PATNA UNIVERSITY

INTRODUCTION

Financial derivative is a financial instrument whose

payoff is based on the price of an underlying asset,
reference rate, or an index. The term ‘derivatives’ is hardly
thirty years old in the academic discipline of finance. Since
derivatives markets have been in existence for a long, and
by many accounts even longer than that for securities, it has
been their growth in the past 30 years that has made them a
significant segment of the financial markets. Derivative is a
generic term referring to forwards, futures, options and
swaps, although there is no unanimity as to whether (simple)
swaps can really be called as derivatives.

The term ‘derivative’ refers to an asset that has no

independent value, but ‘derives’ its value from that of an
underlying asset. A derivative is a financial instrument
whose pay-off is derived from some other asset which is
called an underlying asset. The underlying asset could be
securities, commodities, bullion, currency, live stock of
anything else. A very simple example of a derivative is Petrol
which is derived from oil. The price of petrol depends upon
the price of oil, which in turn depends upon the demand and
supply of oil.
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The growth in derivative has run in parallel with

increasing direct reliance of companies in the capital
markets as the major source of long- term finding. In this
respect, derivatives have a vital role to play in enhancing
shareholder value by ensuring access to the cheapest source
of funds. Furthermore, active use of derivatives instrument
allows the overall business risk profile to be modified, there
by providing to improve earnings quality by offsetting
undesired risks.

Despite the clear benefits that the use of

derivatives can offer, too often the public- and shareholder-
perception of these instruments has been colored by the
intense media coverage of financial disasters where the use
of derivatives has been blamed. The impression is usually
given that these losses from extremely complex and difficult
to understand financial strategies. The reality is quite
different. When the facts behind the well-reported disasters
are analyzed almost invariably it is found that the true
source of losses was basic organizational weakness or a
failure to observe some simple business controls.

The corollary to this observation is that derivatives

can indeed be used safely and successfully provided that a
sensible control and management strategy is established
and executed. Certainly, a degree of quantitative pricing and
risk analysis may be needed, depending on the extent and
sophistication of the derivative strategies employed.
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However, detailed analytic capabilities are not the key issue.

Rather, successfully execution of a derivatives strategy- and
of business risk management in general- relies much and on
developing a solid organization, infrastructure and controls.
Within a sound control framework, the choice of particular
quantitative risk management techniques is very much
secondary concern. The objective of is to examine the
growth of financial derivative in world markets and to
analyze the impact of these financial derivatives on the
monetary policy.

The financial derivatives market’s worth is

regularly reported as more than $20 trillion. That estimate
dwarfs not only bank capital but also the nation’s $7 trillion
annual gross domestic product. Those often-quoted figures
are notional figures are notional amounts. For derivatives,
notional principal is the amount on which interest and other
payments are based. Notional principal typically does not
change hands; it is simply a quantity used to calculate
payments.

While notional principal is the most commonly

used volume measure in derivatives market, it is not an
accurate measure of credit exposure. A useful proxy for the
actual exposure of derivative instrument is replacement-cost
credit exposure. That exposure is the cost of replacing the
contract at current market values should the counterparty
default before the settlement date.
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OBJECTIVES BEHIND THE STUDY

In the present study objectives are as follows:

1. To know volatility in asset prices in financial markets;

2. To find effective communication facilities and its impact

of cost in their costs;

3. To know the higher rate of returns, reduced risk as well

as transaction costs as compared to individual financial
assets;

LIMITATIONS OF THE STUDY

The summer training work may be affected with

some limitations such as the time constraints, unavailability
of data on time, least interest among the authority of the
bank.

HYPOTHESES OF THE STUDY

The present pioneer research work shall have the

following hypotheses:

1. Derivatives market play the key role for a sustainable

growth of Indian Economy;

2. In the field of derivatives still investors don’t have

sufficient information/knowledge which usually
causes a certain challenge;

METHODOLOGY OF THE STUDY

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The present pioneer training work will be based on

the primary data as well as secondary data.

Primary Data :

The primary data shall be gathered from various

customers, prospects and non-users of the basis of
questionnaire, interviews, field survey and from discussions
held with the different members of the branch office of the
stock market.

Secondary Data :

The Secondary data shall be gathered from the

following sources like websites, annual reports of the
organization, books and newspaper.

DATA COLLETION METHOD

The researcher prepared the questionnaire and

also interviewed the dealers. For the interviews only those
languages were used that could be properly understood by
the interviewees, such as Hindi and English. The researcher
used to front of the randomly chosen dealers. This is a
comprehensive master plan of the study undertaken, given a
general statement of the methods used and procedure
followed.

Since the study was both explanatory and

descriptive in nature, a personal interview with each dealer
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with the help of questionnaire was selected to obtain data.

The questionnaire was used in Patna.

Management in any organization needs information

about potential marketing plans and to change in the market
place. Marketing Research includes all the activities that
enable an organization to obtain the information.

DATA SOURCE

To achieve the objectives primary and secondary

sources of data were used. Primary sources included the
consumers, dealers and company’s official through
questionnaire in the project work.

 Through questionnaire

 Through interview

 Through observation

QUESTIONNAIRE :

A set of relevant questions, according to the

requirements for the collection of appropriate data for the
present study. It was questionnaire format first tested on a
small sample then it was modified and development
according to the environment situations and other affecting
factors. Each questionnaire was framed with systematic and
Modern techniques to make these useful I achieving the
objectives up to a maximum possible limit.
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The respondents were approached personally.

Each respondent was requested to answer the question with
genuine sincerity. All the questions were made very clear to
them. The questionnaire were duly filled with the response of
all the respondents in the project work.

INTERVIEW METHOD :

There was a face-to-face interaction with most of

the samples, they were directly questioned and accordingly,
vital information was collected from them for the project
work.

OBSERVATION METHOD :

During the entire project work, the researcher was

in direct contact with the prospective customers, which gave
the researcher great insight into the behavior of the
customer. During the promotional activity, the researcher
used observation method to arrive at crucial conclusion.

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DERIVATIVES – A PROFILE

Derivatives are financial instruments whose

values depend on the value of other underlying financial
instruments. The main types of derivatives are futures,
forwards, options and swaps.

The main use of derivatives is to reduce risk for

one party. The diverse range of potential underlying assets
and pay-off alternatives leads to a wide range of derivatives
contracts available to be traded in the market. Derivatives
can be based on different types of assets such as
commodities, equities (stocks), residential mortgages,
commercial real estate loans, bonds, interest rates,
exchange rates, or indices (such as a stock market index,
consumer price index (CPI) — see inflation derivatives — or
even an index of weather conditions, or other derivatives).
Their performance can determine both the amount and the
timing of the pay-offs. Credit derivatives have become an
increasingly large part of the derivative market.

Hedging

One use of derivatives is as a tool to transfer risk

by taking the opposite position in the underlying asset. For
example, a wheat farmer and a wheat miller could enter into
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a futures contract to exchange cash for wheat in the future.

Both parties have reduced a future risk: for the wheat
farmer, the uncertainty of the price, and for the wheat miller,
the availability of wheat. An important note is that the risk
reduction is only between the parties involved. There is still
the risk that no wheat will be available due to outside
causes, for example, the weather.

Derivatives can be used to acquire risk, rather than to

insure or hedge against risk. Thus, some individuals and
institutions will enter into a derivative contract to speculate
on the value of the underlying asset, betting that the party
seeking insurance will be wrong about the future value of
the underlying asset. Speculators will want to be able to buy
an asset in the future at a low price according to a derivative
contract when the future market price is high, or to sell an
asset in the future at a high price according to a derivative
contract when the future market price is low.

