Académique Documents
Professionnel Documents
Culture Documents
AT
INDIA INFOLINE PVT. LTD., NOIDA
Submitted
To
1
DECLARATION
I, Maqbool Ahmad hereby declare that the following project report titled”
INDIA is an authentic work done by me. The information and findings presented
in this report are genuine, comprehensive and reliable, based on the data collected
Institute Of Management, Ghaziabad, for the fulfillment of the degree. The matter
presented in this report will not be used for any other purpose and will be strictly
confidential.
MAQBOOL AHMAD
Roll No.-1482070045
2
ACKNOWLEDGEMENT
which the present work would not have been possible. Also, I am thankful to my
faculty guide prof. Dr.Swati Agarwal mam of my institute, for her continued
guidance and invaluable encouragement. Without her help and valuable guidance
my report would not have been a success. I would also like to thank my parents
for their encouragement and moral support. I would also like to thank all the
Finally I would like to thank all the Employees of IIFL who have been kind to me
internship.
(MAQBOOL AHMAD)
Roll No:-1482070045
3
PREFACE
Technical study is incomplete without the practical knowledge. No doubt theory
provides the fundamental stone for the guidance of practice but practice examines
the element of truth lying in the theory. Therefore a stand co-ordination of theory
at “INDIA INFOLINE PVT. LTD., NOIDA”. This project report of the work
INDIA” INDIA INFOLINE LIMITED, NOIDA. Full care has been taken to
make this report error free yet the responses collected through respondent cannot
be 100% error free and I hope I shall be excused for that. Last but not the least I
hope this research work will prove to be of some help and it would applicable to
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TABLE OF CONTENTS
Part-1
Part-2
7 CONCLUSION 75-76
8 SUGGGESTIONS 76-77
10 BIBLIOGRAPGHY 79-80
11 APPENDICES 81-83
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LIST OF GRAPHS & CHATS:-
1 Gender 62
2 Age 63
3 Education 64
4 Occupation 65
5 Annual income 66
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PART 1
Company Profile
INDIA INFOLINE PVT.LTD.,
NOIDA
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COMPANY PROFILE:-
IIFL Holdings Limited (NSE: IIFL, BSE: IIFL) is the apex holding company of
the entire IIFL Group, promoted by first generation entrepreneurs. Our evolution
environment, without losing focus on our core domain of financial services. IIFL
property advisory services through its various subsidiaries. IIFL Holdings with a
2015, has global presence with offices in London, New York, Houston, Geneva,
close to 2,500 business locations spread over 850+ towns and cities has given us
the ability to expand and reach out to different segments of the society. IIFL group
has more than 2.9 million satisfied customers across various business segments
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Vision
To become
the most respected company in the financial services space in
India
Values
Values are IIFL are summarised in one acronym: GIFTS
Growth with focused team of dynamic professionals
Integrity in all aspects of business – no compromise in any situation
Transparency in what we do – and in how and why we do it
Service orientation
is our core value, imbibed by all sales as well as
support teams
our dealings – employees, customers, vendors and
Fairness in all
shareholders.
Business strategy
Steady growth by adapting to the changing environment,
without losing
the focus on our core domain of financial services
De-risked
business through multiple products and diversified revenue
stream
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Knowledge is the key to power superior financial decisions
Keep costs low and continuously strive for innovation
Customer strategy
Remain largely a retail focused organisation, driving stickiness through
Cater to untapped areas in semi-urban
and rural areas, which is relatively
safe from cut-throat competition
Target the micro, small and medium enterprises mushrooming
across the
country through a cluster approach for lending business
Use wide multi- modal network serving as one-stop shop to customers
People strategy
Attract the best talent and driven people
Ensure conducive merit environment
Liberal ownership-sharing
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OUR JOURNEY
Company
Services Pvt.Ltd. The name of the company was later changed to India
Infoline Ltd
offerings to customers and is an intangible voice that speaks volumes about the
company.
At IIFL, we believe that a brand is the face of a company’s work culture. Think of
it as a something that introduces us to our customers and to the world. Our brand
is our identity; it narrates our story of success and serves as a sign of trust.
POSITIONING
The IIFL brand is associated with trust, knowledge and quality service. But more
importantly, the brand stands for timely assistance provided to the country’s
under-banked customers.
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When we pioneered online trading in India with the launch of our brand 5 paisa,
the tag line was “It’s all about money, honey”. We then realigned our positioning
IIFL logo
The IIFL Logo comprises of the nine triangles which form the Sri Yantra. In
Hindu Mythology, the nine interlocked triangles that surround and radiate from
the centre (bindu) symbolize the highest, the invisible and elusive centre from
Our brand represents a cosmos in itself, where two worlds meet. One, where we
together strive to grow and expand and the other, where we strive to make
possibilities infinite for our customers. It is the confluence of these two thoughts,
represented by the age old symbol of converging powers that stands as the face of
our brand.
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MANAGERIAL DEPTH
meritorious
Director, is an Electronics Engineer from IIT Kharagpur and an MBA from IIM
Bangalore.
The Promoters have built the business from scratch, without pedigree of a large
IIFL Group has consistently attracted the best of the talent from across the
financial sector – private sector banks, foreign banks, public sector banks and
established NBFCs. The senior management team have years of experience and
has grown at over 32% per annum since listing in 2005 till March 31, 2015
India Infoline has been founded with the aim of providing world class investing
providing broking services on the NSE, BSE, derivative market and commodity
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comfortably and cost-efficiently place trades online and offline. While offering
the service they also give the added assurance of 92 branch offices. The company,
Financing
Wealth Management
One of the largest and fastest growing Wealth Management companies in India
with assets under advice, management and distribution of over Rs. 700 billion.
Asset Management
Our AMC is wholly owned subsidiary of IIFL Wealth and is the Investment
manager of IIFL Mutual Fund and rapidly growing Alternative Investment Funds.
