Capital Market in India with respect to BSE &

NSE
SIP project report to be submitted in partial fulfillment of the
requirements for the PGDM

By Nishant Seth
20142032
Supervisors: 1. Company Guide: Mr. B. Sanjeev
Post Graduate Diploma in Management
Programme
Under the guidance of
Gaurav Sarin

DELHI SCHOOL OF BUSINESS

NEW DELHI

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ACKNOWLEDGEMENT
It gives me great satisfaction on completion of Summer Internship Project
entitled Introduction to Stock Markets.
On the submission of my project report I would like to express my sincere
gratitude to my Faculty Guide MrsShivi Khanna for mentoring me and taking
active interest throughout the project and for sharing her insights on the topics
and for being a constant source of inspiration and courage during the entire
project work. She was always available, correcting mistakes, intelligently directing
me to proper sources of information advising to aim for simplicity, brevity, clarity
and accuracy.
I would also like to express my special thanks to Mr B. Sanjeev (Head
Online Trading), SMC Global Securities Limited and Mr Sunny Dua ( ManagerBusiness Development - Retail ) for appointing me as project trainee and for their
help and cooperation during the Project work.
I would like to thank the entire team of SMC Global Securities Limited for
sharing their immense experience and extending their support in carrying out this
project work. I am greatly acknowledged for their kind help.

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Executive Summary

This project has been initiated for the purpose of acquainting me with, right
from the basics of the financial terminology used in the stock markets, further up to
gaining in depth knowledge of all the issues concerning the management of various
risks faced by investors and traders under different market scenarios.
It starts with the basic types of equity derivatives in India followed by the
basic terminologies of futures and options and their practical applications in the real
world.
The project goes on to describe how future contracts are used by hedgers,
speculators and arbitrageurs to make short term gains or provide a cushion to their
portfolios. Different strategies with live examples have been explained to give a
practical edge to the project.

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TABLE OF CONTENTS
Acknowledgement
............................
Executive summary...............

CHAPTERSPAGE NO.
1 Introduction to Company
.............................................5-9
2 What is Stock Exchange
................10
3 Stock Exchange of India
...11
4 National Stock Exchange(NSE)
12-13
5.Bombay Stock Exchange (BSE)
.14-15
6. About Stock Market of India
16-17
7.Major Segments of the Capital Market . 18-32
8. Bibliography......33

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Company Background
SMC Global Securities Limited has been working prudently for the past 22 odd years in financial
services in India. From the beginning of this financial institution in 1990 to current time it has
incorporated itself to work diligently for its customers and has consistently delighted its
customers with its discernment. Its hard work and customer oriented approach has added
appreciation from all over the world.
Mr.Subhash

Chand

Agarwal

and

Mr.

Mahesh

Chand Gupta are the visionaries who planted the

sapling of the Kalpvriksha called SMC. To shape
their vision into a reality they watered the sapling with
their principles of transparency, honesty and integrity;
and nourished it with their rock solid commitment for
excellence.

Professionally both are Chartered Accountants with a

rich experience of more than 20 years in the capital
market.

Their

exceptional

leadership

skills,

outstanding commitment and disciplined style of

working have fostered SMC into a financial hub
justifying the words that the future belongs to those
who believe in the beauty of their dreams.

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SMC Achievements
o Best Currency Broker in India (Source: UTV Bloomberg Financial Leadership
awards, 2011)
o Best Equity Broking House in India (Source: BSE-D&B Equity Broking Awards,
2010)
o Largest distribution network in the country (Source: BSE-D&B Equity Broking
Awards, 2011 & 2010)
o Indias Best Wealth management Company (Source : Business Sphere 2011)
o Awarded the Fastest Growing Retail Distribution Network in financial services
(Source: Business Sphere, 2010)
o Received Major Volume Driver award from BSE for 3 years consecutively (2004-05,
2005-06 and 2006-07)
o Nominated amongst the top 3, in the CNBC Optimix Financial Services Award 2008
under "National Level Retail Category"
o Amongst the First Financial Firms in India to expand operations in the lucrative gulf
market, by acquiring license for broking and clearing member with Dubai Gold and
Commodities exchange (DGCX)
o One of the largest proprietary desk for doing near risk-free arbitrage in equities and
commodities
o Institute of Economic Studies (IES) has honored our Chairman with the Pride of
India and Udyog Rattan awards. Also, IIFS has conferred him with Glory of India
award recently
o In its 22 years journey SMC Global Securities Limited offers a diverse range of
financial products and services to their investors.SMC offers a diverse range of

financial services which includes:

Institutional and retail brokerage of
Equity
Currency
Commodities
Derivatives
Online trading
Depository services
Fixed Deposits
IPOs and
Mutual funds distribution
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Dedicated desk for NRI and institutional clients

Insurance broking
Clearing services
Margin funding
Investment banking
Portfolio management
Wealth advisory & research

