METHODOLOGY

(a) OBJECTIVE OF RESEARCH

1.SEARCH FOR BEST COMPANIES FOR

INVESTMENT IN BUYING OF OPTIONS IN INDIAN
DERIVATIVE MARKET.

2. DETERMINING STRETEGY THAT WILL HEDGE THE

FUNDS OF INVESTORS IN BYING OPTIONS.
 2

DERIVATIVE:
Derivative is a financial product whose value is derived from
the value of one or more basic variables, called bases
(underlying assets, index, or reference rate), in a contractual
manner. The underlying assets can be equity, forex,
commodity or any other asset.

The security contracts act, 1956 defines “derivative” as

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.

Derivative contracts have several variations. The most

common variants are following:

FORWARD: A forward contract is a customized contract

between two entities, where the settlement takes place on a
specific date in the future at today’s pre-agreed price.

FUTURES: A future contact is an agreement between two

parties to buy or sell an asset at a certain time in the future
at a certain price. Futures contracts are special types of
forward contracts in the sense that the former are
standardized exchange-traded contracts.
 3

OPTIONS: Options are of two types

CALL: calls give the buyer the right but not the obligation to
buy a given quantity of the underlying assets, at a given
future date.

PUT: Puts give the buyer right, but not the obligation to sell a
given quantity of assets at a given price on or before a g
given date.

SWAPS: swaps are private agreements between two parties

to exchange flows in the future according to a prearranged
formula. They can be regarded as portfolios of forward
contracts.

HEDGING:
Hedging means taking two positions that will offset each other
if prices change and so limiting financial risk.

In regards to financial market hedging is done by investing

funds in more than financial product in such a way that
losses that may occur due to one investment will be covered
by other.
 4

(b) The Sample

The research requires comparison of fluctuation in share

prices of all the companies in which derivative trading is
allowed. Therefore data of all the companies are collected.
Since few companies are recently listed with Stock
exchange board of India, data of those companies are not
available for whole year therefore they are excluded from the
study.
 5

(c)TOOLS
FOR DATA COLLECTION: The data require for the project
are share prices of last 52 weeks. Internet is used for the
collection of data. Web site of national stock exchange keep
record of share prices of all companies listed to Stock
exchange Board of India. The data is collected from the web
site of national stock exchange.

FOR DATA ANALYSIS: Standard deviation and coefficient

of variation are statistical tools used for the analysis of data.

Dispersion is the measure of the variation of the item

A.L bowley
Dispersion is the degree of the scatter or variation of the
variable about a central value.
Brooks and Dick.

Standard deviation is a statistical tool to measure dispersion

in a series.

Definition: Standard deviation is a square root of arithmetic

average of the square of derivative measured from mean.

Standard deviation = √ [(∑(x*X)-(∑X*∑X)/N]/N

Where
X= value of the item.
N= Number of items.
 6

Coefficient of variation: For purpose of relative measure of

dispersion. We calculate coefficient of variation.

Coefficient .of variation= standard deviation /X*

Where

X* =mean value of all items in a given series

 7

Steps in calculating standard deviation

1. Find the square of the values of various variables and total

them.

2. Find square of total of all the values. Divide it by the number

of items.

3. Subtract the above values from sum of square of variables

and divide it by number of items.

