget planning period. 28% of firms indicating that they did not had a benchmark for evaluating foreign currency risk management process. Of the remaining responding firms, the most common benchmark was the use of forward rates available at the beginning of the budget planning period. 24% of the firms with some benchmarking use the forward rates which is a

simple and reasonable approach to the question. 20% of the firms indicated that they simply use the spot rates available at the beginning of the period. The approach is questionable on theoretical grounds as the current spot rates do not incorporate any market expectations of the currency movements over the periods nor do they offer rates at which risk could actually be laid off. 14% of the firms with some forms of benchmarks use a baseline percentage hedged strategy. The firms indicated that the baseline for these benchmarks typically ranged from 50% - 100% hedged. Finally 14% of the firms indicated the use of some other form of benchmark. Examples of the these includes comparison against fully open and fully hedged results, comparison against an average executable rate over a period, comparison against some combination of a forward and an option hedge and simple profit and loss currency derivates, while some of these ideas have more merit than others. It is disturbing that nearly half of the firms do not have well specified benchmarks for evaluating whether their foreign currency risk management process is providing any useful service to the firm. 15. Monitoring and Evaluation 65 66. We know that an important issue in the monitoring derivates is to value them and measure their risk. Such monitoring helps keep the firms abreast of market change as well as provide the basis for determining such change in value and whether such change in value continue to constitute a sufficient hedge of the underlying exposure. To this end, I ask firms to indicate how frequently they value their derivative portfolio. The above figure reports that a significant proportion of the firms, 19% are evaluating their derivative portfolio daily, while another 27% revalue monthly and 21 % revalue quarterly. Only 5% are evaluating their derivative portfolio annually FINDINGS 66 67. 1. About half of nonfinancial firms, brokers and investors are not investing in derivatives. Brokers not dealing in derivatives at present are also not going to adopt it in near futures. 2. The most important reason brokers and investor dont use derivatives is that they can manage their exposures effectively by other means such as operational diversification on

risk shifting/sharing arranged. 3. Hedging is the most important feature of derivatives. It is not for small investors. Through the study it has found out that, the hedging provides a safe position on an underlying security. The loss gets shifted to a counter party. Thus the hedging covers the loss and risk. Sometimes, the market performs against the expectation. This will trigger losses. So the hedger should be a strategic and positive thinker. It has increased brokers turnovers as well as helpful in aggregate investment. 4. The study reveals the effectiveness of risk reduction using hedging strategies. It has found out that risk cannot be avoided. But can only be minimized. 5. Brokers haven't adequate knowledge about options, so most of them are dealing in futures only. 6. People are not aware of derivatives, even people who have invested in it, hasnt adequate knowledge about it. These people are interested to take it in their future portfolio also. They consider it as a tool of risk management. 7. They are investing in future contract, because futures have up to home extent similar quality as Badla. 8. If the trader is not sure about the direction of the movement of the profits of the current position, he can counter position in the future contract and reduces the level of risks. 9. Results suggest that foreign currency hedging rather than eliminating exposures, generally only reduces the exposure, but typically by less than half of original outstanding exposure. 10. Most of the firms are evaluating their portfolio on monthly basis. That is beneficial for the firm. LIMITATIONS OF THE STUDY 67 68. No study is complete in itself, however good it may and every study has some limitations Limited time: Due to limitation of time a sample size of only 50 respondents were chosen. Limited Area: Due to small sample size and limited area the data analysis of all north Indian states trading account holders can be manipulated. Unwillingness of respondent: Respondents unwilled to respond to questions which they consider to be inappropriate for the given context. Legitimate Purpose: Explaining why the data are needed made the request for the information seemed legitimate and increased the respondents' willingness to answer. Sensitive Information: Respondents unwilled to disclose, at least accurately,

sensitive information because this might cause embarrassment or threaten the respondent's prestige or self- image. Response error: Respondents might have given wrong answers in hurry. People are reluctant towards the survey and take it as a waste of time. Non response: Within sample few people denied to respond and few respondents filled the incomplete information Other Limitations: Some of the respondents may be biased in giving responses. Complete data was not available due to company privacy and secrecy 68 69. CONCLUSION On the basis of overall study on risk management through derivatives it was found that derivative products initially emerged as hedging devices against fluctuation and commodity prices and commodity linked derivatives remained the soul form of such products. The financial derivatives came in spotlight in 1972 due to growing in stability in financial market. I was really surprised to see during my study that a layman or a simple investor does not even know how to hedge and how to reduce risk on his portfolios. All these activities are generally performed by big individual investors, institutional investors, mutual funds etc. No doubt that derivative growth towards the progress of economy is positive. But the problems confronting the derivative market segment are giving it a low customer base. The main problems that it confronts are unawareness and bit lot sizes etc. these problems could be overcome easily by revising lot sizes and also there should be seminar and general discussions on derivatives and risk management at varied places. Regarding future, I have find out that derivatives can indeed be used safely and successfully provided a sensible control and management strategy is established and executed. Inspite of that more awareness should be done and technical expertise knowledge should be more expanded. The World Financial Markets have undergone qualitative changes in the last 3 decades due to phenomenal growth of Derivatives. An increasingly; large number of organizations now consider derivatives to play a significant role in implementing their financial policies. Derivatives are used for a variety of purposes, but perhaps, the most important is hedging. Hedging involves

