A PROJECT REPORT ON A STUDY ON INDIAN FINANCIAL DERIVATIVES (FUTURES & OPTIONS) (A study of reference to Sharekhan Ameerpet) A project report

t submitted to JNTU university, Kakinada in partial fulfillment of the requirement for the award of the degree of Master of Business Administration Submitted by M. RAJESH Regd.no.10pm1e0034 Under the guidance of Dr. N. Saibabu sir (M.com , MBA)

DEPARTMENT OF MANAGEMENT STUDIES AITAM SCHOOL OF COMPUTER SCIENCES AND MANAGEMENT (Approved by AICTE, New Delhi & Affiliated to JNTU, KAKINADA) K.Kotturu, Tekkali. 2010-2012

DECLARATION

I hereby declare that this Project Report titled A STUDY ON INDIAN FINANCIAL DERIVATIVES (FUTURES AND OPTIONS) submitted by me to the Department of Business Management, JNTU. KAKINADA is a confide work undertaken by me and it is not submitted to any other University or Institution for the award of any degree diploma / certificate or published any time before.

Name and Address of the Student M.RAJESH, THIMADAM (POST), JALUMURU (MANDAL), SRIKAKULAM (DIST).

Signature of the Student (M.RAJESH)

CERTIFICATION

This is to certify that the Project Report title DERIVATIVES (FUTURES AND

STUDY ON INDIAN FINANCIAL WITH REFERENCE TO

OPTIONS)

SHAREKHAN.LTD submitted in

partial fulfillment for the award of MBA Programme of

Department of Business Management, JNTU. Kakinada was carried out by Mr.M.RAJESH under my guidance. This has not been submitted to any other University or Institution for the award of any degree/diploma/certificate.

Name and address of the Guide

Signature of the Guide

ACKNOWLEDGEMENT I would like to express my gratitude to everyone who helped out me directly and indirectly in completing this project work successfully. I convey heartfelt thanks to all respondents who assisted politely, co-operatively and respectively in collecting the vital and information needed for the project work. I am deeply indebted to Principal Dr.VISHNU MURTY and to my project guide Mr.SAIBABU SIR for their inspiration and timely support in successful completion of this project work. I am very grateful to Mr. CHALLA SRININAS REDDY (Regional Manager) of Share khan ltd. for ever-lasting cordial support and continuous endeavor to bring the best project work. I am thankful to Mr. VINAY and SHYAM SUNDAR and all the staff members of Share khan ltd for their kind co-operation and timely support in completion of this project work. I am thankful to all the faculty members of MBA department, for their valuable support in the completion of this project work. I show the gratitude to the authors of various authentic literatures in management for providing the best study material need for the project work.

ABSTRACT An individual or a firm may have to face a large amount risk in the international markets. Hence it becomes necessary to look for other sources whereby this need can be met. Different types of derivatives have really proved to be given a sharp focus as of late. Different types of derivatives have come into existence to cater the needs of variety of individuals in the global markets. A few prominent ones being varied categories, different types of derivatives suitable for various trades and firms. This study of derivatives is utmost important in recent days. The study confined to one month trading of futures and options of selected companies. In this I found the moment of price, the pay off of the buyers/sellers and the process of trading. The norms of the Security Exchange Board of India (SEBI) and about other exchanges. To study the role of derivatives in Indian financial markets. To analyze the present situation of derivatives in India and other emerging market. To study in detail the role of futures and options. To find out profit/loss of option holder/writer.

The methodology adopted for the study is discussions with the personnel in Share khan ltd. The data has been analysis purpose has been divided into primary data and secondary data. The primary data that has been collected through personnel interview with various heads and individual traders in Sharekhan ltd. The secondary data has been collected from the Share khan value line magazine, Books and the internet. It is better to the investors to keep their money in Infosys futures. They would have take more number of futures in that month, so that they will be in profits. Investors should choose Infosys rather than Dr.Reddy`s.

CHAPTERIZATION CONTENTS CHAPTER 1: INTRODUCTION 1.1 INTRODUCTION 1.2 OBECTIVES OF THE STUDY 1.3 METHODOLOGY 1.4 SCOPE OF THE STUDY 1.5 LIMITATIONS CHAPTER 2: PROFILE OF THE ORGANIZATION 2.1 INDUSTRY PROFILE 2.2 COMPANY CHAPTER 3: THEORITICAL FRAME WORK DERIVATIVES CHAPTER 4: DATA ANALYSIS AND INTERPRETATION CHAPTER 5: SUGGESTIONS & CONCLUSION 5.1 SUGGESTIONS 5.2 CONCLUSION BIBILOGRAPHY

INTRODUCTION

INTRODUCTION
NEED AND IMPORTANCE An individual or a firm may have to face a large amount risk in the international markets. Hence it becomes necessary to look for other sources whereby this need can be met. Different types of derivatives have really proved to be given a sharp focus as of late. Different types of derivatives have come into existence to cater the needs of variety of individuals in the global markets. A few prominent ones being varied categories, different types of derivatives suitable for various trades and firms. This study of derivatives is utmost important in recent days. Introduction With the approval of the derivatives bill in union cabinet, the investors are now in the position to trade through futures and options, which provides the investors a greater hedging facility. Derivatives product initially emerged as hedging devices against fluctuations in commodity prices, and commodity linked derivatives offer organization the opportunity to break financial risks into smaller components and then to buy and sell those components to best meet specific risk management objectives. Financial derivatives came into spotlight in the year 1970 period due to growing instability in the financial markets. However since their emergence, these accounted for about two-third of totals transactions in derivatives products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, there complexity & also turn over. In the class of equity derivatives, futures & options on stock indices gained more popularity than individual stocks, especially among institutional investors, who are major users of indexlinked derivatives. Even small investors find these useful due to high correlation of popular indices with various portfolios. The ease of use and the lower costs associated with index derivatives vis--vis derivatives products based on individuals securities is another reason for their growing use. I wanted to have better understanding about futures and options market and their trading mechanism and therefore I took up this project.

OBJECTIVES
To study the role of derivatives in Indian financial markets (F & O) To find out profit/loss of option holder/writer. To study the cause for fluctuations in the futures and options market.

METHODOLOGY
The methodology adopted for the study is discussions with the personnel in Share khan ltd. and gathering information through secondary sources. PRIMARY DATA: The primary data that has been collected through personnel interview with various heads and individual traders in Share khan ltd. SECONDARY DATA: The secondary data has been collected from the Share khan value line magazine, Books and the internet.

SCOPE
o The scope of the study is limited to DERIVATIVES with the special reference to Indian context and the National stock exchange has been taken as a representative sample for the study. The study includes futures and options. o There are many organizations trading in the NSE, but my study is only for selected organizations such as INFOSYS & DR REDDY for one month period. o My study for both the companies traded in exchange of NSE (National Stock Exchange Ltd).

LIMITATIONS OF THE STUDY

The study is confined to only one month trading contract The study does not look any Nifty Index Futures and Options and international markets into the consideration. This is a study conducted within a period of 45 days. The study contains some assumption based on the demands of the analysis. .

DERIVATIVES
Derivatives are products whose value is derived from one or more variables called bases. These bases can be underling asset such as foreign currency, stock or commodity, bases or reference rates such as LIBOR or US treasury rate etc. Example, an Indian exporter in anticipation of the receipt of dollar denominated export proceeds may wish to sell dollars at a future date to eliminate the risk of exchange rate volatility by the data. Such transactions are called derivatives, with the spot price of dollar being the underlying asset. Derivatives thus have no value of their own but derive it from the asset that is being dealt with under the derivative contract. A financial manager can hedge himself from the risk of a loss in the price of a commodity or stock by buying a derivative contract. Thus derivative contracts acquire their value from the spot price of the asset that is covered by the contract. The primary purposes of a derivative contract is to transfer risk from one party to another i.e. risk in a financial sense is transfer from a party that is willing to take it on. Here, the risk that is being dealt with is that of price risk. The transfer of such a risk can therefore be speculative in nature or act as a hedge against price movement in a current or anticipated physical position. Derivatives or derivative securities are contracts which are written between two parties (counterparties) and whose value is derived from the value of underlying widely-held and easily marketable assets such as agricultural and other physical (tangible) commodities or currencies or short term and long-term and long term financial instruments or intangible things like commodities price index (inflation rate), equity price index or bond piece index. The counterparties to such contracts are those other than the original issuer (holder) of the underlying asset. Derivatives are also known as deferred delivery or deferred payment instruments. In a sense, they are similar to securitized assets, but unlike the latter, they are not the obligations which are backed by the original issuer of the underlying asset or security. It is easier to take a short position in derivatives than in other possible to combine them to match specific requirements, i.e., they are more easily amenable to financial engineering.

The values of derivatives and those of their underlying assets are closely related. Usually, in trading derivatives, the taking or making of delivery of underlying assets is not involved; the transactions are mostly settled by taking offsetting positions in the derivatives themselves. There is, therefore, no effective limit on the quantity of claims which can be traded in respect of underlying assets. Derivatives are off balance sheet instruments, a fact that is said to obscure the leverage and financial might they give to the party. They are mostly secondary market instruments and have little usefulness in mobilizing fresh capital by the companies (warrants, convertibles being the exceptions). Although the standardized, general, exchange-traded derivatives are being contracts which are in vogue and which expose the users to operational risk, counterparty risk, liquidity risk, and legal risk. There is also an uncertainty about the regulatory status of such derivatives.

There are bewilderingly complex varieties of derivatives already in existence, and the markets are innovating newer and newer ones continuously: plain, simple or straightforward, composite, joint or hybrid, synthetic, leveraged, mildly leveraged, customized or OTC-traded, standardized or organized-exchange traded. Although we are not going to discuss all of them, the names of certain derivatives may be noted here: futures, options, range forward and ratio range forward options, swaps, warrants, convertible bonds, credit derivatives, captions, swap ions, futures options, the ratio swaps, periodic floors, spread lock one and two, treasury-linked swaps, wedding bands three and six, inverse floaters, index amortizing swaps, and so on; because of their complexity, derivatives have become a continuing pain for the accounting person and a true mindbender for anyone trying to value them.

