17765525 equities market

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A

Report On

EQUITIES–Cash & Derivatives

PREPARED BY:

NILESH KUMAR

PROJECT TRAINEE

AT ANAND RATHI, HYDERABAD

DATE 25-07-2009

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A

Report On

EQUITIES–Cash & Derivatives

PREPARED BY:

NILESH KUMAR

2008/MBA/32

A Report submitted in partial fulfillment of the

requirements of PGPM (2008 – 2010)

Muenchen International Business School

PUNE

Company Guide Faculty Guide

Mr.Pavan Mantri Prof D.S.Kadam

Branch manager Principal Director ANAND RATHI, MIBS PUNE

HYDERABAD

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(2008-2010)

CERTIFICATE

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ACKNOWLEDGM

ENT

I gratefully acknowledge the expert

support and guidance extended to me by

ANANDRATHI and the guidance of Mr.

Pavan Mantri as regards this project and

the subsequent report. There impartial

and enlightened guidance and the

sophisticated communication and the

commodities knowledge has been on

immense help and has been paramount in

this project and report maintaining andfurther meeting the requisite standards

and the dead lines.

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.

NILESH KUMAR

PGPM/MBA

(2008-2009)

Executive

Summary

In few years Share Market has emerged as a

tool for ensuring one’s financial well being.

Share Markets have not only contributed to

the India growth story but have also helped

families tap into the success of Indian

Industry. As information and awareness is

rising more and more people are enjoying the

benefits of investing in Share Markets. once people are aware of Share Market investment

opportunities, the number who decide to invest

in Share Markets increases to as many as one

in every five people.

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This Project gave

me a great learning experience and at the same

time it gave me enough scope to implement my

analytical ability.

The first part gives an insight about ShareMarket and its various aspects, the Company

Profile, Objective of the study, Research

Methodology. One can have a brief knowledge

about Share market and its basics through the

project.

The second part of

the Project consists of Friday market analysis

collected from past records This Project

covers the topic of “ FRIDAY MARKET

INVESTING PLAN ” The data collected has

been well organized and presented. I hope the

research findings and conclusion will be of use.

ANAND RATHI SECURITIES: ABRIEF PROFILE

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Anand Rathi

(AR) is a leading full service securities firm

providing the entire gamut of financial

services. The firm, founded in 1994 by Mr.

Anand Rathi, today has a pan India presence

with 450 locations as well as an international

presence through offices in Dubai and

Bangkok. AR provides a breadth of financial

and advisory services including wealth

management, investment banking, corporate

advisory, brokerage & distribution of equities,

commodities, mutual funds and insurance,

structured products - all of which are supported

by powerful research teams.

The firm's philosophy is entirely client centric,

with a clear focus on providing long term value

addition to clients, while maintaining the

highest standards of excellence, ethics and

professionalism. The entire firm activities are

divided across distinct client groups:

Individuals, Private Clients, Corporate and

Institutions and was recently ranked by Asia

Money 2006 poll amongst South Asia's top 5

wealth managers for the ultra-rich.

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In year 2007 Citigroup Venture Capital

International joined the group as a financial

partner.

MILESTONES

•

1994: Started activities in consulting and

Institutional equity sales with staff of 14.

• 1995:

Set up a research desk and empanelled

with major institutional investors.

• 1997:

Introduced investment banking

businesses

Retail brokerage services launched

• 1999:

Lead managed first IPO and executed

first M & A deal

• 2001:

Initiated Wealth Management Services

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• 2002:

Retail business expansion recommences

with ownership model

• 2003:

Wealth Management assets cross Rs1500

crores

Insurance broking launched

Launch of Wealth Management services in

Dubai

Retail Branch network exceeds 50

• 2004:

Commodities brokerage and real estate

services introduced

Wealth Management assets cross

Rs3000crores

Institutional equities business re launched

and senior research team put in place

Retail Branch network expands across

100 locations within India

• 2005:

Real Estate Private Equity Fund

Launched

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Retail Branch network expands across

200 locations within India

•

2006: AR Middle East, WOS acquires

membership of Dubai Gold &

Commodity Exchange (DGCX)

Ranked amongst South Asia's top 5

wealth managers for the ultra-rich by

Asia Money 2006 pollRanked 6th in FY2006 for All India

Broker Performance in equity

distribution in the High Net worth

Individuals (HNI) Category

Ranked 9th in the Retail Category having

more than 5% market share

Completes its presence in all States

across the country with offices at 300+

locations within India

• 2007:

Citigroup Venture Capital International

picks up 19.9% equity stake

Retail customer base crosses 200

thousand

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Establishes presence in over 450

locations

•

2009

Started with Currency Derivatives which

deals only in

USD & INR

MANAGEMENT TEAM

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- Vision……………………………………………...