transfer of market risk- the possibility of sustaining losses due to unforeseen unfavorable price changes. A derivatives transaction allows a firm to alter its market risk profile by transferring to counter party some type of risk for a price. Hedging is prime reason for the advent of derivatives and continuous to be significant factor driving financial managers to deal in derivatives. Markets in India have developed a lot day by day these instruments are becoming the integral part of Investments 69 70. RECOMMONDATIONS This research study shows that risk

management is a vast topic to study and employees learns day by day to mitigate risk in different ways. 1. Lot Size - Lot size should be reduced so that the major segment of an India society i.e. small saving class can come under F & O trading. There is strong need for revision of lot sizes as the lot sizes of some of the individual scrip that were worth of Rs. 200000 in starting, now same lot size amount to a much larger value. 2. Scrips - More scrips of reputed companies etc. should be introduced in "F & O segment". 3. The hedging tool to reduce the losses that may arise from the market risk. Its primary objective should be loss minimization, not profit maximization. 4. Training Classes or Seminars - There should be proper classes on derivatives and risk management for investors, traders, brokers, students and employees of stock exchanges because lack of knowledge is the main reason of its less development. The first step towards it should be seminars provide to brokers & LSE employees and secondly seminar to students. 5. New Software There should be new software for risk management and fast trading. 6. I came to know about most important factor about the product with the help of factor analysis, so we should go for change the product according to the customer need. 7. Some promotional activities are required for the awareness of the customer, seminars should be held for providing information to prospective and present customer. 8. The hedger will have to be a strategic thinker and also one who think positively. He should be able to comprehend market trends and fluctuations. Otherwise, the strategies adopted by him earn him earn losses. 9. The hedging tool is suitable in the short term period. They

can be specifically adopted by the investor, who are facing high risks and has sufficient liquid cash with them. Long term investor should beware from the market, because of the volatile nature of the market. 70 71. 10. A lot more awareness needed about the stock market and investment pattern, both in spot and future market. The working of BSE Training Institute and NSE Institutes are apprehensible in this regard. INDUSTRY RELEVANCE My research project is Quite Relevant to the Offline Department of the company, where employees are mitigating portfolio risk through derivatives. The following things can be useful for Prabhudas Lilladher Pvt. Ltd. 1. The Company will be able to know their market position with other competitors in Delhi (NCR) region. 2. The company will also get to know some areas of improvement which came forward through my research. 3. The changing perception of Indian consumers, investor and brokers, and their requirements will also be made clear. 4. The investment companies at large will be able to understand how to keep themselves abreast with the changing technology. 5. They will get knowledge about different risk management strategies used in equity market. 71 72. LEARNINGS The two month summer training was a good experience for me to learn the practical aspects of the corporate life. Some of the learning of mine is: 1. In PL India I have learned how to maintain good relations with the customers by giving them the proper service and solving their queries regarding the share market. 2. I improved my communication skills by learning how to talk to different kind of people as it requires the different approach to handle each person. 3. I have also learned how to maintain good relation with the employees and the co- trainees. 4. Learned about various products of the PL India Pvt. Ltd. 5. Learned how to use online trading terminal. 6. Learned few things about back office work. 7. Learned how to approach the customers. 8. Learned how to open and close the calls. 9. Patience was the thing I learnt the most as I have to approach the clients who were to be explained same things again and again while approaching or calling them at regular Intervals 10. Learned

