A Project Report

ON
A Study on Derivatives
(Future & Options)

AT
INDIA INFOLINE LIMITED

1
 ABSTRACT
The emergence of the market for derivative products, most notably forwards, futures and

options, can be traced back to the willingness of risk-averse economic agents to guard

themselves against uncertainties arising out of fluctuations in asset prices. By their very

nature, the financial markets are marked by a very high degree of volatility. Through the

use of derivative products, it is possible to partially or fully transfer price risks by locking-

in asset prices. As instruments of risk management, these generally do not influence the

fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative

products minimize the impact of fluctuations in asset prices on the profitability and cash

flow situation of risk-averse investors. Derivative products initially emerged as hedging

devices against fluctuations in commodity prices, and commodity-linked derivatives

remained the sole form of such products for almost three hundred years. Financial

derivatives came into spotlight in the post-1970 period due to growing instability in the

financial markets. However, since their emergence, these products have become very

popular and by 1990s, they accounted for about two-thirds of total transactions in

derivative products. In recent years, the market for financial derivatives has grown

tremendously in terms of variety of instruments available, their complexity and also

turnover. In the class of equity derivatives the world over, futures and options on stock

indices have gained more popularity than on individual stocks, especially among

institutional investors, who are major users of index-linked derivatives. Even small

investors find these useful due to high correlation of the popular indexes with various

portfolios and ease of use.

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 This project deals mainly with futures and options, the terminologies involved,

difference between them , their eligibility criteria, how are they traded, how futures and

options are used for hedging, settlement process strategies, and the software’s used.

3
 TABLE OF CONTENT
S.NO CONTENT Pg,n
o
1. INTRODUCTION 7-11
1.1 INTRODUCTION
1.2 SCOPE OF THE STUDY
1.3 STATEMENT OF THE PROBLEMS
1.4 OBJECTIVES OF THE STUDY
1.6 LIMITATIONS
1.6 RESEARCH METHODOLOGY
2. LITERATURE REVIEW 12-42
2.1 INTRODUCTION OF DERIVATIVES
2.2 HISTORICAL VIEW OF FUTURES & OPTIONS
2.3 FUTURES
2.4 OPTIONS
2.5 ELIGIBILITY CRITERIA FOR SECURITIES OF TRADED
2.6 TRADING MECHANISM OF FUTURES & OPTIONS
2.7 STEPS INVOLVED IN FUTURES &OPTIONS TRADING
3. COMPANY PROFILE 43-54
4. DATA ANALYSIS & INTERPRETATION 55-65
4.1 ANALYSIS OF FUTURE
4.2 RELATION OF FP AND WITH SP
4.3 ANALYSIS OF OPTIONS
5. SUMMARY AND CONCLUSION 66-69
5.1 RESULTS & DISCUSSIONS
5.2 SUGGESTIONS
5.3 CONCLUSION
6. BIBILOGRAPHY

//

LIST OF TABLES
S.NO CONTENTS Pg. No
1. T1--Data for FUTSTK-WIPRO from 01-12-2010 to 30-12-2010 56
2. T2--Data for FUTSTK-WIPRO from 01-12-2010 to 30-12-2010 58
LIST OF FIGURES
S.NO CONTENTS Pg. No

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 1. MAJOR PLAYERS IN DERIVATIVE MARKET: 17
2. PAY-OFF FOR A BUYER OF FUTURES 23
3. PAY-OFF FOR A SELLER OF FUTURES 24
4. PAY-OFF PROFILE FOR BUYER OF A CALL OPTION 29
5. PAY-OFF PROFILE FOR SELLER OF A CALL OPTION 30
6. PAY-OFF PROFILE FOR BUYER OF A PUT OPTION 32
7. PAY-OFF PROFILE FOR SELLER OF A PUT OPTION 33
8. INDIA INFOLINE LIMITED Group 44
9. ORGANISATIONAL STRUCTURE 46
10. POWER INDIA BULLS 53

CHAPTER-1
5
 INTRODUCTION

1.1 INTRODUCTION

Derivatives are a wide group of financial securities defined on the basis of other

financial securities, i.e., the price of a derivative is dependent on the price of another security,

called the underlying. These underlying securities are usually shares or bonds, although they

can be various other financial products, even other derivatives. As a quick example, let’s

consider the derivative called a ‘call option’, defined on a common share. The buyer of such a

product gets the right to buy the common share by a future date. But she might not want to do

so—there’s no obligation to buy it, just the choice, the option. Let’s now flesh out some of the

details. The price at which she can buy the underlying is called the strike price, and the date

after which this option expires is called the strike date. In other words, the buyer of a call

option has the right, but not the obligation to take a long position in the underlying at the

strike price on or before the strike date. Call options are further classified as being European,

6
if this right can only be exercised on the strike date and American, if it can be exercised any

time up and until the strike date.

Derivatives are amongst the widely traded financial securities in the world.

Turnover in the futures and options markets are usually many times the cash (underlying)

markets. Our treatment of derivatives in this module is somewhat limited: we provide a short

introduction about of the major types of derivatives traded in the markets and their pricing.

Financial derivatives came into spotlight in the year 1970 period due to

growing instability in the financial markets. However since their emergence, these accounted

for about two-third of totals transactions in derivatives products. In recent years, the market

for financial derivatives has grown tremendously in terms of variety of instruments available,

there complexity & also turn over. In the class of equity derivatives Futures & options on

stock also turn over. In the class of equity derivatives, futures & options on stock indicates

gained more popularly than individual stocks.

1.2 SCOPE OF THE STUDY

 The scope of the study is limited to “DERIVATIVES” with the special reference to

Indian context and the National stock exchange has been taken as a representative

sample for the study. The study includes futures and options.

 My analysis part is limited to selecting the investment option it means that whether

we have to invest cash market or derivatives market.

 I have taken only four different organizations from four different industries to analyze

and interpret the results.

 Based upon four criteria’s only open interest is evaluated for analyzing the trend of

market as well as price movement.

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  The study is not Based on the international perspective of derivatives markets, which

exists in NASDAQ, CBOT etc.

 This study mainly covers the area of hedging and speculation. The main aim of the

study is to prove how risks in investing in equity shares can be reduced and how to

make maximum return to the other investment.

1.3 STATEMENT OF THE PROBLEM

The main problem in the derivatives is we can’t able to decide that time and derivative

product which is more risky and return depend upon the time and product only we can earn

more returns with taking more risk. In this following project I came to know that based upon

some valuations and time conditions we can easily identify that which product is more

efficient for earning more returns. In this research I used only two derivative products they

are FUTURES and OPTIONS. Another one is OPEN INTEREST concept it is very new to

market. This additional work proposes based upon open interest and volume we can tell the

when the market is bullish as well as bearish and identifies that price movements easily when

they are going to rise and when they are coming fall depends upon price volume changes.

1.4 OBJECTIVES OF THE STUDY

The objectives for my research are as below

 Tocalculate the risk and return of investment in futures and investment in options
 To identifies the market trend and price movement based upon the open interest

changes
 To analyze the role of futures and options in Indian financial system
 To understand about the derivatives market.
 To know why derivatives is considered safer than cash market.

 To construct portfolio and analyses the risk return relationship.

 To hedge the most profitable portfolio.

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 1.5 LIMITATIONS

 Share market is so much volatile and it is difficult to forecast any thing about it

whether you trade through online or offline

 The time available to conduct the study was only 2 ½ months. It being a wide topic

had a limited time.

1.6 RESEARCH METHODOLOGY

Research Methodology is a systematic procedure of collecting information in order to

analyse and verify a phenomenon. the collection of information is done in two principle

sources. They are as follows

1. Primary Data
2. Secondary Data

Primary Data:

It is the information collected directly without any references. In this study it is

gathered through interviews with concerned officers and staff, either individually or

9
collectively, sum of the information has been verified or supplemented with personal

observation in trading times and conducting personal interviews with the concerned officers

of INDIA INFOLINE LIMITED .

Secondary Data:

The secondary data was collected from already published sources such as, NSE

websites, internal records, reference from text books and journal relating to derivatives. The

data collection includes:

a) Collection of required data from NSE and BSE websites

b) Reference from text books and journals relating to Indian stock market system and

financial derivatives.

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 CHAPTER-2
LITERATURE REVIEW

CONCEPTUAL AND THEORITICAL REVIEW

2.1 INTRODUCTION OF DERIVATIVES

DEFINITION

Derivative is a product whose value is derived from the value of one or more basic

variables, called bases (underlying asset, index, or reference rate), in acontractual manner.

The underlying asset can be equity, forex, commodity or any other asset. For example, wheat

farmers may wish to sell their harvest at a future date to eliminate the risk of a change in

prices by that date. Such a transaction is an example of a derivative. The price of this

derivative is driven by the spot price of wheat which is the "underlying".

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FACTORS DRIVING THE GROWTH OF DERIVATIVES

Over the last three decades, the derivatives market has seen a phenomenal growth. A

large variety of derivative contracts have been launched atexchanges across the world. Some

of the factors driving thegrowth of financial derivatives are:

1. Increased volatility in asset prices in financial markets,

2. Increased integration of national financial markets with the internationalmarkets,

3. Marked improvement in communication facilities and sharp decline in theircosts,

4. Development of more sophisticated risk management tools, providingeconomic agents a

wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risk andreturns over a

large number of financial assets leading to higher returns, reduced risk as well as transactions

costs as compared to individual financial assets.

