Vous êtes sur la page 1sur 78

A Project Report

ON
THE ANALYSIS OF
“DERIVATIVES FUTURES & OPTIONS NIFTY-50”
With reference to NETWORTH STOCK BROKING Ltd
Dilsukhnagar, Hyderabad.
Submitted in partial fulfillment for the Award of the degree of
MASTER OF BUSINESS MANAGEMENT
By
KRISHNAREDDY
(H. T. NO: 08608170)

VANJARI SEETHAIAH MEMORIAL ENGINEERING COLLEGE


PATANCHERU

AFFILATED TO

JAVAHARLAL NEHRU TECHNOLOGY UNIVERSITY


HYDERABAD
2008-2010

1
DECLARATION

I hereby declare that this Project Report entitled “DERIVATIVES FUTURES &

OPTIONS NIFTY-50” done at NETWOTH STOCK BROCKING .Ltd submitted by me in

partial fulfillment for the award of MASTER OF BUSINESS ADMINISTRATION at T.K.R.

INSTITUTE MANAGEMENT AND SCIENCE, Meerpet, Hyderabad bonafide work done by

me.

I further declare that this work is not been copied or lent and it is not submitted to

any other university or institution for the award of any degree/diploma/certificate or

published any time before.

Signature of the Student

2
ABSTRACT

` The Study depends on Financial Derivatives with uncommon reference to Futures

and Options at NETWORTH STOCK BROKING LIMITED. Subsidiary market has

energized from hundreds of years as requirement for both clients and producers of regular

resources to fence against value fluctuations in hidden commodities, bonds, monetary

forms, stocks and stock files.

In the derivatives advertise Future contract was intended to solve limitations that existed in

Forward contract options are also assume major role in subsidiary. In Bullish market the

Call option Writer acquires more profit, where as the in Bearish market the Call option

holder will bring about more losses and the put option essayist will get more profit so he is

proposed to hold as Put option.

Derivatives advertise is an innovation to Cash showcase, approximately its day by day

turnover compasses to the equivalent phase of money advertise. In Cash advertise the

investor needs to pay the total money, yet in derivatives investors needs to pay premiums

or edges, which are some level of total money. Derivatives are mostly utilized for

supporting purposes.

The subordinate market is recently begun in India and it isn't known by each investor, so

SEBI needs to find a way to make mindfulness among the investors as about the

Derivatives section.

3
ACKNOWLEDGEMENT

I express my deep sense of gratitude and indebtedness to Mr.

D.PRAVEEN KUMAR BRANCH MANAGER of NETWORTH STOCK BROKING Ltd for

his able guidance and continuous support on this project without whose endeavor the

project would not have been completed.

I wish to express my heart full thanks to Mrs. Archana, project - in charge

(Finance) of TKR Institute of Management and Science, R.R.District for rendering her

helpful hand in completion of the project.

Last but not the least, I would like to express my gratitude to all those who have

helped me directly or indirectly by sparing their valuable time for completion of my project

(PRAGNA.P)

4
Table of Contents

Contents Page Numbers

List of Tables

List of Figures

1. Introduction

2. Review of Literature

3. The Company Profile

• The Market Profile

4. Data Analysis & Interpretation

5. Conclusion & Suggestions

6. Bibliography

5
LIST OF TABLES

TABLES PAGE No.


1. Pay off from Call Buying/Long
2. Pay off from Put Buying/Long
3. Effect of increase in relevant parameter option prices
4. 29-April-2010 Future INDEX NIFTY-50
5. NIFTY 5400 Call Option Table for 29-April-2010
6. NIFTY 5400 Put Option Table for 29-April-2010
7. May 2010 Contract
8. 5000 Call Option for May 2010
9. 5000 Put Option for May 2010
10. 5100 put option for May 2010
11. June 2010 Contract
12. 5100 Call Option for June 2010
13. 5100 Put Option for June 2010

LIST OF FIGURES

FIGURES PAGE No
1. Payoff for a buyer of futures
2. Payoff for a seller of futures
3. Payoff from Cal Buying/Long
4. Payoff from Put Buying/Long
5. Services of the Networth Stock Broking Company
6. 107 NSBC Branches locations throughout India

6
CHAPTER-1

INTRODUCTION

7
INTRODUCTION
A subsidiary is a security whose esteem relies upon the estimation of
more essential fundamental variable. These are also known as contingent cases.
Subordinate securities have been exceptionally successful innovation in capital
market.

The development of the market for subsidiary products, most notably forwards,
futures and options, can be followed back to the readiness of hazard loath
economic operators to watch themselves against vulnerabilities emerging out of
fluctuations in resource costs. By their exceptionally nature, financial markets are
set apart by a high level of volatility. Through the utilization of subsidiary products,
is possible to halfway or fully transfer value chances by a locking - in resource
costs. As instruments of hazard administration, these for the most part do not
influence the fluctuation in the hidden resource costs.

However, by locking-in resource costs, subsidiary products limit the effect of


fluctuations in resource costs on the profitability and income situation of hazard
loath investor.

Derivatives are hazard administration instruments, which drive their esteem form
basic resource. Hidden resource can be bullion, record, share, bonds, cash,
premium and so on.

MAIN TOPICS OF STUDY

1. INTRODUCTION TO DERIVATIVE

8
The origin of derivatives can be followed back to the need of farmers to protect themselves
against fluctuations in the cost of their crop. From the time it was sown to the time it was
prepared for gather, farmers would face value vulnerability. Through the utilization of
straightforward subordinate products, it was possible for the farmer to halfway or fully
transfer value chances by locking-in resource costs. These were basic contracts
developed to address the issues of farmers and were essentially a methods for decreasing
danger.

A farmer who sowed his crop in June faced vulnerability over the value he would get for
his reap in September. In long periods of shortage, he would probably obtain appealing
costs. However, amid times of oversupply, he would need to dispose off his reap at a low
cost. Plainly this implied the farmer and his family were exposed to a high danger of value
vulnerability.

On the other hand, a shipper with an ongoing prerequisite of grains too would face a value
chance that of paying exorbitant costs amid lack, although favorable costs could be
obtained amid periods of oversupply. Under such conditions, it unmistakably seemed well
and good for the farmer and the trader to come together and go into contract whereby the
cost of the grain to be conveyed in September could be chosen before. What they would
then negotiate happened to be futures-type contract, which would empower both sides to
wipe out the value chance.

In 1848, the Chicago Board Of Trade, or CBOT, was set up to unite farmers and vendors.
A group of brokers got together and made the 'to-arrive' contract that allowed farmers to
lock into cost upfront and convey the grain later. These to-arrive contracts proved useful as
a gadget for supporting and speculation on value charges. These were in the long run
institutionalized, and in 1925 the first futures clearing house appeared.

Today derivatives contracts exist on assortment of commodities, for example, corn,


pepper, cotton, wheat, silver and so forth. Other than commodities, derivatives contracts
also exist on a lot of financial basic like stocks, loan fee, swapping scale, and so on.

9
2. DERIVATIVE DEFINED
A subsidiary is a product whose esteem is gotten from the estimation of one or more basic
factors or resources in a contractual way. The basic resource can be value, forex,
commodity or some other resource. In our prior discussion, we saw that wheat farmers
may wish to pitch their gather at a future date to dispense with the danger of progress in
cost by that date. Such a transaction is a case of a subsidiary. The cost of this subsidiary
is driven by the spot cost of wheat which is the "hidden" for this situation.

The Forwards Contracts (Regulation) Act, 1952, controls the forward/futures contracts in
commodities all over India. According to this the Forward Markets Commission (FMC)
continues to have jurisdiction over commodity futures contracts. However when derivatives
exchanging securities was introduced in 2001, the expression "security" in the Securities
Contracts (Regulation) Act, 1956 (SCRA), was corrected to incorporate subsidiary
contracts in securities. Consequently, regulation of derivatives went under the domain of
Securities Exchange Board of India (SEBI). We in this manner have isolate regulatory
authorities for securities and commodity subsidiary markets.

Derivatives are securities under the SCRA and henceforth the exchanging of derivatives is
governed by the regulatory framework under the SCRA. The Securities Contracts
(Regulation) Act, 1956 defines "subsidiary" to incorporate

A security got from an obligation instrument, share, loan whether secured or unsecured,
hazard instrument or contract differences or some other form of security.

A contract which gets its incentive from the costs, or file of costs, of hidden securities.

3. TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives Over The Counter Derivatives


10
National Stock Bombay Stock National Commodity &
Exchange Exchange Derivative Exchange

Index Future Index option Stock option Stock future

Figure.1 Types of Derivatives Market

4. TYPES OF DERIVATIVES

Figure.2 Types of Derivatives

(i) FORWARD CONTRACTS

A forward contract is a consent to purchase or offer a benefit on a specified date for a


specified cost. One of the gatherings to the contract expect a long position and consents
to purchase the basic resource on a specific specified future date for a specific specified

11
cost. The other party accept a short position and consents to offer the benefit on a similar
date for a similar cost. Other contract points of interest like conveyance date, cost and
amount are negotiated reciprocally by the gatherings to the contract. The forward contracts
are normally exchanged outside the trades.

BASIC FEATURES OF FORWARD CONTRACT

• They are reciprocal contracts and henceforth exposed to counter-party chance.

• Each contract is custom composed, and henceforth is one of a kind as far as contract
measure, expiration date and the benefit write and quality.

• The contract cost is by and large not accessible openly domain.

• On the expiration date, the contract must be settled by conveyance of the

resource.

• If the gathering wishes to switch the contract, it needs to compulsorily go to a similar


counter-party, which often brings about high costs being charged.

However forward contracts in certain markets have become exceptionally


institutionalized, as on account of foreign trade, in this manner diminishing transaction costs
and expanding transactions volume. This process of standardization achieves its point of
confinement in the organized futures showcase. Forward contracts are often confused with
futures contracts. The confusion is principally in light of the fact that both serve basically the
same economic functions of allocating hazard within the sight of future value vulnerability.
However futures are a significant improvement over the forward contracts as they dispense
with counterparty hazard and offer more liquidity.

(ii) FUTURE CONTRACT

12
In finance, a futures contract is an institutionalized contract, exchanged on a futures trade,
to purchase or offer a specific hidden instrument at a specific date in the future, at a pre-
set cost. The future date is known as the conveyance date or final settlement date. The
pre-set cost is known as the futures cost. The cost of the hidden resource on the
conveyance date is known as the settlement cost. The settlement cost, normally,
converges towards the futures cost on the conveyance date.

A futures contract gives the holder the privilege and the obligation to purchase or offer,
which differs from an options contract, which gives the purchaser the right, yet not the
obligation, and the option author (vender) the obligation, yet not the right. To leave the
commitment, the holder of a futures position needs to offer his long position or purchase
back his short position, effectively closing out the futures position and its contract
obligations. Futures contracts are trade exchanged derivatives. The trade goes about as
counterparty on all contracts, sets edge necessities, and so forth.

BASIC FEATURES OF FUTURE CONTRACT

1. Standardization:

 Futures contracts guarantee their liquidity by being profoundly institutionalized,


for the most part by specifying:

• The fundamental. This can be anything from a barrel of sweet unrefined


petroleum to a short term loan cost.

• The sort of settlement, either money settlement or physical settlement.

