STUDY ON DERIVATIVES AS A TOOL FOR HEDGING Submitted in partial fulfillment of the requirements for the award of the Degree

of Bachelor of Business Management Of Christ University By SNEHA JAIN (Reg. No. 1011263) Under the guidance of Prof. VIJAY AGAWANE

Department of Management Studies CHRIST UNIVERSITY BANGALORE 2013

CERTIFICATE (Company-Optional)

CERTIFICATE This is to certify that SNEHA JAIN, (Reg. No. 1011263) is a bonafide student of Bachelor of Business Management of Christ University, Bangalore and she has prepared and submitted the project report, titled Derivatives as a tool for hedging in partial fulfillment of the requirements for the award of the Degree of Bachelor of Business Management of Christ University, Bangalore, for the academic year 2012-2013.

Place: Bangalore Mathew Date: 20-02-2013 Studies

Dr. HOD

Jain

Dept. of Management

CERTIFICATE This is to certify that the project report, titled Derivatives as a tool for hedging submitted to Christ University, in partial fulfillment of the requirements for the award of the Degree of Bachelor of Business Management, is a record of original research work done by Sneha Jain, during the period 2012 2013 of her study in the Department of Management Studies at Christ University, Bangalore, under my supervision and guidance and the project report has not formed the basis for the award of any Degree/ Diploma/ Associate ship/ Fellowship or other similar title of recognition to any candidate of any University.

Date: 20 - 02 - 2013 Agawane

Prof. Vijay

DECLARATION I, Sneha Jain, hereby declare that the project report, titled Derivatives as a tool for hedging submitted to Christ University, in partial fulfilment of the requirements for the award of the Degree of Bachelor of Business Management is a record of original and independent research work done by me during 2012 2013 under the supervision and guidance of Prof. Vijay Agawane, Department of Management Studies and it has not formed the basis for the award of any

Degree/ Diploma/ Associate ship/ Fellowship or other similar title of recognition to any candidate of any University.

Date: 20 - 02- 2013 Jain

Sneha

ACKNOWLEDGEMENT

Sneha Jain

INTRODUCTION TO FINANCE Finance is the study of funds and management. It is the study of how investors allocate their assets over time under conditions of certainty and uncertainty. A key point in finance, which affects decisions, is the time value of money, which states that a unit of currency today is worth more than the same unit of currency tomorrow. Finance aims to price assets based on their risk level, and expected rate of return. The word finance was originally a French word. In the 18th century, it was adapted by English speaking communities to mean the management of money. Since then, it has found a permanent place in the English dictionary. Finance is nothing but an exchange of available resources. Finance is not restricted only to the exchange and/or management of money. A barter trading system is also a type of finance. Thus, we can say, Finance is an art of managing various available resources like money, assets, investments, securities, etc. Finance can be defined as, Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals and others on the terms that are most favourable to achieve their economic objectives. "Finance is the procurement of funds and effective utilisation of funds. It also deals with profits that adequately compensate for the cost and risks borne by the business." The general areas of finance are business finance, personal finance, and public finance. It also deals with the concepts of time, money, risk, and the interrelation between the given factors. It is basically focused on how the money is spent and budgeted. It is one of the most important aspects in handling business. Finance addresses the methods wherein business entities used their financial resources on a certain period of time. It is the application of a set

of techniques used by organizations in managing their financial affairs. The income and expenditure are emphasized in finance and its differences can easily be indicated. Nowadays, loans have been packaged for resale. This means that the debt has been bought by an investor from the bank. These bonds are sold to investors by financial corporations who have exceeded beyond their expenditures. The investor can now collect all the interests and be sold again through a secondary market. Banks serve as facilitators to companies in the provision of credit and mutual funds. Investments are managed carefully under a financial risk management to control gambling chances of these financial assets. Financial instruments are also used to secure these assets on securities exchanges such as stock exchanges and bonds. A bank provokes the activities of both borrowers and lenders. Lenders pay deposits to banks on which it pays the interest rates. The central banks are the last resorts that handle the monetary funds. These banks affect the interest rates being charged such as an increase in the money supply will result to a decrease in the interest rates. Financial capital is a monetary resource that allows businesses to purchase items that will create goods for production and other services. The budget is the documentation of the entire entrepreneurship. The outline includes the objectives of the business, the target sets, resulting costs, required investment, planned sales, growth, financing source, and financial results. It can be directed on long term or on a short term basis. The capital budget is mainly concerned with the proposed fixed asset requirements. The financing of the expenditure is also indicated in the capital budget. A detailed plan of all the sources and cash usage is emphasized in the cash budget. It has six main sections such as the beginning cash balance, cash collections, cash disbursements, cash excess, cash deficiencies, financing, the ending cash balance, and the management of current assets. A credit comes in various forms such as of open accounts, instalment sales, credit cards, and supplier credits. The advantages of a credit trade are

gaining loyalty and goodwill amongst costumers, drawing in more customers than cash trades, stimulates agricultural and industrial production, and increases rates. But there are also disadvantages to credit trades as well such as risks of bad debt, high administration expenses, necessitates more working capital, risks of bankruptcy declaration, and leading to purchasing nonessential items. An effective credit control may lead to increase in sales, increase in profits, reduces bad debts, builds customer loyalty, and increases company capitalization. The information on creditworthiness is acquired through credit agencies, bank references, credit agencies, chambers of commerce, and credit application forms. Taking legal actions is one part of the many duties of the credit department. Personal finance is related to how much money is needed by an individual. It is concerned on financial resources and its usage. Tax policies and family assets will certainly affect personal decisions. It will also identify the credit score of the lender and the actual financial standing. Planning for a secured financial future within the environments economic stability is one primary concern of the personal finance as well. There are various factors that affect decisions in handling personal finance which are financing durable goods, paying for education, monthly bills, secured loans, minimal debt obligations, and health insurance, and retirement plans. Meanwhile, corporate finance holds a task in providing financial resources for certain organizations and balances risks and profitability. It is referred as SME finance for small enterprises. Managerial finance maximizes a companys wealth and it also values the stocks. Bonds are long-term funds created by ownership equity and long-term credits. Shortterm funding comes from a line of credit given by banks as a working capital. Studying finance will lead to wiser decisions making on financial funds. It can help to identify risks and benefits while planning to set up ones business. Finance gives you

optimum control over your financial assets which will certainly help you in attaining a financially secured life. Relationship of Finance with Other Discipline In these other discipline, we can include production and its department, marketing and its department and personnel and its department. Relationship shows balanced behavior of officers of finance department and other department's officers. They should concentrate on one target of company and many other things, they should know for creating good relation.

