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CHAPTER-1
INRODUCTION
HISTORY OF STOCK EXCHANGE
The only stock exchange operating in the 19th century were those of
Bombay set
up in 1875 and Ahmadabad set up in 1894 these were organized as
voluntary non-profit
making organization of brokers to regulate and protect interest.
Before the control
insecurities trading became a central subject under the constitution in
1950, it was a state
subject and the Bombay securities contract (CONTROL) Act of 1952 used
to regulate
trade in securities. Under this act, the Bombay stock exchange in 1927
and Ahmadabad
in 1937.
During the war boom, a number of stock exchanges were organized
in Bombay,
Ahmadabad and other centers, but they were not recognized. Soon
after it became a
central subject, central legislation was proposed and a committee headed
by A.D. Goral
went in to the bill for securities regulation. On the basis of
committees
recommendations and public discussions the securities contracts
(regulations) Act
became law in 1956.

Definition of Stock Exchange

Stock exchange means any body or individuals whether
incorporated or not,
constituted for the purpose of assisting, regulating or controlling the
business of buying,
selling or dealing in securities. It is an association of member brokers for

the purpose of
self regulation and protecting the interests of its members. It can
operate only of it is
recognized by the govt.
1956. The

Under the securities contract (regulation) Act,

recognition is granted under section 3 of the Act by the central

government, ministry if
finance.

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BYELAWS
Besides the above act, the securities contract (regulations)
rules were also
made in 1975 to regulate certain matters of trading on the stock Exchange.
These are also
byelaws of the exchanges, which are concerned with the following
subjects. Opening /
closing of the stock exchange, timing of trading, regulation of bank
transfer, regulation of
Badla or carryover business, control of settlement, and other activities of
stock exchange,
fixations of margin, fixations of market price or marking price,
regulation of tarlatan
business (jobbing), regulation of brokers trading, brokerage charges,
trading rules on the
exchange, arbitration and settlement of disputes, settlement and
clearing of the trading
etc.

Regulations of Stock Exchange

The securities contract (regulations) is the basis for operations
of the stock
exchange in India. No exchange can operate legally without the
government permission
or recognition. Stock exchanges are give monopoly in certain areas under
section 19 of
the above Act to ensure that the control and regulation are facilitated.
Recognition can be
granted to a stock exchange provided certain are satisfed and the
necessary Information
is supplied to the government. Recognition can also be withdrawn, if
necessary. Where
there are no stock exchanges, the government can license some to the
brokers to perform
the functions of a stock exchange in its absence.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

SEBI was set up as an autonomous regulatory authority by the
Government of India
in 1988 to perform the interests of investors in securities and to
promote the
development and to regulate the securities market and for matters
connected there with
or incidental thereto. It is empowered by two acts namely the SEBI act,
1992 and the
securities contract (regulation) Act 1956 to perform the function of
protecting investors
rights and regulating the capital market.

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BASIC OF DERIVATIVES
The term Derivatives independent value, i.e. its value is
entirely derived from the underlying asset. The underlying asset
can be securities, commodities bullion, currency, live stock or
anything else. In other words, derivative means a forward, future,
option or any other hybrid contract of per determined fixed
duration, linked for the purpose of contract fulfillment to the value of
a specifed real or financial asset or to an index of securities.
The Securities Contracts (Regulation) Act 1956 Define
Derivatives as Under Derivative Includes

a securities derivatives from a debt instrument, share, lone

writher secured or

unsecured, risk instrument or contract

for diferent or any other security

a contract which derives its value from the prices, or index of

price of underlying

Securities

The above definition conveys: Those derivatives are financial

products and derive its value from the underlying assets.
Derivatives is derived from another financial
instrument/contract called the Underlying. In the case of
Nifty futures, Nifty index is the underlying.

Signifcance of
Derivatives

Derivatives are Used

1. By Hedgers for protecting (risk-covering) against adverse
movement. Hedging is
a mechanism to reduce price risk inherent in open positions.
Derivatives are
widely used for hedging. A Hedge can help lock in existing profits. Its
purpose is
to reduce the volatility of a portfolio by reducing the risk.
2. Speculators to make quick fortune by anticipating/forecasting
future market
movement. Hedgers with to eliminate or reduce the price risk to
which they are
already exposed. Speculators, on the other hand are those classes

of investors
who willingly take price risks to proft from price change in the
underlying.
While the need to provide hedging avenues by means of derivative
instruments is
laudable, it call for the existence of
the role of

speculative traders to play

counter-party to the hedgers. It is for this reason that the role of

speculators gains
prominence in a derivatives market.
3. Arbitrageurs to earn risk-free profits by exploiting
market importance. 3

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Arbitrageurs profits from price differential existing in two
markets by
simultaneously operating in the two different markets.

Type of Derivatives
Derivatives products initially emerged devices against fluctuations in
commodity
price, and commodity-linked derivatives remained the sole form of such
predicts for
almost three hundred years. Financial derivatives came into spotlight in
the post-1970
period due to growing instability in the fnancial 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 term of variety of
instruments
available their complexity and also turnover. In the class of equity
derivatives the world
over, future and options on stock indices have gained more popularity
than on individual
stocks, especially among institutional investors, who are major uses of
index-linked
derivatives. Even small investors fnd these useful due to high correlation
of the popular
index 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. The most commonly used derivatives contracts
are forward,
futures and options with we shall discuss in detail later. Here we take a
brief look at
various derivatives contracts that have come to be used.
Forwards:

A forward contract is a customized contract between two

entities, where
settlement takes place on a specifc date in the future at todays preagreed price.
Futures: A futures contract is an agreement between two parties to buy
or sell an asset
at a certain time in the future at a certain price. Futures contracts are
special type of
forward contract in the sense that the former are standardized exchangetrade contracts.

Options: options are of two types- calls and put calls give the buyer
right but not the
obligation to buy a give quantity of the underlying asset, at a given price
on or before a
given future date. Puts gives the buyer the right, but not the
obligation to sell a given 4

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quantity of the underlying asset at a given price on or before given date.
Warrants: Options generally have lives of up to one year, the majority of
option traded
on options exchanges having a maximum maturity of one month. Longerdated options
are called warrants and are generally traded over-counter.
Leaps: The acronym LEAPS means long-term equity anticipation
securities. These are
options having a maturity of up to three years.
Baskets: Basket options are options on portfolios of underlying assets.
The underlying
asset is usually a moving average of a basket of assets. Equity index
options are a form of
basket options.
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: these entail swapping only the interest related cash
flow between
the parties in the same currency.
Currency Swaps: These entail swapping both principal and interest
between the parties,
with the case flows in one direction being in a diferent currency than those
in the
opposition direction.
Swaptions: Swaptions are options to buy or sell a swap that will became
operative at the
expiry of the options. Thus a Swaptions is an option on a forward swap.

Rather than have

called and puts, the swaption market has receiver swaption and payer
swaptions. A
receiver swaptions in an option to receiver fxed and pay floating. A
player swaption is
an option to pay fixed and receive floating.

Classification of Derivatives
The Derivatives Can be Classifed as
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Forwards (Currencies, Stocks, Swaps etc)

Forward contract is diferent from a spot truncation, where payment
of price and

delivery of commodity concurrently take place immediately the transaction

is settled. In a
forward contract the sale/purchase truncation of an asset is settled
including the price
payable, not for delivery/settlement at spot, but at a specified future
date. India has a
strong dollar-rupee forward market with contract being traded for one,
two, and sixmonth expiration. Daily trading volume on this forward Market is around
$500 million a
day. Indian users of hedging services are also allowed to buy derivatives
involving other
currencies on foreign markets.

Futures(Currencies, Stocks, Indexes, Commodities etc)

A futures contract has been defined as a standardized,
exchange-traded
Agreement specifying a quantity and price of a particular type of
commodity
(Soybeans, gold, oil, etc) to be purchased or sold at a predetermined date in the
Future. On contract date, delivery and physical possession take
place unless the
Contract has been closed out futures fate also available ob
various financial
Products and indexes today. A futures contract is thus a forward,
contract, which
trades on national stock exchange. This provides them
transparency, liquidity,
anonymity of trades, and also eliminates the counter party risks
due to the
guarantee provided by national securities clearing corporation
limited.

Options (Currencies, Stocks, Indexes etc)

Options are the standardized financial that allows the buyer (holder)
if the
Options, i.e. the right at the cost of options premium, not the
obligation, to
but (call options) or sell (put options) a specifed asset at a set price
on or before
a Specified date through exchange under stringent financial security
against
default.

FORDWARD CONTRACTS
A forward contract is an agreement to buy or sell an asset on a
specified date for a 6

Page 7
specified price. One of the parties to the contract assumes a long position
and agrees to
buy the underlying asset on a certain specifed future date for a certain
specified price.
The other party assumes a short position and agrees to sell the asset on
the same date for
the same price. Other contract details like delivery date, the parties to
the contracts
negotiate price and quality bilaterally. The forward contracts are normally
traded outside
the exchanges.
The Silent Futures of Forward Contract are
The bilateral contracts and hence exposed to counter-party 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
the same
counter Party, which often results in high prices being changed.
However forward contracts in certain markets have become very
standardization, as
in the case of foreign exchange, thereby reducing transaction cost
and increasing
transactions volume. This process of standardization reaches its limit in
the organized
futures market .Forward contracts is very useful in hedging and
speculation. The classic
hedging application word is that of an exporter who expects to receive
payment in dollars
three Months later he is exposed to the risk of exchange rate
fluctuations. By using the
currency forward markets to sell dollars forward, he can lock on to a
rate today and
reduce his uncertainty. Similarly an importer who is required to make a
payment in
dollars forward if a speculator has information or analysis, which forecasts

an upturn in a
price, than he can go long on the forward market instead of the cash
market. The
speculator would go long on the forward, wait for the price to rise, and
then take a
reversing transaction to book profits. Speculators may well be required
to deposit a
margin upfront. However, this is generally a relatively small proportion of
the value of
the assets underlying the forward contract. The use of forward markets
here supplies
leverage to the speculator.

LIMITATIONS
Forward Markets World-Wide are Aficted by Several Problems
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Lack of centralization of trading, Liquidity, and Counter party risk in

the first two
of these, the basic problem is that of too much flexibility and generality.
The forward
market is like a real estate market in that any two consenting adults can
form contracts
against each other. This often makes them design terms of the deal,
which are very
convenient in that specific situation, but makes the contracts nontradable. Counter party
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
sufers. Even when
forward markets trade standardized contracts, and hence avoid the
problem of liquidity,
still the counter party risk remains a very serious issue.
FUTURES
Futures markets were designed to solve the problems that exist
in forward
markets. Futures Contract is an agreement between two parties to buy or
sell an asset at a
certain time in the future at a certain price. But unlike forward
contracts, the futures
contracts are standardized and exchange traded. To facilitate liquidity
in the future
contracts, the exchange specifies certain standard quantity and quality of
the underlying
instrument that can be delivered, (or which can be used for reference
purposes in
settlement) and a standard timing of such settlement. A futures contract
may be offset
prior to maturity by entering into an equal and opposite transaction.
More than 99% of
futures transactions are offset this way.
The Standardized Items in a Futures Contract are

 Quantity of the underlying

Quality of the underlying
The date and month of delivery
The units of price quotations and minimum price changes
Location of settlement.

