Analysis of comparison among Equity, Commodities and Currency In Investment Summer Project Report Submitted In the partial fulfillment

of the Degree of Master of Business Administration Semester-II By Jeel Hakani Roll No.-20

Under the Guidance of: Prof.Amit Patel V. M. Patel Institute of Management. Submitted To: Dr.Mahendra Sharma V. M. Patel Institute of Management, Ganpat University, Kherva.

July-2011

CERTIFICATE BY THE GUIDE

This is to certify that the contents of this report entitled Analysis of comparison among equity. Commodities, currency in investment. by Jeel Hakani. & Roll No.-20 submitted to V. M. Patel Institute of Management for the Award of Master of Business Administration (MBA Sem-II) is original research work carried out by her under my supervision.

This report has not been submitted either partly or fully to any other University or Institute for award of any degree or diploma.

Prof. Amit Patel Faculty Member, V. M. Patel Institute Of Management, Ganpat University. Kherva. Date : 04/07/2011 Place : Kherva

CERTIFICATE BY THE MENTOR

This is to certify that the contents of this report entitled .Analysis of comparison among equity. Commodities, currency in investment. by Jeel Hakani. & Roll No.-20 submitted to V. M. Patel Institute of Management for the Award of Master of Business Administration (MBA Sem-II) is original research work carried out by him/her under my mentoring. I, hereby certify the authenticity of the data and facts mentioned in the report.

This report has not been submitted either partly or fully to any other University or Institute for award of any degree or diploma. Prof. Amit Patel, Faculty Member, V. M. Patel Institute Of Management, Ganpat University. Kherva. Date : 04/07/2011 Place : Kherva

CANDIDATES STATEMENT

I hereby declare that the work incorporated in this report entitled Analysis of comparison among equity. commodities, currency in investment. In partial fulfillment of the requirements for the award of Master of Business Administration (Sem.- II) is the outcome of original study undertaken by me/Me and it has not been submitted earlier to any other University or Institution for the award of any Degree or Diploma.

Date :04/07/2011 Place :Kherva

Jeel Hakani

PREFACE
It is a famoMe saying in Japan that the person who has read 1000s of pages is not worth that the person who has traveled for 100s of meters. This indicates the importance of exposure to the practical life. Knowing the importance of practical knowledge this M.B.A program is having an integral part training of two months as a practical fulfillment of the course and thats why I get the opportunity of working with India infoline.

The Summer Training at the end of second semesters is an ideal opportunity for the student to have a first hand experience with the different functions of the Corporate sector. This facilitates the understanding and related learning to the students, which might be critical to learn the subject better.

I have undergone my summer training at India infoline .Here I got the practical knowledge of Stock Market. I was unaware about how the Capital Market works. Here I really got practical knowledge about Stock Market.

I have tried My level best to collect the information. All the required relevant information has been obtained from the company. The report is made on the basis of the Discussion with executives of the company and other employees. This exercise has helped Me to sharpen many skills.

In this time of My summer project I have learned many things. Like how to behave as an employee in the organization, how to deal with the subordinates, how to get work done. In an organization each small things is important. I feel nice that I got a chance to work with the this organization Jeel Hakani

ACKNOWLDGEMENT
There is no such thing as a self made man, We all are made up from thousands of others George Adams.

Firstly I are very greatful to Dr.Mahendra Sharma (Director), Dr.Hiren Patel(MBA Coordinator),Prof.Viral Vaishnav (Placement Coordinator)and all others members of the institute, who gave Me this excellent opportunity to join India infoline as the organization for My Summer training.

In My summer training at India infoline., I got a very pleasant experience of practically working in an organization. Every student need a great deal to others and I am no exception because learning is a process which entails give and take; exchange of ideas and value addition through discussion. So it gives Me immense pleasure to be able to express My gratitude to one and all who have contributed to the successful completion of My project with a great learning.

Special thanks to me Shatis Gandhi(Operational Head)whose continual support and practical guidance enabled Me to overcome all the challenges posed during this project. I would like to thank My project guide, Prof.Amit patel. H gave Me an in-depth knowledge. His invaluable and significant guidelines improved My outlook and contributed in making My project a real learning experience. He also encouraged Me to put in My best efforts and bring out the best of My abilities.

A heartfelt thanks to the many respondents surveyed whose ideas, critical insights and suggestions have been invaluable in the preparation of this report.

Jeel Hakani.

CHAPTER-1

INTRODUCTION OF INDIAN CAPITAL MARKET

The wave of economic reforms initiated by the government has influenced the functioning and governance of the capital market. The Indian capital market is also undergoing structural transformation since liberalisation. The chief aim of the reforms exercise is to improve market efficiency, make stock market transactions more transparent, curb unfair trade practices and to bring our financial markets up to international standards. Further, the consistent reforms in Indian capital market, especially in the secondary market resulting in modern technology and online trading have revolutionized the stock exchanges. The number of listed companies increased from 5,968 in March1990 to about 10,000 by 1999 and market capitalization has grown almost 11 times during the same period. The debt market, however, is almost non existent in India even though there has been a large volume of Government bonds trading. Banks and financial institutions have been holding a substantial part of these bonds as a statutory liquidity requirement. A primary auction market for Government securities has been created and a primary dealer system was introduced in 1995. Currently, there are 31 mutual funds, out of which 21are in the private sector. Mutual funds were opened to the private sector in 1992. Earlier, in 1987, banks were allowed to enter this business, breaking the monopoly of the Unit Trust of India (UTI), which maintains a dominant position. Recognizing the importance of increasing investor protection, several measures were enacted to improve the fairness of the capital market. There have been significant reforms in the regulation of the securities market since 1992 in conjunction with overall economic and financial reforms. In 1992, the SEBI Act was enacted giving SEBI statutory powers as an apex regulator. And a series of reforms were introduced to improve investor protection, automation of stock trading, integration of national markets and efficiency of market operations. SEBI in 1993 initiated a significant move which involved the shift of all exchanges to screen-based trading being motivated primarily by the need for greater transparency. The first exchange to be based on an open electronic limit order book was the National Stock Exchange (NSE), which started trading debt instruments in June 1994 and equity in November 1994. In March 1995, Bombay Stock Exchange (BSE) shifted from open outcry to a limit order book market.

1.1 REVIEW OF REGULATORY ENVIRONMENT

SEBI : Securities and Exchange Board of India (SEBI) was set up as an administrative arrangement in 1988.In 1992, the SEBI Act was enacted, which gave statutory status to SEBI. It mandates SEBI to perform a dual function: investor protection through regulation of the securities market and fostering the development of this market. SEBI has been vested most of the functions and powers under the Securities Contract Regulation (SCR) Act, which brought stock exchanges, their members, as well as contracts in securities which could be traded under the regulations of the Ministry of Finance. It has also been delegated certain powers under the Companies Act. In addition to registering and regulating intermediaries, service providers , mutual funds, collective investment schemes, venture capital funds and takeovers, SEBI is also vested with the power to issue directives to any person(s) related to the securities market or to companies in areas of issue of capital, transfer of securities and disclosures. It also has powers to inspect books and records, suspend registered entities and cancel registration

.RBI : Reserve Bank of India (RBI) has regulatory involvement in the capital market, but this has been limited to debt management through primary dealers, foreign exchange control and liquidity support to market participants. It is RBI and not SEBI that regulates primary dealers in the Government securities market. RBI instituted the primary dealership of Government securities in March 1998. Securities transactions that involve a foreign exchange transactions need the permission of RBI.

Stock Exchange: SEBI issued directives that require that half the members of the governing boards of the stock exchanges should be non broker public representatives and include a SEBI nominee. To avoid conflicts of interest, stock brokers are a minority in the committees of stock exchanges set up to handle matters of discipline, default and investor-broker disputes. The exchanges are required to appoint a professional, non member executive director who is accountable to SEBI for the implementation of its directives on the regulation of stock exchanges. SEBI has introduced a mechanism to redress investor grievances against brokers. Further, all issues are regulated through a series of disclosure norms as prescribed by

SEBI and respective stock exchanges through their listing agreement. After a security is issued to the public and subsequently listed on a stock exchange, the issuing company is required under the listing agreement to continue to disclose in a timely manner to the exchange, to the holders of the listed securities and to the public any information necessary to enable the holders of the listed securities to appraise its position and to avoid the establishment of a false market in such listed securities. The powers and functions of regulatory authorities for the securities market seem to be diverse in nature. SEBI is the primary body responsible for regulation of the securities market, deriving its powers of registration and enforcement from the SEBI Act. There was an existing regulatory framework for the securities market provided by the Securities Contract Regulation (SCR) Act and the Companies Act, administered by the Ministry of Finance and the Department of Company Affairs (DCA) under the Ministry of Law, respectively. SEBI has been delegated most of the functions and powers under the SCR Act and shares the rest with the Ministry of Finance. It has also been delegated certain powers under the Companies Act. RBI also has regulatory involvement in the capital markets regarding foreign exchange control, liquidity support to market participants and debt management through primary dealers. It is RBI and not SEBI that regulates primary dealers in the Government securities market. However, securities transactions that involve a foreign exchange transaction need the permission of RBI. So far, fragmentation of the regulatory authorities has not been a major obstacle to effective regulation of the securities market. Rather, lack of enforcement capacity by SEBI has been a more significant cause of poor regulation. But since the Indian stock markets are rapidly being integrated, the authorities may follow the global trend of consolidation of regulatory authorities or better coordination among them. After introduction of SEBI Act, participants in the Indian capital market are required to register with SEBI to carry out their businesses. These include: stock brokers, sub brokers, share transfer agents, bankers to an issue, trustees of a trust deed, registrars to an issue, merchant bankers, underwriters, portfolio managers, and investment advisers. Stockbrokers are not allowed to buy, sell, or deal in securities, unless they hold a certificate granted by SEBI. Each stockbroker is subject to capital adequacy requirements consisting of two components: basic minimum capital and additional or optional capital relating to volume of business. The basic

minimum capital requirements varies from one exchange to another. The additional or optional capital and the basic minimum capital combined have to be maintained at 8 percent or more of the gross outstanding business in the exchange (the gross outstanding business means the cumulative amount of sales and purchases by a stock broker in all securities at any point during the settlement period). Sales and purchases on behalf of customers may not be netted but may be included to those of the broker. Most stockbrokers in India are still relatively small. They cannot afford to directly cover every retail investor in a geographically vast country and in such a complex society. Thus, they are permitted to transact with sub brokers as the latter play an indispensable role in intermediating between investors and the stock market. An applicant for a sub broker certificate must be affiliated with a stockbroker of a recognized stock exchange. There are two major issues which need to be addressed concerning sub brokers in the Indian capital market; majority of sub brokers are not registered with SEBI; and the function of the sub broker is not clearly defined. No sub broker is permitted to buy, sell, or deal in securities, without a certificate granted by SEBI. SEBI enforced the following measures in March 1997 to regulate unregistered sub brokers : [a] initiation of criminal actions on complaints received against unregistered sub-brokers in suitable cases; [b] prohibition of stockbrokers in dealing with unregistered sub brokers. In spite of these actions, the problem is still at large. There is a need to address the basic issue of clarifying the role of the sub brokers and to educate the investors about their role. SEBI Act of 1992 has introduced self-regulatory organizations [SROs] for regulating various participants in the securities market. But they are not yet operational. A clear regulatory framework has yet to be set up, and relevant market participants are not ready to regulate themselves for professional purposes. The only market related SROs in India whose regulatory frameworks have been well established and which are actually functioning are the recognized stock exchanges.

1.2 Recent Developments & Performance. In brief the major reforms which have taken place in Indian markets include screen based trading, electronic transfer of securities, dematerialization, rolling settlement., risk management practices and introduction of derivative trading and so on. The net result of these initiatives can be seen in the form of efficient and transparent trading & settlement processes in our exchanges. If we compare Indian markets today with some of the internationally developed markets we find that we are not lagging behind. This judgment is primarily based on the comparative study of two important ratios, that is market capitalisation ratio and the turnover ratio. [Table No. 1] Table No. 1 Comparative View of Market Capitalization & Turnover Ratios RATIO INDIA Market Capitalisation Turnover 358.8 200.8 130.7 66.6 73.6 158.3 66.4 69.9 54.5 374.7 USA UK CHINA JAPAN

(Source: S&P Emerging Markets Fact Book, 2001) The above figure in fact looks quite impressive. Further, India ha s been placed 23rd in world ranking in terms of market capitalization and 14th in terms of value of trades on stock exchanges by standard. Performance of Primary Market : Primary market is a market where fresh securities are issued whether debt or equity. Primary market for equities are further divided in public issues and rights issues. Public issues can be from existing listed companies or those companies which are approaching public for the first time which are popularly known as IPOs. Since 1991/92, the

primary market has grown fast as a result of the removal of investment restrictions in the overall economy and a repeal of the restrictions imposed by the Capital Issues Control Act. In1991/92, Rs.62.15 billion was raised in the primary market. This figure rose to Rs.276.21 billion in 1994/95. Since 1995/1996, however, smaller amounts have been raised due to the overall downtrend in the market and tighter entry barriers introduced by SEBI for investor protection. More recently, the number of companies that approached public through IPOs have almost vanished in the first quarter of 2000-2001. The declining trend of IPOs continued in 2001-2002 and also in 2002-2003 only after the success of Maruti IPO, a number of IPOs are scheduled for the current financial year. Some research studies have shown the performance of the primary market for equities is very often linked to the performance of equities on secondary markets. If the stocks in the market are booming there will be a rush to issue fresh shares in primary market and vice versa. The impact of the fall in stock markets on primary issues can be clearly seen on the listing price of the IPOs from April 2000 to March 2001. During this period the statistics revealed that as many as 15 issues [out of total of 25] listed on NSE traded during the same period, were well below its issue price on the first day of listing. Even some mega issues are no exception during the same period. This result can be interpreted that the Corporate enterprises started using the private placement market for tapping their resources. Private Placement: The private placement of funds which has been dominated by debt issues has grown in popularity over the years. From a mere Rs. 10,000 crores in 1995-96, the private placements have grown to Rs. 52,434 crores in 2000- 2001. The rapid growth in private placement of debt can be attributed to its advantages like, these can be tailor made to suit the needs of the investor and issuer. Further, the issue is usually exempt from certain legal requirements and public disclosures, tremendous savings in terms of time and costs of issue and finally the not so good response of the primary equity market. The most active segment which is constantly tapping the private placement market are the banks, PSUs and FIs which accounted for 82.5 %of resources mobilized in 2000-2001. The private sector on the other hand raised 9169 crores in 2000-2001 which was 17.49% of total private placement of debt.

Table No. 2 Debt Raised by Corporates Year Private placement of debt (Rs. Crores) 95-96 96-97 97-98 98-99 99-00 200010,035 18,391 30,981 38,748 54,701 52,434 2,940 6,977 1,929 7,407 4,698 4,144 12,975 25,368 32,912 46,155 59,399 56,578 Debt through public issue (Rs. Crores) debt (Rs. Crores) Total corporate

Development Mutual Funds: Three distinct phases in the mutual funds industry are clearly visible. First, is the pre-1987 phase when UTI was the only player and the industry as such had not developed. As a result only 4500 crores funds were mobilized in 23 years, i.e., from 1964-87. Then we have the second phase which started with the entry of public sector mutual funds in 1987-88. This phase lasted for five years and total funds mobilized from 1982-1992 had risen up to Rs. 33000 crores. Then came the third phase when we saw entry of few private players. The private players managed to capture a good clientele through initiatives like, daily declaring of NAVs, 100% disclosure of portfolios etc. The result was that the resource mobilized by all mutual funds during the period 1992-

96 arose to Rs. 43,000 crores.Resources mobilized by all MFs have shown strong correlation with movements in secondary markets. If we compare the movement in stock market index with resource mobilized by mutual funds, we find that from 1.4.1998 to 31.3.1999 when change in the index was negligible, the net resources mobilized by mutual funds were negligible. From 1.4.1999 to 31.3.2000 the BSE sensex arose by 34% and there was substantial rise in net resources raised by all MFs. Thereafter, from 1.4.2000 to 31.3.2001, when BSE sensex fell by 28%, there was a fall in the net resources raised by all MFs by 50%for the same period. :AMFI Devlopment in Secondary Market : The primary and secondary segments of the capital

market expanded rapidly, with greater institutionalization and wider participation of individual investors accompanying this growth. However, many problems, including lack of confidence in stock investments, institutional overlaps, and other governance issues, remain as obstacles to the improvement of Indian capital markets efficiency. SEBI has taken several measures to improve the integrity of the secondary market. Legislative and regulatory changes have facilitated the corporatization of stockbrokers. Capital adequacy norms have been prescribed and are being enforced. A mark-to-market margin and intra day trading limit have also been imposed. Further, the stock exchanges have put in place circuit breakers [or circuit fitters], which are applied in times of excessive volatility. The disclosure of short sales and long purchases is now required at the end of the day to reduce price volatility and further enhance the integrity of the secondary market. Another barrier to volatility has been the introduction of futures trading as a future hedge does not give a give clear signal to the day traders about the direction of the market. Further, there has been introduction of derivative trading in the stock exchanges, this followed recommendations for the establishment of a regulatory framework for derivatives by a committee chaired by L.C. Gupta. If we look at some initial statistics on derivative trading, we find that the instruments seem to have adopted very well in Indian financial markets. This becomes clear when we look at the figures of trading volumes of those stocks which have been selected for derivatives trading vis--vis their volumes in the cash market.

Derivative & Cash Trading Volumes of 31 Shares [Rs crores] Month January-2002 February-2002 March-2002 April-2002 Cash 1155 956 758 686 912 923 944 Derivatives 798

1.3 EMERGING CHALLENGES & ISSUES Despite these significant developments, the Indian capital market has been in decline in the recent past. However, currently the market has recovered substantially and hopefully, the upward trend is expected to remain. The Indian security market still faces many challenges and issues that need to be resolved. Market infrastructure and investor awareness has to be improved as it obstructs the efficient flow of information and effective corporate governance. The legal mechanism should be activated to protect small shareholders by giving them speedy grievance redressal mechanism. The trading system has to be made more transparent. Market information is a crucial public good that should be made available to all participants to achieve market efficiency. Further, SEBI need to monitor more closely cases of insider trading and price manipulation and to meet the challenges of possible roles of market makers.

There is a need for integration of the security market through consolidation of stock exchanges. The trend all over the world is to consolidate and merge existing stock exchanges. Need for integration of security markets with banks so as to improve the payment situation and to reduce the risks of scams. Issue relating market survey: Over the years the turnover of big exchanges has increased but only at the cost of small exchange. The turn over of NSE and BSE were Rs.1339510 crores and Rs.1000032 crores respectively for the year 2000-2001. Further, the top six exchanges of India out of a total of 23 accounted for over 99% of the total turnover of all exchanges. Another important issue is that turnover in our exchanges are dominated mainly by few securities. This is clear because top 100 traded securities on BSE had a share of 95% in the total turnover on BSE for the year 2000-2001, while the listed securities on BSE are approximately 10000. So this brings us to the conclusion that most of the securities on Indian Stock Exchanges are either not traded or very thinly traded .This also indicates that there is a problem of liquidity in our exchanges. Further, on the one hand the object of circuit breaker is to prevent volatility but on the other hand many feel that the breaker distorts the basic price discovery process of scrip. This is again a matter of debate and whether the breaker should stay or be done away with depends upon what is more important for stock exchange, i.e. price discovery which should be independent or controlled volatility Issue relating reginal stock: Regional stock exchanges of late have witnessed shrinking

volumes and are thus in poor financial health. Their inability to attract business is clear if we look at the total incomes of the various exchanges as split between business and non business incomes. Business incomes include membership fees, transaction based service charges and other miscellaneous income whereas non business income includes listing fees, interest and rent. With the government initiating further reforms like, central listing authority to avoid

multiplicity problems of listing for companies and centralized monitoring and compliance of obligations, it seems the end of regional exchanges is not very far and it is only a matter of time when these regional exchanges close their shops.