• The amount and units of the fundamental resource per contract. This can be
the notional amount of bonds, a fixed number of barrels of oil, units of foreign
13
money, the notional amount of the deposit over which the short term loan
cost is exchanged, and so forth.

• The money in which the futures contract is quoted.

• The review of the deliverable. If there should be an occurrence of bonds, this


specifies which bonds can be conveyed. If there should be an occurrence of
physical commodities, this specifies not only the nature of the basic goods
yet in addition the way and location of conveyance. The conveyance month.

• The last exchanging date.

• Other points of interest, for example, the tick, the base allowable value
fluctuation.

14
2. Margin:
Although the estimation of a contract at time of exchanging should be zero, its cost
constantly fluctuates. This renders the owner at risk to unfriendly changes in esteem,
and makes a credit hazard to the trade, who dependably goes about as counterparty.
To limit this hazard, the trade requests that contract owners post a form of collateral,
commonly known as Margin prerequisites are deferred or decreased in some cases
for hedgers who have physical ownership of the covered commodity or spread
dealers who have offsetting contracts adjusting the position.

Beginning Margin: is paid by both purchaser and vender. It speaks to the loss on that
contract, as controlled by historical value changes, which isn't probably going to be
surpassed on a standard day's exchanging. It might be 5% or 10% of total contract
cost.

Stamp to advertise Margin: Because a progression of antagonistic value changes may


debilitate the underlying edge, a further edge, for the most part called variation or
support edge, is required by the trade. This is figured by the futures contract, i.e.
concurring on a cost toward the finish of every day, called the "settlement" or check
to-showcase cost of the contract.

To comprehend the original practice, consider that a futures broker, when taking a position,
deposits money with the trade, called an "edge". This is proposed to protect the trade
against loss. Toward the finish of each exchanging day, the contract is set apart to its
present market esteem. If the broker is on the triumphant side of an arrangement, his
contract has expanded in esteem that day, and the trade pays this profit into his
account. On the other hand, if he is on the losing side, the trade will charge his
account. If he cannot pay, at that point the edge is utilized as the collateral from
which the loss is paid.

3. Settlement
Settlement is the act of consummating the contract, and can be done in one of two ways,
as specified per type of futures contract:
 Physical delivery - the amount specified of the underlying asset of the contract is
delivered by the seller of the contract to the exchange, and by the exchange to the
buyers of the contract. In practice, it occurs only on a minority of contracts. Most are
cancelled out by purchasing a covering position - that is, buying a contract to cancel
out an earlier sale (covering a short), or selling a contract to liquidate an earlier
purchase (covering a long).

15
 Cash settlement - a money installment is influenced in light of the fundamental
reference to rate, for example, a short term loan cost list, for example, Euribor, or the
closing estimation of a stock market record. A futures contract may also opt to settle
against a list in view of exchange a related spot advertise.

 Expiry is the time when the final costs of the future are resolved. For some value
record and financing cost futures contracts, this occurs on the Last Thursday of certain
exchanging month. On this day the t+2 futures contract becomes the t forward
contract.
 PRICING OF FUTURE CONTRACT
In a futures contract, for no arbitrage to be possible, the cost paid on conveyance
(the forward cost) must be the same as the cost (counting enthusiasm) of purchasing and
storing the advantage. In other words, the rational forward cost speaks to the normal
future estimation of the basic discounted at the hazard free rate. Along these lines, for a
straightforward, non-profit paying resource, the estimation of the future/forward, , will be
found by discounting the present an incentive at time to development by the rate of hazard
free return .

This relationship might be modified for storage costs, profits, profit yields, and
convenience yields. Any deviation from this correspondence allows for arbitrage as
follows.

For the situation where the forward cost is higher:

1. The arbitrageur offers the futures contract and purchases the basic today (on
the spot showcase) with borrowed money.

2. On the conveyance date, the arbitrageur hands over the basic, and gets the
concurred forward cost.

3. He at that point reimburses the bank the borrowed amount in addition to


premium.

4. The difference between the two amounts is the arbitrage profit.

16
For the situation where the forward cost is lower:

1. The arbitrageur purchases the futures contract and offers the fundamental
today (on the spot advertise); he contributes the proceeds.

2. On the conveyance date, he trades out the developed speculation, which


has acknowledged at the hazard free rate.

3. He at that point gets the basic and pays the concurred forward value utilizing
the developed venture. [If he was short the hidden, he returns it now.]

4. The difference between the two amounts is the arbitrage profit.

FUNCTIONS OF DERIVATIVES MARKETS:


The following are various functions that are performed by the derivatives markets.
They are

1) Prices of every an organized derivatives advertise reflect the perception of market


members about the future and lead the costs of fundamental to the apparent future level.

2) Derivatives market transfers dangers from those who have them however dislike
them to those who have craving for them.

3) Derivatives, because of their innate nature, are connected to the fundamental


money markets. With the introduction of derivatives, the basic market witnesses higher
exchanging volumes in light of participation by more players who would not otherwise take
part for absence of a plan to transfer chance.

4) Speculative exchanges shift to a more controlled environment of derivatives


advertise.

5) Derivatives exchanging goes about as an impetus for new entrepreneurial


movement.

6) They often stimulate others to make new organizations, new products and new
employment opportunities.
17
7) Derivatives markets help increment reserve funds and interest over the long haul.
Transfer of hazard empowers showcase members to grow their volume of movement.
Derivatives in this manner promote economic development.

METHODOLOGY

The following advances are involved in the examination

Selection of scrip: Selection of scrip is done on a random premise and the scrip chose is
NIFTY '50. The lot is of 50 estimate, profitability position of futures, purchasers and
dealers and also the option holders and option journalists is considered.

Information Collection: The information of the NIFTY '50 has been collected from the
news paper and web.

The information consist of one month contract and period of information collection is from
27th Feb. 2009 to 28th may 2009.

Investigation: The examination consist of the tabulation of the information surveying the
profitability position of the fure purchasers and venders and furthermore the option
holder and the option author speaking to the information with diagrams and making
interpretation utilizing information.

SCOPE OF THE STUDY

18
The examination is restricted to "Derivatives with unique references to futures and options
in the Indian context and the NIFTY '50 has been taken as an agent test for the
investigation. The investigation can't be said as totally perfect. Any alteration may occur.
The investigation has only made humble endeavor at assessing derivatives only in India
markets. The examination did not depend on the international point of view of derivatives
which exists in DOW JONES and NASDAQ.

OBJECTIVES OF STUDY

1. To examination various patterns in subsidiary market.

2. Comparison of the profits/losses in real money market and subsidiary market.

3. To find out profit/losses position of the option essayist and option holder.

4. To examination in detail the role of the forwards, future and options.

5. To examination the role of derivatives in Indian financial market.

6. To find out the hazard and comes back with live exchanging qualities.

7. To know how to limit chance by utilizing STRATEGIES.

8. To give some live cases on options.


LIMITATIONS
The following are the limitations of the investigation

• The Scrip chosen for examination is Nifty'50 and the contract taken in February
2009 is a one month contract finishing off with March.

• The information collected is completely limited to the NIFTY '50 subsequently this
examination cannot be taken generally.

19
CHAPTER -2
LITERATURE REVIEW
DEFINITION
Derivatives is a product whose esteem is gotten from the one or more essential Variables,
called base (hidden resource, record, or estimation of reference rate), in a Contractual
way. The basic resource can be value, forex, commodity or some other resource.

In the Indian context the securities contrasts (regulation) act, 1956 (SCR Act)

20
Defines "subordinate" as

1) A security got from an instrument, share, loan whether secured or unsecured,


chance instrument or contract for differences or some other form of security.

2) A contract, which gets its incentive from the costs, or record of costs, or Underlying
securities.

Futures contracts, forward contracts, options and swaps are the most common sorts of
derivatives. Since derivatives are simply contracts, pretty much in light of climate
information, for example, the amount of rain or the quantity of anything can be utilized as a
basic resource. There are even derivatives bright days in a specific region. Derivatives are
for the most part used to support hazard, however can also be utilized for theoretical
purposes
EVALUTION OF DERIVATIVES:
• Derivatives can be found throughout the history of humanity. In the Middle Ages,
taking part in contracts at foreordained costs for future conveyance of farming
products. The new period for the subsidiary markets was introduced the introduction
of financial derivatives, and it continues to last right up 'til the present time. Although
commodity derivatives are still very dynamic, especially oil and precious metals,
financial derivatives dominate exchanging the present subsidiary markets.

• Although the derivatives markets slowed down considerably before the finish of the
twentieth century, that did not imply that there were not an unfaltering offering of
existing, and also new subsidiary products. Derivatives trades also experienced a
period of progress; some consolidated, some blended, some moved toward
becoming for-profit institutions. In any case, they all had something in common—the
requirement for less regulation.

21
• Beside auxiliary changes, some subordinate trades also changed the way they
conducted traDerivatives can be found throughout the history of mankind. In the
Middle Ages, participating in contracts at foreordained costs for future conveyance of
farming products. The new period for the subordinate markets was introduced the
introduction of financial derivatives, and it continues to last straight up 'til the present
time. Although commodity derivatives are still exceptionally powerful, particularly oil
and precious metals, financial derivatives dominate trading the present subordinate
markets.

• Although the derivatives markets slowed down considerably before the finish of the
twentieth century, that did not suggest that there were not an unfaltering offering of
existing, and in addition new auxiliary products. Derivatives exchanges also
encountered a period of progress; some consolidated, some combined, some
moved toward becoming for-profit institutions. Regardless, they all had something in
common—the prerequisite for less regulation.

• Alongside helper changes, some subordinate exchanges also changed the way they
conducted trading. Old frameworks of face-to-face trading on trading floors have
been supplanted with electronic trading, and telephone and computer networks.
With the approach of Internet, electronic trading evolved into e-trading. Furthermore,
although trading floors still dominate subordinate markets in the U.S., plainly to stay
competitive, the U.S. should at last handle electronic trading.

• The following factors have contributed to the growth of financial derivatives

1) Increased volatility in resource costs in financial markets.

2) Increased integration of national financial markets with the international markets.

3) Marked improvement in communication facilities and sharp decrease in their


costs.

22
4) Development of more sophisticated hazard administration tools, providing
economic specialists a more extensive choice of hazard administration techniques

5) Innovations in the derivatives markets, which optimally combine the dangers


and returns over countless resources prompting higher returns, lessened hazard
and additionally transactions costs as compared to individual financial resources.

6) Technology facilitates the capacity to track the payoffs and hazard exposures
associated with a portfolio of subsidiary positions.

7) An important factor in the growth of derivatives showcase has been an


assortment of scholarly advances. The development of economic models for
esteeming subsidiary instruments and evaluating their peril and the expanding
sophistication of such models have assumed a pivotal role in the growth of the
market

ding. Old frameworks of face-to-face exchanging on exchanging floors have been


supplanted with electronic exchanging, and telephone and computer networks. With
the approach of Internet, electronic exchanging evolved into e-exchanging.
Furthermore, although exchanging floors still dominate subordinate markets in the
U.S., clearly to remain competitive, the U.S. should in the long run grasp electronic
exchanging..

