Abhi Project

1.
INDUSTRY PROFILE Introduction

STOCK MARKET A Stock Exchange is a place that provides facilities to stock brokers to trade company Stocks and other securities. A stock may be bought or sold only if it is listed on an Exchange. Thus it is the meeting place of the stock buyers and sellers. India's premier Stock Exchanges are the Bombay Stock Exchange and the National Stock Exchange. The Stock Market trading history of India In the earlier days, stockbrokers kept in a natural site to conduct their trading Activities, but now it is shifting from one set of Banyan trees to place of market In 1854, trading in India found a permanent address, Dalal Street, now Synonymous with the oldest stock Exchange in Asia, The Bombay Stock Exchange. With A heritage that goes back to over 150 years, BSE was the first stock exchange in the Country to be granted permanent recognition under the Securities Contract Regulation Act, 1956. The exchange has played a pioneering role in the development of the Indian Securities Market one of the oldest in the world. After India gained independence, the BSE formulated a comprehensive set of guidelines adopted by the Indian Capital Markets. Even today, the BSE Sensex remains one of the parameters against which the Indian Economy and finance is measured. The trading scenario in India then underwent a paradigm shift in 1993, when NSE or National Stock Exchange was recognized as a Stock Exchange. Within just a few years, Trading on both the exchanges shifted from an open outcry system to an automated Trading environment Today, the Indian Securities market successfully keeps place in global counterparts Through the use of modern day technology.
1 VISVESVARAYA TECHNOLOGICAL UNINVERSITY

MACHHE, BELGAUM 590 014
Stock market milestones 1875 BSE established as 'the native Share and Stock Brokers Association' 1956 BSE became the first stock exchange to be recognized under the Securities Contract act 1993 NSE recognized as a stock exchange. 2000 Commencement of Internet trading at NSE. 2000 NSE commences derivatives trading (Index futures) 2001 BSE commences derivatives trading. STOCK BROKERS In terms of rule 2 (e) .Stock-brokers. Means a member of stock exchange [SEBI (Stock brokers & Sub Brokers) Rules, 1992] Impact of e-Business on Stock Broking: The following are the major impacts of e-Business on stock broking industry: Internet made the securities market as transparent for Main Street customers as it
was for sophisticated professionals and investment gurus in the wall street. The biggest impact of Internet was that it made a large amount of information available out there. Gone are the days when the key financial data that investors needed to make informed and profitable decisions was available only to the lucky few ``on the inside''. Now the turnover and profit figures, brokers' forecasts, details of how and why company directors buy shares and all the rest of it are just a few mouse clicks away for everybody. Small trades could be executed at a fraction of the cost that was previously charged to customers for similar trades. This encouraged a number of small investors to invest the money they can spare from the banks into share market. The investment community grew at an exponential rate when it became certain that investing is for everyone. A popular slogan summarizes it all You dont have to be rich to be an investor. But have to be an investor to be rich. Quality research and stock analysis could be disseminated to a number of people by e-mails and alerts. Investment tips and news scoops found themselves a more efficient medium to spread. This improves market activity and trading volumes, benefiting brokers 2 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
with their commissions. Investment houses could provide these services, at a price, to investors who were interested, in an efficient and orderly way. E-Business didnt come alone, it came along with automated stock exchanges, electronic document holding services and efficient banking systems. Together these empowered a retail investor to provide a cheaper, more fun, more convenient and more reliable way of trading in shares than the old-fashioned way of using a bank or a broker. Major Challenges and Issues faced by online stock brokers: In order to address this issue comprehensively I distinguish the issues faced based on whether the organization is a click-only, born on the net organization or bricks-and-mortars organization. In the end Ive summarized the issues faced by the industry in general. Issues faced by Born on the net Organization: Lack a global brand name, trust and reputation. Have to build these from scratch. When a known brand offers the same broking service at a comparable cost, these organizations lose out. Lack of well established branches puts these companies at a disadvantage when compared to players like the local banks which have a presence in every corner of the country. This spreads the reach of the brick-and-mortar players. Inability to provide a range of financial services discourages people whod rather see all their different investments and banking needs consolidated. Lack of an umbrella service encourages people to look for brokers who provide complete financial services. The bulk of their client base is made up of retail investors. Institutional investors and other high value and high volume customers prefer the traditional and blue chip brokers. Retail investors are typically easy come easy go and might prove to be inconsistent in trading habits. Retail investors have gained the confidence to trade shares independently, without the help of a professional broker during the recent Bull Run. But in a correction, many will get burned and lose confidence and thus affect the revenues of brokers.

Issues faced by Bricks-And-Mortars Organizations: The newer organizations do not carry the excess baggage of outdated legacy systems and infrastructure over capacity. Usually, the older bricks and mortar firms have a legacy system to integrate to and the technological advances are constrained by the ability of the legacy systems. An excessive manpower that desperately needs retraining, antique work cultures, hierarchies and attitudes are serious inertial forces to innovation in these bricks-and-mortars organizations. They are slow moving, stirring when the smaller and newer ones are already on their toes. A significant portion of the business process needs to be reengineered around the eBusiness model. Primary and Secondary Markets Primary Market An Issuer/Company enters the Primary markets to raise capital. They issue of new securities in to market (buyer). If the Issuer is selling securities for the first time, these are referred to as Initial Public Offers (IPO's). Summing up, Primary Market is the means by which companies float shares to the general public in an Initial Public Offering to raise capital. Secondary Markets Once new securities have been sold in the Primary Market, an efficient mechanism must exist for their resale, if investors are to view securities as attractive opportunities. Secondary Market transactions are referred to those transactions where one investor buys shares from another investor at the prevailing market price or at whatever price both the buyer and seller agree upon. The Secondary Market or the Stock Exchanges are regulated by the regulatory that facilitates authority. In India, the Secondary and Primary Markets are governed by the Security and Exchange Board of India (SEBI). For e.g. If one of the investors who had invested in the shares of company XYZ sold it to another at an agreed upon price, a Secondary Market transaction is said to have taken Place. Normally investors transact in securities using an intermediary such as a broker.

Introduction of SEBI
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The Government of India established the Securities and Exchange Board of India (SEBI) the Regulatory body of stock markets in 1988. Within a short period of time, SEBI became an autonomous body through the SEBI Act passed in 1992, with defined responsibilities that cover both development & regulation of the market. Comprehensive regulatory measures introduced by SEBI ensured that end investors benefited from safe and transparent dealings in securities and also safeguard the investor interest. Securities and Exchange Board of India (SEBI ) head office at Mumbai it has offices in Chennai, Calcutta and Delhi. It is the regulator of Securities markets in India. The Board comprises whole time members and outside members (representing the finance ministry, RBI and experts). SEBI has three functions rolled into one body: quasi-legislative, quasi-judicial and quasiexecutive.It drafts rules in its legislative capacity, it conducts enquiries and enforcement action in its executive function and it passes rulings and orders in its judicial capacity.Though this makes it very powerful, there is an appeals process to create accountability. SEBI has had a mixed history in terms of its success as a regulator. Though it has pushed systemic reforms aggressively and successively (e.g. the quick movement towards making the markets electronic and paperless), it lacked the legal expertise, till recently, needed to sustain prosecutions/enforcement actions. It has recently been announced that it is going to the top law campuses to recruit talent and has found reasonable success there. The basic objectives of the Board were identified as: T protect the interests of investors in securities To promote the development of Securities Market To regulate the Securities Market To made rules and regulation ,and restricts unfair trade policys Formulate duties and responsibility of stock brokers. To regulate safe mode of operations In market place.

SEBI has contributed to the improvement of the Securities Market by introducing Measures like capitalization requirements, margining and establishment of clearing corporations that reduced the risk of credit. Today, the board continues on its two-fold mission of integrating the Securities Market at the National level and also diversifying the trading products to increase the number of traders (including banks, financial institutions, insurance companies, Mutual Funds, primary dealers etc) transacting through the Exchanges. In this context the introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI in 2000 AD has been a real landmark. National Stock Exchange The National Stock Exchange was set up in 1995 as a first step in reforming the Securities market trough technology and introduction of best practices in management. It started with the concept of an independent governing body without any broker Representation thus ensuring that the operators. Interests were not allowed to dominate The governance of the exchange. Before the NSE was set up, trading on the stock exchanges in India used to take place through open outcry without the use of information technology for immediate matching or recording of trades. This was time consuming and inefficient the practice of physical trading imposed limits on trading volumes and on the speed with which new information was incorporated into prices. To obviate this, the NSE introduced screen-based trading system (SBTS) where a member can punch into the computer the quantities of shares and the price at which he wants to transact. The transaction is executed as soon as the quota Punched by a trading member finds a matching sale or buy quota from counter party. SBTS enables distant participants to trade with each other, improving the liquidity of the markets. With SBTS it becomes possible for market participants to see the full market, this helps to make the market more transparent, leading to increased investor confidence. The NSE started nationwide SBTS, which have provided a completely transparent trading mechanism. Today, India can boast that almost 100% trading take place through electronic order matching. Recognized stock exchange means a stock exchange which is for the time being recognized by the Central Government under section 4.

Bombay Stock Exchange The oldest stock market not only in the country, but also in Asia. BSE I the first stock exchange in the country which obtained permanent recognition (in 1956)from the government of India under the securities Contract Act 1956. It migrated from the open outcry system to an online screen based order driven trading system in 1995. Future Trends: Mergers and acquisitions: In the highly competitive and over crowded market, shakeouts and bankruptcies of online brokers can be anticipated. The trend is towards a gradual consolidation of retail investors to a few dominant players or partnerships. Stock broking applications that provided services in various delivery modes, ie., internet, WAP, palm pilots, pocket PCs etc will get more common as more and more people start using these gadgets. Online broking would have a completely new meaning in this scenario. In a crowded stock broking industry, differentiation becomes the key to higher revenues. Better service, straight through processing (STP), immediate execution, portfolio services, investment advisors and telephone call centers or branch investment offices are needed to retain customers and to increase the revenue base