2. History of NSE………………………………………...

3.

Role of SEBI…………………………………………… 4. Introduction………………………………………………

- Listed Securities………………………………………

- Permitted Securities…………………………………

- Tick Size…………………………………………

- Computation of closing price of scrip’s in the Cash

. Segment……………………………………………

5. Compulsory Rolling Settlement (CRS) Segment……….

- Trading and settlement cycle for scrip’s under CRS...

6. Settlement…………………………………………………- Demat pay-in……………………………………….

- Auto delivery facility……………………………….

- Pay-in of securities in physical form…………………

- Funds Pay-in…………………………………………

- Securities Pay-out………………………………..….

- Funds Payout…..…………………………………….

- Dematerialization of shares………………………….

- Merits of Dematerialization.…………………………- Rematerialization. …………………………………

7. Open interest in derivative market………………………………

- What is open interest……………………………………

- Rising market and increasing open interest…………....

- Rising market and decreasing open interest……………- falling marker and increasing open interest…………….

- falling marker and decreasing open interest……………

- sideways marker and increasing open interest……………

8. The index number…………………………………………… - desirable attribute of an index…………………………..

- capturing behavior of portfolios……………………… ..

- including liquid stocks………………………………….

- maintaining professionally……………………………..4 – impact cost…………………………………………….

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9. Futures and options………………………………………….4

- trading underlying versus trading single stock futures.. 4

- derivative market at nse………………………………..4

- index derivatives………………………………………4

10. Future terminology…………………………………………..45

– business growth of futures and options market

. turnover(rs. Crore)……………………………………49

11. Eligibility for any stock to enter in derivative market…….50- trading mechanism…………………………………..50

- volumes………………………………………………51

- index derivatives for hedging………………………..51

– pricing futures………………………………………

– initial margin……………………………………….. - initial margin charged on f & o market……………..54

12. Convergence of futures price to spot price…………………54

- mark to market (mtm) margin……………………….56 – open interest calculation with example……………...5

13. Options………………………………………………………..58

- option terminology…………………………………..59

- strategies in futures and options……………………..62

14. Buying a call option………………………………………….63

– buying a put…………………………………………- writing the call options………………………………68

- writing the buy options………………………………70

15. Firday market analysis……………………………………….7

16. Conclusion………………………………………………….....79

17. Suggestions …………………………………………………..81

18. Bibliography………………………………………………….84

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Bombay Stock Exchange Limited (the Exch

is the oldest stock exchange in Asia with a rich heritage. Popularly k

as "BSE", it was established as "The Native Share & Stock B

Association" in 1875. It is the first stock exchange in the country to

permanent recognition in 1956 from the Government of India und

Securities Contracts (Regulation) Act, 1956.The Exchange's pivot

pre-eminent role in the development of the Indian capital market is w

recognized and its index, SENSEX , is tracked worldwide.

• India's oldest and first stock exchange: Mumbai (Bombay) S

Exchange. Established in 1875. More than 6,000 stocks listed.

• Total number of stock exchanges in India: 22

• They are in: Ahmedabad, Bangalore, Calcutta, Chennai, D

etc.

• There is also a National Stock Exchange (NSE) which is locat

Mumbai.

• There is also an Over the Counter Exchange of India (OT

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which allows listing of small and medium sized companies.

• The regulatory agency which oversees the functioning of

markets is the Securities and Exchange Board of India (SE

which is also located in Bombay.

Today, BSE is the world's num

exchange in terms of the number of listed companies and the wo

5th in transaction numbers. The market capitalization as

December 31, 2007 stood at USD 1.79 trillion.

SERVICES

BSE also has a wide range of services to empower investors and facismooth transactions:

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of theca

pitalmarketandfin

ancialsector.Morethan20,000peopleha

veattendedthe

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TRADIN

G

Trading on the BOLT System is conducted

from Monday to Friday between 9:55 a.m. and

3:30 p.m. The scrip’s traded on the Exchange

have been classified into 'A', 'B1', 'B2','T', ‘S',

‘TS' 'F' ,'G' and 'Z' groups.

The Exchange has for the guidance and benefit

of the investors have classified the scrip’s inthe Equity Segment into 'A', 'B1', 'B2','T', ‘S',

‘TS' and 'Z' groups on certain qualitative and

quantitative parameters which include number

of trades, value traded, etc.