PARTICIPANTS:
The following three categories of participants in the derivatives market:
1) HEDGERS
2) SPECULATORS

23
3) ARBITRAGEURS
HEDGERS: Hedgers face hazard associated with the cost of an advantage. They utilize
futures or options market to decrease or take out this hazard.

Hedgers are those who protect themselves from the hazard associated with the cost of an
advantage by utilizing derivatives. He keeps a close watch upon the costs discovered in
exchanging and when the comfortable cost is reflected according to his needs, he offers
futures contracts. Hedgers utilize futures for protection against unfavorable future value
movements in the fundamental money commodity. Hedgers are often organizations, or
people, who at one point or another arrangement in the fundamental money commodity.
SPECULATORS: Speculators are somewhat similar to a center man. They are never
intrigued by genuine owing the commodity. They will simply purchase from one end and
pitch it to the other in anticipation of future value movements. They really wager on the
future movement in the cost of a benefit. They are the second major group of futures
players. These members incorporate autonomous floor dealers and investors. They handle
exchanges for their personal customers or brokerage firms. Purchasing a futures contract
in anticipation of cost increments is known as 'going long'. Offering a futures contract in
anticipation of a value diminish is known as 'going short'.
ARBITRAGEIRS: Arbitrators are the person who takes the upside of a disparity between
costs in two different markets. If he finds future costs of a commodity pushing out with the
money value, he will take offsetting positions in both the business sectors to lock in a
profit. Hazard less Profit Making is the prime goal of Arbitrageurs. Purchasing in one
market and offering in another, purchasing two products in a similar market are common.
They could be profiting even without putting there own money in and such opportunities
often come up in the market yet keep going for short timeframes. This is on the grounds
that when the situation emerges arbitrageurs exploit and request supply forces drive the
business sectors back to normal.
TYPES OF DERIVATIVES:
The most commonly used derivatives contracts are forwards, futures and options. Here
are various derivatives contacts that have come to be used given briefly:
 FORWARDS

24
 FUTURES
 OPTIONS
 WARRANTS
 LEAPS
 SWAPS
 SWAPTIONS

FORWARDS: forward contract is a customized contract between two entities, where


settlement takes place on a specific date in the future at today's pre-agreed 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 types of forward
contracts in the sense that the former are standardized exchange-traded contracts.

Options: Options are of two types - calls and puts

Calls option gives 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.
Put option 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: Options generally have lives of up to one year, the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated options are
called warrants and are generally traded over-the-counter.

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 flows
between the parties in the same currency.

25
Currency swaps: These entail swapping both principal and interest between the
parties, with the cash flows in one direction being in a different currency than those in the
opposite direction

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are
options having a maturity of up to three years.

Swaptions: Swaptions are options to buy or sell a swap that will become operative at the
expiry of the options. Thus a swaption is an option on a forward swap. Rather than have
calls and puts, the swaptions market has receiver swaptions and payer swaptions. A
receiver swaption is an option to receive fixed and pay floating. A payer swaption is an
option to pay fixed and receive floating.

FUTURES
DEFINITION:
A future is a contract between two parties whereby the one party (the buyer) agrees to
buy an underlying asset from the other party to the contract on a specific future date, and
at a price determined at the close of the contract. A future is a derivative that is used to
transfer the price risk of the underlying instrument from one party to another.
The underlying asset can be a financial asset such as a bond, a currency such as US
dollars, a commodity, etc.
A future is normally classified according to the underlying instrument. Where, for
instance, two parties agree to buy and sell a specific quantity of rice (of a certain quality) at
a certain price on a future date, the contract will be a commodity futures contract.
Where two parties agree to buy and sell bonds, this will be known as a financial futures
contract, and where two parties agree to buy and sell a certain amount of foreign
currency, this is a currency futures contract.

FEATURES OF FUTURES:

26
 Futures are highly standardized.
 The contracting parties need not pay any down payments.
 Hedging of price risks.
 They have secondary markets to.
A futures contract is thus
 an agreement between two parties
 to buy and sell
 a standardized type and quantity
 of a specified underlying asset
 with a certain quality
 at a price determined at the closing of the contract
 on a specified date
 Through a central exchange.
TYPES OF FUTURES:
On the basis of the underlying asset they derive, the futures are divided in to two
types:
1) Stock futures:
The stock futures are the futures that have the underlying asset as the individual
securities. The settlement of the stock futures is of cash settlement and the settlement
price of the future is the closing price of the underlying security.

2) Index futures:
Index futures are the futures, which have the underlying asset as an index. The
index futures are also cash settled. The settlement price of the index futures shall be the
closing value of the underlying index on the expiry date of the contract.

PARTIES IN FUTURES CONTRACT:

There are two parties in a future contract, the buyer and seller. The buyer of the
futures contract is one who LONG on the futures contract and the seller of the futures
contract is who is SHORT on the futures contract.

27
In a futures contract, both parties have an obligation,
 one to buy the underlying instrument
 The other to sell the underlying instrument.
Both the buyer and the seller can make a profit or suffer a loss, due to the fact that the
contract price (at which the underlying instrument is bought and sold) is determined at
closing of the contract. If the market price at the delivery date is lower than the futures
contract price, the buyer suffers a loss because he could have bought the instrument in the
market at a lower price. He is now obliged, according to the contract, to buy the
underlying instrument at the higher price specified in the contract. The opposite applies
when the market value of the underlying instrument is above the futures contract price.
The buyer can now buy the underlying instrument at the lower contract price, and sell the
instrument immediately at the higher market price, thus making an immediate profit.
The pay off for the buyer and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

28
PROFIT

P
E2

L F E1

LOSS

F- FUTURES PRICE
E1, E2 – SETTLEMENT PRICE

CASE 1:- The buyer bought the futures contract at (F); if the futures price goes to E1 then
the buyer gets the profit of (FP).

CASE 2:- The buyer gets loss when the future price goes less then (F), if the
future price goes to E2 then the buyer gets the loss of (FL).

PAY- OFF FOR A SELLER OF FUTURES

29
PROFIT

P
E2

E1
L

LOSS

F- FUTURES PRICE
E1, E2 – SETTLEMENT PRICE
CASE 1:- The seller sold the future contract at (f); if the future goes to E1 then the seller
gets the profit of (FP).
CASE 2: - The seller gets loss when the future price goes greater than (F), if the future
price goes to E2 then the seller gets the loss of (FL).

FUTURES TERMINOLOGY
Spot price:
It is the price at which an asset is traded in the current market.

Futures price:
It is the price at which the futures contract trades in the futures market.

Contract cycle:
It is the period over which the 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 a January expiration contract expires on the last Thursday of
January and February expiration contract ceases trading 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.

30
Expiry date:
It is the date specifies in the futures contract. This is the last day on which the
contract will be traded, at the end of which it will cease to exist.
Contract size:
The amount of asset that has to be delivered under one contract. For instance, the
contract size on NSE’s futures market is 50 nifties.
Basis:
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 contract. In a
normal market, basis will be positive. This reflects that futures prices normally exceed spot
prices.
Cost 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 income earned on the asset.
Open Interest:
Total outstanding long or short position in the market at any specific time. As total
long positions in the market would be equal to short position, for calculation of open
interest, only one side of the contract is counter.

OPTIONS

DEFINITION:
Option is a type of contract between two persons where one grants the other the
right to buy a specific asset at a specific price within a specific time period. Alternatively
the contract may grant the other person the right to sell a specific asset at a specific price
within a specific time period. In order to have this right, the option buyer has to pay the
seller or the option premium.

31
The assets on which option can be derived are stocks, commodities, indexes etc. If
the underlying asset is the financial asset, then the option are financial option like stock
options, currency options, index options etc, and if options like commodity option.
Options contracts are instruments that give the holder of the instrument the right to
buy or sell the underlying asset at a predetermined price.

PROPERTIES OF OPTIONS:
Options have several unique properties that set them apart from other securities. The
following are the properties of options:
 Limited Loss
 High Leverage Potential
 Limited Life

PARTIES IN AN OPTION CONTRACT:


1. Buyer of the Option:
The buyer of an option is one who by paying option premium buys the right but not the
obligation to exercise his option on seller/writer.
2. Writer/Seller of the Option:
The writer of a call/put options is the one who receives the option premium and is there by
obligated to sell/buy the asset if the buyer exercises the option on him.

TYPES OF OPTIONS:
The options are classified into various types on the basis of various variables. The
following are the various types of options:

I). On the basis of the Underlying asset:


On the basis of the underlying asset the options are divided into two types:

 INDEX OPTIONS: The Index options have the underlying asset as the index.

32
 STOCK OPTIONS: A stock option gives the buyer of the option the right to buy/sell
stock at a specified price. Stock options are options on the individual stocks, there
are currently more than 50 stocks are trading in this segment.

II). On the basis of the market movement:


On the basis of the market movement the options are divided into two types.

 CALL OPTION:
A call options is bought by an investor when he seems that the stock price moves
upwards. A call option gives the holder of the option the right but not the obligation to buy
an asset by a certain date for a certain price.

 PUT OPTION:
A put option is bought by an investor when he seems that the stock price moves
downwards. A put option gives the holder of the option right but not the obligation to sell an
asset by a certain date for a certain price.
III). On the basis of exercise of option:
On the basis of the exercising of the option, the options are classified into two categories.

 AMERICAN OPTION:
American options are options that can be exercised at any time up to the
expiration date; most exchange-traded options are American.
 EUROPEAN OPTION:
European options are options that can be exercised only on the expiration
date itself. European options are easier to analyze than American option.
Call option
The following example would clarify the basics on Call Options.

Illustration 1:
An investor buys one European Call option on one share of Reliance Petroleum at a
premium of Rs. 2 per share on 31 July. The strike price is Rs.60 and the contract matures

33
on 30 September. The payoffs for the investor on the basis of fluctuating spot prices at any
time are shown by the payoff table (Table 1). It may be clear form the graph that even in
the worst case scenario, the investor would only lose a maximum of Rs.2 per share which
he/she had paid for the premium. The upside to it has an unlimited profits opportunity.
On the other hand the seller of the call option has a payoff chart completely reverse
of the call options buyer. The maximum loss that he can have is unlimited though a profit
of Rs.2 per share would be made on the premium payment by the buyer.

A European call option gives the following payoff to the investor:


Max (S - Xt, 0).
The seller gets a payoff of:-max (S - Xt, 0) or min (Xt - S, 0).
Notes:
S - Stock Price

34
Xt - Exercise Price at time 't1
C - European Call Option Premium
Payoff - Max (S - Xt, O)

Net Profit - Payoff minus 'c'

Exercising the Call Option and what are its implications for the Buyer and the
Seller?
The Call option gives the buyer a right to buy the requisite shares on a specific date at a
specific price. This puts the seller under the obligation to sell the shares on that specific
date and specific price. The Call Buyer exercises his option only when he/ she feel it is
profitable. This Process is called "Exercising the Option". This leads us to the fact that if
the spot price is lower than the strike price then it might be profitable for the investor to buy
the share in the open market and forgo the premium paid. The implications for a buyer are
that it is his/her decision whether to exercise the option or not. In case the investor expects
prices to rise far above the strike price in the future then he/she would surely be interested
in buying call options. On the other hand, if the seller feels that his shares are not giving
the desired returns and they are not going to perform any better in the future, a premium
can be charged and returns from selling the call option can be used to make up for the
desired returns. At the end of the options contract there is an exchange of the underlying
asset. In the real world, most of the deals are closed with another counter or reverse deal.