Mutual Funds, NCDs, Tax-free bonds, IPOs etc. through our wide distribution
network and business associates. Emerged as one of the largest broker for life
One of the leading broking house with extensive presence all over the country
currency trading.
Premier broker for FIIs, DIIs, financial institution, private equity funds and banks.
with strong institutional placement capabilities and a wide reach across investor
segments
Housing Finance
The company is focussed on home loans and loans for residential project.
and residential properties across the country. IIFL also provides advisory and
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CORPORATE GOVERNANCE
Mr. Nirmal Jain is the founder and Chairman of IIFL Holdings Limited. He is a
career in 1989 with Hindustan Lever Limited, the Indian arm of Unilever. During
He founded Probity Research and Services Pvt. Ltd. (later re-christened India
Infoline) in 1995; perhaps the first independent equity research Company in India.
His work set new standards for equity research in India. Mr. Jain was one of the
first entrepreneurs in India to seize the internet opportunity, with the launch of
steered through the dotcom bust and one of the worst stock market downtrends but
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Mr.R.Venkataraman
Kharagpur) and an MBA (IIM Bangalore). He joined the IIFL Holdings Limited
venture with J P Morgan of US, BZW and Taib Capital Corporation Limited. He
was also the Assistant Vice President with G E Capital Services India Limited in
their private equity division, possessing a varied experience of more than 19 years
Mr. Purwar was the Chairman of State Bank of India, the largest bank in the
country from November 2002 to May 2006 and held several important and critical
Officer of the Tokyo branch, covering almost the entire range of commercial
banking operations in his illustrious career at the bank from 1968 to 2006. He is
currently the Chairman of IndiaVenture Advisors Private Limited, the equity fund
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Ms Geeta Mathur
planning.
She started her career with ICICI, where she worked for over 10 years in the field
Board of reputed companies such as Eicher Motors, Siel Limited etc. She then
worked in various capacities in large organizations such as IBM and Emaar MGF
relations.
She is currently CFO of Helpage India, one of the largest and oldest NPO in India
Mr.ChandranRatnaswami
India, Ridley Inc. in the United States and Zoomermedia Limited in Toronto,
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Products and services:
India Infoline customers have the advantage of trading in all the market segments
executed with high speed and reduced time. At the same time, they have the
advantage of having all kind of insurance and investment advisory services for life
General insurance Depository services Portfolio tracker
Back office.
On line trading through the existing mode of connectivity available in the branch
or can be arranged immediately at client’s location after the MOU. To restore the
uninterrupted trading.
All open contracts not intended for delivery and in non-deliverable positions are
specified by the exchange. Price quoted for the futures contracts would be ex-
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Margin as specified by the concerned exchange for each traded commodity is
Metals:-
Aluminum
Ingot,
Electrolytic Copper Cathode,
Gold,
Mild Steel Ingots,
Nickel Cathode,
Silver,
Sponge Iron
Zinc Ingot.
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PART-2
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INTRODUCTION OF DERIVATIVES
A derivative security is a security whose value depends on the value of together
more basic underlying variable. These are also known as contingent claims.
The emergence of the market for derivative products most notably forwards,
futures and options can be traced back to the willingness of risk -averse economic
prices. By their very nature, financial markets are markets by a very high degree
asset prices. However, by locking-in asset prices, derivative products minimize the
their value from an underlying asset. Underlying asset can be Bullion, Index,
Options in the Indian context and the IIFL have been taken as representative
sample for the study. The study cannot be said as totally perfect, any alteration
may come. The study has only made humble attempt at evaluating Derivatives
markets only in Indian context. The study is not based on the International
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DERIVATIVES:
The emergence of the market for derivative products, most notably forwards,
futures and options, can be traced back to the willingness of risk-averse economic
prices. By their very nature, the financial markets are marked by a very high
partially or fully transfer price risks by locking –in asset prices. As instruments of
prices. However, by locking –in asset prices, derivative products minimizes the
impact of fluctuations in asset prices on the profitability and cash flow situation of
risk–averse investors.
DEFINITION:-
Understanding the word itself, Derivatives is a key to mastery of the topic. The
word originates in mathematics and refers to a variable, which has been derived
In financial sense, these are contracts that derive their value from some underlying
asset. Without the underlying product and market it would have no independent
having an interest in the underlying product market, but the two are always related
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The term Derivative has been defined in Securities Contracts (Regulation) Act
1956, as:
security.
A contract, which derives its value from the prices, or index of prices, of
underlying securities.
IMPORTANCE OF DERIVATIVES:
Derivatives are used to separate risks and transfer them to parties willing to bear
these risks. The kind of hedging that can be obtained by using derivatives is
cheaper and more convenient than what could be obtained by using cash
Moreover, derivatives would not create any risk. They simply manipulate the
risks and transfer to those who are willing to bear these risks. For example,
Mr. A owns a bike If he does not take insurance, he runs a big risk. Suppose he
buys insurance [a derivative instrument on the bike] he reduces his risk. Thus,
having an insurance policy reduces the risk of owing a bike. Similarly, hedging
through derivatives reduces the risk of owing a specified asset, which may be a
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RATIONALE BEHIND THE DEVELOPMENT OF
DERIVATIVE MARKET:-
Holding portfolio of securities is associated with the risk of the possibility that the
investor may realize his returns, which would be much lesser than what he expected to
Industry policy
Management capabilities
Consumer’s preference
These forces are to a large extent controllable and are termed as “Non-systematic
Risks”. An investor can easily manage such non- systematic risks by having a well-
diversified portfolio spread across the companies, industries and groups so that a loss in
There are other types of influences, which are external to the firm, cannot be controlled,
• Economic
• Political
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Their effect is to cause the prices of nearly all individual stocks to move together in
the same manner. We therefore quite often find stock prices falling from time to time in
spite of company’s earnings rising and vice –versa.Rational behind the development of
derivatives market is to manage this systematic risk, liquidity. Liquidity means, being
able to buy & sell relatively large amounts quickly wi In debt market, a much larger
portion of the total risk of securities is systematic. Debt instruments are also finite life
securities with limited marketability due to their small size relative to many common
stocks. These factors favor for the purpose of both portfolio hedging and speculation.