Relationship of Finance with Production

Production departments main duty is to produce the goods. For producing goods, it needs raw material, labor and other expenses. For paying all expenses, production department needs money and fund which will be fulfilled by finance department. Finance department checks the budget of production department and allow funds for production department. With this view, we can understand that production department is dependent on finance departments decision. Now, if production department performs his duty honestly and products are produced and sold on time, it will be helpful for increase sale and profitability and it will again recycle the fund with high profit in finance department. So, we can say both are dependent on each other. Both are players of business team. Both should be adopt cooperative view for each other. After this, business team can succeed in business.

Relationship of Finance with Marketing

Marketing departments main duty is to sell maximum goods and satisfy the consumers. Its products input cost will decrease if all products are sold by marketers of company. For developing the product, promotion activities and distribution activities of marketing department need some money for paying salesmen, advertising budget and other promotional expenses. For this marketing department makes his marketing budget and it is cleared by finance department, but sometime finance department will not all specific marketing expenses but marketing department need that type of expenses for promotion of sales. This will create confliction. Good relations will be helpful for both departments. If both department does meeting and show behavior like good relative, the problem can easily solve. Both departments should think that both are the part of companys organization and co-

ordination between them is must. Sometime, marketing department obtains big order for supplying the goods, at that time finance department should help marketing department for arrangement of money for buying raw material and supplying quickly without any delay.

Relationship of Finance with Human Resources

Human Resource is that science which manages the employees of company and finance is that science which manages the money. If personnel department and finance department work together with co-operation, both departments can satisfy the objectives of company. It is the objective of company to satisfy employee by fulfilling their financial needs. It is also objective of company to reduce the misuse of fund by paying excess salary that required cost of doing work by employee. So, both department should understand each others objective and should help other department for fulfilling the objectives. One more thing, financial decisions are also very necessary in human resource area. Corporate are moving to the development of employees. They are human resource capital of company. Now, investment in training of employees, incentive schemes and retirement schemes etc should be calculated like other investment and both departments should take maximum advantages from this asset.

INTRODUCTION TO THE STUDY

Derivatives are financial contracts whose value/price is dependent on the behavior of the price of one or more basic underlying assets (often simply known as the underlying). These contracts are legally binding agreements, made on the trading screen of stock exchanges, to buy or sell an asset in future. The asset can be a share, index, interest rate, bond, rupee dollar exchange rate, sugar, crude oil, soybean, cotton, coffee etc. Thus, a derivative instrument derives its value from some underlying variable. Derivatives are specialized contracts which are employed for a variety of purposes including reduction of funding costs by borrowers, enhancing the yield on assets and modifying the payment structure on assets. The most important use of derivatives is in transferring market risk, called hedging, which a protection against losses resulting from unforeseen price or volatility changes. Thus derivatives are a very important tool of risk management. Derivatives are an emerging financial product. Different types of people use derivatives for different purposes. They are producers, customers, traders, financial institutions, investors, etc. But they are using derivatives mostly for hedging their price. In recent years, derivatives have increasingly become important in the field of finance. Risk minimization is one of the measures that can be best applied in derivatives. My study focuses mainly on how effectively traders, investors and those dealing in the derivatives can minimize the risk and hedge more successfully.

Factors driving the growth of derivatives

Over the last three decades, the derivatives market has seen a phenomenal growth. A large variety of derivative contract have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are: Increased volatility in asset prices in financial markets Increased integration of national financial markets with international markets Marked improvement in communication facilities and sharp decline in their costs Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies Innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets leading to higher returns, reduced risks as well as transactions costs as compared to individual financial assets

HIGHLIGHTS OF THE RESEARCH PROJECT The main objective of the study is to analyze different strategies available for minimizing the risks in derivatives for different market conditions and to identify how the investor can reduce his risk using derivatives and speculate effectively. The title of the project is A Study on Derivatives as a tool for hedging Besides that I am also trying to gain basic knowledge about derivatives For studying and analyzing purpose I have used some of the most popular index of nifty with my company indiabulls and calculated beta value which shows the volatility of the stock. The study also includes the findings derived from the analysis and interpretation of the secondary data collected. On the basis of the analysis I have been able to interpret that risk

minimization techniques can be effectively applied in the derivatives and can be used for hedging the price. Moreover, before going for hedging the investors should have a clear idea about derivatives and before they implement various risk minimization strategies of derivatives it is important for these investors to have a thorough knowledge of about the market.

HISTORY OF DERIVATIVES The history of derivatives is quite colorful and surprisingly a lot longer than most people think. To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the year 1700 B.C., Jacob purchased an option costing him seven years of labor that granted him the right to marry Laban's daughter Rachel. His prospective father-in-law, however, reneged, perhaps making this not only the first derivative but the first default on a derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah, but because he preferred Rachel, he purchased another option, requiring seven more years of labor, and finally married Rachel, bigamy being allowed in those days. Jacob ended up with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel, and a lot of domestic friction, which is not surprising. Some argue that Jacob really had forward contracts, which obligated him to the marriages but that does not matter. Jacob did derivatives, one way or the other. Around 580 B.C., Thales the Milesian purchased options on olive presses and made a fortune off of a bumper crop in olives. So derivatives were around before the time of Christ.

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

which permitted forward contracting. The celebrated Dutch Tulip bulb mania, which you can read about in Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, published 1841 but still in print, was characterized by forward contracting on tulip bulbs around 1637. The first "futures" contracts are generally traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently standardized contracts, which made them much like today's futures, although it is not known if the contracts were marked to market daily and/or had credit guarantees.