Issues relating to regulatory framework : It is more than a decade since SEBI started to put in place a regulatory framework for the capital market. Despite a plethora of disclosure requirements, there are still key areas where investors get precious little information of value. This relates to mergers and acquisitions, asset sell-off, intra-company, intra-group transactions and inter corporate investments. In these cases the minimum legal requirement under Companies Act is met. Though, we have a full fledged market for corporate control [see Table No-6] yet the disclosure levels are not up to the mark. A lot of information is also made available on financial performance and other synergistic areas of mergers and acquisitions. However, the manner in which the swap ratio is fixed, pricing of offers and the managerial perception is largely missing. The valuations of two companies and swap ratio are key aspects in any merger no doubt valuation reports are available for inspection however, access is not easy for investors. A comprehensive and mandated list of disclosures like, the ones that accompanies IPOs or a rights offer, should be made available to all investors

CHAPTER-2 OVERVIEW OF BSE

2.1 Introduction of BSE The oldest stock exchange in Asia (established in 1875) and the first in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956, Bombay Stock Exchange Limited (BSE) has had an interesting rise to prominence over the past 133 years.While BSE is now synonymous with Dalal Street, it was not always so. The first venues of the earliest stock broker meetings in the 1850s were in rather natural environs - under banyan trees - in front of the Town Hall, where Horniman Circle is now situated. A decade later, the brokers moved their venue to another set of foliage, this time under banyan trees at the junction of Meadows Street and what is now called Mahatma Gandhi Road. As the number of brokers increased, they had to shift from place to place, but they always overflowed to the streets. At last, in 1874, the brokers found a permanent place, and one that they could, quite literally, call their own. The new place was, aptly, called Dalal Street (Brokers Street). In 2002, the name "The Stock Exchange, Mumbai" was changed to Bombay Stock Exchange. Subsequently on August 19, 2005, the exchange turned into a corporate entity from an Association of Persons (AoP) and renamed as Bombay Stock Exchange Limited. BSE, which had introduced securities trading in India, replaced its open outcry system of trading in 1995, with the totally automated trading through the BSE Online trading (BOLT) system. The BOLT network was expanded nationwide in 1997. 2.2 Prominent Position The journey of BSE is as eventful and interesting as the history of India's securities market. In fact, as India's biggest bourse, in terms of listed companies and market capitalization, BSE has played a pioneering role in the development of the Indian securities market. It is surely BSE's pride that almost every leading corporate in India has sourced BSE's services in capital rising and is listed with BSE.

Even in terms of an orderly growth, much before the actual legislations were enacted, BSE had formulated a comprehensive set of Rules and Regulations for the securities market. It had also laid down best practices which were adopted subsequently by 23 stock exchanges which were set up after India gained its independence. BSE, as a brand, has been and is synonymous with the capital market in India. Its SENSEX is the benchmark equity index that reflects the health of the Indian economy. 2.2 Several Firsts At par with the international standards, BSE has in fact been a pioneer in several areas. It has several firsts to its credit even in an intensely competitive environment. First in India to introduce Equity Derivatives First in India to launch a Free Float Index First in India to launch US$ version of BSE SENSEX First in India to launch Exchange Enabled Internet Trading Platform First in India to obtain ISO certification for a stock exchange 'BSE On-Line Trading System (BOLT) has been awarded the globally recognized the Information Security Management System standard

BS7799-2:2002. First to have an exclusive facility for financial training First in India in the financial services sector to launch its website in Hindi and Gujarati Shifted from Open Outcry to Electronic Trading within just 50 days First bell-ringing ceremony in the history of the Indian capital markets

2.3 Investor Education An equally important accomplishment of BSE is its nationwide investor awareness campaign "Safe Investing in the Stock Market" - under which awareness campaigns and dissemination of information through print and electronic medium is undertaken across the country. BSE also

actively promotes the securities market awareness campaign of the Securities and Exchange Board of India..

2.4 Vision: "Emerge as the premier Indian stock exchange by establishing global benchmarks" Logo:

S 2nd Feb 1921 31st Aug 1957 2nd Jan 1986 10th Jul 1987 3rd Jan 1989 25th Jul 1990 15th Jan 1992 30th Mar 1992

The Native Share & Stock Broker's Association formed Clearing House started by Bank of India BSE granted permanent recognition under Securities Contracts (Regulation) Act (SCRA) SENSEX, country's first equity index launched (Base Year:1978-79 =100) Investor's Protection Fund (IPF) introduced BSE Training Institute (BTI) inaugurated SENSEX closes above 1000 SENSEX closes above 2000 SENSEX closes above 4000

1st May 1992

SEBI Act established ( An Act to protect, develop and regulate the securities market) Capital Issues (Control) Act repealed Securities Appellate Tribunal (SAT) established BSE On-Line Trading (BOLT) system introduced

29th May 1992 1992 14th Mar 1995

1996 To 2000 Date 19th Aug 1996 BSE Milestones First major SENSEX revamp

19th Aug 1996 12th May 1997 21st Jul 1997 1997 1st Jun 1999 22nd Mar 1999 15th Jul 1999 11th Oct 1999
11th Feb 2000 9th Jun 2000

First major SENSEX revamp Trade Guarantee Fund (TGF) introduced Brokers Contingency Fund (BCF) introduced BSE On-Line Trading (BOLT) system expanded nation-wide Interest Rate Swaps (IRS) / Forward Rate Agreements (FRA) allowed Central Depository Services Ltd.(CDSL) set up with other financial institutions CDSL commences work SENSEX closed above 5000
SENSEX crosses 6000 intra-day Equity Derivatives introduced

1st Mar 2001 1st Feb 2001 4th Jun 2001 15th Jun 2001 1st Jun 2001 2nd Jul 2001 9th Jul 2001 11th Jul 2001 25th Jul 2001 1st Nov 2001 29th Nov 2001 31st Dec 2001 1st Apr 2002 15th Feb 2002 1st Feb 2002 1st Sep 2003 1st Jan 2003 16th Jan 2003 1st Apr 2003

Corporatisation of Exchanges proposed by the Union Govt. BSE Webx Launched BSE PSU index introduced WDM operations at commenced Index Options launched VaR model introduced for margin requirement calculation Stock options launched BSE Teck launched, India 's First free float index Dollex 30 launched Stock futures launched 100% book building allowed All securities turn to T+5 T+3 settlement Introduced Negotiated Dealing System (NDS) established Two way fungibility for ADR/GDR SENSEX shifted to free-float methodology India 's first ETF on SENSEX - SPICE' introduced Retail trading in G Sec T+2 settlement Introduced

1st June 2003 1st Dec 2003

Bankex launched T group launched Second biggest fall of all time, Circuit filters used twice in a day (564.71 points, 11.14%) SENSEX closes over 6000 for the first time The BSE (Corporatisation and Demutualisation) Scheme, 2005 (the Scheme) announced by SEBI Incorporation of Bombay Stock Exchange Limited Certificate of Commencement of Business BSE becomes a Corporate Entity

17th May 2004

2nd Jun 2004

20th May 2005

8th Aug 2005 12th Aug 2005 19th Aug 2005

7th Feb 2006 7th Jul 2006 21 st Oct 2006 2nd Nov 2006 2nd Jan 2007

SENSEX closed above 10000 BSE Gujarati website launched BSE Hindi website launched iShares BSE SENSEX India Tracker listed at Hong Kong Stock Exchange Launch of Unified Corporate Bond Reporting platform : Indian Corporate Debt Market (ICDM) Singapore Exchange Limited entered into an agreement to invest in a 5% stake in BSE Appointed Date under the Scheme i.e. Date on which

7th Mar 2007

16th May 2007

Corporatisaton and Demutualisation was achieved.Notified by SEBI in the Official Gazette on 29.06.2007

10th Jan 2008 1st Oct 2008

SENSEX All-time high 21206.77 Currency Derivatives Introduced The SENSEX raised 2110.70 points (17.34%) and Index-wide upper circuit breaker applied BSE - USE Form Alliance to Develop Currency & Interest Rate Derivatives Markets BSE IPO Index launched Bombay Stock Exchange introduces trade details facility for the Investors BSE Introduces New Transaction Fee Structure for Cash Equity Segment BSE launches FASTRADE - a new market access platform BSE Launches BSE StAR MF Mutual Fund trading platform Launch of clearing and settlement of Corporate Bonds through Indian Clearing Corporation Ltd. Marathi website launched BSE's new derivatives rates to lower transaction costs for all Market time changed to 9.0 a.m. - 3.30 p.m. BSE PSU website launched New DBM framework @ Rs.10 lakhs - 90% reduction in Membership Deposit Dissemination of Corporate Action information via SWIFT platform Options on BOLT Launch of Fastrade on Web (FoW) - Exchange hosted platform First to introduce Mobile-based Trading

18th May 2009

7th Aug 2009

24th Aug 2009 1st Oct 2009 5th Oct 2009 25th Nov 2009 4th Dec 2009 7th Dec 2009 14th Dec 2009 18th Dec 2009 4th Jan 2010 20 th Jan 2010 22nd Apr 2010 12th May 2010 23rd July 2010 11th Oct 2010 21st Sep 2010

29th Sep 2010 4th Oct 2010 22nd Nov 2010 12th Nov 2010 10th Dec 2010 27th Dec 2010 TOP 2011 Date 15th Jan 2011

Introduction of Smart Order Routing (SOR) EUREX - SENSEX Futures launch Launch of SLB Commencement of Volatility Index Launch of SIP Commencement of Shariah Index

BSE Milestones Co-location facility at BSE - tie up with Netmagic

Management Team
(As of March 2011)
Sl. No. Name Designation PJ. Board Towers Extn. Floor No. 15
th

Mr. MADHU KANNAN

Managing Director & Chief Executive Officer Dy. Chief Executive Officer

8000

Mr. ASHISH KUMAR CHAUHAN Mr. KERSI TAVADIA

15

th

8599

Chief Information Officer

13

th

8989

4 5 6 7 8 9 10

Mr. NEHAL VORA Dr. SAYEE SRINIVASAN Mr. JAMES E. SHAPIRO Mr. RAHUL PARULEKAR Mr. V.K.R AGRAWAL Mr. LAKSHMAN GUGULOTHU

Head - Planning & Policy Head - Product Strategy Head - Corporate Strategy Chief Business Officer and Head of Markets Chief Financial Officer OSD

14 28 28 15 25 24 25

th

8108 8814 8395 8331 8755 8259 8419

th

th

th

th

th

Mr. BALASUBRAMANIAM Head - Business Operations V.

th

CHAPTER-3 OVERVIEW OF NSE

3.1 The Organization The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges. It recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of The National Stock Exchange (NSE) operates a nation-wide, electronic market, offering trading in Capital Market, Derivatives Market and Currency Derivatives segments including equities, equities based derivatives, Currency futures and options, equity based ETFs, Gold ETF and Retail Government Securities. Today NSE network stretches to more than 1,500 locations in the country and supports more With more than 10 asset classes in offering, NSE has taken many initiatives to strengthen the securities industry and provides several new products like Mini Nifty, Long Dated Options and Mutual Fund Service System. Responding to market needs, NSE has introduced services like DMA, FIX capabilities, co-location facility and mobile trading to cater to the evolving need of the market.

NSE has made its global presence felt with cross-listing arrangements, including license agreements covering benchmark indexes for U.S. and Indian equities with CME Group and has also signed a Memorandum of Understanding (MOU) with Singapore Exchange (SGX) to cooperate in the development of a market for India-linked products and services to be listed on SGX. The two exchanges also will look into a bilateral securities trading link to enable investors.

NSE is committed to operate a market ecosystem which is transparent and at the same time offers high levels of safety, integrity and corporate governance, providing ever growing trading & investment opportunities for investors.

3.2 Symbols:

NSCCL

NCCL

NSETECH

IISL DotEx Intl. Ltd.

NSE.I

3.3 NSE Milestones

November 1992 April 1993 May 1993 June 1994 November 1994 March 1995 April 1995 June 1995 July 1995 October 1995 April 1996 April 1996 June 1996

Incorporation Recognition as a stock exchange Formulation of business plan Wholesale Debt Market segment goes live Capital Market (Equities) segment goes live Establishment of Investor Grievance Cell Establishment of NSCCL, the first Clearing Corporation Introduction of centralised insurance cover for all trading members Establishment of Investor Protection Fund Became largest stock exchange in the country Commencement of clearing and settlement by NSCCL Launch of S&P CNX Nifty Establishment of Settlement Guarantee Fund Setting up of National Securities Depository Limited, first depository in India, co-promoted by NSE

November 1996

November 1996 December 1996 December 1996 February 1997 November 1997 May 1998 May 1998 July 1998 August 1998 February 1999 April 1999 October 1999 January 2000 February 2000 June 2000

Best IT Usage award by Computer Society of India Commencement of trading/settlement in dematerialised Launch of CNX Nifty Junior Regional clearing facility goes live Best IT Usage award by Computer Society of India Promotion of joint venture, India Index Services & Products Limited (IISL) Launch of NSE's Web-site: www.nse.co.in Launch of NSE's Certification Programme in Financial Market CYBER CORPORATE OF THE YEAR 1998 award Launch of Automated Lending and Borrowing Mechanism CHIP Web Award by CHIP magazine Setting up of NSE.IT Launch of NSE Research Initiative Commencement of Internet Trading Commencement of Derivatives Trading (Index Futures)

September 2000

Launch of 'Zero Coupon Yield Curve'

November 2000

Launch of Broker Plaza by Dotex International, a joint venture between NSE.IT Ltd. and i-flex Solutions Ltd.

December 2000 Commencement of WAP trading June 2001 July 2001 Commencement of trading in Index Options Commencement of trading in Options on Individual Securities

November 2001 Commencement of trading in Futures on Individual Securities December 2001 Launch of NSE VaR for Government Securities January 2002 Launch of Exchange Traded Funds (ETFs) NSE wins the Wharton-Infosys Business Transformation Award in the Organization-wide Transformation category Launch of NSE Government Securities Index Commencement of trading in Retail Debt Market Launch of Interest Rate Futures Launch of Futures & options in CNXIT Index Launch of STP Interoperability Launch of NSEs electronic interface for listed companies India Innovation Award by EMPI Business School, New Delhi

May 2002

October 2002 January 2003 June 2003 August 2003 June 2004 August 2004 March 2005

June 2005

Launch of Futures & options in BANK Nifty Index

December 2006 'Derivative Exchange of the Year', by Asia Risk magazine January 2007 March 2007 June 2007 October 2007 January 2008 March 2008 April 2008 April 2008 August 2008 August 2009 Launch of NSE CNBC TV 18 media centre NSE, CRISIL announce launch of IndiaBondWatch.com NSE launches derivatives on Nifty Junior & CNX 100 NSE launches derivatives on Nifty Midcap 50 Introduction of Mini Nifty derivative contracts on 1st January 2008 Introduction of long term option contracts on S&P CNX Nifty Index Launch of India VIX Launch of Securities Lending & Borrowing Scheme Launch of Currency Derivatives Launch of Interest Rate Futures

November 2009 Launch of Mutual Fund Service System December 2009 Commencement of settlement of corporate bonds February 2010 March 2010 Launch of Currency Futures on additional currency pairs NSE- CME Group & NSE - SGX product cross listing agreement

April 2010 July 19, 2010 July 19, 2010 July 28, 2010 October 2010 October 2010 October 2010 November 2010 December 2010 January 2011 05, 29, 9, 29, 28, 12,

Financial Derivative Exchange of the Year Award' by Asian Banker Commencement of trading of S&P CNX Nifty Futures on CME Real Time dissemination of India VIX. LOI signed with London Stock Exchange Group

Introduction of Call auction in Pre-open session

Introduction of European Style Stock Options

Introduction of Currency Options on USD INR

Launch of mobile trading for all investors

NSCCL Rated CCR AAA for third consecutive year

NSE receives Financial Inclusion Award

The National Stock Exchange (NSE) (Hindi: Rashtriya hare Bzar) is astock exchange located at Mumbai, India. It is the9th largest stock exchange in the world by market capitalization and largest in India by daily turnover and number of trades, for both equities and derivative trading. NSE has a market capitalization of around US$1.59 trillion and over 1,552 listings as of December 2010. Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. The NSE's key index is the S&P CNX Nifty, known as the NSE NIFTY (National Stock Exchange Fifty), an index of fifty major stocks weighted by market capitalization. NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities.[ There are at least 2 foreign investors NYSE Euronext and Goldman Sachs who have taken a stake in the NSE. As of 2006, the NSEVSAT terminals, 2799 in total, cover more than 1500 cities across India.[ NSE is the third largest Stock Exchange in the world in terms of the number of trades in equities. It is the second fastest growing stock exchange in the world with a recorded growth of 16.6%.

3.4 Markets
Currently, NSE has the following major segments of the capital market:
Equity Futures and Options Retail Debt Market Wholesale Debt Market Currency futures MUTUAL FUND STOCKS LENDING & BORROWING

August 2008 Currency derivatives were introduced in India with the launch of Currency Futures in USD INR by NSE. Currently it has also launched currency futures in EURO, POUND &

YEN. Interest Rate Futures was introduced for the first time in India by NSE on 31 August 2009, exactly after one year of the launch of Currency Futures. NSE became the first stock exchange to get approval for Interest rate futures as recommended by SEBI-RBI committee, on 31 August 2009, a futures contract based on 7% 10 Year GOI bond (NOTIONAL) was launched with quarterly maturities.

3.5 Hours
NSE's normal trading sessions are conducted from 9:15 am India Time to 3:30 pm India Time on all days of the week except Saturdays, Sundays and Official Holidays declared by the Exchange (or by the Government of India) in advance.[11] The exchange, in association with BSE (Bombay Stock Exchange Ltd.), is thinking of revising its timings from 9.00 am India Time to 5.00 pm India Time. There were System Testing going on and opinions, suggestions or feedback on the New Proposed Timings are being invited from the brokers across India. And finally on 18 November 2009 regulator decided to drop their ambitious goal of longest Asia Trading Hours due to strong opposition from its members. On 16 December 2009, NSE announced that it would advance the market opening to 9:00 am from 18 December 2009. So NSE trading hours will be from 9.00 am till 3:30 pm India Time. However, on 17 December 2009, after strong protests from brokers, the Exchange decided to postpone the change in trading hours till 4 Jan 2010.
NSE new market timing from 4 Jan 2010 is 9:00 am till 3:30 pm India Time

CHAPTER-4 COMPANY PROFILE

4.1 Inteoduction of India infoline

The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd (NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of the leading players in the Indian financial services space. IIFL offers advice and execution platform for the entire range of financial services covering products ranging from Equities and derivatives, Commodities, Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking, GoI bonds and other small savings instruments. IIFL recently received an in-principle approval for Securities Trading and Clearing memberships from Singapore Exchange (SGX) paving the way for IIFL to become the first Indian brokerage to get a membership of the SGX. IIFL also received membership of the Colombo Stock Exchange becoming the first foreign broker to enter Sri Lanka. IIFL owns and manages the website, www.indiainfoline.com, which is one of Indias leading online destinations for personal finance, stock markets, economy and business. IIFL has been awarded the Best Broker, India by Finance Asia and the Most improved brokerage, India in the Asia Money polls. India Infoline was also adjudged as Fastest Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the field of equity research, IIFLs research is acknowledged by none other than Forbes as Best of the Web and a must read for investors in Asia. Our research is available not just over the Internet but also on international wire services like Bloomberg, Thomson First Call and Internet Securities where it is amongst one of the most read Indian brokers. A network of over 2,500 business locations spread over more than 500 cities and towns across India facilitates the smooth acquisition and servicing of a large customer base. All our offices are connected with the corporate office in Mumbai with cutting edge networking technology. The group caters to a customer base of about a million customers, over a variety of mediums viz. online, over the phone and at our branches

4.2 History & Milestones

1995 Commenced operations as an Equity Research firm 1997 Launched research products of leading Indian companies, key sectors and the economy Client included leading FIIs, banks and companies. 1999 Launched www.indiainfoline.com 2000 Launched online trading through www.5paisa.com Started distribution of life insurance and mutual fund 2003 Launched proprietary trading platform Trader Terminal for retail customers 2004 Acquired commodities broking license Launched Portfolio Management Service 2005 Maiden IPO and listed on NSE, BSE 2006 Acquired membership of DGCX Commenced the lending business 2007 Commenced institutional equities business under IIFL Formed Singapore subsidiary, IIFL

(Asia) Pte Ltd 2008 Launched IIFL Wealth Transitioned to insurance broking model 2009 Acquired registration for Housing Finance SEBI in-principle approval for Mutual Fund Obtained Venture Capital license 2010 Received in-principle approval for membership of the Singapore Stock Exchange Received membership of the Colombo Stock Exchange

4.3 ]IIFL (India Infoline Ltd) - Corporate Structure

4.4 Board of directors Mr. Nirmal Jain Chairman & Managing Director , India Infoline Ltd.

Mr. R. Venkataraman Executive Director , India Infoline Ltd.

Mr. Nilesh Vikamsey Independent Director , India Infoline Ltd.

Mr. Kranti Sinha Independent Director , India Infoline Ltd.