2.2 HISTORICAL VIEW OF FUTURES AND OPTIONS

Early forward contracts in the US addressed merchants' concerns about ensuring that

there were buyers and sellers for commodities. However 'credit risk" remained a serious

problem. To deal with this problem, a group of Chicago businessmen formed the Chicago

Board of Trade (CBOT) in 1848. The primary intention of the CBOT was to provide a

centralized location known in advance for buyers and sellers to negotiate forward contracts.

In 1865, the CBOT went one step further and listed the first 'exchange traded" derivatives

contract in the US, these contracts were called 'futures contracts".In 1919, Chicago Butter and

Egg Board, a spin-off of CBOT, was reorganizedto allow futures trading. Its name was

changed to Chicago Mercantile Exchange (CME). The CBOT and the CME remain the two

largest organized futures exchanges, indeed the two largest "financial" exchanges of any kind

in the world today.The first stock index futures contract was traded at Kansas City Board of

Trade. Currently the most popular stock index futures contract in the world is based on S&P

12
500 index, traded on Chicago Mercantile Exchange. Index futures, futures on T-bills and

Euro-Dollar futures are the three most popular futures contracts traded today. Other popular

international exchanges that trade derivatives are LIFFE in England, DTB in Germany, SGX

in Singapore, TIFFE in Japan, MATIF in France, Euro ex etc.

INDEX FUTURES (JUNE 12, 2000)

INDEX OPTIONS (JUNE 4, 2001)

STOCK OPTIONS (JULY 2, 2001)

STOCK FUTURES (NOVEMBER 9, 2001)

Flow of futures and options in NSE

Risks involved in Derivatives:

Derivatives are used to separate risks from traditional instruments and transfer these

risks to parties willing to bear these risks. The fundamental risks involved in derivative

business includes

A. Credit Risk: This is the risk of failure of a counterpart to perform its obligation as per

the contract. Also known as default or counterpart risk, it differs with different

instruments.

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 B. Market Risk: Market risk is a risk of financial loss as result of adverse movements of

prices of the underlying asset/instrument.

C. Liquidity Risk: The inability of a firm to arrange a transaction at prevailing market

prices is termed as liquidity risk. A firm faces two types of liquidity risks:

 Related to liquidity of separate products.

 Related to the funding of activities of the firm including derivatives.

D. Legal Risk: Derivatives cut across judicial boundaries, therefore the legal aspects

associated with

The deal should be looked into carefully.

MAJOR PLAYERS IN DERIVATIVE MARKET:

There are three major players in their derivatives trading.

1. Hedgers.

2. Speculators.

3. Arbitrageurs.

Hedgers: The party, which manages the risk, is known as “Hedger”. Hedgers seek to protect

themselves against price changes in a commodity in which they have an interest.

Speculators: They are traders with a view and objective of making profits. They are willing

to take risks and they but upon whether the markets would go up or come down.

Arbitrageurs:Risk less profit making is the prime goal of arbitrageurs. They could be

making money even with out putting their own money in, and such opportunities often come

up in the market but last for very short time frames. They are specialized in making

14
purchases and sales in different markets at the same time and profits by the difference in

prices between the two centres.

M
A
J
O
R

P
L
A
Y
E
R
R
S
Fig 1: MAJOR PLAYERS IN DERIVATIVE MARKET:

Contract Periods:

At any point of time there will be always be available nearly 3months contract periods

in Indian Markets.

15
These were

1) Near Month

2) Next Month

3) Far Month

For example in the month of September 2008 one can enter into September futures

contract or October futures contract or November futures contract. The last Thursday of the

month specified in the contract shall be the final settlement date for the contract at both NSE

as well as BSE It is also know as Expiry Date.

Settlement:

The settlement of all derivative contracts is in cash mode. There is daily as well as

final settlement. Outstanding positions of a contract can remain open till the last Thursday of

the month. As long as the position is open, the same will be marked to market at the daily

settlement price, the difference will be credited or debited accordingly and the position shall

be brought forward to the next day at the daily settlement price. Any position which remains

open at the end of the final settlement day (i.e. last Thursday) shall closed out by the

exchanged at the final settlement price which will be the closing spot value of the underlying

asset.

Margins:

There are two types of margins collected on the open position, viz., initial margin

which is collected upfront which is named as “SPAN MARGIN” and mark to market margin,

which is to be paid on next day. As per SEBI guidelines it is mandatory for clients to give

margins, fail in which the outstanding positions or required to be closed out.

Members of F & O segment:

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  There are three types of members in the futures and options segment. They are

trading members, trading cum clearing member and professional clearing members.

 Trading members are the members of the derivatives segment and carrying on the

transaction on the respective exchange.

 The clearing members are the members of the clearing corporation who deal with

payments of margin as well as final settlements.

 The professional clearing member is a clearing member who is not a trading member.

Typically, banks and custodians become professional clearing members.

 It is mandatory for every member of the derivatives segment to have approved users

who passed SEBI approved derivatives certification test, to spread awareness among

investors.

2.3 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. The futures contracts are standardized and

exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain

standard features of the contract. It is a standardized contract with standard underlying

instrument, a standard quantity and quality of the underlying instrument that can be delivered,

(or which can be used for reference purposes in settlement) and a standard timing of such

settlement.

The standardized items in a futures contract are:

 Quantity of the underlying

 Quality of the underlying

17
 The date and the month of delivery

 The units of price quotation and minimum price change

 Location of settlement

 Futures contracts in physical commodities such as wheat, cotton, gold, silver, cattle,

etc. have existed for a long time. Futures in financial assets, currencies, and interest

bearing instruments like treasury bills and bonds and other innovations like futures

contracts in stock indexes are relatively new developments.

 The futures market described as continuous auction markets and exchanges providing

the latest information about supply and demand with respect to individual

commodities, financial instruments and currencies, etc

 Futures exchanges are where buyers and sellers of an expanding list of commodities;

financial instruments and currencies come together to trade. Trading has also been

initiated in options on futures contracts. Thus, option buyers participate in futures

markets with different risk. The option buyer knows the exact risk, which is unknown

to the futures trader.

Future Contract

 Suppose you decide to buy a certain quantity of goods. As the buyer, you enter

into an agreement with the company to receive a specific quantity of goods at a

certain price every month for the next year. This contract made with the

company is similar to a futures contract, in that you have agreed to receive a

product at a future date, with the price and terms for delivery already set. You have

secured your price for now and the next year - even if the price of goods rises

during that time. By entering into this agreement with the company, you have

reduced your risk of higher prices.

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  So, a futures contract is an agreement between two parties: a short position - the

party who agrees to deliver a commodity - and a long position - the party who

agrees to receive a commodity. In every futures contract, everything is specified:

the quantity and quality of the commodity, the specific price per unit, and the date

and method of delivery. The “price” of a futures contract is represented by the

agreed-upon price of the underlying commodity or financial instrument that will be

delivered in the future.

Features of Futures Contracts:

 The principal features of the contract are as fallows.

 Organized Exchanges: Unlike forward contracts which are traded in an over – the -

counter market, futures are traded on organized exchanges with a designated physical

location where trading takes place. This provides a ready, liquid market which futures

can be bought and sold at any time like in a stock market.

 Standardization: In the case of forward contracts the amount of commodities to be

delivered and the maturity date are negotiated between the buyer and seller and can be

tailor made to buyer’s requirement. In a futures contract both these are standardized

by the exchange on which the contract is traded.

 Clearing House: The exchange acts a clearinghouse to all contracts struck on the

trading floor. For instance a contract is struck between capital A and B. upon

entering into the records of the exchange, this is immediately replaced by two

contracts, one between A and the clearing house and another between B and the

clearing house. In other words the exchange interposes itself in every contract and

deal, where it is a buyer to seller, and seller to buyer. The advantage of this is that A

and B do not have to undertake any exercise to investigate each other’s credit

19
 worthiness. It also guarantees financial integrity of the market. The enforce the

delivery for the delivery of contracts held for until maturity and protects itself from

default risk by imposing margin requirements on traders and enforcing this through a

system called marking – to – market.

 Actual delivery is rare:In most of the forward contracts, the commodity is actually

delivered by the seller and is accepted by the buyer. Forward contracts are entered

into for acquiring or disposing of a commodity in the future for a gain at a price

known today. In contrast to this, in most futures markets, actual delivery takes place

in less than one present of the contracts traded. Futures are used as a device to hedge

against price risk and as a way of betting against price movements rather than a means

of physical acquisition of the underlying asset. To achieve, this most of the contracts

entered into are nullified by the matching contract in the opposite direction before

maturity of the first.

 Margins: In order to avoid unhealthy competition among clearing members in

reducing margins to attract customers, a mandatory minimum margins are obtained by

the members from the customers. Such a stop insures the market against serious

liquidity crises arising out of possible defaults by the clearing members. The

members collect margins from their clients has may be stipulated by the stock

exchanges from time to time and pass the margins to the clearing house on the net

basis i.e. at a stipulated percentage of the net purchase and sale position.