DISTINCTION BETWEEN FUTURES AND FROWARDS

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Forward contracts are often confused with futures contracts. The
confusion is
primarily Became both serve essentially the same economics of
allocations risk in the
presence of Future price uncertainly. However futures are a signifcant
improvement over
the forward Contracts as they eliminate counter party 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 index
futures contracts on
the NSE have one-month, two-month and three-month expiry cycle, which
expire on the
last Thursday of the month. Thus January expiration contract expires
on the last
Thursday of February. On the Friday following the last Thursday, a new
contract having
a three-month expiry is introduced for trading.
Expiry date: It is the date specifed in the futures contract. This is the
last day on which
the contract will be traded, at the end of which it will case to exist.
Contract size: The amount of the asset that has to be delivered less than
one contract. For
instance, the contract size on NSEs futures market is 200 Niftiest.
Basis: In the context of fnancial futures, basis can be defined as the
futures price minus
the spot price. There will be a diferent basis for each delivery month for
each contract.
In a normal market, basis will be positive. This reflects that futures
prices normally
exceed spot prices.
Cost of carry: the relationship between futures prices and spot
prices can be
summarized.

 In terms of what is known as the cost of carry. This measures the

storage Cost
plus the interest that is paid to fnance the asset less the income
earned on the
asset.
Initial margin: the amount that must be deposited in the margin
account at the
time a

future contract is first entered into is known as initial margin.

Marking-to-market: in the futures market, at the end of each

trading day, the
margin.
account is adjusted to reflect the investors gain or loss
depending upon the
futures Closing price. This is called marking-to-market.
Maintenance margin: this is somewhat lower than the initial
margin. This is set to 9

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ensure. That the balance in the margin account never becomes
negative.
If the balance in the margin account falls below the maintenance
margin, the
investor receives a Margin call and is expected to top up the
margin account to
the initial margin level before trading commences on the next day.
OPTIONS
We look at the next derivative product to be traded on the NSE,
namely option.
Options are fundamentally different from forward and futures contracts.
An option gives
the holder of the option 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, the purchase of an option requires an upfront payments.
OPTIONS TERMINAOLOGY
Index option: There option has the index as the underlying. Some
options are
European while others are American. Like index, futures, contract,
index options
Contracts are also cash settled.
Stock options: stock options are options on individual stocks.
option currently
trade On over 500 stocks in the United States. A contract gives the
holder the
right to buy or

sell shares at the specified prices.

Buyer of options: the buyer of an options is the one who by

paying the options
Premium 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 options is the one who
receives the
option premium 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
an Asset by a certain date for a certain price.
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Put option: a put option gives the holder the right but not
the obligation to sell an asset by a certain date for a certain
price.
Option price: option prices are the price, which the option buyer
pays to option
seller. It is also referred to as option premium.
Expiration date: the date specified in the options contract is
known as the
expiration Date, the exercise date, the strike date or the maturity.
Strike price: the price specifed in the options contract is known
as the strike
price or the exercise price.
American options: American options are options that can be
exercised at any
time up to the expiration date. Most exchange-traded options are
American.
European options: European options are options that can be
exercised only on
the Expiration date itself. European options are easier to analyze
than American
options, and Properties of American options are frequently deduced
from those
of its European Counterpart.
In-the-money option: an in-the money (ITM) option that
would lead to a
Positive cash flow to the holder if it were exercised immediately. A
call option
on the Index is said to be in money when the current index is
stands at a level
higher than the strike price, (i.e. spot price strike price). If the
index is much
higher than the strike price, The call is said to be deep ITM. In the
case of a put
is ITM if the index is below the strike price.
At-the-money option: an at-the money (ATM) option is an option
that would
lead to Zero cash flow if it were exercised immediately. An option on
the index
is at-the money when the current index equals the strike price (i.e.

spot price =
strike price.
Out-of the money option: an out-of money (OTM) option is an
option that
would lead to a negative cash flow it was exercised immediately. A
call option
on the index is out-of-the-money when the current index stands at a
level, which
is less than the strike Price (i.e. spot price strike price). If the
index is much
lower than the strike price, the call is said to be deep OTM .in the
case of a put,
the put is OTM if the index is above the Strike price.

Trading Strategies using Futures and Option

There are a lot of practical uses of derivatives. As we have seen,
derivatives can be
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used for profts and hedging. We can use derivatives as a leverage tool
too.
Use of Derivatives as leverage
You can use the derivatives market to raise fund using your stocks.
Conversely,
you can also lend funds against stocks.
Different Between Badla and Derivatives
The derivatives product that comes closest to Badla is futures.
Futures is not
badla, through a lot of people confuse it with badla. The fundamental
difference is badla
consisted of contango and backwardation (undha badla and vyaj badla)
in the same
market. Futures is a diferent market segment altogether. Hence
derivatives is not the
same as badla, through it is similar.
Raising Funds from the Derivatives Market
This is fairly simple. Say, you have Infosys, which is trading at R s
3000. You
have shares lying with you and are in urgent need of liquidity. Instead of
pledging your
shares and borrowing from banks at a margin, you can sell the stock at R s
3000. Suppose
you need this liquidity only for a month and also do not want to party with
Infosys. You
can buy a 1 month future at R s 3050
After a month you get back you Infosys at the cost of additional rs
50. This R s 50
is the financing cost for the liquidity. The other beauty about this is you
have already
locked in your purchase cost at R s 3050. This fixes your liquidity cost also
and protected
against further price losses.
Lending Funds to The Market
The lending into the market is exactly the reverse of borrowing. You

have money
to lend.
You can a stock and sell its future. Say, you buy Infosys at R s 3000
and sell a 1
month future at R s 3100. In effect what you have done is lent R s 3000 to
the market for
a month and earned R s 100 on it.

Using Speculation to Make Profts

When you speculate, you normally take a view on the market,
either bullish or
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bearish. When you take a bullish view on the market, you can always sell
futures and buy
in the spot market. If you take a bearish view on the market, you can buy
futures and sell
in the sport market. Similarly, in the option market, if you are bullish,
you should buy
call options. If you are bearish, you should buy put option conversely, if
you are bullish,
you should write put options. This is so because, in a bull market,
there are lower
changes of the put option being exercised and you can profit from the
premium if you are
bearish, you should write call option. This is so because, in a bear market,
there are lower
chances of the call option being exercised and you can profit from the
premium.
Using Arbitrage to Make Money in Derivatives Market
Arbitrage is making money on price differential in different
markets. For
example, future is nothing but the future value of the spot price. This
futures value is
obtained by factoring the interest rate. But if there are differences in the
money market
and the interest rates change than the future price should correct itself
to factor the
change in interest. But if there is no factoring of this change than it
present an
opportunity to make money-an arbitrage opportunity.
Let us take an example.
Example
A stock is quoting for Rs. 1000. The 1-month future of this stock is at rs
1005. the risk
free Interest rate is 12%. What should be the trading strategy?
Solution
The strategy for trading should be: Sell Spot and Buy Futures
Sell the stock for Rs 1000. Buy the future at Rs 1005.
Invest the Rs 1000 at 12%. The interest earned on this stock will be
1000(1+.02) (1/12) = 1009

So net gain the above strategy is Rs 1009-rs 1005= Rs 4

Thus one can make a risk less profit of Rs 4 because of arbitrage. But an
important point
is that this opportunity was available due to miss-pricing and the market
not correcting
itself. Normally, the time taken for the market to adjust to corrections is
very less. So the
time available for arbitrage is also less. As every one to cash in on the
arbitrage, the
market corrects itself.
USING FUTURE TO HEDGE POSITION
One can hedge ones by taking an opposite position in the futures
market. For
example, if you are sport price, the risk you carry is that of price in the
future. You can
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lock this by selling in the futures price. Even if the stock continues falling,
your position
is hedge as you have firmed the price at witch you are selling. Similarly,
you want to buy
a stock at a later date but face the risk of prices rising. You can hedge
against this rise by
buying futures. You can use a combination of futures too to hedge
yourself. There is
always a correlation between the index and individual stocks, this
correlation may be
negative or positive, but there is a correlation. This is given by the beta
of the stock. In
simple terms, terms, what beta indicates is the change in the price of a
stock to the
change in index.
For examples
If beta of a stock is 0.8, it means that if the index goes up by the
stock goes up by
8. t will also fall a similar level when the index falls.
A negative beta means that the price of the stock falls when the index
rises. So, if you
have a position in a stock, you can hedge the same by buying the index at
times the
value of the stock.
Example: The beta of HPCL is 0.8. The Nifty is at 1000. If I have Rs
10000 worth of
HPCL, I can hedge my position by selling 800 of Nifty. That is I well sell 8
Nifties.
Scenario 1: If index rises by 10%, the value of the index becomes 8800 I
e a loss of R s
800. The value of my stock however goes up by 8% I e it becomes R s
10800 I e a gain
of R s 800.Thus my net position is zero and I am perfectly hedged.
Scenario 2:If index falls by 10%, the value of the index becomes Rs
7200 a gain of Rs
800. But the value of the stock also falls by 8%. The value of this stock
becomes Rs 9200

a loss of Rs 800Thus my net position is zero and I am perfectly hedged.

But against, beta
is a predicated value based on regression models. Regression is nothing
but also analysis
of past data. So there is a chance that the above position may not be
fully hedged if the
beta does not behave as per the predicated value.

Using Options in Trading Strategy: Options are a great tool to use for
trading. If you
feel the market will go up. You should are a call option at a level lower
than what you
expect the market to go up. If you think that the market will fall, you
should buy a put
option at a level higher than the level to which you expect the market fall.
When we say
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market, we mean the index. The same strategy can be used for individual
stocks also. A
combination of futures and options can be used too, to make profits.

Strategy for an option writher to cover himself

An option writer can use a combination strategy of futures and
options to protect
his position. The risk for an option writer arises only when the option is
exercised this
will be very clear with an example.
Supposing I sell a call option on Satyam at a strike price of Rs 300 for
a premium
of rs20. The risk arises only when the option is exercised. The option will
be exercised
when the price exceeds rs 300. I start making a loss only after the price
exceeds Rs 320
(Strick price plus premium).
More impotently, I have to deliver the stock to the opposite party.
So to enable
me to deliver the stock to the other party and also make entire profit on
premium, I buy a
future of Satyam at Rs 300. This is just one leg of the risk. The earlier
risk was of the
called being exercised the risk now is that of the call not being exercised.
In case the call
is not exercised, what do I do?
I will have to take delivery as I have brought a future. So minimize
the risk, I buy
a put option on Satyam at Rs 300. But I also need to pay a premium
for buying the
option. I pay Premium of Rs 10. Now I am fully covered and my net cash
flow would be.
Premium earned from selling call option Rs 20.Premium paid to buy put
option (Rs 10)
Net cash flow Rs 10.
But the above pay of will be possible only when the premium I am
paying for

the put Option is lower than the premium that I get for writing the call.
Similarly, we can
arrive at a covered position for waiting a put option two. Another
interesting observation
is that the above strategy in itself presents an opportunity to make
money. This is so
because of the premium differential in the put and the call option. So if
one tracks the
derivatives make on a continuous basis, one can chance upon almost
risk less money
making opportunities.
Other Strategies Using Derivatives
The other strategies are also various permutations of multiple
puts, call and
futures. They are also called by exotic names, but if one were to observe
them closely,
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they are relatively simple instruments. Some of these instruments are
Butterfy Spread: It is the strategy of simultaneous buying of put and call
Calendar Spread: An option strategy in which a short-term option is sold
and a longerterm option is bought both having the same striking price. Either puts or
calls may be
used.
Double Option: An option that gives the buyers the right to buy and/or
sell a futures
contract, at a premium, at the strike price.

