A STUDY ON DERIVATIVES AND ITS TRENDS

IN THE INDIAN CAPITAL MARKET

A first review report

1 NEED FOR THE STUDY

The study involves learning about derivatives and the trends in various sectors of
Indian capital market. It would enable one to understand the fluctuations in futures & option
segment in stock market and give also the opportunity to know about the share market and analyse
price fluctuation or volatility.
2 REVIEW OF LITERATURE
The Indian capital market has changed dramatically over the last few years, especially
since 1990. Changes have also been taking place in government regulations and technology. The
expectations of the investors are also changing. The only inherent feature of the capital market,
which has not changed is the 'risk' involved in investing in corporate securities. Managing the risk
is emerging as an important function of both large scale and small-scale investors.
Risk management of investing in corporate securities is under active and extensive
discussion among academicians and capital market operators. Surveys and research analyses have
been conducted by institutions and academicians on risk management. The mutual fund companies
in India have conducted specific studies on the 'risk element' of investing in corporate securities.
Grewal S.S and Navjot Grewall (1984) revealed some basic investment rules and rules for
selling shares. They warned the investors not to buy unlisted shares, as Stock Exchanges do not
permit trading in unlisted shares. Another rule that they specify is not to buy inactive shares, ie,
shares in which transactions take place rarely. The main reason why shares are inactive is because
there are no buyers for them. They are mostly shares of companies, which are not doing well.
A third rule according to them is not to buy shares in closely-held companies because these
shares tend to be less active than those of widely held ones since they have a fewer number of
shareholders. They caution not to hold the shares for a long period, expecting a high price, but to
sell whenever one earns a reasonable reward.
Jack Clark Francis (1986) revealed the importance of the rate of return in investments and
reviewed the possibility of default and bankruptcy risk. He opined that in an uncertain world,
investors cannot predict exactly what rate of return an investment will yield. However he
suggested that the investors can formulate a probability distribution of the possible rates of return.
He also opined that an investor who purchases corporate securities must face the possibility of
default and bankruptcy by the issuer. Financial analysts can foresee bankruptcy. He disclosed some
easily observable warnings of a firm's failure, which could be noticed by the investors to avoid
such a risk.

Preethi Singh (1986) disclosed the basic rules for selecting the company to invest in. She
opined that understanding and measuring return md risk is fundamental to the investment process.
According to her, most investors are 'risk averse'. To have a higher return the investor has to face
greater risks. She concludes that risk is fundamental to the process of investment. Every investor
should have an understanding of the various pitfalls of investments. The investor should carefully
analyse the financial statements with special reference to solvency, profitability, EPS, and
efficiency of the company.
David.L.Scott and William Edward (1990) reviewed the important risks of owning
common stocks and the ways to minimise these risks. They commented that the severity of
financial risk depends on how heavily a business relies on debt. Financial risk is relatively
easy to minimise if an investor sticks to the common stocks of companies that employ small
amounts of debt They suggested that a relatively easy way to ensure some degree of liquidity is to
restrict investment in stocks having a history of adequate trading volume. Investors concerned
about business risk can reduce it by selecting common stocks of firms that are diversified in
several unrelated industries.
Lewis Mandells (1992) reviewed the nature of market risk, which according to him is very
much 'global'. He revealed that certain risks that are so global that they affect the entire investment
market. Even the stocks and bonds of the well-managed companies face market risk. He concluded
that market risk is influenced by factors that cannot be predicted accurately like economic
conditions, political events, mass psychological factors, etc. Market risk is the systemic risk that
affects all securities simultaneously and it cannot be reduced through diversification.
Nabhi Kumar Jain (1992) specified certain tips for buying shares for holding and also for
selling shares. He advised the investors to buy shares of a growing company of a growing industry.
Buy shares by diversifying in a number of growth companies operating in a different but equally
fast growing sector of the economy. He suggested selling the shares the moment company has or
almost reached the peak of its growth. Also, sell the shares the moment you realise you have made
a mistake in the initial selection of the shares. The only option to decide when to buy and sell high
priced shares is to identify the individual merit or demerit of each of the shares in the portfolio and
arrive at a decision.
Carter Randal (1992) offered to investors the underlying principles of winning on the stock
market. He emphasised on long-term vision and a plan to reach the goals. He advised the investors
that to be successful, they should never be pessimists. He revealed that though there has been a
major economic crisis almost every year, it remains true that patient investors have consistently
made money in the equities market. He concluded that investing in the stock market should be an
un-emotional endeavour and suggested that investors should own a stock if they believe it would
perform well.
L.C.Gupta (1992) revealed the findings of his study that there is existence of wild
speculation in the Indian stock market. The over speculative character of the Indian stock market is
reflected in extremely high concentration of the market activity in a handful of shares to the
neglect of the remaining shares and absolutely high trading velocities of the speculative counters.