2. COMPANY PROFILE
Organisational Overview SHAREKHAN is a premier integrated financial services provider, and ranked among the top five in the country in all its business segments, services over 16 million individual investors in various capacities, and provides investor services to over 300 corporate, Comprising the who is who of Corporate India. SHAREKHAN covers the entire spectrum of financial services such as Stock broking, Depository Participants, Distribution of financial products - mutual funds, bonds, fixed deposit, equities, Insurance Broking, Commodities Broking, Personal Finance Advisory Services, Merchant Banking & Corporate Finance, placement of equity, IPOs, among others. SHAREKHAN has a professional management team and ranks among the best in technology, operations and research of various industrial segments. Before talking about SHAREKHAN. Lets have a brief introduction about its parent Company SSKI Investor Services Pvt .Ltd About Sharekhan At SSKI investor services private limited, they provide investment banking and corporate finance services to their clients by leveraging the deep domain knowledge of our highly experienced professionals. We strive to be the best research-driven investment bank involved in India-related equity transactions. Their investment banking team provides a full range of services, from private placements and public offerings to advisory work and mergers and acquisitions. The extensive industry expertise of their professionals is matched only by the exceptional degree of their commitment to all aspects of client servicing. What differentiates their investment banking group is their commitment to provide senior level attention to all projects and clients. SSKI Corporate Finance is in a very strong position to raise capital for their clients. They have deep and long-standing relationships with most prominent institutional investors in Indian equities; this strength is further bolstered by the relationships that the SSKI institutional Equities sales team enjoys with institutional investors spread across the Globe .Additionally, SSKI Corporate Finance is able to leverage the industry knowledge of the highly respected SSKI Institutional Equities research team - a pioneer in providing in-depth sell-side research on Indian equities to institutional investors and it has strong position in online trading and also have good position in market analysis. 8 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Sharekhan Sharekhan Limited is a retail financial services provider with a focus on equities, derivatives and commodities brokerage execution on the National Stock Exchange of India Ltd. (NSE), Bombay Stock Exchange Ltd. (BSE), National Commodity and Derivatives Exchange India (NCDEX) and Multi Commodity Exchange of India Ltd. (MCX). SSKI Investor Services Pvt Ltd has been in the equities solutions business for the past eight decades. SSKI created Sharekhan in 1999, when it wanted to utilize the Internet for providing financial services through an online trading website. Sharekhan is one of the country's strongest names in the online trading and offline trading domain today .The company runs India's largest chain of 'share shops' with around 280 cities through a network of 640 locations Sharekhan handles revenues to the tune of Rs 800 crore to Rs 1,000 crore on daily basis and The company was awarded the 2005 Most Preferred Stock Broking Brand. If you experience language, presentation style, content or for that matter the online Trading facility, you'll find a common thread; one that helps you make informed decisions and simplifies investing in stocks. The common thread of empowerment is what Sharekhans all about!
Nature of the Business Carried:

Sharekhan is a broking company. The company offers a complete range of pre trade, trade an post trade service on the BSE (Bombay Stock Exchange) and the NSE (National Stock Exchange). Whether the client come in to the companys conventionally located officers and trade in a dedicated ambience or issue instructions over the phone, our highly trained team and sophisticated equipment ensure smooth transactions and prompt service.

Vision:
Sharekhan aspiration of establishing itself as an integrated financial services company is propelled by a vision that is shared by the entire work force. Towards this end Sharekhan has dedicated it to: o Having a single minded focus on investor services o Establishing sharekhan as a house hold name for financial services o Set industrial standards o Establishing leadership position in all chosen areas of business o And in the process become a crucial link between industry, finance and people
Mission:
Sharekhan mission is leading services provider to our customers and aim to achieve this leadership position by building an innovative, enterprising and technology driven organization which will set the highest standards of service and business ethics.
Core Values:
A Sharekhan adherence to its core values-integrity, Enterprise, and Innovation has earned it an enviable reputation amongst all the intermediaries and regulatory authorises of the capital and financial market. The Business Challenges o Easily access customer portfolio information in a secure contact centre environment. o o Seamlessly integrate with back-end applications and streamline customer data to contact centre agents. Easily manage upgrades and technology issues to accommodate growing customer base.
Managing Business Growth With a customer base of more than 260,000, Sharekhan continues to grow at a fast pace. The company required reliable contact centre technology that could handle its growing customer base and expanding services portfolio. Downtime in the contact centre, even for a short period of time, was unacceptable as it could result in financial losses and more importantly, a decrease in customer loyalty. As a result, customer satisfaction was a top priority in Sharekhans agenda. Its

primary objective was to help and support its customers in managing their shares portfolio in the best possible manner. In Anticipation of market trends, which estimated that multiple applications, up-selling, and crossselling among stockbrokers would grow in the near future, Sharekhan needed a sound solution to manage Complex customer queries resolving and routine technical issues and other day-to-day problems. As a result, our business growth and expansion plans took a back seat. We started losing focus of our business goals and that was detrimental to our business. We needed an effective solution, fast.
Quality Policy
To achieve and retain leadership, Sharekhan shall aim for complete customer satisfaction, by combining its human and technological resources, to provide superior quality financial services. In the process, Sharekhan will strive to exceed Customer's expectations. Quality Objectives As per the Quality Policy, Sharekhan will: Build in-house processes that will ensure transparent and harmonious relationships with its clients and investors to provide high quality of services. Establish a partner relationship with its investor service agents and vendors that will help In keeping up its commitments to the customers. Provide high quality of work life for all its employees and equip them with Adequate knowledge & skills so as to respond to customer's needs. Continue to uphold the values of honesty & integrity and strive to establish unparalleled standards in business ethics. Use state-of-the art information technology in developing new and innovative Financial products and services to meet the changing needs of investors and clients. Strive to be a reliable source of value-added financial products and services Constantly guide the individual and institutions in making a judicious choice of it. Strive to keep all stake-holder (shareholders, clients, investors, employees, suppliers and regulatory authorities) proud and satisfied

PRODUCT PROFILE
A Sharekhan outlet offers the following services: o Online BSE and NSE executions (through BOLT & NEAT terminals) o Free access to investment advice from Sharekhan's Research team o Sharekhan Value Line (a monthly publication with reviews of recommendations, stocks to watch out for etc) o Daily research reports and market review (High Noon & Eagle Eye) o Pre-market Report (Morning Cuppa) o Daily trading calls based on Technical Analysis o Cool trading products (Daring Derivatives and Market Strategy) o Personalized Advice o Live Market Information o Depository Services: Demat & Remat Transactions o Derivatives Trading (Futures and Options) o Commodities Trading o IPOs & Mutual Funds Distribution o Internet-based Online Trading: Speed Trade 12 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Online Trading: Share Khan was amongst the pioneers of online trading in India and has launched Sharekhan.com in February 2000. Since the, they have been at the forefront in understanding customer needs, analyzing trends and brining innovation in their offerings. They have online trading products that are customized to the habits and preferences of investors as well as traders. Features of Online Trading Products: Live streaming quotes Instant order execution and conformation Price alerts Single Screen for equities and derivatives Multiple market watch windows Real-time portfolio tacking Classic Account This account allows the client to trade through our website and is suitable for the retail investor who is riskaverse and hence prefers to invest in stocks or who does not trade too frequently. Account opening charges is Rs.750 Benefits: Freedom from paperwork. Instant credit transfer through our online banking partners. Trade anywhere Dial N Trade through our Toll Free number 1800-22-7050 Timely advice After hour orders Apply IPO and Mutual Fund online Applet based trading for live quotes and instant order execution. 13 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Cash and F & O market. Speedtrade Account This account enables you to buy and sell shares through our software. Account opening charges is Rs.1000 and also this type of account holder trade in online with speed and easily and market changes find out fast than the classic account. Benefits: Intraday charts 6 year graphs My Alerts All the features of Classic Accounts Other features Derivatives & Commodities: Sharkhan's offerings: A ground network offering personalized service through a channel partner. This is a fullservice offering comprising research services, investment advice, trading (margin based) as well as investing facilities and depository services. Charges for this service are slightly higher than for a pure Internet-based service. The Internet-based offering: there are two broad types of pricing plans for investors as well as traders. Mutul Fund Everybody talks about mutual funds, but what exactly are they? Are they like shares in a company, or are they like bonds and fixed deposits? Will I lose all my money in funds or will I become an overnight millionaire? Big questions that get answered in just five minutes. Read on.investment goals, like getting a regular income now or letting the money accumulate over the long term. Investors pay a small fraction of their total funds to the AMC each year as investment management fees.

Commodities The process of economic liberalization in India began in 1991. As part of this process, several capital market reforms were carried out by the capital market regulator Securities and Exchange Board of India. One such measure was to allow trading in equities-based derivatives on stock exchanges in 2000. This step proved to be a shot in the arm of the capital market and volumes soared within three years. The success of the capital market reforms motivated the government and the Forward Market Commission (the commodities market regulator) to kick off similar reforms in the commodities market. Thus almost all the commodities were allowed to be traded in the futures market from April 2003. To make trading in commodity futures more transparent and successful, multi-commodity exchanges at national level were conceived and were allowed to start futures trading in commodities on-line. A lot of water has flown since then. Today commodities exchanges have become an integral part of Indian financial system. Their volumes have gone through the roof; from humble Rs 5000 crore in 2003 today it stands north of Rs 27 lac crore per year. This rise in volumes has been led by bullion (gold and silver) trading. Simultaneously, MCX has emerged as the second largest commodity exchange in the world in terms the number of silver contracts traded. Similarly it is the third largest security in the world today considering the number of gold contracts traded. Coming to commodities, today Indian investors can trade in a great number of commodities on these bourses, and the list is getting bigger by the day. No wonder then that the commodity futures market is being viewed as a significant business segment by many businessmen, investors, institutions, brokers, banks etc. In spite of all this flurry of activity during past three-four years, the awareness about commodities remains low. Many investors are still not aware that they can invest in commodities as diverse as gold, silver, jeera, and cotton with the click of a mouse, right from the confines of their living room. No doubt many are unaware that commodities are completely unrelated to other investment vehicles and thus can act as a buffer in the times of crisis. The subsequent web pages are prepared to spread the word about commodities as well as to advise the seasoned traders about the latest news and analysis in commodities world. It is

expected that these pages will help both novice and experienced investors / traders / hedgers/ arbitrageurs to get the best mileage out of investing in commodities.
Portfolio Management
Ideal for investors looking at steady and superior returns with low to medium risk appetite.This portfolio consists of a blend of quality blue chip and growth stocks ensuring a balanced portfolio with relatively medium risk profile. The portfolio will mostly have large capitalization stocks based on sectors & themes that have medium to long term growth potential Investments are based on 3 tenets: Consistent, steady and sustainable returns Margin of Safety Low Volatility Product Characteristics Bottom up stock selection In-depth, independent fundamental research High quality companies with relatively large capitalization. Disciplined valuation approach applying multiple valuation measures Medium to long term vision, resulting in low portfolio turnover Demat services Dematerialization and trading in the Dmat mode is the safer and faster alternative to the physical existence of securities. Dmat as a parallel solution offers freedom from delays, thefts, forgeries, settlement risks and paper work. This system works through depository participants (DPs) who offer demat services and the securities are held in the electronic form for the investor directly by the Depository. Research Based Advice From Sharekhan