Straddle: The simultaneous purchase and sale of option of the same

speculation to
diferent periods.
Tandem Options: A sequence of options of the same type, with variable
strike price and
period.
Bermuda Option: Like the location of the Bermudas, this option is
located somewhere
between a European style option with can be exercised only at maturity
and an American
style option which can be exercised any time the option holder chooses.
This option can
be exercise only on predetermined dates.
RISK MANAGEMENT IN DERIVATIVES
Derivatives are high-risk instrument and hence the exchanges have
put up a lot of
measures to control this risk. The most critical aspect of risk
management is the daily
monitoring of price and position and the margining of those positions.

NSE uses the SPAN (Standard Portfolio Analysis of Risk). SPAN is a

system that
has origins at the Chicago Mercantile Exchange, one of the oldest
derivative exchanges
in the world.
The objective of SPAN is to monitor the positions and determine the
maximum
loss that a stock can incur in a single day. This loss is covered by the
exchange by
imposing mark to market margins.
16

Page 17
SPAN evaluates risk scenarios, which are nothing but market
conditions. The
specific set of market conditions evaluated, are called the risk scenarios,
and these are
defned in terms of
a) How much the price of the underlying instrument is expected to
change over one
trading day, and
b) How much the volatility of that underlying price is expected to
change over one
trading day?
Based on the SPAN measurement, margins are imposed and risk
covered. Apart
from this, the exchange will have a minimum base capital of Rs. 50 lacks
and brokers
need to pay additional base capital if they need margins above the
permissible limits.
SETELLEMENT OF FUTURES
Mark to Market Settlement
There is daily settlement for Mark to Market. The profts/losses are
computed as
the diference between the trade price or the precious days settlement
price as the case
may be and the current days settlement price. The parties who have
sufered a loss are
required to pay the mark-to-market loss amount to exchange which is in
turning passed
on to the party who has made a profit. This is known as daily mark-to
market settlement.
Theoretical daily settlement price for unexpired futures contracts, which
are not traded
during the last half on a day, is currently the price computed as per the
formula detailed
below.
F = S * e rt
Where

F = theoretical futures price

S = value of the underlying index/stock
r = rate of interest (MIBOR- Mumbai Inter Bank Offer Rate)
t = time to expiration
Rate of interest may be the relevant MIBOR rate or such other rate
as may be
specified. After daily settlement, all the open positions are reset to the
daily settlement
price. The pay-in and payout of the mark-to-market settlement is on T+1
days (T = Trade
day). The mark to market losses or profits are directly debited or credited
to the broker
account from where the broker passes to client account.
17

Page 18

Final Settlement
On the expiry of the futures contracts, exchange market all
positions to the final
settlement price and the resulting profit/loss is settlement I cash. The final
settlement of
the future contract is similar to the daily settlement process except for
the method of
capon of final settlement price. The final settlement profit/loss is
completed as the
diference between trade price or the previous days settlement price, as
the case may be
and the final settlement price of the relevant futures contract.
Final settlement loss/profit amount is debited/credited to the
relevant brokers
clearing bank account on T + 1 day (T = expiry day). This is then passed
on the client
from the broker. Open positions in futures contracts cease to exist after
their expiration
day.

SETTLEMENT OF OPTIONS
Daily Premium Settlement
Premium settlement is cash settled and settlement style is
premium style. The
premium payable position and premium receivable position are netted
across all option
contract for each broker at the client level to determine the net
premium payable or
receivable amount, at the end of each day.
The brokers who have a premium payable position are required
to pay the
premium amount to exchange which is in turn passed on to the
members who have a
premium receivable position. This is known as daily premium settlement.
The brokers in
turn would take from their clients.

The pay-in and pay-out of the premium settlement is on T + 1) days

(T = Trade
day). The premium payable amount and premium receivable amount are
directly debited
or credited to the broker, from where it is passed on to the client.

Interim Exchange Settlement for Options on Individual Securities

Interim exchange settlement for Option contract on individual
securities is
affected for valid exercised option at in-money strike price, at the close
of the trading
hours, on the day of exercise. Valid exercise option contracts are
assigned to short
position in option contracts with the same series, on a random
basis. This interim 18

Page 19
exercise settlement value is the diference between the strike price and
the settlement
price of the relevant option contract. Exercise settlement value is
debited/credited to the
relevant option broker account on T + 3 days (T = exercise date). From
there it is passed
on to clits.
Final Exercise Settlement
Final Exercise settlement is effected for option positions at in-themoney strike
price existing at the close of trading hours, on the expiration day of an
option contract.
Long position at in-the money strike price are automatically assigned to
short positions in
option contracts with the same series, on a random basis. For index
option individual
securities, exercise style is American style. Final Exercise is Automatic on
expiry of the
option contracts.
Exercise settlement is cash settled by debiting/crediting of the
clearing account
or the relevant broker with the respective Clearing Bank, from where
it is passed
debited/credited to the relevant broker clearing bank account on T + 1
day (T = expiry
day), from where it is passed Final settlement loss/proft amount for
option contracts on
Individual Securities is debited/credited to the relevant broker clearing
bank account on T
+ 3 days (T = expiry day), from where it is passed Open positions, in
option contracts,
cease to exist after their expiration day.

Options valuation using Black Scholes model

The black and Scholes Option Pricing model didnt appear
overnight, in fact, Fisher Black started out working to create a
valuation model for stock warrants. This work involved calculating a
derivative to measure how the discount rate of a warrant varies with

time and stock price. The result of this calculation held a striking
resemblance to a well-known heat transfer equation. Soon after this
discovery, Myron Scholes joined Black and the result of their work is
a startlingly accurate option pricing model. Black and Scholes cant
take all credit for their infect the model is actually an improved version
of a precious model developed by A. James Boness in his Ph.D.
dissertation at the University of Chicago. Black and scholes
improvement on the Bones model come in the from of a proof that the
risk- free interest raise is the correct discount factor, and with the
absence of assumptions regarding investors risk preferences.

The model
C = SN (d1) Ke {-rt} N (d2)
19

Page 20

C= Theoretical call
premium S= current
stock price
t= time until option
expiration K= option
striking price
r= risk-free interest rate
N = Cumulative standard normal
distribution D1 = in(S / K) + (r +
s/2)t
In order to understand the model itself, we divide into two parts.
The first part,
SN (d1), derives the expected benefit from acquiring a stock outright.
This is found by
multiplying stock price [S] by the change in the call premium with respect
to a change in
the underlying stock price [N (d1)]. The second part of the model, Ke(rt)N(d2), gives the
present value of paying the exercise price on the expiration day. The fair
market value of
the call option is then calculated by taking the diference between these
two parts.
Assumptions of the Black and Scholes Model
1) The stock pays no dividends during the options life: Most
companies pay
dividends to their share holders, so this might see a serious
limitation to the
model considering the observation that higher dividend yields
elicit lower call
premiums. A common way of adjusting the model for this situation is
subtract the
discounted value of a future dividend from the stock price.
2) European exercise terms are used : European exercise terms
dictate that the
option can only be exercised on the expiration date. American
exercise term
allow the option to be exercised at any time during the life of the
option, making
American option more valuable due to their greater flexibility. This
limitation is

not a major concern because very few calls are exercise before the
last few days
of their life. This is true because when you exercise a call early,
you forfeit the
remaining time value on the call and collect the intrinsic value.
Towards the end
of the life of a call, the remaining time value is very small, but the
iatric value is
the same.
3) Markets are efcient: This assumption suggests that people
cannot consistent
predict the direction of the market or an individual stock. The
market operates
continuously with share price followed a continuous it process. To
understand
what a continues it processes, you must first known that m
Markov process is
one where the observation in time period at depends only on
the preceding
observation. An it process is simply a Marko process you would do
so without
picking the pen up from the piece of paper.
20

Page 21
4) No commissions are charged: Usually market participants do
have to pay a
commission to buy or sell options. Even floor traders pay some kind
of free, but it
is usually very small. The fees that Individual investors pay is more
substantial
and can often distort the out put of the model.
5) Interest rates remain constant and know: The Black and
Scholes model uses
the Risk-free rate to represent this constant and known rate. In
reality there is no
such thing as the risk-free rate, but the discount rate on U.S.
Government
Treasury Bills with 30 days left until maturity is usually used to
represent it.
During periods of rapidly change interest rates, these 30 day
rates are often
subject to change, thereby violating one of the assumptions of the
model.

REGULARITY FRAME WORK

The trading of derivatives is governed by the provisions contained in
the SC(R)A,
the SCBI act, the rules and regulation framed there under and the rules
and bye-laws of
stock exchange.
Securities Contracts (Regulation) Act, 1956
SC(R) A aims at preventing undesirable transactions in securities
by regulating
the Business of dealing therein and by providing for certain other
matters connected
therewith. This is the principal Act, which governs the trading of
securities in
India. The term securities has been defined in the SC(R) A. as per
section 2(h), the
securities include.
1. Shares, scraps, stocks, bonds, debenture stock or other marketable
securities of a like

Nature in or of any incorporated company or other body corporate.