Individuals and institutions may also look for arbitrage

opportunities, as when the current buying price of an asset
falls below the price specified in a futures contract to sell the
asset.

Speculative trading in derivatives gained a great deal of

notoriety in 1995 when Nick Leeson, a trader at Barings
Bank, made poor and unauthorized investments in futures
contracts. Through a combination of poor judgment, lack of
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oversight by the bank's management and by regulators, and

unfortunate events like the Kobe earthquake, Leeson
incurred a $1.3 billion loss that bankrupted the centuries-old
institution

Also, stock index futures and options are known as

derivative products because they derive their existence from
actual market indices, but have no intrinsic characteristics of
their own. In addition to that, one of the reasons some
believe they lead to greater market volatility is that huge
amounts of securities can be controlled by relatively small
amounts of margin or option premiums. One reason
derivatives are popular is that they can be transacted off-
balance-sheet.

The strictest absolute hedging practice is

employed by a merchant banker who buys in the
cash/physical market and sells in the futures market. When
he later sells his commodity in the cash market and covers
his futures contract(s), he has held the asset without market
exposure. This can also be accomplished in conjunction with
puts and calls by managing the hedge ratio (delta) to
neutral.

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
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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. The financial
derivatives came into spotlight in 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
both in terms of variety of instruments available, their
complexity and also turnover. In the class of equity
derivatives, 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.
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Even small investors find these useful due to high correlation

of the popular indices with various portfolios and ease of
use. The lower costs associated with index derivatives
derivative products based on individual securities is another
reason for their growing use.

The following factors have been driving the growth

of financial derivatives:

1. Increased volatility in asset prices in financial markets,

2. Increased integration of national financial markets with

the international markets,

3. Marked improvement in communication facilities and

sharp decline in their costs,

4. Development of more sophisticated risk management

tools, providing economic agents a wider choice of risk
management strategies, and

5. Innovations in the derivatives markets, which optimally

combine the risks and returns over a large number of
financial assets, leading to higher returns, reduced risk
as well as trans-actions costs as compared to individual
financial assets.

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 a contractual
manner. The underlying asset can be equity, forex,
commodity or any other asset. For example, wheat farmers
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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".

In the Indian context the Securities Contracts

(Regulation) Act, 1956 (SC(R) A) defines "equity derivative"
to include –

1. A security derived from a debt instrument, share, loan

whether secured or unsecured, risk instrument or
contract for differences or any other form of security.

2. A contract, which derives its value from the prices, or

index of prices, of underlying securities.

The derivatives are securities under the SC(R) A

and thus the regulatory framework under the SC(R) A
governs the trading of derivatives.

Even in our advanced, technology-based society,

we still live largely at the mercy of the weather. It influences
our daily lives and choices, and has an enormous impact on
corporate revenues and earnings. Until recently, there were
very few financial tools offering companies' protection
against weather-related risks. However, the inception of
the weather derivative - by making weather a trade able
commodity - has changed all this. Here we look at how the
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weather derivative was created, how it differs

from insurance and how it works as a financial instrument.

Weather: Risky Business

It is estimated that nearly 20% of the U.S.

economy is directly affected by the weather, and that the
profitability and revenues of virtually every industry -
agriculture, energy, entertainment, construction, travel and
others - depend to a great extent on the vagaries of
temperature. In a 1998 testimony to Congress, former
commerce secretary William Daley stated, "Weather is not
just an environmental issue; it is a major economic factor. At
least $1 trillion of our economy is weather-sensitive."

The risks businesses face due to weather are

somewhat unique. Weather conditions tend to affect volume
and usage more than they directly affect price. An
exceptionally warm winter, for example, can leave utility and
energy companies with excess supplies of oil or natural gas
(because people need less to heat their homes). Or, an
exceptionally cold summer can leave hotel and airline seats
empty. Although the prices may change somewhat as a
consequence of unusually high or low demand, price
adjustments don't necessarily compensate for lost revenues
resulting from unseasonable temperatures.
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Finally, weather risk is also unique in that it is

highly localized, cannot be controlled and despite great
advances in meteorological science, still cannot be predicted
precisely and consistently.

The past decades has witnessed an explosive

growth is the use of financial derivatives by a wide range of
corporate and financial institutions. The following factors
which have generally been identified as the major driving
force behind growth of financial derivatives are, increased
volatility in asset prices in financial markets, the increased
integration of notional financial markets with the
international markets, the marked improvement in
communication facilities and sharp decline in their costs the
development of more sophisticated risk management
strategies, and the innovations is the derivatives markets,
which optimally combine the risk and return over a large
number of financial assets, leading to higher returns,
reduced risk as well as transaction costs as compared to
individual financial assets. The growth in derivatives has run
in parallel with the increasing with the increasing direct
reliance of companies on the capital markets as the major
source of long term funding. In this respect, derivatives have
a vital role to play in enhancing shareholder value by
ensuring access to the cheapest source of funds.

Financial derivatives have changed the face of

finance by creating new ways to understand measure and
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manage financial risks. Ultimately, derivatives offer

organizations the opportunity to break financial risks into
smaller components and then to buy and sell those
components to best meet specific risk-management
objectives. On the other hand, those who oppose financial
derivatives fear a financial disaster of tremendous
proportions- a disaster that could paralyse the world’s
financial markets and force governments to intervene to
restore stability and prevent massive economic collapse, all
at taxpayers’ expense. Critics believe that derivatives create
risks that are uncontrollable and not well understood. Some
critics liken derivatives gene splicing; potentially useful, but
certainly very dangerous, especially if used by a neophyte or
a madman without proper safeguards.

Derivatives also help to improve market

efficiencies because risks can be isolated and sold to those
who are willing to accept them at the least cost. Using
derivatives breaks risk into pieces that can be managed
independently. Corporations can keep the risks they are
most comfortable managing and transfer those they do no
want to other companies that are more willing to accept
them. From a market oriented perspective, derivatives offer
the free trading of financial risks.

Financial derivatives can bring the world’s

financial system to its knees. It is the biggest, most
potentially lucrative, and destructive market in the world.
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However, the problem is not derivatives if the banking

regulators emphasize more disclosure of derivatives position
in financial statements and ensure that institutions trading
huge derivatives portfolios have adequate capital. In
addition, because derivatives could have implications for the
stability of the financial system, it is important that user
maintain sound risk-management practices. Regulation is an
ineffective substitution for sound risk management at the
individual firm level.

Derivatives also have a dark side. It is important

that derivatives players fully understand the complexity of
financial derivatives contracts and the accompanying risks.
Users should be certain that the proper safeguards are built
into trading practices and that appropriate incentives are in
place so that corporate traders do not take unnecessary
risks.

The use of financial derivatives should be

integrated into an organization’s overall risk-management
strategy and be in harmony with its broader corporate
philosophy and objectives. There is no need to fear financial
derivatives when they are used properly and with the firm’s
corporate goals as guides.

EVOLUTION OF DERIVATIVES

Derivatives are definitely not a modern invention.

They were known and were used from ancient times.
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Bernstein (1992) attributes the first option transaction to the

Greek philosopher Thales from Miletus who was adept at
forecasting the harvest of olives in the ensuing season. He
predicted an outstanding next autumn and so also the
demand for the olive presses. Therefore, he entered into
agreements with olive press owners before autumn for the
exclusive use of their presses. For this he paid the deposits
in advance with an agreement that he will not demand his
money if the harvest is not good.