Definition :Contracts, whose values are to be derived from the asset covered by them (such as paddy), are commonly named as derivatives. These are basically, financial instruments whose value depends on the value of the other, more basic underling variable-such as commodity, stock, currency, etc A contract or an agreement for exchange of payments, whose values derives from the value of an underling asset or underling reference rates or indices. A derivative is a security whose price ultimately depends on that of another asset called underling. Derivatives means forward, futures or options contracts of predetermined fixed duration, linked for the purpose of contract fulfillment to the value of specified real or financial asset or to an index security. With securities Laws (second Amendment) Act, 1999, derivatives has been included in the definition of securities. The term derivative has been defined: In Securities Contract (Regulation) Act; as Derivatives include: a. A security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; b. A contract which derives its value from the prices, or index of prices, of underling securities; The international monetary fund defines derivatives as financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific financial risks can be traded in financial markets in their own right. The value of financial derivatives derives from the price of an underling item, such as asset or index. Unlike debt securities, no principle is advanced to be repaid and no investment income accrues.

History :Derivatives have probably existed ever since people have been trading with another. Forward contracting dates back at list to the twelfth century and may well have been around before then. However the development and growth of the derivatives products has been one of the most extraordinary things to happen in the financial markets place. In 1972, the Britton Woods agreement, the post-war pact that instituted a fixed exchange rate regime to the worlds major nations, effectively collapsed, when the US suspended the dollar convertibility into the gold. This resulted in exchange rate volatility derivative products have come quite handy. They have established themselves as irreplaceable tools to hedge against risks in currency, stock and commodity markets. The history of the derivatives can be traced to the Middle Ages when formers and traders in gains and other agriculture products used certain specific types of futures and forwards to hedge, their risks. Essentially the former wants to ensure that he receives a reasonable price for the grain that he would harvest (say) three to four months later. An oversupply will hurt him badly. For the grain merchant, the opposite is true. A fall in the agricultural production will push up the prices. It made sense therefore for the both of them to fix a price for the future. This was now the future market first developed in agricultural commodities such as cotton, coffee, petroleum, Soya bean, sugar and then to financial products such at interest rates, foreign exchange and shares. In 1995 the Chicago Board of Trade commenced trading in derivatives. For the derivatives market to develop, three kinds of participants are necessary. They are the hedgers, the speculators and the arbitrageurs. All the three must co-exist. For a hedging transaction to be completed three must be another person willing to take advantage of price movements. That is speculator. Contrary to the hedger who avoids uncertainties the speculator thrives on them. The speculator may loss plenty of money if his forecast goes wrong but a stand to gain enormously if he is proved corrects.

The third category of participant is the arbitrage, who looks at risk less profit by simultaneously buying and selling the same or similar financial products in different financial markets. With the government of India permitting futures trading in several commodities and with futures trading have arrived in the stock markets, index based derivative trading has finally arrived in India. For smooth functioning of derivative trading the government of India has commenced the process of dematerialization of shares, short sale facility, electronic fund transfer facility and rolling settlements in stock markets. This will hopefully bring transparency in the process of price discovery of the derivative and also attract a board spectrum of hedgers and speculators. The need for a Derivatives Market The derivatives market performs a number of economic functions: 1. 2. 3. 4. 5. They help in transferring risks from risk adverse people to risk oriented people. They help in the discovery of future as well as current prices. They catalyze entrepreneurial activity. They increase the volume traded in markets because of participation of risk adverse people in greater numbers. They increase savings and investment in the long run. Stock options and stock futures were introduced in both the exchange in the year 2001. Thus started trading in derivatives in India stock exchanges (both BSE & NSE) covering index options, index futures, stock options and futures at in the wake of the new millennium. In a short span of three years the volume traded in the derivative market has outstripped the turnover of the cash market.

NATURE OF THE PROBLEM:The turnover of the stock exchanges has been tremendously increasing from last 10 years. The number of trades and the number of investors, who are participating, have increased. investors are willing to reduce their risk, so they are seeking for the risk management tools. Prior to SEBI abolishing the BADLA system, the investors had this system as a source of reducing the risk, as it has many problems like no strong margining system, unclear expiration date and generating counter party risk. In view of this problem SEBI abolished the BADLA system. After the abolition of the BADLA system, the investors are seeking for a hedging system, which could reduce their portfolio risk. SEBI thought the introduction of the derivatives trading, as a first step it has set up a 24 member committee under the chairmanship of Dr.L.C.Gupta to develop the appropriate regulatory framework for derivative trading in India, SEBI accepted the recommendations of the committee on May -11- 1998 and approved the phased introduction of the derivatives trading beginning with stock index futures. There are many investors who are willing to trade in the derivative segment, because of its advantages like limited loss and unlimited profit by paying the small premiums. The

FUNCTIONS OF DERIVATIVES MARKET:

The following are the various functions that are performed by the derivatives markets. They are: Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. Derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. Derivative trading acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase savings and investment in the long run

DR. L. C. GUPTA COMMITTEE RECOMMENDATIONS:

The securities and exchange board of India (SEBI) appointed with Dr.L.C.Gupta as its chairman on 18th November, 1996 to develop regulatory frame work for derivatives trading in India and to suggest buy-laws for regulation and control of trading and settlement of derivatives contracts. The committee was also to focus on the financial derivatives and equity derivatives. The committee submitted its report in March 1998. The committee recommended introduction of derivatives market in a phased manner with the introduction of index futures and SEBI appointed a group with Prof.J.R. Varma as its chairman to recommended measures for risk containment in the derivative market in India. The board of SEBI in its meeting held on may 11, 1998 accepted the recommendation and approved the introduction of derivatives trading in India beginning with stock index futures. The board also approved the suggestive bye-laws recommended by the L.C.Gupta committee for regulation and control of trading and settlement of derivatives contracts. SEBI circulated the contents of the report in June 1998. The L.C.Gupta committee had conducted a wide market survey with contract of several entities relevant to derivatives trading like brokers, mutual funds, banks/FIIs, FIIs and merchant banks. The committee observation was that there is widespread recognition of the needs for derivatives products including equity, interest rate and currency derivatives products. However stock index future is the most preferred product followed by stock index options. Options on individual stocks are the third I the order of preference. The participants took interviews, mostly stated that their objective in derivative trading would be hedging. But there were also a few interested in derivatives dealing for speculation or dealing.

The recommendations of L.C.Gupta committee at a glance:

1. Stock index futures to be the starting point of equity derivatives. 2. SEBI to approve rules, buy-laws and regulations of the derivatives exchange level regulations. 3. SEBI need not be involved in framing exchange level regulations. 4. SEBI should create a special derivatives cell as it involves special knowledge and a derivatives advisory council may be created a tap outside exports for independent advice. 5. Legal restrictions on institutions, including mutual funds, on use of derivatives should be removed.

6.

Existing stock exchanges with cash trading to be allowed to trade derivatives if they meet

prescribed eligibility conditions-importantly a separate governing council and at least 50 members. 7. Two categories of members clearing members and non clearing members, with the later depending on the former for settlement of trades. This is to bring in more traders. 8. Broker members, dealers and salespersons in the derivatives market must have passed a certificate program to be registered with SEBI. 9. Co-ordination between SEBI and the RBI of financial derivatives market must have passed a certificate program registered with the SEBI. 10. Clearing corporation to be the centre piece of the derivative market, both for implementing the margin systems and providing trade guarantee. 11. Minimum net worth requirement of Rs.3 core for participants, maximum exposure limits for each broker/dealer on gross basis and capital adequacy requirement to be prescribed. 12. Mark to market margins to be collected before next days trading starts. 13. As a conservative measure, margins for derivatives purposes not to take into account positions in cash and futures, market and across all stock exchanges. 14. Margin to be systematically collected and not left to discretion of brokers/dealers. 15. Much stricter regulation for derivatives as compared to cash trading. 16. Strengthen cash market with uniform settlement cycles among all SEs and regulatory over weight. 17. Proper supervision of sales practices with regulation of every client with the dealer/broker and risk disclosure as the corner stone.

The Important Recommendations of L.C.Gupta Committee Need for coordinated development To quote from the report of the committee- the committees main concerns is with equity based derivatives but it has tried to examine the need for financial derivatives in a broader perspective. Financial transactions and asset-liability positions are exposed to three broad types of price risks, viz; Equities, market risk, also called systematic risk (which cannot be diversified away because the stock market as a hole may up or down from time to time). Interest rate risk (as in the case of fixed income securities, like treasury bond holding, whose market price could fall heavily it interest rates shot up),and

Exchange rate risk (where the position involves a foreign currency, as in the case of imports, exports, foreign loans or investments). The above classification of price risk explains the emergence of last to emerge. The recent report of the RBI appointed committee on capital account convertibility (Tara pore Committee) has expressed the view that time is ripe for introduction of futures in currencies and interest rates to facilitate various users to have access to a wide spectrum of cost-efficient hedge mechanism. In the some context, the Tara pore Committee has also opinioned that a system of trading in futures.is more transparent and cost efficient than the existing system (of forward contracts). Having a common trading infrastructure will have important advantages. The committee, therefore, feels that the attempt should be to develop an integrate market structure. (a) equity futures, (b) interest rate futures, (c) currency futures, respectively. Equity futures have been the

SEBI-RBI co-ordination mechanism

As all the three types of financial derivatives are set to emerge in India in the near future, it is desirable that such development be coordinated. The committee recommends that a formal mechanism be established for such coordination between SEBI and RBI in respect of all financial derivatives markets. This will help to avoid the problem of overlapping jurisdictions.