India has vibrant securities market with strong retail participation that has evolved over
the years. It was until recently a cash market with facility to carry forward positions in
actively traded “A” group scripts from one settlement to another by paying the required
margins and borrowing money and securities in a separate carry forward sessions held
for this purpose. However, a need was felt to introduce financial products like other
CHARACTERISTICS OF DERIVATIVES:-
currency, etc.
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MAJOR PLAYERS IN DERIVATIVE MARKET:-
1. Hedgers
2. Speculators
3. Arbitrageurs
Hedgers: The party, which manages the risk, is known as “Hedger”. Hedgers seek to
interest.
Speculators: They are traders with a view and objective of making profits. They are
willing to take risks and they bet upon whether the markets would go up or come down.
Arbitrageurs: Risk less profit making is the prime goal of arbitrageurs. They could be
making money even with out putting their own money in, and such opportunities often
come up in the market but last for very short time frames. They are specialized in
making purchases and sales in different markets at the same time and profits by the
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TYPES OF DERIVATIVES:-
settlement takes place on a specific date in the futures at today’s pre-agreed price.
Forward contracts offer tremendous flexibility to the party’s to design the contract in
terms of the price, quantity, quality, delivery, time and place. Liquidity and default risk
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 types of
forward contracts in the sense, that the former are standardized exchange traded
contracts.
Options: Options are two types - Calls and Puts. Calls give the buyer the right but not
the obligation to buy a given quantity of the underlying asset at a given price on or
before a given future date. Puts give the buyer the right but not the obligation to sell a
given quantity of the underlying asset at a given price on or before a given date.
Warrants: Longer – dated options are called warrants and are generally traded over –
the – counter. Options generally have life up to one year, the majority of options traded
LEAPS: The acronym LEAPS means Long Term Equity Anticipation Securities.
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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
Interest rare swaps: These entail swapping only the interest related cash flows
Currency swaps: These entail swapping both the principal and interest between the
parties, with the cash flows in one direction being in a different currency than those in
opposite direction.
Derivatives are used to separate risks from traditional instruments and transfer these
risks to parties willing to bear these risks. The fundamental risks involved in derivative
business include
A. Credit Risk: This is the risk of failure of a counterpart to perform its obligation
as per the contract. Also known as default or counterparty risk, it differs with
different instruments.
market prices is termed as liquidity risk. A firm faces two types of liquidity
risks:
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D. Legal Risk: Derivatives cut across judicial boundaries, therefore the
legal Aspects associated with the deal should be looked into carefully.
DERIVATIVES IN INDIA:-
Indian capital markets hope derivatives will boost the nation’s economic prospects.
Fifty years ago, around the time India became independent men in Mumbai gambled on
the price of cotton in New York. They bet on the last one or two digits of the closing
price on the New York cotton exchange. If they guessed the last number, they got Rs.7/-
for every Rupee layout. If they matched the last two digits they got Rs.72/-Gamblers
preferred using the New York cotton price because the cotton market at home was less
Now, India is about to acquire own market for risk. The country, emerging from a long
history of stock market and foreign exchange controls, is one of the vast major
hybrid over the counter, derivatives market is expected to develop along side. Over the
last couple of years the National Stock Exchange has pushed derivatives trading, by
using fully automated screen based exchange, which was established by India's leading
institutional investors in 1994 in the wake of numerous financial & stock market
scandals.
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Contract Periods:-
At any point of time there will be always be available nearly 3months contract periods
in Indian Markets.
These were
1) Near Month
2) Next Month
3) Far Month
For example in the month of September 2007 one can enter into September
futures contract or October futures contract or November futures contract. The last
Thursday of the month specified in the contract shall be the final settlement date for the
Settlement:-
The settlement of all derivative contracts is in cash mode. There is daily as well as final
settlement. Outstanding positions of a contract can remain open till the last Thursday of
that month. As long as the position is open, the same will be marked to market at the
daily settlement price, the difference will be credited or debited accordingly and the
position shall be brought forward to the next day at the daily settlement price. Any
position which remains open at the end of the final settlement day (i.e. last Thursday)
shall be closed out by the exchange at the final settlement price which will be the
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Margin
There are two types of margins collected on the open position, viz., initial margin
which is collected upfront which is named as “SPAN MARGIN” and mark to market
for clients to give margins, failing in which the outstanding positions are required to be
closed out.
Forwards
Forwards are the simplest and basic form of derivative contracts. These are instruments
agreement to buy/sell an asset at certain in future for a certain price. They are private
One of the parties in a forward contract assumes a long position i.e. agrees to buy the
underlying asset on a specified future date at a specified future price. The other party
assumes short position i.e. agrees to sell the asset on the same date at the same price.
This specified price referred to as the delivery price. This delivery price is choosen so
that the value of the forward contract is equal to zero for both the parties. In other
words, it costs nothing to the either party to hold the long/short position.A forward
contract is settled at maturity. The holder of the short position delivers the asset to the
holder of the long position in return for cash at the agreed upon rate. Therefore, a key
determinate of the value of the contract is the market price of the underlying asset. A
movements of the price of the asset. For example, if the price of the asset rises sharply
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after the two parties entered into the contract, the party holding the long position stands
to benefit, that is the value of the contract is positive for him. Conversely the value of
the contract becomes negative for the party holding the short position.