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Over the years, SMC has expanded its operations domestically as well as internationally.
Existing network includes regional offices at Mumbai, Kolkata, Chennai, Ahmadabad, Jaipur,
Hyderabad and Bangalore plus a growing network of 2500+ offices spread across 500+
cities/towns in India. SMC group has a highly efficient workforce of over 3,350+ employees and
over 16500 financial advisors serving the financial needs of more than 7,20,000 satisfied
investors.
The SMC provides trading platforms for its clients to trade in NSE, BSE, F&O, NCDEX, MCX,
MCX-SX, NMCE, ICEX, ACE & DGCX. There is online and off line services for the investors
and they can use it as per their knowledge and understanding. Currently in India, there are 3
major exchanges offering Currency future trading NSE, MCX-SX & USE. SMC Global
Securities is a trading cum clearing member of all these exchanges for the currency segment.
SMC is one of the largest proprietary desks for doing near risk-free arbitrage in equities and
commodities.
SMC is a participant of Central Depository Services Limited (CDSL) and National Securities
Depository Limited (NSDL). SMC, as a Depository Participant, offers depository accounts to
individual investors as well as corporate houses, which enables them to trade in the
dematerialized environment. Moneywise Financial Services Pvt. Ltd. (MFSPL), registered as a
non banking financial company (NBFC), is a subsidiary of SMC global securities Ltd. offers
loan against securities of shares. Loans against shares are extended against basket of securities
traded on BSE/ NSE.
SMC Comex International DMCC (part of SMC Group) is one of the initial, leading &
experienced clearing and broking members of Dubai Gold and Commodities Exchange (DGCX).
It offers commodity trading in Gold, Silver, Crude (WTI & Brent), Forex (INR, Euro, Dollar &
Sterling) and Steel Rebar Contracts.
SMC Capitals Limited is the Investment Banking arm of SMC group and is a SEBI registered
Category I Merchant Banker with strong management team; financial sponsors and corporate
partners to help corporate clients achieve their financial and strategic goals. SMC offers a wide
spectrum of investment banking services covering Corporate Advisory, Public Issues
Management, Capital Restructuring, Private Equity and Debt Syndication, Merger & Acquisition
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Advisory, Valuation Services and ESOP. SMC Capitals is associated with London-based Sapien
Capital. Sapien is authorized and regulated by the Financial Services Authority (FSA), UK and is
a member of the London Stock Exchange (LSE) which helps companies to raise money from
foreign markets by issuing ADR, GDR and IDR. Sapien is also an approved broker for the AIM
segment of the LSE. SMC also deals in Capital Gain Bond Issues which facilitates tax exemption
against long term capital gain as per Sec 54EC of Income Tax Act. Besides this they deal in GOI
8% Bonds and Bonds issued by Companies from time to time.
SMC with the help of their team of highly experienced analysts helps investors in understanding
the changes in economic world by providing a detailed timely Research reports covering
investment summary, trend of world markets, sector trends, commodity trends.

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What is meant by a Stock Exchange?

The Securities Contract (Regulation) Act, 1956 [SCRA] defines StockExchange as anybody of
individuals, whether incorporated or not,constituted for the purpose of assisting, regulating or
controlling the business of buying, selling or dealing in securities. Stock exchange could bea
regional stock exchange whose area of operation/jurisdiction is specified atthe time of its
recognition or national exchanges, which are permitted tohave nationwide trading since
inception. NSE was incorporated as a nationalstock exchange.
What is an Equity/Share?
Total equity capital of a company is divided into equal units of smalldenominations, each called
a share. For example, in a company the totalequity capital of Rs 2,00,00,000 is divided into
20,00,000 units of Rs 10each. Each such unit of Rs 10 is called a Share. Thus, the company then
issaid to have 20,00,000 equity shares of Rs 10 each. The holders of suchshares are members of
the company and have voting rights.
What is an Index?
An Index shows how a specified portfolio of share prices is moving in orderto give an indication
of market trends. It is a basket of securities and theaverage price movement of the basket of
securities indicates the indexmovement, whether upwards or downwards.
What is a Depository?
A depository is like a bank wherein the deposits are securities (viz. shares,debentures, bonds,
government securities, units etc.) in electronic form.
What is Dematerialization?
Dematerialization is the process by which physical certificates of an investorare converted to an
equivalent number of securities in electronic form andcredited to the investors account with his
Depository Participant (DP).

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Stock Exchanges of India

STOCK EXCHANGES OF INDIAThere are 24 stock exchanges in the country, 20 of them being
regional ones with allocated areas.Three others set up in the reforms era, viz., National Stock
Exchange (NSE) the Over theCounter Exchange of India Limited (OTCEI) and Inter-connected
Stock Exchange of IndiaLimited (ISE) have mandate to nationwide trading network. The ISE is
promoted by 15 regionalstock exchanges in the country and has been set up at Mumbai. The ISE
provides a member- broker of any of these stock exchanges and access into the national market
segment, which would be in addition to the local trading segment available at present. The NSE
and OCTEI, ISE andmajority of the regional stock exchanges have adopted the screen based
trading system (SBTS)to provide automated and modern facilities for trading in a transparent,
fair and open manner with access to investors across the country. As on 31 March 1999, 9,877
companies were listedon the stock exchanges and the market capitalization was 5,30,772crore.
The total single sided turnover on all stock exchanges during 2998-99 was Rs 10,23,381.The
following are the names of the various stock exchanges in India :The Mumbai Stock Exchange
TheAhmadabad Stock exchange Association Ltd.Bangalore Stock Exchange Ltd.C Stock
Exchange Association Ltd.The Calcutta Stock Exchange Association Ltd.Cochin Stock
Exchange Ltd.The Delhi Stock Exchange Association Ltd.The Guwahati Stock Exchange
Ltd.The Hyderabad Stock Exchange Ltd.Jaipur Stock Exchange Ltd.Kanara Stock Exchange
Ltd.The Ludhiana Stock Exchange Association Ltd.Madras stock Exchange Ltd.Madhya Pradesh
Stock Exchange Ltd.The Magadh Stock Exchange Ltd. Mangalore Stock Exchange Ltd.Pune
Stock Exchange Ltd.Saurashtra Kutch Stock Exchange Ltd.The Uttar Pradesh Stock Exchange
Association Ltd.Vadodara Stock Exchange Ltd.Coimbatore Stock ExchangeMeerut Stock
Exchange Ltd.Over The Counter (OTC) Exchange of IndiaThe National Stock Exchange of India

National Stock Exchange (NSE)