FUTURES TERMINOLOGY

Spot price: The price at which an asset trades in the spot market.

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

20
Contract cycle: The period over which a contract trades. The index futures contracts on the

NSE have one- month, two-months and three months expiry cycles which expire on the last

Thursday of the month. Thus a January expiration contract expires on the last Thursday of

January and a 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.

Expiry date: It is the date specified 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. Also called

as lot size.

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 each contract. In a

normal market, basis will be positive. This reflects that futures prices normally exceed spot

prices.

Cost of carry: The relationship between futures prices and spot prices can be summarized in

terms of what is known as the cost of carry. This measures the storage cost plus the interest

that is paid to finance the asset less the income earned on the asset.

Initial margin: The amount that must be deposited in the margin account at the time a

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

Marking-to-market: In the futures market, at the end of each trading day, the margin

account is adjusted to reflect the investor's gain or loss depending upon the futures closing

price. This is called marking-to-market.

Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure

that the balance in the margin account never becomes negative. If the balance in the margin

account falls below the maintenance margin, the investor receives a margin call and is

21
expected to top up the margin account to the initial margin level before trading commences

on the next day.

TYPES OF FUTURES

On the basis of the underlying asset they derive, the futures are divided into two types:

 Stock Futures

 Index Futures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a futures contract, the buyers and the seller. The buyer of the

futures contract is one who is LONG on the futures contract and the seller of the futures

contract is who is SHORT on the futures contract.

The pay-off for the buyers and the seller of the futures of the contracts are as follows:

Fig-2: PAY-OFF FOR A BUYER OF FUTURES

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 P
PROFIT

E 2
F E 1
LOSS

Figure 3.2

CASE 1:- The buyers bought the futures contract at (F); if the futures

PriceGoes to E1 then the buyer gets the profit of (FP).

CASE 2:-The buyers gets loss when the futures price less then (F); if

The Futures price goes to E2 then the buyer the loss of (FL).

Fig: PAY-OFF FOR A SELLER OF FUTURES

P
PROFIT

E 2
E 1 F

LOSS

23
 Figure 3.3

F = FUTURES PRICE

E1, E2 = SATTLEMENT PRICE

CASE 1:-The seller sold the future contract at (F); if the future goes to

E1Then 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 get the loss of (FL).

HOW THE FUTURE MARKET WORKS

The futures market is a centralized marketplace for buyers and sellers from around

the world who meet and enter into futures contracts. Pricing can be based on an open

outcry system, or bids and offers can be matched electronically. The futures contract

will state the price that will be paid and the date of delivery. Almost all futures contracts

end without the actual physical delivery of the commodity.

2.4 OPTIONS

INTRODUCTION TO OPTIONS

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 In this section, we look at the next derivative product to be traded on the NSE,

namely options. Options are fundamentally different from forward and futures contracts. An

option gives the holder of the option the right to do something. The holder does not have to

exercise this right. In contrast, in a forward or futures contract, the two parties have

committed themselves to doing something. Whereas it costs nothing (except margin

requirement) to enter into a futures contracts, the purchase of an option requires as up-front

payment.

DEFINITION

Options are of two types- calls and puts. Calls give the buyer the right but not the

obligation to buy a given quantity of the underlying asset, at a given price on or before a

given future date. Puts give the buyers 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.

PROPERTIES OF OPTION

Options have several unique properties that set them apart from other securities. The

following are the properties of option:

 Limited Loss

 High leverages potential

 Limited Life

PARTIES IN AN OPTION CONTRACT

There are two participants in Option Contract.

25
Buyer/Holder/Owner of an Option:

The Buyer of an Option is the one who by paying the option premium buys the right

but not the obligation to exercise his option on the seller/writer.

Seller/writer of an Option:

The writer of a call/put option is the one who receives the option premium and is

thereby obliged to sell/buy the asset if the buyer exercises on him.

Characteristics of Options:

The following are the main characteristics of options:

1. Options holders do not receive any dividend or interest.

2. Options only capital gains.

3. Options holder can enjoy a tax advantage.

4. Options holders are traded an O.T.C and in all recognized stock exchanges.

5. Options holders can control their rights on the underlying asset.

6. Options create the possibility of gaining a windfall profit.

7. Options holders can enjoy a much wider risk-return combinations.

8. Options can reduce the total portfolio transaction costs.

9. Options enable with the investors to gain a better return with a limited amount of

investment.

TYPES OF OPTIONS

The Options are classified into various types on the basis of various variables. The

following are the various types of options.

1. On the basis of the underlying asset:

26
 On the basis of the underlying asset the option are divided in to two types:

Index options:

These options have the index as the underlying. Some options are European while

others are American. Like index futures contracts, index options contracts are also cash

settled.

Stock options:

Stock Options are options on individual stocks. Options currently trade on over 500

stocks in the United States. A contract gives the holder the right to buy or sell shares at the

specified price.

2. On the basis of the market movements :

On the basis of the market movements the option are divided into two types. They are:

Call Option:

A call Option gives the holder the right but not the obligation to buy an asset by a certain

date for a certain price. It is brought by an investor when he seems that the stock price moves

upwards.

Put Option:

A put option gives the holder the right but not the obligation to sell an asset by a certain date

for a certain price. It is bought by an investor when he seems that the stock price moves

downwards.

27
3.On the basis of exercise of option:

On the basis of the exercise 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 analyse than American options, and properties of an American

option are frequently deduced from those of its European counterpart.

PAY-OFF PROFILE FOR BUYER OF A CALL OPTION

The Pay-off of a buyer options depends on a spot price of an underlying asset. The

following graph shows the pay-off of buyers of a call option.

28
 PROFIT
R

ITM

ATM E 1
OTM

E 2 LOSS P

Figure 3.4

S= Strike price ITM = In the Money

Sp = premium/loss ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

SR = Profit at spot price E1

CASE 1:(Spot Price > Strike price)

As the Spot price (E1) of the underlying asset is more than strike price (S).

29
The buyer gets profit of (SR), if price increases more than E 1 then profit also increase more

than (SR)

CASE 2:(Spot Price < Strike Price)

As a spot price (E2) of the underlying asset is less than strike price (S)

The buyer gets loss of (SP); if price goes down less than E 2 then also his loss is limited to his

premium (SP)

PAY-OFF PROFILE FOR SELLER OF A CALL OPTION

The pay-off of seller of the call option depends on the spot price of the underlying asset. The

following graph shows the pay-off of seller of a call option:

PROFIT

P
ITM ATM
E 2
E 1
S
OTM

LOSS

Figure 3.5

S= Strike price ITM = In the Money

SP = Premium / profit ATM = At The money

30
 E1 = Spot Price 1 OTM = Out of the Money

E2 = Spot Price 2

SR = loss at spot price E2

CASE 1:(Spot price < Strike price)As the spot price (E1) of the underlying is less than strike

price (S). The seller gets the profit of (SP), if the price decreases less than E1 then also profit

of the seller does not exceed (SP).

CASE 2:(Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S) the Seller gets loss

of (SR), if price goes more than E2 then the loss of the seller also increase more than (SR).

PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

31
The Pay-off of the buyer of the option depends on the spot price of the underlying asset. The

following graph shows the pay-off of the buyer of a call option.

PROFIT
R

ITM
S
E 2
E 1 ATM
OTM

P LOSS

Figure 3.6

S = Strike price ITM = In the Money

SP = Premium / loss ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

SR = Profit at spot price E1

CASE 1:(Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S). The buyer gets the

profit (SR), if price decreases less than E1 then profit also increases more than (SR).

CASE 2:(Spot price > Strike price)

32
As the spot price (E2) of the underlying asset is more than strike price (S),

The buyer gets loss of (SP), if price goes more than E 2 than the loss of the buyer is limited to

his premium (SP).

PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

The pay-off of a seller of the option depends on the spot price of the underlying asset. The

following graph shows the pay-off of seller of a put option.

PROFIT
P
ITM
E 1 ATM

E 2
S
OTM

LOSS

Figure 3.7

S = Strike price ITM = In the Money

SP = Premium/profit ATM = At the Money

E1 = Spot price 1 OTM = Out of the Money

E2 = Spot price 2

33
 SR = Loss at spot price E1

CASE 1:(Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S), the seller gets the

loss of (SR), if price decreases less than E1 than the loss also increases more than (SR).

CASE 2:(Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S), the seller gets

profit of (SP), of price goes more than E 2 than the profit of seller is limited to his premium

(SP).

FACTORS AFFECTING THE PRICE OF AN OPTION

The following are the various factors that affect the price of an option they are:

Stock Price:

The pay-off from a call option is an amount by which the stock price exceeds the

strike price. Call options therefore become more valuable as the stock price increases and

vice versa. The pay-off from a put option is the amount; by which the strike price exceeds

the stock price. Put options therefore become more valuable as the stock price increases and

vice versa.

Strike price:

In case of a call, as a strike price increases, the stock price has to make a larger

upward move for the option to go in-the –money. Therefore, for a call, as the strike price

increases option becomes less valuable and as strike price decreases, option become more

valuable

34
 Time to expiration:

Both put and call American options become more valuable as a time to expiration

increases.

Volatility:

The volatility of a stock price is measured of uncertain about future stock price

movements. As volatility increases the chance that the stock will do very well or very poor

increases. The value of both calls and puts therefore increases as volatility increase.