The “F” Group represents the Fixed Income

Securities.

The “T” Group represents scrip's which are

settled on a trade to trade basis as a

surveillance measure.

The “S” Group represent scrip’s forming part

of the “ BSE-Indonext” segment . The “TS”

Group consist of scrip’s in the “ BSE-

Indonext” segment which are settled on a trade

to trade basis as a surveillance measure.

Trading in Govt. Securities for retail investors

is done under "G" group.

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The scrip’s of the companies which are in

demat can be traded in market lot of one but

the securities of companies which are still in

the physical form are traded on the Exchange

in the market lot of generally either 50 or 100.

However, the investors having quantities of

securities less than the market lot are required

to sell them as "Odd Lots". The facility of

trading in odd lots of securities not only offers

an exit route to investors to dispose of their odd

lots of securities but also provides them an

opportunity to consolidate their securities into

market lots.

This facility of selling physical shares in

compulsory demat scrips is called an Exit

Route Scheme. This facility can also be used

by small investors for selling upto 500 shares

in physical form in respect of scrips of

companies where trades are required to be

compulsorily settled by all investors in demat

mode.

Listed Securities:

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The securities of companies which have signed

Listing Agreement with the Exchange are

traded at the Exchange as "Listed Securities".

Baring a few scrip’s, all scrip’s traded in the

Equity Segment at the Exchange fall in this

category.

Permitted Securities:

To facilitate the market participants to trade in

securities of the companies which are actively

traded at other Regional Stock Exchanges but

are not listed on the Exchange, the Exchange

has in April 2002 decided to permit trading in

such securities as “Permitted Securities"

provided they meet the relevant norms

specified by the Exchange.

Tick Size:

Tick size is the minimum differences in rates

between two orders on the same side i.e., buy

or sell, entered on the system for particular scrip. Trading in scrip’s listed on the Exchange

is done with the tick size of 5 paise.

However, in order to increase

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Compulsory Rolling Settlement

(CRS) Segment:

As per the directive by SEBI, all transactions in

all groups of securities in the Equity Segment

and Fixed Income securities listed on the

Exchange are required to be settled on T+2

basis w.e.f. from April 1, 2003. The settlement

calendar, which indicates the dates of the

various settlement related activities, is drawn

by the Exchange in advance and is circulated

among the market participants.

Under

rolling settlements, the trades done on a

particular day are settled after a given number

of business days. A T+2 settlement cycle means

that the final settlement of transactions done on

T, i.e., trade day by exchange of monies and

securities between the buyers and sellers

respectively takes place on second business day

(excluding Saturdays, Sundays, bank andExchange trading holidays) after the trade day.

The transactions in securities of companies

which have made arrangements for

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dematerialization of their securities are settled

only in demat mode on T+2 on net basis, i.e.,

buy and sell positions of a member-broker in

the same scrip are netted and the net quantity

and value is required to be settled. However,

transactions in securities of companies, which

are in "Z" group or have been placed under

"trade to trade" by the Exchange as a

surveillance measure (“T” and “TS” group) ,

are settled only on a gross basis and the facility

of netting of buy and sell transactions in such

scrip’s is not available.

The Exchange has introduced a new segment

named “BSE Indonext” w.e.f. January 7, 2005.

“S” group consists of scrips from “B1” & “B2”

group on BSE and companies exclusively listed

on regional stock exchanges having capital of 3

crores to 30 crores. All trades in this segment

are done through BOLT system under S group.

The transactions in 'F' group securities

representing "Fixed Income Securities" and "

G" group representing Govt. Securities for

retail investors are also settled at the Exchange

on T+2 basis.

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DAY ACTIVITY

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Thus, the pay-in

and pay-out of funds and securities takes places

on the second business day (i.e., excluding

Saturday, Sundays and bank & Exchange

trading holidays) of the day of the execution of

the trade.

* 6A/7A : A mechanism whereby the

obligation of settling the transactions done by amember-broker on behalf of a client is passed

on to a custodian based on confirmation of

latter. The custodian can confirm the trades

done by the members on-line and upto 11 a.m.

on the next trading day. The late confirmation

of transactions by the custodian after 11:00

a.m. upto 12:15 p.m., on the next trading day

is, however, permitted subject to payment of

charges for late confirmation @ 0.01% of the

value of trades confirmed or Rs. 10,000/-,

whichever is less.