The concept of forward price is also important. The forward price for a certain contract
MEANIG OF FORWARDS
is defined as that delivery price which would make the value of the contract zero. To
explain further, the forward price and the delivery price are equal on the day that the
contract is entered into. Over the duration of the contract, the forward price is liable to
contractin terms of the price, quantity, quality, delivery time and place
Forward contracts suffer from poor liquidity and default risk
Contract price is generally not available in public domain
On the expiration date the contract will settle by delivery of the asset
If the party wishes to reverse the contract, it iscompulsorily to go to the same
counter party, which often results high prices
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Forward Trading in Securities:
The Securities Contract (amendment) Act of 1999 has allowed the trading in derivative
products in India. As a further step to widen and deepen the securities market the
st
government has notified that with effect from March 1 2000 the ban on forward
trading in shares and securities is lifted to facilitate trading in forwards and futures.
It may be recalled that the ban on forward trading in securities was imposed in 1986 to
curb certain unhealthy trade practices and trends in the securities market. During the
past few years, thanks to the economic and financial reforms, there have been many
The lifting of ban on forward deals in securities will help to develop index futures
and other types of derivatives and futures on stocks. This is a step in the right
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Meaning of Futures
FUTURES
The future contract is an agreement between two parties to buy or sell an asset at a
certain specified time in future for certain specified price. In this, it is similar to a
forward contract. A futures contract is a more organized form of a forward contract;
these are traded on organized exchanges. However, there are a number of differences
between forwards and futures. These relate to the contractual futures, the way the
markets are organized, profiles of gains and losses, kind of participants in the markets
and the ways they use the two instruments.
Futures contracts in physical commodities such as wheat, cotton, gold, silver, cattle,
etc. have existed for a long time. Futures in financial assets, currencies, and interest
bearing instruments like treasury bills and bonds and other innovations like futures
contracts in stock indexes are relatively new developments.
The futures market described as continuous auction markets and exchanges providing
the latest information about supply and demand with respect to individual commodities,
financial instruments and currencies, etc. Futures exchanges are where buyers and
sellers of an expanding list of commodities; financial instruments and currencies come
together to trade. Trading has also been initiated in options on futures contracts. Thus,
option buyers participate in futures markets with different risk. The option buyer knows
the exact risk, which is unknown to the futures trader.
Organized Exchanges: Unlike forward contracts which are traded in an over- the-
counter market, futures are traded on organized exchanges with a designated physical
location where trading takes place. This provides a ready, liquid market which futures
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delivered and the maturity date are negotiated between the buyer and seller and can be
Tailor made to buyer’s requirement. In a futures contract both these are standardized by
Clearing House: The exchange acts a clearing house to all contracts struck on the
trading floor. For instance a contract is struck between capital A and B. Upon entering
into the records of the exchange, this is immediately replaced by two contracts, one
between A and the clearing house and another between B and the clearing house. In
other words the exchange interposes itself in every contract and deal, where it is a buyer
to seller, and seller to buyer. The advantage of this is that A and B do not have to
undertake any exercise to investigate each other’s credit worthiness. It also guarantees
financial integrity of the market. This enforces the delivery for the delivery of contracts
held for until maturity and protects itself from default risk by imposing margin
market.
In most of the forward contracts, the commodity is actually delivered by the seller and
is accepted by the buyer. Forward contracts are entered into for acquiring or disposing
of a commodity in the future for a gain at a price known today. In contrast to this, in
most futures markets, actual delivery takes place in less than one percent of the
contracts traded. Futures are used as a device to hedge against price risk and as a way of
betting against price movements rather than a means of physical acquisition of the
underlying asset. To achieve this most of the contracts entered into are nullified by the
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Margins:
to attract customers, a mandatory minimum margins are obtained by the members from
the customers. Such a stop insures the market against serious liquidity crisis arising out
Collect margins from their clients as may be stipulated by the stock exchanges from
time to time and pass the margins to the clearing house on the net basis i.e. at a
stipulated percentage of the net purchase and sale position. The stock exchange imposes
margins as follows:
Initial margins on both the buyer as well as the seller.
The accounts of buyer and seller are marked to the market daily.
The concept of margin here is same as that of any other trade, i.e. to introduce a
financial stake of the client, to ensure performance of the contract and to cover day to
Initial margin: In futures contract both the buyer and seller are required to perform
the contract. Accordingly, both the buyers and the sellers are required to put in the
initial margins. The initial margin is also known as the “performance margin” and
usually 5% to 15% of the purchase price of the contract. The margin is set by the stock
exchange keeping in view the volume of business and size of transactions as well as
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Operative risks of the market in general.
The concept being used by NSE to compute initial margin on the futures transactions is
called “value- at –Risk” (VAR) where as the options market had SPAN based margin
system”.
substitutes each existing futures contract with a new contract that has the settlement
price or the base price. Base price shall be the previous day’s closing Nifty value.
Settlement price is the purchase price in the new contract for the next trading day.
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FUTURES TERMINOLOGY:
Spot price:
Futures price:
The price at which the futures contract is traded in the futures market.
Expiry Date:
It is the date specified in the futures contract. This is the last day on which the contract
Contract Size:
The amount of asset that has to be delivered under one contract. For instance contract
Basis/Spread:
In the context of financial futures basis can be defined as the futures price minus the
spot price. There will be a different basis for each delivery month for each contract. In
formal 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 finance the asset less the income earned on the asset.
Multiplier:
It is a pre-determined value, used to arrive at the contract size. It is the price per index
point.