Managemen

Institutional Equities Investment Banking Consumer Finance Retail Broking Wealth Management \

H.Nemkumar Ajit Menon,Donald D' Souza Apul Nayyar Nandia Vaidya Karan Bhagat

4.5 IIFLs philosophy on Corporate Governance IIFL (India Infoline) is committed to placing the Investor First, by continuously striving to increase the efficiency of the operations as well as the systems and processes for use of corporate resources in such a way so as to maximize the value to the stakeholders. The Group aims at achieving not only the highest possible standards of legal and regulatory compliances, but also of effective management. Committee Audit Committee Terms of reference & Composition, Name of members and Chairman: The Audit committee comprises Mr Nilesh Vikamsey (Chairman), Mr Sat Pal Khattar, Mr Kranti Sinha, three of whom are independent Directors. The Managing Director, the Executive Director along with the Statutory and Internal Auditors are invitees to the Meeting. The Terms of reference of this committee are as under: - To investigate into any matter that may be prescribed under the provisions of Section 292A of The Companies Act, 1956 - Recommendation and removal of External Auditor and fixation of the Audit Fees. - Reviewing with the management the financial statements before submission of the same to the Board. - Overseeing of Companys financial reporting process and disclosure of its financial information. - Reviewing the Adequacy of the Internal Audit Function. Compensation/ Remuneration Committee Terms of reference & Composition, Name of members and Chairman: The Compensation / Remuneration Committee comprises Mr Kranti Sinha (Chairman), Mr Nilesh Vikamsey and Mr. Sat Pal Khattar all of whom are independent Directors. The Terms of reference of this committee are as under: - To fix suitable remuneration package of all the Executive Directors and Non Executive Directors, Senior Employees and officers i.e. Salary, perquisites, bonuses, stock options, pensions etc. - Determination of the fixed component and performance linked incentives alongwith the performance criteria to all employees of the company - Service Contracts, Notice Period, Severance Fees of Directors and employees. - Stock Option details: whether to be issued

at discount as well as the period over which to be accrued and over which exercisable. - To conduct discussions with the HR department and form suitable remuneration policies. 4.6 Share Transfer and Investor Grievance Committee Details of the Members, Compliance Officer, No of Complaints received and pending and pending transfers as on close of the financial year. The committee functions under the Chairmanship of Mr Kranti Sinha, a Non-executive independent Director. The other Members of the committee are Mr. Nirmal Jain and Mr. R Venkataraman. Ms Sunil Lotke, Company Secretary is the Compliance Officer of the Company. 4.7 IIFL CSR Initiatives

CSR activities of IIFL Foundation: In line with our vision to be the most respected company in the financial services space, we recognize the importance of contributing to and sustaining social transformation. With this end in mind, we have setup the IIFL foundation, which will work for the support and upliftment of the underpri line with our vision to be the most respected company in the financial services space, we recognize the importance of contributing to and sustaining social transformation. With this end in mind, we have setup the IIFL foundation, which will work for the support and upliftment of the underprivileged sections of society.

Blood donation drive: IIFL regularly organizes blood donation drives via camps at its various locations across India. Over 800 employees have participated in these camps.

4.8 India Infoline product and services Overview: IIFL is a one-stop financial services shop, most respected for quality of its advice, personalized service and cutting-edge technology. Equities IIFL is a member of BSE and NSE registered with NSDL and CDSL as a depository participant and provides broking services in the cash, derivatives and currency segments, online and offline. IIFL is a dominant player in the retail as well as institutional segments of the market. It recently became the first Indian broker to get a membership of the Colombo Stock Exchange and is also the first Indian broker to have received an in-principle approval for membership of the Singapore Stock Exchange. IIFLs Trader Terminal, its proprietary trading platform, is widely acknowledged as one of the best available for retail investors. Investors opt for IIFL given its unique combination of superior Service, cutting-edge proprietary Technology, Advice powered by world-acclaimed research and its unparalleled Reach owing to its over 2500 business locations across over 500 cities in India. IIFL received the BQ1 broker grading (highest grading) from CRISIL. The assigned grading reflects an effective external interface, robust systems framework and strong risk management. The grading also reflects IIFLs healthy regulatory compliance track record and adequate credit risk profile. IIFLs analyst team won Zee Business Indias best market analysts awards 2009 for being the best in the Oil and Gas and Commodities sectors and a finalist in the Banking and IT sectors. IIFL has rapidly emerged as one of the premier institutional equities houses in India with a team of over 25 research analysts, a full-fledged sales and trading team coupled with an experienced investment banking team.

The Institutional equities business conducted a very successful Enterprising India global investors conference in Mumbai in March 2010, which was attended by funds with aggregate AUM over US$5 trillion and CEOs and other executives representing corporates with a combined market capitalization of over US$500 billion. The Discover Sri Lanka global investors conference, held in Colombo in July 2010, was attended by more than 50 leading global and major local investors and 25 Sri Lankan corporates, along with senior Government officials. Contact IIFL for Retail broking Email: info@5pmail.com Tel: +91-44- 40071000 Contact Us for Institutional Equities Email: info@iiflcap.com Tel: +91-22-46464600 Website: http://www.iiflcap.com For Commodities IIFL offers commodities trading to its customers vide its membership of the MCX and the NCDEX. Our domain knowledge and data based on in depth research of complex paradigms of commodity kinetics, offers our customers a unique insight into behavioral patterns of these markets. Our customers are ideally positioned to make informed investment decisions with a high probability of success. Contact IIFL for Commodities Email: comm@indiainfoline.com Tel: +91-22-40077105 India Infoline Commodities Ltd 143, MGR Road, Perungudi, Chennai, Tamil Nadu - 600 096

Credit and finance IIFL offers a wide array of secured loan products. Currently, secured loans (mortgage loans, margin funding, loans against shares) comprise 94% of the loan book. The Company has discontinued its unsecured products. It has robust credit processes and collections mechanism resulting in overall NPAs of less than 1%. The Company has deployed proprietary loan-processing software to enable stringent credit checks while ensuring fast application processing. Recently the company has also launched Loans against Gold. Contact Us for Loans Email: reach@moneylineindia.com Tel: +91-22- 28710625 Insurance IIFL entered the insurance distribution business in 2000 as ICICI Prudential Life Insurance Co. Ltds corporate agent. Later, it became an Insurance broker in October 2008 in line with its strategy to have an open architecture model. The Company now distributes products of major insurance companies through its subsidiary India Infoline Insurance Brokers Ltd. Customers can choose from a wide bouquet of products from several insurance companies including Max New York Life Insurance, MetLife, Reliance Life Insurance, Bajaj Allianz Life, Birla Sunlife, Life Insurance Corporation, Kotak Life Insurance and others. Wealth Management Service IIFL offers private wealth advisory services to high-net-worth individuals (HNI) and corporate clients under the IIFL Private Wealth brand. IIFL Private Wealth is managed by a qualified team of MBAs from IIMs and premier institutes with relevant industry experience. The team advises clients across asset classes like sovereign and quasi-sovereign debt, corporate and collateralised debt, direct equity, ETFs and mutual funds, third party PMS, derivative strategies, real estate and private equity. It has developed innovative products structured on the fixed income side. It also has tied up with Interactive Brokers LLC to strengthen its execution platform and provide investors with a global investment platform.

Contact Us for Wealth Management Services Email: acquisitions@iiflw.com Tel: +91-22-3958 5704 / +91 9004094893 Investment Banking IIFLs investment banking division was launched in 2006. The business leverages upon its strength of research and placement capabilities of the institutional and retail sales teams. Our experienced investment banking team possesses the skill-set to manage all kinds of investment banking transactions. Our close interaction with investors as well as corporates helps us understand and offer tailor-made solutions to fulfill requirements. The Company possesses strong placement capabilities across institutional, HNI and retail investors. This makes it possible for the team to place large issues with marquee investors. In FY10, the team advised and managed more than 10 transactions including four IPOs and four Qualified Institutions Placements Contact Us for Investment Banking Email: info.ib@iiflcap.com Tel: +91-22-4646 4600 4.9 India Infolin Contact Us

Corporate Office IIFL Center, B Wing,Trade Centre Kamala Mills Compound, Off Senapati Bapat Marg, Lower Parel, Mumbai - 400013

CHAPTER 5 INTRODUCTION OF OF EQUITY:

5.1 History

One of the earliest stock by VOC. During Roman times, the empire contracted out many of its services to private groups called publicani. Shares in publicani were called "socii" (for large cooperatives) and "particulae" which were analogous to today's Over-The-Counter shares of small companies. Though the records available for this time are incomplete, Edward Chancellor states in his book Devil Take the Hindmost that there is some evidence that a speculation in these shares became increasingly widespread and that perhaps the first ever speculative bubble in "stocks" occurred. The first company to issue shares of stock after the Middle Ages was the Dutch East India Company in 1606. The innovation of joint ownership made a great deal of Europe's economic growth possible following the Middle Ages. The technique of pooling capital to finance the building of ships, for example, made the Netherlands a maritime superpower. Before adoption of the joint-stock corporation, an expensive venture such as the building of a merchant ship could be undertaken only by governments or by very wealthy individuals or families. Economic historians find the Dutch stock market of the 17th century particularly interesting: there is clear documentation of the use of stock futures, stock options, short selling, the use of credit to purchase shares, a speculative bubble that crashed in 1695, and a change in fashion that unfolded and reverted in time with the market (in this case it was headdresses instead of

hemlines). Dr. Edward Stringham also noted that the uses of practices such as short selling continued to occur during this time despite the government passing laws against it. This is unusual because it shows individual parties fulfilling contracts that were not legally enforceable and where the parties involved could incur a loss. Stringham argues that this shows that contracts can be created and enforced without state sanction or, in this case, in spite of laws to the contrary.[6][7] 5.2 What is equity? Stocks or Equities are also called shares in common parlance. In other words, when you invest in a company's stock or buy its shares, you own part of a company. As a stockholder, you share a portion of the profit or loss that a company may make. While on the subject on stocks, it is good to know about dividends. A dividend is a sum of money paid to the shareholders of a corporation out of its earnings. This is usually determined by a company's directors. How did the stock markets evolve to its present state? The earliest roots of the stock market can be traced back to the days when people conducted their trading activities under Banyan trees. In 1854, Dalal Street came to prominence. The oldest stock Exchange in Asia, The Bombay Stock Exchange (BSE) came into existence. With over 150 years of functioning, BSE became the first stock exchange in the country to be granted permanent recognition under the Securities Contract Regulation Act, 1956. The Indian stock market has witnessed tremendous changes over the past two decades. Gone are the days when the 'open outcry' method was used to trade shares. In this method, brokers came to the trading floors of stock exchanges and placed bids by shouting out prices . Once an agreement was reached to buy or sell shares, the settlement would take days. Even worse, if you were a long-term investor, it was your headache to preserve the shares certificates that came in paper form. The process underwent a rapid change with the advent of information technology. Paper

share certificates gave way to the electronic form (dematerialised) and a screen-based trading system was introduced. Thanks to these developments, now there is no risk of losing share certificates. Similarly, there is no need for brokers to assemble at a place to trade. An investor can call a broker and place his order. The broker would punch orders into his terminals, which are fed into a centralized system at the stock exchange. The transaction gets executed as soon as the order matches an existing order in the system. Otherwise, it waits for new orders before it can effect a match. In 1993 the NSE or National Stock Exchange was recognized as a Stock Exchange in India. Today technology has helped automate the entire trading mechanism in India . 5.3 What do the terms primary market and secondary markets mean? Primary Market A Company enters into the Primary markets to raise capital. They issue new securities in Exchange for cash from an investor. If the company is isuing securities for the first time, these are referred to as Initial Public Offers (IPOs). Secondary Market Secondary Market transactions are those transactions where one investor buys shares from another investor at the prevailing market price or at a price agreeable to both the buyer and seller. The Secondary Markets or the Stock Exchanges are regulated by the industry watchdog Security and Exchange Board of India (SEBI).

5.4 What are Stock Exchanges? A Stock Exchange provides a platform 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. The major stock exchanges in India are the Bombay Stock Exchange and the National Stock Exchange and are regulated by SEBI. Types of stock Stock typically takes the form of shares of either common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate

decisions. Preferred stock differs from common stock in that it typically does not carry voting rights but is legally entitled to receive a certain level of dividend payments before any dividends can be issued to other shareholders.[3][4] Convertible preferred stock is preferred stock that includes an option for the holder to convert the preferred shares into a fixed number of common shares, usually anytime after a predetermined date. Shares of such stock are called "convertible preferred shares" (or "convertible preference shares" in the UK) New equity issues may have specific legal clauses attached that differentiate them from previous issues of the issuer. Some shares of common stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them and issued only to certain parties. Often, new issues that have not been registered with a securities governing body may be restricted from resale for certain periods of time. Preferred stock may be hybrid by having the qualities of bonds of fixed returns and common stock voting rights. They also have preference in the payment of dividends over common stock and also have been given preference at the time of liquidation over common stock. They have other features of accumulation in dividend 5.5 Stock derivatives For more details on this topic, see equity derivative. A stock derivative is any financial instrument which has a value that is dependent on the price of the underlying stock. Futures and options are the main types of derivatives on stocks. The underlying security may be a stock index or an individual firm's stock, e.g. single-stock futures. Stock futures are contracts where the buyer is long, i.e., takes on the obligation to buy on the contract maturity date, and the seller is short, i.e., takes on the obligation to sell. Stock index futures are generally not delivered in the usual manner, but by cash settlement. A stock option is a class of option. Specifically, a call option is the right (not obligation) to buy stock in the future at a fixed price and a onput opti is the right (not obligation) to sell stock in the future at a fixed price. Thus, the value of a stock option changes in reaction to the underlying

stock of which it is a derivative. The most popular method of valuing stock options is the Black Scholes model.[5] Apart from call options granted to employees, most stock options are transferable 5.6 Shares The stock of a business is divided into multiple shares, the total of which must be stated at the time of business formation. Given the total amount of money invested in the business, a share has a certain declared face value, commonly known as the par value of a share. The par value is the de minimis (minimum) amount of money that a business may issue and sell shares for in many jurisdictions and it is the value represented as capital in the accounting of the business. In other jurisdictions, however, shares may not have an associated par value at all. Such stock is often called non-par stock. Shares represent a fraction of wneorship in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares is documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares. 5.7 Shareholder

Stock certificate for ten shares of the Baltimore and Ohio Railroad Company. Main article: Shareholder

A shareholder (or stockholder) is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. Both private and public traded companies have shareholders. Companies listed at the stock market are expected to strive to enhance shareholder value. Shareholders are granted special privileges depending on the class of stock, including the right to vote on matters such as elections to the board of directors, the right to share in distributions of the company's income, the right to purchase new shares issued by the company, and the right to a company's assets during a liquidation of the company. However, shareholder's rights to a company's assets are subordinate to the rights of the company's creditors. Shareholders are considered by some to be a partial subset of stakeholders, which may include anyone who has a direct or indirect equity interest in the business entity or someone with even a non-pecuniary interest in a non-profit organization. Thus it might be common to call volunteer contributors to an association stakeholders, even though they are not shareholders. Although directors and officers of a company are bound by fiduciary duties to act in the best interest of the shareholders, the shareholders themselves normally do not have such duties towards each other. However, in a few unusual cases, some courts have been willing to imply such a duty between shareholders. For example, in California, USA, majority shareholders of closely held corporations have a duty to not destroy the value of the shares held by minority shareholders.[8][9] The largest shareholders (in terms of percentages of companies owned) are often mutual funds, and, especially, passively managed exchange-traded funds 5.8 Application The owners of a company may want additional capital to invest in new projects within the company. They may also simply wish to reduce their holding, freeing up capital for their own private use.

By selling shares they can sell part or all of the company to many part-owners. The purchase of one share entitles the owner of that share to literally share in the ownership of the company, a fraction of the decision-making power, and potentially a fraction of the profits, which the company may issue as dividends. In the common case of a publicly traded corporation, where there may be thousands of shareholders, it is impractical to have all of them making the daily decisions required to run a company. Thus, the shareholders will use their shares as votes in the election of members of the board of directors of the company. In a typical case, each share constitutes one vote. Corporations may, however, issue different classes of shares, which may have different voting rights. Owning the majority of the shares allows other shareholders to be out-voted effective control rests with the majority shareholder (or shareholders acting in concert). In this way the original owners of the company often still have control of the company. 5.9 Edit Shareholder rights Although ownership of 50% of shares does result in 50% ownership of a company, it does not give the shareholder the right to use a company's building, equipment, materials, or other property. This is because the company is considered a legal person, thus it owns all its assets itself. This is important in areas such as insurance, which must be in the name of the company and not the main shareholder. In most countries, boards of directors and company managers have a fiduciary responsibility to run the company in the interests of its stockholders. Nonetheless, as Martin Whitman writes: ...it can safely be stated that there does not exist any publicly traded company where management works exclusively in the best interests of OPMI [Outside Passive Minority Investor] stockholders. Instead, there are both "communities of interest" and "conflicts of interest" between stockholders (principal) and management (agent). This conflict is referred to as the principal/agent problem. It would be naive to think that any management would forgo management compensation, and management entrenchment,

just because some of these management privileges might be perceived as giving rise to a conflict of interest with OPMIs.[10] Even though the board of directors runs the company, the shareholder has some impact on the company's policy, as the shareholders elect the board of directors. Each shareholder typically has a percentage of votes equal to the percentage of shares he or she owns. So as long as the shareholders agree that the management (agent) are performing poorly they can elect a new board of directors which can then hire a new management team. In practice, however, genuinely contested board elections are rare. Board candidates are usually nominated by insiders or by the board of the directors themselves, and a considerable amount of stock is held or voted by insiders. Owning shares does not mean responsibility for liabilities. If a company goes broke and has to default on loans, the shareholders are not liable in any way. However, all money obtained by converting assets into cash will be used to repay loans and other debts first, so that shareholders cannot receive any money unless and until creditors have been paid (often the shareholders end up with nothing). 5.10 Usage Used in the plural, stocks is often used as a synonym for shares.[1] Traditionalist demands for the plural stocks to be used only when referring to stocks of more than one company are rarely heard nowadays. In the United Kingdom, Republic of Ireland, South Africa, and Australia, stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities

5.11 Trading The shares of a company may in general be transferred from shareholders to other parties by sale or other mechanisms, unless prohibited. Most jurisdictions have established laws and regulations governing such transfers, particularly if the issuer is a publicly-traded entity. The desire of stockholders to trade their shares has led to the establishment of stock exchanges. A stock exchange is an organization that provides a marketplace for trading shares and other derivatives and financial products. Today, investors are usually represented by a stock broker who buys and sells shares of a wide range of companies on the exchanges. A company may list its shares on an exchange by meeting and maintaining the listing requirements of a particular stock exchange. In the United States, through the inter-market quotation system, stocks listed on one exchange can also be traded on other participating exchanges, including the Electronic Communication Networks (ECNs), such as Archipelago or Instinet. Many large non-U.S companies choose to list on a U.S. exchange as well as an exchange in their home country in order to broaden their investor base. These companies must maintain a block of shares at a bank in the US, typically a certain percentage of their capital. On this basis, the holding bank establishes American Depositary Shares and issues an American Depository Receipt (ADR) for each share a trader acquires. Likewise, many large U.S. companies list their shares at foreign exchanges to raise capital abroad. Small companies that do not qualify and cannot meet the listing requirements of the major exchanges may be traded over the counter (OTC) by an off-exchange mechanism in which trading occurs directly between parties. The major OTC markets in the United States are the electronic quotation systems OTC Bulletin Board (OTCBB) and the C MarketsPink OT (Pink Sheets) where individual retail investors are also represented by a brokerage firm and the quotation service's requirements for a company to be listed are minimal. Shares of companies in bankruptcy proceeding are usually listed by these quotation services after the stock is delisted from an exchange.

5.12 Buying There are various methods of buying and financing stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they arrange the transfer of stock from a seller to a buyer. Most trades are actually done through brokers listed with a stock exchange. There are many different stock brokers from which to choose, such as full service brokers or discount brokers. The full service brokers usually charge more per trade, but give investment advice or more personal service; the discount brokers offer little or no investment advice but charge less for trades. Another type of broker would be a bank or credit union that may have a deal set up with either a full service or discount broker. There are other ways of buying stock besides through a broker. One way is directly from the company itself. If at least one share is owned, most companies will allow the purchase of shares directly from the company through their investor relations departments. However, the initial share of stock in the company will have to be obtained through a regular stock broker. Another way to buy stock in companies is through Direct Public Offerings which are usually sold by the company itself. A direct public offering is an initial public offering in which the stock is purchased directly from the company, usually without the aid of brokers. When it comes to financing a purchase of stocks there are two ways: purchasing stock with money that is currently in the buyer's ownership, or by buying stock on margin. Buying stock on margin means buying stock with money borrowed against the stocks in the same account. These stocks, or collateral, guarantee that the buyer can repay the loan; otherwise, the stockbroker has the right to sell the stock (collateral) to repay the borrowed money. He can sell if the share price drops below the margin requirement, at least 50% of the value of the stocks in the account. Buying on margin works the same way as borrowing money to buy a car or a house, using a car or house as collateral. Moreover, borrowing is not free; the broker usually charges 810% interest.