4. Find square root of above calculation.

 8

RESULTS
ST. COEFF. OF
NAME SYMBOL DEEVIATION VARIATION
ABB Ltd. ABB 876.4211321 26.457
Aditya Birla Nuvo Limited ABIRLANUVO 216.2447902 19.76703649
Adlabs Films Ltd ADLABSFILM 86.71810523 21.14280733
AIA Engineering Limited AIAENG 342.2367694 29.13800278
Allahabad Bank ALBK 8.502826327 10.48006532
Alok Industries Ltd. ALOKTEXT 5.69932379 8.943623053
Alstom Projects India Ltd APIL 143.2702867 32.17839618
Ambuja Cements Ltd. AMBUJACEM 13.28162042 10.86468148
Amtek Auto Ltd. AMTEKAUTO 42.58263698 12.1392988
Andhra Bank ANDHRABANK 7.935858317 9.429676186
Ansal Prop & Infra Ltd ANSALINFRA 233.5566259 41.06129147
Arvind Mills Ltd. ARVINDMILL 8.345932143 15.58530746
Ashok Leyland Ltd ASHOKLEY 4.160301388 10.1049725
Associated Cement Co. Ltd. ACC 109.0990643 11.67646645
Aurobindo Pharma Ltd. AUROPHARMA 54.71010517 8.253820484
Bajaj Auto Ltd. BAJAJAUTO 240.800016 9.297851357
Bajaj Hindustan Ltd. BAJAJHIND 70.98813819 30.55114795
Ballarpur Industries Ltd. BILT 6.537152105 5.717834123
Balrampur Chini Mills Ltd. BALRAMCHIN 15.60614807 19.48839969
Bank of Baroda BANKBARODA 22.78341068 9.139411594
Bank of India BANKINDIA 32.20690596 18.07092493
Bata India Ltd. BATAINDIA 24.40912426 13.19115024
Bharat Earth Movers Ltd. BEML 91.69467555 8.949278027
Bharat Electronics Ltd. BEL 261.2262719 18.72008255
Bharat Forge Co Ltd BHARATFORG 23.94336598 7.229368116
Bharat Heavy Electricals Ltd. BHEL 362.6835541 16.55900258
Bharat Petroleum Corporation Ltd. BPCL 22.19698232 6.423744749
Bharti Airtel Ltd BHARTIARTL 168.3877488 25.60933027
Birla Corporation Ltd BIRLAJUTE 49.9051244 17.49496773
Bombay Dyeing & Mfg. Co Ltd. BOMDYEING 90.27971771 14.35879352
Bombay Rayon Fashions Ltd BRFL 35.87464358 17.88255646
Bongaigaon Refinery Ltd. BONGAIREFN 4.92178406 10.00871187
Canara Bank CANBK 37.14415237 15.09106949
Century Textiles Ltd CENTURYTEX 103.9727791 18.03791194
CESC Ltd. CESC 32.60405351 9.873533593
Chambal Fertilizers Ltd. CHAMBLFERT 2.100925722 6.016971041
Chennai Petroleum Corporation Ltd. CHENNPETRO 28.08455332 13.39033474
Cipla Ltd. CIPLA 17.15447383 7.068665816
 9

Colgate Palmolive (I) Ltd. COLGATE 21.86168762 6.084733707

Corporation Bank CORPBANK 54.34850935 16.59433132
Crompton Greaves Ltd. CROMPGREAV 204.7257354 71.72348951
Cummins India Ltd CUMMINSIND 40.20119431 15.31644252
Dabur India Ltd. DABUR 21.63264757 17.97789195
Deccan Aviation Limited AIRDECCAN 24.5568512 20.9298778
Dena Bank DENABANK 6.161704084 1.459082189
Divi's Laboratories Ltd. DIVISLAB 1190.137751 37.75797774
Dr. Reddy's Laboratories Ltd. DRREDDY 182.0115951 23.57383236
Educomp Solutions Ltd EDUCOMP 521.5155233 51.72610512
Escorts India Ltd. ESCORTS 17.0996279 14.88488156
Essar Oil Ltd. ESSAROIL 4.821701161 9.002009168
Everest Kanto Cylinder Ltd EKC 250.5126818 35.2388074
Federal Bank Ltd. FEDERALBNK 31.24534521 13.70059351
Financial Technologies (I) Ltd FINANTECH 450.5572803 24.2145052
GAIL (India) Ltd. GAIL 19.11665759 6.91734436
Gateway Distriparks Ltd. GDL 14.13040211 7.992685617
Glaxosmithkline Pharma Ltd. GLAXO 76.45830143 6.515568965
GMR Infrastructure Ltd. GMRINFRA 127.4375841 36.33331376
Grasim Industries Ltd. GRASIM 252.2585645 10.08101764
GTL Ltd. GTL 27.67808123 18.06172031
Gujarat Alkalies & Chem GUJALKALI 16.40607262 11.1369182
Gujarat Narmada Fertilizer Co. Ltd. GNFC 5.19065667 5.134180683
HCL Technologies Ltd. HCLTECH 140.6080247 27.21050647
HDFC Bank Ltd. HDFCBANK 105.7836855 10.54545793
Hero Honda Motors Ltd. HEROHONDA 33.55676989 4.656889542
Hindalco Industries Ltd. HINDALC0 22.08108951 14.00269905
Hindustan Construction Co HCC 20.75007865 17.80231242
Hindustan Petroleum Corporation Ltd. HINDPETRO 24.48247212 8.812852741
Hindustan Unilever Ltd HINDUNILVR 19.70683398 8.968522746
Hotel Leela Ventures Ltd HOTELEELA 78.47584853 82.50844897
Housing Development Finance Corporation Ltd. HDFC 210.3517326 13.15095597
ICICI Bank Ltd. ICICIBANK 141.7081363 17.002851
IFCI Ltd. IFCI 15.55319445 63.04284189
I-FLEX Solutions Ltd. I-FLEX 395.571179 21.10299149
India Cements Ltd. INDIACEM 22.26800886 10.975545
India Infoline Limited INDIAINFO 183.9933885 53.57860327
Indian Hotels Co. Ltd. INDHOTEL 551.532208 102.5009911
Indian Oil Corporation Ltd. IOC 42.1302418 9.23410993
Indian Overseas Bank IOB 10.54323111 9.691954444
Indian Petrochemicals Corpn. Ltd. IPCL 30.47351879 10.38604406
Indusind Bank Ltd. INDUSINDBK 5.767359062 12.47221279
Industrial development bank of India Ltd. IDBI 14.60160463 17.68730182
Infosys Technologies Ltd. INFOSYSTCH 187.649979 9.300826073
Infrastructure Development Finance Company
Ltd. IDFC 22.88898328 26.42052706
ITC Ltd. ITC 13.02908805 7.554736856
IVRCL Infrastructure & Projects Ltd. IVRCLINFRA 69.74317208 21.81263445
J & K Bank Ltd. J&KBANK 119.5279037 21.04997608
Jaiprakash Associates Ltd. JPASSOCIAT 122.0601687 20.94839173
Jaiprakash Hydro-Power Ltd. JPHYDRO 3.629075774 11.60221374
 10