Derivative
2. Units or any other instrument issued by any collective investors in such
schemes
To the investors in such schemes,
securities.

risk Government
Such other

instruments as may be declared by the central government to be

securities rights or
interests in securities. Derivative is defined to include: A security
derived from a
debt instrument, share, loan whether secured or unsecured instrument
or contract for
differences or any other from of security.
A contracts which derives its value from the prices, or index of
prices, of
Underlying Securities.
Section 18 a provides that notwithstanding anything contained
in any other
21

Page 22
law for the time being in force, contracts in derivative shall be
legal and valid
if such contracts are :
Traded on a recognized stock exchange settled on the
clearing hose of the
recognized stock exchange, in accordance with the rules and
bye loss of
such stock exchanges

Securities and Exchange Board of India Act, 1992

SEBI Act, 1992 provides for establishment of Securities and
Exchange Board of
India (SEBI) with statutory powers for (A) protecting the interests of
investors in
securities (B) promoting the development of the securities market and
(C) regulating
the securities market. Its regulatory jurisdiction extends over
corporate in the
issuance of capital and transfer of securities, in addition to all
intermediaries and
persons associated with securities market. SEBI has been obligated to
perform the
aforesaid functions by such measures as it thinks fit.
In Particular, it has Powers For
Regulating the business in stock exchanges and any other
securities markets
Registering and regulating the working of stock brokers, subbrokers etc.
Promoting and regulating self regulatory organizations
Prohibiting fraudulent and unfair trade practices.
Calling for information from, undertaking inspection,
conducting inquires and audits of the stock exchanges,
mutual funds and other persons associated with the
securities market and intermediaries and self-regulatory
organization in the securities market
Performing such functions and exercising according to
Securities Contracts (Regulation) Act, 1956, as may be

delegated to it by the Central Government

SEBI (Stockbrokers and Sub-brokers) Regulations, 1992
In this section we shall have a look at the regulations that apply to
brokers under the SEBI Regulation.
BROKERS
A broker is an intermediary who arranges to buy and sell securities
on behalf of
clients (the buyers and the seller). According to section2 (e) of the SEBI
(Stock Brokers
and sub brokers) Rules, 1992, a stock broker mean of a recognized stock
exchange. No
22

Page 23
stock broker is allowed to buy, sell or deal in securities, unless he or
she holds a
certificate of registration granted by SEBI. A stock broker applies for
registration to
SEBI through a stock exchange or stock exchanges of which he or she is
admitted as a
member. SEBI may grant a certifcate to a stock-broker [as per SEBI (stock
Brokers and
Sub-Brokers) Rules, 1992] subject to the conditions that,
1. He holds the membership of stock exchange.
2. Sell abide by the rules, regulations and buy-laws of the stock
exchange or stock
exchange of which he is a member.
3. In case of any change in the status and constitution, he shall obtain
prior
permission of SEBI to continue to buy, sell or deal in securities in any
stock
exchange.
4. He shall pay the amount of fees for registration in the prescribed
manner, and
5. He shall take adequate steps for redressed of grievances of the
investors within
one month of the date of the receipt of the complaint and keep
SEBI informed
about the number, nature and other particulars of the
complaints as per
SEBI(Stock Brokers) Regulations, 1992,SEBI shall take into
account for
considering the grant of a certifcate all matters relating to
buying, selling, or
dealing in securities and in particular the following namely,
Whether the Stock Broker
(a) Is eligible to be admitted as a member of a stock exchange.
(b) Has the necessary infrastructure like adequate office space,
equipment and man
power to efectively discharge his activities.
(c) Has any past experience in the business of buying, selling or dealing in
securities.
(d) Is subjected to disciplinary proceeding under the rules, regulations and

buy-laws of a
stock exchange with respect to his business as a stock-broker involving
either himself
or any of his partners, directors or employees.
REGULATION FOR DERIVATIVES TRADING
SEBI set up a 24-member committee under the Chairmanship of
Dr.L.C.Gupta
to develop the appropriate regulatory framework for derivatives trading
in India. The
committee submitted its report in March 1998. On May 11, 1998 SEBI
accepted the
recommendations of the committee and approved the phased
introduction of
derivatives trading in India beginning with stock index futures. SEBI
also approved
the suggestive bye-laws recommended by the committee for
regulation and control 23

Page 24
of trading settlement of derivatives contracts.
The provision in the SC(R)A and the regulatory framework
developed there
under govern trading in securities .
The amendment of the SC(R) A to included derivatives with in the
ambit of
securities in the SC(R) A made trading in derivatives possible within the
frame work of
that Act.
1. Any Exchange fulfilling the eligibility criteria as prescribed in the
L.C.Gupta
Committee report may apply to SEBI for grant of recognition under
section 4 of
the SC(R) A, 1956 to start trading derivatives. The derivatives
exchange/segment
Should have a separate governing council and representation of trading
/clearing
Members shall be limited to maximum of 30% pf the total members and
will obtain
Prior approval of SEBI before start of trading in any derivatives contract.
2. The exchange shall have maximum 50 members.
3. The members of an existing segment of the exchange will not
automatically become
the members of derivatives segment. The members of the derivatives
segment need
to fulfill the eligibility conditions as laid down by the L.C.Gupta
committee.
4. The clearing and settlement of derivatives trades shall be through a
SEBI approved
clearing corporations/house. Clearing corporation/house complying with
the
eligibility conditions as laid down by the committee have to apply to SEBI
for grant of
approval.
5. Derivatives brokers/dealers and clearing members are required to seek
registration
from SEBI. This is in additional top their registration as brokers of existing
stock
exchanges. The minimum net worth for clearing members of the
derivatives clearing

corporation/house shall be Rs. 300 lakh.

The Net Worth of the Members Shall be Computed as Follows

Capital + Free reserves
Less non-allowable assets viz,

Fixed assets

Pledged securities
24

Page 25

Members card

Non-allowable securities (unlisted securities)

Bad deliveries

Doubtful debts and advances

Prepaid expenses

Intangible asset

30% marketable securities

6. The minimum contract value shall not to be less than Rs. 2 Lakh.
Exchanges should
also submit details of the futures contract they propose to introduce.
7. The initial margin requirement, exposure limits linked to capital
adequacy and
margin demands related to the risk of loss on the position shall be
prescribed by
SEBI/Exchange from time to time.
8. The L .C. Gupta committee report requires strict enforcement of
know your
customer Rules and requires that every client shall be registered with
the derivative
broker. The Members of the derivatives segment are also required to
make their clients
aware of the Risks involved in derivatives trading by issuing to the
client the risk
disclosure Document and obtain a copy of the same duly signed by the
client. A trading
members are required to have qualified approved user and sales person
who have passed
a certification programmed approved by SEBI.

NSES CERTIFICATION IN FINANCIAL MARKETS

A critical element of financial sector reforms is the development of

a pool of
human resources having right skills and expertise to provide quality
intermediation
services in Each segment of the market. In order to dispense quality
intermediation,
personnel providing services need to possess requisite skills and
knowledge. This is
generally achieved through a system of testing and certification. Such
testing and
25

Page 26
certification has assumed added significance in India as there is
no formal
education/training on financial Markers, especially in the area of
operations. Taking into
account international experience and needs of the Indian financial
Market, NSE offers
NCFM (NSE s Certifcation in Financial Markets) to test practical
knowledge and
skills that are required to operate in financial markets in a very secure
and unbiased
manner and to certify personnel with a view to improve quality of
intermediation. NCFM
offers a comprehensive range of Modules covering many diferent
areas in fnance
including a module in derivatives. The Module on derivatives has been
recognized by
SEBI. SEBI requires that derivative Brokers/dealers and sales persons
must mandatory
pass this module of the NCFM
.

Regulation For Clearing And Settlement

The L. C Gupta committee has recommended that the clearing
corporation
must perform full notation i.e. the clearing corporation should
interpose
itself between both legs of every trade, becoming the legal
counter party to
both or alternatively should provide an unconditional guarantee
for
settlement of all trades.
The clearing corporation should ensure that none of the Board
member has
trading interests.
The definition of net-worth as prescribed by SEBI need to be
incorporated in
the c

application/regulations of the clearing corporation.

The regulations relating to arbitration need to be incorporated in

the clearing
corporation.

 Specific provision/chapter relating to declaration of default must

be
incorporated by the clearing corporation in its regulations.
The regulations relating to investor protection fund for the
derivatives market
must be included in the clearing corporation
application/regulations.
The clearing corporation should have the capabilities to
segregate
upfront/initial margins deposited by clearing members for trades
on their
own account and on account of his clients. The clearing
corporation shall
hold the clients margin money in trust for the clients purposes
only and
should not allow its diversion for ant other purposes. This
condition must be
incorporated in the clearing corporation regulations.
26

Page 27
The clearing member shall collect margins from his constituents
(clients/trading members). He shall clear and settle deals in
derivative
contracts on behalf of the constituents only on the receipt of such
minimum
margin.
Exposure limits based on the value at risk concept will be used
and the
exposure limits. Will be continuously monitored. These shall be
within the
limits prescribed by SEBI from time to time.
The clearing corporation must lay down a procedure of periodic
review of
the net worth of its members.
The clearing corporation must lay down a procedure for periodic
review of
the net worth of its members.
The clearing corporation must inform SEBI how it proposes to
monitor the
exposure of its members in the underlying market.
Any changes in the bye-laws, rules or regulations which are
covered under
the suggestive bye-laws for regulations and control of trading
and
settlement of derivatives contracts would require prior approval
of SEBI.

Product Specifications BSE-30 Sensex Futures

Contract size R s .50 times the Index

Tick size 0.1 points or R s. 5

Expiry day last Thursday of the month

Settlement basis cash settled

Contract cycle 3 months

Active contracts 3 nearest months

Product Specifications S&P CNX Nifty Futures

Contract size R s . 200 times the Index

Tick size 0.05 points or R s. 10

Expiry day last Thursday of the month

27

Page 28

Settlement basis cash settled

Contract cycle -3 months

Active contracts -3 nearest months

Membership
Membership for the new segment in both the exchanges is not
automatic and has
To be separately applied fir.

Membership is currently open on both the exchanges.

All members will also have to be separately registered with SEBI

before they can be accepted.

Membership Criteria National Stock Exchange (NSE)

Clearing Member (CM)

Net worth 300 lakh

Interest free security Deposit Rs.25 lakh

Collateral Security Deposit Rs.25 lakh

In addition for every TM be wishes to clear for the CM has to deposit Rs.10
lakh.
Trading Member (TM)

Net worth R s .100 lakh

Interest fee security Deposits R s. 8 lakh

Annul subscription fee R s .1 lakh

Membership Criteria Mumbai Stock Exchange (BSE)

Clearing Member (CM)

Net worth 300 lake

Interest free Security Deposits R s. 25 lakh

28

Page 29

Collateral Security Deposits R s. 25 lakh

Non-refundable Deposit R s. 5 lakh

Annual Subscription Fee R s.50 thousand

In addition for every TM he wishes to clear for the CM has to deposit R s.

10 lake with
The following break-up.
I.Cash R s. 2.5 lakh
II.Cash Equivalents R s. 25 lakh
III.Collateral Security Deposit R s. 5 lakh
Trading Member (TM)

Net worth R s. 50 lakh

Non-refundable Deposit R s.3 lakh

Annual subscription Fees R s.25 thousand

The non-refundable fees paid by the members are exclusive and will be a
total of R s. 8
Lakh if the member has both clearing and trading rights.
Trading Systems
NSEs trading system for its futures and options segment is called
NEAT F&O.

It is based on the NEAT system for the cash segment.

BSEs trading system for its derivatives segment is called DTSS.

It is built on a Platform diferent from the BOLT system
though most of the features are common
Table 1.1
LOT SIZE OF DIFFERENT COMPANIES
CODE

LOT
SIZE

COMPANY NAME

ACC

188

ANDHRA BANK

2300

ASSOCIATES CEMENT
COMPANIES LTD.
ANDHRA BAKS.
29

Page 30
ARIVENDMILLS

4300

ARIVENDMILLS LTD

BAJAJAUTO

200

BAJA AUTOMOBILES LTD.

BANK BARODA

700

BANK OF BRODA.

BANK INDIA

950

BANK OF INDIA.