5.13 Selling Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order although a number of reasons may induce an investor to sell at a loss, e.g., to avoid further loss. As with buying a stock, there is a transaction fee for the broker's efforts in arranging the transfer of stock from a seller to a buyer. This fee can be high or low depending on which type of brokerage, full service or discount, handles the transaction. After the transaction has been made, the seller is then entitled to all of the money. An important part of selling is keeping track of the earnings. Importantly, on selling the stock, in jurisdictions that have them, capital gains taxes will have to be paid on the additional proceeds, if any, that are in excess of the cost basis. 5.14 Stock price fluctuations The price of a stock fluctuates fundamentally due to the theory of supply and demand. Like all commodities in the market, the price of a stock is sensitive to demand. However, there are many factors that influence the demand for a particular stock. The field of fundamental analysis and technical analysis attempt to understand market conditions that lead to price changes, or even predict future price levels. A recent study shows that customer satisfaction, as measured by the American Customer Satisfaction Index (ACSI), is significantly correlated to the market value of a stock. Stock price may be influenced by analyst's business forecast for the company and outlooks for the company's general market segment.

5.15 Share price determination At any given moment, an equity's price is strictly a result of supply and demand. The supply, commonly referred to as the float, is the number of shares offered for sale at any one moment. The demand is the number of shares investors wish to buy at exactly that same time. The price of the stock moves in order to achieve and maintain equilibrium. The product of this instantaneous

price and the float at any one time is the market capitalization of the entity offering the equity at that point in time. When prospective buyers outnumber sellers, the price rises. Eventually, sellers attracted to the high selling price enter the market and/or buyers leave, achieving equilibrium between buyers and sellers. When sellers outnumber buyers, the price falls. Eventually buyers enter and/or sellers leave, again achieving equilibrium. Thus, the value of a share of a company at any given moment is determined by all investors voting with their money. If more investors want a stock and are willing to pay more, the price will go up. If more investors are selling a stock and there aren't enough buyers, the price will go down.

Note: "For Nasdaq-listed stocks, the price quote includes information on the bid and ask prices for the stock.

Of course, that does not explain how people decide the maximum price at which they are willing to buy or the minimum at which they are willing to sell. In professional investment circles the efficient market hypothesis (EMH) continues to be popular, although this theory is widely discredited in academic and professional circles. Briefly, EMH says that investing is overall (weighted by a Stdev) rational; that the price of a stock at any given moment represents a rational evaluation of the known information that might bear on the future value of the company; and that share prices of equities are priced efficiently, which is to say that they represent accurately the expected value of the stock, as best it can be known at a given moment. In other words, prices are the result of discounting expected future cash flows. The EMH model, if true, has at least two interesting consequences. First, because financial risk is presumed to require at least a small premium on expected value, the return on equity can be expected to be slightly greater than that available from non-equity investments: if not, the same rational calculations would lead equity investors to shift to these safer non-equity investments that could be expected to give the same or better return at lower risk. Second, because the price of a share at every given moment is an "efficient" reflection of expected value, thenrelative to the curve of expected returnprices will tend to follow a random walk, determined by the

emergence of information (randomly) over time. Professional equity investors therefore immerse themselves in the flow of fundamental information, seeking to gain an advantage over their competitors (mainly other professional investors) by more intelligently interpreting the emerging flow of information (news). The EMH model does not seem to give a complete description of the process of equity price determination. For example, stock markets are more volatile than EMH would imply. In recent years it has come to be accepted that the share markets are not perfectly efficient, perhaps especially in emerging markets or other markets that are not dominated by well-informed professional investors. Another theory of share price determination comes from the field of Behavioral Finance. According to Behavioral Finance, humans often make irrational decisionsparticularly, related to the buying and selling of securitiesbased upon fears and misperceptions of outcomes. The irrational trading of securities can often create securities prices which vary from rational, fundamental price valuations. For instance, during the technology bubble of the late 1990s (which was followed by the dot-com bust of 20002002), technology companies were often bid beyond any rational fundamental value because of what is commonly known as the "greater fool theory". The "greater fool theory" holds that, because the predominant method of realizing returns in equity is from the sale to another investor, one should select securities that they believe that someone else will value at a higher level at some point in the future, without regard to the basis for that other party's willingness to pay a higher price. Thus, even a rational investor may bank on others' irrationality.

Arbitrage trading When companies raise capital by offering stock on more than one exchange, the potential exists for discrepancies in the valuation of shares on different exchanges. A keen investor with access to information about such discrepancies may invest in expectation of their eventual convergence, known as arbitrage trading. Electronic trading has resulted in extensive price transparency

(efficient market hypothesis) and these discrepancies, if they exist, are short-lived and quickly equilibrate. 5.16 Types of order:

Market Order: A market order is an order to buy or sell a stock at the current prevailing market price

Limit Order: A limit order is an order to buy or sell a security at a specific price quoted by you. You could set the price of the stock. However, a limit order cannot guarantee execution of the trade, since the scrip might not reach the desired price on that particular trading day owing to Market related factors.

Stop Loss Order: A stop loss order is a Normal order placed with a broker to sell a security when it reaches a certain predetermined price called the Trigger Price. The stop loss trigger price helps you limit your losses against unanticipated market movements. Your stop loss instruction is an order to sell when the price of contracts reaches a pre-determined level - the trigger price. This price cannot be more than the price of the stock you are trading. For eg. If you bought a stock at Rs. 100/- and you expect it to move to Rs. 110/-. However you place a stop loss order with your broker to sell it, if it reaches Rs. 80. This helps you prevent further loss, in the eventuality that the price of the stock might dip even further. Thus, it helps limit your loss or protect unrealized profits, whichever the case.

After Market Order An After Market Order (AMO) is a feature using which a customer can place an order even after the close of regular trading hours. For more details, please visit our section on AMOs.

5.17 Key of financial ratios The ratio analysis technique helps you understand a company's financial strength. Crosssectional analysis compares financial ratios of several companies from the same industry and enables you to deduce success, failure or progress of any business. Thus, a financial ratio measures a company's performance in a specific area and guides your judgment regarding which company is a better investment option. Some of the important ratios that an investor must know are: Price-Earnings Ratio (P-E ratio) It is a ratio obtained by dividing the price of a share of stock by Earnings per share (EPS) for a 12-month period. EPS (Earnings Per Share) EPS gives an indication of the profitability of a company. It is calculated using the formula: Current Ratio Companies need a surplus supply of current assets in order to meet their current liabilities. They generally pay their interest payments and other short-term debts with current assets. If a company has only illiquid assets, it may not be able to make payments on their debts. It is a type of Liquidity ratio.

5.18difference between Technical Analysis and Fundamental analysis Technical analysis is a method of evaluating stocks by analyzing stock market related activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts to identify patterns that can suggest future activity. They believe in the momentum that the scrips/markets gather over a period of time and cashing in on the same.

Fundamental analysis uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company's underlying value and potential for future growth To know more about the technical and fundamental reports, that we can provide you with, please visit our section on

CHAPTER-6 INTROEUCTION OF COMMODITIES

Derivatives as a tool for managing risk first originated in the commodities markets. They were then found useful as a hedging tool in financial markets as well. In India, trading in commodity futures has been in existence from the nineteenth century with organised trading in cotton through the establishment of Cotton Trade Association in 1875. Over a period of time, other commodities were permitted to be traded in futures exchanges. Regulatory constraints in 1960s resulted in virtual dismantling of the commodities future markets. It is only in the last decade that commodity future exchanges have been actively encouraged. However, the markets have been thin with poor liquidity and have not grown to any significant level.

Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.

6.1 Evolution of commodities market in India Although India has a long history of trade in commodity derivatives, this segment remained underdeveloped due to government intervention in many commodity markets to control prices. The production, supply and distribution of many agricultural commodities are still governed by the state and forwards and futures trading are selectively introduced with stringent controls. While free trade in many commodity items is restricted under the Essential Commodities Act (ECA), 1955, forward and futures contracts are limited to certain commodity items under the Forward Contracts (Regulation) Act (FCRA), 1952. The first commodity exchange was set up in India by Bombay Cotton Trade Association Ltd., and formal organized futures trading started in cotton in 1875. Subsequently, many exchanges came up in different parts of the country for futures trade in various commodities. The Gujrati Vyapari Mandali came into existence in 1900 which has undertaken futures trade in oilseeds first

time in the country. The Calcutta Hessian Exchange Ltd and East India Jute Association Ltd were set up in 1919 and 1927 respectively for futures trade in raw jute. In 1921, futures in cotton were organized in Mumbai under the auspices of East India Cotton Association (EICA). Many exchanges were set up in major agricultural centres in north India before world war broke out and they were mostly engaged in wheat futures until it was prohibited. The existing exchanges in Hapur, Muzaffarnagar, Meerut, Bhatinda, etc were established during this period. The futures trade in spices was first organized by India Pepper and Spices Trade Association (IPSTA) in Cochin in 1957. Futures in gold and silver began in Mumbai in 1920 and continued until it was prohibited by the government by mid-1950s. Options are though permitted now in stock market, they are not allowed in commodities. The commodity options were traded during the preindependence period. Options on cotton were traded until they along with futures were banned in 1939 (Ministry of Food and Consumer Affairs, 1999). However, the government withdrew the ban on futures with passage of FCRA in 1952. The Act has provided for the establishment and constitution of Forward Markets Commission (FMC) for the purpose of exercising the regulatory powers assigned to it by the Act. Later, futures trade was altogether banned by the government in 1966 in order to have control on the movement of prices of many agricultural and essential commodities.

After the ban of futures trade all the exchanges went out of business and many traders started resorting to unofficial and informal trade in futures. On recommendation of the Khusro Committee in 1980 government reintroduced futures on some selected commodities including cotton, jute, potatoes, etc. As part of economic liberalization of 1990s an expert committee on forward markets under the chairmanship of Prof. K.N. Kabra was appointed by the government of India in 1993. Its report submitted in 1994 recommended the reintroduction of futures which were banned in 1966 and also to widen its coverage to many more agricultural commodities and silver. In order to give more thrust on agricultural sector, the National Agricultural Policy 2000 has envisaged external and domestic market reforms and dismantling of all controls and regulations in agricultural commodity markets. It has also proposed to enlarge the coverage of futures markets to minimize the wide fluctuations in commodity prices and for hedging the risk arising from price fluctuations. In line with the proposal many more agricultural commodities are being brought under futures trading.

6.2 The Presant Status: Presently futures trading is permitted in all the commodities. Trading is taking place in about 78 commodities through 25 Exchanges/Associations as given in the table below:-

No. 1.

Exchange

COMMODITY (both domestic and

India Pepper & Spice Trade Association, Pepper Kochi (IPSTA)

international contracts) Chambers Ltd., Gur, Mustard seed

2.

Vijai

Beopar

Muzaffarnagar 3. Rajdhani Oils & Oilseeds Exchange Ltd., Gur, Mustard seed its oil & Delhi 4. oilcake

Bhatinda Om & Oil Exchange Ltd., Gur Bhatinda

5. 6.

The Chamber of Commerce, Hapur

Gur, Potatoes and Mustard seed

The Meerut Agro Commodities Exchange Gur Ltd., Meerut

7.

The Bombay Commodity Exchange Ltd., Oilseed Complex, Castor oil Mumbai international contracts

8.

Rajkot Seeds, Oil & Bullion Merchants Castor seed, Groundnut, its oil Association, Rajkot & cake, cottonseed, its oil & cake, cotton (kapas) and RBD palmolein.

9.

The Ahmedabad Commodity Exchange, Castorseed, cottonseed, its oil Ahmedabad and oilcake

10.

The East India Jute & Hessian Exchange Hessian & Sacking Ltd., Calcutta

11.

The East India Cotton Association Ltd., Cotton Mumbai

12.

The Spices & Oilseeds Exchange Ltd., Turmeric Sangli.

13.

National Board of Trade, Indore

Soya seed, Soyaoil and Soya meals, Rapeseed/Mustardseed

its oil and oilcake and RBD Palmolien 14. The First Commodities Exchange of India Copra/coconut, its oil & oilcake Ltd., Kochi 15. Central India Commercial Exchange Ltd., Gur and Mustard seed Gwalior 16. 17. E-sugar India Ltd., Mumbai Sugar

National Multi-Commodity Exchange of Several Commodities India Ltd., Ahmedabad

18.

Coffee Futures Exchange India Ltd., Coffee Bangalore

19.

Surendranagar Cotton Oil & Oilseeds, Cotton, Cottonseed, Kapas Surendranagar

20. 21.

E-Commodities Ltd., New Delhi National Commodity &

Sugar (trading yet to commence)

Derivatives, Several Commodities

Exchange Ltd., Mumbai

22. 23.

Multi Commodity Exchange Ltd., Mumbai Bikaner Bikaner commodity Exchange

Several Commodities

Ltd., Mustard seeds its oil & oilcake, Gram. Guar seed. Guar Gum Mustard seed complex Mustard seed Complex

24. 25.

Haryana Commodities Ltd., Hissar Bullion Association Ltd., Jaipur

Futures trading perform two important functions of price discovery and price risk management with reference to the given commodity. It is useful to all segments of the economy. It is useful to the producer because he can get an idea of the price likely to prevail at a future point of time and therefore can decide between various competing commodities, the best that suits him. It enables the consumer, in that he gets an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and also cover his purchases by making forward contracts. Futures trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoting a realistic price and thereby secure export contract in a competitive market. Having entered into an export contract, it enables him to hedge his risk by operating in futures market.

Forward/futures trading involves a passage of time between entering into a contract and its performance making thereby the contracts susceptible to risks, uncertainties, etc. Hence there is a need for the regulatory functions to be exercised by an exchange that is the Forward Markets Commission (FMC).

Forward Markets Commission (FMC) headquartered at Mumbai, is a regulatory authority which is overseen by the Ministry of Consumer Affairs and Public Distribution, Govt. of India. It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.

Exchange is an association of members which provides all organizational support for carrying out futures trading in a formal environment. These exchanges are managed by the Board of Directors which is composed primarily of the members of the association. There are also

representatives of the government and public nominated by the Forward Markets Commission. The majority of members of the Board have been chosen from among the members of the Association who have trading and business interest in the exchange. The Board is assisted by the chief executive officer and his team in day-to-day administration. National Exchanges In enhancing the institutional capabilities for futures trading the idea of setting up of National Commodity Exchange(s) has been pursued since 1999. Three such Exchanges, viz, National Multi-Commodity Exchange of India Ltd., (NMCE), Ahmedabad, National Commodity & Derivatives Exchange (NCDEX), Mumbai, and Multi Commodity Exchange (MCX), Mumbai have become operational. National Status implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance of byelaws and contract specifications by the FMC. While the NMCE, Ahmedabad commenced futures trading in November 2002, MCX and NCDEX, Mumbai commenced operations in October/ December 2003 respectively.

6.3 MCX MCX (Multi Commodity Exchange of India Ltd.) an independent and de-mutulised multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank Of India, Bank Of Baroda, Canara Bank, Corporation Bank.

Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Centers, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure.

MCX, having a permanent recognition from the Government of India, is an independent and demutualised multi commodity Exchange. MCX, a state-of-the-art nationwide, digital Exchange, facilitates online trading, clearing and settlement operations for a commodities futures trading.

6.3 NMCE National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). While various integral aspects of commodity economy, viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities, research and training were adequately addressed in structuring the Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions.

NMCE facilitates electronic derivatives trading through robust and tested trading platform, Derivative Trading Settlement System (DTSS), provided by CMC. It has robust delivery mechanism making it the most suitable for the participants in the physical commodity markets. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE was the first commodity exchange to provide trading facility through internet, through Virtual Private Network (VPN). NMCE follows best international risk management practices. The contracts are marked to market on daily basis. The system of upfront margining based on Value at Risk is followed to ensure financial security of the market. In the event of high volatility in the prices, special intra-day

clearing and settlement is held. NMCE was the first to initiate process of dematerialization and electronic transfer of warehoused commodity stocks. The unique strength of NMCE is its settlements via a Delivery Backed System, an imperative in the commodity trading business. These deliveries are executed through a sound and reliable Warehouse Receipt System, leading to guaranteed clearing and settlement. 6.4 NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23,2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.

Forward Markets Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. It is located in Mumbai and offers facilities to its members in more than 390 centres throughout India. The reach will NCDEX currently facilitates trading

of thirty six commodities - Cashew, Castor Seed, Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow Soybean Meal.

The current profile of futures trading in India with respect to the various exchanges in India:-

6.5 Commodities Derivites The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlying assets are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary largely. This becomes an important issue to be managed. A brief look at these issues.\ Physical settlement Physical settlement involves the physical delivery of the underlying commodity, typically at an accredited warehouse. The seller intending to make delivery would have to take the commodities to the designated warehouse and the buyer intending to take delivery would have to go to the designated warehouse and pick up the commodity. This may sound simple, but the physical settlement of commodities is a complex process. The issues faced in physical settlement are enormous. They are: Limits on storage facilities in different states. Restrictions on interstate movement of commodities. State level octroi and duties have an impact on the cost of movement of goods across locations. The process of taking physical delivery in commodities is quite different from the process of taking physical delivery in financial assets. We take a general overview at the process flow of physical settlement of commodities

Delivery notice period Unlike in the case of equity futures, typically a seller of commodity futures has the option to give notice of delivery. This option is given during a period identified as `delivery notice

period'. The intention of the notice is to allow verification of delivery and to give adequate notice to the buyer of a possible requirement to take delivery. These are required by virtue of the fact that the actual physical settlement of commodities requires preparation from both delivering and receiving members. Typically, in all commodity exchanges, delivery notice is required to be supported by a warehouse receipt. The warehouse receipt is the proof for the quantity and quality of commodities being delivered. Some exchanges have certified laboratories for verifying the quality of goods. In these exchanges the seller has to produce a verification report from these laboratories along with delivery notice. Some exchanges like LIFFE, accept warehouse receipts as quality verification documents while others like BMF-Brazil have independent grading and classification agency to verify the quality.

Assignment Whenever delivery notices are given by the seller, the clearing house of the exchange identifies the buyer to whom this notice may be assigned. Exchanges follow different practices for the assignment process. One approach is to display the delivery notice and allow buyers wishing to take delivery to bid for taking delivery. Among the international exchanges, BMF, CBOT and CME display delivery notices. Alternatively, the clearing houses may assign deliveries to buyers on some basis. Exchanges such as COMMEX and the Indian commodities exchanges have adopted this method. Any seller/ buyer who has given intention to deliver/ been assigned a delivery has an option to square off positions till the market close of the day of delivery notice. After the close of trading, exchanges assign the delivery intentions to open long positions. Assignment is done typically either on random basis or first-in-first out basis. In some exchanges, the buyer has the option to give his preference for delivery location. The clearing house decides on the daily delivery order rate at which delivery will be settled. Delivery rate depends on the spot rate of the underlying adjusted for discount/ premium for quality and freight costs. The discount/ premium for quality and freight costs are published by the clearing house before introduction of the contract. The most active spot market is normally taken as the benchmark for deciding spot prices.

Alternatively, the delivery rate is determined based on the previous day closing rate for the contract or the closing rate for the day.

Delivery After the assignment process, clearing house/ exchange issues a delivery order to the buyer. The exchange also informs the respective warehouse about the identity of the buyer. The buyer is required to deposit a certain percentage of the contract amount with the clearing house as margin against the warehouse receipt. The period available for the buyer to take physical delivery is stipulated by the exchange. Buyer or his authorised representative in the presence of seller or his representative takes the physical stocks against the delivery order. Proof of physical delivery having been effected is forwarded by the seller to the clearing house and the invoice amount is credited to the seller's account. In India if a seller does not give notice of delivery then at the expiry of the contract the positions are cash settled by price difference exactly as in cash settled equity futures contracts.