35
There is no requirement to exchange the underlying assets then as the investor gets out of
the contract just before its expiry.
Put Options:
The European Put Option is the reverse of the call option deal. Here, there is a contract to
sell a particular number of underlying assets on a particular date at a specific price. An
example would help understand the situation a little better:

Illustration 2:
An investor buys one European Put Option on one share of Reliance Petroleum at a
premium of Rs. 2 per share on 31 July. The strike price is Rs.60 and the contract matures
on 30 September. The payoff table shows the fluctuations of net profit with a change in the
spot price.

The payoff for the put buyer is: max (Xt - S, 0)


The payoff for a put writer is: -max (Xt - S, 0) or min(S - Xt, 0)

36
These are the two basic options that form the whole gamut of transactions in the options
trading. These in combination with other derivatives create a whole world of instruments to
choose form depending on the kind of requirement and the kind of market expectations.
Exotic Options are often mistaken to be another kind of option. They are nothing but non-
standard derivatives and are not a third type of option.
Options Classifications: Options are often classified as
In the money - These result in a positive cash flow towards the investor
At the money - These result in a zero-cash flow to the investor
Out of money - These result in a negative cash flow for the investor
Example:
Calls
Reliance 350 Stock Series
Naked Options: These are options which are not combined with an offsetting contract to
cover the existing positions.
Covered Options: These are option contracts in which the shares are already owned by
an investor (in case of covered call options) and in case the option is exercised then the
offsetting of the deal can be done by selling these shares held.
37
OPTIONS PRICING
Prices of options are commonly depending upon six factors. Option's prices are far
more complex. These are the two basic options that form the whole gamut of transactions
in the options trading. These in combination with other derivatives create a whole world of
instruments to choose form depending on the kind of requirement and the kind of market
expectations. Exotic Options are often mistaken to be another kind of option. They are
nothing but non-standard derivatives and are not a third type of option.

Options undertakings:
Stocks
Foreign Currencies
Stock Indices
Commodities
Others - Futures Options, are options on the futures contracts or Underlying assets are
futures contracts. The futures contract generally matures shortly after the options
expiration.

OPTIONS PRICING
Prices of options are commonly depending upon six factors. Option's prices are far more
complex. The table below helps understand the affect of each of these factors and gives a
broad picture of option pricing keeping all other factors constant. The table presents the
case of European as well as American Options.

EFFECT OF INCREASE IN THE RELEVANT PARAMETRE ON OPTION PRICES

38
SPOT PRICES: In case of a call option the payoff for the buyer is max(S -Xt, 0) therefore,
more the Spot Price more is the payoff and it is favorable for the buyer. It is the other ways
round for the seller, more the Spot Price higher are the chances of his going into a loss.
In case of a put Option, the payoff for the buyer is max (Xt - S, 0) therefore, more the Spot
Price more are the chances of going into a loss. It is the reverse for Put Writing.

STRIKE PRICE: In case of a call option the payoff for the buyer is shown above. As per
this relationship a higher strike price would reduce the profits for the holder of the call
option.

TIME TO EXPIRATION: More the time to Expiration more favorable is the option. This can
only exist in case of American option as in case of European Options the Options Contract
matures only on the Date of Maturity.

VOLATILITY: More the volatility, higher is the probability of the option generating higher
returns to the buyer. The downside in both the cases of Call and put is fixed but the gains
can be unlimited. If the price falls heavily in case of a call buyer then the maximum that he

39
loses is the premium paid and nothing more than that. More so he/ she can buy the same
shares form the spot market at a lower price.
Similar is the case of the put option buyer. The table shows all effects on the buyer side of
the contract.

RISK FREE RATE OF INTEREST: In reality the r and the stock market is inversely related.
But theoretically speaking, when all other variables are fixed and interest rate increases
this leads to a double effect: Increase in expected growth rate of stock prices discounting
factor increases making the price fall.
In case of the put option both these factors increase and lead to a decline in the put value.
A higher expected growth leads to a higher price taking the buyer to the position of loss in
the payoff chart. The discounting factor increases and the future value become lesser.
In case of a call option these effects work in the opposite direction/The first effect is
positive as at a higher value in the future the call option would be exercised and would
give a profit. The second affect is negative as is that of discounting. The first effect is far
more dominant than the second one, and he overall effect is favorable on the call option.

DIVIDENDS: When dividends are announced then the stock prices on ex-dividend are
reduced. This is favorable for the put option and unfavorable for the call option.

CALL OPTION:
C = SN (dl)-Xe"rtN(d2)
PUT OPTION:
p = xe^NC-oa-SNC-oa)
Where
C - VALUE OF CALL OPTION

40
S - SPOT PRICE OF STOCK
X - STRIKE PRICE
r - ANNUAL RISK FREE RETURN
t - CONTRACT CYCLE

41
CHAPTER-3
COMPANY PROFILE

42
Incorporated in 1993, Net worth Stock Broking Limited (NSBL) has been a listed company
at Bombay Stock Exchange (BSE), Mumbai since 1995.
A Member, at the National Stock Exchange of India (NSE) and Bombay Stock Exchange, Mumbai
(BSE) on the Capital Market and Derivatives (Futures & Options) segment, NSBL has been
traditionally servicing Institutional clients and in the recent past has forayed into retail broking,
establishing branches across the country. Presence is being marked in the Middle East, Europe and
the United States too, as part of our attempts to cater to global markets. We are a Depository
participant at Central Depository Services India (CDSL) with plans to become one at National
Securities Depository (NSDL) by the end of this quarter. We have our customers participating in the
booming commodities markets with our membership at the Multi Commodity Exchange of India
(MCX) and National Commodity & Derivatives Exchange (NCDEX), through Networth
Stock.Com Ltd. With its strong support and business units of research, distribution & advisory,
NSBL aims to become a one-stop solution to the broking and investment needs of its clients,
globally.
Strong team of professional’s experienced and qualified pool of human resources drawn
from top financial service & broking houses form the backbone of our sizeable infrastructure.
Highly technology oriented, the company’s scalability of operations and the highest level of service
standards has ensured rapid growth in the number of locations & the clients serviced in a very short
span of time. ‘Networthians’, as each one of our 400 plus and ever growing team members are
addressed, is a dedicated team motivated to continuously progress by imbibing the best of global
practices, Indian sing
such practices, and to constantly evolve a comprehensive suite of products &
services trying to meet every financial / investment need of the clients.
NSE CM and Derivatives Segment SEBI Regn. 1NB230638639 & 1NF230638639
BSE CM and Derivatives Segment SEBI Regn. 1NB010638634 &
PMS SEBI Regn. 1NP000001371 CDSL DP SEBI Regn. IN-DP-CDSL 251-2004
Commodities Trading: MCX -10585 and NCDEX - 00011 (through Networth Stock.Com
Hyderabad (Somajiguda)

401, Dega Towers, 4th Floor, Raj Bhavan Road, Somajiguda Hyderabad - 500 082

Andhra Pradesh. Phone Nos.: 040-55560708, 55562256, and 30994985

43
Mumbai (MF Division)
49, Au Chambers, 4th Floor, Tamarind Lane, Fort Mumbai - 400 001 Maharashtra.
Phone Nos.: 022- 22650253
Mumbai (Registered Office)

5, Church gate House, 2nd Floor, 32/ 34 Veer Nariman Road, Fort
Mumbai - 400 001
Products and services portfolio
With greater choices comes greater value. Networth offers you more choices by providing a wide
array of products and personalized services, so you can take charge of your financial future with
confidence. So whether you are a new investor or a seasoned one, we have the resources and advice
you would need to make smart, well-researched investments and help you grow your Networth.
1 Retail and institutional broking
2 Research for institutional and retail clients
3 Distribution of financial products
* Mutual funds
* Insurance
* NBFC Loans
4 PMS
5 Corporate finance
6 Net trading
7 Depository services
8 Commodities Broking

44
Infrastructure
1 A corporate office and 3 divisional offices in CBD of Mumbai which houses state-of-the-art
dealing room, research wing & management and back offices.
2 All of 107 branches and franchisees are fully wired and connected to hub at corporate office
at Mumbai. Add on branches also will be wired and connected to central hub
3 Web enabled connectivity and software in place for net trading.
4 60 operative ID’s for dealing room
5 In house technology back up team to ensure un-interrupted connectivity.
1993: Networth Started with 300 Sq.ft. of office space & 10 employees
2006: Spread over 42 cities (around 70,000 Sq.ft of office space) with over 107 branches &
employee strength over 400
Market & research
Focusing on your needs

45
Every investor has different needs, different preferences, and different viewpoints. Whether investor
prefer to make own investment decisions or desire more in-depth assistance, company committed to
providing the advice and research to help you succeed.

Networth providing following services to their customers,


Daily Morning Notes Market Musing Company Reports
Theme Based Reports Weekly Notes IPOs
Sector Reports Stock Stance Pre-guarter/Updates
Bullion Tracker F&O Tracker.
Key Personnel:
Mr. S P Jain – CMD Networth Stock Broking Ltd.
Mr. Deepak Mehta – Head PMS
Mr. Viral Doshi – Equity Strategist
1 Mr. Vinesh Jain – Asst. Fund Manager

OUR GROUP COMPANIES

Networth Stock Broking Ltd. [NSBL]


NSBL is a member of the National Stock Exchange of India Ltd (NSE) and the Bombay Stock
Exchange Ltd (BSE) in the Capital Market and Derivatives (Futures & Options) segment. NSBL
has also acquired membership of the currency derivatives segment with NSE, BSE & MCX-SX. It
is Depository participants with Central Depository Services India (CDSL) and National Securities
Depository (India) Limited (NSDL). With a client base of over 1L loyal customers, NSBL is spread
across the country though its over 300+ branches. NSBL is listed on the BSE since 1994.

Net worth Wealth Solutions Ltd. [NWSL]


Net worth Commodities & Investments Limited [NCIL]
Net worth Soft Tech Ltd. [NSL]
Ravisha Financial Services Pvt. Ltd. [RFSL]

46
Principles & Values
At Net worth Stock Broking Ltd. success is built on teamwork, partnership and the diversity of the
people.

At the heart of our values lie diversity and inclusion. They are a fundamental part of our culture,
and constitute a long-term priority in our aim to become the world's best international bank.

Values
 Responsive
 Trustworthy
 Creative
 Courageous

Approach
 Participation:- Focusing on attractive, growing markets where we can leverage our
relationships and expertise
 Competitive positioning:- Combining global capability, deep local knowledge and creativity
to outperform our competitors
 Management Discipline:- Continuously improving the way we work, balancing the pursuit
of growth with firm control of costs and risks Commitment to stakeholders

 Customers:- Passionate about our customers' success, delighting them with the quality of
our service
 Our People:- Helping our people to grow, enabling individuals to make a difference and
teams to win
 Communities:- Trusted and caring, dedicated to making a difference
 Investors:- A distinctive investment delivering outstanding performance and superior returns
 Regulators: - Exemplary governance and ethics wherever we are.