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The National Stock Exchange (NSE India) is the worlds third largest stock exchange interms of
transaction volumes. NSE India is based out of Mumbai. The National Stock Exchange of India
is the largest and most advanced exchange with 1016 companies listed and 726 trading members.
NSE is the largest stock exchange in India in terms of daily turnover and number of trades, for
both equitiesand derivative trading. National Stock Exchange (NSE India) was promoted by
leading financial institutions, banks, insurance companies and other financial intermediaries in
India but its ownership and management operate as separate entities eliminating any conflict of
interest. National Stock Exchange (NSE India) was incorporated in November 1992 as a taxpaying company unlike other stock exchanges in the India. NSE India Market Operations NSE
India 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
FNO segment commenced in June 2000. NSE India pioneered commencement of Internet
Trading in February 2000, which led tothe wide popularization of the National Stock Exchange
(NSE India) in the broker community.The year 2008 saw introduction of Stock and Currency
derivatives by the NSE India. NSE India AdvantageToday, the National Stock Exchange, in
short, NSE India, is the heart of the Indiancapital market, which beats in sync with the changing
market trends. There are 2799 plus NSE VSAT terminals covering cover more than 1500 cities
across the country, givinginvestors an added advantage. S&P CNX Nifty is the key index of NSE
India; the performance of fifty major Indian stocks is displayed here. These stocks are weighted
bymarket capitalization.Pioneering Efforts of National Stock ExchangeNSE India has to its
credit numerous pioneering efforts directed towards modernizingIndias financial and capital
markets. The NSE model of market structure originatedfrom the electronic limit order book
(LOB) feature for trading of securities firstimplemented by the National Stock Exchange India.
Online trading in India commencedin February 2000 under the efforts of this bourse. NSE India
also happens to be the firstand only exchange in the country for trading of GOLD ETFs
(exchange traded funds).The other few firsts associated with the National Stock Exchange are
launch of NSE-CNBC-TV18 media centre in association with CNBC-TV18, setting up the first
clearingcorporation National Securities Clearing Corporation Ltd. in India, co-promoting
andsetting up of the first depository in India (National Securities Depository Limited), andmore.
Today, the NSE India is counted amongst the topmost courses in the world.

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NSE is owned by the group of leading financial institutions such as Indian Bank or Life
Insurance Corporation of India and IDFC. However, in the totally de-mutualised Exchange, the
ownership as well as the management does not have a right to trade on the Exchange. Only
qualified traders can be involved in the securities trading.

The NSE is one of the few exchanges in the world trading all types of securities on a single
platform, which is divided into three segments: Wholesale Debt Market (WDM), Capital Market
(CM), and Futures & Options (F&O) Market. Each segment has experienced a significant growth
throughout a few years of their launch. While the WDM segment has accumulated the annual
growth of over 36% since its opening in 1994, the CM segment has increased by even 61%
during the same period.
The National Stock Exchange of India has stringent requirements and criteria for the companies
listed on the Exchange. Minimum capital requirements, project appraisal, and company's track
record are just a few of the criteria. In addition, listed companies pay variable listing fees based
on their corporate capital size.
The National Stock Exchange of India Ltd. provides its clients with a single, fully electronic
trading platform that is operated through a VSAT network. Unlike most world exchanges, the
NSE uses the satellite communication system that connects traders from 345 Indian cities. The
advanced technologies enable up to 6 million trades to be operated daily on the NSE trading
platform.
Interest Rate Futures was introduced for the first time in India by National Stock Exchange (NSE
India) on 31st August 2009, exactly after one year of the launch of Currency Futures. Common
segments dealt in include
Equity
Futures and Options
Retail Debt Market
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 Wholesale Debt Market

Currency futures

Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE India) is the oldest stock exchange in Asia and thefirst in India.
Established in 1875 as an AOP (Association of Persons), BSE India is nowa corporatized and
demutualised entity incorporated under the provisions of the Companies Act, 1956. With demutualization,
BSE India has Deutsche Brse and Singapore Stock Exchange as its strategic partners, two of world's best
managed stock exchanges providing BSE live updates to the investors in their countries. The Bombay
Stock Exchange (BSE India) is situated at Dalal Street in Mumbai and has over 5,000 companies that are
listed on it. The BSE India uses the latest technologies in the IT field to provide a single place where
traders from across the world can buy and sell stock in the Indian stock market. Today, BSE India is the
world's number one stock exchange in terms of the number of listed companies and the world's fifth in
transaction numbers. The market capitalizations on August 31, 2009 stood at USD 1.09 trillion. For easy
reference, a stock listed on theBSE India is classified into A, B, S, T and Z groups. The Bombay Stock
Exchange (BSEIndia) also offers electronic trading system called BOLT providing BSE live stock
prices.BSE India also offered India's first stock market index the Sensex (Sensitive index). It isan index of
30 stocks representing 12 major sectors. The Sensex is constructed on a 'free-float' methodology, and is
sensitive to movement of its constituents and market sentiments. Apart from the SENSEX, the BSE India
offers 21 indices, including 12sectoral indices in Indian share market.BSE India has an index cooperation
agreement with Deutsche Brse stock exchange so the SENSEX and other indices are available to
investors in Europe and America and investors are also able to check live BSE stock quotes there.
Barclays Global Investors through its iShares brand, has created an ETF (Exchange Traded Fund) which
tracks the SENSEX. The ETF enables investors in Hong Kong to take an exposure to share market India.
Simplification of Trading in the NSE BSE Market Initially shares and stocks of the NSE BSE did not
attract investors as in the current scenario. The complex processes involved and the lack of easy access to
information, updates, stock tips, guidance, etc. were the key drawbacks. With online trading and withall
inconveniences negated, the investor count increased rapidly. Today, companys listedin the NSE and
BSE sell thousands of shares each day to the public, raising money for further expansion and related
activities.Swimming against Volatility of NSE BSE Market the Indian stock market is often interpreted as
the NSE BSE market. Investments aresubject to market risks; it is the volatility that determines the rising
and falling prices of stocks. Here, you can have access to the A-Z of information related to the NSE and

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BSE.Our commitment is to serve you and guide you towards achieving your trading goals.Online Share
Market Trading in IndiaThe financial market in India is growing rapidly and is expected to emerge as one
of theleaders in the international arena very soon. This boom in financial markets is stimulatingthe growth
of the Indian share market encouraging the investors to invest in the sharemarket.The history of the share
market of India dates back to 1875. The name of the first sharetrading association in India was Native
Share and Stock Broker's Association whichlater came to be known as Bombay Stock Exchange (BSE).
This association began with318 members. Today India can boast of 24 share markets in the various parts
of thecountry, and a number of financial intermediaries that include banks, Non BankingFinancial
Corporations, Insurance companies, Mutual Funds, etc.