Probably the next major event, and the most significant as far as the history of U. S. futures markets, was the creation of the Chicago Board of Trade in 1848. Due to its prime location on Lake Michigan, Chicago was developing as a major center for the storage, sale, and distribution of Midwestern grain. Due to the seasonality of grain, however, Chicago's storage facilities were unable to accommodate the enormous increase in supply that occurred following the harvest. Similarly, its facilities were underutilized in the spring. Chicago spot prices rose and fell drastically. A group of grain traders created the "to-arrive" contract, which permitted farmers to lock in the price and deliver the grain later. This allowed the farmer to store the grain either on the farm or at a storage facility nearby and deliver it to Chicago months later. These to-arrive contracts proved useful as a device for hedging and speculating on price changes. Farmers and traders soon realized that the sale and delivery of the grain itself was not nearly as important as the ability to transfer the price risk associated with the grain. The grain could always be sold and delivered anywhere else at any time. These contracts were eventually standardized around 1865, and in 1925 the first futures clearinghouse was formed. From that point on, futures contracts were pretty much of the form we know them today.

In the mid 1800s, famed New York financier Russell Sage began creating synthetic loans using the principle of put-call parity. Sage would buy the stock and a put from his customer and sell the customer a call. By fixing the put, call, and strike prices, Sage was creating a synthetic loan with an interest rate significantly higher than usury laws allowed.

One of the first examples of financial engineering was by none other than the beleaguered government of the Confederate States of America, which is sued a dual currency optionable bond. This permitted the Confederate States to borrow money in sterling with an option to pay back in French francs. The holder of the bond had the option to convert the claim into cotton, the south's primary cash crop.

Interestingly, futures/options/derivatives trading was banned numerous times in Europe and Japan and even in the United States in the state of Illinois in 1867 though the law was quickly repealed. In 1874 the Chicago Mercantile Exchange's predecessor, the Chicago Produce Exchange, was formed. It became the modern day Merc in 1919. Other exchanges had been popping up around the country and continued to do so.

The early twentieth century was a dark period for derivatives trading as bucket shops were rampant. Bucket shops are small operators in options and securities that typically lure customers into transactions and then flee with the money, setting up shop elsewhere.

In 1922 the federal government made its first effort to regulate the futures market with the Grain Futures Act. In 1936 options on futures were banned in the United States. All the while options, futures and various derivatives continued to be banned from time to

time in other countries.

The 1950s marked the era of two significant events in the futures markets. In 1955 the Supreme Court ruled in the case of Corn Products Refining Company that profits from hedging are treated as ordinary income. This ruling stood until it was challenged by the 1988 ruling in the Arkansas Best case. The Best decision denied the deductibility of capital losses against ordinary income and effectively gave hedging a tax disadvantage. Fortunately, this interpretation was overturned in 1993.

Another significant event of the 1950s was the ban on onion futures. Onion futures do not seem particularly important, though that is probably because they were banned, and we do not hear much about them. But the significance is that a group of Michigan onion farmers, reportedly enlisting the aid of their congressman, a young Gerald Ford, succeeded in banning a specific commodity from futures trading. To this day, the law in effect says, "you can create futures contracts on anything but onions. In 1972 the Chicago Mercantile Exchange, responding to the now-freely floating international currencies, created the International Monetary Market, which allowed trading in currency futures. These were the first futures contracts that were not on physical commodities. In 1975 the Chicago Board of Trade created the first interest rate futures contract, one based on Ginnie Mae (GNMA) mortgages. While the contract met with initial success, it eventually died. The CBOT resuscitated it several times, changing its structure, but it never became viable. In 1975 the Merc responded with the Treasury bill futures contract. This contract was the first successful pure interest rate futures. It was held up as an example, either good or bad depending on your perspective, of the enormous leverage in futures. For only about $1,000, and now less than that, you

controlled $1 million of T -bills. In 1977, the CBOT created the T -bond futures contract, which went on to be the highest volume contract. In 1982 the CME created the Eurodollar contract, which has now surpassed the T -bond contract to become the most actively traded of all futures contracts. In 1982, the Kansas City Board of Trade launched the first stock index futures, a contract on the Value Line Index. The Chicago Mercantile Exchange quickly followed with their highly successful contract on the S&P 500 index.

1973 marked the creation of both the Chicago Board Options Exchange and the publication of perhaps the most famous formula in finance, the option pricing model of Fischer Black and Myron Scholes. These events revolutionized the investment world in ways no one could imagine at that time. The Black-Scholes model, as it came to be known, set up a mathematical framework that formed the basis for an explosive revolution in the use of derivatives. In 1983, the Chicago Board Options Exchange decided to create an option on an index of stocks. Though originally known as the CBOE 100 Index, it was soon turned over to Standard and Poor's and became known as the S&P 100, which remains the most actively traded exchange-listed option.

The 1980s marked the beginning of the era of swaps and other over-the-counter derivatives. Although over-the-counter options and forwards had previously existed, the generation of corporate financial managers of that decade was the first to come out of business schools with exposure to derivatives. Soon virtually every large corporation, and even some that were not so large, were using derivatives to hedge, and in some cases, speculate on interest rate, exchange rate and commodity risk. New products were rapidly created to hedge the now-recognized wide varieties of risks. As the problems became more complex, Wall Street turned increasingly to the talents of mathematicians and

physicists, offering them new and quite different career paths and unheard-of money. The instruments became more complex and were sometimes even referred to as "exotic."

In 1994 the derivatives world was hit with a series of large losses on derivatives trading announced by some well-known and highly experienced firms, such as Procter and Gamble and Metallgesellschaft. One of America's wealthiest localities, Orange County, California, declared bankruptcy, allegedly due to derivatives trading, but more accurately, due to the use of leverage in a portfolio of short- term Treasury securities. England's venerable Barings Bank declared bankruptcy due to speculative trading in futures contracts by a 28- year old clerk in its Singapore office. These and other large losses led to a huge outcry, sometimes against the instruments and sometimes against the firms that sold them. While some minor changes occurred in the way in which derivatives were sold, most firms simply instituted tighter controls and continued to use derivatives.

