SYNOPSIS

ON

TO, NAGALAKSHMI MADAM, FACAULTY, MBA DEPT.

By, PRASHANTH.G.ARKACHARI, MBA 4TH SEM (10SBCMA067)

COMPANY PROFILE
Anand Rathi (AR) is a leading full service securities firm providing the entire gamut of financial services. The firm, founded in 1994 by Mr. Anand Rathi, today has a pan India presence as well as an international presence through offices in Dubai and Bangkok. AR provides a breadth of financial and advisory services including wealth management, investment banking, corporate advisory, brokerage & distribution of equities, commodities, mutual funds and insurance - all of which are supported by powerful research teams. The firm's philosophy is entirely client centric, with a clear focus on providing long term value addition to clients, while maintaining the highest standards of excellence, ethics and professionalism. The entire firm activities are divided across distinct client groups: Individuals, Private Clients, Corporate and Institutions

1) TITLE OF THE DISSERTATION Perception of investors on derivatives in comparison with other investment Avenues

2) BACKGROUND OF THE STUDY

INTRODUCTION TO DERIVATIVES

The emergence of the market for derivate products most notably forward, future and option. Can be traced back to the willingness of risk-averse economics agent to guard themselves against uncertainties arising out of fluctuation in asset price. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price by locking-in asset price. As instrument of risk management, these generally do not influence the fluctuation in the underlying asset price. However, by locking-in asset price, derivative products minimize the impact of fluctuation in asset price on the profitability and cash flow situation of risk-averse investors 2

Derivatives definition;
Derivative is a product whose value is derived from the value of one or more basic variable, called bases (underlying asset, index, or reference rate), in a contractual manner. For example, wheat framer may wish to sell their harvest at a future date to eliminate the risk of a change in price by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying In the Indian context the securities contract (regulation) Act, 1956 (SC(R)A) defines derivates to include 1) A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument, or contract for difference or any other form of security. 2) A contract, which derives its value from the price, or index of price, of underlying securities. 3) Derivatives and securities under the SC(R)A and hence the trading of derivative is governed by the regulatory framework under the SC(R)A

Types of derivatives; DERIVATIVES

Forwards
1) Inter bank Foreign exchange Forwards 2) Specific delivery Forward contract (Transferable or Non-transferable)

Future
1) Commodity future

Options
1) Commodity option

Complex Derivative
1) Swaps

2) Financial future

2) Financial option

2) Forward rate agreement 3) Range forwards 4) Exotic options 5) Collars 6) Synthetic derivatives 7) Credit derivatives

Indian derivative market:

Traditionally, equity derivative also have had a long history in India in the OTC market. The securities & contracts regulation act (SCRA) however banned all kind of options in 1956 in India. The prohibition on options in SCRA was removed in 1995. The securities laws (Amendment in SCRA) bill 1999 was introduced to bring about the much-needed changes. In December 1999, the new framework was approved. Derivatives have since then been accorded the status of securities. Also the notification of June 1969 under section 16 of SCRA banging forward trading was revoked in March 2000. Foreign currency options in currency pairs other than rupee. Were the first options permitted by reserve bank of India (RBI). RBI permitted options, interest rate swaps, currency swaps and others risk reduction OTC derivative products. Besides the forward market in currencies has been a vibrant market in India for several decades. 4

In addition the forward markets has allowed the setting up of future exchange. Today we have over 20 commodities exchanges most of which trade futures. e.g. the Indian pepper and spice traders association (IPSTA) and the coffee owners future exchange of India (COFEI). Last two years of this market have observed phased introduction of various derivative products including stock options and stock futures

Derivative history:
The formal setup of derivative market is relatively new (since 1970s), the general concept has existed around the world for years. Traders in Asian economic have observed and used the derivative instrument (forward, future & options) for their benefit and development processes. During the renaissance, Venetian spice traders waited for cargo on the high seas for which they enter into future contract agreeing to price for future deliveries. Also, for hundred of years, the Japanese and Indian rice farmer rice farmer have used the future value of their production. Looking at not distant history, options of various kinds (called Tejl & mandi & fatak) in unorganized markets were traded as early as 1900 in Mumbai. Insurance products are one of the most prominent and widely used derivative instruments, although they were never introduced in the form of derivative. In India and also in many other economics. Today trading procedure like future & options have been a single name and brought under the umbrella of derivatives. Along with the evolution of financial derivatives, there has been adoption of a formal setup and specific rules, which did not and could not have existed before due to non-existence of systematized financial markets. Till1985, future trading in its present form was obscure in India, where in even bankers, financial journalist and academician would not understand the trade. Although, the evolution of derivatives can be can be traced to forward trading that was done in ancient times. It is not clearly established as to where and when the first forward market came into existence. Recorded evidence dates back to 2000 BC. India has had forward trading for ages. The follower around the same period were the Romans too practice this form of trading in the 12th century, Japan did its rice trade through forward contracts.