MARKET PROFILE

47
NATIONAL STOCK EXCHANGE
The National Stock Exchange of India (NSE) situated in Mumbai - is the largest and
most advanced exchange with 1016 companies listed and 726 trading members. Capital
market reforms in India and the launch of the Securities and Exchange Board of India
(SEBI) accelerated the incorporation of the second Indian stock exchange called the
National Stock Exchange (NSE) in 1992. After a few years of operations, the NSE has
become the largest stock exchange in India.
Three segments of the NSE trading platform were established one after another. The
Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital
Market (CM) segment was opened at the end of 1994. Finally, the Futures and Options
segment began operating in 2000. Today the NSE takes the 14th position in the top 40
futures exchanges in the world.
In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX Junior
Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of 50
stocks from 25 different economy sectors. The Indices are owned and managed by India
Index Services and Products Ltd (IISL) that has a consulting and licensing agreement with
Standard & Poor's.
In 1998, the National Stock Exchange of India launched its web-site and was the first
exchange in India that started trading stock on the Internet in 2000. The NSE has also
proved its leadership in the Indian financial market by gaining many awards such as 'Best
IT Usage Award' by Computer Society in India (in 1996 and 1997) and CHIP Web Award
by CHIP magazine (1999).
The NSE is owned by the group of leading financial institutions such as Indian Bank or Life
Insurance Corporation of India. However, in the totally de-mutualized Exchange, the
ownership as well as the management does not have a right to trade on the Exchange.
Only qualified traders can be involved in the securities trading.

48
The NSE is one of the few exchanges in the world trading all types of securities on a
single platform, which is divided into three segments: Wholesale Debt Market (WDM),
Capital Market (CM), and Futures & Options (F&O) Market.
Each segment has experienced a significant growth throughout a few years of their
launch. While the WDM segment has accumulated the annual growth of over 36% since
its opening in 1994, the CM segment has increased by even 61% during the same period.
The National Stock Exchange of India has stringent requirements and criteria for the
companies listed on the Exchange. Minimum capital requirements, project appraisal, and
company's track record are just a few of the criteria. In addition, listed companies pay
variable listing fees based on their corporate capital size.
The National Stock Exchange of India Ltd. provides its clients with a single, fully electronic
trading platform that is operated through a VSAT network. Unlike most world exchanges,
the NSE uses the satellite communication system that connects traders from 345 Indian
cities. The advanced technologies enable up to 6 million trades to be operated daily on the
NSE trading platform.
NSE Nifty:
The S&P CNX Nifty (nicknamed Nifty 50 or simply Nifty), is the leading index for large
companies on the National Stock Exchange of India. S&P CNX Nifty is a well diversified 50
stock index accounting for 22 sectors of the economy. It is used for a variety of purposes
such as benchmarking fund portfolios, index based derivatives and index funds.
Nifty was developed by the economists Ajay Shah and Susan Thomas, then at IGIDR.
Later on, it came to be owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized
company focused upon the index as a core product. IISL have a consulting and licensing
agreement with Standard & Poor's (S&P), who are world leaders in index services.
CNX stands for CRISIL NSE Indices. CNX ensures common branding of indices, to reflect
the identities of both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands for CRISIL, 'N'
stands for NSE and X stands for Exchange or Index. The S&P prefix belongs to the US-
based Standard & Poor's Financial Information Services.
NSE other indices:
 S&P CNX Nifty

49
 CNX Nifty Junior
 CNX 100
 S&P CNX 500
 CNX Midcap
 S&P CNX Defty
 CNX Midcap 200

BOMBAY STOCK EXCHANGE:


The Bombay Stock Exchange Limited (formerly, The Stock Exchange, Mumbai; popularly
called The Bombay Stock Exchange, or BSE) is the oldest stock exchange in Asia. It is
located at Dalal Street, Mumbai, India.

50
Bombay Stock Exchange was established in 1875. There are around 5,600 Indian
companies listed with the stock exchange, and has a significant trading volume. As of
October2006, the market capitalization of the BSE was about Rs. 33.4 trillion (US $ 730
billion). The BSE SENSEX (Sensitive index), also called the BSE 30, is a widely used
market index in India and Asia. As of 2005, it is among the 5 biggest stock exchanges in
the world in terms of transactions volume.
History:
An informal group of 22 stockbrokers began trading under a banyan tree opposite the
Town Hall of Bombay from the mid-1850s, 1875, was formally organized as the Bombay
Stock Exchange (BSE).In January 1899, the stock exchange moved into the Brokers’ Hall
after it was inaugurated by James M MacLean. After the First World War, the BSE was
shifted to an old building near the Town Hall. In 1956, the Government of India recognized
the Bombay Stock Exchange as the first stock exchange in the country under the
Securities Contracts (Regulation) Act.1995, when it was replaced by an electronic
(e.trading) system named BOLT, or the BSE Online Trading system. In 2005, the status of
the exchange changed from an Association of Persons (AoP) to a fully fledged corporation
under the BSE (Corporatization and Demutualization) Scheme, 2005 (and its name was
changed to The Bombay Stock Exchange Limited).
BSE Sensex:
The BSE SENSEX (also known as the BSE 30) is a value-weighted index composed of 30
scrip’s, with the base April 1979 = 100. The set of companies which make up the index has
been changed only a few times in the last 20 years. These companies account for around
one-fifth of the market capitalization of the BSE.
SENSEX, first compiled in 1986 was calculated on a "Market Capitalization-Weighted"
methodology of 30 component stocks representing a sample of large, well-established and
financially sound companies. The base year of SENSEX is 1978-79. The index is widely
reported in both domestic and international markets through print as well as electronic
media. SENSEX is not only scientifically designed but also based on globally accepted
construction and review methodology. From September 2003, the SENSEX is calculated
on a free-float market capitalization methodology. The "free-float Market Capitalization-

51
Weighted" methodology is a widely followed index construction methodology on which
majority of global equity benchmarks are based.
The growth of equity markets in India has been phenomenal in the decade gone by. Right
from early nineties the stock market witnessed heightened activity in terms of various bull
and bear runs. More recently, the bourses in India witnessed a similar frenzy in the 'TMT'
sectors. The SENSEX captured all these happenings in the most judicial manner. One can
identify the booms and bust of the Indian equity market through SENSEX.
The values of all BSE indices are updated every 15 seconds during the market hours and
displayed through the BOLT system, BSE website and news wire agencies.

SENSEX calculation: SENSEX is calculated using a "Market Capitalization-Weighted"


methodology. As per this methodology, the level of index at any point of time reflects the
total market value of 30 component stocks relative to a base period. (The market
capitalization of a company is determined by multiplying the price of its stock by the
number of shares issued by the company). An index of a set of combined variables (such
as price and number of shares) is commonly referred as a 'Composite Index' by
statisticians. A single indexed number is used to represent the results of this calculation in
order to make the value easier to work with and track over time. It is much easier to graph
a chart based on indexed values than one based on actual values.
The base period of SENSEX is 1978-79. The actual total market value of the
stocks in the Index during the base period has been set equal to an indexed value of 100.
This is often indicated by the notation 1978-79=100. The formula used to calculate the
Index is fairly straightforward. However, the calculation of the adjustments to the Index
(commonly called Index maintenance) is more complex.
The calculation of SENSEX involves dividing the total market capitalization of 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. It keeps the Index comparable over time
and is the adjustment point for all Index maintenance adjustments. During market hours,
prices of the index scrips, at which latest trades are executed, are used by the trading
system to calculate SENSEX every 15 seconds and disseminated in real time. During
market hours, prices of the index scrip’s, at which trades are executed, are automatically

52
used by the trading computer to calculate the SENSEX every 15 seconds and
continuously updated on all trading workstations connected to the BSE trading computer
in real time.
BSE - other Indices:
Apart from BSE SENSEX, which is the most popular stock index in India, BSE uses other
stock indices as well:
 BSE 500
 BSE PSU
 BSE MIDCAP
 BSE SMLCAP
 BSE BANKEX

BSE SENSEX 2009 is calculated based on the 30scrips. Those thirty scrips are as
follows:
Code Name Sector
500410 ACC Ltd. Housing Related
500103 Bharat Heavy Electricals Ltd. Capital Goods

Code Name Sector


532454 Bharti Airtel Ltd. Telecom
532868 DLF Ltd. Housing Related
500300 Grasim Industries Ltd. Diversified
500010 HDFC Finance
500180 HDFC Bank Ltd. Finance
500440 Hindalco Industries Ltd. Metal,Metal Products & Mining

53
500696 Hindustan Unilever Ltd. FMCG
532174 ICICI Bank Ltd. Finance
500209 Infosys Technologies Ltd. Information Technology
500875 ITC Ltd. FMCG
532532 Jaiprakash Associates Ltd. Housing Related
500510 Larsen & Toubro Limited Capital Goods
500520 Mahindra & Mahindra Ltd. Transport Equipments
532500 Maruti Suzuki India Ltd. Transport Equipments
532555 NTPC Ltd. Power
500312 ONGC Ltd. Oil & Gas
500359 Ranbaxy Laboratories Ltd. Healthcare
532712 Reliance Communications Limited Telecom
500325 Reliance Industries Ltd. Oil & Gas
500390 Reliance Infrastructure Ltd. Power
500376 Satyam Computer Services Ltd. Information Technology
500112 State Bank of India Finance
500900 Sterlite Industries (India) Ltd. Metal,Metal Products & Mining
532540 Tata Consultancy Services Limited Information Technology
500570 Tata Motors Ltd. Transport Equipments
500400 Tata Power Company Ltd. Power
500470 Tata Steel Ltd. Metal,Metal Products & Mining
507685 Wipro Ltd. Information Technology

54
CHAPTER-4
ANALYSIS &
INTERPRETATION

ANALYSIS AND INTERPRETATION

APRIL 2010 NIFTY FUTURE CONTRACT


Symbol Date Expiry Open High Low Close

NIFTY 26-Mar-10 29-Apr-10 5276 5309.9 5272.6 5296.95


NIFTY 29-Mar-10 29-Apr-10 5291.5 5344 5279.4 5318.8
NIFTY 30-Mar-10 29-Apr-10 5324.9 5331 5263.25 5273.9
NIFTY 31-Mar-10 29-Apr-10 5279 5296.1 5245 5261.6
NIFTY 1-Apr-10 29-Apr-10 5286.1 5319.75 5276.05 5306.8
NIFTY 5-Apr-10 29-Apr-10 5329.8 5371.6 5322.5 5365.9
NIFTY 6-Apr-10 29-Apr-10 5376 5387 5352.25 5367.1
NIFTY 7-Apr-10 29-Apr-10 5380 5398 5343.3 5378.95
NIFTY 8-Apr-10 29-Apr-10 5368 5370 5290.1 5301.6
NIFTY 9-Apr-10 29-Apr-10 5307.1 5388.9 5307.1 5364.9
NIFTY 12-Apr-10 29-Apr-10 5363.8 5377.8 5322.45 5343.8
NIFTY 13-Apr-10 29-Apr-10 5328.75 5338 5308 5329.6