About Share Market of India

The Indian share market (capital market) is divided into two segments:
I.
II.

Primary market
II. Secondary market

The Primary market is that market where new securities (like shares, debentures,government bonds,
CDs, CPs, etc.) are issued to the public.
Investors can subscribe to IPO of companies to buy new shares directly from the issuer of shares i.e.
the company. The company receives the proceeds from the sale of these shares and uses it to fund its
operations and expand its business. The Primary Market is also known as the New Issues Market. The
Secondary market consists of trading in the shares of listed companies. Once the initial sale of shares
is undertaken, buying and selling shares of companies can be undertaken between the traders and
investors who want to purchase the shares and those share-holders who want to sell their shares.
These operations are undertaken in the Secondary Market.

The Secondary market consists of trading in the shares of listed companies. Once the initial sale of
shares is undertaken, buying and selling shares of companies can be undertaken between the traders
and investors who want to purchase the shares and those share-holders who want to sell their shares.
These operations are undertaken in theSecondary Market. A newly issued IPO will be considered a
primary market trade when the shares are first purchased by investors directly from the underwriting
investment bank; after that any shares traded will be on the secondary market, between investors
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themselves. In the primary market, share prices are set by the merchant bankers using valuation
methodologies, while the share prices in the secondary market are determined by themarket forces of
supply and demand.The share market of India is regulated by the Securities and Exchanges Board of
India (SEBI). The primary objective of SEBI is to promote healthy and orderly growth of theshare
market and secure investor protection. The SEBI also regulates the sharetransactions done by foreign
investors and traders and also keeps check againstmalpractices in the share market.The scope of the
share market in India has widened tremendously over the past fewyears, thanks to the launch of a
variety of products and services. Share markets are, bynature, extremely volatile and hence the risk
factor is an important concern for theintermediaries. To reduce this risk, the concept of derivatives
comes into the picture.Derivatives are products whose values are derived from one or more
underlying assets.These assets can be forex, equity, etc. The derivatives market in India is also
expandingimmensely with an increased number of market participants using derivatives.The need for
a derivatives market; the derivatives market performs a number of economicfunctions:
I.
II.
III.

V.

They help in channelizing risks from risk-averse people to risk oriented people
They help in the discovery of future as well as current prices
They boost entrepreneurial activity
IV.
They increase the volume traded in markets because of participation of risk
averse people in greater numbers
They increase savings and investment in the long run

The participants in a derivatives market:

Hedgers use futures or options markets to reduce or eliminate the risk associated with price
of an asset
Speculators use futures and options contracts to get extra leverage in betting on
futuremovements in the price of an asset. They canincrease both the potential gains and
potential losses by usage of derivatives in aspeculative venture
Arbitrageurs are in business to take advantage of a discrepancy between prices in
twodifferent markets. If, for example, they see thefutures price of an asset getting out of
line with the cash price, they will take offsetting positions in the two markets to lock in a
profit.
`
To invest in stock, one could start by opening a demat account with a broker. While investing in stock
market, one should make a detailed analysis of ones risk appetite. The investor must understand how
much he must invest, when must he invest and for how long he must stay invested. One must diversify
his portfolio in such a way that the risks arising due to the volatility in the market is spread over a
variety of stock investment avenues.If he is not willing to take any risk in the short term, he can be

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called a Cautious stock market Investor. He may wish to invest in cash or near-cash assets. He may also
think to invest in stock through Mutual Funds. But the potential for growth in such assets is not all that
high. Also inflation can reduce the returns that some of these assets generate. If the investor decides to
have a balance of risk and reward while investing in stock market, he can be called an investor with a
balanced Portfolio. He may choose to diversify his risks over a plethora of stock investment options. An
investor who chooses to have high risk levels in his portfolio can be called an Adventurous stock
market investor. He is ready to forgo the short term losses caused by the fluctuations in the market and
focus on the larger gains that await him in the long term. Such investors typically prefer investing in
stock market in a narrow range of securities, primarily equity.
The place where such securities are traded by these investors is known as the secondary market.
Securities issued
A) Preference Shares
B) Equity Shares
C) Debentures
Securities like Preference Shares and Debentures cannot be traded in the secondary market.
Equity shares is issued by the under writers and merchant bankers on behalf of the company.
Equity shares are tradable through a private broker or a brokerage house.
People who apply for these securities are:
A) High net worth individual
B) Retail investors
C) Employees
D) Financial Institutions
E) Mutual Fund Houses
F) Banks

In the context of financial market structure, Currently, NSE has the following major segments of
the capital market:
Equity: NSE plays an important role in helping an Indian companys access equity capital, by
providing a liquid and well-regulated market. NSE has about 1319 companies listed representing the
length, breadth and diversity of the Indian economy which includes from hi-tech to heavy industry,
software, refinery, public sector units, infrastructure, and financial services. Listing on NSE raises a
companys profile among investors in India and abroad. Trade data is distributed worldwide through
various news-vending agencies. More importantly, each and every NSE listed company is required to

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satisfy stringent financial, public distribution and management requirements. High listing standards
foster investor confidence and also bring credibility into the markets.
Futures and Options: The National Stock Exchange of India Limited (NSE) commenced trading in
derivatives with the launch of index futures on June 12, 2000. The futures contracts are based on the
popular benchmark S&P CNX Nifty Index. The Exchange introduced trading in Index Options (also
based on Nifty) on June 4, 2001. NSEalso became the first exchange to launch trading in options on
individual securities from July 2, 2001. Futures on individual securities were introduced on November
9, 2001. Futures andOptions on individual securities are available on 224 securities stipulated by
SEBI.The Exchange has also introduced trading in Futures and Options contracts based on CNX-IT,
BANK NIFTY, and NIFTY MIDCAP 50 indices. This section provides you with an insight into the
derivatives segment of NSE. Real-time quotesand information regarding derivative products, trading
systems & processes, clearing andsettlement, risk management, statistics etc. are available here.
Retail Debt Market: With a view to encouraging wider participation of all classes of investorsacross
the country (including retail investors) in government securities, the Government, RBIand SEBI have
introduced trading in government securities for retail investors. Trading in this retail debt market
segment (RDM) on NSE has been introduced w.e.f. January 16, 2003. Trading shall take place in the
existing Capital Market segment of the Exchange. In the first phase, all outstanding and newly issued
central government securities would be tradedin the retail segment. Other securities like state
government securities, T-Bills etc. would beadded in subsequent phases.