how to interact with people, how to convince them and guide them in trading. 11. Learned the importance of the Excel sheet. I maintained all my daily records in the Excel sheet. 12. Got the practical knowledge of the market. 72 73. 13. Had a practical experience of working in a reputed organization. 14. Got the corporate exposure. APPENDIX Questionnaire Dear Respondent, I am Manisha Gupta, student of MBA at IILM Institute, Gurgaon & this is the part of the market research for the PGP program. You are requested to fill this questionnaire to enable me to undertake the study on the project. Your information will be valuable to me. I ensure your data will be kept confidential. Hoping for your co-operation. 1- For how long you have been trading in derivatives? a) Less than 1 year b) 1 Year c) 2 Year d) 3 Year e) More than 3 years. 2- What is your purpose for trading in derivatives? a) Hedging b) Speculation c) Arbitraging d) Others 3- How will you describe your experience with derivative till date? a) I find these quite profitable b) I don't find derivatives can give big profits c) I feel that equities are better than derivatives d) Any other __________________________________ 4What according to you is relationship between derivative market and cash market? a) Positive b) Negative c) Can't say 5- According to you have derivatives settled in Indian investors psyche? a) Yes b) No 6- What shortcomings do you feel in Indian derivative market? a) Lack of awareness among the investors about derivatives. b) Shortage of domestic technical expertise. c) If any other___________________________ 7Which of following Media would you prefer the most for investor education? a) TV b) Newspaper c) Magazines d) Others 73 74. 8- Indicate how the derivative usage is in the current year compared to usage in the previous year. a) Usage has increased b) Usage has decreased c) Usage has remained constant 9- What suggestions do you want to make with regard to investors education in derivatives market in India? ___________________________ 10- Please indicate the three most important factors in your decision not to use derivatives- S.N. High Medium Low 1 Insufficient exposure to financial or commodity prices 2

Exposures are more effectively managed by other means 3 Difficulty pricing & valuing derivatives 4 Disclosure requirements of the SEC or FASB 5 Accounting treatment 6 Concerns about perceptions of derivative use by investors, regulators and the public 7 Cost of establishing & maintaining a derivatives program exceeds the expected benefits 8 Other 11- How often does your firm transact to the currency derivatives market to- S.N. NA Never Sometimes Frequently 1 Hedge foreign repatriation(dividends, royalties, interest payments) 2 Hedge contractual commitments A On-balance sheet transaction(account receivables/payables) B Off-balance sheet transaction(Unfilled or pending contract) 3 Hedge anticipated transactions one year or less 4 Hedge anticipated transactions over one year 5 Hedge transaction of foreign accounting statements 6 Hedge economic/competitive exposure 74 75. 7 Arbitrage borrowing rates across currencies(currencies swaps in association with foreign currency borrowings) 12- What percentage of the following categories of exposures do you typically hedge- S.N. % of exposure typically hedged <25% 25%-50% 50%-75% 75%-100% 1 Onbalance sheet transactions 2 Off-balance sheet transactions 3 Anticipated transactions one year or less 4 Anticipated transactions over one year 5 Economic/competitive exposure 6 Foreign repatriations 7 Transaction of foreign accounts 13- What percentage of your total foreign currency derivatives(by face value of contracts) have the following original maturities- S.N. % foreign currency Zero 1%-25% 25%-50% 50%-75% 75%-100% hedging activity with maturities of: 1 90 days or less 2 91 -180 days 3 181 days to 1 year 4 1year to 3 year 5 Beyond 3 year 75 76. 14- Which benchmark does your firm use for evaluating foreign

currency risk management over the budget/planning period? a) Firm does not use benchmark b) Forward rates available at the beginning of the period c) Spot rates at the beginning of the period d) Baseline percent hedged strategy e) Other benchmark 15- How frequently do you value your derivatives portfolio? a) Daily b) Monthly c) Quarterly d) Annually e) As

needed/No set schedule f) Other THANKS FOR YOUR COOPERATION Names: Occupation: Phone No.: Branch name: 76 77. REFRENCES Website - http://www.plindia.com/ (Accessed on 2/05/2010) http://nseindia.com/ (Accessed on - 4/05/2010) http://bseindia.com/ (Accessed on - 4/05/2010) http://money.rediff.com/ (Accessed on - 16/05/2010) http://www.religare.in/ (Accessed on 20/05/2010) http://www.sharekhan.com/ (Accessed on - 20/05/2010) http://www.indiabulls.com/ (Accessed on - 22/05/2010) http://www.reliancemoney.com/ (Accessed on - 22/05/2010) http://www.indiainfoline.com/ (Accessed on - 23/05/2010) http://karvy.com/v2/ (Accessed on - 23/05/2010) http://www.traderji.com/ (Accessed on - 12/06/2010) http://www.investorguide.com/ (Accessed on 14/06/2010) http://www.managementparadise.com/home.php (Accessed on - 17/06/2010) http://www.worldscibooks.com/etextbook/5855/5855_chap1.pdf (Accessed on - 19/06/2010) Newspapers - Economics Times Times of India Financial Express 77