Risk- free interest rate:

The put option prices decline as the risk-free rate increases where as the price of call

always increases as the risk-free interest rate increases.

Dividends:

Dividends have the effect of reducing the stock price on the X- dividend rate. This has

a negative effect on the value of call options and a positive effect on the value of put options.

OPTIONS TERMINOLOGY

Option price/premium:

Option price is the price which the option buyer pays to the option seller. It is also

referred to as the option premium.

Expiration date:

35
 The date specified in the options contract is known as the expiration date, the exercise

date, the strike date or the maturity.

Strike price:

The price specified in the option contract is known as the strike price or the exercise

price.

Intrinsic value and time value for calls:

In the case of a call, intrinsic value is the amount by whichthe underlying futures price

exceeds the strike price:

Futures Price – Strike Price = Intrinsic Value

(must be positive or 0)

Example: June CME Live Cattle futures are trading at 82.50 cents/lb. and the June 80 CME

Live Cattle call option is trading at 3.50 cents/lb. What are the time value and intrinsic value

components of the premium?

Futures Price – Strike Price = Intrinsic Value

82.50 – 80.00 = 2.50

Time value represents the amount option traders are willingto pay over intrinsic value, given

the amount of timeleft to expiration for the futures to advance in the case of

calls, or decline in the case of puts.

Options Premium – Intrinsic Value = Time Value

3.50 – 2.50 = 1.00

Time Value + Intrinsic Value = Premium

1.00 + 2.50 = 3.50

Intrinsic value and time value for puts:

36
In the case of a put, intrinsic value is the amount by whichthe underlying futures price is

below the strike price:

Intrinsic Value = Strike Price – Futures Price (must be positive or 0)

Time Value = Put OptionPremium – Intrinsic Value

Put Option Premium = Put Time Value + Put IntrinsicValue

Example: What are the time value and intrinsic value of aCME Eurodollar 95.00 put if the

underlying futures aretrading at 94.98 and the option premium is 0.03?

Strike Price – Futures Price = Intrinsic Value

95.00 – 94.98 = 0.02

There are 0.02 points of intrinsic value.

Options Premium – Intrinsic Value = Time Value

0.03 – 0.02 = 0.01

2.5 ELIGIBILITY CRITERIA FOR SECURITIES/INDICES TRADED IN

F&O
Eligibility criteria of stocks

1. The stock is chosen from amongst the top 500 stocks in terms of average daily market

capitalization and average daily traded value in 206 the previous six months on a

rolling basis.

2. The stock's median quarter-sigma order size over the last six months should be not

less than Rs. 1 lakh. For this purpose, a stock's quarter sigma order size should mean

the order size (in value terms) required to cause a change in the stock price equal to

one-quarter of a standard deviation.

3. The market wide position limit in the stock should not be less than Rs.50 crore. The

market wide position limit (number of shares) is valued taking the closing prices of

stocks in the underlying cash market on the date of expiry of contract in the month.

The market wide position limit of open position (in terms of the number of underlying

37
 stock) on futures and option contracts on a particular underlying stock should be

lower of:- 20% of the number of shares held by non-promoters in the relevant

underlying security i.e. free-float holding.

4. If an existing security fails to meet the eligibility criteria for three months

consecutively then no fresh month contract will be issued on that security.

5. However, the existing unexpired contracts can be permitted to trade till expiry and

new strikes can also be introduced in the existing contract months.

6. For unlisted companies coming out with initial public offering, if the net public offer

is Rs.500 crores or more, then the exchange may consider introducing stock options

and stock futures on such stocks at the time of its listing in the cash market.

Eligibility criteria of indices

The exchange may consider introducing derivative contracts on an index if thestocks

contributing to 80% weightage of the index are individually eligible forderivative trading.

However, no single ineligible stocks in the index shouldhave a weightage of more than 5% in

the index. The above criteria is appliedevery month, if the index fails to meet the eligibility

criteria for three monthsconsecutively, then no fresh month contract would be issued on that

index,However, the existing unexpired contacts will be permitted to trade till expiryand new

strikes can also be introduced in the existing contracts.

2.6 TRADING MECHANISM OF FUTURES AND OPTIONS

The futures and options trading system of NSE, called NEAT-F&O trading system,

provides a fully automated screen-based trading for Index futures &options and Stock futures

& options on a nationwide basis and an online monitoring and surveillance mechanism. It

supports an anonymous order driven market which provides complete transparency of trading

operations and operates on strict price-time priority. It is similar to that of trading of equities

in the Cash Market (CM) segment. The NEAT-F&O trading system is accessed by two types

38
of users. The Trading Members (TM) have access to functions such as order entry, order

matching, order and trade management. It provides tremendous flexibility to users in terms of

kinds of orders that can be placed on the system. Various conditions like Immediate or

Cancel, Limit/Market price, Stop loss, etc. can be built into an order. The Clearing Members

(CM) use the trader workstation for the purpose of monitoring the trading member(s) for

whom they clear the trades. Additionally, they can enter and set limits to positions, which a

trading member can take.

PRICING FUTURES

Forwards/ futures contract are priced using the cost of carry model. The cost of

carry model calculates the fair value of futures contract based on the current spot price of the

underlying asset. The formula used for pricing futures is given below:

F = SerT

Where :

F = Futures Price

S = Spot price of the underlying asset

R = Cost of financing (using a continuously compounded interest rate)

T = Time till expiration in years

E = 2.71828 (The base of natural logarithms)

Example: Security of ABB Ltd trades in the spot market at Rs. 850. Money can be invested at

11% per annum.

The fair value of a one-month futures contract on ABB is calculated as

follows:

850 * 12 857.80

39
1

1.1 1

F = SerT = e

The presence of arbitrageurs would force the price to equal the fair value of the asset. If the

futures price is less than the fair value, one can profit by holding a long position in the futures

and a short position in the underlying. Alternatively, if the futures price is more than the fair

value, there is a scope to make a profit by holding a short position in the futures and a long

position in the underlying. The increase in demand/ supply of the futures (and spot) contracts

will force the futures price to equal the fair value of the asset.

PRICING OPTIONS

Our brief treatment of options in this module initially looks at pay-off diagrams,

which chart the price of the option with changes in the price of the underlying and then

describes how call and option prices are related using put-call parity. We then briefly describe

the celebrated Black-Scholes formula to price a European option.

Payoffs from an option contract refer to the value of the option contract for the parties (buyer

and seller) on the date the option is exercised. For the sake of simplicity, we do not consider

the initial premium amount while calculating the option payoffs. In case of call options, the

option buyer would exercise the option only if the market price on the date of exercise is

more than the strike price of the option contract. Otherwise, the option is worthless since it

will expire without being exercised. Similarly, a put option buyer would exercise her right if

the market price is lower than the exercise price.

The payoff of a call option buyer at expiration is:

Max [(Market price of the share – Exercise Price), 0]

The following figures shows the payoff diagram for call options buyer and seller (assumed

40
exercise price is 100)

The payoff for a buyer of a put option at expiration is:

Max [(Exercise price –Market price of the share), 0]

The payoff diagram for put options buyer and seller (assumed exercise price is 100)

2.7 STEPS INVOVED IN F & O TRADING PROCESS

1. PLACING THE ORDER

For placing an order, if it’sa buy order press F11 and to place a sell order

press F12.

The following details have to be entered to place a buy / sell order

 Client idevery client have an unique ID which has to be entered before placing an

order.

 Quantityof the order

 OPTIDX / OPTSTKselect the suitable option, whether to trade on index or stock

options.

 MARKET/LIMIT

 INDEXchoose the index under which you want to trade

 Trigger priceits a stop loss order beyond at which loss is not bearable. An order

placed with a broker to buy or sell at a specified price (or better) after a given stop

price has been reached or passed.

 Disc qtythe quantity of the order can be disclosed

 Strike price the price specified in the options contract is known as the strike price

or theexercise price.

 DAY/IOC it’s an order

 CALL/PUT

41
2. ORDER CONFORMATION

It’s a confirmation from the exchange that the orders have been executed. It

gives the information about online order reference number, exchange order number, trade

number, quantity of the order and the client id.

3. DOCUMENTS SUBMITED TO THE CLIENT

 CONTRACT NOTE

 At the end of the day digital contract note is sent to each and every client regarding

the details about the each and every transaction done on that specific day, the

brokerage amount and taxes levied.

 CLIENT LEDGER

 It gives the details of the client’s debts andcredits.

4. CLIENT SUPPORT

5. COMPLIANCE POLICY

 CALLS RECORD: Every order placed through telephone is recorded

 CONFIRMATION OF ORDERS: Every order which is executed will be

intimated to the client

 SIGNATURES of walking clients have to be verified every time

6. RISK MANAGEMENT SYSTEM (RMS): It specifies the initial margin requirements

for each futures and options contract on a daily basis

42
 CHAPTER-3
COMPANY PROFILE

43
INTRODUCTION

IndiaInfoline founded in 1995 by Mr. Nirmal Jain (Chairman and Managing Director) as an
independent business research and information provider. We gradually evolved into a one-
stop financial services solutions provider. Our strong management team comprises competent
and dedicated professionals.