Derivatives exchange
The committee strongly favored the introduction financial derivatives to facilitate hedging in most cost-efficient way against market risk. There is a need for equity derivatives, interest rate derivative and currency derivatives; there should be phased introduction of derivatives products. To start with, index future to be introduced, which should be followed by options on index and later options on stocks. The derivative trading should take place on separate segment of the existing stock exchanges with an independent governing council where the number of trading members should be limited to 40 percent of the total number. Trading to be based on online screen trading with disaster recovery site. Per half hour capacity should 4-5 times the anticipated peck load. Percentage of broker-member in the council to be prescribed by the SEBI. The settlement of derivatives to be through an independent clearing corporate/clearing house, which should become counter party for all trades or alternatively guarantee the settlement of all the trades. The clearing corporation to have adequate risk containment measures and to collect margins through EFT. The derivative exchange to have both online trading and surveillance system. It should disseminate trade and price information on real time basis through two

information vending networks. The committee recommended separate membership for derivatives segment.

Specification regarding trading

Stock exchanges to stipulate in advance trading days and hours. Each contract to have pre determined expiration date and time. Contract expiration period may not exceed 12 months. The last trading day of the trading cycle to be stipulate in advance.

Membership eligibility criteria

The trading and clearing member will have stringent eligibility conditions. The committee recommended for separate clearing and non-clearing members. There should be separate registration with SEBI in addition to registration with stock exchange.

Clearing corporation
The clearing system to be totally re-structured. There should be no trading interests on board of CC. the maximum exposure limit to be liked to be deposit limit. To make the clearing system effective the committee stressed stipulation of initial and mark to market margins. Extent of margin prescribed to co-relate to the level of volatility of particular scrips traded. Since margin to be adjusted frequently based on market volatility margin payments to be remitted through EFT (Electronic Fund Transfer).

Marked to Market settlement

There should the system of daily settlement of futures contracts. Similarly the closing price of futures to be settled on daily basis. The final settlement price to be as per the closing price of underlying security.

Sales practices
Risk disclosure document with each client mandatory. Sales person to pass certification exam. Specific authorization from clients board of directors/trustees.

Trading parameters
Each order- buy/sell and open/close Unique order identification number

Regular market lot size, tick size Gross exposure limits to be specified Price bands for, each derivative contract Maximum permissible open position Off line order entry permitted

Brokerage
Prices on the system shall be exclusive of brokerage Maximum brokerage rates shall be prescribed by the exchange Brokerage to be separately indicated in the contracts note

Margins from Clients

Margins to be collected from all clients/trading members Daily margins to be further collected Losses if any to be charged clients/TMs and adjusted against margins

Other recommendations
Removal of regulatory prohibition on the use of derivative by mutual funds while making the trustees responsible to restrict the use of derivatives by mutual funds only to hedging and portfolio balancing and not for speculation. Creation of derivative cell, a derivative advisory committee, and economic research wing by SEBI.

Derivatives Market
There are two types of derivative market: 1. Exchanged based market. 2. Over the counter (OTC) markets.

Exchanged based market and clearing houses

These markets are developed, highly organized and regulated by their own owners who are usually traders. It is the exchange with decides on the 1. Standard units currency, size maturity to be traded and the times when trading begin and cease each day.

2. 3.

Rules of the clearing house through which all deals are routed. Margin requirements that all members have to deposit with the clearing house to ensure

that the default is unlikely.

Mechanics of the markets

Example: In S&P 500 stock index futures contracts are tied to the standard and Poors composite stock index. The futures have standard maturity and the exchange prescribes rules for settlement of any outstanding contracts in cash on the expiration dates. In contrast, OTC derivatives are customized to meet the specific needs of the counterparty. A financial swap is a good example of OTC derivative. An important difference between exchange traded and OTC derivative is the credit risk. In the OTC markets, one party is exposed to the risk that his counterparty may default on the contract. In case of default there will be need to replace the counterparty that is also knows as replacement risk. The risk becomes insignificant in case of exchange-traded derivatives.

Market participants in DERIVATIVES

1. Hedgers use for protecting (risk-covering) against adverse movement. Hedging is a mechanism to reduce price risk inherent in open positions. Derivatives are widely used for hedging. A hedge can help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing the risk.

2. Speculators to make quick fortune by anticipating/forecasting future market movements. Speculators wish to bet on future movements in the price of an asset. Futures and

3. options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. Speculators on the other hand arte those classes of investors who willingly take price risks to profit from price changes in the underlying. 4. Arbitrageurs to earn risk-free profits by exploiting market imperfections. Arbitrageurs profit from price differential existing in two markets by simultaneously operating in the two different markets. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets.

Indian derivatives market

Indian derivatives market, through has a history of more than a century, is still in its nascent stage vis--vis global derivatives market. The first step towards development of derivatives markets in India is the appointment of L.C.Gupta committee by SEBI to go into the question of derivatives trading and to suggest various policy and regulatory measures that need to be undertaken before such trading is formally allowed. We have today active derivative markets in the segment of stock and foreign currency while trading in commodities is in the process of stabilization. Stock market derivative have indeed picked up momentum and the volumes under futures on individual stock have reached global proportions. We have also well established OTC currency derivatives market. In a net shall we may say that derivatives market in India an evolving phase.

Derivatives products
Derivatives are in fact as old as trading but their Dramatic rise in popularly took place in the last thirty years. The breakdown of Britton woods system of fixed exchange rates and the resulting volatility in forex markets put the derivative on a pedestal. The key reason for their popularly has been that derivatives such as futures and options have indeed filed a gap in the financial system. Prier to their emergence, there was no mechanism for that could protect to trades, banks, etc, from price risk. Secondly, they are highly flexible and thus have a universal applicability. For instance, stock market index futures provide insurance against stock price risk due to market fluctuations, while currency futures provide insurance against price risk due to exchange rate fluctuations.

All derivatives can be classified based on the following features: 1. Nature of contracts 2. Underlying assets 3. Market mechanism

Underlying assets: Most derivatives are based on one of the following four types of assets:
Foreign exchange Interest being financial assets Commodities (grain, coffee, cotton, wool, etc.) Equities Precious metals (gold, silver, copper, etc.) Bonds of all types

Market mechanism:
OTC products

Exchange traded products Role of clearing house

A clearing house is a key institution in the derivatives market. It performs two critical functions. Offering customers deals and assuring the financial integrity of the transactions that take place in the exchange. The clearing house could be a part of the exchange of a separate body coordinating with the exchange.

Trading in derivatives
Indian securities markets have indeed waited for too long for derivatives trading to emerge. Mutual funds, FIIs, and other investors who are deprived of hedging opportunities will now have a derivatives market to bank on. First to change are the globally popular variety index futures. While derivatives markets flourished in the developed world Indian markets remain deprived of financial derivatives to the beginning of this millennium. While the rest of the world progressed by the leaps and the bonds on the derivatives front, Indian market lagged behind. Having emerged in the market of the developed nations in the 1970s, derivatives market grew from strength to strength. The trading volumes nearly doubled in every three years making it a

trillion-dollar business. They become so ubiquitous that, now one cannot think of the existence of financial markets without derivatives. Two board approaches of SEBI is to integrate the securities market at the national level, and also to diversify the trading banks, financial institutions, insurance companies, mutual funds, primary dealers etc, choose to transact through the exchanges. In this context the introduction of derivatives trading through Indian stock exchanges permitted by SEBI in 2000 AD is real landmark. SEBI first appointed the L.C.Gupta committee in 1998, to recommend the regulatory frame work for derivatives recommended suggestive buy-laws for regulation and control of trading and settlements of derivatives contracts. The board of SEBI in its meeting held on May 11, 1998 accepted the recommendations of the Dr.L.C.Gupta, committee and approved the phased introduction of derivatives trading in India beginning with stock index futures. The board also approved the suggestive Bye-laws recommended by the committee for regulation and control of trading and settlement of derivatives contracts. SEBI subsequently the J.R.Varma committee to recommended risk containment measures in the Indian stock index futures market. The report was submitted in the same year (1998) in the month of November by the said committee.

Derivatives market today:

Foreign currency options in currency pairs other than rupee were the first options permitted by RBI. The RBI has permitted options, interest rate swaps, currency swaps, and other risk reduction OTC derivative products. Beside the forward market to currencies has been a vibrant market in India for several decades. In addition the forward markets commission has allowed the setting up of commodities futures exchanges. Today we have 18 commodities exchanges most of which trade futures e.g. the Indian Paper and Spice Trader Association (IPSTA) and the Coffee Owners Futures Exchange of India (COFEI). The year 2000 heralded the introduction of exchange traded equity derivative products.

TYPES OF DERIVATIVES There are four most commonly traded derivative instruments: Forwards, Futures, Options, and Swaps. Futures and options are actively traded on many exchanges. Forward contracts and swaps and certain kind of options are mostly traded as over the counter (OTC) products.

DERIVATIVES

OPTIONS

FUTURES

SWAPS

FORWARDS

PUT OPTION CALL OPTION

COMMODITY SECURITY

INTEREST RATE CURRENCY

Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products, in recent years, the market for financial derives has grown tremendously in terms of variety of instruments depending on their complexity and also turnover. In this class of equity derivatives the world over, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are maor users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indices with various portfolios and ease of use. The lower costs associated with index derivatives vis--vis derivative products based on individual securities is another reason for their growing use. The most commonly used derivatives contracts are forwards, futures and options. Here we take a brief look at various derivatives contracts that have come to be used.

CLASSIFICATION OF DERIVATIVES:

1. 2.

ETF (Exchange Traded Fund) OTF ( Out Side Traded Fund)

ETF (Exchange Traded Fund): An exchange-traded fund (or ETF) is an investment vehicle traded on stock exchanges, much like stocks. An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Futures Options

OTF (Out Side Traded Fund): An Outside traded fund (or OTF) is an investment vehicle traded out side or at the counter much like stocks. The net asset value of its underlying assets over the course of the trading day may change. Forwards Swaps Warrants Leaps Baskets

FORWARDS: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price.

FUTURES: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchanged-traded contracts.

OPTIONS: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. WARRANTS: Options generally have lives of up to one year; the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years. BASKETS: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options. SWAPS: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts.

The two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash flows between the Parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite Direction.