In Japan, this was basically centered around Dojima, a district of Osaka and the trade was known as cho-ai-mai a kinai (rice-trade-on-book). This trade in rice grew and flourished to a stage where receipts for future delivery were traded with a high degree of standardization. In 1730, the market received official recognition from the tokugawa shogunte (the ruling clan of shoguns or feudal lords). The dojima rice market can thus be regarded as the first future market in the sense of an organized exchange with stadedaiszed trading terms. The market was its successors went through many phases including closures in 1869 & 1973. The first future markets in the western hemisphere were developed in the United States, in Chicago. These market (in grain) had started as spot markets and gradually evolved into future trading. This evolution, however, was in stages. The first stage was the starting of agreements to buy grain in the future at a pre-determined price with the intention of actual delivery. Gradually these contracts became transferable and over a period of time, particularly during the American civil war (1860-1865), it became commonplace to sell and agreements themselves, instead of taking delivery of the physical produce. Traders found that the agreements were easier to buy and sell if they were standardized in terms of quality of grains, market lot and place of delivery. This is how modern future contrast first came into being. The Chicago board of trade (CBOT), which opened in 1848, is to this day the largest future market in the world. The general rules framed by CBOT in1865 became a trend seller for many other market .in 1870, the New York cotton exchange was founded. The London metal exchange was established in 1877. LME is lately the leading market in metal trading (both spot & forward). Thereafter many new future markets were started. The first financial future market was the international monetary market, founded in 1972 by the Chicago mercantile exchange. This was followed by the London international financial future exchange in 1982. Unfortunately, India has not had such a good tradition of record keeping for such financial trades as the west. Also, India has been invaded time and again over ages in the last 10 centuries, which had also contributed to reduction in records being reduced to the minimum. Only the archeological findings and ancient literature, if any provide us with reference. It is therefore very difficult to trace back evidence for forward/future trading in our history.

The first organized forward market in India came into existence in the late 19th and early 20th century in Calcutta (for jute & jute goods) and Mumbai (for cotton). Several new markets grew over the first half of the 20th century. Chronologically, Indias experience in organized forward trading is almost as long as that of the United Kingdom, and certainly longer than the most developed nations. However the tidal wave of price controls, nationalism and state intervention in market swept through all economics policy-making specifically after independence. This led to a rapid decline in the number of such future and forward markets (not known as derivative market then). Frequently markets were closed due to the felling that they were responsible for sudden movements of price in the commodities; the underlying presumption was that speculation on forward market was creating or exacerbating price pressures. At present India have future commodity market only in few goods like Hessian, turmeric, pepper, castor seed, gur (jaggery), potatoes and other. The market is dynamic and is growing at an tremendous rate. Options might have had existed in ancient Greece and Rome as early as 400 BC. Also there is evidence of options in wheat and other agriculturist commodities during the Middle Ages in England. In the 17th century Holland had presence of options on tulip bulbs. Options trading in agricultural commodities and in shares revolutionized and brought under the purview of the term Derivatives in the United States from mid 1860s. However these were not standardized traded options then, but one-to-one deals between traders (over-the-counter). Options trading remained peripheral and never grew as much as futures trading till the 1970s. The first traded options market was started by CBOT on April 26,1973. This brought about, standard maturates, standard strike price and standard delivery arrangements. This also led to the introduction of clearing house and a margin system, so that the risk of default could be removed. Options on future contracts commenced in 1982. The introduction of traded options opened the way for the evolution of more complex derivatives. The first swap transaction, a currency swap, took place in 1981 between the World Bank and international Business Machines (IBM). Other derivative like interest rate swaps, forward rate agreements (FRAs), range forward, collars, etc, evolved since

3) STATEMENT OF PROBLEM
In financial markets, expectations of the investors play a vital role. These expectations of the investors are influenced by their perception and humans generally relate perception to action.

However, in the financial literature, there are no models, which explain the influence of these perceptions and beliefs on Expectations and Decision Making. Because of our own inability to understand the sources of motivations and the basis of these expectations we tend to ignore it. No doubt, reality is so complex that trying to fit an individual investors beliefs into a model is impossible. But, to a certain extent, we can borrow concepts from social psychology where behavioral patterns, rational or irrational, are developed and empirically tested. On the same lines, we can develop certain models to test the financial behavior, to the extent of the availability of the explanatory variables.

Such models can help to understand the Why? And How? Aspect of investors behaviors, which can have managerial implications for policy makers

OBJECTIVES OF THE STUDY: Perception of the investors on derivatives in comparison with other investment avenues Sub-objectives;
y y y To understand trading mechanism of derivatives To identify the awareness of derivatives among the investors. To understand the perception of investors on derivatives in comparison with other investment avenues. y y y To understand the basis of planning for investment preferred by the investors To understand the saving level among different investors To know why F&O are not so popular as stocks

4) METHODOLOGY
The procedure of the collection of information has been done in to two phases. y y Collection of available secondary data in magazines, journals, web sites etc. Collection of primary data by preparation of structured questionnaires for the study of perception of investors on derivatives

Sampling area: Ranebennur Sampling element: Questioner to the investors

Sampling size 100 respondents

Sampling method: The samples will be selected based on the convenience sampling method (nonprobability sampling)

The research process involves a number of inter-related activities, which overlap and do not rigidly follow a particular sequence. A researcher if often requires to think a few steps ahead. For example, if a researcher has formulated a research problem and is considering the sampling plan, he is supposed to consider the type of data to be collected as also the detailed tabulation. This is because the various steps are interwoven into each other and each step will have some influence over the following steps. There are several steps involved in designing the research study: 1. Research Design 2. Determining the sources of data 9

3. Designing the data collection forms y y Observation and Survey method

4. Determining sample design & sample size 5. Organizing & conducting the field survey 6. Analysis of collected data 7. Preparing the research report &

This study involves all above-mentioned steps. In Designing the data collection forms questioner method is being carried out because, as the study deals with the perception of investors. All the steps were carried out with prior plan. Each step is broadly discussed in the subsequent chapters.

HYPOTHESIS
Hypothesis testing is a statistical procedure that uses samples data to determine whether a statement about the value of a population parameter should or should not be rejected. The hypothesis are two competing statements about a population parameter. One statement is called null hypothesis (Ho) and the other statement is called alternative hypothesis(Ha). Null hypothesis:-The hypothesis tentatively assumed true in the hypothesis testing procedure. Alternative hypothesis:- The hypothesis concluded to be true if the null hypothesis is rejected.

But in this project, I am using CHI-SQUARE TEST for analyzing the data collected.

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