Wholesale Debt Market:The Wholesale Debt Market segment deals in fixed income securities and is
fast gaining ground in an environment that has largely focused on equities. The Wholesale Debt Market
(WDM) segment of the Exchange commenced operations on June30, 1994. This provided the first formal
screen-based trading facility for the debt market in the country. This segment provides trading facilities
for a variety of debt instruments including Government Securities, Treasury Bills and Bonds issued by
Public Sector Undertakings/ Corporate/ Bankslike Floating Rate Bonds, Zero Coupon Bonds,
Commercial Papers, Certificate of Deposits,Corporate Debentures, State Government loans, SLR and
Non-SLR Bonds issued by FinancialInstitutions, Units of Mutual Funds and Securitized debt by banks,
financial institutions, corporate bodies, trusts and others.Large investors and a high average trade value
characterize this segment. Till recently, themarket was purely an informal market with most of the trades
directly negotiated and struck between various participants. The commencement of this segment by NSE
has brought about transparency and efficiency to the debt market.

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Currency futures: Currency future is a forex derivatives contract to buy or sell one currency against the
other on a specified future date, at a price decided in the contract. NSE has Started Forex futures trading
from August 29th 2008. NSE is the first exchange in India to have obtained an in-principle approval from
Securities and Exchange Board of India (SEBI) to set up currency derivative segment. All the trades done
at NSE are clearly settled and risk managed by National Securities Clearing Corporation (NSCCL).
NSCCL is set up as a separate and independent entity. Reserve Bank of India and SEBI jointly formed a
Standing Technical Committee to evolve norms and oversee implementation of Exchange Traded
Currency Derivatives.

Departments of SEBI regulating trading in the secondarymarket

(1) Market Intermediaries Registration and Supervision department (MIRSD)
Registration, supervision, compliance monitoring and inspections of all market intermediaries
in respect of all segments of the markets viz. equity, equity derivatives, debt and debt related
derivatives.
(2) Market Regulation Department (MRD)
Formulating new policies and supervising the functioning and operations (except relating to
derivatives) of securities exchanges, their subsidiaries, and market institutions such as
Clearing and settlement organizations and
Depositories (Collectively referred to as Market SROs).
(3)Derivatives and New Products Departments (DNPD)
Supervising trading at derivatives segments of stock exchanges, introducingnew product to be
traded, and consequent policy changes.

POWERS &FUNCTIONS
1. Regulating the business in stock exchanges and any other securitiesmarkets.
2.Registering and regulating the working of stock brokers, sub-brokers, sharetransfer
agents, bankers to an issue, trustees of trust deeds, registrars to anissue, merchant
bankers, underwriters, portfolio managers, investmentadvisers and such other
intermediaries who may be associated withsecurities markets in any manner.
3. Registeringandregulatingtheworkingofthedepositories, participants custodians of
securities, foreign institutional investors, credit rating agenciesand such other
intermediaries as the board may, by notification, specify inthis behalf.
4. Registering and regulating the working of (venture capital funds andcollective
investment schemes) including mutual funds.
5. Promoting and regulating self-regulatory organizations.
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6. Prohibiting fraudulent and unfair trade practices relating to securitiesmarkets.

7. Promotinginvestors'educationandtrainingofintermediariesofsecuritiesmarkets.
8. Prohibiting insider trading in securities.

Instruments Available For Trading

In recent years, derivatives have become increasingly popular due to their applications
forhedging, speculation and arbitrage. Before we study about the applications of
commodityderivatives, we will have a look at some basic derivative products. While futures and
optionsare now actively traded on many Exchanges, forward contracts are popular on the OTC
market.In this chapter, we shall study in detail these three derivative contracts. At present,
onlycommodity futures trade on the NCDEX.

Forward Contracts
A forward contract is an agreement to buy or sell an asset on a specified date for a specifiedprice.
One of the parties to the contract assumes a long position and agrees to buy the underlyingasset
on a certain specified future date for a certain specified price. The other party assumesa short
position and agrees to sell the asset on the same date for the same price. Other contract details
like delivery date, price and quantity are negotiated bilaterally by the partiesto the contract. The
forward contracts are normally traded outside the exchanges.The salient features of forward
contracts are:
They are bilateral contracts and hence exposed to counterparty risk.
Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the same
counterparty, which often results in high prices being charged.

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However, forward contracts in certain markets have become very standardized, as in the caseof
foreign exchange, thereby reducing transaction costs and increasing transactions volume.This
process of standardization reaches its limit in the organized futures market.Forward contracts are
very useful in hedging and speculation. The classic hedging application would be that of an
exporter who expects to receive payment in dollars three months later. Heis exposed to the risk
of exchange rate fluctuations. By using the currency forward market tosell dollars forward, he
can lock on to a rate today and reduce his uncertainty. Similarly animporter who is required to
make a payment in dollars two months hence can reduce hisexposure to exchange rate
fluctuations by buying dollars forward.If a speculator has information or analysis, which
forecasts an upturn in a price, then he cango long on the forward market instead of the cash
market. The speculator would go long onthe forward, wait for the price to rise, and then take a
reversing transaction to book profits.

Limitations of Forward Markets

Forward markets world-wide are afflicted by several problems:
Lack of centralization of trading,
Illiquidity and
Counterparty risk
In the first two of these, the basic problem is that of too much flexibility and generality.
Theforward market is like a real estate market in that any two consenting adults can form
contractsagainst each other. This often makes them design terms of the deal which are very
convenientin that specific situation, but makes the contracts non-tradable.
Counterparty risk arises from the possibility of default by any one party to the transaction.When
one of the two sides to the transaction declares bankruptcy, the other suffers. Evenwhen forward
markets trade standardized contracts, and hence avoid the problem of illiquidity,still the
counterparty risk remains a very serious issue.