Your Investment decisions should not be based on rumours, gut feel or emotions ; but should be taken after a careful study of facts. Most investors who have made their money in the stock market are those who have been patient, have backed their investments with logic and have never lost sight of common sense. Typically there are two ways of selecting the right stock: (1) Fundamental / research and (2) Technical analysis 1. Fundamental Research This requires you to rate a stock based on its historical performance and growth parameters. This type of research involves a careful scrutiny of the financials of a company. 2. Technical Analysis This requires you to predict the trend in the market or the price of a company based on historical price movements, using certain statistical parameters. Sharekhan offers a selection of stocks based on both fundamental and technical research techniques with different time frames for both types of calls. Sharekhan provides news letters and analytical reports to help you decide which share to select and when to buy or sell them. Account holders get research based investment advice with recommendations to buy shares of companies whose prospects are good. These recommendations are termed as Stock Ideas Sharekhan customers also get a host of services including timely research reports (Sharekhan stock Ideas).
Area of operation
Sharekhan's equity related services include trade execution on BSE, NSE, Derivatives, commodities, depository services, online trading and investment advice. Trading is available in BSE and NSE. Along with Sharekhan.com website, ShareKhan has around 510 offices (share shops) in 170 cities around the country. Share khan has one of the best state of art web portal providing fundamental and statistical information across equity, mutual funds and IPOs. You can surf across 5,500 companies for indepth information, details about more than 1,500 mutual fund schemes and IPO data. You can also access other market related details such as board meetings, result announcements, FII transactions, buying/selling by mutual funds and much more. 17 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Ownership pattern
OWNER OF THE COMPANY : Mr.Dinesh Murikya CHIEF EXICUTIVE OFFICER: Mr. Tarun Shah DIRECTOR- PRODUCTS AND TECHNOLOGY : Mr. Jaideep Arora DIRECTOR OPERATIONS :Mr.Shankar Vailaya Competitors informations ICICI Securities Ltd. (www.icicidirect.com) Kotak Securities Ltd. (www.kotaksecurities.com) Indiabulls Financial Services Limited (www.indiabulls.com) India Infoline (www.5paisa.com) Motilal Oswal Securities (www.motilaloswal.com) Fortis Securities (Religare) (www.fortissecurities.com) Karvy (www.karvy.com) Geojit Securities (www.geojit.com) HDFC Securities (www.hdfcsec.com) Angel Brokering

Achievements:
SSKI has been voted as the Top Domestic Brokerage House in the research category, twice by Economy Survey and four times by Asia money Survey. Sharekhan Limited won the CNBC AWARD for the year 2004. Rated among the top 20 wired companies along with Reliance, HUJl, Infosys, etc by Business Today, January 2004 edition. Awarded Top Domestic Brokerage House four times by Euro money and Asia money Pioneers of online trading in India amongst the top 3 online trading websites from India. Most preferred financial destination amongst online broking customers. Winners of Best Financial Website award.
Future growth and prospects:

2,00,000 plus retail customers being serviced through centralized call centers / web solutions. Branches / Semi branches servicing affluent / aggressive traders through high skill financial advisor. 250 independent investment managers/ franchisee servicing 50,000 highly valued clients

3. Mc Kensys 7S Frame Work

The 7S model is better known as McKensys 7S, because the two persons who developed this model, Tom Peters and Robert Waterman, have been consultants at McKensys and Co. at that time. They published their 7S model in their article Structure is not Organization (1980) and in their books The art of Japanese Management (1981) and In Search of Excellence (1982). The model consists of seven elements. Those seven elements are distinguished in so called hard Ss and soft Ss. The hard elements are feasible and easy to identify. They are Strategy, Structure and Systems of the organization. The four soft Ss are hardly feasible. They are highly determined by the people at work in the organization i.e., Style, Staff, Skills and Shared values.
STRATERGY: A company of sharekhan stature cannot afford to work without objectives. An overall group objective is already set and all the employees are driven towards Sharekhan believes that .no individual is big as the organizational itself. Competition is the key to survival and for giving diversification for the given product as such competition is always good. Sharekhan updates itself to the surroundings competition and bring out changes are services and related products to be in competition. 20 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
STRUCTURE: Overall organizational structure
FUNCTIONS OF DEPARTMENTS

Key Persons:
BRANCH HEAD: Mr. Amit Dhupad. BRANCH MANGER: Mr. Prashant Gudisagar. FRONT OFFICE: In front office the following services are done. Account opening Holding enquiries Transfer of physical shares to demat form Transfer of demat shares to physical form Transformations of shares from demat to trading account etc. BACK OFFICE Maintenance of all Demat account with KCL Giving intimation related to the due of AMC.s to heir accout holders Sends quarterly information to the holders related to the holdings MARKETING In this department where the Demat account is marketed, marketing executives seek for prospective customers, they help in opening of an account and also these executives collect AMCs and provide other door to door services. Here all the records of investors are to maintained and kept confidentially and identifies the customers requirements and the department members try to fulfill their needs. o TIN. Tax information network services, this is recently introduced by the RIS department in this service, SHAREKHAN tries to give the services regarding taxation like o PAN opening o TDS return (filling) quarterly, yearly 22 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
ADVISORY SERVICES This is the main function done by the ris department kcl gives every financial advisory services to investors for ex: portfolio management, equity tips, tax planning etc ACCOUNTS Maintaining the purchases /stores department Internal auditing Payments and receipts HR & ADMINISTRATION PAY ROLL MAINTAINANCE: maintenance of employee details like salary incentives, bonus, and performance records etc RECRUITMENT DEPARTMENT: this department helps in assessing the needs of employees and recruiting the needs of human resources and giving the orientation programme to new employees. HRD: Maintain good relation ship with the employees Identifying the Demotivate employees and providing the necessary motivation Accepting problems of the workers and helps in solving them, Branch - Head Office A-206, Phoenix House, 2nd Floor, Senapati Bapat Marg, Lower Parel, Mumbai 400 013. TECHNOLOGY DEPARTMENT Sharekhan has been successful in keeping IT investments under control, and helping in keeping these spends aligned with Sharekhans business goals. He runs a team with 50 people on Board. ShareKhan retains its focus on providing reliable, secure, and fast trading services. Inside the Jungle ShareKhan operates through online and offline (SSKI) channels. The Online structure forms the most integral point for business and transactions. The online component is made up of a conventional portal, a chat facility and a few 'speed trade' terminals. 23 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
With the 'speed trade' channel, customers gain a better and more efficient platform for transactions. It has a terminal at the user end, connected to ShareKhan's systems through a TCP/IP link. When a Web trade request is made, it travels via HTTP/HTTPS and is not real-time. But with a speed trade transaction, the transfer of information is directly with the trading system and is entirely live. ShareKhan uses 128-bit SSL encryption technology by Verisign and can also operate on cable connections, GPRS and dial-up. The offline model is more personalized in the sense that it provides the customer the opportunity to interact with a human voice through the IVR or a team of customer service executives over the telephone. Sharekhan implemented BEA's Web Logic platform, which runs on 12 Sun Solaris servers.BEA's Web Logic is the basis of ShareKhan's online trading application. Its middleware platform provides the business logic to interface with technology and also provides encrypted transactions. The different constituents of Web trade such as broker accounts,depository participants And bank interfaces have been integrated into one scalable unit, which in turn supports Optimization of the architecture. The essential business logic and risk management functions are vital to the application server framework. They have enabled the company to support its customers with the help of various channels. Each business transaction has to pass through the risk management infrastructure. The IT system has been designed as a multi-tiered architecture. The ISP (Reliance) and web servers offer the front-end of the portal and LDAP services. SQL database utilizes LDAP for which the authentication happens from the ISP. A risk management engine-a customized solution from Cambridge Technology Partners-runs on a cluster mode. A content management layer sends information to the trading applications manager. Based on the request type, a content manager from Vignette routes traffic to the trading applications manager. An Oracle Parallel Server (OPS) database runs on a cluster mode. An order routing system leads all requests to the stock exchange. The IVR operates on applications created by Talisma Corporation. Customers can place orders through the IVR. The service request can also be diverted to a sales executive or agent, if the customer wishes to speak to someone. The agent will verify the user details, take down the order and execute the same. BEA WebLogic manages the applications servers and risk management portfolio and the Web servers and ISP run on Microsoft's IIS. The data is passed on to a load director by a checkpoint firewall and the director balance it across the IIS servers. As the

IT Infrastructure is de-centralized; there are over 200 servers across all ShareKhan branches and franchises.
SYSTEMS: The organization follows strict rules and regulations for the employee. It follows specific entry and exit timing for its employees. All junior staff member will have to report to the designated senior staff member daily attendance register to the human resource department.This is duly processed at the end of each month. The company has its regional office in Belgaum, which is headed by a regional manager. All branch heads and various dept heads will report to him on regular basis. Finance operations are centralized at the head office level and excess funds are regularly transferred to the head office account. Periodic fund requirement at the regional level will be sent as and when required. But the local regional manager would sign all cheques and such instruments. Requirement of fresh incumbents are made at local office at the regional level depending upon the manpower requirement. HR would dispatch interviews and the appointment from the head office.Usually the employee will be on one-year probation and after successful completion he will be made permanent employee. Operation of company is monitored by the chairman of the company and various others senior managers, operations at the junior level is largely centralized with division heads making key decisions. The company is ISO certified and follows strict register of quality maintenance with high standards of process and systems SKILLS: Skills include the distinctive competencies that reside in the organisation. These can be distinctive competencies of people, management practices, systems and technology. The skills of Sharekhan Brand image of the Company& the Brand power of Sharekhans products. Customer friendly & hassle free procedures. Strong financial fundamentals. Transparency in policies. A wide network in major cities & towns. 25 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Personalized customer attention.
The skills required to be an employee of Sharekhan are as follows: Basic knowledge of Computer Good communication skills Management Skills Trainable Lead a team of at least four advisors Having good knowledge about the stock market and its operation. STAFF: Each incumbent should have a specific academic qualification to match the position he is going to hold and also necessary skills to execute the assignment. Marketing/sales people should posses at least a degree and a management degree is preferred and should necessary posses good communication skill and flair for sales .he should have a two-wheeler for communicating purpose. All back end employees should have at leas graduation with exposure to necessary skills. For fresher due training will be given and then will be put on the jobs. Their potentials will be monitored on a regular basis and will be suitable guidance from time to time. Annual increments are also given based on the performance predominant. SHARED VALUES: Shared value of the organization can be characterized as the whole of the norms, views and culture shared by the people working in the organization. These values and set goals keep the employees working towards common destination as a coherent team and thus help them to keep the team spirit alive. Sharekhan Ltd is conscious of its moral responsibilities towards its employees, staff and customers. Some of the shared values are: Integrity & Respect Being honest, ethical and open as a basis for building trusting relationships. Customer satisfaction is of cordial value to Sharekhan Ltd.