We are a pan-India financial services organization across 1,361 business locations and a
presence in 428 cities. Our global footprint extends across geographies with offices in New
York, Singapore and Dubai. We are listed on the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE).

We offer a wide range of services and products comprising broking (retail and institutional
equities and commodities), wealth management, credit and finance, insurance, asset
management and investment banking.

We are registered with the BSE and the NSE for securities trading, MCX, NCDEX and

44
DGCX for commodities trading, CDSL and NSDL as depository participants. We are
registered as a Category I merchant banker and are a SEBI registered portfolio manager. We
also received the FII license in IIFL Inc. IIFL Securities Pte Ltd received approval from the
Monetary Authority of Singapore to carry out corporate advisory and dealing in securities
operations. Two subsidiaries – India Infoline Investment Services and Moneyline Credit
Limited – are registered with RBI as non-deposit taking non-banking financial services
companies. India infoline Housing Finance Ltd, the housing finance arm, is registered with
the National Housing Bank.

HISTROY OF INDIAINFOLINE

The IndiaInfoline Group was originally incorporated on October 18, 1995 as Probity
Research and Services Private Limited at Mumbai under the Companies Act, 1956 with
Registration No. 11 93797. The IndiaInfoline Group commenced its operations as an
independent provider of information, analysis and research covering Indian businesses,
financial markets and economy, to institutional customers. We became a public limited
company on April 28, 2000 and the name of the Company was changed to Probity Research
and Services Limited. The name of the Company was changed to India Infoline.com Limited
on May 23, 2000 and later to India Infoline Limited on March 23, 2001.

In 1999, The IndiaInfoline Group identified the potential of the Internet to cater to a
mass retail segment and transformed our business model from providing information services
to institutional customers to retail customers. Hence we launched our Internet portal,
www.indiainfoline.com in May 1999 and started providing news and market information,
independent research, interviews with business leaders and other specialized features.
45
 In May 2000, the name of our Company was changed to India Infoline.com Limited
to reflect the transformation of our business. Over a period of time, we have emerged as one
of the leading business and financial information services provider in India.

In the year 2000, The India Infoline Group leveraged it’s position as a provider of
financial information and analysis by diversifying into transactional services, primarily for
online trading in shares and securities and online as well as offline distribution of personal
financial products, like mutual funds and RBI Bonds. These activities were carried on by our
wholly owned subsidiaries.

The India Infoline Group’s broking services was launched under the brand name of
5paisa.com through our subsidiary, India Infoline Securities Private Limited and
www.5paisa.com, the e-broking portal, was launched for online trading in July 2000. It
combined competitive brokerage rates and research, supported by Internet technology
Besides investment advice from an experienced team of research analysts, we also offer real
time stock quotes, market news and price charts with multiple tools for technical analysis.

Acquisition of Agri Marketing Services Limited ("Agri")

In March 2000, The IndiaInfoline Group acquired 100% of the equity shares of Agri
Marketing Services Limited, from their owners in exchange for the issuance of 508,482 of
our equity shares. Agri was a direct selling agent of personal financial products including
mutual funds, fixed deposits, corporate bonds and post-office instruments. At the time of our
acquisition, Agri operated 32 branches in South and West India serving more than 30,000
customers with a staff of, approximately 180 employees. After the acquisition, we changed
the company name to India Infoline.com Distribution Company Limited.

The India Infoline group, comprising the holding company, India Infoline Ltd (NSE:
INDIAINFO, BSE: 532636) and it’s subsidiaries, is one of the leading players in the Indian
financial services space. India Infoline offers the entire gamut of financial services covering
investment products ranging from Equities and derivatives, Commodities, Portfolio
Management Services, Mutual Funds, Life Insurance, Fixed deposits, Loans, Investment
Banking, GoI bonds and other small savings instruments. It owns and manages the website,
www.indiinfoline.com, which is one of India’s leading online destinations for personal
finance, stock markets, economy and business.

46
A forerunner in the field of equity research, IndiaInfoline’s research is acknowledged by none
other than Forbes as ‘Best of the Web’ and ‘…a must read for investors in Asia’.
IndiaInfoline’s research is available not just over the internet but also on international wire
services like Bloomberg (Code: IILL), Thomson First Call and Internet Securities where it is
amongst the most read Indian brokers.

A network of 753 business locations spread over 346 cities across India, facilitates the
smooth acquisition and servicing of a large customer base. All these offices are connected
with the corporate office in Mumbai with cutting edge networking technology.

The group caters to a customer base of over 500,000 over a variety of mediums viz. online,
over the phone and at our branches. The Group is strengthening its institutional broking and
investment banking services and has built a team of experienced research analysts, sales and
trading professionals

IndiaInfoline refers to IndiaInfoline Ltd and its subsidiaries. The consolidated figures will
give a more meaningful picture of the Company to the investors. Reference to the company
or IndiaInfoline is to the business done by the company and its subsidiaries, unless otherwise
specified.

47
VISION

Our vision is to be the most respected company in the financial services space.

MISSION

“To become a full-fledged financial services company known for its quality of advice,
personalized services and cutting edge technology”

COMPANY PHILISOPHY

The IndiaInfoline Group is committed to placing the Investor First, by continuously striving
to increase the efficiency of the operations as well as the systems and processes for use of
corporate resources in such a way so as to maximize the value to the stakeholders. The Group
aims at achieving not only the highest possible standards of legal and regulatory compliances,
but also of effective management.

COMMITTEE

Audit Committee

Terms of reference & Composition, Name of members and Chairman: The Audit committee
comprises Mr Nilesh Vikamsey, Chairman of the Committee, Mr Sat Pal Khattar, Mr Sanjiv

48
Ahuja and Mr Kranti Sinha, three of whom are independent Directors. The top Executivess
and Internal Auditors are invitees to the Meeting. The Terms of reference of this committee
are as under: - To investigate into any matter that may be prescribed under the provisions of
Section 292A of The Companies Act, 1956 - Recommendation and removal of External
Auditor and fixation of the Audit Fees. - Reviewing with the management the financial
statements before submission of the same to the Board. - Overseeing of Company’s financial
reporting process and disclosure of its financial information. - Reviewing the Adequacy of the
Internal Audit Function.

Compensation/ Remuneration Committee

Terms of reference & Composition, Name of members and Chairman: The Compensation /
Remuneration Committee comprises Mr Sanjiv Ahuja, Chairman of the Committee, Mr
Nilesh Vikamsey and Mr Kranti Sinha, all of whom are independent Directors. The Terms of
reference of this committee are as under: - To fix suitable remuneration package of all the
Executive Directors and Non Executive Directors, Senior Employees and officers i.e. Salary,
perquisites, bonuses, stock options, pensions etc. - Determination of the fixed component and
performance linked incentives alongwith the performance criteria to all employees of the
company - Service Contracts, Notice Period, Severance Fees of Directors and employees. -
Stock Option details: whether to be issued at discount as well as the period over which to be
accrued and over which exercisable. - To conduct discussions with the HR department and
form suitable remuneration policies.

Share Transfer and Investor Grievance Committee

Details of the Members, Compliance Officer, No of Complaints received and pending and
pending transfers as on close of the financial year. The committee functions under the
Chairmanship of Mr Kranti Sinha, a Non-executive independent Director. The other Members
of the committee are Mr Sanjiv Ahuja, Independent Director and Mr R Venkataraman,
Executive Director. Ms Komal Parikh, Company Secretary is the Compliance Officer of the
Company.

COMPANY STRUCTURE

49
IndiaInfoline Limited is listed on both the leading stock exchanges in India, viz. the Stock
Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) and is also a member of
both the exchanges. It is engaged in the businesses of Equities broking, Wealth Advisory
Services and Portfolio Management Services. It offers broking services in the Cash and
Derivatives segments of the NSE as well as the Cash segment of the BSE. It is registered with
NSDL as well as CDSL as a depository participant, providing a one-stop solution for clients
trading in the equities market. It has recently launched its Investment banking and
Institutional Broking business.

A SEBI authorized Portfolio Manager; it offers Portfolio Management Services to clients.

These services are offered to clients as different schemes, which are based on differing
investment strategies made to reflect the varied risk-return preferences of clients

PRODUCT & SERVICES

50
Equities

India Infoline provided the prospect of researched investing to its clients, which was
hitherto restricted only to the institutions. Research for the retail investor did not exist
prior to India Infoline. India Infoline leveraged technology to bring the convenience of
trading to the investor’s location of preference (residence or office) through
computerized access. India Infoline made it possible for clients to view transaction
costs and ledger updates in real time.

Over the last five years, India Infoline sharpened its competitive edge through the
following initiatives:

Multi-channel delivery model:

The Company is among the few financial intermediaries in India to offer a complement
of online and offline broking. The Companies network of branches also allows
customers to place orders on phone or visit our branches for trading.

Integrated middle and back office:

The customer can trade on the BSE and NSE, in the cash as well as the derivatives
segment all through the available multiple options of Internet, phone or branch
presence.

Multiple-trading options:
The Company harnessed technology to offer services at among the lowest rates in the
business.

Membership:
The Company widened client reach in trading on the domestic and international
exchanges.