Most futures markets had evolved from the basis

commodity market and agriculture where the foremost
contracts that made their appearance long before financial
futures. That way these agreements are futures but their
prices are not determined at arm’s length distance nor the
contracts are liquid enough. Still they represent the
forerunners to the relatively organized futures that evolved
subsequently in the 18th century in the US. Though there are
reports are futures trading.

Derivatives have a fairly long history in India too.

The first organize future market came up in 1875 with the
establish of “Bombay Cotton Trade Association Ltd”.
Subsequently, many futures exchanges, predominantly
commodity-based futures sprang up, viz. “Bombay Cotton
Exchanges Ltd” in 1893, “Gujarati Vyapari Mandali” in 1900,
“Calcutta Hessian Exchange Ltd” in 1919 and most of them
did not last till the second war in 1939. After the country
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attained independence, derivative markets came through a

full circle-from prohibition of all sorts of derivative trade to
their recent reintroduction. The chronology if the events is
presented below:

1952Enactment of the Forward Contracts (Regulation)

Act.

1953 Setting up of the Forward Markets Commission.

1956 Enactment of SCRA

1969 Prohibition of all forms of forward trading under

section 16 of SCRA.

1972 Informal carry forward trades between two

settlement cycles began on BSE.

1980Khoso Committee recommends reintroduction of

futures in most commodities.

1983Government amends bye-laws of exchanges of

Bombay, Calcutta and Ahmedabad and
introduces carry forward trading in specified
shares.

1992 Enactment of the SEBI Act.

1993 SEBI prohibits carry forward transaction.

1994 Kabra Committee recommends futures trading in

nine commodities

1995 G.S.Patel Committee recommends Revised Carry

Forward System.
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1996 Revised system restarted on BSE.

1996 SEBI appoints L.C. Gupta committed to develop

regulatory framework for derivatives trading.

1997 Verma Committee recommends Modified Carry

Forward system. Cross currency derivatives with
Indian rupee as one leg were introduce with
some restrictions in April 1997 credit policy.

1998 Verma Committee to recommend Risk

Containment Measures for derivatives trading.

1999 Securities Laws (Amendment) Act, 1999 permits

legal framework for derivatives trading in India.

2000 Trading in index futures began on BSE and NSE.

2001 Trading in options on index and stocks

commenced trading on BSE and NSE.

2002 Trading on single stock futures began on BSE and

NSE.

2003 Introduction of interest rate futures on NSE.

INTRODUCTION OF RUPEE OF OPTIONS

Futures trading in permitted on almost all

commodities but options on commodities still prohibited.

Commencement of NCDEX and MCX commodity exchanges.

The Indian financial market woke up to this new

generation of financial instrument and the Indian derivatives
markets’ odyssey in modern times commenced with the
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Forex derivatives in 1997 has also seen the introduction of

many derivatives on different underlying’s. Currently the
following contracts are allowed for trading in Indian markets:

SIZE OF THE DERIVATIVES MARKET

Globally, derivatives markets are huge and

growing rapidly, and expansion is probably going at a
scorching pace in the developing countries. It is a bit
amazing to note that by some measures, securities markets
are drafed by the derivatives markets. Although the exact
size is unknown due to limited data collection efforts, from
April 1995, the Bank for International Settlements (BIS)
commenced collecting some aggregated data from the
largest over the counter (OTC) through which one can
understand the size of these markets.

WHERE DO THEY TRADE

Broadly we can say that derivatives are traded on

two sorts of markets: over- the-counter (OTC) markets and
exchanges. Customarily in exchanges trading is done
through an open outcry basis in the “pit”; but in the recent
past, most exchanges have some form of market
participants to execute trades.

• Over-the-counter (OTC) derivatives are contracts

that are traded (and privately negotiated) directly
between two parties, without going through an
exchange or other intermediary. Products such as
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swaps, forward rate agreements, and exotic options are

almost always traded in this way. The OTC derivative
market is the largest market for derivatives, and is
unregulated. According to the Bank for International
Settlements, the total outstanding notional amount is
$596 trillion (as of December 2007). Of this total
notional amount, 66% are interest rate contracts, 10%
are credit default swaps (CDS), 9% are foreign
exchange contracts, 2% are commodity contracts, 1%
are equity contracts, and 12% are other. OTC
derivatives are largely subject to counterparty risk, as
the validity of a contract depends on the counterparty's
solvency and ability to honor its obligations.

• Exchange-traded derivatives (ETD) are those

derivatives products that are traded via specialized
derivatives exchanges or other exchanges. A
derivatives exchange acts as an intermediary to all
related transactions, and takes Initial margin from both
sides of the trade to act as a guarantee. The world's
largest derivatives exchanges (by number of
transactions) are the Korea Exchange (which lists KOSPI
Index Futures & Options), Eurex (which lists a wide
range of European products such as interest rate &
index products), and CME Group (made up of the 2007
merger of the Chicago Mercantile Exchange and the
Chicago Board of Trade and the 2008 acquisition of the
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New York Mercantile Exchange). According to BIS, the

combined turnover in the world's derivatives exchanges
totalled USD 344 trillion during Q4 2005. Some types of
derivative instruments also may trade on traditional
exchanges. For instance, hybrid instruments such as
convertible bonds and/or convertible preferred may be
listed on stock or bond exchanges. Also, warrants (or
"rights") may be listed on equity exchanges.
Performance Rights, Cash xPRTs and various other
instruments that essentially consist of a complex set of
options bundled into a simple package are routinely
listed on equity exchanges. Like other derivatives,
these publicly traded derivatives provide investors
access to risk/reward and volatility characteristics that,
while related to an underlying commodity, nonetheless
are distinctive.

In India derivatives are traded on the following exchanges

inter alia:

1. Bombay Stock Exchanges (BSE)

2. National Stock Exchanges (NSE)

3. National Commodity and Derivatives

Exchanges (NCDEX)

4. Multi Commodity Exchanges (MCX)

Equity derivatives are traded on BSE and NSE

while in NSE, interest rate derivatives are also available for
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trading. The latter two are the recently establish commodity

derivatives exchanges with reasonable volumes. Apart from
NCDEX and MCX, there are around twenty- three other
commodity derivatives exchanges, the details of which can
be obtained from the Forward Markets Commission of India.

OTC derivatives are negotiated deals between the

buyer and sellers. There is no definite place where this
market exists. Infact it is predominantly market that works
on the support of communication networks. The loan is not
an example for a derivatives but the nature of deal is over-
the-counter. These are simple example of OTC transactions.

WHO ARE THE TRADERS?

Traders in the derivatives market are classified

into three categories:

1. Arbitrageurs

2. Speculators, and

3. Hedgers.

Ofcourse, this classification is purely based on

motives and the motives cannot be gauged from the trades.
Hence this classification is for academic purpose only.

Arbitrageurs are a set of traders who are on the look out

for risk-free profits, predominantly interested in exploiting
any mispricing between spot market and the derivatives
market. Arbitrage entails zero initial investment and zero
risk. When these two conditions are met in perfect markets,
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returns will be zero. When arbitrage profits are zero, one can
say that the market is in equilibrium and arbitrageur have
successfully exhausted all the profitable opportunities. Since
they assume zero risk, we can say that they are risk neutral
traders.

Speculators are risk seeking traders who believe they have

some specialized knowledge about the market and they can
predict the direction of the market’s movement. With this
hope, they buy/sell the assets only to sell/buy them back
profitable at a later point in time. They know what their risks
and they willingly assume the risks. Hence in a way,
speculators are doing a service to the society by assuming
the risks.