To sustain an organization of able and committed employees and provide opportunities for growth and development.
MEASURES FOR IMPROVING COMMON INVESTOR CONFIDENCE Scandals affect investor confidence in stock market. Spate of scandals in United States were being addressed by stricter laws and strong actions against culprits to prevent any recurrence of these events and to restore investor confidence. It is important for investors to realize that returns on equities are cyclical in nature and also, market moves up and down with time. Understanding market and patience while market is going down are important while investing in equities. IPOs in the long run are overpriced. So after listing, a fall in market price results in loss of investment to the investors. There is also evidence to suggest that the corporate stock owned by highincome investors appreciate substantially faster than stock owned by investors with lower incomes. The main reason for the same is better diversification and information availability for wealthy investors. There are also studies to indicate that investors have adoption and not rational expectations. Adaptive expectations result in both trusts and mistrust in securities market based on past actions. In Indian context, the number of small investors in new issue market is massive. Most of new investors make their first entry into equity investments via the new issue market. So retaining common investor confidence in primary markets is important.

SWOT ANALYSIS
STRENGTH: Employee motivation policy: Sharekhan maintain different type of employee motivation policy like, if a employee get one Demat account ,he get 600 Rs incentives and also if he get more accounts ,he get more incentives this is one example of employee motivation policy employees in sharekhan is main strength of sharekhan compare to competitors Research Team: Good research team is one of the most important strength of sharekhan. It has its one research team of technical analysist, this team will helps to investor to know the future market position .research team will helps to sharekhan investor to give financial advices in market fluctuation. Good Infrastructure: Sharekhan having fully furnitured and well arranged department in each branch and its automated work. Most of stock broking are very Compaq but sharekhan having big spaced office. This creates good customer relationship Healthy Financial Market: Sharekhan working in investor friendly and working transparent because most of investors common compliant is mistake and trust. Thats why sharekhan maintain transparent working it will create customer loyalty. User friendly web site: It is one of the main strength of the sharekhan .sharekhan technical persons design web site user friendly compare to other competitors. Home page is design well it give all the type of information to customers and also it having its security system to each Demat accounts because to control internet hacking. WEAKNESS: 28 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Insufficient Advertisement Policy: Sharekhan advertisement policy is not so good compare to other competitors like ICICI, KARVEY, and RELIANCE MONEY etc No access to the rural market: It is one of the major weakness of sharekhan because sharekhan more concentrated on urban area only not concentrate on semi urban areas. These are two main weakness of sharekhan. OPPORTUNITY: Sharekhan having good customer relation strategy so that it create good opportunity to cerate goodwill and capture the market. Growing initial public offer create opportunity to capture the new market Positive Outlook of People towards Financial Products because most of investors more about financial instrument and working strategy of stock brokers Attraction New investor to financial market through media this creates new opportunity to sharekhan. THREATS: Market Uncertainty: Market uncertainty is major threats to all stock brokers because in India, markets depend upon global market so that if anything happens in global market it will affect by Indian market and Indian economy depend upon Agri if any thing natural calamites occur it affect economy of India. Market uncertainty is major threats to stock brokers because if any thing happens in market it will affect to investors and investor interest Stiff Competition: Competition is one of the major threat to sharekhan .competition is stiff between major companies like reliance, is difficult to compete in market New entry in to market: New entry in to market is another threat to sharekhan because it increases the competition. Government policy:

Government rules and regulation relating stock broking is another major threat because it some time more restricts the stock brokers. Government made rules to save investors interest but it create negative effect on stock brokers.
Learning Experience
Investment in India has become more of a security necessity than a business lifestyle. As the interest rates all over are dropping, people are switching to other avenues which fetch better results. The risk band that initially existed as been eased out and people are on the lookout for new and better stuff. In olden days, one could invest only in a few companies, but the present day has given people to try a wide range of companies. The decision in regard to investments is based on the sector performance as well as the strong fundamentals of the company. The act of speculation has considerably been reduced due to the statistical data and its analysis that companies like sharekhan do and people have become intelligent investors rather than mere speculators. It was a very fruitful experience working in sharekhan as a management trainee. It offered exposure to the wide range of investment options available. The risk factors involved could be understood easily. Not only did it give a learning experience but also gave an idea on how we could incorporate the various investment options, discovered by the economists, into a good planning package

1. Executive Summary
Market deregulation, growth in global trade, and continuing technological developments have revolutionized the financial marketplace during the past two decades. A by-product of this revolution is increased market volatility, which has led to a corresponding increase in demand for risk management products. This demand is reflected in the growth of equity derivatives from the standardized futures and options products of the 1970s to the wide spectrum of over-the-counter (OTC) products offered and sold in the 1990s. Equity derivatives come in many shapes and forms, including futures, forwards, swaps, options, structured debt obligations and deposits, and various combinations thereof. Some are traded on organized exchanges, whereas others are privately negotiated transactions. Derivatives have become an integral part of the equity markets because they can serve several economic functions. Derivatives can be used to reduce business risks, expand product offerings to customers, trade for profit, manage capital and funding costs, and alter the risk-reward profile of a particular item or an entire balance sheet. These events serve as a reminder of the importance of understanding the various risk factors associated with business activities and establishing appropriate risk management systems to identify, measure, monitor, and control exposure. The study tries to understand the Intrinsic value, Time value of an option and also compares the theoretical option price and market option price of selected option contracts. There have been various attempts in using Black and Schools option pricing model. We have discussed in this study the relationship between BSOPM price and market price which helps to investor to know the fair price of an option premium. This study can also be extended to other option contracts and hence forth find the option contract which give fair price of an option premium.

General Introduction
The study of option in Indian stock market and to find out the relationship between theoretical option price and market option price.
INTRODUCTION:
Market deregulation, growth in global trade, and continuing technological developments have revolutionized the financial marketplace during the past two decades. A by-product of this revolution is increased market volatility, which has led to a corresponding increase in demand for risk management products. This demand is reflected in the growth of equity derivatives from the standardized futures and options products of the 1970s to the wide spectrum of over-the-counter (OTC) products offered and sold in the 1990s. Equity derivatives come in many shapes and forms, including futures, forwards, swaps, options, structured debt obligations and deposits, and various combinations thereof. Some are traded on organized exchanges, whereas others are privately negotiated transactions. Derivatives have become an integral part of the equity markets because they can serve several economic functions. Derivatives can be used to reduce business risks, expand product offerings to customers, trade for profit, manage capital and funding costs, and alter the risk-reward profile of a particular item or an entire balance sheet. These events serve as a reminder of the importance of understanding the various risk factors associated with business activities and establishing appropriate risk management systems to identify, measure, monitor, and control exposure. INTRODUCTION TO EQUITY: Equity trading started in India in June 2000, after a regulatory process which stretched over more than four years. In July 2001, the equity spot market moved to rolling settlement. Thus, in 2000 and 2001, the Indian equity market reached the logical conclusion of the reforms program which began in 1994. It is hence important to learn about the behavior of the equity market in this new regime.

Indias experience with the launch of equity market has been extremely positive, by world standards. NSE is now one of the prominent exchanges, amongst all emerging markets, in terms of equity derivatives turnover. There is an increasing sense that the equity derivatives market is playing a major role in shaping price discovery. The goal of this paper is to convey a detailed sense of the functioning of the equity market, in order to convey the state of the art. It seek to convey some insights into what is going on with the equity derivatives market, and suggest the investors to keep a track of the Equity financial instruments, which include futures, options and swaps, are based on underlying cash assets. Equity derivatives are based on stocks and stock indices and their pricing and performance are closely linked to those of the underlying equity instruments. Equity derivatives are traded on futures and options exchanges and on over-the-counter markets, and in a similar way to equities. Equity traders need access to tools that enable them to analyse derivatives and their underlying equity instruments. They look for tools such as equity option calculators and for purpose-built models that help them devise hedging and trading strategies. The more structured equity transactions can put considerable strains on pricing and risk management systems, as the amount of data needed to perform the necessary calculations gives rise to performance issues. Furthermore, these calculations need to be performed within a relatively short timeframe to ensure a rapid time to market. Timing efficiencies can provide a significant competitive advantage for most institutions and effective technology can further assist this effort. INTRODUCTION TO DERIVATIVES: A Derivative is an instrument whose value is derived from the value of underlying assets, which may be commodities, foreign exchange, bonds, stocks or even stocks indices, etc. For example, in the case of a rice derivative, say rice futures, the underlying asset is rice, which is a commodity. The value of rice futures will be derived from the current price of rice. Similarly, in the case of 'index futures,' say NSE Index Futures, the NSE Index (the nifty) is the underlying assets. The first step towards introduction of derivatives trading in India was promulgation of the securities Laws (amendment) Ordinance, 1995. It withdrew the prohibition on options in 33 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
securities. The market for derivatives however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24 member committee under the Chairmanship of Dr. L.C. Gupta on November 18, 1996 to develop regulatory framework for derivatives trading in India 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 started operations in the derivatives segment on June 12, 2000. Initially NSE introduced 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 trading in futures and options 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. Today, The National Stock Exchange of India Ltd. (NSE), is the largest stock exchange in India and a preferred exchange for trading in equity, debt and derivatives instruments by investors. NSE has set up a sophisticated electronic trading, clearing and settlement platform and its infrastructure serves as a role model for the securities industry. The standards set by NSE in terms of market practices; products and technology have become industry benchmarks and are being replicated by many other market participants. NSE has four broad segments Wholesale Debt Market Segment (commenced in June 1994), Capital Market Segment (commenced in November 1994) Futures and Options Segment (commenced June 2000) and the Currency Derivatives segment (commenced in August 2008). Various products which are traded on the NSE include, equity shares, bonds, debentures, warrants, exchange traded funds, mutual funds, government securities, futures and options on indices & single stocks and currency futures. Today NSEs share to the total equity market turnover in India averages around 72% whereas in the futures and options market this share is around 99%. At NSE, it has always been our Endeavour to continuously upgrade the skills and proficiency of the Indian investor. Exchange-traded options form an important class of derivatives which have standardized contract features and trade on public exchanges, facilitating trading among investors. They provide settlement guarantee by the Clearing Corporation thereby reducing counterparty risk. Options can be used for hedging, taking a view on the future direction of the market or for arbitrage. Options are also helpful for implementing various trading strategies such as straddle, strangle, butterfly, collar etc. which can help in generating income for investors under various market conditions. 34 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Types of derivatives: OTC and exchange-traded Broadly speaking there are two distinct groups of derivative contracts, which are distinguished by the way that they are traded in market 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 Swaps, Forward rate agreements, and exotic option are almost always traded in this way. The OTC derivatives market is huge. Exchange-traded derivatives 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. Some types of derivative instruments also may trade on traditional exchanges. For instance, hydrid 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. Like other derivatives, these publicly traded derivatives provide invertors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive. Need for a derivatives market: The derivatives market performs a number of economic functions: 1. They help in transferring risks from risk averse people to risk oriented people 2. They help in the discovery of future as well as current prices 3. They catalyze entrepreneurial activity 4. They increase the volume traded in markets because of participation of risk averse people in greater numbers 5. They increase savings and investment in the long run Risks Associated with Derivative Activities Risk is the potential that events, expected or unanticipated, may have an adverse impact on the individuals capital and earnings. The OCC has 35 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
defined nine categories of risk for bank supervision purposes. These risks are: strategic, reputation, price, foreign exchange, liquidity, interest rate, credit, transaction, and compliance. These categories are not mutually exclusive. Any product or service may expose the bank to multiple risks. For analysis and discussion purposes, however, the OCC identifies and assesses each risk separately. Derivative activities must be managed with consideration of all of these risks. Participants in a derivatives market: Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset. Speculators use futures and options contracts to get extra leverage in betting on future govements in the price of an asset. They can increase both the potential gains and potential losses by usage of derivatives in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit
Derivatives Product:
Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. 36 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options. Swaps: Swaps are private agreements between two parties to exchange cash flows in the Future according to a prearranged formula. They can be regarded as portfolios of forward Contracts. The two commonly used swaps are : Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cashflows in one direction being in a different currency than those in the opposite direction. Swaptions : Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.
Need for a derivatives market: 1. The derivatives market performs a number of economic functions: 2. They help in transferring risks from risk averse people to risk oriented people 3. They help in the discovery of future as well as current prices 4. They catalyze entrepreneurial activity 5. They increase the volume traded in markets because of participation of risk averse people in greater numbers 6. They increase savings and investment in the long run