Introduction to Futures

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Futures markets were designed to solve the problems that exist in forward markets.A futures
contract is an agreement between two parties to buy or sell an asset at acertain time in the future
at a certain price.
Distinction between Futures and Forward Contracts
Forward contracts are often confused with futures contracts. The confusion is primarily
becauseboth serve essentially the same economic functions of allocating risk in the presence of
futureprice uncertainty. However, futures are a significant improvement over the forward
contracts as they eliminate counterparty risk and offer more liquidity.
Futures Terminology
Spot price: The price at which an asset trades in the spot market.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The period over which a contract trades. The commodity futures contracts on
the NCDEX have one month, two months, three months etc (not more than a year)expiry
cycles.
Most of the agri commodities futures contracts of NCDEX expire on the20th day of the delivery
month. Thus, a January expiration contract expires on the20th of January and a February
expiration contract ceases to exist for trading after the20th of February. If 20th happens to be a
holiday, the expiry date shall be theimmediately preceding trading day of the Exchange, other
than a Saturday. Newcontracts for agri commodities are introduced on the 10th of the month.
Expiry date: It is the date specified in the futures contract. This is the last day onwhich the
contract will be traded, at the end of which it will cease to exist.
Delivery unit: The amount of asset that has to be delivered under one contract. Forinstance,
the delivery unit for futures on Soybean on the NCDEX is 10 MT. The deliveryunit for the
Gold futures contract is 1 kg.
Basis: Basis is the difference between the futures price and the spot price. There willbe a
different basis for each delivery month for each contract. In a normal market,futures prices
exceed spot prices. Generally, for commodities basis is defined as spotprice -futures price.
However, for financial assets the formula, future price -spot price,is commonly used.

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 Cost of carry: The relationship between futures prices and spot prices can be summarizedin
terms of what is known as the cost of carry. This measures the storage cost plus theinterest
that is paid to finance the asset.
Initial margin: The amount that must be deposited in the margin account at the timea
futures contract is first entered into is known as initial margin.
Marking-to-market (MTM): In the futures market, at the end of each trading day,
themargin account is adjusted to reflect the investor's gain or loss depending upon
thefutures closing price. This is called marking to market.
Maintenance margin: This is somewhat lower than the initial margin. This is set toensure
that the balance in the margin account never becomes negative. If the balancein the margin
account falls below the maintenance margin, the investor receives amargin call and is
expected to top up the margin account to the initial margin levelbefore trading commences
on the next day.

Introduction to Options
In this section, we look at another interesting derivative contract, namely options. Options are
fundamentally different from forward and futures contracts. An option gives the holder of
theoption the right to do something. The holder does not have to exercise this right. In contrast,In
a forward or futures contract, the two parties have committed themselves to doing
something.Whereas it costs nothing except margin requirements to enter into a futures contract,
thepurchase of an option requires an up-front payment.

Option Terminology
Commodity options: Commodity options are options with a commodity as the
underlying.For instance, a gold options contract would give the holder the right to buy or
sell aspecified quantity of gold at the price specified in the contract.

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 Stock options: Stock options are options on individual stocks. Options currently tradeon
over 500 stocks in the United States. A contract gives the holder the right to buy orsell
shares at the specified price.
Buyer of an option: The buyer of an option is the one who by paying the optionpremium
buys the right but not the obligation to exercise his option on the seller/writer.
Writer of an option: The writer of a call/ put option is the one who receives the
optionpremium and is thereby obliged to sell/ buy the asset if the buyer exercises on him.

There are two basic types of options: call options and put options.
Call option: A call option gives the holder the right but not the obligation to buy anasset by
a certain date for a certain price.
Put option: A put option gives the holder the right but not the obligation to sell anasset by a
certain date for a certain price.
Option price: Option price is the price which the option buyer pays to the option seller.It is
also referred to as the option premium.
Expiration date: The date specified in the options contract is known as the expirationdate,
the exercise date, the strike date or the maturity.
Strike price: The price specified in the options contract is known as the strike price or the
exercise price.
In-the-money option: An in-the-money (ITM) option is an option that would lead to
apositive cash flow to the holder if it were exercised immediately. A call option on thendex
is said to be in-the- money when the current index stands at a level higher thanthe strike
price (i.e. spot price > strike price). If the index is much higher than thestrike price, the call
is said to be deep ITM. In the case of a put, the put is ITM if theindex is below the strike
price.
At-the-money option: An at-the-money (ATM) option is an option that would lead tozero
cash flow if it were exercised immediately. An option on the index is at-themoneywhen the
current index equals the strike price (i.e. spot price = strike price).
Out-of-the-money option: An out-of-the-money (OTM) option is an option that wouldlead
to a negative cash flow if it were exercised immediately. A call option on the indexis outof-the-money when the current index stands at a level which is less than thestrike price (i.e.
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spot price < strike price). If the index is much lower than the strikeprice, the call is said to
be deep OTM. In the case of a put, the put is OTM if the indexis above the strike price.
Intrinsic value of an option: The option premium can be broken down into twocomponents
- intrinsic value and time value. The intrinsic value of a call is the amountthe option is
ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Putting itanother way, the
intrinsic value of a call is Max [0; (St - K)] which means the intrinsicvalue of a call is the
greater of 0 or (St - K). Similarly, the intrinsic value of a put isMax[0;K - St],i.e. the greater
of 0 or (K - St). K is the strike price and St is the spotprice.
Time value of an option: The time value of an option is the difference between itspremium
and its intrinsic value. Both calls and puts have time value. An option that isOTM or ATM
has only time value. Usually, the maximum time value exists when theoption is ATM. The
longer the time to expiration, the greater is an option's time value,all else equal. At
expiration, an option should have no time value.