SWAPTIONS: Swap ions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swap ion is an option on a forward swap. Rather than have calls and puts, the swap ions market has receiver swap ions and payer swap ions. A receiver swap ion is an option to receive fixed and pay floating. A payer swap ion is an option to pay fixed and receive floating. REGULATORY FRAMEWORK: The trading of derivatives is governed by the provisions contained in the SCRA, the SEBI Act, the rules and regulations framed there under and the rules and bye-laws of stock exchanges.

Securities contracts Regulation Act, 1956: SCRA aims at preventing undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India. The term securities has been defined in the SCRA. As per section 2(h), the securities include: 1. Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. 2. Derivative 3. Units or any other instrument issued by any collective investment scheme to the investors in such schemes 4. Government securities 5. Such other instruments as may be declared by the Central Government to be securities 6. Rights or interests in securities.

Derivative is defined to include: A security derived from a debt instrument, share and loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. A contract which derives its value from the prices or index of prices, of underlying securities. Section 18A provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivatives shall be legal and valid if such contracts are: Traded on a recognized stock exchange settled on the clearinghouse of the recognized stock exchange, in accordance with the rules and byelaws of such stock exchanges.

Securities and exchange board of India act, 1992:

SEBI act, 1992 provides for establishment of securities and exchange board of India (SEBI) with statutory powers for (a) protecting the interests of investors in securities (b) Promoting the development of the securities market and (c) regulating the securities market. Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit.

In particular, it has powers for: Regulating the business in stock exchanges and any other securities markets. Registering and regulating the working of stockbrokers, sub broker etc. Promoting and regulating self-regulatory organizations. Prohibiting and fraudulent and unfair trade practices.

Calling information from, undertaking inspection, conducting inquiries and audits the stock exchanges, mutual funds and other persons associated with the securities marker and intermediaries and self-regulatory organizations in the securities market performing such functions and exercising according the securities contracts (regulation) act, 1956, as may be delegated to it by the central government.

SEBI (stock brokers and sub-brokers) regulations, 1992: In this we shall have a look at the regulations that apply to brokers under the SEBI regulations. Brokers

A broker is an intermediary who arranges to buy and sell securities on behalf of clients (the buyer and the seller). According to Section 2(e) of the SEBI (stockbrokers and sub-brokers) rules 1992, s Stock Broker means a member of a recognized stock exchange. NO stockbroker is allowed to buy, sell or deal in securities, uses he or she holds a certificate of registration granted by SEBI through a stock exchange of which he or she is admitted as a member. SEBI may grant a certificate to a stock-broker (as per SEBI rules, 1992) subject to the conditions that: 1. He holds the membership of any stock exchange: 2. He shall abide by the rules, regulations and byelaws of the stock exchange or stock exchanges of which he is a member. 3. In case of any change in the status and condition, he shall contain prior permission of SEBI to continue to buy, sell or deal in securities in any stock exchange; 4. He shall pay the amount of fees for registration in the prescribed manner; and 5. HE shall take adequate steps for redress of grievances of the investors within one month of the date of the complaint and keep SEBI informed about the number, nature and other particulars of the complaints. As per SEBI (stock brokers and sub-brokers) regulations, 1992, SEBI shall take into account for considering the grant of a certificate all matters relating to buying, selling, or dealing in securities and in particular the following, namely whether the stockbroker-(a) is eligible to be admitted as a member of a stock exchange; (b)has the necessary infrastructure like adequate office space, equipment and man power to effectively discharge his activities; (c) has any past experience in the business of buying selling or dealing in securities; (D) is subjected to disciplinary proceedings under the rules, regulations and bye-laws of a stock exchange with respect to his business as a stock-brokers involving either himself or any of his partners, directors or employees.

Regulations for derivatives trading:

SEBI set up a 24-member committee under the chairmanship of Dr.L.C.Gupta to develop the appropriate regulatory framework for derivatives trading in India. The committee submitted its

report in March 1998. On May 11, 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index futures. SEBI also approved the suggestive bye-laws recommended by the committee for regulation and suggestive bye-laws recommended by the committee for regulation and control of trading and settlement of derivatives contracts.

The provisions in the SC(R) A and regulatory framework developed there under govern trading in securities.

The amendment of the SC(R)A to include derivatives within the ambit of securities in the securities in the SC(R)A made trading in derivatives possible within the framework of that Act.

Any Exchange fulfilling the eligibility criteria as prescribed in the L.C. Gupta committee report may apply to SEBI for grant of recognition under section 4 of the SC(R) A, 1956 to start trading derivatives. The derivatives exchange/segment should huge a separate governing council and representation of trading/clearing members shall be limited to maximum of 40% of the total members of the governing council. The exchange shall regulate the sales practice of its members and will obtain prior approval of SEBI before start of trading in any derivative contact.

The Exchange shall have minimum 50 members. The members of an existing segment of the exchange will not automatically become the members of the derivative segment need to fulfill the eligibility conditions as laid down by the L.C.Gupta committee.

The clearing and settlement of derivatives trades shall be through a SEBI approved clearing corporation/house. approval. Clearing corporations/houses complying with the eligibility conditions laid down by the committee have to apply SEBI for grant of

Derivative brokers/dealers and clearing members are required to seek registration from SEBI. This is in addition to their registration a brokers of existing stock exchanges. The minimum net worth for clearing members of the derivatives clearing corporation/house shall be Rs.300 lakhs. The net worth of the member shall be computed as follows:

Capital Free reserves Less non-allowable assets viz,

(a) Fixed assets (b) Pledged securities (c) Members card (d) Non-allowable securities (unlisted securities) (e) Bad deliveries (f) Doubtful debts and advances (g) Prepaid expenses (h) Intangible assets (i) 30% marketable securities The minimum contract value shall not be less than Rs.2 lakhs. Exchanges should also submit details of the futures contract they propose to introduce. The initial margin requirement exposure limits linked to capital adequacy and SEBI/Exchange shall prescribe margin demands related to the risk of loss on the position from time to time. The L.C.Gupta committee report requires strict enforcement of Know you customer rule and requires that every client shall be registered with the derivatives broker. The members of the derivatives segment are also required to make their clients aware of the risks involved in derivatives trading by issuing to the client the Risk Disclosure Document and obtain a copy of the same duly signed by the client. The trading members are required to have qualified approved user and sales person who have passed a certification program approved by SEBI.

REGULATION FOR CLEARING AND SETTLEMENT:

1) The L.C.Gupta committee has recommended that the clearing corporation should interpose itself between both legs of every trade, becoming the legal counter party to both or alternatively should provide an unconditional guarantee for settlement of all trades. 2) The clearing corporation should ensure that none of the Board members has trading interests. 3) The definition of net-worth as prescribed by SEBI needs to be incorporated in the application/regulations of the clearing corporation 4) The regulations relating to arbitration need to be incorporated in the clearing corporations regulations.

5) The clearing corporation in its regulations must incorporate specific provision/chapter relating to declaration of default. 6) The regulations relating to investor protection fund for the derivatives market must be included in the clearing corporation application/regulations. 7) The clearing corporation should have the capabilities to segregate upfront initial margins deposited by clearing members for trades on their own account and on account of his clients. The clearing corporation shall hold the clients margin money in trust for the clients purposes only and should not allow its diversion for any other purpose. This condition must be incorporated in the clearing corporation regulations 8) The clearing member shall collect margins from his constituents (client/trading members). He shall clear and settle deals in derivative contracts on behalf of the constituents only on the receipt of such minimum margin. 9) Exposure limits based on the value at its risk concept will be used and the exposure limits will be continuously monitored. These shall be within the limits prescribed by SEBI from time to time. 10) The clearing corporation must lay down a procedure for periodic review of the new worth of its members. 11) The clearing corporation must inform SEBI how it reposes to monitor the exposure of its members in the underlying market. 12) Any changes in the byelaws, rules or regulations, which are covered under the suggestive bye-laws for regulations and control of trading and settlement of derivatives contracts, would require prior approval of SEBI.

Product specifications BSE-30 Sensex Futures:

Contract Size -Rs.50 times the Index Tick size 0.1 points or Rs.5 Expiry day last Thursday of the month Settlement basis cash settled Contract cycle 3 months Active contracts 3 nearest months

Product Specifications S&P CNX Nifty Futures:

Contract Size Rs.200 times the Index Tick Size 0.05 points or Rs.10

Expiry day last Thursday of the month Settlement basis cash settled Contract cycle - 3 month Active contracts 3 nearest months

Membership:
Membership for the new segment in both the exchanges is not automatic and has to be separately applied for: Membership is currently open on both the exchanges. All members will also have to be separately registered with SEBI before they can be accepted.

Membership Criteria National Stock Exchange (NSE)

Clearing Member (CM) Net worth Rs.300 lakhs Interest-Free Security Deposits Rs.25 lakhs Collateral Security Deposit Rs.25 lakhs

In addition for every TM he wishes to clear for the CM has to deposit Rs.10 lakhs. Trading Member (TM) Net worth Rs.100 lakhs Interest-Free Security Deposit Rs.8 lakhs Annual Subscription fees Rs.1 lakh

Membership Criteria Mumbai Stock Exchange (BSE) Clearing Member (CM) Net worth 300 lakhs Interest-Free Security Deposit Rs.25lakhs

Collateral Security Deposit Rs.25 lakhs Non-refundable Deposit Rs.5 lakhs Annual Subscription Fees Rs.50, 000.

In addition for every TM he wishes to clear for the CM has to deposit Rs.10 lakhs with the following break-up. i. ii. Cash Rs.25 lakhs Cash Equivalents Rs.25 lakhs

iii. Collateral Security Deposit Rs.5 lakhs Trading Member (TM) Net worth Rs.50 lakhs Non-refundable deposit Rs.3 lakhs Annual Subscription Fees Rs.25 thousand The Non-refundable fee paid by the members is exclusive and will be a total of Rs.8 lakhs if the member has both clearing and trading rights.