Early forward contracts in the US addressed merchants concerns about ensuring that there buyers and sellers for commodities. However credit risk remained a serious problem to deal with these problems a group of Chicago Board of Trade (CBOT) in 1848. The primary intention of CBOT was to provide a centralized location known in advance for buyers and sellers to negotiate forward contracts. In 1865 the CBOT went one step further and listed the first exchange traded derivatives contract in the US, these contracts were called futures contracts. In 1919, Chicago Mercantile Exchange (CME). The CBOT and the CME remain the two largest organized futures exchanges, indeed the two largest financial exchanges of any kind in the world today.

The first stock index futures index futures contract was traded at Kansas City Board of Trade. Currently the most popular stock index futures contract in the world is based on S&P 500 index, traded on Chicago Mercantile Exchange. During the mid eighties, financial futures became the most active derivatives instruments generating volumes many times more than the commodity futures. Index futures, futures on t-bills and Euro Dollar futures are the most popular futures contracts traded today. Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the post 1970 periods due to growing instability in the financial markets. However, since their emergence these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives all over the world, futures and options on stocks, especially among institutional investors, are major users of index-linked derivatives. Even small investors find the easeful due to high correlation of the popular indexes with various portfolios and ease of use. The lower costs associated with index derivatives vis--vis derivative products based on individual securities is another reason for their growing use.

They will innovate as a way of life.

They will compete on value in meeting member needs, not on price. They will achieve leadership in related niche markets.

1.1.6 Quantitative Analysis One of the concepts used in risk and return calculations is standard deviation, which measures the dispersion of actual returns around the expected return of an investment. Since standard deviation is the square root of the variance, this is another crucial concept to know. The variance is calculated by weighting the dispersion by its relative probability (take the difference between the actual return and the expected return, then square the number). The standard deviation of an investment's expected return is considered a basic measure of risk. If two potential investments had the same expected return, the one with the lower standard deviation would be considered to have less potential risk.

Standard deviation takes into account both systematic risk and unsystematic risk and is considered to be a measure of an investment's total risk.

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

Beta: measures stock-price volatility based solely on general market movements. Beta is a relative measure of systematic risk. Typically, the market as a whole is assigned a beta of 1.0. So, a stock or a portfolio with a beta higher than 1.0 is predicted to have a higher risk, and potentially, a higher return than the market. Conversely, if a stock (or fund) had a beta of 0.85, this would indicate that if the market increased by 10%, this stock (or fund) would likely return only 8.5%. However, if the market dropped 10%, this stock would likely drop only 8.5%.

Alpha: measures stock-price volatility based on the specific characteristics of the particular security. As with beta, the higher the number, the higher the risk.

R-Squared: Measures the percentage of an investment's movement that are attributable to movements in its benchmark index

Standard Deviation: Measures how much return on an investment is deviating from the expected normal or average returns

DERIVATIVES MARKET AT NSE The derivatives trading on the exchange commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in Index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and option contract on NSE are based on S&P CNX Nifty Index. Currently, the futures contracts have a maximum of 3-month expiration cycles. Three contracts are available for trading with 1 month, 2 months and 3 months expiry. A new contract is introduced on the next trading day following the expiry of near month contract. The futures and options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen-based trading for Nifty futures & options and stock futures and options on a national wide basis and an online monitoring and surveillance mechanism. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict pricetime priority. It is similar to that of trading of equities in cash market segment.

INDUSTRY PROFILE One of the key features of financial markets are extreme volatility. Prices of foreign currencies, petroleum and other commodities, equity shares and instruments fluctuate all the time, and poses a significant risk to those whose businesses are linked to such fluctuating prices . To reduce this risk, modern finance provides a method called hedging. Derivatives are widely used for hedging. Of course, some people use it to speculate as well although in India such speculation is prohibited. Derivatives are products whose val ue is derived from one or more basic variables called underlying assets or base . In simpler form, derivatives are financial security such as an option or future whose value is derived in part from the value and characteristics of another an underlying asset. The primary objectives of any investor are to bring an element of certainty to returns and minimise risks. Derivatives are contracts that originated from the need to limit risk. Derivative contracts can be standardized and traded on the stock exchange. Such derivatives are called exchange-traded derivatives. Or they can be customised as per the needs of the user by negotiating with the other party involved. Such derivatives are called over-the-counter (OTC) derivatives. A Derivative includes : (a) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security ;

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

Advantages of Derivatives: 1. They help in transferring risks from risk adverse people to risk oriented people. 2. They help in the discovery of future as well as current prices. 3. They catalyze entrepreneurial activity. 4. They increase the volume traded in markets because of participation of risk adverse people in greater numbers. 5. They increase savings and investment in the long run. Types of Derivative Instruments: Derivative contracts are of several types. The most common types are forwards, futures, options and swap. Forward Contracts A forward contract is an agreement between two parties a buyer and a seller to purchase or sell something at a later date at a price agreed upon today. Forward contracts, sometimes called forward commitments , are very common in everyone life. Any type of contractual agreement that calls for the future purchase of a good or service at a price agreed upon today and without the right of cancellation is a forward contract. Future Contracts

A futures contract is an agreement between two parties a buyer and a seller to buy or sell something at a future date. The contact trades on a futures exchange and is subject to a daily settlement procedure. Future contracts evolved out of forward contracts and possess many of the same characteristics. Unlike forward contracts, futures contracts trade on organized exchanges, called future markets. Future contacts also differ from forward contacts in that they are subject to a daily settlement procedure. In the daily settlement, investors who incur losses pay them every day to investors who make profits. Options Contracts Options are of two types calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Swaps Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are interest rate swaps and currency swaps. 1. Interest rate swaps: These involve swapping only the interest related cash flows between the parties in the same currency. 2. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. PLAYERS OF DERIVATIVES MARKET

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

Hedgers Hedgers are the traders who wish to eliminate the risk (of price change) to which they are already exposed. The main objective of these kinds of traders is to reduce the risk and not for making profits. Again traders dealing in exports and imports are subject to fluctuations in the exchange rates called forex risk. So, apart from the equity markets, hedging is also common in the foreign exchange market where fluctuations in the exchange rate have to be taken care as transactions are in the foreign currency. It could also be used in the commodities market where spiraling oil prices have to be tamed using the derivative instrument.