The settlement of the trades (money and

securities) done by a member-broker on his

own account or on behalf of his individual,

corporate or institutional clients may be either

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through the member-broker himself or through

a SEBI registered custodian appointed by

him/client. In case the delivery/payment in

respect of a transaction executed by a member-

broker is to be given or taken by a registered

custodian, then the latter has to confirm the

trade done by a member-broker on the BOLT

System through 6A-7A entry. For this purpose,

the custodians have been given connectivity to

BOLT System and have also been admitted as

clearing member of the Clearing House. In case

a transaction done by a member-broker is not

confirmed by a registered custodian within the

time permitted, the liability for pay-in of funds

or securities in respect of the same devolves on

the concerned member-broker.

The following statements can be downloaded

by the members in their back offices on a daily

basis.

a. Statements giving details of the daily

transactions entered into by the members.

b. Statements giving details of margins

payable by the member-brokers in

respect of the trades executed by them.

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wise details of payments/receipts of monies by

the members in the settlement. The

Delivery/Receive Orders and Money

Statement, as stated earlier, can be downloaded

by the members in their back office.

Settlement

Pay-in and Pay-out for 'A', 'B1', 'B2',

‘T’, ‘S’, ‘TS’, 'C', "F", "G" & 'Z' group

of securities

The trades done on BOLT/Exchange by the

members in all the securities in CRS are now

settled on the Exchange by payment of monies

and delivery of securities on T+2 basis. All

deliveries of securities are required to be routed

through the Clearing House,

The Pay-in /Pay-out of funds based on the

money statement and that of securities based

on Delivery Order/ Receive Order issued by

the Exchange are settled on T+2 day.

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Demat pay-in :

The members can effect pay-in of demat

securities to the Clearing House through either of the Depositories i.e. the National Securities

Depository Ltd. (NSDL) or Central Depository

Services (I) Ltd. (CDSL). The members are

required to give instructions to their respective

Depository Participants (DPs) specifying

details such as settlement no., effective pay-in

date, quantity, etc.

Members may also effect pay-in directly from

the clients' beneficiary accounts through

CDSL. For this, the clients are required to

mention the settlement details and clearing

member ID through whom they have sold the

securities. Thus, in such cases the Clearing

Members are not required to give any delivery

instructions from their accounts.

In case, if a member-broker fails to deliver the

securities, then the value of shares delivered

short is recovered from him at the

standard/closing rate of the scrip’s on the

trading day.

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Auto delivery facility :

Instead of issuing Delivery instructions for

their securities delivery obligations in demat

mode in various scrip’s in a settlement /auction,

a facility has been made available to the

members of automatically generating Delivery

instructions on their behalf from their CM Pool

accounts maintained with NSDL and CM

Principal Accounts maintained with CDSL.

This auto delivery facility is available for CRS

(Normal & Auction) and for trade to trade

settlements. This facility is, however, not

available for delivery of non-pari passu shares

and shares having multiple ISINs. The

members wishing to avail of this facility have

to submit an authority letter to the Clearing

House. This auto delivery facility is currently

available for Clearing Member (CM) Pool

accounts and Principal accounts maintained by

the members with the respective depositories .

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Pay-in of securities in physical

form:

In case of delivery of securities in physical

form, the members have to deliver the

securities to the Clearing Hose in special

closed pouches along with the relevant details

like distinctive numbers, scrip code, quantity,

etc., on a floppy. The data submitted by the

members on floppies is matched against the

master file data on the Clearing House

computer systems. If there is no discrepancy,

then the securities are accepted.

Funds Pay-in:

The bank accounts of members maintained

with the clearing banks, viz., Bank of India,

HDFC Bank Ltd., Oriental Bank of

Commerce., Standard Chartered Bank,

Centurion Bank Ltd., UTI Bank Ltd., ICICI

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Clearing House. Based on the break up given

by the member-brokers, the Clearing House

instructs depositories, viz., CDSL & NSDL to

credit the securities to the Beneficiary Owners

(BO) Accounts of the clients. In case delivery

of securities received from one depository is to

be credited to an account in the other

depository, the Clearing House does an inter

depository transfer to give effect to such

transfers.

In case of physical securities,

the Receiving Members are required to collect

the same from the Clearing House on the pay-

out day.

Funds Payout:

The bank accounts of the members having pay-

out of funds are credited by the Clearing House

with the Clearing Banks on the pay-in day

itself

In case, if a member-broker fails to deliver the

securities, then the value of shares delivered

short is recovered from him at the

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standard/closing rate of the scrips on the

trading day.