Hedgers are risk-averse traders and are just

opposite to speculators; they want to reduce the risks
normally encounter in their business operations or those
associated with the holding of investments. For reducing
their risks, they do not hesitate to pay a price also. Hedgers
very well know that they are only reducing the risk and
hedging is not meant for making money. In a majority of
occasions, the returns on a hedged position are quite less
than the unhedged position.

ECONOMIC BENEFITS OF DERIVATIVES

Derivative markets serve the society in two

important ways-provide risk management and mitigation
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tools, thereby contributing to the development of what

economists call complete markets. Secondly, derivatives
assist in managerial decision-making by providing some
information on future prices that will help in production
decisions. A financial system sans derivative markets is
incomplete because most financial pursuits are risky in
varying degrees because these activities deal with future
cash flows that are by nature uncertain. For instance, an
investor in the stock market holding a diversified portfolio is
still exposed to market risk, which cannot be diversified
away because the stock market as a whole may go up or
down from time to time.

Derivatives equip the firms in the economy with

more effective tools to manage the exposure of interest
rates, foreign exchanges rates, and commodity prices. When
firms are free from these botherations, they can better focus
on their core activities and improve the quality and reduce
the cost of its product. These will kindle economic growth. To
sum it up, the financial market may be considered as an
edifice standing on four pillars made up of securities markets
(issuing and trading of bonds and equity shares), commercial
banking (advancing loans and accepting deposits, providing
payments and settlement services), insurance and pension
funds (providing for future income) and derivatives markets
(risk management and price discovery). All four pillars are
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required to support the building. By permitting the derivative

markets, the system will be complete and stable.

Another important function that is served by the

derivative markets is price discovery, which refers to the
process of establishment of benchmark market prices that
are used more broadly in the economy. Prices of goods in
the future are very important for production decisions
because these will help the producers and suppliers in
superior allocation of resources.

BENEFITS OF TRADING IN DERIVATIVES

Trading in derivatives offers four advantages:

1) It allows you to speculate.

If you have a view on where the market will move,

you can cash in on this view by using derivatives.

2) It allows you to hedge.

Derivatives are very efficient risk management

instruments. You can use derivatives to cap your potential
losses in the underlying asset.
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3) It allows you to undertake arbitrage

activities.

You can use derivatives to take advantages of the

differences in prices of the derivative product and the
underlying asset.

4) It allows you to buy on margin.

When you purchase a derivative product, you

simply have to pay a fraction of the price of the traded
value. In other words, you don’t have to pay a fraction of the
asset at the time of the transaction.

TYPES OF DERIVATIVES

There are two types of actively traded equity

derivatives instruments:

1. Options

2. Futures

Both options and futures are traded in the stock

exchanges and can be bought and sold through a registered
stockbroker.

The value of both these instrument depend on the

spot price (current market price) of the underlying asset.

Both these derivative instrument can have a

validity of one month, two months or three months. In other
words, if you buy a one month derivative instrument, it will
 PATNA UNIVERSITY

expire after the completion of the specified one month

tenure.

OPTIONS

An ‘options’ is a type of derivative contract that

gives the buyer the right (but not the obligation or the
liability), to buy or sell a specified quantity of the underlying
asset (in this case, stocks or and index) at an agreed price
(strike/exercise price) on or before the specified future
date (expiration date). You can purchase an option for a
price for a price called premium.

In the world of investments, an option is a type of

a contract between two parties when one person grants the
other person the right to buy a specific asset at a specific
price within a specific time period. Alternatively, the contract
may grant the other party the right to sell a specific asset at
a specific price within a specific time period. Generally, stock
options are looked upon as a speculative vehicle as in any
options there is a risk of loss to both contracting parties-a
buyer who uses the option and a seller who makes good the
option terms.

USES OF OPTIONS

There are a number of reasons for being either a

writer or a buyer of options. The writer assures an uncertain
amount of risk for a certain amount of money, whereas the
buyer assures an uncertain potential gain for fixed cost.
 PATNA UNIVERSITY

Such a situation can lead to number of reasons for using

options. However, fundamental to either writing or buying an
option am I promise that option is fairly valued in terms of
the possible outcomes. If the option is not fairly priced then,
of course, an additional source of profit or loss is introduced,
and the writer or buyer of such a contract may be subject to
an additional handicap that will reduce his or her return.

The reasons for writing option contracts are

varied, but three of the most common are to cash additional
income on a securities portfolio, the fact that option buyers
are not as sophisticated as writers, and to hedge a long
position. It is sometimes argued that option writing is a
source of additional income for the portfolio of an investor
with a large portfolio of securities. Such an approach
assumes that the portfolio manager can guess the direction
of specific stock prices closely rough it makes this strategy
worth-while.

EIGHT WINNING OPTIONS TRADING RULES

1. Stay away from deep in the money options

The key advantages to buying options are limited

risk and high leverage. If an option is too deep in the money,
it cuts down on investor’s leverage and adds to his risk. He is
paying more, and has more to lose, so even the risk is
limited it is higher.
 PATNA UNIVERSITY

The biggest advantage to the option seller is time

decay, and with less time the investors has less to gain the
easy way and more risk since the intrinsic component is
larger.

2. Stay away from deep out of the money options

The illusions is that deep out of the money

purchases gives a lot of hope, promote over-commitment,
and offer very little profit opportunity. Yes, they can hit at
times, but this is a game of odds, and odds are certainly
against an investor if he is buying deep out of the moneys.

3. Trade slightly out of the money, at the money, or

slightly in the money options

The reasons are the opposite for which one prefers

to stay away form the deep options. These have a
reasonable chance of providing profitable when buying, one
gains from the maximum possible time decay when selling,
and they are generally the most liquid of the bunch saves on
transaction costs.

4. Know your market

There is a time for all seasons. Options writing can

be extremely profitable in dull, flat markets. If the tone
changes, cover fast, before that catastrophic loss. Option
purchase will start to become more expensive, but then the
rising volatility will work in the buyer’s favour.
 PATNA UNIVERSITY

5. Covered all writings is a good strategy for what

appears to be a bullish environment, and covered
put writings is generally good for what looks like a
bearish one

This is one of the few strategies where uses of

future and options together have the ability to profit on both
legs. The strategy works well in a modestly bullish or bearish
environment as well. It is not risk free, but is less risky than
the outright purchase or sale of futures alone.

6. Use options to hedge a profitable futures position

The trend-following traders are lucky enough to

catch a major move which is showing massive unrealized
profits, the great dilemma is when to cash in. An investor
inevitably will have to give up a large part of the paper gain
if he is to wait for confirmation of a trend changes.

These are wonderful tools, these options. Not a

panacea, but major extent they can offer the best of both
the worlds. Constantly be on the alert for ways to use them
to your benefit.

7. Look for opportunities to backspread

This is a seldom used strategy, but when used

consistently has the potential to make one rich. Recall, this
involves setting a call ot one strike price, and buying a
greater number of calls at a higher strike price.
 PATNA UNIVERSITY

8. In “normal” markets, write straddles and strangles

Selling puts and calls works in most market

environments. It is a good strategy as long as it is managed
properly. Normal is a term which cannot be defined
specifically.

TYPES OF OPTIONS

There are two basic types of options which can be

used separately or combined to derive two additional types
of options. Fundamentally, the holder of an option merely
possesses the right to buy or sell a specific asset. The main
types of stock options are listed below:

PUT OPTION

A put is an option to sell. A put gives its holder the

privilege of selling or putting- to a second party a fixed
amount of some stock at a stated price on or before a
predetermined date.