Speculators Hedgers are the people who wish to avoid the price risk and speculators are those who are willing to take such risk. These people take positions in the market and assume risks to profit from fluctuations in prices. They consume information, make forecasts about the prices and put their money in these forecasts. By taking positions, they are bet whether the market would go up or down.

Arbitrageurs Arbitrageurs thrive on market imperfections. They earn profits by trading a given commodity or other item for different prices in different markets. Thus arbitrage involves making risk-less profit by simultaneously entering into transactions into two or more markets.

For example, if a certain share is quoted at a lower rate on the Delhi stock exchange (DSE) and at a higher rate at Bombay stock exchange (BSE), an arbitrageur would profit by buying the share at DSE and simultaneously selling it at BSE. They could be making money even without putting their own money in and such opportunities often come up in the market but last for very shot time frames. This is because as soon as this situation arises arbitrageurs take the advantage before demand-supply forces drive the market back to the normal.

SEBI Guidelines: SEBI has laid the eligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House to ensure that Derivative Exchange/Segment and Clearing

Corporation/House provide a transparent trading environment, safety and integrity and provide facilities for redressal of investor grievances. Some of the important eligibility conditions are : 1. Derivative trading to take place through an on-line screen based Trading System. 2. The Derivatives Exchange/Segment shall have on-line surveillance capability to monitor positions, prices, and volumes on a real time basis so as to deter market manipulation. 3. The Derivatives Exchange/ Segment should have arrangements for dissemination of information about trades, quantities and quotes on a real time basis through at least two information vending networks, which are easily accessible to investors across the country.

4. The Derivatives Exchange/Segment should have arbitration and investor grievances redressal mechanism operative from all the four areas/regions of the country. 5. The Derivatives Exchange/Segment should have satisfactory system of monitoring investor complaints and preventing irregularities in trading. 6. The Derivative Segment of the Exchange would have a separate Investor Protection Fund. 7. The Clearing Corporation/House shall perform full novation, i.e., the Clearing Corporation/House shall interpose itself between both legs of every trade, becoming the legal counterparty to both or alternatively should provide an unconditional guarantee for settlement of all trades. 8. The Clearing Corporation/House shall have the capacity to monitor the overall position of Members across both derivatives market and the underlying securities market for those Members who are participating in both. 9. The level of initial margin on Index Futures Contracts shall be related to the risk of loss on the position. The concept of value-at-risk shall be used in calculating required level of initial margins. The initial margins should be large enough to cover the oneday loss that can be encountered on the position on 99 per cent of the days. 10. The Clearing Corporation/House shall establish facilities for electronic funds transfer (EFT) for swift movement of margin payments. 11. In the event of a Member defaulting in meeting its liabilities, the Clearing Corporation/House shall transfer client positions and assets to another solvent Member or close-out all open positions. 12. The Clearing Corporation/House should have capabilities to segregate initial margins deposited by Clearing Members for trades on their own account and on account of his

client. The Clearing Corporation/House shall hold the clients margin money in trust for the client purposes only and should not allow its diversion for any other purpose. 13. The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the trades executed on Derivative Exchange/Segment. SEBI has specified measures to enhance protection of the rights of investors in the Derivative Market. These measures are as follows: 1. Investors money has to be kept separate at all levels and is permitted to be used only against the liability of the Investor and is not available to the trading member or clearing member or even any other investor. 2. The Trading Member is required to provide every investor with a risk disclosure document which will disclose the risks associated with the derivatives trading so that investors can take a conscious decision to trade in derivatives. 3. Investor would get the contract note duly time stamped for receipt of the order and execution of the order. The order will be executed with the identity of the client and without client ID order will not be accepted by the system. The investor could also demand the trade confirmation slip with his ID in support of the contract note. This will protect him from the risk of price favour, if any, extended by the Member. 4. In the derivative markets all money paid by the Investor towards margins on all open positions is kept in trust with the Clearing House /Clearing Corporation and in the event of default of the Trading or Clearing Member the amounts paid by the client towards margins are segregated and not utilised towards the default of the member. However, in the event of a default of a member, losses suffered by the Investor, if any, on settled/closed out position are compensated from the Investor Protection

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

COMPANY PROFILE Indiabulls security limited is a premier brokerage house in India on the fast growth trackIndiabulls Securities Limited is part of the indiabulls group of companies. Indiabulls group is leading financial services and Real estate player with a pan India presence. ISL offer ease, convenience and reliability in all our products ranging from securities trading to customers finance, mortgages to real estates development. Started functioning in the stock market in 2000. Over the years, the company has grown from strength to strength to become a major player in India's financial services sector. Today Indiabull Securities limited is Indias leading capital markets company with AllIndia Presence and an extensive client base. Indiabulls Securities is the first and only brokerage house in India to be assigned the highest rating BQ 1 by CRISIL. Indiabulls Securities Ltd is listed on NSE, BSE & Luxembourg stock exchange., the National Securities Depository Ltd and Central Depository Services (India) Limited. To help the clients better Indiabull Securities limited has located their offices in major towns, and placed highly qualified and experienced financial experts to man them. A team of dynamic finance professionals with decades of experience leads them. These professionals

share a common vision not only to transform the company into a highly professional organization, but also make their clients earn the maximum from their hard-earned money. HISTORY In middle of 1999, when e-commerce was just about starting in India, Sameer Gehlaut and his close IIT Delhi friend Rajiv Rattan got together and bought a defunct securities company with a NSE membership and started offering brokerage services . A Few months later, their friend Saurabh Mittal also joined them. By December 1999, the company embarked on its journey to build one of the first online platforms in India for offering internet brokerage services. In January 2000, the 3 founders incorporated Indiabulls Financial Services and made it as the flagship company. In mid 2000, Indiabulls Financial Services received venture capital funding from Mr L.N. Mittal & Mr Harish Fabiani. In late 2000, Indiabulls Securities, a subsidiary of Indiabulls Financial Services started offering online brokerage services and simultaneously opened physical offices across India. By 2003, Indiabulls securities had established a strong pan India presence and client base through its offices and on the internet. In September 2004, Indiabulls Financial Services went public with an IPO at Rs 19 a share. In late 2004, Indiabulls Financial Services started its financing business with consumer loans. In March 2005, Indiabulls Properties Private Ltd, a subsidiary of Indiabulls Financial Services, participated in government auction of Jupiter Mills, a defunct 11 acre textile mill owned by NTC in Lower Parel, Mumbai. Indiabulls Properties private Ltd won the mill in auction and that purchase started Indiabulls real estate business. A few months later, Indiabulls Real Estate company pvt ltd bought Elphinstone mill in Lower Parel, another textile mill auctioned by NTC.