Warehousing One of the main differences between financial and commodity derivatives is the need for warehousing. In case of most exchange-traded financial derivatives, all the positions are cash settled. Cash settlement involves paying up the difference in prices between the time the contract was entered into and the time the contract was closed. In case of commodity derivatives however, there is a possibility of physical settlement. Which means that if the seller chooses to hand over the commodity instead of the difference in cash, the buyer must take physical delivery of the underlying asset. This requires the exchange to make an arrangement with warehouses to handle the settlements. The efficacy of the commodities settlements depends on the warehousing system available. Most international commodity exchanges used certified warehouses (CWH) for the purpose of handling physical settlements. Such CWH are required to provide storage facilities for participants in the commodities markets and to certify the quantity and quality of the underlying commodity. In India, the warehousing system is not as efficient as it is in some of the other developed markets.

Quality of underlying assets

A derivatives contract is written on a given underlying. Variance in quality is not an issue in case of financial derivatives as the physical attribute is missing. When the underlying asset is a commodity, the quality of the underlying asset is of prime importance. There may be quite some variation in the quality of what is available in the marketplace. When the asset is specified, it is therefore important that the exchange stipulate the grade or grades of the commodity that are acceptable. Commodity derivatives demand good standards and quality assurance/ certification procedures. A good grading system allows commodities to be traded by specification. Currently there are various agencies that are responsible for specifying grades for commodities. For example, the Bureau of Indian Standards (BIS) under Ministry of Consumer Affairs specifies standards for processed agricultural commodities whereas AGMARK under the department of rural development under Ministry of Agriculture is responsible for promulgating standards for basic agricultural commodities. Apart from these, there are other agencies like EIA, which specify standards for export oriented commodities.

CHAPTER 7
FOREIGN EXCHANGE MARKET OVERVIEW

In todays world no economy is self sufficient, so there is need for exchange of goods and services amongst the different countries. So in this global village, unlike in the primitive age the exchange of goods and services is no longer carried out on barter basis. Every sovereign country in the world has a currency that is legal tender in its territory and this currency does not act as money outside its boundaries. So whenever a country buys or sells goods and services from or to another country, the residents of two countries have to exchange currencies. So we can imagine that if all countries have the same currency then there is no need for foreign exchange.

7.1 About foreign exchange market. Particularly for foreign exchange market there is no market place called the foreign exchange market. It is mechanism through which one countrys currency can be exchange i.e. bought or sold for the currency of another country. The foreign exchange market does not have any geographic location. Foreign exchange market is describe as an OTC (over the counter) market as there is no physical place where the participant meet to execute the deals, as we see in the case of stock exchange. The largest foreign exchange market is in London, followed by the newyork, Tokyo, Zurich and Frankfurt. The market is situated throughout the different time zone of the globe in such a way that one market is closing the other is beginning its operation. Therefore it is stated that foreign exchange market is functioning throughout 24 hours a day. In most market US dollar is the vehicle currency, viz., the currency sued to dominate international transaction. In India, foreign exchange has been given a statutory definition. Section 2 (b) of foreign exchange regulation ACT, 1973 states:

Foreign exchange means foreign currency and includes: All deposits, credits and balance payable in any foreign currency and any draft, travelers cheques, letter of credit and bills of exchange. Expressed or drawn in India currency but payable in any foreign currency. Any instrument payable, at the option of drawee or holder thereof or any other party thereto, either in Indian currency or in foreign currency or partly in one and partly in the other. In order to provide facilities to members of the public and foreigners visiting India, for exchange of foreign currency into Indian currency and vice-versa. RBI has granted to various firms and individuals, license to undertake money-changing business at seas/airport and tourism place of tourist interest in India. Besides certain authorized dealers in foreign exchange (banks) have also been permitted to open exchange bureaus. Following are the major bifurcations: Full fledge moneychangers they are the firms and individuals who have been authorized to take both, purchase and sale transaction with the public. 9913413871 Restricted moneychanger they are shops, emporia and hotels etc. that have been authorized only to purchase foreign currency towards cost of goods supplied or services rendered by them or for conversion into rupees. Authorized dealers they are one who can undertake all types of foreign exchange transaction. Bank are only the authorized dealers. The only exceptions are Thomas cook, western union, UAE exchange which though, and not a bank is an AD.

Even among the banks RBI has categorized them as followes: Branch A They are the branches that have nostro and vostro account.

 Branch B The branch that can deal in all other transaction but do not maintain nostro and vostro a/cs fall under this category. For Indian we can conclude that foreign exchange refers to foreign money, which includes notes, cheques, bills of exchange, bank balance and deposits in foreign currencies. 7.3 WHAT IS FOREX MARKET? The international currency market Forex is a special kind of the world financial market. Traders purpose on the Forex to get profit as the result of foreign currencies purchase and sale. The exchange rates of all currencies being in the market turnover are permanently changing under the action of the demand and supply alteration. The latter is a strong subject to the influence of any important for the human society event in the sphere of economy, politics and nature. Consequently current prices of foreign currencies, evaluated for instance in US dollars, fluctuate towards its higher and lower meanings. Using these fluctuations in accordance with a known principle buy cheaper sell higher traders obtain gains. Forex is different in compare to all other sectors of the world financial system thanks to his heightened sensibility to a large and continuously changing number of factors, accessibility to all individual and corporative traders, exclusively high trade turnover which creates an ensured liquidity of traded currencies and the round the clock business hours which enable traders to deal after normal hours or during national holidays in their country finding markets abroad open. Just as on any other market the trading on Forex, along with an exclusively high potential profitability, is essentially risk - bearing one. It is possible to gain a success on it only after a certain training including a familiarization with the structure and kinds of Forex, the principles of currencies price formation, the factors affecting prices alterations and trading risks levels, sources of the information necessary to account all those factors, techniques of the analysis and prediction of the market movements as well as with the trading tools and rules. Foreign exchange market is an over the counter market in which currencies of different countries are bought and sold against each other. Foreign Exchange is nothing but claims of the residents of a country to foreign currency payable abroad. It is a method of converting one country's currency into another. So long as there is a cross border flow of funds, the need for such conversion/exchange continues to arise.

Forex markets are quite decentralized. Participants like market makers, brokers, corporates and individual customers are physically separated from each other. They communicate with each other via, telephone, telex, computer network, etc. It is the commercial banks that offer such conversion facility through their dealing rooms. Today, it is a giant market. 7.4 Why Forex? If you are reading this guide, you have most likely taken some sort of interest in the Forex market. But what does the Forex market have to offer you? Accessibility Its no wonder that the Forex market has the trading volume of 3 trillion a day all anyone needs to take part in the action is a computer with an internet connection. 24 Hour Market The Forex market is open 24 hours a day, so that you can be right there trading whenever you hear a financial scoop. No need to bite your fingernails waiting for the opening bell. Narrow Focus Unlike the stock market, a smaller market with tens of thousands of stocks to choose from, the Forex market revolves around more or less eight major currencies. A narrow choice means no rooms for confusion, so even though the market is huge, its quite easy to get a clear picture of whats happening. Liquidity The foreign exchange market is the largest financial market in the world with a daily turnover of just over $3 trillion! Now apart from being a really cool statistic, the sheer massive scope of the Forex market is also one of its biggest advantages. The enormous volume of daily trades makes it the most liquid market in the world, which basically means that under normal market conditions you can buy and sell currency as you please. You can never be in a jam for currency to buy or stuck with currency that you cant unload.

The Market Cant Be Cornered The colossal size of the Forex market also makes sure that no one can corner the market. Even banks dont have enough pull to really control the market for a long period of time, which makes it a great place for the little guy to make a move.

7.5 Need for Foreign Exchange Let us consider a case where Indian company exports cotton fabrics to USA and invoices the goods in US dollar. The American importer will pay the amount in US dollar, as the same is his home currency. However the Indian exporter requires rupees means his home currency for procuring raw materials and for payment to the labor charges etc. Thus he would need exchanging US dollar for rupee. If the Indian exporters invoice their goods in rupees, then importer in USA will get his dollar converted in rupee and pay the exporter. From the above example we can infer that in case goods are bought or sold outside the country, exchange of currency is necessary. Sometimes it also happens that the transactions between two countries will be settled in the currency of third country. In that case both the countries that are transacting will require converting their respective currencies in the currency of third country. For that also the foreign exchange is required.

7.6 Major Participants in foreign exchange market: The main players in foreign exchange market are as follows: 1. CUSTOMERS The customers who are engaged in foreign trade participate in foreign exchange market by availing of the services of banks. Exporters require converting the dollars in to rupee and importers require converting rupee in to the dollars, as they have to pay in dollars for the goods/services they have imported.

2. COMMERCIAL BANK They are most active players in the forex market. Commercial bank dealing with international transaction offer services for conversion of one currency in to another. They have wide network of branches. Typically banks buy foreign exchange from exporters and sells foreign exchange to the importers of goods. As every time the foreign exchange bought or oversold position. The balance amount is sold or bought from the market.

3. CENTRAL BANK In all countries Central bank have been charged with the responsibility of maintaining the external value of the domestic currency. Generally this is achieved by the intervention of the bank. 4. EXCHANGE BROKERS Forex brokers play very important role in the foreign exchange market. However the extent to which services of foreign brokers are utilized depends on the tradition and practice prevailing at a particular forex market center. In India as per FEDAI guideline the Ads are free to deal directly among themselves without going through brokers. The brokers are not among to allowed to deal in their own account allover the world and also in India. 5. OVERSEAS FOREX MARKET Today the daily global turnover is estimated to be more than US $ 1.5 trillion a day. The

international trade however constitutes hardly 5 to 7 % of this total turnover. The rest of trading in world forex market is constituted of financial transaction and speculation. As we know that the forex market is 24-hour market, the day begins with Tokyo and thereafter Singapore opens, thereafter India, followed by Bahrain, Frankfurt, paris, London, new york, Sydney, and back to Tokyo. 6. SPECULATORS The speculators are the major players in the forex market. Bank dealing are the major speculators in the forex market with a view to make profit on account of favorable movement in exchange rate, take position i.e. if they feel that rate of

particular currency is likely to go up in short term. They buy that currency and sell it as soon as they are able to make quick profit. Corporations particularly multinational corporation and transnational corporation having business operation beyond their national frontiers and on account of their cash flows being large and in multi currencies get in to foreign exchange exposures. With a view to make advantage of exchange rate movement in their favor they either delay covering exposures or do not cover until cash flow materialize. Individual like share dealing also undertake the activity of buying and selling of foreign exchange for booking short term profits. They also buy foreign currency stocks, bonds and other assets without covering the foreign exchange exposure risk. This also result in speculation

1RBI Regulations: These contracts were allowed with the following conditions: These currency options can be used as a hedge for foreign currency loans provided that the option does not involve rupee and the face value does not exceed the outstanding amount of the loan, and the maturity of the contract does not exceed the unexpired maturity of the underlying loan.

In short, The Indian forex derivatives market is still in a nascent stage of development but offers tremendous growth potential. The development of a vibrant forex derivatives market in India would critically depend on the growth in the underlying spot/forward markets, growth in the rupee derivative markets along with the evolution of a supporting regulatory structure. Factors such as market liquidity, investor behavior, regulatory structure and tax laws will have a heavy bearing on the behavior of market variables in this market. Increasing convertibility on the capital account would accelerate the process of integration of Indian financial markets with international markets. Some of the necessary preconditions to this as suggested by the Tarapore committee report are already being met. Increasing convertibility does carry the risk of removing the insularity of the Indian markets to external shocks like the South East Asian crisis, but a proper management of the transition

should speed up the growth of the financial markets and the economy. Introduction of derivative products tailored to specific corporate requirements would enable corporate to completely focus on its core businesses, de-risking the currency and interest rate risks while allowing it to gain despite any upheavals in the financial markets. Increasing convertibility on the rupee and regulatory impetus for new products should see a host of innovative products and structures, tailored to business needs. The possibilities are many and include INR options, currency futures, exotic options, rupee forward rate agreements, both rupee and cross currency swap options, as well as structures composed of the above to address business needs as well as create real options. A further development in the derivatives market could also see derivative products linked to commodities, weather, etc which would add great value in an economy where a substantial section is still agrarian and dependent on the vagaries of the monsoon. 7.7 EXCHANGE RATE SYSTEM Countries of the world have been exchanging goods and services amongst themselves. This has been going on from time immemorial. The world has come a long way from the days of barter trade. With the invention of money the figures and problems of barter trade have disappeared. The barter trade has given way ton exchanged of goods and services for currencies instead of goods and servic The rupee was historically linked with pound sterling. India was a founder member of the IMF. During the existence of the fixed exchange rate system, the intervention currency of the Reserve Bank of India (RBI) was the British pound, the RBI ensured maintenance of the exchange rate by selling and buying pound against rupees at fixed rates. The inter bank rate therefore ruled the RBI band. During the fixed exchange rate era, there was only one major change in the parity of the rupee- devaluation in June 1966. Different countries have adopted different exchange rate system at different time. The following are some of the exchange rate system followed by various countries.

THE GOLD STANDARD Many countries have adopted gold standard as their monetary system during the last two decades of the 19th century. This system was in vogue till the outbreak of world war 1. under this system the parties of currencies were fixed in term of gold. There were two main types of gold standard: 1. gold specie standard Gold was recognized as means of international settlement for receipts and payments amongst countries. Gold coins were an accepted mode of payment and medium of exchange in domestic market also. A country was stated to be on gold standard if the following condition were satisfied: Monetary authority, generally the central bank of the country, guaranteed to buy and sell gold in unrestricted amounts at the fixed price. Melting gold including gold coins, and putting it to different uses was freely allowed. Import and export of gold was freely allowed. The total money supply in the country was determined by the quantum of gold available for monetary purpose.

2. Gold Bullion Standard Under this system, the money in circulation was either partly of entirely paper and gold served as reserve asset for the money supply.. However, paper money could be exchanged for gold at any time. The exchange rate varied depending upon the gold content of currencies. This was also known as Mint Parity Theory of exchange rates. The gold bullion standard prevailed from about 1870 until 1914, and intermittently thereafter until 1944. World War I brought an end to the gold standard.

BRETTON WOODS SYSTEM During the world wars, economies of almost all the countries suffered. In ordere to correct the balance of payments disequilibrium, many countries devalued their currencies. Consequently, the international trade suffered a deathblow. In 1944, following World War II, the United States and most of its allies ratified the Bretton Woods Agreement, which set up an adjustable parity exchange-rate system under which exchange rates were fixed (Pegged) within narrow intervention limits (pegs) by the United States and foreign central banks buying and selling foreign currencies. This agreement, fostered by a new spirit of international cooperation, was in response to financial chaos that had reigned before and during the war. In addition to setting up fixed exchange parities ( par values ) of currencies in relationship to gold, the agreement established the International Monetary Fund (IMF) to act as the custodian of the system. Under this system there were uncontrollable capital flows, which lead to major countries suspending their obligation to intervene in the market and the Bretton Wood System, with its fixed parities, was effectively buried. Thus, the world economy has been living through an era of floating exchange rates since the early FLOATING RATE SYSTEM In a truly floating exchange rate regime, the relative prices of currencies are decided entirely by the market forces of demand and supply. There is no attempt by the authorities to influence exchange rate. Where government interferes directly or through various monetary and fiscal measures in determining the exchange rate, it is known as managed of dirty float. PURCHASING POWER PARITY (PPP) Professor Gustav Cassel, a Swedish economist, introduced this system. The theory, to put in simple terms states that currencies are valued for what they can buy and the currencies have no intrinsic value attached to it. Therefore, under this theory the exchange rate was to be determined and the sole criterion being the purchasing power of the countries. As per this theory if there were no trade controls, then the balance of payments equilibrium would always be maintained. Thus if 150 INR buy a fountain pen and the same fountain pen can be bought for USD 2, it can

be inferred that since 2 USD or 150 INR can buy the same fountain pen, therefore USD 2 = INR 150. For example India has a higher rate of inflation as compared to country US then goods produced in India would become costlier as compared to goods produced in US. This would induce imports in India and also the goods produced in India being costlier would lose in international competition to goods produced in US. This decrease in exports of India as compared to exports from US would lead to demand for the currency of US and excess supply of currency of India. This in turn, cause currency of India to depreciate in comparison of currency of US that is having relatively more exports. 7.8. FUNDAMENTALS IN EXCHANGE RATE Exchange rate is a rate at which one currency can be exchange in to another currency, say USD = Rs.48. This rate is the rate of conversion of US dollar in to Indian rupee and vice versa. METODS OF QOUTING RATE There are two methods of quoting exchange rates. 1) Direct methods Foreign currency is kept constant and home currency is kept variable. In direct quotation, the principle adopted by bank is to buy at a lower price and sell at higher price. 2) In direct method: Home currency is kept constant and foreign currency is kept variable. Here the strategy used by bank is to buy high and sell low. In India with effect from august 2, 1993,all the exchange rates are quoted in direct method It is customary in foreign exchange market to always quote two rates means one for buying and another rate for selling. This helps in eliminating the risk of being given bad rates i.e. if a party comes to know what the other party intends to do i.e. buy or sell, the former can take the letter for a ride.

There are two parties in an exchange deal of currencies. To initiate the deal one party asks for quote from another party and other party quotes a rate. The party asking for a quote is known as asking party and the party giving a quotes is known as quoting party. The advantage of twoway quote is as under i. ii. The market continuously makes available price for buyers or sellers Two way price limits the profit margin of the quoting bank and comparison of one quote with another quote can be done instantaneously. iii. As it is not necessary any player in the market to indicate whether he intends to buy or sale foreign currency, this ensures that the quoting bank cannot take advantage by manipulating the prices. iv. v. It automatically insures that alignment of rates with market rates. Two way quotes lend depth and liquidity to the market, which is so very essential for efficient market. In two way quotes the first rate is the rate for buying and another for selling. We should understand here that, in India the banks, which are authorized dealer, always quote rates. So the rates quoted- buying and selling is for banks point of view only. It means that if exporters want to sell the dollars then the bank will buy the dollars from him so while calculation the first rate will be used which is buying rate, as the bank is buying the dollars from exporter. The same case will happen inversely with importer as he will buy dollars from the bank and bank will sell dollars to importer. 7.9 FACTOR AFFECTINGN EXCHANGE RATES In free market, it is the demand and supply of the currency which should determine the exchange rates but demand and supply is the dependent on many factors, which are ultimately the cause of the exchange rate fluctuation, some times wild.

The volatility of exchange rates cannot be traced to the single reason and consequently, it becomes difficult to precisely define the factors that affect exchange rates. However, the more important among them are as follows:

STRENGTH OF ECONOMY Economic factors affecting exchange rates include hedging activities, interest rates, inflationary pressures, trade imbalance, and euro market activities. Irving fisher, an American economist, developed a theory relating exchange rates to interest rates. This proposition, known as the fisher effect, states that interest rate differentials tend to reflect exchange rate expectation. On the other hand, the purchasing- power parity theory relates exchange rates to inflationary pressures. In its absolute version, this theory states that the equilibrium exchange rate equals the ratio of domestic to foreign prices. The relative version of the theory relates changes in the exchange rate to changes in price ratios. POLITICAL FACTOR The political factor influencing exchange rates include the established monetary policy along with government action on items such as the money supply, inflation, taxes, and deficit financing. Active government intervention or manipulation, such as central bank activity in the foreign currency market, also have an impact. Other political factors influencing exchange rates include the political stability of a country and its relative economic exposure (the perceived need for certain levels and types of imports). Finally, there is also the influence of the international monetary fund. EXPACTATION OF THE FOREIGN EXCHANGE MARKET\ Psychological factors also influence exchange rates. These factors include market anticipation, speculative pressures, and future expectations. A few financial experts are of the opinion that in todays environment, the only trustworthy method of predicting exchange rates by gut feel. Bob Eveling, vice president of financial markets at SG, is corporate finances top foreign exchange forecaster for 1999. evelings gut feeling has, defined convention, and his method proved uncannily accurate in foreign exchange forecasting in 1998.SG ended the corporate finance forecasting year with a 2.66% error overall, the most accurate among 19 banks. The secret to evelings intuition on any currency is keeping abreast of world events. Any event,from a declaration of war to a fainting political leader, can take its toll

on a currencys value. Today, instead of formal modals, most forecasters rely on an amalgam that is part economic fundamentals, part model and part judgment.