55
NIFTY 15-Apr-10 29-Apr-10 5372.25 5377.5 5268.15 5277.3
NIFTY 16-Apr-10 29-Apr-10 5264.9 5294.8 5246 5263.05
NIFTY 19-Apr-10 29-Apr-10 5200 5226 5162.3 5207.4
NIFTY 20-Apr-10 29-Apr-10 5217 5255.5 5207.95 5226.65
NIFTY 21-Apr-10 29-Apr-10 5245 5265 5230.1 5245.15
NIFTY 22-Apr-10 29-Apr-10 5220 5341.7 5217.05 5265.4
NIFTY 23-Apr-10 29-Apr-10 5269 5315 5265.25 5305
NIFTY 26-Apr-10 29-Apr-10 5346.8 5346.8 5310 5319.9
NIFTY 27-Apr-10 29-Apr-10 5304.8 5333.9 5298.9 5309.05
NIFTY 28-Apr-10 29-Apr-10 5252.25 5276.95 5198 5216.7
NIFTY 29-Apr-10 29-Apr-10 5233.3 5257.45 5225.15 5254.1

56
5400 CALL OPTION FOR APRIL 2010
Symbol Date Expiry Strike Price Open High Low Close
NIFTY 26-Mar-10 29-Apr-10 5400 46 58.9 43 55.25
NIFTY 29-Mar-10 29-Apr-10 5400 54 73.75 50 65.35
NIFTY 30-Mar-10 29-Apr-10 5400 67 69 46 49.15
NIFTY 31-Mar-10 29-Apr-10 5400 48.9 55 41.7 45.2
NIFTY 1-Apr-10 29-Apr-10 5400 49 51.8 44.25 48.35
NIFTY 5-Apr-10 29-Apr-10 5400 50.35 62.8 48.8 61.05
NIFTY 6-Apr-10 29-Apr-10 5400 65 68.3 55.25 59.25
NIFTY 7-Apr-10 29-Apr-10 5400 63 73 50.6 64.5
NIFTY 8-Apr-10 29-Apr-10 5400 60 60.8 40 43.1
NIFTY 9-Apr-10 29-Apr-10 5400 45 69.3 43.65 58.3
NIFTY 12-Apr-10 29-Apr-10 5400 60.5 61.95 47.25 51.65
NIFTY 13-Apr-10 29-Apr-10 5400 49 52 39.05 42.65
NIFTY 15-Apr-10 29-Apr-10 5400 67.7 67.7 26.8 28.6
NIFTY 16-Apr-10 29-Apr-10 5400 25 27.4 18.5 20.55
NIFTY 19-Apr-10 29-Apr-10 5400 10 14 5.6 9.8
NIFTY 20-Apr-10 29-Apr-10 5400 10.5 11.7 6 6.6
NIFTY 21-Apr-10 29-Apr-10 5400 7.5 9.25 5.15 5.75
NIFTY 22-Apr-10 29-Apr-10 5400 4.35 23 3.4 7.4
NIFTY 23-Apr-10 29-Apr-10 5400 6.45 11.9 5.4 8.1
NIFTY 26-Apr-10 29-Apr-10 5400 12.2 14 5.9 7.05
NIFTY 27-Apr-10 29-Apr-10 5400 4.95 9.5 2.6 3.15
NIFTY 28-Apr-10 29-Apr-10 5400 1.4 2 0.35 0.55
NIFTY 29-Apr-10 29-Apr-10 5400 0.2 0.2 0.05 0.05

5400 PUT OPTION FOR APRIL 2010


Symbol Date Expiry Strike Price Open High Low Close
NIFTY 26-Mar-10 29-Apr-10 5400 171.65 175 149.95 157.95
NIFTY 29-Mar-10 29-Apr-10 5400 141.2 169.5 128.05 145.55
NIFTY 30-Mar-10 29-Apr-10 5400 143.7 181 138 172.2
NIFTY 31-Mar-10 29-Apr-10 5400 178.8 195 157 181
NIFTY 1-Apr-10 29-Apr-10 5400 161.05 170.45 131.9 140.5
NIFTY 5-Apr-10 29-Apr-10 5400 126 129.9 92 96
NIFTY 6-Apr-10 29-Apr-10 5400 92.55 103.5 82.65 93.7
NIFTY 7-Apr-10 29-Apr-10 5400 81.15 106.55 75.9 86.6
NIFTY 8-Apr-10 29-Apr-10 5400 97.9 149.65 90.25 138.85
NIFTY 9-Apr-10 29-Apr-10 5400 133.5 133.5 79.7 93.5
NIFTY 12-Apr-10 29-Apr-10 5400 91 126.5 83.3 110.45

57
NIFTY 13-Apr-10 29-Apr-10 5400 111.1 131 109.8 114.45
NIFTY 15-Apr-10 29-Apr-10 5400 84.95 159 82 150.4
NIFTY 16-Apr-10 29-Apr-10 5400 160 172 132 156.45
NIFTY 19-Apr-10 29-Apr-10 5400 207.5 239.7 182.55 19915.
NIFTY 20-Apr-10 29-Apr-10 5400 176.3 194 151.8 178.4
NIFTY 21-Apr-10 29-Apr-10 5400 160 171.45 141 157.3
NIFTY 22-Apr-10 29-Apr-10 5400 175 182 78 139.65
NIFTY 23-Apr-10 29-Apr-10 5400 125.35 135 93.3 101.05
NIFTY 26-Apr-10 29-Apr-10 5400 74.9 92.35 61 84.8
NIFTY 27-Apr-10 29-Apr-10 5400 90 98 73 90.55
NIFTY 28-Apr-10 29-Apr-10 5400 125 198.65 121.05 180.35
NIFTY 29-Apr-10 29-Apr-10 5400 171 185 135.6 140
INTERPRETATION: In the above graph I calculated BEP.
BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2
=5378+5207/2
= 10585/2
= 5292.5

In the above table I observed fluctuations in the period of (26-03-2010 to 29-04-


2010) in this graph I found as BEP was 5292.5 share value.
Here with the above values, I have not found any major fluctuations towards ups and
downs, so, here I am not calculating marginal of safety.

What is called as Margin?


Margin amount is security to the Broking firms In derivatives market trading happens on
basis of margin amount, here Margin amount is investment of customers, sometimes
margin may becomes zero, sometimes it may go negative values.

Ex: if a Nifty contract worth is 2 lakhs, broking companies will not take total amount,
normally they used to collect 15% on actual worth it means they collect only 30k. if nifty
looses 600 points , margin amount becomes zero, if nifty looses more than 600 points, it
comes in negative

Is hedging gives the security to Margin Amount?


A: Absolutely Yes

When coming to may contract, there is lot of positive fluctuations (Never happen in stock
market). Because of Old Govt. formation on 16 th May 2009.
Here , in a situation, a investor expects correction on may 13 th and he had short
sell nifty future on same day @ 3700 ( keep in mind elections results on 16 th) and Paid
margin amount of 30k. and he knows that if Nifty crosses 4250 his margin becomes Zero.
In above situation, to give the security to his margin amount, I am suggesting 3900
call option .on 15th may 2009 for the investment of Rs.3500 (50*70)

58
Calculations as on 19th May 2009

• Nifty future hits 4600 it means he was in loss of 900 points


900*50 = 45000
Margin amount = 30000
It means on 19th may his margin amount gone into negative of 15000

• Nifty option hits 680 it means is he was in gain of 600 points


600*50 = 30000
It means after deducting the margin amount he has still 15000 positive balance with the
company.
Here Rs 3500 worth call option given the 30k worth security

 On 19th may if he sold the call option he gains 610 points and he hold the position
short sell of 3700.

 On 22nd may he covers the nifty (3700 short) @4200, here the loss was 500 points.

 On 2 positions he got 110 points gain. It means here hedging given security and
returns also.

27-MAY-2010 FUTURES INDEX NIFTY-50


Symbol Date Expiry Open High Low Close
NIFTY 30-Apr-10 27-May-10 5263.8 5290 5252 5262.8
NIFTY 3-May-10 27-May-10 5235 5245 5202.35 5218.45
NIFTY 4-May-10 27-May-10 5224 5238 5128.15 5141.85
NIFTY 5-May-10 27-May-10 5071.55 5133 5053 5120.15
NIFTY 6-May-10 27-May-10 5112.35 5114.5 5025 5087.15
NIFTY 7-May-10 27-May-10 5016 5043 4976.1 5019.8
NIFTY 10-May-10 27-May-10 5080 5208.3 5080 5200.25
NIFTY 11-May-10 27-May-10 5191.25 5191.25 5122 5132.95
NIFTY 12-May-10 27-May-10 5131.3 5174.4 5088.25 5150.2
NIFTY 13-May-10 27-May-10 5185.5 5218 5165.4 5178.15
NIFTY 14-May-10 27-May-10 5163.2 5202 5058.2 5083.65
NIFTY 17-May-10 27-May-10 5017.7 5074.8 4962.2 5058.05
NIFTY 18-May-10 27-May-10 5055.55 5107.6 5017.95 5063.4
NIFTY 19-May-10 27-May-10 5006.35 5019.7 4901 4922.9
NIFTY 20-May-10 27-May-10 4946.25 4976.9 4915.25 4941.05
NIFTY 21-May-10 27-May-10 4851 4943.7 4851 4928.4
NIFTY 24-May-10 27-May-10 4990 5023 4910.55 4931.05
NIFTY 25-May-10 27-May-10 4862.7 4875 4786.45 4809.35
NIFTY 26-May-10 27-May-10 4855.3 4925 4854.85 4917.05

59
NIFTY 27-May-10 27-May-10 4916 5004.45 4900.6 5004

NIFTY5000 CALL OPTION TABLE FOR 27-MAY-2010

Symbol Date Expiry Strike Price Open High Low Close

NIFTY 27-May-10 5000 296 315.85 283.7 291.9


30-Apr-10
NIFTY 27-May-10 5000 268.1 277 244.25 255.05
3-May-10
NIFTY 27-May-10 5000 265 270 188.35 196.95
4-May-10
NIFTY 27-May-10 5000 135 193 135 186.05
5-May-10
NIFTY 27-May-10 5000 171 177.65 130.1 160.25
6-May-10
NIFTY 27-May-10 5000 122.4 141.5 110 129.1
7-May-10
NIFTY 27-May-10 5000 161 238.5 153.55 230.6
10-May-10
NIFTY 27-May-10 5000 225 225 176 185.6
11-May-10
NIFTY 27-May-10 5000 174 214 155.5 195.65
12-May-10
NIFTY 27-May-10 5000 230.8 239.95 198 209.1

60
13-May-10
NIFTY 27-May-10 5000 193.15 222.85 123.1 135.2
14-May-10
NIFTY 27-May-10 5000 99 127.9 73 117.4
17-May-10
NIFTY 27-May-10 5000 110 142.2 92 112.2
18-May-10
NIFTY 27-May-10 5000 81 87.85 40.5 46.7
19-May-10
NIFTY 27-May-10 5000 50 58.9 38 43.2
20-May-10
NIFTY 27-May-10 5000 15.35 38.8 15 34.2
21-May-10
NIFTY 27-May-10 5000 49 57.7 16.2 21.35
24-May-10
NIFTY 27-May-10 5000 9.45 12.8 1.5 2
25-May-10
NIFTY 27-May-10 5000 2.8 4.9 1.4 3.85
26-May-10
NIFTY 27-May-10 5000 2.5 8.8 0.45 3
27-May-10