BEL

138

BHARAT ELECTRICALS LTD.

BHEL

75

BHARAT HEAVY ELECTRICALS LTE.

BPCL

550

CANBK

800

BHARAT PETROL CORPORATION

LTD.
CANARABANK

CIPLA

1250

CIPLA LTD.

CNXIT

1200

IT INDEX

DABUR

2700

DABUR LTD.

DRREDDY

400

DR. REDDYS LABORATORIES LTD.

GAIL

1125

GAS AUTHORITY OF INDIA.

GRASIM

88

GRASIM AMBUJA CEMENTS LTD.

GUJAMBCEMENT

4125

GUJRAT AMBUJA CEMENTS LTD.

HCLTECH

650

HDFC

75

HDFE BANK

200

HINDISTAN CORPORATION
LTD TECNO.
HOUSING DEVELOPMENT
FINACE CORP.
HDFE BANK

HERO HONDA

400

HEROHONDA MOTARS LTD.

HINDALCO

1759

HINDLEVER

2000

HINDUSTAN ALUMINIUM
COMPANY.
HINDUSTAN LEVER LTD.

HINDPETROL

1300

I-FLEX

600

ICICI BANK

175

INFOSYSTECH

200

HINDUSTAN
PETROLEUM
I-FLEX SOLUTIONS
ICICI BANKING CORPORATION
LTD.
INFOSYS TECHNOLOGIES LTD.

30

Page 31

IDBI

1200

INDUSTRIAL DEV BANK OF INDIA

IPCL

2200

ITC

1125

INDIAN PETROALEUM CHEMICALS

LTD.
INDIAN TOBACCO COMPANY LTD.

MATRIX

1250

MATRIX LAB.

M&M

312

MAHENDRA &MAHENDRA LTD.

MARUTI

200

MARUTI UDYOG LTD.

MPHASIS

800

MPHASIS BFL

MTNL

1600

MAHENDRA TELECOM NIGAML LTD.

NATIONAL ALUM

575

NATIONAL ALUMINIUM COMP.

NDTV

550

NATIONAL INDEX FOR FIFTY STOCK

NIIT

1450

ONGC

225

NATIONAL INSTITUT OF
FASHION TECH.
OIL & NATURAL GAS CORPORATION.

ORIENT BANK

1200

ORIENTAL BANK.

PNB

600

PANJAB NATIONAL BANK.

POLARIS

2800

POLARIS SOFTWARE COMPANY LTD.

RANBAXY

800

RANBAXY LABORATORIES LTD.

RELIANCE

75

RELIANCE INDUSTRIES LTD.

REL

550

RELIANCE COMPUTERS SERVICES

LTD.

SBIN

132

STATE BANK OF INDIA.

SCI

1200

SHIPPING CORPORATION OF INDIA.

SYNDIBANK

1900

SYNDICATE BANK

TATAMOTORS

425

TATA MOTORS

TATAPOWER

200

TATA POWER COMPANY LTD.

TATASTEEL

382

TATA STEEL COMPANY

TATATEA

275

TATA TEA LTD.

TSICO

2800

TATA IRON & STEEL COMPANY LTD.

UNION BANK

2100

UNION BANK OF INDIA.

CHAPTER-2
INDUSTAL
PROFILE

31

Page 32

BOMBAY STOCK EXCHANGE

This stock exchange, Mumbai, popularly known as BSE was
established in
1875 as The Native share and stock brokers association as a voluntary
non-proft
Making association. It has an evolved over the year into its present status
as the premiere
Stock exchange in the country .it may be noted that the stock exchange
the oldest one in
Asia, even older than the Tokyo stock exchange, which was founded in
1878.
The exchange, while providing an effcient and transparent market
for trading in
securities, upholds the interests of the investors and insurers dressed of
their grievances,
whether against the companies or its own member brokers. It also strives
to educate and
enlighten the investors by making available necessary informative inputs
and conducting
investor education programmers.
A governing board comprising of 9 elected directors, 2 SEBI
nominees, 7 public
representatives and an executive director is the apex body, which decides
the policies and
regulates the affairs of the exchange.
The executives directors as the chief executive officer are
responsible for the day
today administration of the exchange. The average daily turnover of the
exchange during
the year 2000-01(April-March) was Rs 3984.19 corers and average
number of Daily
trades 5.69 lakhs.
However the average daily turn over of the exchange during the year
2001-02 has
declined to R s. 1244 .10 cores and number of average daily trades during
the period to
5.17 lakes.
The average daily turnover of the exchange during the year 2002-03
has declined

and number of average daily trades during the period is also decreased.
The Ban on all deferral products like BLESS AND ALBM in the Indian
capital
markets by SEBI with effect from July 2, 2001, abolition of account period
settlements,
introduction of compulsory rolling settlements in all scripts traded on the
exchange with
efect from Dec 31, 2001, etc., have adversely imprecated the liquidity
and consequently
there is a considerable decline in the daily turn over of the exchange
present scenario is
110363 (laces) and number of average daily trades 1075 (laces)
BSE INDICES
In order to enable the market participants, analysts etc., to track the
various ups and
32

Page 33
downs in the Indian stock market, the exchange has introduced in 1986
an equity stock
index called BSE- SENSEX that subsequently became the barometer of the
movements
of the share prices in the Indian stock market. It is a Market
capitalization weighted
index of 30 component stocks representing a sample of large, wellestablished and
leading companies. The base year of sensex is 1978-79. The sensex is
widely reported in
both domestic and international markets through print as well as electronic
media.
Sensex is calculated using a market capitalization weighted
method. As per this
methodology, the level of the index reflects the total market value of all
30-component
stocks from different industries related to particular base period. The total
market value
of a company is determined by multiplying the price of its stocks by the
number of shares
outstanding. Statisticians call an all index of a set of combined variables
(such as price
and number of shares) a composite index. An indexed number is used to
represent the
results of this calculation in order to market the value easier to work with
and track over
a time. It much easier to graph a chart based on indexed values than one
based on actual
values world over majority of the well-known indices are constructed
using Market
capitalization weighted method.
In practice, the daily calculation of SENSEX is done by dividing the
aggregate
market value of the 30 companies in the index by a number called the
index Divisor. The
Divisor is the only link to the original base period value of the SENSEX.
The Divisor
Keeps the Index comparable over a period or time and if the reference
point for the entire
index maintenance adjustments. SENSEX is widely used to describe the
mood in the

Indian stock markets. Base year average is changed has per the formula
new base year
average =old base year average *(new market value/old market value).
NATIONAL STOCK EXCHANGE
The NSE was incorporated in Now 1992 with an equity capital of R
s 25 Crs.
The international securities consultancy (ISC) of Hong Kong has helped
in setting up
NSE. ISE has prepared the detailed business plans and installation of
hardware and
software systems. The promotions for NSE were financial institutions,
insurances
companies, banks and SEBI capital market Ltd, infrastructure leasing
and financial
services ltd and stock holding corporation ltd.
It has been set up to strengthen the move towards professionalisation
of the capital
market as well provided nation wide securities trading facilities to
investors.NSE is not
an exchange in the traditional sense where brokers own and manage the
exchange. A two
33

Page 34
tier administrative set up involving a company board and a governing
aboard of the
exchange envisaged. NSE is a national market for shares PSU bonds,
debentures and
government securities since infrastructure and trading facilities are
provided.
NSE-NIFTY
The NSE on April 22, 1996 launched a new equity index. The NSE-50.
The new
index, which replaces the existing NSE-100 index, is expected, to serve as
an appropriate
index for the new segment of futures and options. Nifty means national
index for fifty
stocks.
The NSE-50 comprises 50 companies that represent 20 broad
industry groups with
An aggregate market capitalization of around R s .1,70,000 crs. All
companies included
in the index have a market capitalization in excess of R s 500 crs each
and should have
traded for 85% of trading days at an impact cost of less than 1.5%.
The base period for the index is the close of prices on Nov 3, 1995,
which makes
one year of completion of operation of NSEs capital market segment. The
base value of
the index has been set at 1000.
NSE MIDCAP INDEX
The NSE madcap index or the junior nifty comprises 50 stocks that
represent 21
a board industry groups and will provide proper representation of the
madcap segment of
the Indian capital market. All stocks in the index should have market
capitalization of
greater than R s list of 200 cores and should have traded 85% of the
trading days at an
impact cost of less 2.5%.
The base period for the index is Nov4, 1996, which signifes two

years for
completion of operations of the capital market segment of the operations.
The base value
of the Index has been set at 1000.
Average daily turnover of the present scenario 258212(laces)
and number of
averages daily trades 2160(laces) At present, there are 24 stocks
exchanges recognized
under the securities contracts (regulations) Act, 1956. They are
Table No: 2.1
Name of The Stock Exchanges
NAMEOF THE STOCK EXCHANGE

YEARS

34

Page 35
Bombay stock exchange,

1875

Ahmadabad share and stock brokers association,

1957

Calcutta stock exchange associations Ltd,

1957

Delhi stock exchange association Ltd,

1957

Madras stock exchange association Ltd,

1957

Indoor stock brokers association Ltd,

1958

Bangalore stock exchange,

1963

Hyderabad stock exchange,

1943

Cochin stock exchange,

1978

Prune stock exchange,

1982

U.P. stock exchange,

1982

Ludhiana stock exchange,

1983

Jaipur stock exchange Ltd,

1984

Gauhati stock exchange Ltd,

1984

Mangalore stock exchange,

1985

Maghad stock exchange Ltd, patna,

1986

Bhuvaneshwar stock exchange association Ltd,

1989

Over the counter exchange of India, Bombay,

1989

Saurastra kuth stock exchange Ltd,

1990

Vsdodard stock exchange Ltd,

1991

Coimbatore stock exchange Ltd,

1991

The Meerut stock exchange,

1991

I National stock exchange,

1991

Integrated stock exchange,

1999

COMPANY PROFILE
THE INDIA INFOLINE LIMITED

35

Page 36
Origin
India Infoline Ltd., was founded in 1995 by a group of
professional with
impeccable educational qualifcations and professional credentials. Its
institutional
investors include Intel Capital (world's) leading technology company, CDC
(promoted by
UK government), ICICI, TDA and Reeshanar.
India Infoline group ofers the entire gamut of investment
products including
stock broking, Commodities broking, Mutual Funds, Fixed Deposits, GOI
Relief bonds,
Post office savings and life Insurance. India Infoline is the leading
corporate agent of
ICICI Prudential Life Insurance Co. Ltd., which is India' No. 1 Private
sector life
insurance company.
www.indiainfoline.com has been the only India Website to have
been listed by
none other than Forbes in it's 'Best of the Web' survey of global website,
not just once but
three times in a row and counting... A must read for investors in south
Asia is how they
choose to describe India Infoline. It has been rated as No.l the category of
Business News
in Asia by Alexia rating.
Stock and Commodities broking is ofered under the trade name
5paisa. India
Infoline Commodities Pvt Ltd., a wholly owned subsidiary of India Infoline
Ltd., holds
membership of MCX and NCDEX

Main Objects of the Company

Main objects as contained in its Memorandum or Association are:
1. To engage or undertake software and internet based services,
data processing IT enabled services, software development services,
selling advertisement space on the site, web consulting and related
services including web designing and web maintenance, software

product development and marketing, software supply services,

computer consultancy
including

electronic

services,

E-Commerce

financial intermediation

of

all

business

types
and

E-

broking, market research, business and management consultancy.