Technology:
The Company provides a prudent mix of proprietary and outsourced technologies,
which facilitate business growth without a corresponding increase in costs.
Content:

51
 The Company has leveraged its research capability to provide regular updates and
investment picks across the short and long-term.

Service:
Clients can access the customer service team through various media like toll-free lines,
emails and Internet- messenger chat for instant query resolution. The Companies
customer service executives proactively contact customers to inform them of key
changes and initiatives taken by the Company. Business World rated the Companies
customer service as Best in their survey of online trading sites carried out in December
2003.

Key features :

Membership on the Bombay Stock Exchange Limited and the National Stock Exchange

Registered with the NSDL as well as CDSL as a depository participant, providing a

one-stop solution for clients trading in the equities market

Broking services in cash and derivative segments, online as well as offline.

Presence across 350 cities and towns with a network of over 850 business locations
Equity client base of over 500,000 clients

Provision of free and world-class research to all clients

Commodities

India Infolines extension into commodities trading reconciles its strategic intent to
emerge as a one stop solutions financial intermediary. Its experience in securities
broking has empowered it with requisite skills and technologies. Increased offering:
The Companies commodities business provides a contra-cyclical alternative to equities
broking. The Company was among the first to offer the facility of commodities trading
in Indias young commodities market (the MCX commenced operations only in 2003).
Average monthly turnover on the commodity exchanges increased from Rs 0.34 bn to
Rs 20.02 bn. The commodities market has several products with different and non-
correlated cycles. On the whole, the business is fairly insulated against cyclical

52
gyrations in the business.

IndiaInfoline distinguished its business through the interplay of knowledge and

technology:

Complete solution:
The Company provides a complete - advice to execution solution facilitated by
information and advice on likely commodity trends in the Indian and international
environment.

Technology:
The Company has extended the trading terminal to the investors home/workplace
reinforced with real-time commodity information and ledger position.
Rates :
The Company harnessed technology to offer services at among the lowest rates in the
business. Membership: The Company widened client reach in trading on the domestic
and international exchanges.

Key Features :

Enjoys memberships with the MCX and NCDEX, two leading Indian commodities
exchanges

Recently acquired membership of the DGCX

Multi-channel delivery model, making it among the select few to offer online as well as
offline trading facilities

Extended commodity trading to retail investors, among the few Indian financial
intermediaries to do so

Online business at 80% of revenues dominates commodities trading revenues

Provides regular commodity updates pertaining to the Indian and international

53
environment

54
 CHAPTER-4
DATA ANALYSIS
&
INTERPRETATION

4.1 ANALYSIS OF FUTURES

55
RETURN OF INDEX OPTIONS FOR THE MONTH OF JULY-2017

Index options
DATE Turnover Return
2-Jul-17 3646.53 0.73
3-Jul-17 2751.83 -24.54
4-Jul-17 2929.4 6.45
5-Jul-17 3568.64 21.82
6-Jul-17 2865.42 -19.71
9-Jul-17 3201 11.71
10-Jul-17 3591.12 12.19
11-Jul-17 2433.77 -32.23
12-Jul-17 3774.97 55.11
13-Jul-17 6311.16 67.18
17-Jul-17 2561.99 -59.41
17-Jul-17 4186.71 63.42
18-Jul-17 4581.82 9.44
19-Jul-17 4577.02 -0.10
20-Jul-17 5315.8 17.12
23-Jul-17 3650.38 -31.32
24-Jul-17 3826.73 4.83
25-Jul-17 6156.73 60.63
26-Jul-17 7610.78 23.82
27-Jul-17 7545.39 -0.86
30-Jul-17 4841.67 -35.83
31-Jul-17 4643.34 -4.10

SUMMARY OF STATISTICS
Mean 6.61
Minimum -59.41
Maximum 67.18
Sd 33.71631
Range 126.59

GRAPHICAL REPRESENTATION

56
Interpretation: The above graphical table represents the Mean, Standard deviation for the
month of jul-17. Here the risk is more and mean is 6.61.The returns can fluctuate in between
-59.41 and 67.18

RETURN OF INDEX OPTIONS FOR THE MONTH OF AUGUST-2017

57
 Index options
DATE Turnover Return
1-Aug-17 7591.02 63.48
2-Aug-17 5047.69 -33.50
3-Aug-17 3819.82 -24.33
6-Aug-17 4581.5 19.94
7-Aug-17 3315.89 -27.65
8-Aug-17 5119.45 54.44
9-Aug-17 7688.03 50.17
10-Aug-17 6802.47 -11.52
13-Aug-17 3912.17 -42.49
15-Aug-17 3219.88 -17.70
17-Aug-17 8160.02 163.12
17-Aug-17 9321.9 15.38
20-Aug-17 5849.88 -37.25
21-Aug-17 6691.88 15.39
22-Aug-17 7718.5 16.34
23-Aug-17 8477.99 9.84
24-Aug-17 6498.43 -23.35
27-Aug-17 8069.84 24.18
28-Aug-17 5623.72 -30.31
29-Aug-17 8046.44 43.08
30-Aug-17 9186.76 15.17
31-Aug-17 6228.51 -32.20

SUMMARY OF STATISTICS
Mean 8.92
Minimum -42.49
Maximum 163.12
Sd 45.56925
Range 195.60
GRAPHICAL REPRESENTATION

Interpretation:The above graphical table represents the Mean, Standard deviation for the
month of Aug-17.Here the risk is more and mean is 8.92.The returns can fluctuate in between
-42.49 and 163.12.

RETURN OF INDEX OPTIONS FOR THE MONTH OF SEPTEMBER-2017

58
 Index options
DATE Turnover Return
3-Sep-17 3236.83 -48.03
4-Sep-17 3218.25 -0.57
5-Sep-17 4170.93 26.50
6-Sep-17 4750.1 17.68
7-Sep-17 4601.21 -3.13
10-Sep-17 3899.64 -16.25
11-Sep-17 4472.68 15.69
12-Sep-17 3400.29 -23.98
13-Sep-17 3617.2 6.09
15-Sep-17 5337.69 47.97
17-Sep-17 4432.73 -17.95
18-Sep-17 5670.72 27.93
19-Sep-17 11027.96 94.47
20-Sep-17 5512.76 -50.01
21-Sep-17 8646.74 56.85
24-Sep-17 7761.12 -10.24
25-Sep-17 6229.09 -19.74
26-Sep-17 5399.98 -13.31
27-Sep-17 8475.4 56.95
28-Sep-17 4213.48 -50.29

SUMMARY OF STATISTICS
Mean 4.83
Minimum -50.29
Maximum 94.47
Sd 38.63582
Range 154.76
GRAPHICAL REPRESENTATION

Interpretation:
The above graphical table represents the Mean, Standard deviation for the month of Sep-
17.Here the risk is more and mean is 4.83.The returns can fluctuate in between -50.29 and
94.47

59
RETURN OF INDEX OPTIONS FOR THE MONTH OF OCTOBER-2017
Index options
DATE Turnover Return
1-Oct-17 4642.8 10.19
3-Oct-17 10264.22 121.08
4-Oct-17 5667.4 -44.78
5-Oct-17 5858.49 3.37
8-Oct-17 6531.99 11.50
9-Oct-17 9463.8 44.88
10-Oct-17 8459.8 -10.61
11-Oct-17 7113.16 -16.92
12-Oct-17 6737.26 -5.28
16-Oct-17 8230.08 22.17
17-Oct-17 7178.06 -12.90
17-Oct-17 10956.37 52.85
18-Oct-17 11804.46 7.74
19-Oct-17 11701.76 -1.72
22-Oct-17 8577.39 -26.17
23-Oct-17 11008.33 28.34
24-Oct-17 10317.9 -6.28
25-Oct-17 10209.18 -1.04
26-Oct-17 4917.17 -51.93
29-Oct-17 5504.37 12.17
30-Oct-17 5177.53 -6.12
31-Oct-17 3801.98 -26.43

SUMMARY OF STATISTICS
Mean 4.78
Minimum -51.93
Maximum 121.08
Sd 36.15536
Range 173.01

GRAPHICAL REPRESENTATION

Interpretation: The above graphical table represents the Mean, Standard deviation for the
month of Oct-17.Here the risk is more and mean is 4.78.The returns can fluctuate in between
-51.98 and 121.08.

60
RETURN OF INDEX OPTIONS FOR THE MONTH OF NOVEMBER-2017
Index options
DATE Turnover Return
1-Nov-17 5015.58 31.89
2-Nov-17 4387.64 -12.50
5-Nov-17 4065.81 -7.33
6-Nov-17 4283.56 5.36
7-Nov-17 4589.12 7.13
8-Nov-17 4363.11 -4.92
9-Nov-17 1117.04 -74.42
12-Nov-17 5917.18 429.30
13-Nov-17 4660.79 -21.10
15-Nov-17 6179.87 32.59
16-Nov-17 4100.62 -33.65
17-Nov-17 3710.58 -9.51
19-Nov-17 3828.93 3.19
20-Nov-17 6000.43 56.71
21-Nov-17 8969.2 49.48
22-Nov-17 8310.57 -7.34
23-Nov-17 6120.19 -26.36
26-Nov-17 6208.93 1.45
27-Nov-17 4216.88 -32.10
28-Nov-17 6524.75 54.77
29-Nov-17 9269.97 42.17
30-Nov-17 5123.83 -44.73

SUMMARY OF STATISTICS
Mean 20.00
Minimum -74.42
Maximum 429.30
Sd 97.4247
Range 503.72

Interpretation: The above graphical table represents the Mean, Standard deviation for the
month of Nov-17.Here the risk is more and mean is 20.00.The returns can fluctuate in
between -74.42 and 429.30.