Jet Airways (India) Ltd. JETAIRWAYS 91.53660091 13.77076964

Jindal Stainless Ltd. JSTAINLESS 18.27028933 14.89223421
Jindal Steel & Power Ltd JINDALSTEL 597.9775487 26.4742657
JSW Steel Ltd. JSWSTEEL 126.9674982 30.55377816
Kesoram Industries Ltd KESORAMIND 80.35087248 18.19436682
Kotak Mahindra Bank Ltd. KOTAKBANK 106.0401699 24.84928213
Larsen & Toubro Ltd. LT 366.7143463 21.25736499
LIC Housing Finance Ltd LICHSGFIN 14.40886771 8.911553282
Lupin Ltd. LUPIN 105.2279784 17.10490959
Mahanagar Telephone Nigam Ltd. MTNL 9.308854618 6.165655053
Maharashtra Seamless Ltd. MAHSEAMLES 87.1903756 18.72612008
Mahindra & Mahindra Ltd. M&M 97.14891133 12.91816559
Mahindra Gesco Developers GESCOCORP 136.8627323 19.41590755
Mangalore Refinery and Petrochemicals Ltd. MRPL 3.210583626 8.034828679
Maruti Udyog Ltd. MARUTI 69.45024698 8.022129252
Matrix Laboratories Ltd. MATRIXLABS 34.39453586 14.57961886
Moser-Baer (I) Ltd MOSERBAER 86.35703865 28.65910185
Nagarjuna Constrn. Co. Ltd. NAGARCONST 38.65380174 19.88705286
Nagarjuna Fertiliser & Chemicals Ltd. NAGARFERT 3.235706402 21.28170832
National Aluminium Co. Ltd. NATIONALUM 17.00790819 7.435828337
National Thermal Power Corporation Ltd. NTPC 13.32180426 9.581446919
NDTV Ltd. NDTV 80.18853165 28.43775042
Neyveli Lignite Corporation Ltd. NEYVELILIG 4.846555191 8.110258304
Nicolas Piramal India Ltd NICOLASPIR 20.55379248 8.498131162
Oil & Natural Gas Corp. Ltd. ONGC 138.680303 13.96749047
Orchid Chemicals Ltd. ORCHIDCHEM 28.80462444 12.74634904
Oriental Bank of Commerce ORIENTBANK 27.45837348 12.36422754
Oswal Chem. & Fert. Ltd. BINDALAGRO 6.241310626 16.61027445
Pantaloon Retail (I) Ltd PANTALOONR 679.6754606 68.97195008
Patel Engineering Ltd. PATELENG 62.48002056 16.41349504
Patni Computer Syst Ltd PATNI 63.00195585 15.07118662
Peninsula Land Limited PENINLAND 98.45574584 20.97555214
Petronet LNG Limited PETRONET 4.146953366 8.355178038
Polaris Software Lab Ltd. POLARIS 39.32303427 25.41136871
Praj Industries Ltd. PRAJIND 130.1459346 43.66336434
Punj Lloyd Ltd. PUNJLLOYD 331.5221926 51.80540172
Punjab National Bank PNB 48.26315451 9.786708813
Rajesh Exports Ltd RAJESHEXPO 132.106095 39.46901881
Ranbaxy Laboratories Ltd. RANBAXY 24.25224073 6.34889262
Rel. Nat. Resources Ltd. RNRL 5.227788663 23.40364259
Reliance Capital Ltd RELCAPITAL 180.795332 27.37664022
Reliance Communications Ltd. RCOM 77.92192941 18.84220274
Reliance Energy Ltd. REL 38.63221795 7.70576645
Reliance Industries Ltd. RELIANCE 224.7935566 16.68531167
Reliance Petroleum Ltd. RPL 15.25193749 20.59912773
Rolta India Ltd ROLTA 96.45671633 31.48322034
S Kumars Nationwide Ltd SKUMARSYNF 10.15356738 13.14235881
Satyam Computer Services Ltd. SATYAMCOMP 24.06789406 26.13176258
Sesa Goa Ltd. SESAGOA 371.0102444 25.58242913
Shipping Corporation of India Ltd. SCI 20.78896066 12.09979522
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Shree Cements Ltd SHREECEM 191.1585172 16.35172831