2. To undertake, conduct, study, carry on, help, promote any kind
of research, probe, investigation, survey, developmental work on
economy, industries, corporate business houses, agricultural and
mineral, fnancial institutions, foreign financial institutions, capital
market
equity

on

matters

related

market, secondary

to

investment

decisions

equity

market,

debentures,

primary
bond,

ventures, capital funding proposals,

competitive analysis, preparations of corporate / industry profile etc.
and trade / invest in 36

Page 37
researched securities
VISION STATEMENT OF THE COMPANY
Our

vision is to be the most respected company in the financial services

space In India.

Products: the India Infoline Pvt ltd offers the

following products
A. Ebroking. B.
Distribution
C.
Insurance
D. PMS
E. Mortgages

A. E-Broking
It refers to Electronic Broking of Equities, Derivatives and
Commodities

under
the brand

name of 5paisa
1.

Equities

2.
Derivatives 3.
Commodities
B. Distribution
1.

Mutual funds

2.

Govt of India bonds.

3.

Fixed deposits

C. Insurance
1.

Life insurance

policies 2.

General

Insurance.
3.

Health Insurance Policies.

THE CORPORATE STRUCTURE

The India Infoline group comprises the holding company,
India Infoline Ltd, which has 5 wholly-owned subsidiaries,
engaged in distinct yet complementary businesses which together
offer a whole bouquet of products and services to make your money
grow.
37

Page
38
The
corpor
ate
structu
re has
evolve
d to
compl
y with
odditie
s of
the
regula
tory
framework
but still
beautifully
help attain
synergy and
allow
flexibility to
adapt to
dynamics of
different
businesses.
The
parent
compa
ny,
India
Infolin
e Ltd
owns
and
manag
ers
the
web properties
www.Indiainfoline.com and www.5paisa.com. It also undertakes research
Customized
and off-the-shelf.
Indian Infoline Securities Pvt. Ltd. is a member of BSE, NSE and
DP with
NSDL. Its business encompasses securities broking Portfolio Management
services.
India Infoline.com Distribution Co. Ltd., Mobilizes Mutual Funds

and other
personal investment products such as bonds, fixed deposits, etc.
India Infoline Insurance Services Ltd. Is the corporate agent of ICICI
Prudential
Life Insurance, engaged in selling Life Insurance, General Insurance
and Health
Insurance products.
India Infoline Commodities Pvt. Ltd. is a registered commodities
broker MCX and offers futures trading in commodities.

India Infoline Investment Services Pvt Ltd., is proving margin

funding and NBFC services to the customers of India Infoline Ltd.,

Chart No: 2.1-

38

Pictorial Representation of India Infoline Ltd

Management of India Infoline Ltd.,

India Infoline is a professionally managed Company. The promoters
who run the
company/s day-to-day afairs as executive directors have
impeccable academic
39

Page 40
professional track records.
Nirmal Jain, chairman and Managing Director, is a Chartered
Accountant, (All
India Rank 2); Cost Account, (All India Rank l) and has a post-graduate
management
degree from IIM Ahmadabad. He had a successful career with Hindustan
Lever, where
he inter alia handled Commodities trading and export business. Later he
was CEO of an
equity research organization.
R. Venkataraman, Director, is armed with a post- graduate
management degree
from IIM Bangalore, and an Electronics Engineering degree from IIT,
Kharagpur. He
spent eight fruitful years in equity research sales and private equity with
the cream of
financial houses such as ICICI group, Barclays de Zoette and G.E. Capital
The non-executive directors on the board bring a wealth of
experience and
expertise.
Satpal khattar -Reeshanar investments, Singapore The key
management team
comprises seasoned and qualified professionals.
Mukesh Sing-

Director, India Infoline Securities Pvt Ltd.

Seshadri
Bharathan-

Director, India Infoline. Com Distribution Co

Ltd

S Sriram-

Vice President, Technology

Sandeepa Vig Arora- Vice President, Portfolio Management

Services
Dharmesh
PandyaToral MunshiAnil
MascarenhasPinkesh Soni
Harshad Apte

Vice President, Alternate Channel

Vice President, Research
Chief Editor
Financial controller
Chief Marketing Oficer

Human Resources
I.
General: Management is committed to provide necessary
resources which
are required as identified in documents like Quality system
procedures, work
instructions and quality forms / other documents etc.
40

Page 41
Personnel assigned to various tasks are suitably qualifed with
formal job
training, education, and / or experience.
II.

Competence, Awareness and Training

The necessary competence are determines for personnel
performing
work afecting product quality

Identified and provides necessary training as and when

required to the employees to meet the customer needs.

Evaluates the efective of training.

Ensures that employees are aware of the relevance

and

importance

of

their

activities

and

how

they

contribute to the achievement of the quality objectives.

Maintains appropriate records of education,

training, skills and experience

Work Environment
It is determined and managed the work environment need to
achieve conformity
to product requirements.

MISSION, VISION, CORE VALUES

Mission: To maintain the customer satisfaction level, with zero defect
supply.
Vision: To become one of the best forging company in south India
with press
technology
Core values

Quality
Service at any cost

Cordial relation ship

Collective team work

Organization of Employees in INDIA INFOLINE LTD

along with
Minimum Competence level
The Manpower is categorized as Non-technical & Technical. In
the non-technical 41

Page 42
category four identified levels are present. They are Manger, Asst.
Manager, officer &
Assistant. Minimum competence details are given in the chart.
In the technical category C.E.O. is Chief lead a technical and a
business
qualification. In the top-management category G. Manager, Dy. Gen.
Manager, and Asst.
Gen. Manager levels are there, these report to C.E.O. In the middle
management category
the levels are Manager, Asst. Manager, Sales manager , team
manager, relationship
managers, dealers are in the Junior Management category.
The work force of consists of operators (experienced and skilled),
apprentice, and
helper. The details are given in organization chart.

TRADING IN DERIVATIVES
Indian securities market has indeed waited for too long for
derivatives trading to
emerge. Mutual fund, FIIs and other inventors who are deprived of hedging
opportunities
will now have a derivatives market to bank on. First to emerge are the
globally popular
variety index futures.
While derivatives markets flourished in the developed world Indian
markets remain
deprived of fnancial derivatives to the beginning of this millennium.
While the rest of
the world progressed by leaps and bounds on the derivatives front, Indian
market lagged
behind. Having emerging in the market of the developed nations in the
1970s, derivatives
markets grew from strength to strength. The trading volumes nearly
doubled in every
Three years marking it a trillion-dollar business. They became so
ubiquitous that, now,
one cannot think of the existence of financial markets without
derivatives. Two broad

approaches of SEBI is integrate the securities market at the national

level, And also to
diversify the trading products, so that more number of traders including
Banks, financial
institutions, insurance companies, mutual fund, primary dealers etc.
Choose to transact
through the ex change. In this context the introduction of derivatives
trading through
Indian stock exchange permitted by SEBI IN 2000 AD is a real landmark.
SEBI frst appointed the L.C Gupta Committee in 1998 to recommend
the regulatory
Frame work for derivatives trading and to recommend suggestive bye-laws
for regulation
And control of trading and settlement of derivatives contracts. The broad
of SEBI in its
Meeting held on May 11,1998 accepted the recommendations of the
Dr L.C Gupta
Committee and approved the phased introduction of derivatives
trading in India 42

Page 43
beginning with Stock Index Futures. The Board also approved the
Suggestive Byelaws recommended by the committee for regulation and control of
trading and
settlement of Derivatives Contracts.
SEBI subsequently appointed the J. R. Varna Committee to
recommend Risk
containment Measures in the Indian stock index Futures Market. The
report was
submitted in the same year (1998) in the month of November by the said
committee.
However the Securities Contracts (REGULATION) Act, 1956
(SCRA0 need
amendment to include derivatives in the definition of securities to
enable SEBI to
introduce trading in derivatives. The government in the year 1999
carried out the
necessary amendment. The securities laws (amendment) bill 1999 was
introduced to
bring about the much-needed changes. In December 1999 the new
framework has been
approved. Derivatives have been accorded the statues of securities. The
ban imposed on
trading in derivatives way back in 1969 under a notification issued by
the central
government has been revoked. Therefore SEBI formulated the necessary
regulation/byelaws and intimated the stock exchange in year 2000, while derivative
trading started in
India at NSE in the same Year and BSE started trading in the year 2001. In
this module
we are covering the different types of derivative products and their
features, which are
traded in the stock exchanges in India.

EQUITY DERIVATIVES EXCHANGES IN INDIA

. In the equity markets both the national stock exchange of India Ltd.
(NSE)

and The stock exchange, Mumbai (BSE) was quick to apply to SEBI
for setting
Up There derivatives segment.

NSE as stated earlier commends derivatives trading in the

same year i.e. 2000 AD, while BSE followed after a few
months in 2001.

Both the exchange have set-up an in-house segment instead of

setting up a
Separate exchange for derivates.

NSEs Futures & Options Segment was launched with Nifty

futures as the first Production.

BSEs Derivatives Segment, started with sensex futures as its first

product.
43

Page 44
Stock options and stock futures were introduced in both the
Exchange in the year
2001.
Thus started trading in Derivatives in India Stock Exchanges (both BSE
& NSE)
Covering index options, Index Futures, and Stock Options & Futures in the
wake of the
new millennium in a short span of three years the volume traded in the
derivatives
Market has outstripped the turnover of the cash market.

Derivatives Trading in Financial Markets

Derivatives were not traded in the financial markets of the world up
to the period
about there decades backs, through Stock Exchange trading in
securities in the cash
market came to be in vogue more than a century ago. In Indian the frst
Stock Exchange,
BSE was established in1875. But BSE commenced trading in derivatives
only from
2001.Even in the international finance/securities market the advent of
derivatives as
trading products was a concurrent-efect with the process of globalization
and integration
the national economies of the development countries beginning from the
Seventies of the
last Century. As volumes traded increased and as competition on turned,
trade & business
became more complex in the new environment. The new opportunities
were matched by
fresh challenges and unpredictable volatility of the trading environment.
Corporate for
the first time sensed the formidable risks inherent in business
transactions and the
unpredictability of the markets to which they are exposed. Facing
multiple risks the
business organization, were induced to search for new remedies, i.e. risk
containment
devices/instrument. Derivatives came to be the natural remedy in this

context. To quote
an international professional authority.
As capital markets become increasingly integrated, shocks
transmit easily from
one market to another. The proliferation of new instruments with has
become darling of
corporate, banks, institutions alike is Derivatives. To have a touch of
the tree tops
view, Derivatives transaction is defined as a bilateral contract whose
value is derived,
from the value of an underlying asset, or reference rate, or index.
Derivative transaction have evolved in the past twenty years to
cover a broad
range of products which include instruments like forward, future,
options, swaps
covering a broad spectrum of underlying assets including exchange
rates, interest rate,
commodities, and equities.
Through recent in origin derivates instrument issued over the
years have grown 44

Page 45
by leaps and bounds and the total amount issued globally is estimated to
approach $80
trillion by the advent of the new millennium. Derivatives position has
growth at
compounding rate 20% since 1990. In Indian through derivatives were
introduced very
recently in2001, the trading turnover has already surpassed that of the
equity segment. In
NSE alone as per a report on ors website the total turnover of the
derivates segment for
the month of May 2003 stood at Rs. 53424 crores. During the month of
May 2003, the
percentage of derivatives segment as a percentage of the cash
segment was 97.68%.
However in the earlier two month the turnover of Derivatives was higher
than that of the
cash segment.