TRADING SYSTEMS: NSEs trading system for its futures and options segment is called NEAT F&O. It is based on the NEAT system for the cash segment. BSEs trading system for its derivatives segment is called DTs. It is built on a platform different from the BOLT system though most of the features are common.

RISK MANAGEMENT by using DERIVATIVES: Derivatives are high-risk instruments and hence the exchanges have put a lot of measures to control this risk. The most critical aspect of risk management is the daily monitoring of price and position and the margining of those positions.

NSE used the SPAN (Standard Portfolio Analysis of Risk). SPAN is a system that has origins at the Chicago mercantile exchange, one of the oldest derivative exchanges in the world.

The objective of SPAN is to monitor the positions and determine the maximum loss that a stock can incur in a single day. This loss is covered by the exchange by imposing mark to market margins. SPAN evaluates risk scenarios, which are nothing but market conditions. The specific set of market conditions evaluated, are called the risk scenarios, and these are defined in terms of; a) How much the price of the underlying instrument is expected to change over one trading day, and b) How much the volatility of that underlying price is expected to change over one trading day? Based on the SPAN measurement, margins are imposed and risk covered. Apart from this, the exchange will have a minimum base capital of Rs.50 lakhs and brokers need to pay additional base capital if they need margins about the permissible limits. LOT SIZES OF CONTRACTS: Underlying S&P CNX Nifty CNX IT Bank Nifty Symbol Nifty CNX IT BANK NIFTY Market Lot 100 100 100

Derivatives on Individual Securities: Underlying ABB Ltd. Associated cement Co. Ltd Allahabad Bank Alok Industries Ltd. Andhra Bank Arvind Mills Ltd. Ashok Leyland Ltd. Aurobindo pharma Ltd. Bajaj Auto Ltd. Bank Of Baroda Bank of India Bharat Electronics Ltd. Symbol ABB ACC ALBK ALOKTEXT ANDHRABANK ARVINDMILL ASHOKLEY AUROPHARMA BAJAJAUTO BANKBARODA BANKINDIA BEL Market Lot 100 375 2450 3350 2300 4300 4775 350 100 1400 1900 275

Bharti Tele-Ventures Ltd. Bharat Heavy Electricals Ltd. Ballarpur Industries Ltd. Bongaigaon Refinery Ltd. Bharat Petroleum Corporation Ltd. Canara Bank Century Textiles Ltd. CESC Ltd. Chambal fertilizers Ltd. Chennai Petroleum Corp Ltd. Cipla Ltd. Colgate Palmolive (I) Ltd. Corporation Bank Cummins India Ltd. Dabur India Ltd. Divis Laboratories Ltd. Dr. Reddys Laboratories Ltd. Escorts India ltd. Essar Oil Ltd. Federal Bank Ltd. GAIL (INDIA) Ltd. Great Eastern Shipping Co.Ltd. GlaxoSmithKline Pharma Ltd. Gujarat Narmada Fertilizer Co. Ltd. Grasim Industries Ltd. Gujarat Ambuja Cement Ltd. HCL Technologies Ltd Housing Development Finance Corporation Ltd. HDFC Bank Ltd. Hero Honda Motors Ltd. Hindalco Industries Ltd. Hindustan Lever Ltd. Hindustan Petroleum Corporation Ltd. ICICI Bank Ltd. I-FLEX Solutions Ltd. Industrial Development Bank Of India Ltd. Infrastructure Development Finance Co. Ltd. IFCI Ltd. Indian Hotels Co.Ltd. India Cements Ltd. Indusind Bank Ltd. Infosys Technologies Ltd. Indian Petrochemicals Corp. Ltd Indian Over Seas Bank Indian Oil Corp Ltd. ITC Ltd. IVRCL Infrastructure & Projects Ltd. J & K Bank Ltd. Jet Airways (INDIA) Ltd.

BHARTI BHEL BILT BONGAIREFN BPCL CANBK CENTURYTEX CESC CHAMBALFERT CHENNPETRO CIPLA COLGATE CORPBANK CUMMINSIND DABUR DIVISLAB DRREDDY ESCORTS ESSAROIL FEDERALBNK GAIL GESHIPPING GLAXO GNFC GRASIM GUJAMBCEM HCLTCH HDFC HDFCBANK HEROHONDA HINDALCO HINDLEVER HINDPETRO ICICIBANK I-FLEX IDBI IDFC IFCI INDHOTEL INDIACEM INDUSINDBK INFOSYSTCH IPCL IOB IOC ITC IVRCLINFRA J&KBANK JETAIRWAYS

1000 150 1900 4500 1100 1600 425 550 6900 900 1250 525 1200 950 2700 250 400 2400 5650 1300 750 600 300 2950 175 2062 650 150 200 400 1595 1000 1300 350 150 2400 2950 7875 1750 1450 3850 200 1100 2950 600 1125 500 300 400

Jindal Steel & Power Ltd. Jaiprakash HyDro-Power Ltd. Jindal Stainless Ltd. The Karnataka Bank Ltd. LIC Housing Finance Ltd. MahinDra & MahinDra Ltd. Maharashtra Seamless Ltd. Marti Udyog Ltd. Matrix Laboratories Ltd. Mphasis BFL Ltd. Mangalore Refinery and Petrochemicals Ltd. Mahanagar Telephone Nigam Ltd. Nagarjuna Fertilizers & Chemicals Ltd. National Aluminum Co. Ltd. NDTV Ltd. Neyveli Lignite Corporation Ltd. Nicolas Piramal India Ltd. National Thermal Power Corp. Ltd. Oil & Natural Gas Corp. Ltd. Orchid Chemicals Ltd. Oriental Bank Of Commerce Patni Computer System Ltd. Punjab National Bank Punjab Lloyd Ltd. Polaris Software Lab Ltd. Ranbaxy Laboratories Ltd. Reliance Energy Ltd. Reliance Capital Ltd. Reliance Industries Ltd. Satyam Computer Services Ltd. State Bank Of India Shipping Corporation Of India Ltd. Siemens Ltd. SRF Ltd. Strides Arcolab Ltd. Sterlite Industries (I) Ltd. Sun Pharmaceuticals India Ltd. Suzlon Energy Ltd. Syndicate Bank Tata Chemicals Ltd. Tata Consultancy Services Ltd. Tata Motors Ltd. Tata Power Co. Ltd Tata Steel Ltd. Tata Tea Ltd. Titan Industries Ltd. TVS Motor Company Ltd. Union Bank Of India UTI Bank Ltd. Vijaya Bank

JINDALSTEL JPHYDRO JSTAINLESS KTKBANK LICHSGFIN M&M MAHSEAMLES MARUTI MATRIXLABS MPHASISBFL MRPL MTNL NAGARFERT NATIONALUM NDTV NEYVELILIG NICOLASPIR NTPC ONGC ORCHIDCHEM ORIENTBANK PATNI PNB PUNJLLOYD POLARIS RANBAXY REL RELCAPITAL RELIANCE SATYAMCOMP SBIN SCI SIEMENS SRF STAR STER SUNPHARMA SUZLON SYNDIBANK TATACHEM TCS TATAMOTORS TATAPOWER TATASTEEL TATATEA TITAN TVSMOTOR UNIONBANK UTIBANK VIJAYABANK

125 6250 2000 1250 1700 625 600 400 1250 800 8920 1600 14000 1150 1100 5900 1045 1625 225 1050 1200 650 600 1500 1400 800 550 550 150 600 250 1600 375 1500 850 875 225 200 3800 1350 250 412 400 675 275 411 2950 2100 450 6900

Videsh Sanchar Nigam Ltd. Wipro Ltd. Wockhardt Ltd.

VSNL WIPRO WOCKPHARMA

525 600 600

LOT SIZES OF SELECTED COMPANIES FOR ANALYSIS CODE LOT SIZE 400 DRREDDY INFOSYSTCH 200 COMPANY NAME Dr.Reddy`s Pharmaceuticals Ltd. Infosys Technologies Ltd.

The following tables explain about the trades that took place in futures and options between 05/05/2008 and 10/06/2008. The table has various columns, which explains various factors involves in derivatives trading. Date the day on which trading took place Closing premium premium for the day Open interest No. of Options that did not get exercised Traded quantity No. of futures and options traded on that day N.O.C No. of contacts traded on that day Closing price the price of the futures at the end of the trading day

THE COMPANY

COMPANY PROFILE

ABOUT SHAREKHAN LIMITED: Sharekhan Limited is one of the fastest growing financial services providers with a focus on equities, derivatives and commodities brokerage execution on the National Stock Exchange of India Ltd. (NSE), Bombay Stock Exchange Ltd. (BSE), National Commodity and Derivatives Exchange India (NCDEX) and Multi Commodity Exchange of India Ltd. (MCX). Sharekhan provides trade execution services through multiple channels - an Internet platform, telephone and retail outlets and is present in 280 cities through a network of 704 locations. The company was awarded the 2005 Most Preferred Stock Broking Brand by Ahwaz Consumer Vote. ORIGIN:
Share khan traces its lineage to SSKI, an organization with more than decades of trust and

credibility in the stock market. Pioneers of online trading in India- Sharekhan.com was launched in 2000 and is now the second most visited broking site in India. Has one of the largest networks of Share shops in the country. SHAREHOLDING PATTERN: SHAREHOLDERS CITI Venture Capital and other Private Equity Firm IDFC Employees MANAGEMENT TEAM CONSISTS OF: NAME Tarun Shah Mr. Pathik Gandotra Mr. Rishi Kohli Jaideep Arora Shankar Vailaya POST Chief Executive Officer Head Of Research Vice President Of Equity Derivative Director- Products And Technology Director- Operation HOLDINGS 81% 9% 10%

Sharekhan Limited offers blend of tradition and technology like Share shops, dial-n-trade and online trading- where there is choice of three trading interfaces which are speed trade for active trader, web based classic interface for investor, web based applet- fast trade for investor. Share

khan Limited was formerly known as SSKI Investor Services Private Limited. The company is based in Mumbai, India and its address is- A-206 Phoenix House, 2nd Floor Senapati Bapat Marg, Lower Parel Mumbai, 400 013. India. Phone: 91 22 24982000 Fax: 91 22 24982626

www.sharekhan.com

ADVANCED TECHNOLOGY USED BY SHAREKHAN: Sharekhan has selected Aspect EnsemblePro from the Aspect Software Unified IP Contact Center product line, a unified contact centre solution delivering advanced multichannel contact capabilities, because it provided the best total value over other solutions evaluated. It enabled Sharekhan to meet customer service needs for inbound call handling, voice self service, predictive outbound dialing, call blending, call monitoring and recording, and creating outbound marketing campaigns, among other capabilities. This helps them to Increased agent efficiency and productivity. Enabled company to execute proactive customer service calls and expand services offered to customers. Enhanced call monitoring for improved service quality Financial services are a highly competitive and volume-driven industry which demands high standards of customer service, effective consultation and quick deliverables. This is something Share khan Limited, a financial services provider based in India, understands. The company offers several user-friendly services for customers to manage their stock portfolios, including online capabilities linked to an information database to help customers confidently invest, and inbound customer services using voice self-service technology and customer service agents handling telephone orders from clients.