With real estate business gaining size, Indiabulls Financial Services demerged the real estate business under Indiabulls Real Estate and each shareholder of Indiabulls Financial Services received additional share of Indiabulls Real Estate through the demerger. Subsequently, Indiabulls Financial Services also demerged Indiabulls Securities and each shareholder of Indiabulls Financial Services also received a share of Indiabulls Securities. In year 2007, Indiabulls Real Estate incorporated a 100% subsidiary, Indiabulls Power, to build power plants and started work on building Nashik & Amrawati thermal power plants. Indiabulls Power went public in September 2009. Today, Indiabulls Group has a networth of Rs 16,796 Crore & has a strong presence in important sectors like financial services, power & real estate through independently listed companies and Indiabulls Group continues its journey of building businesses with strong cash flows. BUSINESSES Indiabulls Group is one of the country's leading business houses with business interests in Power, Financial Services, Real Estate and Infrastructure. Indiabulls Group companies are listed in Indian and overseas financial markets. The Net worth of the Group is Rs 16,844 Crore and the total planned capital expenditure of the Group by 2013-14 is Rs 35,000 Crore. Indiabulls Power is currently developing Thermal Power Projects with an aggregate capacity of 5400 MW. The first unit is expected to go on stream in May 2012. The net worth of Indiabulls Power is Rs 3,919 Crore. The company has a total capital expenditure of Rs 27,500 Crore. The company has been assigned 'BBB' rating.

Indiabulls Financial Services is one of Indias leading non-banking finance companies providing Home Loans, Commercial Vehicle Loans and Secured SME Loans. The company has a net worth of Rs 4,661 crore with an asset book of Rs 23,792 Crore. The company has disbursed loans over Rs 50,000 Crore to over 3,00,000 customers till date. Amongst its financial services and banking peers, Indiabulls Financial Services ranks amongst the top few companies both in terms of net worth and capital adequacy. Indiabulls Financial Services has been assigned AA+ rating and has presence in over 87 cities and towns with a total branch network of 170 branches. Indiabulls Real Estate is among India's top Real Estate companies with development projects spread across residential complexes, integrated townships, commercial office complexes, hotels, malls, Special Economic Zones (SEZs) and infrastructure development. Indiabulls Real Estate partnered with Farallon Capital Management LLC of USA to bring the first FDI into real estate in the country. The company has a networth of Rs 7,505 Crore and has purchased prime land, mostly in the metros and other Tier 1 cities worth Rs 4,000 Crore in government auctions alone. Indiabulls Real Estate is currently developing 64.32 million sqft into premium quality, high-end commercial, residential and retail spaces. The company has been assigned 'A+' rating. Indiabulls Securities is one of India's leading capital markets companies providing securities broking and advisory services. Indiabulls Securities also provides depository services, equity research services and IPO distribution to its clients and offers commodities trading through a separate company. These services are provided both through on-line and off-line distribution channels. Indiabulls Securities is a pioneer of on-line securities trading in India. Indiabulls Securities in-house trading platform is one of the fastest and most efficient trading platforms in the country. Indiabulls Securities has been assigned the highest rating BQ-1 by CRISIL.

Vision: Indiabulls Securities Limited was born out of a vision to explore the immense investment opportunities in the Indian financial market, to benefit the investors. The vision of the Indiabulls Securities Limited is to be a Financial Super Market. It aims to provide all types of financial services to its clients at one place to save them from going from place to place to meet their investment needs. Creating a world of smart investors. Products or Services:

Equity and Derivatives Depository Services Margin Trading Equity Analysis IPO Financing Loan Against Shares Trading Platforms

- Power Indiabulls (PIB) - Browser Based Indiabulls Securities Limited Indiabulls Securities Limited is a big player financial market that has put the brokerage business on fast growth track over the years. They are providing through indiabulls Equity Research Commodities

o o

o o

Internet Trading NRI Online Trading

Competitors: Major competitors for India bulls Securities Limited Include: ICICI Direct Share khan India infoline Limited Indian Angels Mothilal Oswol

o o o o o

Indiabulls Securities Ltd. : Board of Directors

1 2 3 4 5 6

Brig.Labh Singh Sitara Mr.Karan Singh Mr.Ashok Sharma Mr.Aishwarya Katoch Mr.Prem Prakash Mirdha Mr.Divyesh B Shah

Director Director Director Director Director Director

Securities Limited

SENIOR VICE PRESIDENT BRANCH MANAGER/ Support System Sales Hierarchy & Branch Structure Securities Limited

SENIOR VICE PRESIDENT BRANCH MANAGER/ Support System

Back office Executive Local Compliance Officer

Sales Functions

RM/SRM

Dealer
Sales Current Position of the Company

ARM

On March 2011, the company earned an after tax profit of Rs. 37.75 crores as compared to Rs. 58.51crores during the previous year. The total revenue earned by the company in 2011 march is Rs 325.45 the company raised its funds through the issue 46.22 Crores equity. ISL, which is into capital market operations generate a volume of Rs 40000 through commodity futures transactions.