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Tick Size:
Open Interest:
Total outstanding long/short positions in the market in any specific point of time. As
total long positions for market would be equal to total short positions for calculation of
Long position:
Short position:
Index Futures:
Stock Index futures are most popular financial futures, which have been used to hedge
or manage systematic risk by the investors of the stock market. They are called hedgers,
who own portfolio of securities and are exposed to systematic risk. Stock index is the
apt hedging asset since, the rise or fall due to systematic risk is accurately shown in the
stock index. Stock index futures contract is an agreement to buy or sell a specified
Stock index futures will require lower capital adequacy and margin requirement as
index futures will be much lower. Savings in cost is possible through reduced bid-ask
spreads where stocks are traded in packaged forms. The impact cost will be much lower
40
in case of stock index futures as opposed to dealing in individual scraps. The market is
conditioned to think in terms of the index and therefore, would refer trade in stock
The stock index futures are expected to be extremely liquid, given the speculative
nature of our markets and overwhelming retail participation expected to be fairly high.
In the near future stock index futures will definitely see incredible volumes in India. It
will be a blockbuster product and is pitched to become the most liquid contract in the
world in terms of contracts traded. The advantage to the equity or cash market is in the
fact that they would become less volatile as most of the speculative activity would shift
ideally have more depth, volumes and act as a stabilizing factor for the cash market.
However, it is too early to base any conclusions on the volume or to form any firm
trend. The difference between stock index futures and most other financial futures
contracts is that settlement is made at the value of the index at maturity of the contract
Stock Futures
With the purchase of futures on a security, the holder essentially makes a legally
binding promise or obligation to buy the underlying security at same point in the future
(the expiration date of the contract). Security futures do not represent ownership in a
A futures contract represents a promise to transact at same point in the future. In this
light, a promise to sell security is just as easy to make as a promise to buy security.
Selling security futures without previously owing them simply obligates the trader to
sell a certain amount of the underlying security at same point in the future. It can be
done just as easily as buying futures, which obligates the trader to buy a certain amount
41
of the underlying security at some point in future.
OPTIONS
An option is a derivative instrument since its value is derived from the underlying asset.
It is essentially a right, but not an obligation to buy or sell an asset. Options can be a
call option (right to buy) or a put option (right to sell). An option is valuable if and only
An option by definition has a fixed period of life, usually three to six months. An
option is a wasting asset in the sense that the value of an option diminishes as the date
An investor in options has four choices before him. Firstly, he can buy a call option
meaning a right to buy an asset after a certain period of time. Secondly, he can buy a
put option meaning a right to sell an asset after a certain period of time. Thirdly, he can
write a call option meaning he can sell the right to buy an asset to another investor.
Lastly, he can write a put option meaning he can sell a right to sell to another investor.
Out of the above four cases in the first two cases the investor has to pay an option
premium while in the last two cases the investors receives an option premium.
DEFINITION:-
An option is a derivative i.e. its value is derived from something else. In the case of the
stock option its value is based on the underlying stock (equity). In the case of the index
42
Options clearing corporation
once an option transaction has been completed. Once a seller has written an option and
a buyer has purchased that option, the OCC takes over it. It is the responsibility of the
OCC who over sees the obligations to fulfill the exercises. If I want to exercise an ACC
November 100-call option, I notify my broker. My broker notifies the OCC, the OCC
One ACC stock. That brokerage firm then notifies one of its customers who have
written one ACC November 100 call option and exercises it. The brokerage firm
customer can be chosen in two ways. He can be chosen at random or FIFO basis.
Because, OCC has a certain risk that the seller of the option can’t fulfill the contract,
strict margin requirement are imposed on sellers. This margin requirements acts as a
European options:
European options are the options that can be exercised only on the expiration date itself.
European options are easier to analyze than the American options and properties of an
American option are frequently deduced from those of its European counterpart.
In-the-money option:
An in-the-money option (ITM) is an option that would lead to a positive cash flow to
the holder if it were exercised immediately. A call option in the index is said to be in
the money when the current index stands at higher level that 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 in the money. In the case of a put option, the put is in the money if the index is
43
At-the-money option:
An At-the-money option (ATM) is an option that would lead to zero cash flow if it
exercised immediately. An option on the index is at the money when the current index
Out-of-the-money option:
An out of the money (OTM) option is an option that would lead to a negative cash flow
if it were 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.
It is one of the components of option premium. The intrinsic value of a call is the
amount the option is in the money, if it is in the money. If the call is out of the money,
its intrinsic value is Zero. For example X, take that ABC November-call option. If ABC
is trading at 102 and the call option is priced at 2, the intrinsic value is 2. If ABC
November-100 put is trading at 97 the intrinsic value of the put option is 3. If ABC
stock was trading at 99 an ABC November call would have no intrinsic value and
conversely if ABC stock was trading at 101 an ABC November-100 put option would
have no intrinsic value. An option must be in the money to have intrinsic value.
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Time value of an option:
The value of an option is the difference between its premium and its intrinsic value.
Both calls and puts have time value. An option that is OTM or ATM has only time
value. Usually, the maximum time value exists when the option is ATM. The longer
the time to expiration, the greater is an options time value. At expiration an option
CHARACTERISTICS OF OPTIONS:
9. Options enable the investors to gain a better return with a limited amount of
investment.
45
Call Option:
An option that grants the buyer the right to purchase a desired instrument is called a
call option. A call option is contract that gives its owner the right but not the obligation,
An American call option can be exercised on or before the specified date. But, a
The writer of the call option may not own the shares for which the call is written. If he
owns the shares it is a ‘Covered Call’ and if he des not owns the shares it is a ‘Naked
call’.
Strategies:
The following are the strategies adopted by the parties of a call option. Assuming that
brokerage, commission, margins, premium, transaction costs and taxes are ignored.
• At all points where spot price < exercise price, there will be a loss.
• At all points where spot prices > exercise price, there will be a profit.
• Call Option buyer’s losses are limited and profits are unlimited.
• At all points where spot prices < exercise price, there will be a profit
• At all points where spot prices > exercise price, there will be a loss
• Call Option writer’s profits are limited and losses are unlimited.