With a customer base of more than 500000, and a employee of 3100 Share khan continues to grow at a fast pace. Customer satisfaction is a top priority in Share khans agenda. Its primary objective To help and support its customers in managing their portfolio in the best possible manner through quality advice, innovative product and superior service. Scheme which are provided by Share khan cover almost every segment of the customerSCHEME First Step Classic Speed Trade Platinum Circle COMPANY BACKGROUND: Share khan is the retail broking arm of SSKI, securities pvt ltd. SSKI owns 56% in share Into broking since 80 years. Focused on providing equity solutions to every segment. Largest ground network of 210 branded share shops in 90 cities. INVESTOR New Comer Trade Occasionally Day Trader High Net Worth Individuals

khan, balance ownership is HSBC, first caryle, and Intel pacific.

STOCK MARKETS IN INDIA: Stock exchanges are the perfect type of market for securities whether of government and semi- govt bodies or other public bodies as also for shares and debentures issued by the joint-stock companies. In the stock market, purchases and sales of shares are affected in conditions of free competition. Government securities are traded outside the trading ring in the form of over the counter sales or purchase. The bargains that are struck in the trading ring by the members of the stock exchanges are at the fairest prices determined by the basic laws of supply and demand.

Definition of Stock Exchange:

Stock Exchange means anybody or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. The securities include: Shares of public company.

 Government securities. Bonds HISTORY OF STOCK EXCHANGES: The only stock exchanges operating in the 19 th century were those of Mumbai setup in 1875 and Ahmadabad set up in 1894. These were organized as voluntary non-profit-making associations of brokers to regulate and protect their interests. Before the control on securities under the constitution in 1950, it was a state subject and the Bombay securities contracts (control) act of 1925 used to regulate trading in securities. Under this act, the Mumbai stock exchange was recognized in 1927 and Ahmadabad in 1937. During the war boom, a number of stock exchanges were organized. Soon after it became a central subject, central legislation was proposed and a committee headed by A.D.Gorwala went into the bill for securities regulation. On the basis of the committees recommendations and public discussion, the securities contract (regulation) act became law in 1956.

FUNCTIONS OF STOCK EXCHANGES: Stock exchanges provide liquidity to the listed companies. By giving quotations to the listed companies, they help trading and raise funds from the market. Over the hundred and twenty years during which the stock exchanges have existed in this country and through their medium, the central and state government have raised crores of rupees by floating public loans. Municipal corporations, trust and local bodies have obtained from the public their financial requirements, and industry, trade and commerce- the backbone of the countrys economy-have secured capital of cores of rupees through the issue of stocks, shares and debentures for financing their day-to-day activities, organizing new ventures and completing projects of expansion, diversification and modernization. By obtaining the listing and trading facilities, public investment is increased and companies were able to raise more funds. The quoted companies with wide public interest have enjoyed some benefits and assets valuation has become easier for tax and other purposes. VARIOUS STOCK EXCHANGES IN INDIA:

At present there are 23 stock exchanges recognized under the securities contracts (regulation), Act, 1956. Out of these major two Stock Exchanges are:

1. NSE (National Stock Exchange) 2. BSE (Bombay Stock Exchange)

NSE (National Stock Exchange): The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which 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 Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000. NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the main objectives of:

Establishing a nation-wide trading facility for equities and debt instruments. Ensuring equal access to investors all over the country through an appropriated communication network. Providing a fair, efficient and transparent securities market to investors using electronic trading systems. Enabling shorter settlement cycles and book entry settlement systems, and Meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technology, have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. It's that force which is guiding the industry towards new horizons and greater opportunities.

BSE (Bombay Stock Exchange): The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association". It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making Association of Persons (AOP) and is currently engaged in the process of converting itself into demutualised and corporate entity. It has evolved over the years into its present status as the premier Stock Exchange in the country. It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. of India under the Securities Contracts (Regulation) Act 1956.The Exchange, while providing an efficient and transparent market for trading in securities, debt and derivatives upholds the interests of the investors and ensures redresses of their grievances whether against the companies or its own member-brokers. It also strives to educate and enlighten the investors by conducting investor education programmers and making available to them necessary informative inputs. A Governing Board having 20 directors is the apex body, which decides the policies and regulates the affairs of the Exchange. The Governing Board consists of 9 elected directors, who are from the broking community (one third of them retire ever year by rotation), three SEBI nominees, six public representatives and an Executive Director & Chief Executive Officer and a Chief Operating Officer. The Executive Director as the Chief Executive Officer is responsible for the day-to-day administration of the Exchange and the Chief Operating Officer and other Heads of Department assist him. The Exchange has inserted new Rule No.126 A in its Rules, Byelaws pertaining to constitution of the Executive Committee of the Exchange. Accordingly, an Executive Committee, consisting of three elected directors, three SEBI nominees or public representatives, Executive Director & CEO and Chief Operating Officer has been constituted. The Committee considers judicial & quasi matters in which the Governing Board has powers as an Appellate Authority, matters regarding annulment of transactions, admission, continuance and suspension of member-brokers, declaration of a member-broker as defaulter, norms, procedures and other matters relating to arbitration, fees, deposits, margins and other monies payable by the member-brokers to the Exchange, etc. REGULATORY FRAME WORK OF STOCK EXCHANGE:

A comprehensive legal framework was provided by the Securities Contract Regulation Act, 1956 and Securities Exchange Board of India 1952. Three tier regulatory structure comprising Ministry of finance The Securities And Exchange Board of India Governing body

MEMBERS OF THE STOCK EXCHANGE: The securities contract regulation act 1956 has provided uniform regulation for the admission of members in the stock exchanges. The qualifications for becoming a member of a recognized stock exchange are given below:

The minimum age prescribed for the members is 21 years. He should be an Indian citizen. He should be neither a bankrupt nor compound with the creditors. He should not be convicted for fraud or dishonesty. He should not be engaged in any other business connected with a company. He should not be a defaulter of any other stock exchange. The minimum required education is a pass in 12th standard examination.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI): The securities and exchange board of India was constituted in 1988 under a resolution of government of India. appointed by the central government. With the coming into effect of the securities and exchange board of India act, 1992 some of the powers and functions exercised by the central government, in respect of the regulation of stock exchange were transferred to the SEBI. It was later made statutory body by the SEBI act 1992.according to this act, the SEBI shall constitute of a chairman and four other members

OBJECTIVES AND FUNCTIONS OF SEBI:

To protect the interest of investors in securities. Regulating the business in stock exchanges and any other securities market.

Registering and regulating the working of intermediaries associated with securities market as well as working of mutual funds. Promoting and regulating self-regulatory organizations. Prohibiting insider trading in securities. Regulating substantial acquisition of shares and takeover of companies. Performing such functions and exercising such powers under the provisions of capital issues (control) act, 1947 and the securities to it by the central government.

SEBI GUIDELINES TO SECONDARY MARKETS:

Board of Directors of Stock Exchange has to be reconstituted so as to include nonmembers, public representatives and government representatives to the extent of 50% of total number of members.

Capital adequacy norms have been laid down for the members of various stock exchanges depending upon their turnover of trade and other factors. All recognized stock exchanges will have to inform about transactions within 24 hr

DATA ANALYSIS & PRESENTATION

Futures of INFOSYS Date OPEN Rs. 05-july-2011 1755 06-july-2011 07- july-2011 08- july-2011 09- july-2011 12- july-2011 13- july-2011 14- july-2011 15- july-2011 16- july-2011 20- july-2011 21- july-2011 22- july-2011 23- july-2011 26- july-2011 27- july-2011 28- july-2011 29- july-2011 30- july-2011 02- aug-2011 03- aug-2011 04- aug-2011 05-aug-2011 06-aug-2011 09-aug-2011 10-aug-2011 1754.95 1829.95 1795 1748 1800 1765 1760 1811 1874 1840 1860 1835 1800 1785.3 1857 1877 1880 1890 1946 1955 1900 1890 1990 1946 1900 HIGH Rs. 1780 1833 1839.9 1795 1772 1800 1794 1808.9 1877.6 1895.1 1884.5 1885 1835 1800 1856 1869.9 1900 1900 1950 2021 1955 1921.5 1990 2019.5 1970.8 1911 LOW Rs. 1750 1725 1795 1736.4 1721 1689.9 1704.9 1725.2 1811 1842 1833.1 1807.75 1835 1800 1771 1836.3 1877 1880 1871 1943 1885.7 1855.8 1890 1980.35 1892.2 1799 CLOSE Rs. 1761.7 1782.5 1816.55 1762.75 1731.05 1762.8 1725.8 1800.4 1861.85 1852.45 1863.3 1885 1835 1800 1849.5 1847.45 1896 1900 1983.9 1951.95 1928.2 1874.75 1983.95 1983.35 1912.9 1854.25 N.O.C. 6577 12076 12420 10606 9547 15560 10675 16253 15243 12720 10210 5637 12139 10634 19275 19252 14500 14738 16334 13914 13456 10158 12770 8646 161 13052