Buying a Put option

When you buy a Put option, you hold the right the
sell a specified a quantity of the underlying asset at the
strike price on or before the expiration date.

If you are bearish a stock, you could purchase a

put option a predetermine price that is lower than the fall
that you expect in the price of the stock.
 PATNA UNIVERSITY

If the stock price does fall below the strike price

you could exercise your options to sell at the strike price and
simultaneously, buy the stock in the spot market.

If, on the other hand, the price does not fall to the
strike price, you can let the contract lapse, i.e., you do not
sell at the strike price. Your loss in such a case would be the
premium that you have paid.

CALL OPTION

A call is an option to purchase; its holder as the

privilege of purchasing-or-calling from a second party a fixed
amount of some stock at a stated price on or before a
predetermined day. The standard call contract is not by the
individual originating the contract, but his broker who by
market practice must be a member firm of the stock
exchange. This endorsement guarantees that the contract
will be fulfilled and considerably enhances its status as a
negotiable instrument.

Buying a Call option:

When you a Call option, you hold the right to buy a

specified quantity of the underlying asset at the strike price
on or before the expiration date.

If you are bullish on a stock, you could purchase a

Call option at pre-determined price (the strike price) that is
lower than the appreciation you expect. Then, if all goes well
and the stock price does rise beyond the strike price plus the
 PATNA UNIVERSITY

premium you have paid, on or before the expiration of the

contract, you can exercise your option to buy the stock at
the strike price and simultaneously sell it in the spot market
i.e., the cash market, to book your profit.

If, on the other hand, the price of the stock in the

cash market does not rise beyond the strike price plus
premium you can let the contract lapse, i.e., you do not buy
the underlying asset at the strike price. Your loss in such a
case would be currently cash settled and are not settled by
delivery.

Therefore puts and calls are securities in end of

themselves and can be traded as any other security is
traded.

Puts and calls are almost always written on

equities, although occasionally preference shares, bonds and
warrants become the subject of options. Warrants are
themselves a kind of call option, as are stock rights, but they
are distinct from the call that concern since that warrants
are issued by corporations themselves as part of financing
programmes. Puts and calls, on the other hand, can be
created by any individual investor on any stock for which
there is a demand for such options.

Puts and calls are the two basic options forms. In

addition there are kinds of options present in today’s trading
which are combination of puts and calls. These are:
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(A) Spread

A spread consists of both put and call contract.

The option price at which the put or call is executed is
specify in term of a number of rupees away from the market
price of the stock at time the option is granted.

(B) Straddle

Straddle is similar to spread expect that the

execution price of either the put or call option is add the
market price of the stock at the time the straddle is granted.
In essence, both the straddle and the spread accomplish the
same thing.

Two recent additions to the family of options in

current trading are the strip and the strap. A strip is a
straddle with second put added to it having the same
dimensions as the first put. A strap is a straddle with second
call added to it. These combination options appear for the
most part on the supplying side of the put and call market.
Options buyers tend to buy individual puts and calls, but to
obtain these papers dealers frequently purchase straddles,
spreads, strips and straps for writers.

FACTORS DETERMINING OPTION PRICE

The price at which the stock under option may be

put or called is the contract prices. Sometimes, it is referred
to as the striking price. During the life of the contract, the
contract price remain fixed, except that market practice is
 PATNA UNIVERSITY

for the contract price to be reduced by the amount of any

dividend paid or by the value of any stock right which
becomes effective during the life of the contract. In
purchasing an option the amount the buyer pays for the
option privilege is called the premium, or sometimes the
option money. In most option transaction the contract price
is the stock market prevailing at the time the option is
written, and the premium becomes the variable over which
buyer and seller bargain.

The variety of expiration dates and striking prices

offered with option bewilders many investors. How does
anyone select the “best” expiration date and striking price?
The answer depends upon an investor’s goals, forecasts of
the future and factors listed below:

Volatility

Options premium deflect the personal beliefs of

both buyers and sellers. Buyers of options thrive on changes
in stock prices and gladly pay premium for options o volatile
stocks. The more stock prices fluctuate in the future, the
better their chances, for making money. The willingness of
buyers to pay higher premium on options if more volatile
stocks.

Expiration Date

The expiration date of the option also effects the

premium. The odds of a stock making a profitable move
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increase with time. The option buyer resembles a brand

jumper. The longer the run, the better the chances of
making a good jump. Because buyers benefit from the
extended periods of time and seller suffer, buyers or sellers
agree to higher premiums for longer lasting options.

Striking Prices

Striking prices add a further complication to the

analysis of options. The striking prices remains the same
during the entire life of the option contract. The nearer this
striking price is to the market price of the underlying stock,
the greater the buyer’s chances of making money on the
option. In effect the striking price serves as a hurdle placed
in front of an investor sprinting after profits.

Dividends

Dividends also effect option premiums. Generally

speaking, firms paying high dividend seldom increase very
much in price. So prospective call buyers avoid options on
these stocks. Since options writers collect these dividends in
addition to their premium income, they naturally prefer to
right options on high dividend stock. Buyers and sellers
compromise and agree to lower premiums for high dividend
paying stock.

Interest Rates

Interest rates have the opposite impact on

premium. At higher interest rate, options writers sacrifice
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considerable income by holding stocks instead of bond. As a

result they usually demand and get higher premium for
writing options during times of high interest rate.

TABLE

Factors that influence the option price

Effect on an increase of factor on
Factor
Call price Put price
Current price of Increase Decrease
underlying stock
Strike Price Decrease Increase
Short term interest Increase Decrease
rate
Expected price Increase Decrease
volatility
Short-term interest Increase Decrease
rate
Anticipated cash Decrease Increase
dividends

RISK CONTAINMENT MEASURES FOR INDEX OPTIONS

IN INDIA

SEBI outlined the risk management framework for index

options in December 2000, with following salient features:

1. The index contract to be traded on the derivative

exchange/ segments shall have prior approval of SEBI.
 PATNA UNIVERSITY

The contract should comply with the disclosure

requirement, if any, laid down by SEBI.

2. Initially, the exchange shall introduce premium style

index options.

3. Initially, the exchange shall introduce European style

index options, which shall be settled in cash.

4. The index options contract shall have a minimum

contract of size of Rs. 2 lakh at the time of its
introduction in the market.

5. The index option contract shall have maximum maturity

of 12 months ad shall have a minimum of 3 strikes.

6. The initial margin requirement shall be based on worst

case loss of a portfolio of an individual client to cover a
99% VaR over a one day horizon.

7. A portfolio-based margining approach shall be adopted,

which takes and integrated view of the risk involved in
the portfolio of each individual client comprising of his
position in index futures and index options contracts.
The parameter for such a model should include.

ABOUT FUTURES

Futures are derivatives contracts that require you to sell or

buy a specified quantity of the underlying asset on a
specified date (expiration date) at the spot price of the
underlying asset prevailing in the expiration date. Futures
can have a validity of 1 month, 2 months or 3 months, when
 PATNA UNIVERSITY

the contracts do not have a strike price. In other words,

when the contract expires, the holder gains or incurs a loss
depending on the prevailing spot price of the underlying
asset in the cash market on the expiration date.

In this way we can say that future contract is an agreement

to buy or sell an asset at a certain time in the future for a
certain price. Equities, bonds, hybrid securities and
currencies are the commodities of the investment business.
Futures trading are to enter into contracts to buy or sell
financial instruments, dealing in commodities or other
financial instruments, for forward delivery or settlement, on
standardized terms. The major functions performed by future
markets are: they facilitate stockholding; they facilitate; they
facilitate the shifting of risk; they act as a mechanism for
collection and dissemination of information; and they
perform a forward pricing function.