He opined that, short- term speculation, if excessive, could lead to "artificial price". An artificial
price is one which is not justified by prospective earnings, dividends, financial strength and assets
or which is brought about by speculators through rumours, manipulations, etc. He concluded that
such artificial prices are bound to crash sometime or other as history has repeated and proved.
Yasaswy N.J.(1993) disclosed how 'turnaround stocks' offer big profits to bold investors
and also the risks involved in investing in such stocks. Turnaround stocks are stocks with
extraordinary potential and are relatively under priced at a given point of time. He also revealed
that when the economy is in recession and the fundamentals are weak, the stock market, being a
barometer of the economy, also tends to be depressed. A depressed stock market is an ideal hunting
ground for 'bargain hunters', who are aggressive investors. Sooner or later recovery takes place
which may take a very long time. He concluded that the investors' watch work is 'caution' as
he may lose if the turnaround strategy does not work out as anticipated.
Sunil Damodar (1993) evaluated the 'Derivatives' especially the 'futures' as a tool for short-term
risk control. He opined that derivatives have become an indispensable tool for finance managers
whose prime objective is to manage or reduce the risk inherent in their portfolios. He disclosed that
the over-riding feature of 'financial futures' in risk management is that these instruments tend to be
most valuable when risk control is needed for a short- term, ie, for a year or less. They tend to be
cheapest and easily available for protecting against or benefiting from short term price. Their low
execution costs also make them very suitable for frequent and short term trading to manage risk,
more effectively.
Yasaswy J.N.(1993) evaluated the quantum of risks involved in different types of stocks.
Defensive stocks are low risk stocks and hence the returns are relatively low but steady. Cyclical
stocks involve higher risks and hence the rewards are higher when compared to the growth stocks.
Growth stocks belong to the medium risk category and they offer medium returns which are much
better than defensive stocks, but less than the cyclical stocks. The market price of growth stocks
does fluctuate, sometimes even violently during short periods of boom and bust. He emphasised
the financial and organisational strength of growth stocks, which recover soon, though
they may hit bad patches once in a way.
Donald E Fischer and Ronald J. Jordan (1994) analysed the relation between risk, investor
preferences and investor behaviour. The risk return measures on portfolios are the main
determinants of an investor's attitude towards them. Most investors seek more return for additional
risk assumed. The conservative investor requires large increase in return for assuming small
increases in risk. The more aggressive investor will accept smaller increases in return for large
increases in risk. They concluded that the psychology of the stock market is based on how
investors form judgments about uncertain future events and how they react to these judgment
R.Venkataramani.(1994) disclosed the uses and dangers of derivatives. The derivative
products can lead us to a dangerous position if its full implications are not clearly understood.
Being off-balance sheet in nature, more and more derivative products are traded than the cash
market products and they suffer heavily due to their sensitive nature.

3.1 PRIMARY OBJECTIVE

* To find the price movements of derivative market and investment strategies over futures
and options.
3.2 SECONDARY OBJECTIVES
* To identify the performance of various kinds of derivatives in the market.
* To analyze the traders technique in handling hedging towards the scripts.
* To study the speculation activities those are lying in the derivative market.
* To carry out the relevant relationship between Options and Futures market securities.
* To understand the price movements and market volatility in Cash and F & O market in
various sectors.
4 METHODOLOGY
RESEARCH DESING
The research design would be descriptive in nature.
SECONDARY DATA
The data which already collected and published are referred through the following web
sites.

Samples have been selected from 5 important sectors. And from each sectors two companies are
selected and made it easier for the analysis. Random selection technique has been used to provide
the analysis.
SAMPLE SIZE

10

TECHNIQUE

Random selection

SAMPLE SECTORS
1.

PETROLEUM SECTOR
IOC
ONGC

2.

BANKING SECTOR
CAN BANK
SBI BANK

3.

PHARMASUTICALS SECTOR
GLAXO SMITHKLIME
DR. REDDY

4.

AUTOMOBILE SECTOR
TATA MOTOTS
MAHINDRA & MAHINDRA

5.

IT SECTOR
INFOSYS
WIPRO

PERIOD OF STUDY
The study period considered for the study would be limited to 2010-11 to 2013-14.
Data has been collected through the trading terminal used by the company.
And also other means of sources are helpful in collecting the data for the study.

5. WORK DONE SO FAR

Objectives, research methodology and review of literature has been completed.
6. WORK TO BE DONE
The study depends on secondary data. This has to be compiled from the records of the
company.
7. LIMITATIONS
1.
2.
3.
4.