20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 OP N HIGH L E OW C OS N.O.C L E . R. s R. s R. s R. s

5-Jul-11 6-Jul-11 7-Jul-11 8-Jul-11 9-Jul-11 12-Jul-11 13-Jul-11 14-Jul-11 15-Jul-11 16-Jul-11 20-Jul-11 21-Jul-11 22-Jul-11 23-Jul-11 26-Jul-11 27-Jul-11 28-Jul-11 29-Jul-11

Futures of Dr.REDDY
Date OPEN Rs. 05-july-2011 625 06-july-2011 07- july-2011 08- july-2011 09- july-2011 12- july-2011 13- july-2011 14- july-2011 15- july-2011 16- july-2011 20- july-2011 21- july-2011 22- july-2011 23- july-2011 26- july-2011 27- july-2011 28- july-2011 29- july-2011 30- july-2011 02- aug-2011 03- aug-2011 04- aug-2011 05-aug-2011 06-aug-2011 09-aug-2011 10-aug-2011 638.9 644 649 649 628 626 620 655.1 653 644 630 643 679.4 675.95 685 688.2 685.5 697 714.4 705.5 692.2 674.9 701.1 670 695 HIGH Rs. 639 653.95 651.4 657.7 649 638.8 636.4 679 655.1 664.8 656.4 665 689.5 694 705.8 692.9 691 703.9 697 724.45 715.45 710 707.3 707.8 711 695 LOW Rs. 625 637.05 635.45 636.2 628.5 620 620.3 620 651.1 648.5 633.5 630 642.5 669 675.95 677.5 675.5 674.85 697 697.05 683.25 664 672 689.1 670 695 CLOSE Rs. 637.1 648.05 648 655.7 631.5 635.25 624.15 672.45 651.1 652.8 641.75 657.6 681.95 677.5 682.5 686.9 683.63 679.75 6967 713.6 697.3 669.83 699.20 693.4 690.05 695 N.O.C. 364 553 335 558 498 3669 455 1472 1260 758 1590 1328 2742 2275 1150 2264 1599 1911 1956 1763 1395 984 1324 744 1342 1249

8000 7000 6000 5000 4000 3000 2000 1000 0 OP N HIGH L E OW C OS N.O.C L E . R. s R. s R. s R. s

5-Jul-11 6-Jul-11 7-Jul-11 8-Jul-11 9-Jul-11 12-Jul-11 13-Jul-11 14-Jul-11 15-Jul-11 16-Jul-11 20-Jul-11 21-Jul-11 22-Jul-11 23-Jul-11 26-Jul-11

PUT OPTIONS OF INFOSYS

Options Date 05-july-2011 06-july-2011 07- july-2011 08- july-2011 09- july-2011 PA 1650 C.P 26.35 24.35 18 20 26 N.C 23 30 37 32 29 40 28 49 30 1 4 3 3 2 12 4 0 6 0 1 0 0 0 0 0 0 PA 1680 C.P 38.2 31.55 20.55 25.5 36.9 36.1 32 15.8 8.5 5.05 4 4 4 2.5 2 1.1 1.1 0.3 221.4 221.4 221.4 221.4 221.4 221.4 221.4 125.03 2 14 5 4 2 10 11 4 12 2 3 0 0 1 1 6 0 4 0 0 0 0 0 0 0 0 PA 1740 N.C C.P 57 46.65 31.5 51 63.3 40.85 61.65 22.45 14.45 9.05 6.35 6.7 8.45 8.5 4.0 1.55 0.65 0.2 223.5 223.5 223.5 223.5 223.5 223.5 223.5 221.4 N.C 15 31 151 133 34 45 41 39 163 21 10 14 28 23 15 19 10 7 0 0 0 0 0 0 0 0 PA 1770 C.P 75 79 79 30 30 62 84.7 40.05 19.95 16 10.1 10.1 10.1 29 6 5.79 5.75 0.25 13 20 20.6 26 19.35 18 21.6 244.4 1 1 0 1 0 4 3 2 14 6 1 0 0 9 11 3 0 1 1 56 8 7 355 90 22 0 PA 1800 N.C 1 4 70 72 8 1 127 93 329 119 69 50 69 138 36 44 41 35 46 100 48 43 77 26 176 0 99 58.65 61.9 82.1 103 115 110 52 29 25.6 18.4 14.2 19.7 25.35 19.9 9.35 1.1 0.2 26.85 20.25 24.75 38.4 20.45 18.25 25.16 262 N.C C.P

12- july-2011 20.55 13- july-2011 29.95 14- july-2011 12.25 15- july-2011 16- july-2011 20- july-2011 5.95 6 3.5

21- july-2011 2.8 22- july-2011 2.5 23- july-2011 2.2 26- july-2011 1.5 27- july-2011 1.1 28- july-2011 1.1 29- july-2011 0.25 30- july-2011 203.9 02- aug-2011 14 03- aug-2011 14 04- aug-2011 14 05-aug-2011 14 06-aug-2011 14 09-aug-2011 14 10-aug-2011 14

CALL OPTIONS OF INFOSYS

Options Date 05-july-2011 06-july-2011 07- july-2011 08- july-2011 09- july-2011 12- july-2011 13- july-2011 14- july-2011 15- july-2011 16- july-2011 20- july-2011 21- july-2011 22- july-2011 23- july-2011 26- july-2011 27- july-2011 28- july-2011 29- july-2011 30- july-2011 02- aug-2011 03- aug-2011 04- aug-2011 CA 1650 C.P 144.5 179 198.5 1985 198.5 149 110.05 110.5 110.5 110.5 110.5 110.5 110.05 110.05 264.05 301 301 301 CA 1680 N.C C.P 10 1 10 0 0 8 4 0 0 0 0 0 0 0 0 0 0 0 122.3 149 163.5 124 87 125 100 148 211.95 211.95 211.95 211.95 160.1 190 229.5 229.5 249.9 168.55 168.55 168.55 N.C 10 13 14 12 2 6 1 1 14 0 0 0 3 0 2 0 0 0 0 0 CA 1710 C.P 97 122.15 141.25 100 87 110 72.35 137 185.2 171.2 171.2 180 139.9 120.5 175 170.7 199.8 199.8 236.55 461.1 461.1 461.1 CA 1740 N.C C.P 19 20 1 1 3 4 5 3 25 1 0 1 0 6 13 12 29 0 0 0 0 0 71.9 104.65 114 81.85 62.2 75.95 56.7 98.75 153.85 133 169.95 139.9 104.1 85 145.35 141.6 172.15 172.15 233.4 169.65 169.65 169.65 N.C 9 68 84 53 34 248 38 69 117 10 2 2 5 9 21 52 25 0 0 0 0 0 CA 1770 C.P 56.25 83.55 95 81.85 48.2 63.4 43.5 77 123 110 150 119.95 67.5 67.45 115.85 112.5 145 145 211.05 160.45 160.45 160.45 N.C 12 25 10 531 17 64 27 53 36 9 4 1 26 15 16 2 3 0 0 0 0 0

05-aug-2011 06-aug-2011 09-aug-2011 10-aug-2011

301 307 307 307

0 0 0 0

168.55 168.55 168.55 168.55

0 0 0 0

160 160 160 160

1 0 0 0

169.65 169.65 169.65 169.65

0 0 0 0

160.45 160.45 160.45 160.45

0 0 0 0

C.P. = Close Premium

Spot Price

Strike Price Premium

Buyers (Gain/ Writers Loss) (Gains/ Loss)

1785.95 1785.95 1785.95 1785.95 1785.95 1800 99 1770 75 1740 57 1680 38.2 -13550 2210 2810

1650

26.55

-21990

21990 13550 -2210 -11810 -2810

N.C. = Number of Contracts The following table of net payoffs explains the profit/loss of option holder/writer of INFOSYSTCH for the month of 5-May to 10-June, 2008.

Spot Price

Strike Price Premium

Buyers (Gain/ Writers Loss) (Gains/ Loss)

1785.95 1785.95 1785.95 1785.95 1785.95 1800 1770 1740 97.0 71.9 56.25 1680 123.5

1650

144.55

-1720 -3470 -10210 -11190 1440

1720 3470 10210 11190 -1440

Put options of DR.REDDY`S

Options Date 05-july-2011 06-july-2011 PA 560 C.P 47.05 35.25 N.C 12 91 15 31 95 0 0 0 0 0 0 PA 580 C.P 57 57 57 57 57 PA 600 PA 620 N.C C.P 11 16 52 51 0 0 0 1 0 0 0 79.9 65.8 79.0 79.0 79.9 65.8 65.8 65.8 65.8 65.8 65.8 N.C 0 0 0 0 0 0 0 0 0 0 0 PA 640 C.P 92.75 78.15 92.75 92.75 92.75 78.15 78.15 78.15 78.15 78.15 78.15 N.C 0 0 1 0 5 3 0 0 0 0 0 N.C C.P 2 5 0 1 0 67.95 54.5 67.95 67.95 67.95 54.5 54.5 54.5 54.5 54.5 54.5

07- july-2011 37.05 08- july-2011 47.05 09- july-2011 47.05 12- july-2011 47.05 13- july-2011 35.25 14- july-2011 35.25 15- july-2011 35.25 16- july-2011 35.25 20- july-2011 35.25

44.3 1 44.3 0 44.3 0 44.3 0 44.3 0 44.3 0

Spot Price

Strike Price Premium

Buyers (Gain/ Writers Loss) (Gains/ Loss)

638.95 638.95 638.95 638.95 638.95 640 92.75 620 79.9 600 67.95 11600 24380 36680 580 57.0 -780

560

47.02

-12772

12772 780 -11660 -24380 -36680

Call options of Dr.Reddy`s Options Date CA 560 CA 580 CA 600 CA 620 CA 640 C.P N.C C.P N.C C.P N.C C.P N.C C.P N.C 1 0 0 0 5 1 1 0 0 0 0 61.7 73.2 74.8 60.2 61.7 61.7 73.8 72.2 72.2 72.2 61.7 4 3 1 0 0 1 5 0 0 0 0 52.4 61.7 6 11 44.2 51.6 44.2 100.4 51.6 44.2 44.2 44.2 44.2 44.2 44.2 7 11 14 0 0 13 0 0 0 0 0 37.05 0 42.7 51.6 42.7 0 1 3 88.45 0

05-May-08 72.2 06-May-08 85.95 07-May-08 72.2 08-May-08 72.2 09-May-08 84.3 12-May-08 70.2 13-May-08 72.3 14-May-08 72.2 15-May-08 72.2 16-May-08 72.2 20-May-08 72.2

111.4 1 61.75 36 52.4 52.4 52.4 61.7 0 0 1 0

37.05 0 37.05 1 88.45 0 42.7 42.7 42.7 0 0 0

61.75 1 61.75 0 111.4 0

C.P. = Close Premium N.C. = Number of Contracts The following table of net payoffs explains the profit/loss of option holder/writer of DRREDDY for the month of 5-May to June, 2008.