Shree Renuka Sugars Ltd. RENUKA 113.4208886 21.85320943
Siemens Ltd SIEMENS 124.5181002 10.9819251
SRF Ltd. SRF 34.97691401 18.57921155
State Bank of India SBIN 160.8829915 14.25693628
Steel Authority of India Ltd. SAIL 24.06789406 23.50858562
Sterling Biotech Ltd STERLINBIO 28.54211405 18.70949491
Sterlite Industries (I) Ltd STER 58.81754318 11.89224216
Sterlite Optical Technology STROPTICAL 35.04091334 18.06271441
Strides Arcolab Ltd. STAR 27.28553366 8.478815132
Sun Pharmaceuticals India Ltd. SUNPHARMA 75.54369999 7.652868797
Sun TV Network Ltd. SUNTV 192.8034857 14.81740725
Suzlon Energy Ltd. SUZLON 150.7083819 12.10784639
Syndicate Bank SYNDIBANK 7.22366265 9.701074568
Tata Chemicals Ltd TATACHEM 15.04253691 6.620834907
Tata Consultancy Services Ltd TCS 221.8408574 17.92430094
Tata Motors Ltd. TATAMOTORS 75.76427109 9.396584723
Tata Power Co. Ltd. TATAPOWER 46.80868179 8.227988157
Tata Steel Ltd. TATASTEEL 54.57961104 10.65167198
Tata Tea Ltd. TATATEA 79.37259795 10.53641868
Tata Teleserv(Maharastra) TTML 3.265699262 15.10149948
The Karnataka Bank Ltd. KTKBANK 28.54043428 19.54601138
Titan Industries Ltd. TITAN 52.26255602
Triveni Engg. & Inds. Ltd. TRIVENI 10.00917201 17.50747965
TVS Motor Company Ltd. TVSMOTOR 19.60428445 23.73759279
Ultratech Cement Ltd. ULTRACEMCO 103.5284341 11.84671405
Union Bank of India UNIONBANK 10.70494181
Unitech Ltd UNITECH 111.0572365 27.95328497
United Phosphorous Ltd UNIPHOS 38.1830287 13.05663079
United Spirits Ltd. MCDOWELL-N 223.8807528 27.34671912
UTI Bank Ltd. UTIBANK 82.45401359 17.94347669
Videsh Sanchar Nigam Ltd VSNL 33.61402315 7.903835205
Vijaya Bank VIJAYABANK 4.60213379 9.506085803
Voltas Ltd. VOLTAS 284.0146674 125.8581587
Wipro Ltd. WIPRO 49.89697354 8.819810167
Wockhardt Ltd. WOCKPHARMA 28.97414407 7.727898131
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INTERPRETATION
The profit by investing in purchasing of options in derivative
market of a particular company is directly proportional to the
fluctuation in price of share of that company in the cash market. In
the research the nature of share price of all the companies are made
by studying the share prices of companies in last 12 months .By
applying statistical tools, the estimation of fluctuation in prices of
shares in future is done. The companies which were highly
fluctuating last year are suggested for investment