61
RETURN OF INDEX OPTIONS FOR THE MONTH OF DECEMBER-2017
Index options
DATE Turnover Return
3-Dec-17 2851.49 -44.35
4-Dec-17 3042.26 6.69
5-Dec-17 3718.43 22.23
6-Dec-17 4786.63 28.73
7-Dec-17 4297.16 -10.23
10-Dec-17 3089.71 -28.10
11-Dec-17 6170.62 96.48
12-Dec-17 6231.6 2.65
13-Dec-17 5917.43 -5.20
15-Dec-17 3893.43 -34.09
17-Dec-17 8700.98 123.48
18-Dec-17 8139.11 -6.46
19-Dec-17 6897.97 -16.25
20-Dec-17 4924.16 -28.61
24-Dec-17 7859.59 59.61
26-Dec-17 7587.66 -3.46
27-Dec-17 8416.1 10.91
28-Dec-17 4306.57 -48.82
31-Dec-17 2445.53 -43.21

SUMMARY OF STATISTICS
Mean 4.37
Minimum -48.82
Maximum 123.48
Sd 46.33377
Range 172.30

GRAPHICAL REPRESENTATION

Interpretation:
The above graphical table represents the Mean, Standard deviation for the month of Dec-
17.Here the risk is more and mean is 4.37.The returns can fluctuate in between -48.82 and
123.48.

62
RETURN OF STOCK OPTIONS FOR THE MONTH OF JULY-2017
Stock options
DATE Turnover Return
2-Jul-17 1174.77 3.92
3-Jul-17 1179.78 0.43
4-Jul-17 1112.67 -5.69
5-Jul-17 1322.12 18.82
6-Jul-17 1327.58 0.41
9-Jul-17 950.51 -28.40
10-Jul-17 1206.84 26.97
11-Jul-17 1698.34 32.44
12-Jul-17 1800.01 12.62
13-Jul-17 2176.78 20.93
17-Jul-17 1753.27 -19.46
17-Jul-17 2026.42 16.58
18-Jul-17 1789.96 -17.60
19-Jul-17 1952.49 16.53
20-Jul-17 1854.3 -5.03
23-Jul-17 1381.52 -25.50
24-Jul-17 1749.02 26.60
25-Jul-17 1898.72 8.56
26-Jul-17 2060.61 8.53
27-Jul-17 1749.64 -19.94
30-Jul-17 1533.44 -13.11
31-Jul-17 1283.49 -10.46

SUMMARY OF STATISTICS
mean 2.15
minimum -28.40
maximum 32.44
sd 18.03591
range 60.84
GRAPHICAL REPRESENTATION

Interpretation: The above graphical table represents the Mean, Standard deviation for the
month of Jul-17.Here the risk is less and mean is 2.15.The returns can fluctuate in between
-28.40 and 32.44.

63
RETURN OF STOCK OPTIONS FOR THE MONTH OF AUGUST-2017
Stock options
DATE Turnover Return
1-Aug-17 1565.83 15.21
2-Aug-17 1049.66 -28.39
3-Aug-17 1174.58 2.37
6-Aug-17 1376.6 28.11
7-Aug-17 1379.16 0.19
8-Aug-17 1857.83 34.71
9-Aug-17 1942.65 4.57
10-Aug-17 1781.6 -13.44
13-Aug-17 1091.42 -35.10
15-Aug-17 1139.88 4.44
17-Aug-17 1730.29 43.02
17-Aug-17 1599.15 -8.04
20-Aug-17 1152.96 -23.76
21-Aug-17 1574.56 29.01
22-Aug-17 1195.86 -18.90
23-Aug-17 1520.82 18.81
24-Aug-17 1053.8 -25.83
27-Aug-17 1559.28 38.48
28-Aug-17 1642.06 5.67
29-Aug-17 2135.59 38.49
30-Aug-17 2175.31 1.86
31-Aug-17 1709.49 -26.01

SUMMARY OF STATISTICS
Mean 3.84
Minimum -35.10
Maximum 43.02
Sd 24.40851
Range 78.12
GRAPHICAL REPRESENTATION

Interpretation:The above graphical table represents the Mean, Standard deviation for the
month of Aug-17.Here the risk is more and mean is 3.84.The returns can fluctuate in between
-35.10 and 43.02.

64
RETURN OF STOCK OPTIONS FOR THE MONTH OF SEPTENBER-2017
Stock options
DATE Turnover Return
3-Sep-17 1651.7 -3.59
4-Sep-17 1573.34 -5.05
5-Sep-17 1365.28 -7.33
6-Sep-17 1285.05 -5.88
7-Sep-17 1192.46 -7.21
10-Sep-17 1361.35 15.17
11-Sep-17 1753.91 21.49
12-Sep-17 1717.29 3.23
13-Sep-17 1622.95 -10.80
15-Sep-17 1865.74 22.51
17-Sep-17 1117.18 -40.12
18-Sep-17 1638.28 37.69
19-Sep-17 2668 73.44
20-Sep-17 2317.51 -13.15
21-Sep-17 3185.27 37.44
24-Sep-17 2801.93 -12.03
25-Sep-17 2474.34 -11.69
26-Sep-17 2161.82 -13.03
27-Sep-17 2319.26 7.78
28-Sep-17 1932.51 -17.68

SUMMARY OF STATISTICS
Mean 3.56
Minimum -40.12
Maximum 73.44
Sd 25.15167
Range 113.56
GRAPHICAL REPRESENTATION

Interpretation:
The above graphical table represents the Mean, Standard deviation for the month of Sep-
17.Here the risk is more and mean is 3.56.The returns can fluctuate in between -40.12 and
73.44.

65
RETURN OF STOCK OPTIONS FOR THE MONTH OF OCTOBER-2017

DATE Stock options Turnover Return

1-Oct-17 2105.39 8.95
3-Oct-17 2447.76 17.26
4-Oct-17 1910.9 -21.93
5-Oct-17 1934.11 1.21
8-Oct-17 1977.63 2.25
9-Oct-17 2717.58 36.91
10-Oct-17 2903.55 7.24
11-Oct-17 2486.57 -15.36
12-Oct-17 2910.32 17.04
16-Oct-17 2139.84 -26.47
17-Oct-17 2726.69 27.42
17-Oct-17 2717.71 -0.70
18-Oct-17 3746 38.35
19-Oct-17 2369.35 -36.75
22-Oct-17 1695.55 -32.66
23-Oct-17 2422.58 51.83
24-Oct-17 2850.13 17.65
25-Oct-17 3211.2 12.67
26-Oct-17 2000.02 -37.72
29-Oct-17 2164.31 7.71
30-Oct-17 2746.77 27.50
31-Oct-17 2274.03 -17.21

SUMMARY OF STATISTICS
mean 3.87
minimum -37.72
maximum 51.83
sd 25.30562
range 89.55
GRAPHICAL REPRESENTATION

Interpretation: The
above graphical table
represents the Mean,
Standard deviation for
the month of Oct-
17.Here the risk is more
and mean is 3.87.The
returns can fluctuate in
between -37.72 and
51.83.

66
RETURN OF STOCK OPTIONS FOR THE MONTH OF NOVEMBER-2017
Stock options
DATE Turnover Return
1-Nov-17 3096.21 36.17
2-Nov-17 2402.92 -22.39
5-Nov-17 2816.3 17.17
6-Nov-17 3226.88 15.62
7-Nov-17 2013.66 -37.60
8-Nov-17 1802.13 -10.50
9-Nov-17 384.62 -78.66
12-Nov-17 1856.19 382.60
13-Nov-17 2178.01 17.80
15-Nov-17 2593.3 19.62
16-Nov-17 2502 -3.52
17-Nov-17 2084.05 -17.70
19-Nov-17 1799.05 -13.68
20-Nov-17 2154.72 19.21
21-Nov-17 2060.01 -3.95
22-Nov-17 2017.24 -2.08
23-Nov-17 1751.77 -13.17
26-Nov-17 1958.7 11.81
27-Nov-17 1528.41 -27.17
28-Nov-17 1819.82 27.40
29-Nov-17 2005.81 10.22
30-Nov-17 1745.42 -12.98

SUMMARY OF STATISTICS
Mean 15.24
Minimum -78.66
Maximum 382.60
Sd 86.06624
Range 61.95
GRAPHICAL REPRESENTATION

Interpretation: The above graphical table represents the Mean, Standard deviation for the
month of Nov-17.Here the risk is more and mean is 15.24.The returns can fluctuate in
between -78.66 and 382.60.