A financial futures contract exists to provide risk

management services to participants. Risk and uncertainty
in the form of price volatility and opportunism are major
factors giving rise to future trading. Futures trading evolved
out of autonomous forward contracting by merchants,
dealers and processors, designed to increase business
efficiency. This evolution from spot, to forward to futures
contracts suggests a progressive adaptation of institution to
more efficient methods of dealing with price risk. Futures
markets develop because they are a more efficient means of
 PATNA UNIVERSITY

transferring those contract rights attached to price. Spot and

forward contracting may become too costly. However, these
three contracting modes are not mutually exclusive ways of
transacting. Indeed, the development of futures markets
improve the efficiency of spot and possibly of forward
contracting. It is perhaps best to view futures markets as
‘side’ market designed to deal with price volatility that is
poorly handled by spot and forward markets. This
transactional superiority of futures market comes mainly
form their transaction – cost reducing attributes.

Futures markets, by forming prices relating to forward

delivery dates, project their prices into the futures. These
prices are used by agents to plan future production to price
forward contracts for the supply of commodities, and to
tender to forward contracts. Agents need not transact on
future exchanges to use futures prices in this way, and the
information contained in such prices is an externality to
them. Agents may also use futures markets in deciding
whether to store a commodity (using the forward premium
as an indicator of whether storage is expected to be
profitable). Thus, futures markets perform a forward pricing
function, and in these ways futures prices facilitate the
allocation of resources between present and future uses.

STOCK INDEX FUTURES

Stock-Index futures offer the investor a medium for

expressing an option on the general course of the market. In
 PATNA UNIVERSITY

addition, these contracts can be used by portfolio managers

in a variety of ways to alter the risk-return distribution of
their stock portfolios. For instance much of a sudden upward
surge in the market could be missed by the institutional
investor due to the time it takes to get money into the stock
market. By purchasing stock-index contracts, the institution
investors can enter the marker immediately and then
gradually unwind the long futures position as they are able
to get more funds invested in the stock. By selling an
appropriate number of stock index futures contracts, the
institutional investors could offset any losses on the stock
portfolio with corresponding gains on the future position.

Trading in futures

Margin money

When you decide to buy a futures contracts, you are not

expected to pay for the total value of the contract up front.
You are only required to deposit a pre-specified percentage
of the value of the contract prevailing on the futures market
with your broker at the time of purchase. This is known as
Margin money.

Mark-to-market margins/ Mark to Market Profit or

Loss

The exchange in turn the broker computes the percentage of

your margin money to the spot price of the future on a daily
basis in order to ensure that the percentage remains
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constant. In other words, if the spot price rises, the broker

will request for additional funds towards the margin in order
to keep the margin percent the same.

Setting a futures contract

When you wish to settle your futures contract, you could

either settle the contract before expiry of the contract or at
expiry of the contract.

Before expiry of the contract: Buy/sell your contract on

the futures exchange through your broker while the futures
have still not reached expiry date.

At expiry of the contract: You could hold on to your

futures contract till its expiry date and you will pay or
receive the difference between your cost price and your
selling price.

FEATURES OF A FUTURES CONTRACT

All futures contracts are traded on the futures (derivatives)

section of the stock exchange. Although these contracts
cannot be liquidated before their expiry date, you can sell
them on the exchange. In other words, a features contract is
bought and sold regularly on the market till its expiry. The
fair price of futures contracts depends upon the spot price
and the cost of carry. Cost of carry is the sum of all costs
that you would have to bear if you purchased the underlying
asset now from the stock market and held on to it until the
time of maturity of the futures contract, less any dividends
 PATNA UNIVERSITY

received in this period. The cost typically includes interest

costs.

RISK CONTAINMENT MEASURES FOR INDEX FUTURES

IN INDIA

The main features of risk containment measures for index

futures approved by SEBI in JULY 1999 are given below:

1. Initial Margin Computation: The initial margin

would be computed based on 99% Value at Risk
(VaR).

2. Margin for calendar spreads: A calendar spread

is a position at one maturity which is hedged by
an offsetting position at a different maturity,
e.g., a short position in six month contract
matched by a long position in nine month
contract.

3. Margin Collection and Enforcement: The marks

to market (MTM) margins need to be collected
before start of the next days trading. If MTM
margins cannot be collected before start of the
next days trading.

4. Liquid Net Worth and Exposure Limit: The liquid

net worth is defined as total liquid assets
deposited with the exchange/clearing
corporation/ house towards initial margin.
 PATNA UNIVERSITY

Futures markets are to provide an opportunity for market

participants to hedge against the risk of adverse price
movements. Futures are obligation to buy or sell specific
commodity on a specific day for a present price. Shares,
bond and currency are the commodities of the investment
business. The market that investor consider more efficient
for their investment objective should be the one where
prices will first be established that reflect the new economic
information. That is, this will be the market where price
discovery takes place. Price information is then transmitted
to the other market. It is in the future market that investor
send a collective message about how any new information
expected to impact the cash market.


 PATNA UNIVERSITY

ORGANISATIONAL A-PROFILE

Reliance money is a leading financial services and brokerage

firm with acknowledged industry leadership in execution and
clearing services on exchange traded derivatives and cash
market products

A key element that place reliance money amongst the

leading brokerage firm and makes it the preferred service
providers for value based financial services are:

A client– driven foundation and strategy committed to client-

specific investment needs and objectives.

Integrated and innovative use of Technology enabling clients

to trade offline, online and strategic tie-ups with latest
technology partners to facilitate trading access and direct
processing across 900 outlets in 270 cities.

“Investment means laying out money today

to receive money in real terms after taking
inflation into account, tomorrow”

That’s because they’re realistic, experienced,

backed by research and study and most
importantly, client-driven.

Empowering the investor

The Reliance money Desk has one key

objective-to empower us completely with Market
 PATNA UNIVERSITY

Knowledge, Analysis and Advisory Services to help

us proper.

Their team provides expert and timely analysis on equity

and commodity to help us maximize our trading decisions.
They offer value perspectives, suggest strategy, focus on
opportunities for investment and growth, and endeavor to
reduce risk potential.

Trading Ideas

• Daily Market Strategies

• Monthly Updates

• Investment Ideas

• Trading Calls

• Commodity Views

Reliance Money Affiliation and Distribution

Network

Proven and accredited leaders in the Financial Services

business, Reliance money provides us the unique
opportunity to trade offline and online while cutting across
all geographic barriers.

 Strategic tie-ups that provide latest

technology for access and processing.

 Trading over 900 locations across 270

cities in India.
 PATNA UNIVERSITY

 24- Hour access to account information

via the Net or Electronic File Transfer (FTP) facilities.

 Membership of all principal Indian stock

and commodity Exchanges.

 National Stock Exchange of India Ltd

(NSEIL).

 Bombay Stock Exchange (BSE).

 Futures and Option Segment of National

Stock Exchange of India Ltd and Bombay Stock Exchange.

 Dubai Gold Commodities Exchange

(DGCX).

 Multi Commodity Exchange (MCX).

 National Commodity and Derivatives

Exchange Ltd (NCDEX).

 OTC Exchange of India Ltd (OTCEIL).

 Depository Participant with NSDL and

CDSL Corporate Agents for Life and Non- life Insurance
(both foreign/private and state owned insurance
companies).One of the largest distributors of leading
Mutual funds in India.