Indiabulls Securities Ltd. : Capital Structure From To Class of Auth. Issued Capital 17.83 50.69 50.69 45.99 46.22 Paid-up (No's) 17834099 253426989 253426989 229940648 231112511 Shares Face Value Paid-up (Rs) 10 2 2 2 2 Capital 17.83 50.69 50.69 45.99 46.22

Shares Capital 2006 2007 Equity Share 19.00 2007 2008 Equity Share 100.00 2008 2009 Equity Share 100.00 2009 2010 Equity Share 100.00 2010 2011 Equity Share 100.00

Indiabulls Securities Ltd. : Share Holding Share Holding Pattern 30/09/2011 as on : FaceValue Share Holder 30/06/2011 31/03/2011

2.00 No.

Of %

2.00 No.

Of %

2.00 No.

Of % Holding 0.00 29.73 0.00

Shares PROMOTER'S HOLDING Foreign Promoters 0 Indian Promoters 68713425 Person Acting in 0 Concert Sub Total 68713425 NON PROMOTER'S HOLDING Institutional Investors Mutual Funds and UTI 0 Banks Fin. Inst. and 345724 Insurance FII's 23247349 Sub Total 23593073 Other Investors Private Corporate 30868583 Bodies NRI's/OCB's/Foreign Others GDR/ADR Directors/Employees Government Others Sub Total General Public GRAND TOTAL

Holding Shares 0.00 29.73 0.00 0 68713425 0

Holding Shares 0.00 29.73 0.00 0 68713425 0

29.73

68713425

29.73

68713425

29.73

0.00 0.15

0 395254

0.00 0.17

0 382320

0.00 0.17

10.06 10.21 13.36

24127109 24522363 30873758

10.44 10.61 13.36

24732792 25115112 33163095

10.70 10.87 14.35

14753231

6.38

14664216

6.35

14556410

6.30

4188982 0 0 335671 50146467 88659546 231112511

1.81 0.00 0.00 0.15 21.70 38.36 100.00

4688982 0 0 300189 50527145 87349578 231112511

2.03 0.00 0.00 0.13 21.86 37.80 100.00

4688982 0 0 465950 52874437 84409537 231112511

2.03 0.00 0.00 0.20 22.88 36.52 100.00

Indian stock Market: An Introduction The Indian securities market has a long history going back 130 years. The Bombay Stock Exchange, the iconic trademark of our securities market, is one of the oldest stock exchanges in the world, having been set up in 1875. A pioneer in organized stock broking activity, this exchange was the brainchild of a group of enterprising brokers. Over the years, the Indian securities market has evolved gradually to become one of the Asias most modern and efficient markets, setting international standards in technology and settlement systems. Stock markets have a stellar role to play in the economic growth of every country. Needless to mention, the Indian stock market too is inextricably entwined in the business fabric of our country. At the end of 2003, S&P has ranked the Indian market 17 th in terms of market capitalization on a global scale, 16 th in terms of turnover and 6 th in terms of turnover ratio. India has the highest number of listed securities in the world surpassing even the US which is the worlds largest equity market in terms of market capitalization. The Indian securities market has two fundamental segments the primary market and the secondary market . The primary market is the market for new issues where resources get mobilized either through public issues or through private placements. The secondary market provides liquidity to participants holdings by enabling them to buy and sell securities according to their risk return assessments. This market is further divided into the over the counter (OTC) market and the exchange traded market . The OTC markets are informal markets where transactions are negotiated over the telephone and/or computer network of dealers.

The two most tracked indices in India are the BSE Sensex and the S&P CNX Nifty. Originally complied in 1986, the Sensex is a basket of 30 constituent stocks of companies that figure in the top 100 in terms of market capitalization. The S&P CNX Nifty is an S&P endorsed index, owned and managed by the Indian Index Services Ltd. (IISL). It is an index of 50 stocks representing 24 sectors of the economy. Apart from being a popular avenue of investments, Indian stock market is today an important source of financing for both the industry as well as the government. It registers the pulse of the Indian markets and is indeed the most publicized barometer of the economy.

Indian Capital Market The Indian capital markets have witnessed a transformation over the last decade. India now finds its place amongst some of the most sophisticated and largest markets of the world. With over 20 million shareholders, India has the third largest investor base in the world after the USA and Japan. Over 9,000 companies are listed on Indian stock exchanges. The Indian capital market is significant in terms of the degree of development, volume of trading and its tremendous growth potential. Over the past few years, the capital markets have also witnessed substantial reforms in regulation and supervision. Reforms, particularly the establishment and empowerment of SEBI, market-determined prices and allocation of resources, screen-based nation-wide trading, dematerialization and electronic transfer of securities, rolling settlement and

derivatives trading have greatly improved both the regulatory framework and efficiency of trading and settlement. There are 23 recognized stock exchanges in India, including the OTCEI for small and new companies and the NSE, which was set up as a model exchange to provide nation-wide services to investors. During 2002-03 the NSE and the BSE were ranked third and sixth respectively amongst all exchanges in the world with respect to the number of transactions. The year 2003, also witnessed setting up of the NCDEX, an online multi-commodity exchange for trading of various commodities. The entry of new players has resulted in a more sophisticated range of financial services being offered to corporate and retail customers which has compelled the existing players to upgrade their product offerings and distribution channels. This is particularly evident in the non banking financial services sector, such as brokerage industry, where innovative products combined with new delivery methods have helped the sector achieve high growth rates. Over the last 7 years, the market share of the top 5 brokers has increased from 6% (1996-97) to 15% (December, 2005), with most of the consolidation coming in the last 2 years. The consolidation in the online business is even greater, with the top 5 players owning more than 90% of the market. This consolidation is expected to continue, and provide an opportunity for the top broker to own 15% market share or more over the next 3-4 years. Key initiatives in recent years include: Depository and share de-materialization process have enhanced the efficiency of the transaction cycle. Replacing the flexible, but often exploited, long settlement cycles with rolling settlement, to bring about transparency.

 IT driven stock exchanges (NSE and BSE) with a national presence (for the benefit of investors across locations) and other initiatives to enhance the quality of financial disclosures by the listed companies. Empowering SEBI with powers to impose higher penalties and establish itself as an independent regulator with adequate statutory powers. NSE, which in the recent past has accounted for the largest trading volumes, has a fully automated screen based system (NEAT and BOLD) that operates in the wholesale debt market segment as well as the capital market segment. Many new instruments have been introduced in the markets, including index futures, index options, derivatives and options and futures in select stocks.

Porters Five Forces Analysis

Buyer Power Lack of Expertise Curtails Bargaining Power.

Retail investors often lack the knowledge and expertise in the financial sector that calls them Low to Product approach the broking Proves houses. Beneficial.

Differentiation

The retail broking services provided by the various companies are homogeneous with very low product differentiation. This allows customers to enjoy a greater bargaining power.