OPTIONS
An option is the right, but not the obligation, to buy or sell something at a stated date at a stated price. A call option gives one the right to buy, a put option gives one the right to sell. An option is a security, just like a stock or bond, and constitutes a binding contract with strictly defined terms and properties. Listed options have been available since 1973, when the Chicago Board Options Exchange, still the busiest options exchange in the world, first opened. The World With and Without Options Prior to the founding of the CBOE, investors had few choices of where to invest their money; they could either be long or short individual stocks, or they could purchase treasury securities or other bonds. Once the CBOE opened, the listed option industry began, and investors now had a world of investment choices previously unavailable. Option Feature In other contracts, the focus is on underlying asset and each counterpart has right and obligation (r&o) to perform. For example, in futures contract, the buyer has the right and obligation to buy; and seller, the right and obligation to sell. Option contract differs from others in two respects. The primary focus is on r&o, not on underlying asset. Second, the r&o are separated, with buyer taking the right without obligation (r w/o o) and seller taking the obligation without right. Thus, the distinguishing feature of option is the right-without-obligation for the buyer
OPTION TERMINOLOGY
Index options: These options have the index as the underlying. In India, they have a European style settlement. Eg. Nifty options, Mini Nifty options etc. Stock options: Stock options are options on individual stocks. A stock option contract gives the holder the right to buy or sell the underlying shares at the specified price. They have an American style settlement. Buyer of an option: The buyer of an option is the one who by paying the option premium buys the right buy not the obligation to exercise his option on the seller/writer. Writer / seller of an option: The writer / seller of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. Option price/premium: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium. Expiration date: The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity. Strike price: The price specified in the options contract is known as the strike price or the exercise price. American options: American options are options that can be exercised at any time upto the expiration date. European options: European options are options that can be exercised only on the expiration date itself.
In-the-money option: An in-the-money (ITM) option is an option that would lead to a 39 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
positive cashflow to the holder if it were exercised immediately. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i.e. spot price > strike price). If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price. At-the-money option: An at-the-money (ATM) option is an option that would lead to zero cashflow if it were exercised immediately. An option on the index is at-the-money when the current index equals the strike price (i.e. spot price = strike price). Out-of-the-money option: An out-of-the-money (OTM) option is an option that would lead to a negative cashflow if it were exercised immediately. A call option on the index is out-of-the-money when the current index stands at a level which is less than the strike price (i.e. spot price < strike price). If the index is much lower than the strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price. Intrinsic value of an option: The option premium can be broken down into two components - intrinsic value and time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero. Putting it another way, the intrinsic value of a call is Max[0, (St K)] which means the intrinsic value of a call is the greater of 0 or (St K). Similarly, the intrinsic value of a put is Max[0,K St],i.e. the greater of 0 or (K St). K is the strike price and St is the spot price. Time value of an option: The time value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually, the maximum time value exists when the option is ATM. The longer the time to expiration, the greater is an option's time value, all else equal. At expiration, an option should have no time value. PAY-OFFS FOR OPTION CONTRACT CALL OPTION 40 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
PUT OPTION
Option Frameworks
The buyer assumes a long position, and the seller a corresponding short position. (Thus the seller of a call is "short a call" and has the obligation to sell to the holder, who 41 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
is "long of a call option" and who has the right to buy. The writer of a put is "on the short side of the position", and has the obligation to buy from the taker of the put option, who is "long a put".) The option style will affect the terms and valuation. Generally the contract will either be American style - which allows exercise before the maturity date - or European style - where exercise is on a fixed maturity date. European contracts are easier to value and therefore to price. The contract can also be on an exotic option. Buyers and sellers of options do not (usually) interact directly; the options exchange acts as intermediary and quotes the market price of the option. The seller guarantees the exchange that he can fulfill his obligation if the buyer chooses to execute. The risk for the option holder is limited: he cannot lose more than the premium paid as he can "abandon the option". His potential gain is theoretically unlimited; see strike price. The maximum loss for the writer of a put option is equal to the strike price. In general, the risk for the writer of a call option is unlimited. However, an option writer who owns the underlying instrument has created a covered position; he can always meet his obligations by using the actual underlying. Where the seller does not own the underlying on which he has written the option, he is called a "naked writer", and has created a "naked position". Options can be in-the-money, at-the-money or out-of-the-money. The "in-themoney" option has a positive intrinsic value, options in "at-the-money" or "out-of-themoney" has an intrinsic value of zero. Additional to the intrinsic value an option has a time value, which decreases, the closer the option is to its expiry date (also see Option time value). Option Uses One can combine options and other derivatives in a process known as financial 42 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
engineering to control the risk in a given transaction. The risk taken on can be anywhere from zero to infinite, depending on the combination of derivative features used. By using options, one party transfers (buys or sells) risk to or from another. When using options for insurance, the option holder reduces the risk he bears by paying the option seller a premium to assume it. Call options: Consider a typical transaction. On 4 Jan 2010, S sells a call option to L for a price of Rs.3.25. Now L has the right to come to S on 28 jan 2010 and buy 1 share of Reliance at Rs.900. Here, Rs.3.25 is the option price, Rs.900 is the exercise price and 28 jan 2010 is the expiration date. L does not have to buy 1 share of Reliance on 28 Jan 2010 at Rs.900 from S (unlike a forward/futures contract which is binding on both sides). It is only if Reliance is above Rs.900, on 28 Jan 2010, that L will find it useful to exercise his right. If L chooses to exercise the option, S is obliged to live up to his end of the deal: i.e. S stands ready to sell a share of Reliance to L at Rs.900 on 28 Jan 2010. Hence, at option expiration, there are two outcomes that are possible: an option could be profitably exercised, or it could be allowed to die unused. If the option lapses unused, then L has lost the original option price (Rs.3.25) and S has gained it. When L and S enter into a futures contract, there is no payment (other than initial margin). In contrast, the option has a positive price which is paid in full on the date that the option is purchased. Options come in two varieties European and American. In a European option, the holder of the option can only exercise his right (if he should so desire) on the expiration date. In an American option, he can exercise this right anytime between purchase date and the expiration date. Strategies for speculation. Spread trading 43 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Spread trading involves taking a position in two or more options of the same type (call or put) at the same time. The most popular spread trading strategies are: Bull spread Bear spread
Bull spread: A bull spread is created when the trader is expecting the prices to rise. This is done by:
Buying a call with lower strike price.selling a call at higher strike price. How is it done? Suppose the spot price of ITC is Rs.250 and a trader expects that the price will rise. He buys 100 calls with strike price of Rs. 275 at Rs. 5 per share and sells 100 calls with a strike price of Rs.290 at Rs. 2 per share. He pays a premium of Rs. 500 (i.e. 5 x 100) on the calls bought and receives Rs. 200 (i.e. 2 x 100) premium on calls sold. Thus he incurs an initial cost of Rs.300 as premium differential. If the price of ITC moves to Rs.300 He would gain (300 275)*100 = Rs. 2500 on the calls bought, and lose (300-290)*100 = Rs.1000 on calls sold. Thus his gain would be 2500 1000 = Rs. 1500. After deducting the initial premium cost of Rs. 300, his net profit would sum up to 1500 300 = Rs. 1200. If the price remains below Rs. 275 he loses Rs.300.(only premium paid). In this strategy his maximum gains would be Rs. 1200 i.e. when price is Rs. 390 or more and maximum loss would be Rs.300 when the price is Rs. 275 or less Bear spread: A bear spread is created when the trader is expecting the prices to fall. This is done by: 44 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Buying a call with higher strike price. Selling a call with lower strike price. How is it done? Suppose the spot price of ITC is Rs.350 and a trader expects that the price will fall. He buys100 calls with strike price of Rs. 290 at Rs. 2 per share and sells 100 calls with a strike price of Rs.275 at Rs. 5 per share. He pays a premium of Rs. 200 (i.e. 2 x 100) on the calls bought and receives Rs. 500 (i.e. 5 x 100) premium on calls sold. Thus he initially gains Rs.300 as premium differential. If the price of ITC falls to Rs.300 He would gain (300 290)*100 = Rs. 1000 on the calls bought, and lose (300-275)*100 = Rs.2500 on calls sold. Thus he loses 2500 1000 = Rs. 1500. After deducting the initial premium gain of Rs. 300, his net loss would sum up to 1500 300 = Rs. 1200. If the price remains below Rs. 275 he gains Rs.300.(only premium paid). In this strategy his maximum gains would be Rs. 300 i.e. when price is Rs. 775 or less and maximum loss would be Rs.1200 when the price is Rs. 290 or more. As with index futures, index options are also cash settled. Option prices: some illustrative values Option strike price Calls 1 month Puts 1 month 4800 117 8 4850 79 19 4900 48 38 4950 27 66 5000 13 102
Assumptions: Nifty spot is 4900, Nifty volatility is 25% annualized, interest rate is 10%, Nifty dividend yield is 1.5%. Suppose Nifty is at 4900 on 1 Jan 2010. Suppose L buys an option which gives him the right to buy Nifty at 5000 from S on 28 Jan 2010. It turns out that this option is 45 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
worth roughly Rs.90. So a payment of Rs.90 passes from L to S for having this option. When 28 Jan 2010 arrives, if Nifty is below 5000, the option is worthless and lapses without exercise. Suppose Nifty is at 5050. Then (in principle) L can exercise the option, buy Nifty using the option at 5000, and sell off this Nifty on the open market at 5050. So L has a profit of Rs.50 and S has a loss of Rs.50. In this case, cash settlement consists of NSCC imposing a charge of Rs.50 upon S and paying it to L. When Nifty is at 4900, the right to buy Nifty at 5000 one month away is worth little (Rs.13). The buyer of this option puts down Rs.13 when the option is purchased, and this fee is nonrefundable. If Nifty turns out to be above 5000 after a month, this option will prove to be valuable. If Nifty proves to be at 5002 after a month, the option will pay Rs.2. Conversely when Nifty is at 4900, the right to sell Nifty at 4800 one month away isnt worth much (Rs.8): this is the insurance premium for protecting yourself against a fall in Nifty of worse than a hundred points. However, when we increase the time to expiration of the option, there is a greater chance that prices can move around, and these same options become worth more: e.g. the right to sell Nifty at 5000 is worth Rs.25 when we consider a threemonth horizon (i.e. insurance against a hundredpoint drop on a threemonth horizon). In India, last Thursday of every months contract is taken as the expiration date Option Contract Dec 2009 Jan 2010 Feb 2010 Expiry Date 31 Dec, 2009 28 Jan, 2010 25 Feb, 2010
At any given point of time, 3-month contracts would be available for trading. In the beginning of December;Dec,Jan and Feb future contracts are available. After the expiry of Dec future we would have Jan, Feb and March future contracts available and so on.