67
RETURN OF STOCK OPTIONS FOR THE MONTH OF DECEMBER-2017
Stock options
DATE Turnover Return
3-Dec-17 1853.15 6.17
4-Dec-17 1759.52 -10.45
5-Dec-17 1829.2 10.22
6-Dec-17 2088.66 15.18
7-Dec-17 1742.5 -17.57
10-Dec-17 1573.21 -16.45
11-Dec-17 1791.67 15.83
12-Dec-17 1822.62 7.74
13-Dec-17 1893.15 3.87
15-Dec-17 1766.36 -11.98
17-Dec-17 2123.75 27.45
18-Dec-17 1733.09 -23.10
19-Dec-17 1756.2 1.42
20-Dec-17 1527.19 -13.83
24-Dec-17 1749.81 22.61
26-Dec-17 2322.84 32.75
27-Dec-17 2117.82 -8.83
28-Dec-17 1528.66 -32.54
31-Dec-17 1631.39 7.19

SUMMARY OF STATISTICS
Mean 0.82
Minimum -32.54
Maximum 32.75
Sd 17.71782
Range 65.29

GRAPHICAL REPRESENTATION

Interpretation:
The above graphical table represents the Mean, Standard deviation for the month of Dec-
17.Here the risk is less and mean is 0.82.The returns can fluctuate in between -32.54 and
32.75.

68
CORRELATION OF RETURNS BETWEEN INDEX AND STOCK
OPTIONS FOR THE MONTH OF JUL-17
index(x) stock(y) Correlation
0.73 3.92
-24.54 0.43
6.45 -5.69
21.82 18.82
-19.71 0.41
11.71 -28.40
12.19 26.97
-32.23 32.44
55.11 12.62
67.18 20.93
-59.41 -19.46
63.42 16.58
9.44 -17.60
-0.10 16.53
17.12 -5.03
-31.32 -25.50
4.83 26.60
60.63 8.56
23.82 8.53
-0.86 -19.94
-35.83 -13.11
-4.10 -10.46 0.405788

Interpretation: The above graph and table represents the correlation of returns between
index and stock options for the month of jul-17.Here in the month of jul-17 there exists
moderate positive relationship, So all the data points tilts upward towards right

CORRELATION OF RETURNS BETWEEN INDEX AND STOCK

OPTIONS FOR THE MONTH OF AUG-17
index(x) stock(y) correlation
63.48 15.21

69
 -33.50 -28.39
-24.33 2.37
19.94 28.11
-27.65 0.19
54.44 34.71
50.17 4.57
-11.52 -13.44
-42.49 -35.10
-17.70 4.44
163.12 43.02
15.38 -8.04
-37.25 -23.76
15.39 29.01
16.34 -18.90
9.84 18.81
-23.35 -25.83
24.18 38.48
-30.31 5.67
43.08 38.49
15.17 1.86
-32.20 -26.01 0.720804

Interpretation:

The above graph and table represents the correlation of returns between index and stock
options for the month of aug-17.Here in the month of aug-17 there exists strong positive
relationship, So all the data points tilts upward towards right.

CORRELATION OF RETURNS BETWEEN INDEX AND STOCK

OPTIONS FOR THE MONTH OF SEP-17
index(x) stock(y) Correlation
-48.03 -3.59
-0.57 -5.05
26.50 -7.33
17.68 -5.88
-3.13 -7.21

70
 -16.25 15.17
15.69 21.49
-23.98 3.23
6.09 -10.80
47.97 22.51
-17.95 -40.12
27.93 37.69
94.47 73.44
-50.01 -13.15
56.85 37.44
-10.24 -12.03
-19.74 -11.69
-13.31 -13.03
56.95 7.78
-50.29 -17.68 0.751197

Interpretation:

The above graph and table represents the correlation of returns between index and stock
options for the month of sep-17.Here in the month of sep-17 there exists strong positive
relationship, So all the data points tilts upward towards right.

CORRELATION OF RETURNS BETWEEN INDEX AND STOCK

OPTIONS FOR THE MONTH OF OCT-17
index(x) stock(Y) Correlation
10.19 8.95
121.08 17.26
-44.78 -21.93
3.37 1.21
11.50 2.25
44.88 36.91
-10.61 7.24
-16.92 -15.36
-5.28 17.04
22.17 -26.47

71
 -12.90 27.42
52.85 -0.70
7.74 38.35
-1.72 -36.75
-26.17 -32.66
28.34 51.83
-6.28 17.65
-1.04 12.67
-51.93 -37.72
12.17 7.71
-6.12 27.50
-26.43 -17.21 0.432184

Interpretation:

The above graph and table represents the correlation of returns between index and stock
options for the month of oct-17.Here in the month of oct-17 there exists moderate positive
relationship, So all the data points tilts upward towards right.

CORRELATION OF RETURNS BETWEEN INDEX AND STOCK

OPTIONS FOR THE MONTH OF NOV-17
index(x) stock(Y) correlation
31.89 36.17
-12.50 -22.39
-7.33 17.17
5.36 15.62
7.13 -37.60
-4.92 -10.50
-74.42 -78.66
429.30 382.60
-21.10 17.80
32.59 19.62
-33.65 -3.52
-9.51 -17.70
3.19 -13.68
56.71 19.21

72
 49.48 -3.95
-7.34 -2.08
-26.36 -13.17
1.45 11.81
-32.10 -27.17
54.77 27.40
42.17 10.22
-44.73 -12.98 0.96647

Interpretation:
The above graph and table represents the correlation of returns between index and stock
options for the month of nov-17.Here in the month of nov-17 there exists strong positive
relationship, So all the data points tilts upward towards right.

CORRELATION OF RETURNS BETWEEN INDEX AND STOCK

OPTIONS FOR THE MONTH OF DEC-17
index(x) stock(Y) Correlation
-44.35 6.17
6.69 -10.45
22.23 10.22
28.73 15.18
-10.23 -17.57
-28.10 -16.45
96.48 15.83
2.65 7.74
-5.20 3.87
-34.09 -11.98
123.48 27.45
-6.46 -23.10
-16.25 1.42
-28.61 -13.83
59.61 22.61
-3.46 32.75
10.91 -8.83
-48.82 -32.54

73
 -43.21 7.19 0.609032

Interpretation:

The above graph and table represents the correlation of returns between index and stock
options for the month of dec-17.Here in the month of dec-17 there exists moderate positive
relationship, So all the data points tilts upward towards right.

CHAPTER-5
SUMMARY
74
 &
COMCLUSION

5.1RESULTS AND DISCUSSIONS

The following results are made on the basis of data analysis from the previous Chapter.

 The study reveals the effectiveness of risk reduction using hedging strategies. It has

found out that risk cannot be avoided. But can only be minimized.

 Through the study. it has found out that, the hedging provides a safe position on an

underlying security. The loss gets shifted to a counter party. Thus the hedging covers the

loss and risk. Sometimes, the market performs against the expectation. This will trigger

losses. so the hedger should be a strategic and positive thinker.

 The anticipation of the hedger regarding the trend of the movement in the prices of the

underlying security plays a key role in the result of the strategy applied.

 It has been found that, all the strategies applied on historical data of the period of the

study were able to reduce the loss that rose from price risk substantially.

 If the trader is not sure about the direction of the movement of the profits of the current

position, he can counter position in the future contract and reduces the level of risks.

75
  The trader can effectively use the strategy for return enhancement provided he has the

correct market anticipation.

 In general, the anticipation of the strategies purely for return enhancement is a risky

affair, because, if the anticipation about the performance of the market and the

underlying goes wrong, the position taker would end up in higher losses.

5.2 SUGGESTIONS

 If an investor wants to hedge with portfolios, it must consist of scrips from different

industries, since they are convenient and represent true nature of the securities market as a

whole.

 The hedging tool to reduce the losses that may arise from the market risk. Its primary

objective is loss minimization, not profit maximization .The profit from futures or shares

will be offset from the losses from futures or shares, as the case may be. as a result, a

 Hedger will earn a lower return compared to that of an unhedger. But the unhedger faces

a high risk than a hedger.

 The hedger will have to be a strategic thinker and also one who think positively. He

should be able to comprehend market trends and fluctuations. Otherwise, the strategies

adopted by him earn him earn losses.

A lot more awareness needed about the stock market and investment pattern, both in spot and

future market. The working of BSE Training Institute and NSE Institutes are apprehensible in

this regard.

76
5.3 CONCLUSION

 Derivative trading provides lot of opportunities in the market but the investor should

have a deep insight of derivatives and use of different product combinations.

 An investor should book profit than anticipating more profits because unlike equity

markets small price movement in equity may show some adverse impact on the

premium amount under Futures and options.

 Short positions should be handled carefully because of unlimited loss liability with

limited profits.

 Investor should try to hedge his/her positions to minimize losses rather anticipating

huge profits.

 Avoid taking positions in contact where liquidity is low.

 Avoid taking contracts belonging to underlying equity whose liquidity is low and with

less volume, which will lead to unusual stock movement.

 Investor should follow the principle of strict stock losses to cut down losses.

 Investor should make a simultaneous use of call options and put options, in case the

77
 volatility in share prices is unexpected.

BIBLIOGRAPHY

BOOKS:

Indian financial system

-M.Y.Khan

Financial Markets and Services

– GORDAN and NATRAJAN

Derivatives Dealers Module Work Book

– NCFM

NEWSPAPERS:

Business Line

Economic Times

The Hindu

78
Websites:

www.nseindia.com

www.bseindia.com

www.sebi.gov.in

www.derivativesindia.com

79