Developments Leading to Trading of Financial

Derivatives in the USA

The pace of innovation in derivatives markets increased remarkably in

the 1970s.
The frst major innovation occurred in February 1972, when
the Chicago
mercantile Exchange CME began trading futures on currencies in its
International
Money Market (IMM) division. This marked the first time a futures
contract was
written on anything other than a physical commodity.
The second was in April 1973, when the CBT formed Chicago Board
Options
Exchange (CBOE) to trade options on common stocks. This
marked the first
time an option was traded on an exchange.
The third major innovation occurred in October 1975, when the CBT
introduced
The first futures contract on an interest rare instrument
Government National
Mortgage Association futures.
In January 1976, the CME launched Treasury bill futures and, in

August 1977,
the CBT launched Treasury bond futures.
The 1980s brought yet another round of important innovations. The
first was the
use of cash settlement. In December 1981, the IMM launched the
first cash
Settlement contracts, the 3-months Eurodollar futures. At expiration,
the
Eurodollar future is settled in cash based on the interest rate
prevailing for a
three month Eurodollar time deposit.
Cash settlement made feasible the introduction of derivatives on
stock index
futures, the second major innovation of the 1980s. in February
1982, the
Kansas City Board of Trade (KCBT) listed futures on the Value Line
Composite
stock index, and, in April 1982, the CME listed futures on the S&P
500.these
45

Page 46
contract introductions marked the frst time future that contracts
were written on
stock indexes.
The third major innovation of the 1980s was the introduction of
exchange-traded
option contracts written on UNDERLYING other than individual
common
stocks. The CBOE and AMEX listed interest rate options in October
1982 and the
Philadelphia Stock Exchange (PHILX) listed currency options in
December 1982
as also options and gold futures.
In January 1983, the CME and year New York Futures Exchanges
(NYFE) began
to list options directly on stock index futures, and, March 1983, the
CBOE began
to list options on stock indexes.
These two decades if innovation has transformed the nature of
derivatives
trading activates on exchanges. While derivatives exchange
were originally
developed to help market participants manage the price risk of physical
commodities,
todays trading activates is focused on hedging the financial risks
associated with
unanticipated price movement in stock, bonds, and currencies.

CHAPTER-3
RESARESH METHODLGY
46

Page 47

NEED FOR THE STUDY

To Study the various trends in derivative market.

To study the role of derivative in Indian Financial Market.

To study in detail the role of features and options.
To find out proft/loss of the option holder and option writer.
To study about risk Management with the help of derivatives.

OBJECTIVES
The objective of this analysis is to evaluate the profit/loss
position of option
Holder/writer. This analysis is done based on the sample data. The
sample is taken as
ICICI & NTPC scripts of JUNE 2006. The lot size of the scrip is 175&1625.
The option
contract starting period is 01/06/09 and its maturity date is on 29/06/09.
As the scripts of
ICICI BANK & NTPC Companies are volatile, they are chosen as the
sample for
analysis. The data is collected from various news papers, like Economic
Times, Business
standard and Business Line off course from the Hyderabad stock exchange.

METHODOLOGY

To achieve the object of studying the stock market data has been collected
from
1. Primary
2. Secondary
47

Page 48
PRMARY
The primary data collected from the original trade in time to time
process and the
data is taken from IIFL staf and from my project guide.
SECONDARY
The secondary information is mostly from websites, books, journals,
etc.

CHAPTERISATION
The study has been presents in Five chapters as flows
Chapter 1:- Introduction, Which Deals With the Importance of Derivatives.
Chapter 2:- Profle of The Company, Which Deals with Industry Profile.
Chapter 3:- Provides Research Methodology, Which Deals With
Objectives, Data Collection and Limitations.
Chapter 4:- Deals with Data presentation, Interpretation and Analysis.
Chapter5:- Deals with Conclusions, Suggestions.

LIMITATIONS
The sample size chosen as ICICIBANK & NTPC Companies scrips of
the month
of July.
The study is confined to June month only.

 The data gathered is completely restricted to the ICICIBANK & NTPC

48
Page 49
Companies
scripts of

June 09. And hence cannot be taken universal.

The opening premium is considered for calculation of profit/loss

position.

CHAPTER-4
ANALYSIS

INTERDUCTION TO ANALYSIS
The following table explained the amount transaction
between the option 49

Page 50
writer and option holder. The table has various columns, which explain
various factors
involved in derivatives trading.
Date - the day on which trading took place.
Closing premium premium for that day.
Open interest no of that did not get exercised.
Trading quantity no of options traded on bourses on that day.
Value - total value of the options on that particular day.

Table No: 4.1 CALL OPTION JUNE, 2009 ON ICICI BANK

50

Page 51
ICICI CALL OPTIONS
Date

Close pre

Open int

Tra
d
qul
17K

Volum Clos
e
e
pre

Ope Trad Volum

n int e qul e

01/06/09

80.00

2L

104.67 63.50 64K

16K

02/06/09

87.00

2L

05/06/09

106.75

2L

73K

444.3

87.60 73K

18K

06/06/09

128.50

2L

61K

369.4

93.65 74K

11K

07/06/09

82.75

3L

3L

48K

09/06/09

62.00

3L

3L

12/06/09

62.00

2L

76K

1781.5 75.00 91K

9
2177.8 53.00 1L
9
465.9 43.10 2L

13/06/09

68.00

2L

38K

233.95 29.65

2L

27K

14/06/09

43.00

2L

36K

223.85 34.20

2L

22K

15/06/09

57.25

2L

37K

227.24 21.20

2L

25K

16/06/09

33.45

2L

24K

145.64 27.20

2L

22K

19/06/09

39.50

2L

42K

254.74 18.80

2L

33K

20/06/09

30.60

2L

42K

253.58 10.75

2L

20K

21/06/09

19.70

2L

26K

156.58 3.15

2L

23K

22/06/09

6.20

2L

22K

134.92 3.50

2L

5K

23/06/09

7.60

2L

20K

132.96 1.05

2L

4K

27/06/09

3.60

2L

23K

130.95 0.85

2L

6K

28/06/09

10.80

2L

24K

131.92 3.30

2L

5K

29/06/09

9.25

2L

18K

128.65 0.05

2L

8K

66.35

21L
70K
1
40.34

1
26.14

The above call options details have revalues that, the

premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as
but at some
places there is rise the price due to increase in the index .

Table No: 4.2 CALL OPTION JUNE, 2009 ON NTPC

51

Page 52

CA NTPC (180)
Date

Clos
e
pre

01/06/09

5.85

02/06/09

6.25

Ope
n int

4L

CA NTPC (190)
Trad
e qul

2L

Volum Clos
e
e
pre
237.86

Ope
n int

Trad
e qul

Volum
e

12L

10L

1102.3
6

2.65

14L

3L

405.96

3.1
3

05/06/09
06/06/09

7.9

3L

3L

364.01

3.9

14L

11L

07/06/09

8.95

3L

2L

217.18

4.2

13L

7L

1362.6
9864.36

09/06/09

9.9

3L

59K

70.05

5.05

12L

5L

545.8

12/06/09

12.25

2L

1L

138.01

7.25

11L

11L

13/06/09

11.15

2L

2L

283.51

6.3

6L

3L

1349.7
2391.29

14/06/09

6.2

4L

1L

153.03

15/06/09

4.8

4L

72K

85.83

16/06/09

9.5

3L

2L

299.75

19/06/09

9.45

3L

62K

76.89

20/06/09
21/06/09
22/06/09

14

49K

10K

12.1

9.6

3L

3K

4.05

23/06/09

19.2

46K

23K

28.84

14.4

3L

3L

348.87

27/06/09

22.5

26K

10K

4.9

18.5

1L

13K

17.56

NTPC CALL OPTIONS

The above call options details have revalues that, the
premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as
but at some
places there is rise the price due to increase in the index .

PUT OPTIONS OF JUNE09

Table No: 4.3 PUT OPTION JUNE, 2009 ON ICICI BANK

52

Page 53

PA ICICI (390)
Date

Clos
e
pre

Ope
n int
51K

Trad
e qul

01/06/09

10.85

8K

02/06/09

18.30

05/06/09

24.6

33K

33K

06/06/09

37

27K

07/06/09

15

09/06/09

PA ICICI (400)
Volum Clos
e
e
pre
51.36

Ope
n int

Trad
e qul

Volum
e

34

204.5

19K

120.12

61K

63K

387.68

11.8

29K

69K

419.57

19.5

18K

19K

12/06/09

14.2

94K

50K

309.53

13/06/09

12.9

90K

29K

176.15

14/06/09

15/06/09

14.4

84K

21K

16/06/09

19/06/09

20/06/09

19.2

68K

29K

176.86

21/06/09

11.05

53K

26K

160.71

22/06/09

23.75

1K

700

437

23/06/09

8.2

52K

6K

34.22

27/06/09

10.75

50K

4K

25.56

128.89

_
_

120.85

ICICI PUT OPTIONS

The above put options details have revalues that, the
premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as
but at some
places there is rise the price due to increase in the index .

Table No: 4.4 PUT OPTION JUNE, 2009 ON NTPC

PA NTPC (160)

PA NTPC (170)
53

Page 54

Date

Clos
e
pre

Ope
n int

01/06/09

1.5

2L

02/06/09

1.30

Trad
e qul
1L

Volum Clos
e
e
pre
137.77

4.4

Ope
n int

Trad
e qul

Volum
e

2L

2L

208.76

2.4

3L

2L

217.29

07/06/09

1.55

4L

2L

231.12

09/06/09

1.35

4L

72K

83.19

12/06/09

1.05

5L

1L

158.64

13/06/09

0.85

5L

1L

139.4

14/06/09

0.65

5L

2L

255.86

0.2

5L

1L

153.56

22/06/09

0.1

5L

3K

3.74

23/06/09

0.05

5L

3K

3.74

3.60

05/06/09
06/06/09

0.95

3L

55K

61.29

15/06/09
16/06/09
19/06/09
20/06/09
21/06/09

NTPC PUT OPTIONS

The above PUT options details have revalues that, the
premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as
but at some
places there is rise the price due to increase in the index.