The study will be limited to only 3 commodities in Multi Commodity Exchanges.

Time duration for this study will be 3years.
The tools used have their own limitations.
The study will covers the periods between (1.4.2013 to 31.3.2014). The changes that have
taken place before and after this period will not be taken into consideration.
5. An in-depth analysis on the cause of changes in commoditys performance will not be
made.
EXPECTED DELIVERABLES
Futures market will have greater price transparency for the end-user. In fact, it has done a
commendable job to consider both stock and commodity exchanges for launching futures market
will have greater price transparency for the end-user. In fact, it has done a commendable job to
consider both stock and commodity exchanges for launching currency futures contracts. Stock
exchange will enable their large network of clients, traders, jobbers, arbitrators and speculators to
trade in currency derivatives; the commodity exchange MCX will enable the hedgers, namely
importers and exporters, who have genuine hedging needs for protection against bank rate
fluctuation. By the introduction of exchange traded currency futures in India can now avoided the
legal tangle and also bring the platform of foreign exchange in India same as developed countries.

The upward trend of the open interest, number of contracts traded and average daily turnover since
its inspection explain the whole story in detail. So, it can be thus concluded that the currency
futures market will get more success in the coming future and the economy and the risk hedgers
will definitely be benefited from this trade.
REFERENCES
1. Grewal and Navjot Grewal, Profitable lnz?estrnent in shares, Vision Books Pvt. Ltd. 36
Connaught Place, New Delhi 1984.
2. Jack Clark Francis, investments - Analysis and Management, MC Graw Hill, International
Editions, 1986.
3. Preethi Singh, Investment Management, Himalaya Publishing House, Bombay Nagpur and
Delhi, 1986.
4. David. L. Scott and William Edward, Ulzderstrrrldilzg and Managing lnz?estr~rerrt rlsk
and rettrrn, MC. Graw Hill Book Co. (U.K.) Ltd., London 1990.
5. Lewis Mandell, Inz?estnlerlts, Macmillan Publishing Company, New York, 1992.
6. Nabhi Kumar Jain, Horrr to errrrr irzore froin sl~rrres, Nabhi Publications, Delhi, 1992.
7. Carter Randall Norr-stop ~i~iil~ziirg 011 the stock innrket Vision Books, New Delhi,
Bombay (1992).
8. L.C.Gupta., "Stock Trading in India", Society for Capital Market Research and
Development, Delhi, 1992
9. Yasaswy.N.J., Tzlrnnrotrrzd Stocks, Big Profits for Bold Bargain Htinfers, Vision Books,
New Delhi, Bombay, 1993.
10. Sunil Bamodar, An Introduction to Derivatives and Risk Management in Financial
Markets", State Bank of India, Monthly Review Vol. XXXII No. 8, August 1993.
11. Yasaswy J.N. "The Risk Return Trade-off in shares" The Hindu Daily, Vol.116, February
12,1993, p.11.
12. Dona1d.E. and Fisher Rona1d.J. Jordan, Security Analysis and Portfolio Management,
Prentice Hall of India (Pvt.) Ltd. New Delhi 110001,1994.
13. R.Venkataraman.., "Risk Management in International Treasury Operations", Sfnfr Bnnk
ofli~~iin, Monthly Review, Vol. XXXIII, No. 12, April 1994, p.577.
14. K.Sivakumar., "Is your company creating Wealth for you", The Hindu, Business Line,
Daily, Vol. 117, February 13,1994, p.12.
15. Pattabhi Raman.V. "Wanna Do Equity Research, Annlyst, Monthly, October 1995, p.22.
16. S.Rajagopal,. "Bank Risk Management - A risk pricing model", State Bank of indin,
Monthly Review, VoI. XXXV, No.11, November
17. 1996, p.555.
18. Charles.P.Jones, Irlr~est~neilt Annlysis nnd nlnnngeiirerzt, John Wiley and sons Inc. New
York, Toronto, Singapore, 1996.
19. V.T.Godse., "Conceptual Framework for Risk Management", I.B.A. B~~lletiil, July 1996,
p.22.
20. Aswath Damodaran, lnr~esfiile~lt Vnliintioiz Tools nnd Techniques, John Wiley & Sons
Inc. New York 1996. Basudev Sen, Der~e~opilreilt nnlf Reglilatioil of the Indian Capital
21. Mnrket, Risk Mnirngeiirerlt Iiiiplicntioi~s, University Books House (Pvt. Ltd., Jaipur 1997.
22. Bhalla V.K., Iirz~estiirerrt Mnilngeiirei~t Secur ity Analysis and Portfolio Mnr~ngeiiierlf,
S. Chand & Co. Ltd., New Delhi. 1982.
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