Basic Payoffs
A payoff is the likely profit/ loss that would accrue to a market participant with change in the
price of the underlying asset. This is generally depicted in the form of payoff diagrams which
show the price of the underlying asset on the X-axis and the profits/ losses on the Y-axis. In
this section, we shall take a look at the payoffs for buyers and sellers of futures and options.
But first we look at the basic payoff for the buyer or seller of an asset. The asset could be a
commodity like gold or chilli, or it could be a financial asset like a stock or an index.

Payoff for Buyer of Asset: Long Asset

In this basic position, an investor buys the underlying asset, gold for instance, for Rs. 18,000
per 10 gms, and sells it at a future date at an unknown price, St. Once it is purchased, the
investor is said to be 'long' the asset.

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Payoff for Futures

Futures contracts have linear payoff, just like the payoff of the underlying asset that we lookedat
earlier. If the price of the underlying rises, the buyer makes profits. If the price of theunderlying
falls, the buyer makes losses. The magnitude of profits or losses for a given upwardor downward
movement is the same. The profits as well as losses for the buyer and the sellerof a futures
contract are unlimited. These linear payoffs are fascinating as they can be combinedwith options
and the underlying to generate various complex payoffs.
Payoff for Buyer of Futures: Long Futures
The payoff for a person who buys a futures contract is similar to the payoff for a person
whoholds an asset. He has a potentially unlimited upside as well as a potentially unlimited
downside.Take the case of a speculator who buys a two-month gold futures contract on the
NCDEX whenit sells for Rs. 18000 per 10 gms. The underlying asset in this case is gold. When
the prices ofgold in the spot market goes up, the futures price too moves up and the long futures
positionstarts making profits. Similarly, when the prices of gold in the spot market goes down,
thefutures prices too move down and the long futures position starts making losses.
Payoff for Seller of Futures: Short Futures
The payoff for a person who sells a futures contract is similar to the payoff for a person
whoshorts an asset. He has a potentially unlimited upside as well as a potentially unlimited
downside.Take the case of a speculator who sells a two-month chilli futures contract when the
contractsells at Rs.6500 per quintal. The underlying asset in this case is red chilli. When the
prices ofchilli move down, the chilli futures prices also move down and the short futures position
startsmaking profits. When the prices of chilli move up, the chilli futures price also moves up
and theshort futures position starts making losses.
Payoff for Options
The optionality characteristic of options results in a non-linear payoff for options. In
simplewords, it means that the losses for the buyer of an option are limited, however the profits
arepotentially unlimited. The writer of an option gets paid the premium. The payoff from the
option written is exactly the opposite to that of the option buyer. His profits are limited to the
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option premium, however his losses are potentially unlimited. These non-linear payoffs are
fascinating as they lend themselves to be used for generating various complex payoffs
usingcombinations of options and the underlying asset. We look here at the four basic payoffs.
Payoff for Buyer of Call Options: Long Call
A call option gives the buyer the right to buy the underlying asset at the strike price specifiedin
the option. The profit/ loss that the buyer makes on the option depends on the spot price of the
underlying. If upon expiration, the spot price exceeds the strike price, he makes a profit. Higher
the spot price, more is the profit he makes. If the spot price of the underlying is less than the
strike price, he makes loss. If he lets his option expire un-exercised, his loss in thiscase is the
premium he paid for buying the option.
Payoff for buyer of call option on gold
The figure shows the profits / losses for the buyer of a three-month call option on gold at astrike
of Rs. 17000 per 10 gms. As can be seen, as the prices of gold rise in the spot market,the call
option becomes in-the-money. If upon expiration, gold trades above the strike of Rs.17000, the
buyer would exercise his option and get profit. The profits possible on this optionare potentially
unlimited. However, if the price of gold falls below the strike of Rs. 17000, helets the option
expire. His losses are limited to the extent of the premium he paid for buyingthe option.
Payoff for Writer of Call Options: Short Call
A call option gives the buyer the right to buy the underlying asset at the strike price specifiedin
the option. For selling the option, the writer of the option charges a premium. The profit loss that
the buyer makes on the option depends on the spot price of the underlying. Whateveris the
buyer's profit is the seller's loss. If upon expiration, the spot price exceeds the strikeprice, the
buyer will exercise the option on the writer. Hence, as the spot price increases, thewriter of the
option starts making losses. Higher the spot price, more is the loss he makes. Ifupon expiration
the spot price of the underlying is less than the strike price, the buyer losses.If he lets his option
expire un-exercised, the writer gets to keep the premium.
Payoff for Buyer of Put Options: Long Put
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A put option gives the buyer the right to sell the underlying asset at the strike price specifiedin
the option. The profit/ loss that the buyer makes on the option depends on the spot price ofthe
underlying. If upon expiration, the spot price is below the strike price, he makes a profit.Lower
the spot price, more is the profit he makes. If the spot price of the underlying is morethan the
strike price, he makes loss. If he lets his option expire un-exercised, his loss in thiscase is the
premium he paid for buying the option.
Payoff for Writer of Put Options: Short Put
A put option gives the buyer the right to sell the underlying asset at the strike price specifiedin
the option. For selling the option, the writer of the optioncharges a premium. The profit/loss that
the buyer makes on the option depends on the spotprice of the underlying. Whatever is the
buyer's profit is the seller's loss. If upon expiration,the spot price happens to be below the strike
price, the buyer will exercise the option on thewriter. If upon expiration the spot price of the
underlying is more than the strike price, thebuyer lets his option expire un-exercised and the
writer gets to keep the premium.