Fiscal policy Interest rates Monetary policy Balance of payment Exchange control Central bank intervention Speculation Technical factors

7.10 Foreign Exchange Risk Management:

Process & Necessity:Firms dealing in multiple currencies face a risk (an unanticipated gain/loss) on account of sudden/unanticipated changes in exchange rates, quantified in terms of exposures. Exposure is defined as a contracted, projected or contingent cash flow whose magnitude is not certain at the moment and depends on the value of the foreign exchange rates. The process of identifying risks faced by the firm and implementing the process of protection from these risks by financial or operational hedging is defined as foreign exchange risk management. This paper limits its scope to hedging only the foreign exchange risks faced by firms. Kinds of Foreign Exchange Exposure Risk management techniques vary with the type of exposure (accounting or economic) and term of exposure. Accounting exposure, also called translation exposure, results from the need to restate foreign subsidiaries financial statements into the parents reporting currency and is the sensitivity of net income to the variation in the exchange rate between a foreign subsidiary and its parent. Economic exposure is the extent to which a firm's market value, in any particular currency, is sensitive to unexpected changes in foreign currency. Currency fluctuations affect the value of the firms operating cash flows, income statement, and competitive position, hence

market share and stock price. Currency fluctuations also affect a firm's balance sheet by changing the value of the firm's assets and liabilities, accounts payable, accounts receivables, inventory, loans in foreign currency, investments (CDs) in foreign banks; this type of economic exposure is called balance sheet exposure. Transaction Exposure is a form of short term economic exposure due to fixed price contracting in an atmosphere of exchange-rate volatility.

The most common definition of the measure of exchange-rate exposure is the sensitivity of the value of the firm, proxied by the firms stock return, to an unanticipated change in an exchange rate. This is calculated by using the partial derivative function where the dependant variable is the firms value and the independent variable is the exchange rate (Adler and Dumas, 1984). Necessity of managing foreign exchange risk A key assumption in the concept of foreign exchange risk is that exchange rate changes are not predictable and that this is determined by how efficient the markets for foreign exchange are. Research in the area of efficiency of foreign exchange markets has thus far been able to establish only a weak form of the efficient market hypothesis conclusively which implies that successive changes in exchange rates cannot be predicted by analyzing the historical sequence of exchange rates.(Soenen, 1979). However, when the efficient markets theory is applied to the foreign exchange market under floating exchange rates there is some evidence to suggest that the present prices properly reflect all available information.(Giddy and Dufey, 1992). This implies that exchange rates react to new information in an immediate and unbiased fashion, so that no one party can make a profit by this information and in any case, information on direction of the rates arrives randomly so exchange rates also fluctuate randomly. It implies that foreign exchange risk management cannot be done away with by employing resources to predict exchange rate changes. Corporate Hedging for Foreign Exchange Risk Hedging as a tool to manage foreign exchange risk There is a spectrum of opinions regarding foreign exchange hedging. Some firms feel hedging techniques are speculative or do not fall in their area of expertise and hence do not venture into hedging practices. Other firms are unaware of being exposed to foreign exchange

risks. There are a set of firms who only hedge some of their risks, while others are aware of the various risks they face, but are unaware of the methods to guard the firm against the risk. There is yet another set of companies who believe shareholder value cannot be increased by hedging the firms foreign exchange risks as shareholders can themselves individually hedge themselves against the same using instruments like forward contracts available in the market or diversify such risks out by manipulating their portfolio. (Giddy and Dufey, 1992). There are some explanations backed by theory about the irrelevance of managing the risk of change in exchange rates. For example, the International Fisher effect states that exchange rates changes are balanced out by interest rate changes, the Purchasing Power Parity theory suggests that exchange rate changes will be offset by changes in relative price indices/inflation since the Law of One Price should hold. Both these theories suggest that exchange rate changes are evened out in some form or the other. Also, the Unbiased Forward Rate theory suggests that locking in the forward exchange rate offers the same expected return and is an unbiased indicator of the future spot rate. But these theories are perfectly played out in perfect markets under homogeneous tax regimes. Also, exchange rate-linked changes in factors like inflation and interest rates take time to adjust and in the meanwhile firms stand to lose out on adverse movements in the exchange rates. The existence of different kinds of market imperfections, such as incomplete financial markets, positive transaction and information costs, probability of financial distress, and agency costs and restrictions on free trade make foreign exchange management an appropriate concern for corporate management. (Giddy and Dufey, 1992) It has also been argued that a hedged firm, being less risky can secure debt more easily and this enjoy a tax advantage (interest is excluded from tax while dividends are taxed). This would negate the Modigliani-Miller proposition as shareholders cannot duplicate such tax advantages. The MM argument that shareholders can hedge on their own is also not valid on account of high transaction costs and lack of knowledge about financial manipulations on the part of shareholders. There is also a vast pool of research that proves the efficacy of managing foreign exchange risks and a significant amount of evidence showing the reduction of exposure with the use of tools for managing these exposures. In one of the more recent studies, Allayanis and Ofek (2001) use a multivariate analysis on a sample of S&P 500 non-financial firms and calculate a firms exchange-rate exposure using the ratio of foreign sales to total sales as a proxy and isolate the impact of use of foreign currency derivatives (part of foreign exchange risk management) on a firms foreign exchange exposures. They find a

statistically significant association between the absolute value of the exposures and the (absolute value) of the percentage use of foreign currency derivatives and prove that the use of derivatives in fact reduce exposure. Foreign Exchange Risk Management Framework Once a firm recognizes its exposure, it then has to deploy resources in managing it. A heuristic for firms to manage this risk effectively is presented below which can be modified to suit firmspecific needs i.e. some or all the following tools could be used. Forecasts: After determining its exposure, the first step for a firm is to develop a forecast on the market trends and what the main direction/trend is going to be on the foreign exchange rates. The period for forecasts is typically 6 months. It is important to base the forecasts on valid assumptions. Along with identifying trends, a probability should be estimated for the forecast coming true as well as how much the change would be. Risk Estimation: Based on the forecast, a measure of the Value at Risk (the actual profit or loss for a move in rates according to the forecast) and the probability of this risk should be ascertained. The risk that a transaction would fail due to market-specific problems4 should be taken into account. Finally, the Systems Risk that can arise due to inadequacies such as reporting gaps and implementation gaps in the firms exposure management system should be estimated. Benchmarking: Given the exposures and the risk estimates, the firm has to set its limits for handling foreign exchange exposure. The firm also has to decide whether to manage its exposures on a cost centre or profit centre basis. A cost centre approach is a defensive one and the main aim is ensure that cash flows of a firm are not adversely affected beyond a point. A profit centre approach on the other hand is a more aggressive approach where the firm decides to generate a net profit on its exposure over time.

Hedging: Based on the limits a firm set for itself to manage exposure, the firms then decides an appropriate hedging strategy. There are various financial instruments available for the firm to choose from: futures, forwards, options and swaps and issue of foreign debt. Hedging strategies and instruments are explored in a section. Stop Loss: The firms risk management decisions are based on forecasts which are but estimates of reasonably unpredictable trends. It is imperative to have stop loss arrangements in order to rescue the firm if the forecasts turn out wrong. For this, there should be certain monitoring systems in place to detect critical levels in the foreign exchange rates for appropriate measure to be taken. Reporting and Review: Risk management policies are typically subjected to review based on periodic reporting. The reports mainly include profit/ loss status on open contracts after marking to market, the actual exchange/ interest rate achieved on each exposure, and profitability vis--vis the benchmark and the expected changes in overall exposure due to forecasted exchange/ interest rate movements. The review analyses whether the benchmarks set are valid and effective in controlling the exposures, what the market trends are and finally whether the overall strategy is working or needs change. Hedging Strategies/ Instruments A derivative is a financial contract whose value is derived from the value of some other financial asset, such as a stock price, a commodity price, an exchange rate, an interest rate, or even an index of prices. The main role of derivatives is that they reallocate risk among financial market participants, help to make financial markets more complete. This section outlines the hedging strategies using derivatives with foreign exchange being the only risk assumed.

7.11 CURRENCY FORWARD MARKET:

Forward (Cash) Contract is a cash contract in which a seller agrees to deliver a specific cash commodity to a buyer sometime in the future. Forward contracts, in contrast to futures contracts, are privately negotiated and are not standardized. Many market participants want to exchange currencies at a time other than two days in advance but would like to know the rate of exchange now. Forward foreign exchange contracts are generally used by importers, exporters and investors who seek to lock in exchange rates for a future date in order to hedge their foreign currency cash flows. For example, if a company had contracted to purchase equipment for the price of GBP 1 million payable in 3 months time but was concerned that the GBP would rise against the Australian dollar in the interim, the company could agree today to buy the USD for delivery in 3 months time. In other words, the company could negotiate a rate at which it could buy GBP at some time in the future, setting the amount of GBP needed, the date needed etc. and hence be sure of the Australian Dollar purchasing price now. There are two components to the price in forward transaction and they are the spot price and the forward rate adjustment. The spot rate is simply the current market rate as determined by supply and demand. The forward rate adjustment is a slightly more complicated calculation that involves the applicable interest rates of the currencies involved. Forward Exchange Contracts, both Buying and Selling, may be either fixed or optional term contracts. Fixed Term Contracts With a Fixed Term Contract the customer specifies the date on which delivery of the overseas currency is to take place. An earlier delivery can be arranged but it may involve a marginal adjustment to the Forward Contract Rate. Optional Term Contracts Optional Term Contracts can be entered into for a specific period, and the customer states the period within which delivery is to be made (normally for periods not more than one month) eg. a contract may be entered into for a six month period with the customer having the option of delivery at anytime during the last week.

In each case there is a firm contract to effect delivery by both the Bank and the customer. An optional delivery contract does not give the customer an option to not deliver the Forward Exchange Contract. It is only the period during which delivery may occur that is optional. Forward rates are quoted for transactions where settlement is to take place more than two business days after the transaction date. Forward Contract rates consist of the Spot rate for the currency concerned adjusted by the relative Forward Margin. Forward Margins are a reflection of the interest rate differentials between currencies, and not necessarily a forecast of what the spot rate will be at the future date. The Forward rate may be expressed as being at parity (par), or at a Premium (dearer) or at a Discount (cheaper), when related to the spot rate. It follows therefore that premiums are deducted from the spot rate and discounts are added to the spot rate. Forward Rates incorporating a 'Premium' are more favourable to exporters and less favourable to importers than the relative spot rates on which they are based. Similarly, Forward rates incorporating a 'Discount' are more favourable to importers and less favourable to exporters that the relative spot rates on which they are based. The general rule in determining whether a currency will be quoted at a premium or a discount is as follows:

The currency with the higher interest rate will be at a discount on a forward basis against the currency with the lower interest rate.

The currency with the lower interest rate will be at a premium on a forward basis against the currency with the high interest rate.

As the interest differential between the currencies widens then the premium or discount margin increases (i.e. moves farther from parity) and similarly as the interest differential narrows then the premium or discount margin decreases (ie moves towards parity).

7.12 Comparison between currency Futures and Currency Forward Markets: Features Size contract Quotation Generally Dollar/Currency unit Maturity Standardized , generally Negotiated U.S. US $/ Currency Unit Currency Futures of Standardized Currency Forwards Negotiated/Tailor made

shorter than one year Location trading Price Settlement Fixed on the market Quotation of rates of Futures exchanges Linkages by telephone or fax

Generally no settlement but Generally delivery of currencies compensation through reverse operations

Counterparties Generally do not know each Generally in contact with each other Negotiation Hours Guarantee Marking market Guarantee Deposit No guarantee deposit During market sessions other Round the clock

to Gains or losses on positions No marking to market settled every day

A forward is a made-to-measure agreement between two parties to buy/sell a specified amount of a currency at a specified rate on a particular date in the future. The depreciation of the receivable currency is hedged against by selling a currency forward. If the risk is that of a

currency appreciation (if the firm has to buy that currency in future say for import), it can hedge by buying the currency forward. E.g if RIL wants to buy crude oil in US dollars six months hence, it can enter into a forward contract to pay INR and buy USD and lock in a fixed exchange rate for INR-USD to be paid after 6 months regardless of the actual INR-Dollar rate at the time. In this example the downside is an appreciation of Dollar which is protected by a fixed forward contract. The main advantage of a forward is that it can be tailored to the specific needs of the firm and an exact hedge can be obtained. On the downside, these contracts are not marketable, they cant be sold to another party when they are no longer required and are binding. Forward exchange contract is a firm and binding contract, entered into by the bank and its customers, for purchase of specified amount of foreign currency at an agreed upon at the time of entering into forward deal. The bank on its part will cover itself either in the inter- bank market or by matching a contract to sell with buy. The contract between customers and bank is essentially written agreement and bank generally stands to make a loss if the customer default in fulfilling his commitment to sell foreign currency A foreign exchange forward contract is a contract under which the bank agrees to sell or buy a fixed amount of currency to or from the company on an agreed future date in exchange for a fixed amount currency. No money is exchanged until that future date. A company will usually enter into forward contract when it knows there will be a need to buy or sell foreign currency on a certain date in the future. It may believe that todays forward rate will prove to be more favorable than the spot rate prevailing on that future date. Alternatively, the company may just want to eliminate the uncertainty associated with foreign exchange rate movements. The forward contract commits both parties to carrying out the exchange of currencies at the agreed rate, irrespective of whatever happens to the exchange rate.

The rate quoted for a forward contract is not an estimate of what the exchange rate will be on the agreed future date. It reflects the interest rate differential between the two currencies involved. The forward rate may be higher or lower than the market exchange rate on the day contract is entered into. Forward rate has two components 1) Spot rate 2) Forward points Forward points, also called as forward differential, reflect the interest differential between the pair of currencies provided capital flows are freely allowed. This is not true in case of US $/Rupee rate as there is exchange control regulating prohibiting free movement of capital from/into India. In case of US $/Rupee it is pure demand and supply which determines forward differentials. Forward rate are quoted by indicating spot rate and premium/discount. In direct rate, Forward rate = spot rate +premium/-discount Example: The interbank rate for 31st march is 48.70 Premium for forward are as follows

Month

Paise

April May June

40/42 65/67 87/88

If a 1-month forward is taken then the forward rate would be 48.70+0.42 = 49.12 If a 2-month forward is taken then the forward rate would be 48.70 + .67 = 49.37. If a 3-month forward is taken then the forward rate would be 48.70 + .88 = 49.58. Example : Lets take the same example for a broken date forward contract spot rate = 48.70 for 31st March. Premium for forwards are as follows 30th April 31st May 30th June 48.70 + .42 48.70 + .67 48.70 + .88

For 17th May the premium would be (.67 - .42) * 17/31 = .137 Therefore the premium up to 17th May would be .67 + .137 =.807 Therefore the forward rate for 17th May would be 48.70 + .807 = 49.507. Premium when a currency is costlier in future (forward) as compared to spot, the currency is said to be at premium vis--vis another currency. Discount when a currency is cheaper in future (forward) as compared to spot, the currency is said to be at discount vis--vis another currency. Example : A company needs DEM 235000 in six months time. Market Parameters : Spot rate IEP/DEM = 2.3500

Six months forward rate IEP/DEM = 2.3300. Solution available : The company can do nothing and hope that the rate in six months time will be more favorable than the current six months forward rate. This would be successful strategy if in a six months time the rate is higher than 2.33. However, if in a six months time the rate is lower than 2.33, the company will have to lose money. It can avoid the risk of a rates being a lower in the future by entering into a forward contract now to buy DEM 235000, for delivery in six months time at an IEP/DEM at rate of 2.33. It can decide on some combinations of the above.

Various options available in forward contracts : A forward contract once booked can be cancelled, rolled over, extended and even early delivery can be made. Roll over forward contracts Rollover forward contracts are one where forward exchange contract is initially booked for the total amount of loan etc. to be re-paid. As and when installment falls due, the same is paid by the customer at the exchange rate fixed in forward exchange contract. The balance amount of the contract rolled over till the date for the next installment. The process of extension continues till the loan amount has been re-paid. But the extension is available subject to the cost being paid by the customer. Thus, under the mechanism of roll over contracts, the exchange rate protection is provided for the entire period of the contract and the customer has to bear the roll over charges. The cost of extension (rollover) is dependent upon the forward differentials prevailing on the date of extension. Thus, the customer effectively protects himself against the adverse spot exchange rates but he takes a risk on the forward differentials. (i.e. premium/discount). Although spot exchange rates and forward differentials are prone to fluctuations, yet the spot exchange rates being more volatile the customer gets the protection against the adverse movements of the exchange rates.

A corporate can book with the Authorised Dealer a forward cover on roll-over basis as necessitated by the maturity dates of the underlying transactions, market conditions and the need to reduce the cost to the customer. Example : An importer has entered into a 3 months forward contract in the month of February. Spot Rate = 48.65 Forward premium for 3 months (May) = 0.75 Therefore rate for the contract = 48.65 + 0.75 = 49.45 Suppose, in the month of May the importer realizes that he will not be able to make the payment in May, and he can make payment only in July. Now as per the guidelines of RBI and FEDAI he can cancel the contract, but he cannot re-book the contract. So for this the importer will go for a roll-over forward for May over July. The premium for May is 0.75 (sell) and the premium for July is 119.75 (buy). Therefore the additional cost i.e. (119.75 0.75) = 0.4475 will have to be paid to the bank. The bank then fixes a notional rate. Lets say it is 48.66. Therefore in May he will sell 48.66 + 0.75 = 49.41 And in July he will buy 48.66 + 119.75 = 49.85 Therefore the additional cost (49.85 49.41) = 0.4475 will have to be paid to the Bank by the importer. Cancellation of Forward Contract A corporate can freely cancel a forward contract booked if desired by it. It can again cover the exposure with the same or other Authorised Dealer. However contracts relating to non-trade transaction\imports with one leg in Indian rupees once cancelled could not be rebooked till now. This regulation was imposed to stem volatility in the foreign exchange market, which was

driving down the rupee. Thus the whole objective behind this was to stall speculation in the currency. But now the RBI has lifted the 4-year-old ban on companies re-booking the forward transactions for imports and non-traded transactions. It has been decided to extend the freedom of re-booking the import forward contract up to 100% of un-hedged exposures falling due within one year, subject to a cap of $ 100 Mio in a financial year per corporate. The removal of this ban would give freedom to corporate Treasurers who should be in apposition to reduce their foreign exchange risks by canceling their existing forward transactions and rebooking them at better rates. Thus this in not liberalization, but it is restoration of the status quo ante Also the Details of cancelled forward contracts are no more required to be reported to the RBI. The following are the guidelines that have to be followed in case of cancellation of a forward contract. 1.) In case of cancellation of a contract by the client (the request should be made on or

before the maturity date) the Authorized Dealer shall recover/pay the, as the case may be, the difference between the contracted rate and the rate at which the cancellation is effected. The recovery/payment of exchange difference on canceling the contract may be up front or back ended in the discretion of banks. 2.) Rate at which the cancellation is to be effected: Purchase contracts shall be cancelled at the contracting Authorized Dealers spot T.T. selling rate current on the date of cancellation. Sale contract shall be cancelled at the contracting Authorized Dealers spot T.T. selling rate current on the date of cancellation. Where the contract is cancelled before maturity, the appropriate forward T.T. rate shall be applied.

3.)

Exchange difference not exceeding Rs. 100 is being ignored by the contracting Bank.

4.)

In the absence of any instructions from the client, the contracts, which have matured,

shall be automatically cancelled on 15th day falls on a Saturday or holiday; the contract shall be cancelled on the next succeeding working day. In case of cancellation of the contract 1.) 2.) Swap, cost if any shall be paid by the client under advice to him. When the contract is cancelled after the due date, the client is not entitled to the exchange

difference, if any in his favor, since the contract is cancelled on account of his default. He shall however, be liable to pay the exchange difference, against him. Early Delivery Suppose an Exporter receives an Export order worth USD 500000 on 30/06/2009 and expects shipment of goods to take place on 30/09/2009. On 30/06/2009 he sells USD 500000 value 30/09/2009 to cover his FX exposure. Due to certain developments, internal or external, the exporter now is in a position to ship the goods on 30/08/2009. He agrees this change with his foreign importer and documents it. The problem arises with the Bank as the exporter has already obtained cover for 30/09/2009. He now has to amend the contract with the bank, whereby he would give early delivery of USD 500000 to the bank for value 30/08/2009. i.e. the new date of shipment. However, when he sold USD value 30/09/2009, the bank did the same in the market, to cover its own risk. But because of early delivery by the customer, the bank is left with a long mismatch of funds 30/08/2009 against 30/09/2009, i.e. + USD 500000 value 30/08/2009 (customer deal amended) against the deal the bank did in the inter bank market to cover its original risk USD value 30/09/2009 to cover this mismatch the bank would make use of an FX swap. The swap will be 1.) 2.) Sell USD 500000 value 30/08/2009. Buy USD 500000 value 30/09/2009

The opposite would be true in case of an importer receiving documents earlier than the original due date. If originally the importer had bought USD value 30/09/2009 on opening of the L/C and now expects receipt of documents on 30/08/2009, the importer would need to take early delivery of USD from the bank. The Bank is left with a short mismatch of funds 30/08/2009 against 30/09/2009. i.e. USD 500000 value (customer deal amended) against the deal the bank did in the inter bank market to cover its original risk + USD 500000 To cover this mismatch the bank would make use of an FX swap, which will be; 1. Buy USD value 30/08/2009. 2. Sell USD value 30/09/2009. The swap necessitated because of early delivery may have a swap cost or a swap difference that will have to be charged / paid by the customer. The decision of early delivery should be taken as soon as it becomes known, failing which an FX risk is created. This means that the resultant swap can be spot versus forward (where early delivery cover is left till the very end) or forward versus forward. There is every likelihood that the original cover rate will be quite different from the market rates when early delivery is requested. The difference in rates will create a cash outlay for the bank. The interest cost or gain on the cost outlay will be charged / paid to the customer. Substitution of Orders The substitution of forward contracts is allowed. In case shipment under a particular import or export order in respect of which forward cover has been booked does not take place, the corporate can be permitted to substitute another order under the same forward contract, provided that the proof of the genuineness of the transaction is given. Advantages of using forward contracts : They are useful for budgeting, as the rate at which the company will buy or sell is fixed in advance. There is no up-front premium to pay whn using forward contracts. The contract can be drawn up so that the exchange takes place on any agreed working day.