Supplier Increased Dependence on

Power IPOs

There is a growing dependence of corporate on broking houses with the rising number of IPOs coming to the market.

Intensity

of

Competition

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

Increased Focus of Banks in Retail Broking-Various foreign banks like ABN Amro and others are planning to enter the Indian retail brokerage industry.

Online Trading Competes with Traditional Brokerage-There is an increasing demand for online trading due to consumers growing preference for internet as compared to approaching the brokers.

Threat Entry

of of

New Foreign

Entrants Players

New forms of trading including T+2 settlement system, dematerialization etc are strengthening the retail brokerage market and attracting foreign companies to enter the Indian industry.

Threat

of

Substitutes

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

Growth Drivers Constantly tapping new business areas to drive growth IPO financing Consumer loans to a large lower and middle class client base Mortgages & Loans against Property

Financial Overview of the Company a) Financial Services Revenue Contribution Other Rs 1,175
19% 42% 39% Financing Rs 2,405 Brokerage Rs 2,555

FY 06 Rs 6,135 million

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

Increasing Market share of Indiabulls in NSE trading volumes

35% 30% 25% 20% 15% 10% 5% 0% FY2002 FY2003 Share in Online Trading
(1) Source: NSE data from NSE website (Equity Segment)

30.7%

22.3% 18.8% 17.5%

21.9%

3.4% 1.1% 1.9% 2.2%

5.5%

(1

FY2004

FY2005

) FY2006

Share in Total Trading

c) Growing Customer Base

5,00,000 4,50,000 4,00,000 Increasing Number of Customers 3,50,000 3,00,000 2,50,000 2,00,000 1,50,000 1,00,000 50,000 0 37681 38047 38412 38504 Sep -05 Dec -05 Mar -06 2007 Jan 16,455 30,498 79,932 1,08,324 1,78,800 1,44,000 2,35,000 4,50,000

d) High Revenue Growth Rs mm 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 FY03
Brokerage
266.7

6131.5

): 06 3 (0 % R G 184 A C
719.5

1,684.1

FY04

FY05
Financing

FY06

Insurance, Mutual Funds &

Brokerage and Tax break up Remarks Delivery Buy Brokerage Service tax(@12.24% on 0.5 0.0612 Sell 0.5 0.0612 Intraday Buy Sell Futures Buy Sell

0.1 0.1 0.1 0.1 0.01224 0.01224 0.01224 0.01224

brokerage) Security transaction tax (STT) Turnover Tax (T oT) Stamp duty Total 0.125 0.018 0.125 0.018 0 0.018 0.025 0.018 0 0.018 0.017 0.018

0.011224 0.011224 0.002245 0.002245 0.002245 0.002245 0.715424 0.715424 0.132485 0.157485 0.132485 0.149485

Products and Services The products of Indiabulls are : Trading Platform for Equity and Derivatives Depository Services Commodities Equity Analysis IPO Financing Loan Against Shares Margin Trading

Indiabulls offers Broker assisted trade execution Automated online investing Access to all IPOs

Sales of Equity, Derivatives and commodities instruments listed on NSE, BSE, NCDEX and MCX

There are 3 mediums of using / accessing Indiabulls Trading Services. Click Power Indiabulls (PIB) Indiabulls Signature Account Call Indiabulls Visit the nearest branch

Depository Services

Value added Services for seamless delivery. Depository Participant with: Central Depository Services (India) Limited [CDSL] National Securities Depository Limited [NSDL]

Execute trades through Indiabulls Securities and settle these transactions through Indiabulls Depository services.

RESEARCH DESIGN

TITLE

A study on Derivatives as a tool for hedging.

STATEMENT OF PROBLEM

India is a developing country. It is prone to frequent changes in the market due to political, social, economic changes. As a result this leads to high volatility in the stock market. The players in the Indian stock market are prone to various kinds of risks and level of risk. This may be due to lack of information regarding trading practices in stock exchange. This study attempts to provide the derivatives as a hedging tool to reduce the various risks in the stock market.

NEEDS FOR OR IMPORTANCE OF THE STUDY

Business concerns and corporate investors worldwide are using various f i n a n c i a l instruments to hedge the risks. Derivatives effectively to reduce substantial loss have proved that these instruments can effectively reduce risk.

OBJECTIVES OF THE RESEARCH

To study the trading practices in the derivative market.

To study the various risk associated with derivatives.

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

SCOPE OF THE STUDY

This study is done to know the derivative markets in India. There are various types of derivatives instruments like commodities, cash market, futures, stock futures but in this study mainly it is concentrated on the stock futures for finding the risk involved in the stock futures.

Statistical tools for analysis

Beta Analysis Beta is calculated using historical data for the benchmark index and historical data for the same period for the instrument for which you are trying to calculate the beta. First, the data has to be retrieved then second step is to normalize the data by calculating the percent change from one period to another. Then the data has to be calculated as the percent change for each day to another for the benchmark index and for the instrument for which beta is being calculated. Once the data is normalized begin with the calculation of the relationship of the two instruments. Excel's slope function lets you calculate this relationship. Excel's slope function takes two arguments:

the array of dependent variables (daily percent change of instrument) the array of independent variables and returns the rate of change along the regression line (daily percent change of the benchmark index)

FORMULA USING BETA

Beta = Covariance of stock ,nifty index -------------------------------------------Variance of Nifty index

DATA COLLECTION

The report is prepared by using secondary data. The secondary data are collected from reports, magazines, and journals and also from websites. Market movements were observed for one month with Nifty Index Futures, observation on the price movement of derivative market for the purpose of analysis of data were collected from the official websites of National

Stock e x c h a n g e a n d D e r i v a t i v e s I n d i a ( www.nseindia.com& derivative sindia.com) Theobservation period was from 1 st November to 30th November. The data collected from websites were used to analyze the strategies and for calculations.

PLAN OF ANALYSIS

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

LIMITATIONS OF THE RESEARCH

A)Availability of data because the data used for calculating beta is only one month B)In the stock market various options are available like commodities, cash market,options except from this I have used stock futures for calculation.

DATA COLLECTION AND ANALYSIS