TRACK RECORD OF RELIANCE MONEY

Resent past performance return %( from2005-

2007)
 PATNA UNIVERSITY

Absolute Annualised
Reliance 360.4% 169.82%
Money
Sensex 230.89% 78.90%

Nifty 220.50% 71.71%

Performance Returns%

400
350
300
250
200
Absolute
150 Annualised
100
50
0
Reliance Sensex Nifty
Money

Reliance Money

Reliance Money is one of India’s leading and fastest growing

private sector financial services companies, and ranks
among the top 3 private sector financial services and
banking companies, in terms of net worth.

The company has interests in asset management and mutual

funds, life and general insurance, private equity and
 PATNA UNIVERSITY

proprietary investments, stock broking and other activities in

financial services.

Reliance Communications Limited

The flagship company of the Reliance – ADA Group, Reliance

Communications Limited, is the realisation of our founder’s
dream of bringing about a digital revolution that will provide
every Indian with affordable means of communication and a
ready access to information.

The company began operations in 1999 and has over 20

million subscribers today. It offers a complete range of
integrated telecom services. These include mobile and fixed
line telephony, broadband, national and international long
distance services, data services and a wide range of value
added services and applications aimed at enhancing the
productivity of enterprises and individuals.

Reliance Energy Limited

Reliance Energy Limited, incorporated in 1929, is a fully

integrated utility engaged in the generation, transmission
and distribution of electricity. It ranks among India’s top
listed private companies on all major financial parameters,
including assets, sales, profits and market capitalization.
 PATNA UNIVERSITY

It is India’s foremost private sector utility with aggregate

estimated revenues of Rs 9,500 crore (US$ 2.1 billion) and
total assets of Rs 10,700 crore (US$ 2.4 billion).

Reliance Energy Limited distributes more than 21 billion

units of electricity to over 25 million consumers in Mumbai,
Delhi, Orissa and Goa, across an area that spans 1,24,300
sq. kms. It generates 941 MW of electricity, through its
power stations located in Maharashtra, Andhra Pradesh,
Kerala, Karnataka and Goa.

The company is currently pursuing several gas, coal, wind

and hydro-based power generation projects in Maharashtra,
Uttar Pradesh, Arunachal Pradesh and Uttaranchal with
aggregate capacity of over 12,500 MW. These projects are at
various stages of development.

Reliance Energy Limited is vigorously participating in

emerging opportunities in the areas of trading and
transmission of power. It is also engaged in a portfolio of
services in the power sector in Engineering, Procurement
and Construction (EPC) through a network of regional offices
in India.

For more information click here: www.rel.co.in

Reliance Health
 PATNA UNIVERSITY

In a country where healthcare is fast becoming a booming

industry, Reliance Health is a focused healthcare services
company enabling the provision of solution to Indians, at
affordable prices. The company aims at providing integrated
health services that will compete with the best in the world.
It also plans to venture into diversified fields like Insurance
Administration, Health care Delivery and Integrated Health,
Health Informatics and Information Management and
Consumer Health.

Reliance Health aims at revolutionising healthcare in India by

enabling a healthcare environment that is both affordable
and accessable through partnerships with government and
private businesses.

Reliance Media & Entertainment

As part of the Reliance - ADA Group, Reliance Entertainment

is spearheading the Group’s foray into the media and
entertainment space. Reliance Entertainment’s core focus is
to build significant presence for Reliance in the
Entertainment eco-system: across content and distribution
platforms.

The key content initiative are across Movies, Music, Sports,

Gaming, Internet & mobile portals, leading to direct
opportunities in delivery across the emerging digital
 PATNA UNIVERSITY

distribution platforms: digital cinema, IPTV, DTH and Mobile

TV.

Reliance ADA Group acquired Adlabs Films Limited in 2005,

one of the largest entertainment companies in India, which
has interests in film processing, production, exhibition &
digital cinema.

Reliance Entertainment has made an entry into the FM Radio

business through Adlabs Radio http://www.big927fm.com/
Having won 45 stations in the recent bidding, BIG 92.7 FM is
already India’s largest private FM radio network with 12
radio stations across the country as on 28th February 2007,
with many more to be launched in the coming months.

Shareholder Interest

We value the trust of shareholders, and keep their interests

paramount in every business decision we make, every
choice we exercise

People Care

We possess no greater asset than the quality of our human

capital and no greater priority than the retention, growth and
well-being of our vast pool of human talent.
 PATNA UNIVERSITY

Consumer Focus

We rethink every business process, product and service from

the standpoint of the consumer – so as to exceed
expectations at every touch point

Excellence in Execution

We believe in excellence of execution – in large, complex

projects as much as small everyday tasks. If something is
worth doing, it is worth doing well.

Team Work

The whole is greater than the sum of its parts; in our rapidly-
changing knowledge economy, organizations can prosper
only by mobilizing diverse competencies, skill sets and
expertise; by imbibing the spirit of “thinking together” --
integration is the rule, escalation is an exception
 PATNA UNIVERSITY

Proactive Innovation

We nurture innovation by breaking silos, encouraging cross-

fertilization of ideas & flexibility of roles and functions. We
create an environment of accountability, ownership and
problem-solving –based on participative work ethic and
leading-edge research

Leadership by Empowerment

We believe leadership in the new economy is about

consensus building, about giving up control; about enabling
and empowering people down the line to take decisions in
their areas of operation and competence…

Social Responsibility

We believe that organizations, like individuals, depend on

the support of the community for their survival and
sustenance, and must repay this generosity in the best way
they can

Respect for Competition

We respect competition – because there’s more than one

way of doing things right. We can learn as much from the
success of others as from our own failures
PATNA UNIVERSITY
 PATNA UNIVERSITY

ANALYSIS AND INTERPRETATION OF

DATA

On the basis of the subsequent chapter, the Analytical

interpretation and findings is done. Every research consists
of individual dealer interpretation and individual dealer
perception. The research concept is something, which
involve the use of primary data analysis and secondary data
ratings with a view to give a comprehensive outcome to the
whole environment of the study, in this study of mine, there
and attempt has been made to take care of the level of
awareness, it was important to assess the individual
responses and try to view the same from an angle, which
would clarify the total interpretation of the response. The
following paragraph in this chapter take base on the
assessment, which would justify the answer the research has
obtained from the dealer. The National Stock Exchange of
India Limited (NSE) commenced trading in derivatives with
the launch of index futures on June 12, 2000. The futures
contracts are based on the popular benchmark S&P CNX
Nifty Index. The Exchange introduced trading in Index
Options (also based on Nifty) on June 4, 2001. NSE also
became the first exchange to launch trading in options on
individual securities from July 2, 2001. Futures on individual
securities were introduced on November 9, 2001. Futures
and Options on individual securities are available on 265
 PATNA UNIVERSITY

securities stipulated by SEBI. The Exchange provides trading

in other indices i.e. CNX-IT, BANK NIFTY, CNX NIFTY JUNIOR,
CNX 100 and NIFTY MIDCAP 50 indices. The Exchange is now
introducing mini derivative (futures and options) contracts
on S&P CNX Nifty index w.e.f. January 1, 2008.
This section provides you with an insight into the derivatives
segment of NSE. Real-time quotes and information regarding
derivative products, trading systems & processes, clearing
and settlement, risk management, statistics etc. are
available here

BUSINESS GROWTH IN DERIVATIVES SEGMENT

Derivatives trading commenced in India after SEBI

granted the final approval to commence trading and
settlement in approved derivative contracts on the NSE and
BSE. NSE introduced segment futures contracts on Nifty
index. However, the basket of instruments has widened
considerably. Now trading in futures and options is based on
not only on Nifty index but also on other indices viz., CNX IT
index and Bank index as well as options and futures on
single stocks and also futures on interest rates. NSE has
been making huge strides by moving upwards in the global
ranking.