NIFTY 5000 PUT OPTION TABLE FOR 26-MARCH-2009


Symbol Date Expiry Strike Open High Low Close
Price
NIFTY 30-Apr-10 27-May-10 5000 35 38 29.55 33.9

3-May-10 27-May-10 5000 39.9 47 36.55 43


NIFTY
4-May-10 27-May-10 5000 40 66.6 37.25 61.95
NIFTY
5-May-10 27-May-10 5000 84.95 98.7 63 70.05
NIFTY
6-May-10 27-May-10 5000 69.9 109.7 68 77.65
NIFTY
7-May-10 27-May-10 5000 103.5 137.9 103.2 112.5
NIFTY
10-May-10 27-May-10 5000 70 78.8 35.6 37.2
NIFTY
11-May-10 27-May-10 5000 38 59.7 38 57
NIFTY
12-May-10 27-May-10 5000 55 72.2 43.4 51.05
NIFTY
13-May-10 27-May-10 5000 40 40 27.75 36.8
NIFTY

61
14-May-10 27-May-10 5000 38 69.9 26.8 60.5
NIFTY
17-May-10 27-May-10 5000 83.7 113.25 55.65 62.65
NIFTY
18-May-10 27-May-10 5000 68.35 76.9 40.7 52.3
NIFTY
19-May-10 27-May-10 5000 73.9 142 70.3 127.3
NIFTY
20-May-10 27-May-10 5000 110 123 83.35 104.1
NIFTY
21-May-10 27-May-10 5000 165 167 96 104.65
NIFTY
24-May-10 27-May-10 5000 65 106.9 36.6 89.35
NIFTY
25-May-10 27-May-10 5000 119 212 119 191.1
NIFTY
26-May-10 27-May-10 5000 155 155 76 84.15
NIFTY
27-May-10 27-May-10 5000 85 97.9 0.05 0.05
NIFTY

NIFTY 5100 PUT OPTION TABLE FOR 27-MAY-2010


Symbol Date Expiry Strike Price Open High Low Close
30-Apr-10 27-May-10 5100 59 59 47.55 53.75
NIFTY
3-May-10 27-May-10 5100 52.2 72.5 52.2 66.85
NIFTY
4-May-10 27-May-10 5100 60.1 100 59 93.3
NIFTY
5-May-10 27-May-10 5100 131.25 142 95 103.35
NIFTY
6-May-10 27-May-10 5100 105.25 158 102.35 117.4
NIFTY
7-May-10 27-May-10 5100 150.3 195.1 148.35 160.9
NIFTY
10-May-10 27-May-10 5100 113.85 115.5 56.05 58.45
NIFTY
11-May-10 27-May-10 5100 62.05 90.45 61.2 86.9
NIFTY
12-May-10 27-May-10 5100 84.25 107.4 68.6 78
NIFTY
13-May-10 27-May-10 5100 60.9 63.4 45.1 59.1
NIFTY
14-May-10 27-May-10 5100 59.85 110 45.3 95.3

62
NIFTY
17-May-10 27-May-10 5100 111.1 173 93.25 102.45
NIFTY
18-May-10 27-May-10 5100 110 127.45 72.6 92.75
NIFTY
19-May-10 27-May-10 5100 125.5 215 121 196.2
NIFTY
20-May-10 27-May-10 5100 176 195 144.5 171.45
NIFTY
21-May-10 27-May-10 5100 255 255.75 164.9 177.05
NIFTY
24-May-10 27-May-10 5100 124.15 188 90 169.05
NIFTY
25-May-10 27-May-10 5100 230.3 310.2 222.2 291.2
NIFTY
26-May-10 27-May-10 5100 258.05 258.05 170 178.45
NIFTY
27-May-10 27-May-10 5100 193.4 196 94.05 95.7
NIFTY

OPEN = 5263.8
HIGH = 5290
LOW = 4786.45
CLOSE = 5004
INTERPRETATION: In the above graph I calculated BEP.
BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2
=5290+4786.45/2
= 10076.45/2
= 5038.225
In this graph I observed fluctuations in the period of (30-04-2010 to 27-05-2010) in
this graph I found as BEP was 5038.225 share value .

Here I observed as a value share is high rate so Nifty-50 value was (5038.225 -
5290.00=251.775) so here share value is decreased so in this period of so here investors
gets more losses, when goes for more longs .if investor enter for longs on 7 th of May, with
in short span of time investor get good profits. So this is good signal of the investors. So
here I again observed nifty-50 losses of the period so here Nifty-50 share value is
(5038.225-4786.45=251.775) so share value is increased so here investor gets more
profits, when attempts for more shorts. So this is unexpected changes in market and
politics and lack of experts of investors.

63
2nd
So here investor in the contract Thursday was more losses. So May contract was
started 5263.8 and ending of the contract 5004 so here investor gets more losses in longs
and more profits in shorts.
When an investor goes for shorts in 3 levels, when compare to BEP
Explaining the actual position of investor
(1)Margin of Safety (M.o.S) =opening share value – BEP
. =5263.8-5038.225
=-225.575
So here margin of safety is less than to the BEP share value. So here investor gets some
profits in shorts.
(2) Margin of Safety (M.o.S) =high share value –BEP
=5290.00-5038.225
=251.775
So here margin of safety is more than to the BEP share value. So here investor gets more
profits and longs.

(3) Margin of Safety (M.o.S) =low share value –BEP


= 4786.45 – 5038.225
= 251.775
So, in the above situation , after low recorded price 4786.45, nifty maximum reached 5004,
so the max loss in the current contract is 217.55 here margin of safety is less than to the
BEP so here investor gets more losses when investor goes for more shorts.

Hedging
Hedging does not remove losses. The best that can be achieved using hedging is the
removal of unwanted exposure, i.e. unnecessary risk. The hedged position will make less
profit than the un-hedged position, half the time. One should not enter into a hedging
strategy hoping to make excess profits for sure; all that can come out of hedging is
reduced risk
Example for Hedging
In stock market terminology Hedging means Risk Minimizing

64
1. A customer buys the 10 lots nifty May Future @5280 in first day of May. till end of the
May he has not covered the position.
In last week of May nifty has closed @5004. So the loss per lot is Approx 13800. So
which instrument gives the best HEDGING for him?
According to analyst words on 30 th April 2010, market performance for the current contract
will be based on these factors.
If nifty crosses 5301, next level will be 5381 and 5450. If nifty breaks 5220 next levels will
be continue in down trend, like 5150, 5080,5020,4950,4880. Where continuous down
trend also not possible, there will be some ups and downs.
Above I have mentioned call option table for 5000 and put option table for 5000 and 5100
for May 2010, if you observe on 3rd May 5100 put option recorded Rs55.00, assume that
customer entered in this level and exits at this level. Rs310 on 25 th may 2010.
Here, nifty unable to break its next resistance level 4780 on the 25 th May 2010. So and
recorded huge volume in open interest for 5100 puts.
According to market sentiment, when a product records high volumes in open interest,
probability is very less to increase.
Based on above information first, customer has to exit put option from the market on 25 th
and has to maintain his future long position in the market.

Gain on May put option


310-55 = 255 is profit on single unit, nifty lot contains 50 units
So 255*50 = 12750 is profit
For the above mentioned customer May 5100 put option gives the best hedging.
Because, in May future he occurred 13800 losses and in same month call option given
17600 profits.
End of the month still he is in loss of Rs1000 per lot, it proves that in volatility
market options will give the hedging to the investors
Conclusion: options will give hedging to the investment and minimizes the risk but,
will not give profits.

Do options always give the positive returns?

65
A: No, sometimes, investors prefer options for investment purpose only. But investment
amount becomes zero in some situations.
Ex. In the above table assume that customer enter the nifty 5100put in first week, last
week of the contract it became zero. So, options also fail to give positive returns.

NIFTY June 2010 CONTRACT


Symbol Date Expiry Open High Low Close LTP
28-May-10 24-Jun-10 5025 5054.65 4996 5041 5037
NIFTY
31-May-10 24-Jun-10 5035.15 5071.7 5015.3 5056.2 5056.05
NIFTY
1-Jun-10 24-Jun-10 5045 5049.75 4933.5 4944.05 4940
NIFTY
2-Jun-10 24-Jun-10 4955 5019.9 4941.1 5004.35 5014
NIFTY
3-Jun-10 24-Jun-10 5070 5108.8 5061.55 5095.95 5097.25
NIFTY
4-Jun-10 24-Jun-10 5090.6 5134.9 5070.6 5119.95 5117.25
NIFTY
7-Jun-10 24-Jun-10 5011.35 5032 4985.2 5020.2 5028.7
NIFTY
8-Jun-10 24-Jun-10 5030.1 5054.5 4937.65 4960.7 4965.15
NIFTY
9-Jun-10 24-Jun-10 5053.1 5053.1 4953.1 4990.4 5008.05
NIFTY
10-Jun-10 24-Jun-10 5008.2 5093.5 5005 5086.1 5090.5
NIFTY
11-Jun-10 24-Jun-10 5129 5138 5092.1 5116.85 5113.65
NIFTY

66
14-Jun-10 24-Jun-10 5138.25 5209 5138.25 5204.8 5205
NIFTY
15-Jun-10 24-Jun-10 5201.25 5245.25 5173 5234.3 5226.5
NIFTY
16-Jun-10 24-Jun-10 5239.8 5249.45 5211 5226.45 5223.5
NIFTY
17-Jun-10 24-Jun-10 5232 5297 5206 5284.8 5286
NIFTY
18-Jun-10 24-Jun-10 5275 5296.8 5248.2 5261.15 5258.6
NIFTY
21-Jun-10 24-Jun-10 5325 5377.55 5316.3 5357.65 5354.15
NIFTY
22-Jun-10 24-Jun-10 5342.75 5358.95 5311.25 5320.3 5325.5
NIFTY
23-Jun-10 24-Jun-10 5303.4 5344 5296.1 5333.6 5343
NIFTY
24-Jun-10 24-Jun-10 5331.3 5353.2 5287.2 5320.55 5320.55
NIFTY

OPEN 5025 HIGH 5377.55


LOW 4933.5 CLOSE 5320.55

BEP For above contract 5155.525


5100 CALL OPTION FOR JUNE 2010 CONTRACT
Symbol Date Expiry Strike Price Open High Low Close
28-May-10 24-Jun-10 5100 109.8 119.9 84.7 94.05
NIFTY
31-May-10 24-Jun-10 5100 92 104.95 84 98.65
NIFTY
1-Jun-10 24-Jun-10 5100 94.9 94.9 56.6 59.2
NIFTY
2-Jun-10 24-Jun-10 5100 63.25 80 58.25 74.75
NIFTY
3-Jun-10 24-Jun-10 5100 89.5 111.25 89.5 102.15
NIFTY
4-Jun-10 24-Jun-10 5100 94 116.25 88.25 107.85
NIFTY
7-Jun-10 24-Jun-10 5100 61.1 74.8 50 70.05
NIFTY
8-Jun-10 24-Jun-10 5100 69.9 77.95 45 48.45
NIFTY
9-Jun-10 24-Jun-10 5100 48 72.35 45.25 53.6
NIFTY
10-Jun-10 24-Jun-10 5100 55 86.5 52.2 82.45
NIFTY
11-Jun-10 24-Jun-10 5100 91.25 99.8 75.85 88.75
NIFTY