Depositories
A depository holds the securities in a dematerialized form for the investors in their beneficiary
accounts. Each clearing member is required to maintain a clearing pool account with the
depositories. They are required to make available the required securities in the designated
account on settlement day. The depository runs an electronic file to transfer the securities from
the accounts of the custodians/clearing member to that of the NSCCL(and vice versa) as per the
schedule of allocation of the securities. The two depositories in India are the National Securities
Depository Ltd. (NSDL) and the Central Depository Services (India) Ltd. (CDSL).
Professional Clearing Member
The NSCCL admits a special category of members known as professional clearing members
(PCMs). The PCMs may clear and settle trades executed for their clients (individuals,
institutions, etc.). In such cases, the functions and responsibilities of the PCM are similar to those
of the custodians. The PCMs also undertake the clearing and settlement responsibilitiesof the
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trading members. The PCMs in this case have no trading rights, but have clearing rights, i.e.,
they clear the trades of their associate trading members and institutional clients.
Trading Mechanism
The NSE was the first stock exchange in the country and was set up as a national exchange
having nationwide access with a fully automated screen-based trading system. The National
Exchange for Automated Trading (NEAT) is the trading system of the NSE. The NEAT facilitates
an online, fully automated, nationwide, anonymous, order driven, screen-based trading system.
In this system, a member can enter the quantities of securities and the prices at which he/she
would liketo transact, and the transaction is executed as soon as it finds a matching sale for the
buy order for a counterparty. The numerous advantages of the NEAT system are listed below:
It electronically matches orders on a price/time priority, and hence, cuts down on time,
cost, and risk of error, as well as on fraud, resulting in improved operational efficiency.
It allows the faster incorporation of price sensitive information into prevailing prices, thus
increasing the informational efficiency of markets.
It enables market participants to see the full market in real time, making the market
transparent. It allows a large number of participants, irrespective of their geographical
locations, to trade with one another simultaneously, improving the depth and the liquidity
of the market.
It provides tremendous flexibility to the users in terms of the kinds of orders that can be
placed on the system.It ensures full anonymity by accepting orders, big or small, from
members without revealing their identity, thus providing equal access to everybody.
It provides a perfect audit trail that helps to resolve disputes by logging in the trade
execution process in its entirety.
Clearing and Settlement Process
The clearing process involves the determination of what the counterparties owe, and which
counterparties are due to receive on the settlement date, following which the obligations are
discharged by settlement. The clearing and settlement process involves three main activities
clearing, settlement, and risk management.
The core processes involved in clearing and settlement include:
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a) Trade Recording: The key details about the trades are recorded to provide the basis for
settlement. These details are automatically recorded in the electronic trading system of the
exchanges.
b) Trade Confirmation: Trades that are meant for settlement by the custodians are indicated with
a custodian participant code, and the same is subject to confirmation by the respective custodian.
The custodian is required to confirm the settlement of these trades on T+1 day by the cut-off time
of 1:00 pm.
c) Determination of Obligation: The next step is the determination of what the counterparties
owe, and what the counterparties are due to receive on the settlement date. The NSCCL
interposes itself as a central counterparty between the counterparties to trade and net the
positions so that a member has a security-wise net obligation to receive or deliver a security, and
has to either pay or receive funds.
The settlement process begins as soon as the members obligations are determined through the
clearing process.
The settlement process is carried out by the clearing corporation with the help of clearing banks
and depositories.
The clearing corporation provides a major link between the clearing banks and the depositories
and the actual movement of funds as well as securities on the prescribed pay-in and pay-out day.
d) Pay-in of Funds and Securities: This requires the members to bring in their funds/securities to
the clearing corporation. The CMs make the securities available in the designated accounts with
the two depositories (the CM pool account in the case of the NSDL, and the designated
settlement accounts in the case of CDSL). The depositories move the securities available in the
pool accounts to the pool account of the clearing corporation.
Likewise, the CMs with funds obligations make the funds available in the designated accounts
with the clearing banks. The clearing corporation sends electronic instructions to the clearing
banks to debit the designated CMs accounts to the extent of the payment obligations. The banks
process these instructions, debit the accounts of the CMs, and credit the accounts of the clearing
corporation. This constitutes the pay-in of funds and securities.
e) Pay-out of Funds and Securities: After processing for shortages of funds/securities and
arranging for the movement of funds from surplus banks to deficit banks through RBI clearing,
the clearing corporation sends electronic instructions to the depositories/clearing banks to release
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the pay-out of securities/funds. The depositories and clearing banks debit the accounts of the
clearing corporation and credit the accounts of CMs. This constitutes the pay-out of funds and
securities.
Settlement Cycle
The NSCCL clears and settles trades as per the well-defined settlement cycles All the securities
are traded and settled under the T+2 rolling settlement. The NSCCL notifies the relevant trade
details to the clearing members/custodians on the trade day (T), which are confirmed on T+1 to
the NSCCL. Based on this, the NSCCL nets the positions of the counterparties to determine their
obligations. A clearing member has to pay-in/pay-out funds and/or securities.The obligations are
netted for a member across all the securities to determine his fund obligations and he has to
either pay or receive funds. The members pay-in/pay-out obligations are determined by T+1 at
the latest, and are forwarded to them on the same day, so that they can settle their obligations on
T+2. The securities/funds are paid-in/paid-out on T+2 day to the members clients and the
settlement is completed within 2 days from the end of the trading day.
The important settlement types are: Normal Segment (N), Trade for Trade Surveillance (W),
Retail Debt Market (D), Limited Physical Market (O), Non-cleared TT Deals (Z), and Auction
Normal (A). Trades in the settlement type N, W, D, and A are settled in the dematerialized mode.
Trades under the settlement type O are settled in the physical form. Trades under the settlement
type Z are settled directly between the members, and may be settled in either the physical
or the dematerialized mode.
Dematerialized Settlement
For all trades executed on the T day, the NSCCL determines the cumulative obligations of each
member on the T+1 day, and electronically transfers the data to the clearing members (CMs). All
trades concluded during a particular trading date are settled on a designated settlement day, i.e.,
T+2 day. In the case of short deliveries on the T+2 day in the normal segment, the NSCCL
conducts a buyin auction on the T+2 day, and the settlement for the same is completed on the
T+3 day, whereas in the case of the W segment, there is a direct close out. For arriving at the
settlement day, all intervening holidays, including bank holidays, NSE holidays, Saturdays, and
Sundays are excluded. The settlement schedule for all the settlement types in the manner
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explained above is communicated to the market participants vide a circular issued during the
previous month.

Bibliography

www.ncfm.com
www.nseindia.com
www.scribd.com
www.bseindia.com
www.moneycontrol.com

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