FUTURES OF JUNE09
Table No: 4.5 FUTURES JUNE, 2009 ON ICICI BANK

54

Page 55

FUTURES FOR THE MONTH OF JUN-09 (ICICI)

DATE

OPEN

CLOSE

OPEN INT

TURN IN L NO OF
CON

01/06/09

454.70

465.90

108L

02/06/09

468.15

470.75

105L

05/06/09

486.50

497.75

114L

29L

40189

06/06/09

498.80

522.40

123L

24L

63821

07/06/09

525.20

468.60

110L

8771

09/06/09

459.95

454.90

110L

68L

63014

12/06/09

444.90

436.10

110L

46L

49409

13/06/09

435.00

423.00

114L

24L

49583

14/06/09

430.00

441.15

115L

13L

37757

15/06/09

428.90

408.20

122L

23L

50809

16/06/09

412.10

424.00

123L

17L

27879

19/06/09

421.35

413.45

120L

9L

20/06/09

405.00

396.90

116L

20L

43269

21/06/09

374.70

368.40

104L

22L

76052

22/06/09

375.00

378.35

95L

20L

55638

23/06/09

372.00

363.95

85L

20L

67488

27/06/09

368.40

380.45

57L

23L

75488

28/06/09

382.00

407.50

33L

24L

55846

29/06/09

410.00

417.85

24L

20L

44256

17L

26812
26831

Table: 4.6 FUTUER JUNE,2009 ON NTPC

FURURES FOR THE MONTHOF JUN-09 (NTPC)

28748

55

Page 56

DATE

OPEN

CLOSE

OPEN INT

TURN IN L NO OF
CON

01/06/09

180.90

182.20

315L

13646.44

02/06/09

182.80

183.95

320L

25144.70

05/06/09

184.95

180.80

312L

19420.49

733

06/06/09

180.00

176.40

320L

26255.30

2005

07/06/09

177.10

170.00

296L

31257.67

2098

09/06/09

167.45

175.20

324L

32884.12

1345

12/06/09

175.05

168.00

286L

30265.57

2903

13/06/09

164.00

164.75

289L

29679.20

1365

14/06/09

167.40

166.05

295L

25088.80

1065

15/06/09

162.50

162.05

294L

23749.49

719

16/06/09

162.20

176.15

291L

44308.00

4749

19/06/09

177.00

175.25

290L

16720.10 2696

20/06/09

172.25

182.20

318L

60257.27

1922

21/06/09

178.80

176.65

274L

64879.22

1313

22/06/09

178.00

175.30

253L

28409.57

895

23/06/09

174.05

174.30

221L

31261.29

4003

27/06/09

175.50

187.70

183L

48546.79

620

28/06/09

188.00

189.15

148L

32078.49 513

29/06/09

189.75

190.15

119L

41181.56

3141

729

56

Page 57

Table No: 4.7 Spot price of ICICI Bank

SPOT PRICE OF ICICI

DATE

SPOT PRICE

01/06/09

465.90

02/06/09

470.75

05/06/09

497.75

06/06/09

522.40

07/06/09

468.60

09/06/09

454.90

12/06/09

436.10

13/06/09

423.00

14/06/09

441.15

15/06/09

408.20

16/06/09

424.00

19/06/09

413.45

20/06/09

396.90

21/06/09

368.40

22/06/09

378.35

23/06/09
27/06/09
28/06/09
29/06/09

363.95
380.45
408.50
410.00

57

Page 58

Table No: 4.8 - Efect of an increase in each variable on the value

of the option.

Variable

Efect of an increase in each

variable on the value of the
option, holding other factors
constant
Call premium

Put premium

58

Page 59

Sport price (S)

Increase

Decrease

Strike price (K)

Decrease

Increase

Volatility ()

Increase

Increase

Time to
expiration (t)

Increase

Increase

Interest rates (r)

Increase

Decrease

Dividend (D)

Decrease

Increase

In the nutshell, we can formulate the basic rules for options pricing as
follows:
For calls
Lower the strike (exercise) price, the more valuable the call.
Diferent in call prices cannot exceed diference in the exercise
price.
A call must be worth at least the stock price less the present
value of the exercise price.
More the time till expiration, greater the call price.
More the volatility, higher the call option premium.
Higher the interest rates, more the call value.

For puts
Higher the exercise price, more valuable the put.

 The price difference between two puts cannot exceed the different
in exercise
59

Page 60
prices.
Before expiration, a put must be worth at least the
difference between the exercise
price and the stock price.
Longer the time to expiration, the more voluble the put.
More the volatility, higher the put premium.
Higher the interest rate, lower the put value.

POSITION OF CALL OPTION BUYERS/WRITERS

1. DATE

2.
STRIKE
PRI CE

3.
SPOT
PRICE

4.
PREMIU
M

5. STRICK
PRICE
+PREMIU
M

6. SPOT
5

60

Page 61
15/06/09

400

396.40

12.25

412.25

-15.85

15/06/09

420

396.40

6.00

426.00

-30

All OPTIONS IS OUT-OF-THE-MONEY

If the OPTION is purchased on 1st June and as on expiry date (29/06/09)

POSITION OF CALL OPTION BUYER/WRITER
1. DATE

3.
SPOT
PRICE
394.40

4.
PREMIU
M
23.7

5. STRICK
PRICE
+PREMIU
M
423.7

6. SPOT
5

23/06/09

2.
STRIKE
PRI CE
400

23/06/09

420

394.40

12.00

432.00

-39.6

-29.3

All OPTIONS IS OUT-OF-THE-MONEY

POSITION OF PUT OPTION BUYER/WRITERS

1. DATE
15/06/09

2.
STRIKE
PRI CE
400

3.
SPOT
PRICE
396.40

4.
PREMIU
M
14.4

5.
STRICK
PRICE
385.6

6. SPOT
5
10.8

61

Page 62

15/06/09

420

396.40

420

23.6

All OPTION IS OUT-OF-THE- MONEY

If the OPTION is purchased on 1st June and as on expiry date (29/06/09)

POSITION OF PUT OPTION BUYER/WRITER
1. DATE
29/06/09

2.
STRIKE
PRI CE
400

3.
SPOT
PRICE
394.40

29/06/09

420

394.40

4.
PREMIU
M
10.85
_

5.
STRICK
PRICE
389.15

6. SPOT
5

420.00

-26.6

THE OPTION 600 IS OUT-OF-THE-MONEY

THE OPTION 620 IS IN-THE-MONEY.

TABLE NO: 4.9 SPOT PRICE ON NTPC

SPOT PRICE OF NTPC

5.25

62

Page 63
DATE

SPOT PRICE

01/06/09

182.20

02/06/09

183.95

05/06/09

180.80

06/06/09

176.40

07/06/09

170.00

09/06/09

175.20

12/06/09

168.00

13/06/09

164.75

14/06/09

166.05

15/06/09

162.05

16/06/09

176.15

19/06/09

175.25

20/06/09

182.20

21/06/09

176.65

22/06/09

175.30

23/06/09
27/06/09
28/06/09
29/06/09

174.30
187.70
189.15
190.15

63

Page 64

POSITION OF CALL OPTION BUYER/WRITER

1. DATE

3.
SPOT
PRICE
121.10

4.
PREMIU
M
11.15

5. STRICK
PRICE
+PREMIU
M
121.15

6. SPOT
5

11/06/09

2.
STRIKE
PRI CE
110

11/06/09

115

121.10

6.3

121.3

-0.2

11/06/09

120

121.10

2.85

122.85

-1.75

-0.05

All OPTIONS ARE OUT-OF-THE-MONEY

If the OPTION is purchased on 1st July and as on expiry date (23/07/06)
POSITION OF CALL OPTION BUYER/WRITER

64

Page 65

1. DATE

3.
SPOT
PRICE
129.45

4.
PREMIU
M
5.85

5. STRICK
PRICE
+PREMIU
M
115.85

6. SPOT
5

23/06/09

2.
STRIKE
PRI CE
110

23/06/09

115

129.45

3.1

118.1

11.35

23/06/09

120

129.45

1.3

121.3

8.15

13.6

All OPTIONS ARE IN-THE-MONEY

POSITION OF PUT OPTION BUYER/LOWER

1. DATE

3.
SPOT
PRICE
121.10

4.
PREMIU
M
_

5.
STRICK
PRICE
110

6. SPOT
5

11/06/09

2.
STRIKE
PRI CE
110

11/06/09

115

121.10

0.85

114.15

6.95

11/06/09

120

121.10

2.6

117.4

3.5

11.1

All OPTIONS ARE OUT-OF-THE-MONEY

If the OPTION is purchased on 1st July and as on expiry date (23/07/2006)

POSITION OF PUT OPTION BUYER/WRITER

65

Page 66
3.
SPOT
PRICE
129.45

4.
PREMIU
M
1.5

5.
STRICK
PRICE
108.5

6. SPOT
5

23/06/09

2.
STRIKE
PRI CE
110

23/06/09

115

129.45

4.4

110.6

18.85

23/06/09

120

129.45

120.00

9.45

1. DATE

20.95

ALL OPTIONS ARE OUT-OF-THE-MONEY

CHAPTER-5
SUMMARY
Derivatives market is on innovation to cash market, approximately
its daily turn
over reaches to equal stage of cash market. The average daily turn
over of the
NSE derivative segment is.
Presently the available scrip sin futures and options segment are in
cash market.
The profit/ loss of the investor depends on the market price of the
under lying
asset. the investor may incur huge profit or he may incur huge loss.
But in derivative segment the investor enjoys huge profit with
limited down side.
In cash market the investor as to pay the total money. But in
derivatives the

investor as to pay premium or margins which are some percentage

of total
money.

66

Page 67
Derivatives are mostly used for hedging purpose.
In derivatives segment the profit/loss of the option holder/option
writer is purely
depended on the fluctuations of the under lying assets

CONCLUSION
at present scenario the derivatives market is increased to a grate
position.
Approximately its daily turnover reaches to the equal stage of cash
market, the
avgas daily turnover of the NSE in derivatives market is
4,00,000(vol).
Presently the available scraps in the futures and options segment
are 55.
The derivative market is newly stated in India and its is not know by
every one so
SEBI should take necessary actions to create awareness among
investors.
In cash market the profit/loss of the investor may be unlimited, but
in the
Derivative market.
The investor can enjoy unlimited profits and minimize the losses
incurred.

 In derivatives market the investors enjoys the privilege of paying

less amount in
case of options.
Derivatives are mostly used for hedging purpose.
In derivatives market the profit/loss of the investors depends upon
the market
67

Page 68

fluctuations, especially with the prices of the securities.

In bearish market the investor is suggested to option for put options
in order to
minimized his losses.
In bullish market the investor is suggested to option for call options
in order to
maximize the profits.

BIBLIOGRAPHY
BOOKS:
Futures and
options

Vohra & bogri

Mahajan.

Future and
options
DERIVATIVES CORE MODULE WORK BOOK
NCFM (NSES CERTIFICATION IN FINANCIAL MARKETS)
NEWS PAPERS:
THE ECONOMIC TIMES
BUSINESS STANDARDS
BUSINESS LINE
And various newspapers.
Websites:

www.NSEindia.com
www.BSEindia.com
68

Page 69
www.dervativesindia.com
www.peninsular.com
www.5paisa.com
www.sify.com

69