67
14-Jun-10 24-Jun-10 5100 97.2 138.45 93.35 134.65
NIFTY
15-Jun-10 24-Jun-10 5100 131.55 161.4 110.5 153.7
NIFTY
16-Jun-10 24-Jun-10 5100 155 162.5 135.85 144.85
NIFTY
17-Jun-10 24-Jun-10 5100 145 201.7 126.3 192.6
NIFTY
18-Jun-10 24-Jun-10 5100 180 199.95 156.1 166.2
NIFTY
21-Jun-10 24-Jun-10 5100 212.3 275.3 211.05 261.75
NIFTY
22-Jun-10 24-Jun-10 5100 238.2 259 212.3 220.55
NIFTY
23-Jun-10 24-Jun-10 5100 200 241.8 196 230.8
NIFTY
24-Jun-10 24-Jun-10 5100 234.75 251.7 187.5 221.7
NIFTY

5100 PUT OPTION FOR JUNE 2010 CONTRACT

Symbol Date Expiry Strike Price Open High Low Close


28-May-10 24-Jun-10 5100 176 190.8 149 155.25
NIFTY
31-May-10 24-Jun-10 5100 147 171.05 135.6 142.1
NIFTY
1-Jun-10 24-Jun-10 5100 158 223.1 150 215.5
NIFTY
2-Jun-10 24-Jun-10 5100 201 218 160.15 171.5
NIFTY
3-Jun-10 24-Jun-10 5100 139.45 143.7 105 107.7
NIFTY
4-Jun-10 24-Jun-10 5100 106 119 82.4 88.75
NIFTY
7-Jun-10 24-Jun-10 5100 132 173.85 110.25 149.2
NIFTY
8-Jun-10 24-Jun-10 5100 149.9 207.25 123.1 187.35
NIFTY
9-Jun-10 24-Jun-10 5100 181.2 182.8 126.5 163.4
NIFTY
10-Jun-10 24-Jun-10 5100 152.7 152.7 92.65 96.75
NIFTY

68
11-Jun-10 24-Jun-10 5100 76 86.7 65.4 73.85
NIFTY
14-Jun-10 24-Jun-10 5100 63.85 63.85 32.1 33.5
NIFTY
15-Jun-10 24-Jun-10 5100 31.5 40.2 20.5 22.25
NIFTY
16-Jun-10 24-Jun-10 5100 22.8 30.25 18.15 23.15
NIFTY
17-Jun-10 24-Jun-10 5100 22 23.85 8.4 9.9
NIFTY
18-Jun-10 24-Jun-10 5100 10 10.95 5.55 7.2
NIFTY
21-Jun-10 24-Jun-10 5100 3.45 3.45 1.1 2.45
NIFTY
22-Jun-10 24-Jun-10 5100 2.25 2.35 1.2 1.65
NIFTY
23-Jun-10 24-Jun-10 5100 1.25 1.25 0.45 0.55
NIFTY
24-Jun-10 24-Jun-10 5100 0.2 0.2 0.05 0.05
NIFTY

INTERPRETATION: In the above graph I calculated BEP.


BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2
=5377.55 + 4933.5/2
= 10311.05/2
= 5155.525

In this graph I observed fluctuations in the period of (28-05-2010 to 24-06-2010) in


this graph I found as BEP was 5155.525 share value .
Here I observed as a value share is high rate so Nifty-50 value was (5377.55 –
5155.525=222.025) so here share value is increased so in this period of so here investors
gets more profits and more longs .so this is JUNE month last week Monday investor get
good profits. So this is good signal of the investors. So here I again observed nifty-50
losses of the period so here Nifty-50 share value is (4933.5-5155.525=-222.025) so share
value is decreased so here investor gets more losses and more shorts. So this is
unexpected change in market and politics and lack of expertness in investors.
Then a investor goes for shorts in 3 levels, when compare to BEP.
Explaining the actual position of investor with margin of safety

69
(1) Margin of Safety (M.o.S) =opening share value – BEP
. =5025 – 5155.525
=-130.525

So here margin of safety is less than to the BEP share value . so here investor gets some
losses in shorts.

(2) Margin of Safety (M.o.S) high share value –BEP


=5377.55-5155.525
=222.025
So here margin of safety is more than to the BEP share value. So here investor gets more
profits and longs.

(3) Margin of Safety (M.o.S) = low share value –BEP


=4933.5-5155.525
= 222.025
So here margin of safety is less than to the BEP so here investor gets more losses and
more shorts.

How Premiums works on Options

In derivatives market, customers can invest in only options also. But here the maximum
risk is Premium amount paid by the investor.

The options will give buying or selling right, not an obligation.

Call option premium increases when market is in bullish or Positive


Put option premium increases when market is in bearish or negative.

The reason investor’s shown more interest on options: less risk with high returns.

In equities investor needs to pay the total amount towards investment

Ex: Ramesh buys 300 equity shares of RIL @1000 on 1 st January 2010, for a target price
of Rs.1200 by 28th January2010. According to his expectation target reaches to 1200, what
are the returns generated by ramesh

A; investment amount is 3 00 000 (1000 * 300)


Sell value 3 60 000 (1200*300)

70
Rs.60000 generated on investment, 60k is 20% on investment.

In futures long / short investor no need to pay complete contract amount. Here investor
has to pay 25% as margin amount.

In the above example, 300 RIL shares contain one lot. Total contract value is 300000. But
the margin amount is only 75000.

Returns on Investment: Rs.200 growth on 300 units it means 60k profit on investment,
here 60k is 80% on investment.

An equity customer can invest with his investment 4 times in future, this is the one reason
people shown interest on futures investment.

In options investor has to pay only premiums. Here premium amount is investment. Here
investor gets right towards investment.

Ex: in the above example, on 1000 RIL strike price investor paid Rs.25 as premium on
each unit. Contract size is 300 units. Investment value is 7500. Here 7500 giving the right
on 300000 contract. Here assumption of buy price is 1025, because Rs.25 premium is
added in the contract.

End of the contract price appreciation on RIL is 200. But here we have to take Rs.175 into
consideration.

Returns on investment are 175*300 = 52500, means 7 times on investment 700% profit for
the given contract.

In the above example if the stock price falls to Rs.500 also, the maximum loss would be
only the premium. He no need to bare any extra loses.

This is the only one reason, I have found in the study people shown more interest towards
futures and options.

Some live examples on options investment: during my study, I got an opportunity to


observe some client’s derivatives positions: in those NIFTY, LT, Are best examples.

1. NIFTY EXAMPLE FOR JUNE CONTRACT 2010:

On 16th June, nifty traded between 5215 to 5230, where investor expected market fall for
the month below 5100.and he bought 15000 nifty 5100 puts @ 20.

End of the contract nifty closes above 5300.

71
According to put concept, if the value of underlying asset increases, put value decreases,
so here end of the contract put became zero. The same one can observe in June month
put option table.

2. One client expected that LT share price will increases to 1800, when market trades at
1635, on 7th June 2010. He knows 3 alternative investments in the market one is buying in
equities, or entering into futures contract or buying nearest call option. So, he ready to do
high risk and entered into 1650 call on 07 th June 2010 at Rs.35.

Calculating returns on investment:


On 21st June 2010 LT, reaches 1840, where he settles call option at Rs.186, return on
investment is Rs.151 on each unit. Because in 186 he has to deduct his investment
amount of Rs. 35, in very rare situations investors get their premium back.

Return on investment is 431.42%.

In the above situation if investor takes any other investments like investing in equities and
futures, he would not able to generate above mentioned returns.

72
CHAPTER - 6
FINDINGS AND
SUGGESTIONS

FINDINGS:

1. Derivative have existed and evolved over a long time, with roots in commodities
market .In the recent years advances in financial markets and technology have made
derivatives easy for the investors.
2. Derivatives market in India is growing rapidly unlike equity markets. Trading in
derivatives require more than average understanding of finance. Being now markets,
Maximum number of investors have not yet understood thee full implications of the trading

73
in derivatives. SEBI should take actions to create awareness in investors about the
derivative market.
3. Introduction of derivative implies better risk management. These markets can greater
depth, stability and liquidity to India capital markets. Successful risk management with
derivatives requires a thorough understanding of principles that govern the pricing of
financial derivatives.
4. In order to increase the derivatives market in India SEBI should revise some of their
regulation like contract size, participation of Fill in the derivative market. Contract size
should be minimized because small investor cannot afford this much of huge premiums.
5. Derivatives are mostly used for hedging purpose.
6. In derivative market the profit and loss of the option writer/option holder purely depends
on the fluctuations of the underlying.
7. Where investor have higher risk, is getting high returns, it’s clearly showing in live
examples.

SUGGESSIONS

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.

74
It is advisable to the investor to invest in the derivatives market because of the greater
amount of liquidity offered by the financial derivatives and the lower transaction costs
associated with the trading of financial derivatives.

The derivative products give the investor an option or choice whether the exercise the
contract or not. Option gives 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 option.

However, these instruments act as a powerful instrument for knowledge traders to expose
them to the properly calculated and well understood risks in pursuit of reward i.e profit.

OTHER SUGGESTIONS ARE


1. Increase in scripts under derivative segment:
SEBI and the stock exchanges should constantly endeavor to Update the lists of stocks
available for derivatives trading by including in the list of companies with very strong
fundamentals and a history of excellent track record and also with excellent corporate
governed record even while periodically deleting Companies which do not keep up their
record of high disclosures And corporate governance and also those companies which
may Come under any serious allegations of being associated with any Stock market
scams etc…
2. Physical settlement:
Presently the derivatives traded are settled on cash basis on the last Thursday of each
month. Thus, there is no physical delivery of the traded securities. This is one of the
reasons for the Derivatives market to be dominated by speculators and big players with
grossly inadequate interest shown by small investors to take advantages of the derivative
trading, there is a need to switch over the phases to the physical system.

3. Investor and broker education:

75
This is the need of the hour. While the Indian investor is familiar With the forward trading
under Badla system, the derivatives Strategies are not yet familiar to him. Like the
certification of traders on the derivatives desk, there has to be an orientation program for
the brokers and intermediaries can best do this job as part of service to expand the market
and awareness

4. SEBI has to take steps to reduce the speculation that is going on in


the market segment.

5. SEBI has to take further steps in the risk management mechanism.

6. SEBI has to take measures to use effectively the derivatives segment as tool of
hedging.

ROLL OVER PROCESSOR:

Every script having 3 months contract cycles Current month, Next month and far month. if
current month is not gives the expected returns customers are roll over their positions into
next month , this roll over process they can do up to n no of months until they have margin
with them

STOPLOSS:

Derivatives are high volatility product, to keep their margin in positive always they must
use stop loss order, when they enter into the contract. When stop loss triggers, it means
the investor has to book the loss.

76
CHAPTER-7
BIBLIOGRAPHY

BIBLIOGRAPHY

Text Books:

M.Y.Khan : Indian Financial System – 9th Edition

R. Mahajan : Futures & Options

Rene.M.Stulz : Risk Management & Derivatives

77
Websites:

www.indianderivatives.com

www.nseindia.com

www.bseindia.com

www.networthdirect .com

News papers:

Economic Times

Bussiness Line

Times of India

78