Disadvantages of forward contracts : They are legally binding agreements that must be honoured regardless of the exchange rate prevailing on the actual forward contract date. They may not be suitable where there is uncertainty about future cash flows. For example, if a company tenders for a contract and the tender is unsuccessful, all obligations under the Forward Contract must still be honoured. 7.13CURRENCY FUTURES: Futures: A futures contract is similar to the forward contract but is more liquid because it is traded in an organized exchange i.e. the futures market. Depreciation of a currency can be hedged by selling futures and appreciation can be hedged by buying futures. Advantages of futures are that there is a central market for futures which eliminates the problem of double coincidence. Futures require a small initial outlay (a proportion of the value of the future) with which significant amounts of money can be gained or lost with the actual forwards price fluctuations. This provides a sort of leverage. The previous example for a forward contract for RIL applies here also just that RIL will have to go to a USD futures exchange to purchase standardised dollar futures equal to the amount to be hedged as the risk is that of appreciation of the dollar. As mentioned earlier, the tailorability of the futures contract is limited i.e. only standard denominations of money can be bought instead of the exact amounts that are bought in forward contracts. Currency future contracts can be used as an alternative to the forward market as a hedging tool. A UK importer having an unmatured dollar payable could either buy dollars in the forward market, or sell sterling futures contracts approximately equal in amount to the dollar exposure, and maturing as near as possible to the due date of payment. His profit or loss in the cash market will be compensated by the loss or profit in reversing the futures transaction. In the effect, he will get the exchange rate he had contracted while selling the sterling future contracts. An example will help clarify the situation. A UK importer has to pay $ 1,60,000 to his creditor on 20th April for imports made in January. In February, he is worried that the dollar may appreciate against the pound and desires to cover the exchange risk in the futures market. The

amount of the LIFFE sterling, dollar contract is pounds 25,000 and the maturity 2nd Wednesday of June. The current spot rate in the cash market is $1.50 per pound, the forward rate delivery 20th April is $ 1.48, and the June contract is being traded at say $ 1.45. He therefore decides to sell four June contracts at $ 1.45. On the 20th April the spot rate in the cash market is say $ 1.40 and the June future contract is now trading at say $ 1.36. The purchase $ 1,60,000 in the cash market will now cost him PDS 1,14,285.71, or a loss of PDS 6,177.61 compared to the forward rate of $ 1.48 ruling when he decided to hedge the risk. In the future market he can now buy back the four contracts sold at $ 1.45, at the current price of $ 1.36, or a profit of 9 cents per pound or $ 9,000. This profit is equal to PDS 6,428.57 at the current spot rate, and compensates him for the loss. The example of also evidences that the hedge is not perfect the profit and loss do not match exactly because amounts and maturities do not coincide/ The spot rate and futures contract price have not moved by the same amount, nor was the entire $ 1,60,000 hedged. Futures are not perfect Hedges The advantage of the standardized amounts and maturity are tradability and liquidity, the disadvantage is that future market does not in general provide a perfect hedge since the amount and maturity of the exposure one is trying to hedge will rarely coincide with the standardized amount and maturities of the contracts traded on the exchange. It will be appreciated that prices of the currency futures contracts will run in close tandem with the forward rates in the cash market. Discrepancies will lead to arbitrage opportunities and arbitraged trading will correct them. Also on the maturity date the prices in the futures and cash market will have to be identical, as a counter party has a right to insist upon delivery of the currency. Future contracts rarely provide perfect hedges because of standardized maturities and amounts. But they have also some significant advantages over the counter parts in the OTC market, namely forwards contracts. The most important are transparency of prices, ease in taking and unwinding of the positions and no counter party risk.

Forward contracts are generally dealt over the telephone the result is that same point of time different counterparties may be quoted different prices for the same currency and maturity. This is not the case in the future exchange, at a given point of time there will be one price for a particular contract.

Liquidity in the future exchange also facilitates the taking and unwinding of positions, that too at market rates. This is all the more important as the most positions in the future market are unwound well before maturity, by doing a reverse transaction, and not by exchange of the underlying currencies, as in the case of forward contract.

The elimination of counter party risk come through the system of initial margin and its adjustments daily to reflect change in the prices of the contracts. This is yet another difference with the forward contract. Under the letter cash flow will be exchanged only on maturity, in futures the cash flow would be affected daily because of margin system. 7.14 CURRENCY OPTION MARKET: A currency Option is a contract giving the right, not the obligation, to buy or sell a specific quantity of one foreign currency in exchange for another at a fixed price; called the Exercise Price or Strike Price. The fixed nature of the exercise price reduces the uncertainty of exchange rate changes and limits the losses of open currency positions. Options are particularly suited as a hedging tool for contingent cash flows, as is the case in bidding processes. Call Options are used if the risk is an upward trend in price (of the currency), while Put Options are used if the risk is a downward trend. Again taking the example of RIL which needs to purchase crude oil in USD in 6 months, if RIL buys a Call option (as the risk is an upward trend in dollar rate), i.e. the right to buy a specified amount of dollars at a fixed rate on a specified date, there are two scenarios. If the exchange rate movement is favourable i.e the dollar depreciates, then RIL can buy them at the spot rate as they have become cheaper. In the other case, if the dollar appreciates compared to todays spot rate, RIL can exercise the option to purchase it at the agreed strike price. In either case RIL benefits by paying the lower price to purchase the dollar.

Forex option is a contract that conveys the right, but not the obligation, to buy or sell a particular item at a certain price for a limited time. Only the seller of the option is obligated to perform. Simply stated, a buyer of a currency option acquires the right - but not the obligation - to buy (a call) or sell (a put) a specific amount of one currency for another at a predetermined price and date in the future. The cost of the option is called a premium and is paid by the buyer to the seller. The seller determines the price of the premium at which they are willing to grant the option, based on current rates, nominated delivery and expiry dates, the nominated strike rate and option style. It is entirely up to the buyer whether or not to exercise that right; only the seller of the option is obligated to perform.

Call Option - an option to BUY an underlying asset (stock or currency) at an agreed upon price (Strike Price or Exercise Price) on or before the expiration date. Since this option has economic value, you have to pay a price, called the Premium.

Example: Microsoft (MSFT) was recently selling at $29.50/share, and there were 4 different options. For example, for $1.00 (premium) you could buy one call option that would allow you to buy a share of MSFT for $30 (strike P) on or before January 16, 2005. You will exercise the option if P > $30, and you will make money if the P > $31.00 ($30 + $1.00). If P = $30, you will not exercise the option, it will expire worthless and you will lose the premium ($1.50).

Next example shows two ways to calculate profit from call option: You have paid a premium of $187.50 in July that gives you the right to buy SF @ $0.67 on or before September 10. If the SF sells at $.7025 on expiration, you can exercise your right to buy @$0.67 and then sell at $0.7025, for proceeds of $2,031.25. Subtracting the cost of your option premium of $187.50, you have a net profit of $1,843.75 ($2,031.25 - $187.50). The writer (seller) of the call option would lose $1,843.75. 1. Profit = S - (Exercise Price + Premium) x SF62,500 Profit = $.7025 - ($0.670 + $0.003) = $0.0295/SF x SF62,500 = $1,843.75 2. Profit = (S - Exercise Price) x SF62,500 - PREMIUM

Profit = ($0.7025 - $0.67) x SF62,500 = $2,031.25 - $187.50 = $1,843.75

ROI: Your return on investment (ROI) would be $1843.75 / $187.50 (Profit / Investment) = 983% for 2 months! Illustrates leverage. You control about $42,000 worth of SFs (SF62,500 x $.67/SF) with only $187.50, or less than 1% of the underlying value of the currency. If spot rate at expiration is only $.6607/SF (or any rate < $.67/SF), the option expires worthless, you lose the premium of $187.50, which would be the gain to the writer (seller) of the call. Note: If the spot rate was between $.67 and $.673, you would exercise, but lose money. For example, if S = $0.671, you would lose ($.671 - .673) x SF62,500 = -$125 by exercising, vs. $187.50 without exercising. Like futures trading, option trading is a zero-sum game. The buyer of the option purchases it from the seller or the person who "writes" the call. Options are traded in units of 100 shares.

Put Option - gives the owner the right, but not the obligation to sell an underlying asset at a stated price on or before the expiration date. Example: MSFT $30 January 2005 puts were selling for $2 (premium). You will make money if the P < $28. You will exercise if P < $30, exercise but lose money if P $28-30. If P > $30, put will expire worthless. The option extends only until the expiration date. The rate at which one currency can be purchased or sold is one of the terms of the option and is called the exercise price or strike price. The total description of a currency option includes the underlying currencies, the contract size, the expiration date, the exercise price and another important detail: that is whether the option is an option to purchase the underlying currency - a call - or an option to sell the underlying currency - a put.

A Currency Option is a bilateral contract between two counterparties, and therefore each party is responsible for assessing the credit standing and capacity of the other party, before entering into a transaction.

There are two types of option expirations - American-style and European-style. American-style options can be exercised on any business day prior to the expiration date. European-style options can be exercised at expiration only.

Currency options give the holder the right, but not the obligation, to buy or sell a fixed amount of foreign currency at a specified price. 'American' options are exercisable at any time prior to the expiration date, while 'European' options are exercisable only on the expiration date. Most currency options have 'American' exercise features. Call options give the holder the right to buy foreign currency, while put options give the holder the right to sell foreign currency. Call options make money when the exchange rate rises above the exercise price (allowing the holder to buy foreign currency at a lower rate), while put options make money when the exchange rate falls below the exercise price (allowing the holder to sell foreign currency at a higher rate). If the exchange rate doesn't reach a level at which the option makes money prior to expiration, it expires worthless unlike forwards and futures, the holder of an option does not have an obligation to buy or sell if it is not advantageous to do so.

7.15 CURRENCY SWAP MARKET: Currency swap is the type of forex derivative. It is an agreement between two parties to buy or sell currency at spot rates, which reverts at the end of an agreed period for a specified price (the forward rate). The forward rate is calculated from the spot rate, forward points (premium on the spot rate based on the interest rate differential between the currencies) and length of the agreement in days. In a currency swap, the holder of an unwanted currency exchanges that currency for an equivalent amount of another currency to improve the market liquidity of a currency owned or to obtain bank financing at a lower rate. For example, company ONE obtains five-year below market financing from a German bank, and swaps deutschmarks for dollars with company TWO, which has more U.S. Dollars than it needs. At maturity, the swap is reversed. A cross-currency swap involves the exchange of a fixed rate obligation in one currency for a floating rate

obligation in another. swaps are technically borrowings, but unlike bank loans they are not ordinarily disclosed on the balance sheet. Currency swaps can be negotiated for a variety of maturities up to at least 10 years. Unlike a back-to-back loan, a currency swap is not considered to be a loan by United States accounting laws and thus it is not reflected on a company's balance sheet. A swap is considered to be a foreign exchange transaction (short leg) plus an obligation to close the swap (far leg) being a forward contract. Currency swaps are often combined with interest rate swaps. For example, one company would seek to swap a cash flow for their fixed rate debt denominated in US dollars for a floating-rate debt denominated in Euro. This is especially common in Europe where companies "shop" for the cheapest debt regardless of its denomination and then seek to exchange it for the debt in desired currency. Interest Rate swaps is a financial interest rate contracts whereby the buyer and seller swap interest rate exposure over the term of the contract. The most common swap contract is the fixedto-float swap whereby the swap buyer receives a floating rate from the swap seller, and the swap seller receives a fixed rate from the swap buyer. Other types of swap include fixed-to-fixed and float-to-float. Interest rate swaps are more often utilized by commercials to re-allocate interest rate risk exposure. In other words, a currency swap involves two principal amounts, one for each currency. There is an exchange of the principal amounts and the rate generally used to determine the two principal amounts is the then prevailing spot rate. Alternatively, the parties to the swap transaction can also enter into delayed/forward start swaps by agreeing to use the forward rate. A currency swap is similar to a series of foreign exchange forward contracts, which are agreements to exchange two streams of cash flows in different currencies. Like all forward contracts, the currency swap exposes the user to foreign exchange risk. The swap leg the party agrees to pay is a liability in one currency and the swap leg the party agrees to receive is an asset in the other currency.

The first mentioned swap is generally the preferred swap. In the stated case, the customer enters into the swap with the bank to receive floating interest rate (USD Libor) payments and USD principal and simultaneously pays INR fixed interest rate and equivalent INR principal amount arrived at based on the spot rate prevailing on the transaction date. Choice of hedging instruments The literature on the choice of hedging instruments is very scant. Among the available studies, Gczy et al. (1997) argues that currency swaps are more cost-effective for hedging foreign debt risk, while forward contracts are more cost-effective for hedging foreign operations risk. This is because foreign currency debt payments are long-term and predictable, which fits the long-term nature of currency swap contracts. Foreign currency revenues, on the other hand, are short-term and unpredictable, in line with the short-term nature of forward contracts. A survey done by Marshall (2000) also points out that currency swaps are better for hedging against translation risk, while forwards are better for hedging against transaction risk. This study also provides anecdotal evidence that pricing policy is the most popular means of hedging economic exposures. These results however can differ for different currencies depending in the sensitivity of that currency to various market factors. Regulation in the foreign exchange markets of various countries may also skew such results. Determinants of Hedging Decisions The management of foreign exchange risk, as has been established so far, is a fairly complicated process. A firm, exposed to foreign exchange risk, needs to formulate a strategy to manage it, choosing from multiple alternatives. This section explores what factors firms take into consideration when formulating these strategies. Production and Trade vs. Hedging Decisions An important issue for multinational firms is the allocation of capital among different countries production and sales and at the same time hedging their exposure to the varying exchange rates. Research in this area suggests that the elements of exchange rate uncertainty and the attitude toward risk are irrelevant to the multinational firm's sales and production decisions (Broll,1993). Only the revenue function and cost of production are to be assessed, and, the production and trade decisions in multiple countries are independent of the hedging decision. The implication of

this independence is that the presence of markets for hedging instruments greatly reduces the complexity involved in a firms decision making as it can separate production and sales functions from the finance function. The firm avoids the need to form expectations about future exchange rates and formulation of risk preferences which entails high information costs. Cost of Hedging Hedging can be done through the derivatives market or through money markets (foreign debt). In either case the cost of hedging should be the difference between value received from a hedged position and the value received if the firm did not hedge. In the presence of efficient markets, the cost of hedging in the forward market is the difference between the future spot rate and current forward rate plus any transactions cost associated with the forward contract. Similarly, the expected costs of hedging in the money market are the transactions cost plus the difference between the interest rate differential and the expected value of the difference between the current and future spot rates. In efficient markets, both types of hedging should produce similar results at the same costs, because interest rates and forward and spot exchange rates are determined simultaneously. The costs of hedging, assuming efficiency in foreign exchange markets result in pure transaction costs. The three main elements of these transaction costs are brokerage or service fees charged by dealers, information costs such as subscription to Reuter reports and news channels and administrative costs of exposure management.

CHAPTER-8 REPORT ANALYSI

8.1 MARKETING RESEARCH AND PROCEDURE: Marketing research:
The systematic and objective identification, collection, analysis, discrimination, and use of information for the purpose of assisting management in decision making related to the identification and solution of problem(and opportunities) in marketing.

Procedure:
A set of six that defines the task to be accomplished in conducting a marketing research studyThese include problem definition, development of an approach to the problem, research design formulation, field work, data preparation and analysis, and report preparation and presentation. a) Problem Definition b) Development of an approach to the Problem c) Research Design Formulation d) Fieldwork or Data Collection e) Data Preparation and Analysis f) Report Preparation and Presentation

8.2 Main Objectives

Analysis of comparison among equity. Commodities, currency in investment.

Sub Objectives: To find the Customers view about investment among equity, commodities, currency.. To find the highest investment in assets class.. To find the Age relationship with investment in Stock market . To find the Education relationship with investment in Stock market. To find the Experience relationship with investment in Stock market. To find the periodicity of investment in Stock market. To find reason behind investing in Stock market.

8.3 Data source There are mainly two types of data sources: Primary Data Secondary Data

a) Primary Data: In our survey, information provided by respondent with questionnaire b) Secondary Data: In our survey, information collected from magazines, newspapers, brochures and websites.

8.4 Research Instruction We have used questionnaire that contains open ended and close Ended questions. The open-ended questions are completely structured Respondents Can answer specifically In close ended questions, I have used Dichotomous, multiple choice And linker scale.

8.5 Research Methodology

Research Methodology: Research Design Research Approach Research Instrument Information Need Area of the survey Sample Size Sampling unit Interview method : : : : : : : : Exploratory Survey Questionnaire Primary Data Ahmedabad City 100 Respondents Traders Personal interview

8.6 Data Analysis HYPOTHESIS

HO: There is no change in the perception of the gender about the equity market factors. H1: There is a change in the perception of the gender about the equity market factors.

Ho: Different age group does not affect the various factor of equity market H1: Different age group affects the various factor of equity market.

Ho: Monthly income of a individual does not affect the equity market factors. H1: Monthly income of a individual affects the equity market factors.

HO: There is no change in the perception of the gender about the commodity market factors. H1: There is a change in the perception of the gender about the commodity market factors.

Ho: Different age group does not affect the various factor of commodity market H1: Different age group affects the various factor of commodity market.

Ho: Monthly income of a individual does not affect the commodity market factors. H1: Monthly income of a individual affects the commodity market factors.

HO: There is no change in the perception of the gender about the currency market factors. H1: There is a change in the perception of the gender about the currency market factors.

Ho: Different age group does not affect the various factor of currency market H1: Different age group affects the various factor of currency market.