Hence, if there are three serial month contracts available and the scheme of strikes is 4-1-4, then there are minimum 3 x 9 x 2 (call and put 83 options) i.e. 54 options contracts available on an index Factors 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 transactions costs as compared to individual financial assets. Trading Mechanisms: The derivatives trading system at NSE is called NEAT-F&O trading system. It provides a fully automated screen-based trading for all kind of derivative products available on NSE on a nationwide basis. It supports an anonymous order driven market, which operates on a strict price/time priority. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system. Various time and price related conditions like Immediate or Cancel, Limit/Market Price, Stop Loss, etc. can be built into an order. Trading in derivatives is essentially similar to that of trading of securities in the CM segment. The NEAT-F&O trading system distinctly identifies two groups of users. The trading user more popularly known as trading member has access to functions such as, order entry, order matching and order & trade management. The clearing user (clearing member) uses the trader workstation for the purpose of monitoring the trading member(s) for whom he clears the trades. Additionally, he can enter and set limits on positions, which a trading member can take. Trading terminals can also be accessed through the Internet by the investors from anywhere. Transaction Charges: 47 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
The maximum brokerage chargeable by a trading member in relation to trades effected in the contracts admitted to dealing on the F&O segment of NSE is fixed at 2.5% of the 88 contract value in case of index futures and stock futures. In case of index options and stock options it is 2.5% of notional value of the contract [(Strike Price + Premium) Quantity)], exclusive of statutory levies. Clearing and Settlement: NSCCL undertakes clearing and settlement of all trades executed on the F&O segment of the Exchange. It also acts as legal counterparty to all trades on this segment and guarantees their financial settlement. The Clearing and Settlement process comprises of three main activities, viz., Clearing, Settlement and Risk Management. Clearing Mechanism The first step in clearing process is working out open positions and obligations of clearing (self-clearing/trading-cum-clearing/professional clearing) members (CMs). The open positions of a CM is arrived at by aggregating the open positions of all the trading members (TMs) and all custodial participants (CPs) clearing though him, in the contracts which they have traded. Settlement Mechanism All futures and options contracts are cash settled i.e. through exchange of cash. The underlying for index futures/options of the Nifty index cannot be delivered. The settlement amount for a CM is netted across all their TMs/clients, across various settlements. For the purpose of settlement, all CMs are required to open a separate bank account with NSCCL designated clearing banks for F&O segment.
Settlement of Futures Contracts on Index or Individual Securities Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. MTM Settlement for Futures: 48 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
All futures contracts for each member are market to- market to the daily settlement price of the relevant futures contract at the end of each day. This is known as daily mark-to-market settlement. The pay-in and pay-out of the mark-to-market settlement are affected on the day following the trade day (T+1).After completion of daily settlement computation, all the open positions are reset to the daily settlement price. Such positions become the open positions for the next day. Final Settlement for Futures: On the expiry day of the futures contracts, after the close of trading hours, NSCCL marks all positions of a CM to the final settlement price and the resulting profit/loss is settled in cash. Final settlement loss/profit amount is debited/credited to the relevant CM's clearing bank account on the day following expiry day of the contract. Settlement Prices for Futures: Daily settlement price on a trading day is the closing price of the respective futures contracts on such day. The closing price for a futures contract is currently calculated as the last half an hour weighted average price of the contract in the F&O Segment of NSE. Final settlement price is the closing price of the relevant underlying index/security in the Capital Market segment of NSE, on the last trading day of the Contract. Settlement of Options Contracts on Index or Individual Securities Options contracts have three types of settlements, daily premium settlement, interim exercise settlement in the case of option contracts on securities and final settlement.
Daily Premium Settlement for Options: Buyer of an option is obligated to pay the premium towards the options purchased by him. Similarly, the seller of an option is entitled to receive the premium for the option sold by him. The premium payable amount and the premium receivable amount are netted to compute the net premium payable or receivable amount for each client for each option contract.The pay-in and pay-out of the premium settlement is on T+1 day. The 49 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
premium payable amount and premium receivable amount are directly credited/debited to the CMs clearing bank account. Interim Exercise Settlement: Interim exercise settlement takes place only for option contracts on individual securities. An investor can exercise his in-the-money options 90 at any time during trading hours, through his trading member. Interim exercise settlement is effected for such options at the close of the trading hours, on the day of exercise. Valid exercised option contracts are assigned to short positions in the option contract with the same series (i.e. having the same underlying, same expiry date and same strike price), on a random basis, at the client level. Final Exercise Settlement: Final Exercise settlement is effected for option positions at in-the-money strike prices existing at the close of trading hours, on the expiration day of an option contract. All long positions at in-the-money strike prices are automatically assigned to short positions in option contracts with the same series, on a random basis.Final settlement loss/profit amount for option contracts on Index is debited/credited to the relevant CMs clearing bank account on T+1 day. Final settlement loss/profit amount for option contracts on Individual Securities is debited/ credited to the relevant CMs clearing bank account on T+2 day. Open positions, in option contracts, cease to exist after their expiration day. Assignment Margin for Options on Securities: Assignment margin is levied in addition to initial margin and premium margin. It is required to be paid on assigned positions of CMs towards interim and final exercise settlement obligations for option contracts on individual securities, till such obligations are fulfilled. The margin is charged on the net exercise settlement value payable by a CM towards interim and final exercise settlement. Client Margins: NSCCL intimates all members of the margin liability of each of their client. Additionally members are also required to report details of margins collected from clients 50 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
to NSCCL, which holds in trust client margin monies to the extent reported by the member as having been collected form their respective clients. Accounting of Derivatives: The Institute of Chartered Accountants of India (ICAI) has issued guidance notes on accounting of index futures contracts from the view point of parties who enter into such futures contracts as buyers or sellers. For other parties involved in the trading process, like brokers, trading members, clearing members and clearing corporations, a trade in equity index futures is similar to a trade in, say shares, and does not pose any peculiar accounting problems Taxation: The income-tax Act does not have any specific provision regarding taxability from derivatives. In the absence of a specific provision, it is apprehended that the derivatives contracts, particularly the index futures which are essentially cash-settled, may be construed as speculative transactions and therefore the losses, if any, will not be eligible for set off against other income of the assessee and will be carried forward and set off against speculative income only up to a maximum of eight years .As a result an investors losses or profits out of derivatives even though they are of hedging nature in real sense, are treated as speculative and can be set off only against speculative income. NSE-SPAN The objective of NSE-SPAN is to identify overall risk in a portfolio of all futures and options contracts for each member. The system treats futures and options contracts uniformly, while at the same time recognizing the unique exposures associated with options portfolios, like extremely deep out-of-the-money short positions and inter-month risk. Its over-riding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day based on 99% VaR methodology. SPAN considers uniqueness of option portfolios. The following factors affect the value of an option: Underlying market price 51 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Volatility (variability) of underlying instrument, and Time to expiration. Interest rate Strike price As these factors change, the value of options maintained within a portfolio also
changes. Thus, SPAN constructs scenarios of probable changes in underlying prices and volatilities in order to identify the largest loss a portfolio might suffer from one day to the next. It then sets the margin requirement to cover this one-day loss. The complex calculations (e.g. the pricing of options) in SPAN are executed by NSCCL. The results of these calculations are called risk arrays. Risk arrays, and other necessary data inputs for margin calculation are provided to members daily in a file called the SPAN Risk Parameter file. Members can apply the data contained in the Risk Parameter files, to their specific portfolios of futures and options contracts, to determine their SPAN margin requirements. Hence, members need not execute complex option pricing calculations, which is performed by NSCCL. SPAN has the ability to estimate risk for combined futures and options portfolios, and also re-value the same under various scenarios of changing market conditions.
THE BLACK AND SCHOLES MODEL: The Black Scholes Model is one of the most important concepts in modern financial theory. It was developed in 1973 by Fisher Black, Robert Merton and Myron Scholes and is still widely used today, and regarded as one of the best ways of determining fair prices of options.

A model of price variation over time of financial instruments such as stocks that can, among other things, be used to determine the price of a European call option. The model assumes that the price of heavily traded assets follow a geometric Brownian motion with constant drift and volatility. When applied to a stock option, the model incorporates the constant price variation of the stock, the time value of money, the option's strike price and the time to the option's expiry. The Black and Scholes Option Pricing Model didn't appear overnight, in fact, Fisher Black started out working to create a valuation model for stock warrants. This work involved calculating a derivative to measure how the discount rate of a warrant varies with time and stock price.
In order to understand the model itself, we divide it into two parts. The first part, SN(d1), derives the expected benefit from acquiring a stock outright. This is found by multiplying stock price [S] by the change in the call premium with respect to a change in 53 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
the underlying stock price [N(d1)]. The second part of the model, Ke(-rt)N(d2), gives the present value of paying the exercise price on the expiration day. The fair market value of the call option is then calculated by taking the difference between these two parts. Assumptions of the Black and Scholes Model: 1. The stock pays no dividends during the option's life 2. Markets are efficient 3. No commissions are charged 4. Interest rates remain constant and known 5. Returns are lognormal distributed
Measures of the Black and Scholes Model: Delta: Delta is a measure of the sensitivity the calculated option value has to small changes in the share price. Delta of an option is the sensitivity of option value to the underlying asset price. It is the most important Greek in hedging risk for an option. It is used to dynamically hedge the option against the asset price movements by buying and selling appropriate amounts of the underlying. Theoretically all risk from an option can be hedged using delta hedging and this position is called a delta neutral position. Delta = N(D1) Gamma: Gamma is a measure of the calculated delta's sensitivity to small changes in share price. Gamma is the sensitivity of delta to asset price movements. So it determines how often the delta hedge needs to be adjusted. Since in real markets risk is still left after achieving a delta neutral position, gamma is used to further hedge the option. Since the second derivative of the underlying would be zero, it is only through buying and selling options on the same underlying that a gamma neutral position can be achieved.