46
Following is the table, which explains In the-money, Out-of-the-money and At-the-
The profit/loss that the buyer makes on the option depends on the spot price of the
underlying asset. If upon expiration, the spot price exceeds the strike price, he makes a
profit. Higher the spot price more is the profit he makes. If the spot price of the
underlying asset is less than the strike price, he lets his option un-exercise. His loss in
The figure below shows the profit/losses for the seller/writer of a three-month put
option. As the spot Nifty falls, the put option is In-The-Money and the writer starts
making losses. If upon expiration, Nifty closes below the strike of 4850, the buyer
would exercise his option on writer who would suffer losses to the extent of the
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Meaning of swap:-
SWAPS
Financial swaps are a funding technique, which permit a borrower to access one market
and then exchange the liability for another type of liability. Global financial markets
present borrowers and investors with a variety of financing and investment vehicles in
terms of currency and type of coupon – fixed or floating. It must be noted that the
swaps by themselves are not a funding instrument: They are devices to obtain the
desired form of financing indirectly. The borrower might otherwise as found this too
A common explanation for the popularity of swaps concerns the concept of comparative
advantage. The basis principle is that some companies have a comparative advantage
when borrowing in fixed markets while other companies have a comparative advantage
in floating markets. Swaps are used to transform the fixed rate loan into a floating rate
loan.
Types of swaps:-
All Swaps involves exchange of a series of payments between two parties. A swap
Institution. The two payment streams estimated to have identical present values at the
outset when discounted at the respective cost of funds in the relevant markets. The most
2. Currency swaps.
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Interest rate swaps
streams, which are fixed and floating in nature. Such an exchange is referred to as an
exchange of borrowings.
For example, ‘B’ to pay the other party ‘A’ cash flows equal to interest at a pre-
determined fixed rate on a notional principal for a number of years. At the same time,
interest at a floating rate on the same notional principal for the same period of time. The
currencies of the two sets of interest cash flows are the same. The life of the swap can
Usually two non-financial companies do not get in touch with each other to directly
arrange a swap. They each deal with a financial intermediary such as a bank.
At any given point of time, the swaps spreads are determined by supply and demand. If
no participants in the swaps market want to receive fixed rather than floating, Swap
spreads tend to fall. If the reverse is true, the swaps spread tend to rise. In real life, it is
exactly same with a proposal to take opposite positions in the same swap
Currency Swaps
Currency swaps involves exchanging principal and fixed interest payments on a loan in
one currency for principal and fixed interest payments on an approximately equivalent
Example:
Suppose that a company ‘A’ and company ‘B’ are offered the fixed five years rates of
49
interest in US $ and Sterling. Also suppose that sterling rates are higher than the dollar
rates. Also, company ‘A’ a better credit worthiness then company ‘B’ as it is offered
Better rates on both dollar and sterling. What is important to the trader who structures
the swap deal is that the difference in the rates offered to the companies on both
currencies is not same. Therefore, though company ‘A’ has a better deal. In both the
currency markets, company ‘B’ does enjoy a comparative lower disadvantage in one of
the markets. This creates an ideal situation for a currency swap. The deal could be
structured such that the company ‘B’ borrows in the market in which it has a lower
disadvantage and company ‘A’ in which it has a higher advantage. They swap to
A point to note is that the principal must be specified at the outset for each of the
currencies. The principal amounts are usually exchanged at the beginning and the end
of the life of the swap. They are chosen such that they are equal at the exchange rate at
institutions that carefully monitor their exposure in various currencies so that they can
50
Literature Review
O.P Gupta(2004) study suggest that the overall volatility of the stock market has
declined after the introduction of the index futures for both Nifty and Sensex
Mayhew (2000) made a more focused, though quite detailed, review of theoretical
cash market, including PD. He points out that a simple way to analyze PD is to look
at the led-lag relationship between spot and derivative market of an asset. Kawaller,
Koch, and Koch (1987) took one-minute-interval spot and futures data for S&P-500
index for 1984-85 and found that the futures leads the spot market 14 by 20-45
minutes, with longer lead in the more active nearer term contracts, but the spot
trading could be showing the spot-market as lagging, many authors try to overcome
the problem. Harris (1989) examined the S&P-500 spot and futures data in five-
minute-intervals ten days around the US stock-market crash of 1987 and concluded
that, though the extreme movements in the cashfutures basis was caused due to
infrequent-trading, even after correcting for that, the futures market still led the cash
(or spot) market. Also using five-minute-interval data from April 1982 to March
1987, Stoll and Whaley (1990) overcame the infrequent-trading problem by making
the spot return pas through an ARMA filter; they also found that the futures market
leads by 5-10 minutes and sometimes cash market also leads, but the incidence of
51
the latter effect is diminishing over time. Chan (1992) looked at the 20-share MMI
index, which is less subject to infrequent trading, and both MMI and S&P-500
futures contracts. He also found strong support for futures leading spot and weak
support for the reverse. In fact, he also observed that the index-futures led even the
most-active component-stocks that are a part of the index. He also highlighted that
the lead-lag relationship is not affected whether good or bad news is received or
whether market activity is high or low. In an insightful paper, Wahab and Lashgari
(1993) pointed out that earlier empirical works were misspecified, because they
failed to recognize that the spot and derivative prices were cointegrated.
volatility in the short run, but not in the long run. Frino, Walter, and West (2000)
Futures Exchange from August 1995 to December 1996 and analyzed the effect of
spot and futures market. They found that the lead of the futures market strengthens
consistent with a scenario where investors with superior information on the broad
market are more likely to trade in the index futures. There was also some evidence
that the lead of the future market weakens and that of the equity-market strengthens
52
scenario where investors with stock-specific knowledge prefer to trade in
underlying shares.