Mathematical expression:

P F

Where
P=profit.
F=fluctuation in share price
 13

SUGGESTIONS
On the basis of the above research study following
companies (since the fluctuation in these companies are
higher as compare to other.) are suggested for purchasing of
options in derivative market

1. Voltas Ltd.

2. Indian Hotels Co. Ltd.

3. Hotel Leela Ventures Ltd.

4. Crompton Greaves Ltd.

5.Pantaloon Retail (I) Ltd.

 14

STRATEGY TO HEDGE THE FUND.

While investing in buying the options in derivative market the
investors should apply strategy that will give return at
comparatively low risk.

1. Investors may buy call and put options of particular company

in same quantity.

2. If investor has bought future option, a put option may be

purchased in order to hedge the fund.

3. If investor has sold future option, a call option may be

purchased in order to hedge the fund.

4. If investor has invested in the shares of a particular company

for long term. The fund can be hedged by purchasing put
option to safeguard against short term volatility.
 15

IMPLICATION

The above research study estimates the nature of share prices of

companies regarding fluctuation. Thus it guides the investors about
in which companies they should invest in. Apart from investment
derivative has also been used as an instrument to hedge other
investment. The study also gives the information of the companies
in which it will beneficial to hedge the funds.

By applying investment strategy investors can safeguard

themselves from losses. One investment may cover the losses that
may occur due to the other investment. In this way funds can be
invested in a way that ensures higher return to investors at
comparatively lower risk.
 16

EXAMPLE:

Suppose an investor purchase call and put option of suggested

companies. As per our estimation in the study the prices of shares
will increase/decrease to a high extent, since the nature of share of
these companies are highly volatile. Let us consider various
possibilities.

CASE I. Price of share increases in the cash market.

There will be loss on purchasing of put option.

Loss = price of put option at the time of purchasing.

There will be profit on purchasing of call option.

Profit = Increase in prices of shares.

CASEII: Price of share decreases in the cash market.

There will be loss on purchasing of call option.

Loss = price of call option at the time of purchasing.

There will be profit on purchasing of put option.

Profit = Increase in prices of shares.
 17

LIMITATIONS

Share prices of companies are influenced by many factors like

performance of company, government policies, international
market, interest rates, inflation, investment of foreign investors,
and overall performance of sensex etc. Thus the nature of the
companies may not be exactly as expected in the research study.

As some of the companies was listed to stock exchange recently.

The data of those companies are not available for whole period.
These companies have been excluded from the research study.
 18

REFERENCES
BOOKS:

1. Elhance D.N, Elhance veena, Fundamental of Statistics.

2. NCFM book, Derivative Market (dealer) module.
3. Kothari C.R., Research Methodology methods and
techniques.

WEB SITES:

1. www.nseindia.com.
2. www.myiris.com.
3. www.google.co.in.
 19

Appendices
1. Last Thursday of every month is expiry day of option.
Therefore closing price of last Thursday was taken for
the study.
2. Brokerage has to be given for trading in derivative
market.
3. Other formula may also be applied for calculating
standard deviation.
4. Example of calculation of standard deviation is shown
below:

Symbol Date Close

ABB 27-Jul-06 2510.35
ABB 31-Aug-06 2791.35
ABB 28-Sep-06 2919.4
ABB 26-Oct-06 3560.25
ABB 30-Nov-06 3497.9
ABB 28-Dec-06 3576.8
ABB 25-Jan-07 3598.55
ABB 22-Feb-07 3780.1
ABB 22-Feb-07 3780.1
ABB 26-Apr-07 4096
ABB 31-May-07 4603.7
ABB 28-Jun-07 1036.1

STANDARD
DEVIATION 876.4211321
TOTAL 39750.6

MEAN 3312.55
COEFF. OF
VARIATION 26.4575971
 20

5. The price of call and put are very less as compare to price of
share in cash market.