Theta: Theta measures the calculated option value's sensitivity to small changes in time till maturity.
Graphs of the Black and Scholes Model: This following graphs show the relationship between a call's premium and the underlying stocks price. The graph identifies the Intrinsic Value, Speculative Value, Maximum Value, and the Actual premium for a call.

Graph : Call Premium Versus Security Price
RESEARCH DESIGN
STATEMENT OF PROBLEM Equity Derivatives were considered risky for retail investors because of their poor knowledge about their operation. In spite of these encouraging developments, industry analysts felt that the derivatives market had not yet realized its full potential. Analysts pointed out that the equity derivative markets on the BSE and NSE had been limited to only four products - index futures, index options and individual stock futures and options which were limited to certain select stocks. Also a financial institution that sells a derivative product in the over-the-counter market is faced with the problem of managing the change in market value of this product until exercise or maturity date. If an equivalent derivative product is traded on an exchange, then the financial institution can neutralize its exposure, the fluctuations of the derivative value, by buying the equivalent derivative on the exchange, since there are no corresponding standard products traded on the exchanges. Thus investing ones exposure to non-standard derivative products becomes far more difficult. This study aims to understand relationship between option theoretical price and market price which heip investors to follow the BSOPM price calculations to know the fair price of option. 56 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
LITERATURE REVIEW There have been two prior papers on derivatives activity in the equity market. Cummins, Phillips, and Smith (CPS) (2002) present extensive descriptive statistics on the use of equity derivatives and conducted a probabilistic analysis of the equity participation decision. Colquitt and Hoyt (CH) (2002) analyzed the participation and volume decisions for equity derivatives in Georgia. This paper extends the analysis in CPS (2002) in a number of ways. The first major extension of CPS is to empirically analyze the dynamics of equity market. By going beyond CPS, The aim of this study is to provide a broad overview of how the design and structure of BSOPM model and understand Intrinsic value and time value associated with option contact in stock market. OBJECTIVES OF THE STUDY To understand the dynamics of equity markets and derivatives market. To study of options in Indian stock market. Comparison of BLACK AND SCHOOLS OPTION PRICING MODEL price of call with market price. To Study of time value and intrinsic value of call option in nifty. To study the basic knowledge about derivative market and options To study the clearing and settlement procedure of Derivatives products To study the option as a profit making strategy
SCOPE OF THE STUDY The study tries to understand the intrinsic value, Time value of an option and also compares the theoretical option price and market option price of selected option contracts This study can also be extended to other option contracts and hence forth find the option contract which give fair price of an option premium. RESEARCH METHODOLOGY Type of research 57 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
This study requires more formalized and typically structured with clearly stated hypothesis. And hence descriptive study is more suitable which helps in descriptions of characteristics associated with the subject population. Also helps in associations among different variables SOURCES OF DATA: Secondary data The data was collected through secondary sources. As this project was a descriptive study conducted, there was no questionnaire used to collect primary data or any other additional data. The secondary data source is through internet, from website of National Stock Exchange. SAMPLING PLAN The niftyoption prices of the last 12 weeks. All the stocks and options will be selected from National Stock Exchange.
SAMPLE SIZE The study is carried on by taking 3 months nifty option contracts which are traded on the stock exchange for previous 12weeks. PLAN OF ANALYSIS: Statistical tools such as Correlation and regression would be used to test the relationship between a metric dependent variable and independent variable. LIMITATIONS OF THE STUDY: 1. Data for the study is representing the status as on 1st Dec 2009. So the study may not hold good for all the time. 2. The study has been limited to the sample size.

2. Data Analysis and Interpretation Calculations of Intrinsic value and Time value.
The Intrinsic Value of an Option Intrinsic Value = Spot Price - Strike Price The intrinsic value of an option must be positive or zero. It cannot be negative. For a call option, the strike price must be less than the price of the underlying asset for the call to have an intrinsic value greater than 0. The Time Value of an Option : Time value=Current premium - Intrinsic value Generally, the longer the time remaining until an options expiration, the higher its premium will be. This is because the longer an options lifetime, greater is the possibility that the underlying share price might move so as to make the option in-themoney. All other factors affecting an options price remaining the same, the time value portion of an options premium will decrease (or decay) with the passage of time.

Note: This time decay increases rapidly in the last several weeks of an options life. When an option expires in-the-money, it is generally worth only its intrinsic value.
CONTRACT PROFILE
Instrument: OPTIDX Symbol: Nifty. Option: CE For December option contract. Strike price = 5100 Expiration Date = 31 Dec 2009 For January option contract Strike price = 5100 Expiration Date = 28 Jan 2010

For Feb option contact. Strike price = 4800 Expiration Date = 25 Feb 2010
Calculations of Intrinsic value and Time value of December 2009 option contract.
Strike Price 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 Spot Price 5122 5123.25 5131.7 5108.9 5066.7 5147.95 5112 5134.65 5117.3 5105.7 5033.05 5042.05 5041.75 4987.7 4952.6 4985.85 5144.6 5178.4 5187.95 5169.45 5201.05 Intrinsic value 22 23.25 31.7 8.9 0 47.95 12 34.65 17.3 5.7 0 0 0 0 0 0 44.6 78.4 87.95 69.45 101.0561 Time Value 124.85 113.25 107.3 133.1 104.9 104.5 121.9 98.85 99.7 102.6 69.9 72.5 58.6 34.25 17.9 19.3 39.9 13.6 10.3 1.05 0
Instrument OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX
Symbol NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY
Option CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE
Date 1-Dec-09 2-Dec-09 3-Dec-09 4-Dec-09 7-Dec-09 8-Dec-09 9-Dec-09 10-Dec-09 11-Dec-09 14-Dec-09 15-Dec-09 16-Dec-09 17-Dec-09 18-Dec-09 21-Dec-09 22-Dec-09 23-Dec-09 24-Dec-09 29-Dec-09 30-Dec-09 31-Dec-09
Expiry 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09
Premium 146.85 136.5 139 142 104.9 152.45 133.9 133.5 117 108.3 69.9 72.5 58.6 34.25 17.9 19.3 84.5 92 98.25 70.5 98
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Calculations of Intrinsic value and Time value of January 2010 option contract.
Instrument OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX
Symbol NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY
Option CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE
Date 4-Jan-10 5-Jan-10 6-Jan-10 7-Jan-10 8-Jan-10 11-Jan-10 12-Jan-10 13-Jan-10 14-Jan-10 15-Jan-10 18-Jan-10 19-Jan-10 20-Jan-10 21-Jan-10 22-Jan-10 25-Jan-10 27-Jan-10 28-Jan-10
Expiry 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10
Strike Price 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100
Spot Price 5232.2 5277.9 5281.8 5263.1 5244.8 5249.4 5210.4 5234 5259.9 5252.2 5274.9 5225.7 5221.7 5094.2 5036 5007.9 4853.1 4867.3
Premium 208.15 224 231.5 206 202 196.8 157 177 181.5 172.75 182 145 134 53.1 24 10.9 0.85 0.05
Intrinsi c value 132.2 177.9 181.8 163.1 144.75 149.4 110.4 133.95 159.9 152.2 174.85 125.65 121.7 0 0 0 0 0
Time value 75.95 46.1 49.7 42.9 57.25 47.4 46.6 43.05 21.6 20.55 7.15 19.35 12.3 53.1 24 10.9 0.85 0.05

Calculations of Intrinsic value and Time value of February 2010 option contract.
Instrument OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX
Symbol NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY
Option CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE
Date 1-Feb-10 2-Feb-10 3-Feb-10 4-Feb-10 5-Feb-10 6-Feb-10 8-Feb-10 9-Feb-10 10-Feb-10 11-Feb-10 15-Feb-10 16-Feb-10 17-Feb-10 18-Feb-10 19-Feb-10 22-Feb-10 23-Feb-10 24-Feb-10 25-Feb-10
Expiry 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10
Strike Price 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800
Spot price 4899.7 4830.1 4931.85 4845.35 4718.65 4757.25 4760.4 4792.65 4757.2 4826.85 4801.95 4855.75 4914 4887.75 4844.9 4856.4 4870.05 4858.6 4859.75
Premium 178 127 183 129.05 76.8 93 92 98 82 107 79 130 127 110 82.9 72.8 87 73.5 53.9
Intrinsic value 99.7 30.1 131.85 45.35 0 0 0 0 0 26.85 1.95 55.75 114 87.75 44.9 56.4 70.05 58.6 59.75
Time Value 78.3 96.9 51.15 83.7 76.8 93 92 98 82 80.15 77.05 74.25 13 22.25 38 16.4 16.95 14.9 0

Graphs of time value

140 120 100 80 60 40 20 0 1 2 3 4 5 6 7
Time Value Of Dec
9 10 11 12 13 14 15 16 17 18 19 20 21
Time value of Jan 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18
Time Value Of Feb

120 100 80 60 40 20
64
11 12 13 14 15 16 17 18 19
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1 2 3 4 5 8 9 10 MACHHE, BELGAUM6 7590 014
CALCULATIONS AND ASSUMPTIONS of BLACK AND SCHOOLS OPTION PRICING MODEL: 1) Firstly we calculated the D1
D1= (LN(S/K) + (0.07/T+(0.27)^2 /2)*T)/(0.27*SQRT(T) K= Strike Price S= Current Call Price Interest Rate=0.07 T =Time until option expiration. S.D = 0.27 LN=Natural logarithm 2) Then we calculated th D2
D2 = D1-0.27*SQRT(T) 3) Finally we calculated the theoretical call premium C. C = SN(D1)-Ke-rtN(D2). N = Cummulative standard
Assumptions : Change in BSOPM premium = Independent Variable. 65 VISVESVARAYA TECHNOLOGICAL UNINVERSITY