Smidt (1971) argued that, in addition to what Demsez (1968) had modelled, the
level, would influence price, thus making it depart, during the course of a day or
sometimes even over a longer period, from the true value. But, it is Garman (1976)
who formally modelled the relation between dealer’s quote (or bid-ask spread) and
the inventory level. One of the model’s implications is that a dealer having a
sizeable long position in inventory would not go for addition unless there is a drastic
price reduction. Models by Stoll (1978) and Amihud and Mendelson (1980) reflect
index and the three-month futures on it and finds two-way causality. A survey by
Lien and Zhang (2008) argues that, while there is clear evidence for the PD role of
unequivocally. Schlusche (2009) analyzes the German blue-chip index, DAX, and,
using Schwarz and Szakmary (1994) procedure, concludes that futures market is the
53
Tsetsekos and Varangis (2000) conducted a survey among almost all the derivative
exchanges that were in operation in 1996: 75 in all. They made some important
agricultural commodities, emerging markets have begun their innings with index-
based and interest-rate-based derivatives. They also find that emerging markets
introduce index derivatives more quickly than do their industrial counterparts. Most
exchanges reported using the open-outcry system, though there is a discernible shift
towards electronic-trading, which is the choice for the more recent entrants. Two-
thirds of the exchanges had their own in-house clearing facility, but a recent
tendency has been towards a common clearing for a group of exchanges; besides,
production, growth in real gross national product (GNP), the level of GNP, and the
share of investments in GNP” as economic proxies and “stock - market turnover and
traded, the volatility in value traded, and the number of listed companies 17 in the
‘derivative-exchange-ready’.
Herfindahl Index that the smaller exchanges have increased their market-share from
9% to 37% during this period. They also observed that most of the new-born
54
derivative exchanges have focused on financial derivatives with or without
commodity derivatives while the older one started with the latter type; this is partly
because financials attract higher liquidity than commodities. They also point out
highest dollar-volume in both exchanges and over the counter (OTC) market,
in the OTC.
55
OBJECTIVES OF THE STUDY
To understand the concept ofthe Financial Derivatives such as Forwards,
Futures, Options and Swaps
To knowthe participation of Investors in Financial Derivative
Markets
To know the Strategy
used by Investors While Trading in
derivatives market
To know the Expected return by Investors in Financial Derivatives Market
To study the Investors Preference for selecting types of Derivatives for
To know the Investment Experience of Investors in Derivative Market
To know theInvestors preference of interest in kinds of Derivatives for
Investment
56
RESEARCH METHODOLOGY
Achieving accuracy in any research requires a deep study regarding the subject. The
prime objective of this research is to know the awareness regarding mutual fund
RSEARCH DESIGN:-
Descriptive Research:-
way. More simply put, descriptive research is all about describing people who take
There are three ways a researcher can go about doing a descriptive research
Observational,
defined as a method of viewing and recording the
participants
Case study,defined as an in-depth study of an individual or group of
individuals
Survey, defined as a brief interview or discussion with an individual about a
specific topic
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Causal Research Design:-
Causal research, as the name specifies, tried to determine the cause underlying a
given behaviour. It finds the cause and effect relationship between variables. It
seeks to determine how the dependent variable changes with variations in the
independent variable.
For example, a marketer may want to determine the cause of dip in sales. He would
test the sales against various parameters like selling price, competition, geography
etc.
The results obtained may not be very straight forward because, more often than not,
the variability will be a factor of more than one variable. Therefore , while varying
one variable, the other variables need to be held constant. This type of research can
scenarios.
58
SAMPLING: - Convenience sampling
study.
primary data source will be used for the research without additional
59
DATA COLLECTION METHOD
Primary data
Secondary data
PRIMARY DATA:-
Data used in research originally obtained through the direct efforts of the researcher
SECONDARY DATA:-
Secondary data is the data that have been already collected by and readily available
from other sources. Such data are cheaper and more quickly obtainable than the
primary data and also may be available when primary data can not be obtained at
all.
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TOOLS OF THE COLLECTION OF DATA
Primary data was collected through Questionnaire where
Respondent give there valuable suggestions and feedback
Secondary data was collected through
internet website of IIFL
Company and other relevant websites.
Journals and Magazines of the Company
which are issued
Weekly, Fortnight and Monthly.
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DATA ANALYSIS & INTERPRETATION
Q.1) Gender
Gender
Male
Female
41
INTERPRETATION
62
Q.2) Age
Age
10 20 20-30
30-40
40-50
50 above
15
INTERPRETATION
20% Investors are 40-50 Age groups
10% Investors are 50 and above Age groups
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Q.3 Education
EDUCATION
0
10th
22
12th
Graduation
PG & Above
22
INTERPRETATION
0% Investors are 10t h Qualified
20% Investors are 12t h Qualified
44% Investors are Graduates Qualified
44% Investors are PG & Above Qualified
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Q.4 Occupation
OCCUPATION
7
9
Service
Business
Profession
Any Other
18
16
INTERPRETATION
65
Q.5 Annual Income.
Annual Income
15
Upto 3 lacs
3-6 lacs
11
6-8 lacs
8 above
17
INTERPRETATION
22% Investors Annual Income is 6-8 Lakhs
14% Investors Annual Income is 8 & Above Lakhs
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Q.6 Participation in Derivative market as:-
14 14
Hedger
Speculator
Arbitrageur
Others
6
16
INTERPRETATION
28% Investors are Participates as Hedger
32% Investors are Participates as Speculator
12% Investors are Participates as Arbitrageur
28% Investors are Participates as Other
67
Q.7 Using Strategy in Derivative market:-
24 Yes
26 No
INTERPRETATION
68
Q.8 Investor’s expected rate of return in derivative market:-
12
Don't trade
22
Less than 5%
5-10%
INTERPRETATION
16% Investors are Expected rate of return less than 5-10%
44%Investors are Expected rate of return more than 10%
69
Q.9 Satisfaction level in Derivative market:-
19 Do not trade
Agree
Disagree
19 Neutral
INTERPRETATION
70
Q.10 Investors prefer investment in Derivative market
10 12
Forward
Future
Option
12 Swap
16
INTERPRETATION
24% Investors prefers investment in Option.