Ho: Monthly income of a individual does not affect the currency market factors. H1: Monthly income of a individual affects the currency market factors. ANOVA ANALYSIS ANOVA Sum Squares risky Between Groups .004 Within Groups Total return is more 37.036 37.040 of df 1 98 99 1 98 99 1 98 99 1 98 99 .000 .442 .001 .974 .181 .531 .341 .560 .298 .392 .759 .386 Mean Square F .004 .378 .011 Sig. .915

Between Groups .298 Within Groups Total 38.452 38.750

awerness is more

Between Groups .181 Within Groups Total 52.009 52.190

prior education is more Between Groups .000 Within Groups Total 43.310 43.310

more requried

investment Between Groups 1.167 Within Groups Total 108.223 109.390

1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99

1.167 1.104

1.057

.307

volatility is more

Between Groups .069 Within Groups Total 130.571 130.640

.069 1.332

.051

.821

participarion is more

Between Groups .286 Within Groups Total 93.104 93.390

.286 .950

.301

.585

speculation is more

Between Groups .093 Within Groups Total 85.667 85.760

.093 .874

.107

.745

long term investment

Between Groups 1.493 Within Groups Total 135.417 136.910

1.493 1.382

1.081

.301

return on investment is Between Groups 3.163 fast Within Groups Total benificial in taxation 91.997 95.160

3.163 .939

3.369

.069

Between Groups 3.400 Within Groups Total 82.640 86.040

3.400 .843

4.032

.047

ANOVA Sum Squares of df Mean Square F Sig.

risky

Between Groups 2.685 Within Groups Total 34.355 37.040

3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96

.895 .358

2.501

.064

return is more

Between Groups .030 Within Groups Total 38.720 38.750

.010 .403

.025

.995

awerness is more

Between Groups 2.200 Within Groups Total 49.990 52.190

.733 .521

1.408

.245

prior education is more Between Groups 2.914 Within Groups Total more requried 40.396 43.310

.971 .421

2.308

.081

investment Between Groups 6.169 Within Groups Total 103.221 109.390

2.056 1.075

1.913

.133

volatility is more

Between Groups 7.602 Within Groups Total 123.038 130.640

2.534 1.282

1.977

.123

participarion is more

Between Groups 11.625 Within Groups Total 81.765 93.390

3.875 .852

4.549

.005

speculation is more

Between Groups 1.440 Within Groups Total 84.320 85.760

.480 .878

.546

.652

long term investment

Between Groups 3.400 Within Groups 133.510

1.133 1.391

.815

.489

Total

136.910

99 3 96 99 3 96 99 .286 .887 .322 .809 .911 .963 .946 .421

return on investment is Between Groups 2.734 fast Within Groups Total benificial in taxation 92.426 95.160

Between Groups .858 Within Groups Total 85.182 86.040

ANOVA Sum Squares risky Between Groups 2.218 Within Groups Total return is more 34.822 37.040 of df 4 95 99 4 95 99 4 95 99 4 95 99 4 95 .108 1.147 .094 .984 .227 .446 .509 .730 .242 .539 .449 .773 .582 .383 1.518 .203 Mean Square F .555 .367 1.513 Sig. .205

Between Groups 2.329 Within Groups Total 36.421 38.750

awerness is more

Between Groups .967 Within Groups Total 51.223 52.190

prior education is more Between Groups .908 Within Groups Total more requried 42.402 43.310

investment Between Groups .432 Within Groups 108.958

Total volatility is more

109.390

99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 .799 .872 .916 .458 1.448 .941 1.539 .197 .437 1.423 .307 .873 2.222 .809 2.747 .033 1.152 .935 1.233 .302 1.604 1.308 1.226 .305

Between Groups 6.415 Within Groups Total 124.225 130.640

participarion is more

Between Groups 4.608 Within Groups Total 88.782 93.390

speculation is more

Between Groups 8.890 Within Groups Total 76.870 85.760

long term investment

Between Groups 1.748 Within Groups Total 135.162 136.910

return on investment is Between Groups 5.792 fast Within Groups Total benificial in taxation 89.368 95.160

Between Groups 3.195 Within Groups Total 82.845 86.040

ANOVA Sum Squares it is risky Between Groups 1.074 Within Groups 82.926 of df 1 98 Mean Square F 1.074 .846 1.270 Sig. .263

Total

84.000

99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 .052 .036 .849 .020 .581 .035 .853 .020 .846 .024 .878 .000 1.136 .000 .984 .087 1.155 .075 .785 .000 .842 .001 .981 .080 .707 .114 .737 .880 .720 1.223 .272 3.772 .967 3.902 .051

in commodites return on Between Groups 3.772 investment is more Within Groups Total in 94.738 98.510

commodities Between Groups .880 Within Groups Total 70.560 71.440

awerness is more

in

commdities

prior Between Groups .080 Within Groups Total 69.310 69.390

education is more

in

commodities

mire Between Groups .000 Within Groups Total 82.560 82.560

investment is required

in

commodities Between Groups .087 Within Groups Total 113.223 113.310

volatilities is more

in

commodites Between Groups .000 Within Groups Total 111.310 111.310

participation is more

in

commodites Between Groups .020 Within Groups Total 82.890 82.910

speculation is more

in commodites return on Between Groups .020 ivestment is fast Within Groups Total commodities 56.890 56.910

are Between Groups .052

benificial in taxation

Within Groups Total

141.187 141.240

98 99

1.441

ANOVA Sum Squares it is risky Between Groups 1.074 Within Groups Total 82.926 84.000 of df 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 .000 .000 .984 .087 1.155 .075 .785 .000 .842 .001 .981 .080 .707 .114 .737 .880 .720 1.223 .272 3.772 .967 3.902 .051 Mean Square F 1.074 .846 1.270 Sig. .263

in commodites return on Between Groups 3.772 investment is more Within Groups Total in 94.738 98.510

commodities Between Groups .880 Within Groups Total 70.560 71.440

awerness is more

in

commdities

prior Between Groups .080 Within Groups Total 69.310 69.390

education is more

in

commodities

mire Between Groups .000 Within Groups Total 82.560 82.560

investment is required

in

commodities Between Groups .087 Within Groups Total 113.223 113.310

volatilities is more

in

commodites Between Groups .000

participation is more

Within Groups Total

111.310 111.310

98 99 1 98 99 1 98 99 1 98 99

1.136

in

commodites Between Groups .020 Within Groups Total 82.890 82.910

.020 .846

.024

.878

speculation is more

in commodites return on Between Groups .020 ivestment is fast Within Groups Total commodities benificial in taxation 56.890 56.910

.020 .581

.035

.853

are Between Groups .052 Within Groups Total 141.187 141.240

.052 1.441

.036

.849

ANOVA Sum Squares it is risky Between Groups 1.076 Within Groups Total 82.924 84.000 of df 3 96 99 3 96 99 3 96 99 3 .337 .474 .701 1.222 .706 1.731 .166 .285 1.017 .280 .840 Mean Square F .359 .864 .415 Sig. .742

in commodites return on Between Groups .855 investment is more Within Groups Total in 97.655 98.510

commodities Between Groups 3.666 Within Groups Total 67.774 71.440

awerness is more

in

commdities

prior Between Groups 1.012

education is more

Within Groups Total

68.378 69.390

96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99

.712

in

commodities

mire Between Groups 2.173 Within Groups Total 80.387 82.560

.724 .837

.865

.462

investment is required

in

commodities Between Groups .879 Within Groups Total 112.431 113.310

.293 1.171

.250

.861

volatilities is more

in

commodites Between Groups .410 Within Groups Total 110.900 111.310

.137 1.155

.118

.949

participation is more

in

commodites Between Groups .755 Within Groups Total 82.155 82.910

.252 .856

.294

.829

speculation is more

in commodites return on Between Groups 4.459 ivestment is fast Within Groups Total commodities benificial in taxation 52.451 56.910

1.486 .546

2.720

.049

are Between Groups 5.342 Within Groups Total 135.898 141.240

1.781 1.416

1.258

.293

ANOVA Sum Squares it is risky Between Groups 7.673 of df 4 Mean Square F 1.918 2.387 Sig. .056

Within Groups Total

76.327 84.000

95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99

.803

in commodites return on Between Groups 3.512 investment is more Within Groups Total in 94.998 98.510

.878 1.000

.878

.480

commodities Between Groups 2.561 Within Groups Total 68.879 71.440

.640 .725

.883

.477

awerness is more

in

commdities

prior Between Groups 5.520 Within Groups Total 63.870 69.390

1.380 .672

2.053

.093

education is more

in

commodities

mire Between Groups 7.399 Within Groups Total 75.161 82.560

1.850 .791

2.338

.061

investment is required

in

commodities Between Groups .744 Within Groups Total 112.566 113.310

.186 1.185

.157

.959

volatilities is more

in

commodites Between Groups 5.387 Within Groups Total 105.923 111.310

1.347 1.115

1.208

.313

participation is more

in

commodites Between Groups 12.796 Within Groups Total 70.114 82.910

3.199 .738

4.334

.003

speculation is more

in commodites return on Between Groups .814 ivestment is fast Within Groups Total 56.096 56.910

.204 .590

.345

.847

commodities benificial in taxation

are Between Groups 3.105 Within Groups Total 138.135 141.240

4 95 99

.776 1.454

.534

.711

ANOVA Sum Squares currancy is risky Between Groups .039 Within Groups Total 132.071 132.110 of df 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 .002 1.196 .002 .968 .107 .621 .172 .679 .322 .398 .809 .371 1.214 .413 2.944 .089 1.414 1.382 1.024 .314 Mean Square F .039 1.348 .029 Sig. .866

in currancy return on Between Groups 1.414 investment is more Within Groups Total 135.426 136.840

in currancy awerness is Between Groups 1.214 more Within Groups Total in currancy 40.426 41.640

prior Between Groups .322 Within Groups Total 38.988 39.310

education is more

in

currancy

mire Between Groups .107 Within Groups Total 60.893 61.000

investment is required

in currancy volatilities is Between Groups .002 more Within Groups Total 117.238 117.240

in currancy participation Between Groups .000 is more Within Groups Total 83.390 83.390

1 98 99 1 98 99 1 98 99 1 98 99

.000 .851

.000

.991

in currancy speculation Between Groups 1.743 is more Within Groups Total 41.247 42.990

1.743 .421

4.141

.045

in curranvy return on Between Groups .114 investment is fast Within Groups Total 53.676 53.790

.114 .548

.209

.649

curranc is benificial in Between Groups .080 taxation Within Groups Total 57.310 57.390

.080 .585

.138

.711

ANOVA Sum Squares currancy is risky Between Groups 2.536 Within Groups Total 129.574 132.110 of df 3 96 99 3 96 99 3 96 99 .460 .419 1.097 .354 .459 1.411 .326 .807 Mean Square F .845 1.350 .626 Sig. .600

in currancy return on Between Groups 1.378 investment is more Within Groups Total 135.462 136.840

in currancy awerness is Between Groups 1.381 more Within Groups Total 40.259 41.640

in

currancy

prior Between Groups .934 Within Groups Total 38.376 39.310

3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99

.311 .400

.779

.509

education is more

in

currancy

mire Between Groups .007 Within Groups Total 60.993 61.000

.002 .635

.004

1.000

investment is required

in currancy volatilities is Between Groups 4.849 more Within Groups Total 112.391 117.240

1.616 1.171

1.381

.253

in currancy participation Between Groups 2.250 is more Within Groups Total 81.140 83.390

.750 .845

.887

.451

in currancy speculation Between Groups .644 is more Within Groups Total 42.346 42.990

.215 .441

.487

.692

in curranvy return on Between Groups 2.207 investment is fast Within Groups Total 51.583 53.790

.736 .537

1.369

.257

curranc is benificial in Between Groups 3.869 taxation Within Groups Total 53.521 57.390

1.290 .558

2.313

.081

ANOVA Sum Squares of df Mean Square F Sig.

currancy is risky

Between Groups 4.486 Within Groups Total 127.624 132.110

4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95

1.122 1.343

.835

.506

in currancy return on Between Groups 9.438 investment is more Within Groups Total 127.402 136.840

2.359 1.341

1.759

.143

in currancy awerness is Between Groups .985 more Within Groups Total in currancy 40.655 41.640

.246 .428

.576

.681

prior Between Groups 1.635 Within Groups Total 37.675 39.310

.409 .397

1.031

.396

education is more

in

currancy

mire Between Groups 7.338 Within Groups Total 53.662 61.000

1.834 .565

3.248

.015

investment is required

in currancy volatilities is Between Groups 5.576 more Within Groups Total 111.664 117.240

1.394 1.175

1.186

.322

in currancy participation Between Groups 1.397 is more Within Groups Total 81.993 83.390

.349 .863

.405

.805

in currancy speculation Between Groups .414 is more Within Groups Total 42.576 42.990

.103 .448

.231

.920

in curranvy return on Between Groups 3.469 investment is fast Within Groups 50.321

.867 .530

1.637

.171

Total

53.790

99 4 95 99 .598 .579 1.032 .395

curranc is benificial in Between Groups 2.390 taxation Within Groups Total 55.000 57.390

ANOVA Sum Squares risky Between Groups .004 Within Groups Total return is more 37.036 37.040 of df 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 .069 1.332 .051 .821 1.167 1.104 1.057 .307 .000 .442 .001 .974 .181 .531 .341 .560 .298 .392 .759 .386 Mean Square F .004 .378 .011 Sig. .915

Between Groups .298 Within Groups Total 38.452 38.750

awerness is more

Between Groups .181 Within Groups Total 52.009 52.190

prior education is more Between Groups .000 Within Groups Total more requried 43.310 43.310

investment Between Groups 1.167 Within Groups Total 108.223 109.390

volatility is more

Between Groups .069 Within Groups 130.571

Total participarion is more

130.640

99 1 98 99 1 98 99 1 98 99 1 98 99 1 98 99 3.400 .843 4.032 .047 3.163 .939 3.369 .069 1.493 1.382 1.081 .301 .093 .874 .107 .745 .286 .950 .301 .585

Between Groups .286 Within Groups Total 93.104 93.390

speculation is more

Between Groups .093 Within Groups Total 85.667 85.760

long term investment

Between Groups 1.493 Within Groups Total 135.417 136.910

return on investment is Between Groups 3.163 fast Within Groups Total benificial in taxation 91.997 95.160

Between Groups 3.400 Within Groups Total 82.640 86.040

ANOVA Sum Squares risky Between Groups 2.685 Within Groups Total return is more 34.355 37.040 of df 3 96 99 3 96 .010 .403 .025 .995 Mean Square F .895 .358 2.501 Sig. .064

Between Groups .030 Within Groups 38.720

Total awerness is more

38.750

99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 96 99 3 .286 .322 .809 .911 .963 .946 .421 1.133 1.391 .815 .489 .480 .878 .546 .652 3.875 .852 4.549 .005 2.534 1.282 1.977 .123 2.056 1.075 1.913 .133 .971 .421 2.308 .081 .733 .521 1.408 .245

Between Groups 2.200 Within Groups Total 49.990 52.190

prior education is more Between Groups 2.914 Within Groups Total more requried 40.396 43.310

investment Between Groups 6.169 Within Groups Total 103.221 109.390

volatility is more

Between Groups 7.602 Within Groups Total 123.038 130.640

participarion is more

Between Groups 11.625 Within Groups Total 81.765 93.390

speculation is more

Between Groups 1.440 Within Groups Total 84.320 85.760

long term investment

Between Groups 3.400 Within Groups Total 133.510 136.910

return on investment is Between Groups 2.734 fast Within Groups Total benificial in taxation 92.426 95.160

Between Groups .858

Within Groups Total

85.182 86.040

96 99

.887

ANOVA Sum Squares risky Between Groups 2.218 Within Groups Total return is more 34.822 37.040 of df 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 95 99 4 1.152 1.233 .302 1.604 1.308 1.226 .305 .108 1.147 .094 .984 .227 .446 .509 .730 .242 .539 .449 .773 .582 .383 1.518 .203 Mean Square F .555 .367 1.513 Sig. .205

Between Groups 2.329 Within Groups Total 36.421 38.750

awerness is more

Between Groups .967 Within Groups Total 51.223 52.190

prior education is more Between Groups .908 Within Groups Total more requried 42.402 43.310

investment Between Groups .432 Within Groups Total 108.958 109.390

volatility is more

Between Groups 6.415 Within Groups Total 124.225 130.640

participarion is more

Between Groups 4.608

Within Groups Total speculation is more

88.782 93.390

95 99 4 95 99 4 95 99 4 95 99 4 95 99

.935

Between Groups 8.890 Within Groups Total 76.870 85.760

2.222 .809

2.747

.033

long term investment

Between Groups 1.748 Within Groups Total 135.162 136.910

.437 1.423

.307

.873

return on investment is Between Groups 5.792 fast Within Groups Total benificial in taxation 89.368 95.160

1.448 .941

1.539

.197

Between Groups 3.195 Within Groups Total 82.845 86.040

.799 .872

.916

.458

EXPLINATION : (1) H0 hypothesis is accepted: There is no change in the perception of the gender about the equity market factors. (2) Ho: is accepted Different age group does not affect the various factor of equity market

(3) H1: is accepted Monthly income of a individual affects the equity market factors (4) H0: IS accepted There is no change in the perception of the gender about the commodity market factors (5) H0: is accepted Different age group does not affect the various factor of commodity market

(6) H1:is accepted Monthly income of a individual affects the commodity market factors. (7) H0: is accepted There is no change in the perception of the gender about the currency market factors. (8) H1: is accepted Different age group affects the various factor of currency market.

(9) H1: is accepted Monthly income of a individual affects the currency market factors.

Pic chart analysis

TOTAL

EQUITY COOMODITIES CURRANCY OTHERS

Explination : 42% traders invest in eouity stock market 27% traders invest in commodities

10% traders invest in currency 21% traders invest in others assets

8.7 FINDINGS:

People have good knowledge about the stock market in Ahmedabad city. Major people who invest in the stock market are from middle class and high middle class . People invest more in equity Most of the People is unaware of currency market People have having good knowledge about IPO, secondary market.

Most of investor was concern with high return. Most of the young people invest in the stock market.

People who are investing in stock market are highly educated

8.8 Limitation: Time:-As the duration of the conducting the research is only one month large no of sample are not able to be cover under the research so it might affect the research in future. Location:-As the scope of the study is limited up to few specific locations so it only shows the view point of limited individual. So it might affect the study. Only few locations of Ahmadabad is only Used to collect the primary date. So data might varies from other cities, region, state, country etc. Money:-Due to money constraints limited area are selected to be surveyed for the collection of date. Sample size:-Sample size is only limited up to 100because of time, location, and money constraints.

8.9 CONCLUTION:
Economically emerging city and have positive perception towards stock market.

Good market for dealers in future.

79% people are invests in the stock market.

ScopeThis research study would provide only a micro insight about the perception of investors towards equity, commodity and currency market. To this extent, I would like to state that the research should not be treated as conclusive and there is a further scope of improvement for research. A wider sample base and a broader geographical territory would be more effective in drawing a relatively more accurate research picture. This has been a very satisfying research experience for me and I would like, if possible to extend and compile a macro profile for this research topic.

CHAPTER-9 BIBLOGRAFY

Research Methodology C.R. Kothari www. India infolin .com www.infolonetrade.com www.nseindia.com www.bseindia.com www.googl.com Other many websites and links of the industrys company which mentioned in particular company information

CHAPTER10 ANNEXURE:

Dear sir / madam, I am the student of V. M. Patel Institute of management( Ganpat university) studying in MBA, 2nd semester. As a part of study, I have required to prepare a research report on analysis on comparison in investment among equity, commodities, currency. So, I survey for the same. Please give your honesty regarding this primary survey of questionnaire, which will create good help to me for carrying out this survey successfully. Thank you. [ 1 ] Name: _________________________________ [ 2 ] Gender: [ ] Male [ ] Female

[ 3 ] Contact No/ Emil id : ______________________________ [ 4 ] Age: [ [ ] 18-25 ] 36-45 [ [ ] 26-35 ] 45 above

[ 5 ] Monthly Income: [

] Below 15000 [

] 15001-30000 [ ] 45001-60000

[ ] 30001-45000 [ ] 60001 above

[ 6 ] what is your primary objective of investing in any assets? [ [ [ [ [ ] Capital preservation ] Profit maximization ] To face inflation ] To meet future expenses through moderate risk /returns. ] Others

[ 7 ] How much percentage of your saving you are investing currently? [ [ ] less than 25% ] between 51% and 75% [ [ ] between 25% and 50% ] more than 75%

[ 8 ] In which assets class you prefer more to invest? Give your priority. [ [ [ ] Equity Stocks ] Commodities spots ] others [ [ ] commodities futures ] currency

[ 9 ] How much returns you expect from your investment? [ [ [ ] less than 10% ] 16% to 20% ] more than 25% [ [ ] 11% to 15% ] 21% to 25%

[ 10 ] Use the following scale For EOUITY, Particular Strongly agree (5) Agree (4) Neither agree Disagree nor disagree (3) (2) Strongly disagree (1)

It is risky Returns on investment is more Return on investment is fast Awareness is more Prior education is required More investment required Beneficial in

taxation Volatility is more Participation is more Speculation is more It is long term investment [ 11 ] Use the following scale For COMMODITIES,

Particular

Strongly agree (5)

Agree (4)

Neither agree Disagree nor disagree (3) (2)

Strongly disagree (1)

It is risky Returns on investment is more Return on investment is fast Awareness is more Prior education is required More investment required Beneficial in taxation Volatility is more Participation is more Speculation is more It is long term investment

[ 12 ] Use the following scale For CURRANCY

Particular

Strongly agree (5)

Agree (4)

Neither agree Disagree nor disagree (3) (2)

Strongly disagree (1)

It is risky Returns on investment is more Return on investment is fast Awareness is more Prior education is required More investment required Beneficial in taxation Volatility is more Participation is more Speculation is more It is long term investment

[ 13 ] Are you interested to attend any work shop for getting information on different segments of market? [ ] Yes [ ] No

[ 14 ] If yes then chose your segmentation in given options [ [ ] Equity ] commodity[ ] currency