Change in Market premium = Dependent variable.
Table shows the relationship between the theoretical option price and market option price of December 2009 :
Instrument OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX
Symbol NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY
Option CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE
Date 1-Dec-09 2-Dec-09 3-Dec-09 4-Dec-09 7-Dec-09 8-Dec-09 9-Dec-09 10-Dec-09 11-Dec-09 14-Dec-09 15-Dec-09 16-Dec-09 17-Dec-09 18-Dec-09 21-Dec-09 22-Dec-09 23-Dec-09 24-Dec-09 29-Dec-09 30-Dec-09
Expiry 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09 31-Dec-09
Strike Price 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100
Spot Price 5122 5123.25 5131.7 5108.9 5066.7 5147.95 5112 5134.65 5117.3 5105.7 5033.05 5042.05 5041.75 4987.7 4952.6 4985.85 5144.6 5178.4 5187.95 5169.45
Premium 146.85 136.5 139 142 104.9 152.45 133.9 133.5 117 108.3 69.9 72.5 58.6 34.25 17.9 19.3 84.5 92 98.25 70.5
BSOP M 189.52 189.74 173.49 160.47 136.71 180.69 159 .63 151 .77 141.32 133.4 97.13 80.81 80.27 58.42 29.23 38.42 110.54 131.5 100.78 20.84
Chang e in premi um Y -7% 2% 2% -26% 45% -12% 0% -12% -7% -35% 4% -19% -42% -48% 8% 338% 9% 7% -28%
Change in BSOPM Premium X 0% -9% -8% -15% 32% -12% -5% -7% -6% -27% -17% -1% -27% -50% 31% 188% 19% -23% -79%

Statistics:
SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations
0.934595 0.873467 0.866024 0.301661 19
ANOVA df Regression Residual Total 1 17 18 Coefficien ts 0.103927 1.471861 SS 10.679 1.546985 12.22598 Standard Error 0.069213 0.135869 MS 10.679 0.090999 F 117.3528 Significa nce F 4.73E-09
Intercept X Variable 1
t Stat 1.501549 10.83295
P-value 0.15156 4.73E-09
Lower 95% -0.0421 1.185202
Upper 95% 0.249953 1.758519
Lower 95.0% -0.0421 1.185202
Upper 95.0% 0.249953 1.758519
Inference:
It is observed that the correlation between the change in BSOPM price and change in market price is 0.9346 This means that 93% of the behavior of market premium can be described by the behavior of BSOPM price It is also observed that the Beta is 1.47 making us to assume that 1% change in the BSOPM premium leads to 1.47% change in the market price. 67 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Table shows the relationship between the theoretical option price and market option price of January 2010 :
Chang e in premi um Y OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE 4-Jan-10 5-Jan-10 6-Jan-10 7-Jan-10 8-Jan-10 11-Jan-10 12-Jan-10 13-Jan-10 14-Jan-10 15-Jan-10 18-Jan-10 19-Jan-10 20-Jan-10 21-Jan-10 22-Jan-10 25-Jan-10 27-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 28-Jan-10 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5100 5232.2 5277.9 5281.8 5263.1 5244.75 5249.4 5210.4 5233.95 5259.9 5252.2 5274.85 5225.65 5221.7 5094.15 5036 5007.9 4853.1 208.15 224 231.5 206 202 196.8 157 177 181.5 172.75 182 145 134 53.1 24 10.9 0.85 234.9 266.26 268.34 236.52 222.64 223.95 196.29 193.74 212.31 205.85 205.55 166.41 162.75 81.78 35.84 10.09 0.02 8% 3% -11% -2% -3% -20% 13% 3% -5% 5% -20% -8% -60% -55% -55% -92% 13% 1% -12% -6% 1% -12% -1% 10% -3% 0% -19% -2% -50% -56% -72% -100%
Instrume nt
Symbol
Optio n
Date
Expiry
Strike Price
Spot Price
Premiu m
BSOM P
Change in BSOPM premium X

Statistics :
SUMMARY OUTPUT Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations
0.971551 0.943912 0.939906 0.074484 16
ANOVA df Regression Residual Total 1 14 15 SS 1.307134 0.077671 1.384806 MS 1.307134 0.005548 F 235.6072 Significance F 3.75E-10
Coefficients Intercept X Variable 1 -0.01086 0.910721
Standard Error 0.021866 0.059332
t Stat 0.49653 15.3495
P-value 0.62722 5 3.75E10
Lower 95% -0.05775 0.78346 6
Upper 95% 0.03604 1.03797 6
Lower 95.0% -0.05775 0.78346 6
Upper 95.0% 0.03604 1.037976
Interpretation:
It is observed that the correlation between the change in BSOPM price and change in market price is 0.9715 This means that 97% of the behavior of market premium can be described by the behavior of BSOPM price It is also observed that the Beta is 0.9107 making us to assume that 1% change in the BSOPM premium leads to 0.9107% change in the market price. 69 VISVESVARAYA TECHNOLOGICAL UNINVERSITY
Table shows the relationship between the theoretical option price and market option price of February 2010:
Change in BSOP M premiu m X -21% 39% -30% -46% 20% 1% 15% -31% 44% -30% 38% 35% -13% -35% -13% 13% -31%
Instrume nt OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX OPTIDX
Symbol NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY NIFTY
Option CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE CE
Date 1-Feb10 2-Feb10 3-Feb10 4-Feb10 5-Feb10 6-Feb10 8-Feb10 9-Feb10 10-Feb10 11-Feb10 15-Feb10 16-Feb10 17-Feb10 18-Feb10 19-Feb10 22-Feb10 23-Feb10 24-Feb10
Expiry 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10 25-Feb-10
Strik e Price 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800 4800
Underlyin g Value 4899.7 4830.1 4931.85 4845.35 4718.65 4757.25 4760.4 4792.65 4757.2 4826.85 4801.95 4855.75 4914 4887.75 4844.9 4856.4 4870.05 4858.6
Premiu m 178 127 183 129.05 76.8 93 92 98 82 107 79 130 127 110 82.9 72.8 87 73.5
BSOP M 204.6 161.31 224.9 0 157.37 84.95 101.96 102.63 118.33 81.35 117.04 82.23 113.16 152.77 133.26 86.31 74.89 84.71 58.6
Chang e in Premi um Y -29% 44% -29% -40% 21% -1% 7% -16% 30% -26% 65% -2% -13% -25% -12% 20% -16%

Statistics:
ANOVA df Regression Residual Total 1 15 16 Coefficient s Intercept X Variable 1 0.008521 0.849615 SS 1.05847 6 0.27533 4 1.33381 Standar d Error 0.03299 4 0.11188 3
SUMMARY OUTPUT Regression Statistics F MS Significanc Multiple R 0.890827e F R 1.05847 Square 0.793573 57.6649 1.63E-06 Adjusted R 6 8 Square 0.779811 0.01835 Standard Error 0.135483 6 Observations 17
t Stat 0.25827 2 7.59374 6
P-value 0.79970 7 1.63E06
Lower 95% -0.0618 0.61114 1
Upper 95% 0.07884 7 1.08808 9
Lower 95.0% -0.0618 0.61114 1
Upper 95.0% 0.07884 7 1.08808 9
Inference:
It is observed that the correlation between the change in BSOPM price and change in market price is 0.8908 This means that 89% of the behavior of market premium can be described by the behavior of BSOPM price It is also observed that the Beta is 0.8496 making us to assume that 1% change in the BSOPM premium leads to 0.8496 % change in the market price.
Findings:
Some times Intrinsic value of option contracts is zero because the spot price of option is Out of The Money (OTM) that is the excess of strike price over spot price The time value graphs shows that the longer the time to expiration,the greater is an option's time value,At expiration an option would have no value or have negative value. In the month of December the 93% of the behavior of market premium can be described by the behavior of BSOPM price and 7% depend upon market circumstances. In the month of January 97% of the behavior of market premium can be
described by the behavior of BSOPM price and 3% depend upon market circumstances In the month of February the 89% of the behavior of market premium can be described by the behavior of BSOPM price and 11% depend upon market circumstances In the month of December 2009 beta is 1.47 and January and February 2010 beta is 0.9107 and 0.8496 it is found that the beta is very closed to 1 in all 3 months. An option always has a non-negative value: i.e., the value of an option is never negative.
Suggestions:
The study carried out for determining the relationship between theoretical option price and market price was only for selected contracts. This study help us to advice investors to follow the Black and schools option pricing model price calculations as these are found to be good pointers for ascertained the fair price of an option premium. The same study can be extended to further option contracts to know the fair price of an option premium. In India many do not know how to trade in the option derivative market, and this study can be extended to develop software that would help in determining the fair price of an permium. The software would just require the data about the type of option, strike price, premium and underlying value of the stock be inputted, and the software would then give fair premium. Given the availability of computer package or specifically programmed calculators, the application of BSOPM formula is very easy, It is suggest to investors and dealers to use this formula for valuing options on the options exchange
Conclusion:
There have been various attempts in using Black and Schools option pricing model. We have discussed in this study as to know the fair price of an option premium. The Black and schools option pricing model provides a precise formula to determine the value of call as well as put options. Given certain assumptions, the BSOPM formula required input of five variables namely the type of option, strike price, premium and underlying value of the stock and time remaining for expiration. For the future research in this area we can make use of other model and can predict the call price. The market premium is dependent variable hypothesis can be accepted, as there exists a correlationship between theoretical option premium and market option premium. The market premium is dependent with respect to the BSOPM premium. The market participants can be find out fair prices and thereby can consistently earn more than average market returns, as fair prices can be calculated. In less than decade of their coming into vogue, derivatives market have become the most important markets in the world, Today derivatives market have part and parcel of the day to day life for ordinary people in major part of world Until the advent of NSE Indian capital market had no access to the latest trading methods of trading. There was huge gap between the investors aspirations of the markets and the available momentum of trading. The opening of economy is precipitated the process of integration Indian financial market with the international financial market. Integration of risk management instrument in India has gained momentum in last few years.
Bibliography:
WWW. SHREKHAN.COM NSE INDIA official site for Historical data Wikipedia for information on Equity and Equity Derivatives Investopedia.com
Books
1. 2. 3. Options,Futures, and other derivatives,7th Edition By John C Hull NCFM derivatives NSE India Limited Financial management M Y Khan,P K Jain


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1.

INDUSTRY PROFILE Introduction

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Nature of the Business Carried:

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Future growth and prospects:

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3. Mc Kensys 7S Frame Work

STRUCTURE: Overall organizational structure

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Personalized customer attention.

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Graph : Call Premium Versus Security Price

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Graphs of time value

Time Value Of Dec

Time value of Jan 80 70 60 50 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Time Value Of Feb

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Assumptions : Change in BSOPM premium = Independent Variable. 65 VISVESVARAYA TECHNOLOGICAL UNINVERSITY

Change in Market premium = Dependent variable.

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0.934595 0.873467 0.866024 0.301661 19

t Stat 1.501549 10.83295

P-value 0.15156 4.73E-09

Lower 95% -0.0421 1.185202

Upper 95% 0.249953 1.758519

Lower 95.0% -0.0421 1.185202

Upper 95.0% 0.249953 1.758519

Change in BSOPM premium X

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0.971551 0.943912 0.939906 0.074484 16

Coefficients Intercept X Variable 1 -0.01086 0.910721

Standard Error 0.021866 0.059332

t Stat 0.49653 15.3495

P-value 0.62722 5 3.75E10