10-

Spot Price

Strike Price Premium

Buyers (Gain/ Writers Loss) (Gains/ Loss)

638.95 638.95 638.95 638.95 638.95 640 37.05 620 44.2 600 54.4 -6180 -10100 -14820 580 61.7 -5300

560

72.2

2700

-2700 5300 6180 10100 14820

FINDINGS:-

As of the early day of the trading with open penetrating price with Rs.1755

for two days it is stable on the third day it shoot up to Rs.1829.95 & buyers are Bearish short it out it falls to Rs.1748 after two days. And as stood with Rs.1800 & again down by two days. For the early week it was raised in one day and falls for two days and from then it shown appositive upwards movement in future and by the month end it was settle down with Rs.1900.

The future of INFOSYS shown a Bullish way till the 7 th of May. And in the

6th June it was Rs.1990, the highest price with number of contracts is 8646. And on 26th May the players are bullish & number of contracts were 19275 as highest contract with an open price Rs.1785.36 in that month. From 5th to 9th market increases open with 625 on 5th May. The market price rose from Rs.625 on first day to 9th May, were it stood at Rs.649 as high. As the player in the market with an intention to short or correct the market they showed an bearish attitude for the next 3 days, were the price fall to Rs.620. And the very next day it shoot up to Rs.655.10 & it slowly fall down for the next 3 days from then it showed the greedy to the investors and price rose to remaining days and at last fall down with Slight variations Among the open prices the price at Rs.643, the open interest stood at peak position 9,12,800. Before that from the open position & the trading is bullish & after it reaches to 9,12,800. The very next day, the players sold the Futures as to gain. The total contract traded at this price stood 2742 which is highest for that month The Put option 1740, 1770 and 1800 were in-the-money option and the remaining i.e., 1650, 1680 were out-of-the-money. The call option 1650, 1680, 1740 & 1770 were out-of-the-money only 1800 were in-the-money. The Profit of Holder = (Strike Price - Spot Price) - Premium *200 (Lot size) in case of Put Option. The Profit of Holder = (Spot Price - Strike Price) - Premium * 200 (Lot size) in case of Call Option.

If it is a profit for buyer then obviously it is a loss for the holder & Vice-versa. The Put option 600, 620, and 640 were in-the-money option and the remaining i.e., 560, and 580 were out-of-the-money. The call option 560 was out-of-the-money and only 580, 600, 620 and 640 were in-themoney. The Profit of Holder = (Strike Price-Spot Price)- Premium * 400(Lot size) in case of Put Option. The Profit of Holder = (Spot Price-Strike Price)-Premium * 400(Lot size) in case of Call Option. If it is a profit for buyer then obviously it is a loss for the holder & Vice-versa.

SUGGESTIONS & CONCLUSIONS

SUGGESTIONS It is better to the investors to keep their money in Infosys futures. In a bearish market it is suggested to an investor to opt for Put Option in order to minimize losses. In a bullish market it is suggested to an investor to opt for Call Option in order to maximize profits. In a cash market the profit/loss is limited but where in futures and options an investor can enjoy unlimited profit/loss. It is recommended that SEBI should take measures in improving awareness about the futures and options market as investors still dont have much understanding about them. It is suggested to an investor to keep in mind the time and expiry duration of futures and options contracts before trading. The lengthy the time, the risk is low and more chances of profit making.

CONCLUSION They would have take more number of futures of Infosys in that month, so that they will be in profits. Investors should choose Infosys rather than Dr.Reddy`s. The investors in the Infosys options would have choose more number of lots in the put option. Dr.Reddy`s options of call is more profitable than the put option. The traders would have take more number or lots.

The investors who are investing in the derivative market in futures and options should choose the blue chip companies whose companies past 3 quarters are in gradually increasing trend. The greed and fear of individual leads to cause of fluctuations in the stock market sometimes the external factors of economical and political mishaps.

BIBLIOGRAPHY Text Books:1. Securities analysis & Portfolio Management, by R. Madhumati, Pearson Education

2. Investments, by Schaums, TATA McGraw-Hill. 3. International Financial Management, by P.G.Apte, TATA McGraw-Hill. 4. Financial Institutions and Markets, by L.M.Bhole, TATA McGraw-Hill. 5. Options, Futures and Other Derivatives, by John C. hull, Education.

Web sites: 1. URL: http//www.nseindia.com 2. URL: http//www.bseindia.com 3. URL: http//www.economictimes.com 4. URL: http//www.sharekhan.com 5. URL: http//www.google.com

APPENDICES Arbitrage The simultaneous purchase and sale of a commodity or financial term

instrument in different markets to take advantage of a price or exchange rate discrepancy. Calendar Spread An option strategy in which a short term option is sold and a longer option is bought both having the same striking price. Either puts or calls may be used. Call Option An option that gives the buyer right to buy a future contract at a premium, at the strike price. Currency Swap A Swap in which the counter parties exchange equal amounts of two currencies at the spot exchange rate. Derivative A derivative is an instrument whose value derived from the value of one or more underlying assets, which can be commodities, precious metals, currency, bonds, stocks, stock indices, etc. derivatives involves the trading of rights or obligations based on the underlying assets, but do not directly transfer the property. Double Option An option that gives the buyer the right to buy and or sell future contract, at a premium, at a strike price. Futures Contract A legally binding agreement for the purpose and a sell of a commodity, index or financial instrument sometime in the future. Hedge Fund A large pool of private money and asset managed aggressively and often riskily on any future exchange, mostly for short term gain. In-the-money option An option with intrinsic value, a Call option is in the money if its strike price is below the current price of the underlying futures contract and the put option is in the money if it is above the underlying. Margin call A demand from a clearing house to a clearing member or from a broker to a customer bring deposits up to a required minimum level to guarantee performance at ruling prices. Option it gives the buyer the right, but not the obligation, to buy or sell stock at a set. price on or before a given date. Investors who purchase call options but the stock will be worth more than the price set by the option (strike price), plus the price they paid for the option itself. Buyer of put option bet the stock price will go down below the price set by the option. Out-of-the-money option An option with no intrinsic value, a call option is out of money if its strike price is above the underlying and a put option is so if it is below the underlying. Premium The price of an option contract, determined on the exchange, which the buyer of the option pays to the option writer for the rights to the option contract. a

Spread The difference between the bid and asked prices in any market. Stop loss orders An order place in the market to buy or sell to close out an open position on order to limit losses when market moves the wrong way. Swap An agreement to exchange on currency on index return for another, the exchange on fixed interest payments for a floating rates payments or the exchange of an equity index return for a floating interest rate. Underlying The currency, commodity, security or any other instrument that of a future or a option contract. Writer The person who originates the option contract by promising to perform the certain obligation in return for the price of the option. Also known as the option writer. All or nothing option An option with a fixed, predetermined payoff if the underlying instrument is at or beyond the strike price at expiration. Average option A path dependent option that calculates the average of the path traversed by the asset, arithmetic or weighted. The payoff therefore the difference between the average price of the underlying asset, over the life of option and the exercise price of the option. Basket option A third party option covered warrant on a basket of underlying stocks, currencies or commodities. Bermuda option Like the location of the Bermudas, this option located somewhere between a European style options, this can be exercised only can be exercised any time. Option holders choose this option can be exercisable only on predetermined on a put etc, a call on a put etc. Cross-currency options An out performance option stock at an exchange rate between. two currency. Digital options These are options that can be structured as a one touch barrier, double no touch barrier and: all nothing call/puts. The one touch digital provides an immediate payoff if the currency hits your selected price barrier chosen at outset. The double no touch provides a payoff upon expiration if the currency does not touch both the upper and lower price. barrier selected at the outset. The call/put all or nothing digital option provides a payoff upon expiration if your option finishes in the money. dates. Compound options This is simply an option on an existing option such as a call on a call a put maturity and an American style option which forms the basis

Knock-in-options There are two kinds of known in options, 1) up and in, 2) down and. in. with known in options, the buyer starts out without a vanilla option. If the buyer has selected an upper price barrier and the currency hits that level; it creates the vanilla option with maturity date And strike price agreed upon at the outset. This would be called an up and in. the down and in option is the same as the up and in, expect the currency has to reach a lower barrier. Upon hitting the chosen lower price level, it creates the vanilla option. Multi-index option An out performance option with a payoff determined by the deference in performance of two or more indices. Out performance option An option with a payoff based on the amount by which one of two underlying instruments or indices outperform the other. Quantity adjusting option This is an option design to eliminate the currency risk by fix effectively hedging it. It evolves combining an equity option and incorporating a predetermined rate. Secondary currency option An option with a payoff in a difference currency than the underlings trading currency . Swap ion An option to enter into a Swap contract . Up-and-out-option The call pays of early exercise price trigger is hit. The put expires. Worthless if the market price of the underlying risks is above a predetermined expiration price.