In 2000-01 Index futures turnovers 2365 Crore, but in

2008-09 turnover 2326668.18 Crore. In 2000-01 index
options turnover is zero, but in 2008-09 index options
turnover is 2066782.57 Crore. Total contracts in 2000-01
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are 90580 but in this time total contracts is 352108305.

Record value of S&P CNX Nifty index is 6357.10 in JAN-08.

Interest
Stock
Index Futures Stock Futures Index Options Rate Total
Options
Futures
Notiona Notion No. Tur
Year No.
No. of Turnov No. of Turnov No. of l al Of nov
of No. Of
contra er (Rs. contr er (Rs. contrac Turnove Turnov con er
contr contracts
cts cr.) acts cr.) ts r (Rs. er (Rs. tra (Rs.
acts
cr.) cr.) cts cr.)
2008-09 117005380 2326668.18 131210727 2371652.29 96869784 2066782.57 7022414 140437.60 0 0 352108305

2007-08 156598579 3820667.27 203587952 7548563.23 55366038 1362110.88 9460631 359136.55 0 0 425013200

2006-07 81487424 2539574 104955401 3830967 25157438 791906 5283310 193795 0 0 216883573

2005-06 58537886 1513755 80905493 2791697 338469 5240776 180253 0 0 15619271

12935116

2004-05 21635449 772147 47043066 1484056 3293558 121943 5045112 168836 0 0 77017185

2003-04 17191668 554446 32368842 1305939 1732414 52816 5583071 217207 10781 202 56886776

2002-03 2126763 43952 10676843 286533 442241 3523062 100131 - - 16768909

9246

2001-02 1025588 21483 1957856 51515 175900 3765 1037529 25163 - - 4196873

2000-01 90580 2365 - - - - - - - - 90580

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CONTRACT TYPES
UNDERLYIN
G Exchange Exchange OTC OTC OTC
-traded -traded swap forward option
futures options

Option on
DJIA Index DJIA Index
future future
Equity Index NASDAQ Option on Equity
swap
Back-to- n/a
back
Index NASDAQ
future Index
future

Interest
Option on rate cap
Eurodollar Eurodollar Intere Forward and
Money future future rate rate floor
market Euribor Option on st
swap agreeme Swaptio
future Euribor nt n
future Basis
swap

Bond Option on Total Repurch

Bonds future Bond return ase
agreeme
Bond
option
future swap nt

Repurch Stock
Single Single- Single- Equity ase option
Stocks stock share swap agreeme Warrant
future option nt Turbo
warrant

Credit Credit
Credit n/a n/a defaul n/a default
t swap option
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Other examples of underlying exchangeable are:

• Property (mortgage) derivatives

• Economic derivatives that pay off according to

economic reports as measured and reported by
national statistical agencies

• Energy derivatives that pay off according to a wide

variety of indexed energy prices. Usually classified as
either physical or financial, where physical means the
contract includes actual delivery of the underlying
energy commodity (oil, gas, power, etc.)

• Commodities

• Freight derivatives

• Inflation derivatives

• Insurance derivatives

• Weather derivatives

• Credit derivatives
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CONCLUSION AND SUGGESTIONS

Today’s financial manager must be able to use all of

the tools available to control a company’s exposure to
financial risk. Derivatives increase the volatility in the
underlying market. From the prior given illustrations and
analyses we have obtained a few important points which can
be expressed in a concise way.

 Derivatives securities have been

very successful innovation in capital markets.

 It can help an organization to meet

their specific risk management.

 It also helps to improve market

efficiencies because risks can be isolated and sold to
those who are willing to accept them at the least
cost.

 Derivatives equip the firms in the

economy with more effective tools to manage the
exposure to interest rates, foreign exchange rates,
and commodity prices.

The main function of derivative markets is price

discovery.

Thus all the above discussions we can say that

derivatives market serve the society in two important ways-
 PATNA UNIVERSITY

provide risk management and mitigation tools, thereby

contributing to the development of what economists call
complete markets. Secondly, derivatives assist in managerial
decision-making by providing some information on future
prices that will help in production decisions.

So, Financial Derivatives have changed the face of

finance by creating new ways to understands, measure and
manage financial risks. Ultimately, derivatives offer
organizations the opportunity to break financial risks into
smaller components and then to buy and sell those
components to best meet specific risk management
objectives.

The most notable development concerning the

secondary segment of the Indian capital market is the
introduction of derivatives trading in June 2000. SEBI
approved derivatives trading based on Futures Contracts at
both BSE and NSE with the rules and regulation of the Stock
Exchanges. The BSE introduced Stock Index Futures for S&P
CNX and Nifty comprising 50 scrips. Stock Index Futures in
India are available with one month, two months and three
months maturities. While derivatives trading based on the
Sensitive Index (Sensex) commenced at the BSE on June 9,
2000 derivatives trading based on S&P NX Nifty commenced
at the NSE on June 12,2000. SIF is the first attempt in the
development of derivatives trading.
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Having done the market survey and the research

analysis of various factors some conclusion can now we
drawn about concerned issue the topic of the research.
These conclusions are scientifically reached upon as in
evident from the analysis itself. So, all the above lines we
can conclude that derivatives can bring the world’s financial
system to its knees. It is the biggest, most potential
lucrative, and destructive market in the world. Not only this,
financial derivatives should be considered for inclusion in
any corporation’s risk-control arsenal. Derivatives allow for
the efficient transfer of financial risks and can help to ensure
that value-enchanging opportunities will not be ignored.
Used properly, derivatives can reduce risks and increase
returns

By the gathered data it is found that the customers of

the Stock Markets were satisfied with the procedure laid
down by the Reliance Money in sanction/disbursement of
Stock exchange. In this particular research, every effort was
taken to ensure that the research remained within the
acceptable Parameter.

SUGGESTIONS

a) More pragmatic approach should be taken.

b) Investors who invest properly should be given some

incentive in the form of enhancement of limit.

c) This will act as model for others to follow.

 PATNA UNIVERSITY

d) This will help to the investors to minimize the risk and

give maximum return to the investors.
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QUESTIONNAIRE

NAME …………………………………………………..

ADDRESS ……………………………………………………

CONTACT NO ……………………………………………

1. Do you know about derivatives scheme?

A) Yes B) No

2. How did you know about Reliance Money?

A) Media B) Banks

C) Friend D) Other

3. Have you ever used derivatives scheme?

A) Yes B) No

If yes, your satisfaction level

A) Ordinary B) Good

C) Better D) Best

4. What do you keep in mind while choosing this

Reliance Money derivatives Scheme?

A) Low interest rate B) Availability

5. Do you like to suggest any marketing strategy for

Reliance Money Derivatives Scheme?

A) Yes B) No

If yes, please specify……………………………………………..

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6. Have this scheme fulfilled your expectation?

A) Yes B) No

If no, please mention the reason……………………

7. Derivatives is used for

A) hedging the risk B) profitability

Thanking you for your kind co-operation valuable

information and suggestion.

Place……………….

Date……………….. Signature
 PATNA UNIVERSITY

BIBLIOGRAPHY

Financial Management - I.M.Pandey

Financial Derivatives - S.S.S Kumar

Investment Management - V.K.Bhalla

Magazines

o Business Standard

o Business world

Websites

a. www.reliancemoney.com

b. www.nseindia.com

c. www.investopedia.com

d. www.bseindia.com

e. www.moneycontrol.com