20% Investors prefers investment in Swap
71
Q.11 Experience in Derivative market
6 4
0 to 1
1 to 3
3 to 6
12 More than 6
18
INTERPRETATION
8% Investors
have Experience in Derivative market approx 0-1
year.
36%% Investors
have Experience in Derivative market approx
1-3 years.
24%% Investors
have Experience in Derivative market approx
3-6 years.
12%% Investors have Experience in Derivative market approx
more than years.
72
Q.12 Training in NSE, BSE for Derivative Market:-
23 Yes
No
27
INTERPRETATION
73
Q.13 Investors investing in Derivative Market:-
7 Equity
Currency
Commodity
Any Other
6 31
INTERPRETATION
62% Investors in invest Equity Market in Derivative.
12% Investors invest in Currency Market in Derivative.
14% Investors invest in Commodity Market in Derivative.
12% Investors invest in Any Other Market in Derivative.
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CONCLUSION
Derivatives have existed and evolved over a long time, with roots in
commodities market. In the recent years advances in financial markets and
the technology have made derivatives easy for the investors.
Derivatives market in India is growing rapidly unlike equity markets.
Trading in derivatives require more than average understanding of finance.
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At present scenario the Derivatives market is increased to a great position.
Its daily turnover teaches to the equal stage of cash market.
The derivatives are mainly used for hedging purpose.
In cash market the investor has to pay the total money, but in derivatives
the
investor has to pay premiums or margins, which are some percentage of
total one.
In derivative segment the profit/loss of the option holder/option writer is
purely depended on the fluctuations of the underlying asset.
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RECOMMENDATIONS TO INVESTORS
The investors can minimize risk by investing in derivatives. The use of
derivative equips the investor to face the risk, which is uncertain. Though the
use of derivatives does not completely eliminate the risk, but it certainly lessens
the risk.
It is advisable to the investor to invest in the derivatives market because ofthe
greater amount of liquidity offered by the financial derivatives and the lower
transactions costs associated with the trading of financial derivatives.
The derivatives products give the investor an option or choice whether to
exercise the contract or not. Options give the choice to the investor to either
exercise his right or not. If on expiry date the investor finds that the underlying
asset in the option contract is traded at a less price in the stock market then, he
has the full liberty to get out of the option contract and go ahead and buy the
asset from the stock market. So in case of high uncertainty the investor can go
for options.
However, these instruments act as a powerful instrument for knowledgeable
traders to expose them to the properly calculated and well understood risks in
pursuit of reward i.e. profit.
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LIMITATIONS:-
The study does not take any Nifty
Index Futures and Options and International
Markets into the consideration.
This is a study conducted within a period of 45 days.
may not be a detailed, Full –
During this limited period of study, the study
fledged and utilitarian one in all aspects.
The study contains some assumptions based on the demands of the analysis.
The study does not provide any predictions or forecast of the selected scripts.
The study was conducted in Noida only.
As the time was limited, study
was confined to conceptual understanding of
Derivatives market in India
78
BIBLIOGRAPGHY:-
WEBSITES:-
www.indiaifoline.com
www.nseindia.org
www.moneycontrol.com
www.bseindia.com
www.unicon.com
www.sebi.gov.in
ARTICLES:-
Gupta, OP (2002): “Effect of Introduction of Index Futures on Stock Market
Volatility: The Indian Evidence”, Paper Presented at the Sixth Capital Market
Conference of UTI Institute of Capital Markets, Mumbai, India.
Kamara, A, T Miller, and A Siegel (1992), “The Effects of Futures Trading
on the
Stability of the S&P 500 Returns”, Journal of Futures Markets, Vol. 12,
Kenourgios, Dimitris F (2004), “Price Discovery in the Athens Derivatives
Exchange: Evidence for the FTSE/ASE-20 Futures Market”, Economic and
Business Review, Vol. 6,
Mayhew, Stewart (2000): “The Impact of Derivatives on Cash Markets: What
Have We Learned?”, University of Georgia Working Paper, 27 October 1999,
Revised 3 February 2000
79
(http://media.terry.uga.edu/documents/finance/impact.pdf, Accessed 28 July
2013)
Smidt, S (1971): “Which Road to an Efficient Stock Market: Free
Competition or
Regulated Monopoly?” Financial Analysts Journal, Vol 27-18-20
Treviño, Lourdes (2005): “Development and Volume Growth of Organized
Derivatives Trade in Emerging Markets”, Ensayos, Vol 24-2
Tsetsekos, George and Panos Varangis (2000): “Lessons in Structuring
Derivatives Exchanges”, World Bank Research Observer, Vol 15-1: 85-98.
80
APPENDICES:-
Dear Respondents,
This is study for investor’s preferences on Derivatives in IIFL.We request you to kindly
fill the information and the information provided by you will be used only for the study
purpose.
(iv)Above 50 ( )
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6. You like to participate in Derivative market as.
(iv)Others ( )
(i) Don’t trade ( ) ii) Less than 5%( ) (iii) 5%-10% ( ) (iv) More than 10% ( )
(iv) Swaps ( )
10. Experience in Derivatives Market (please select only one which is applicable)
11. Have you undergone any training in derivatives from NSE, BSE or Broking
(i)Yes ( ) (ii) No ( )
12. Which Derivatives Markets you like to invest in? (Please tick all applicable
below)
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Any comments, suggestions and feedback with regard to derivatives segment in
83