Dematerialization of shares:

Dematerialization as the name suggests, is a

term used for conversion of shares from their

physical form to electronic form. This

conversion is done by NSDL and CDSL. The

CDSL acts as a depository for BSE, whereas

the NSDL acts as a depository for NSE. After

dematerialization, shares cease to exist in their

physical form.

Merits of dematerialization:

No risk of being fake or stolen shares.

No stamp duty while transfer of shares.

Free from tedious paperwork as it was in the

physical form.

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Stock exchanges have now discarded the

concept of marketable lots, small lots and

odd lots.

Rematerialization:

Rematerialization is the reverse of

dematerialization. It means to convert the

electronically held shares back into physical form.

You have the complete freedom of conversion

from electronic form to physical form whenever

you want to do so.

OPEN INTEREST IN

DERIVATIVE MARKET

Open interest means the total number of

open contracts on a security, that is, the number

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of future contracts or options contracts that

have not been exercised, expired or full filled

by delivery. Hence we can say that the open

interest position at the end of each day

represents the net increase or decrease in the

number of contracts for that day. However, it is

to be noted that open interest is not the same as

trading volume. Trading volume represents the

total number of contracts that are traded during

a day, inclusive of both squared –off (closed)

positions and new positions. Thus, for any day,

the trading volume will always be higher than

the open interest.

What is open interest?

Every trade in the exchange would have

an impact on the open interest for that day. Say,

for example, “A” buys one contract of Nifty on

Monday while “B” buys two on the same day.

Open interest at the end of the day will be

three. On Tuesday, while “A” sells his one

contract to “C”, “B” buys another Nifty

contract. The open interest at the end of the day

is now four. In other words, if both parties to

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positions and suggests the flow of extra money

into the market.

RISING MARKET AND DECREASING

OPEN INTEREST

If despite a rise in market, the open

interest decreases, it can be interpreted as a

precursor to a trend reversal. The lack of

additions to open interest shows that the

markets are rising on the back of short-sellers

covering their existing positions. This also

implies that money is flowing out of the

market, given that open interest is decreasing.

FALLING MARKET AND INCREASING

OPEN INTEREST

When open interest records an increase in

value amidst falling market, it could be a

bearish signal. Though a rise in open interest

means that new money is probably being used

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for creating fresh short positions, which will

lead to a further downtrend.

FALLING MARKET AND

DECREASING OPEN INTEREST

If open interest decreases in a falling

market, it can be attributed to the forced

squaring- off of long – positions by traders. It,

thus, represents a trend reversal, since the

downtrend in the market is likely to reverse

after the long positions have been squared off.

Thus, in a falling market, a declining open

interest can be considered a signal indicating

the strengthening of the market.

SIDEWAYS MARKET ANDINCRESING OPEN INTEREST

If the open

interest decreases in a sideways market, we can

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say that flat market trends will continue for

some more time. A decrease in open interest

only represents the squaring-off of old

positions and lack of any new positions might

result in a sideways or weak trends in the

market.

Though open interest is a good barometer

of where the markets are heading; it is only an

indicator that helps us trade intelligently it

cannot be considered foolproof.

THE INDEX NUMBER

An index is a number which

measures the change in a set of values over a

period of time. A stock index represents the

change in value of a set of stocks which

constitute the index. More specifically, a stock

index number is the current relative value of a

weighted average of the prices of a pre-defined

group of equities. It is a relative value to the

weighted average of prices at some arbitrarily

chosen starting date or base period. The

Page | 48



starting value or base of the index is usually set

to a number such as 100 or 1000. for example

the base value of the Nifty was set to 1000 on

the start date of November 3, 1994.

A good stock market index is on which

captures the behavior of the overall equity

market. It should represent the market, it

should be well diversified and yet highly

liquid. Movements of the index should

represent the returns obtained by “typical”

portfolios in the country.

A market index is very important for its use

As a barometer for market behavior,

As a benchmark portfolio performance,

As an underlying in derivative

instruments like index futures,

In passive fund management by index

funds

Also acts a barometer for lot of elements

such as liquidity in the market, thegrowth of the economy, the investor’s

confidence, government policies etc.

Page | 49



DESIRABLE ATTRIBUTE OF AN

INDEX

A good market index should have the following

attributes:

It should capture the behavior of a large

variety of different portfolios in the

market.

The stocks included in the index should

be highly liquid.

It should be professionally maintained.

Capturing Behavior Of Portfolios

A good market index should accurately

reflect the behavior of the overall market as

well as of different portfolios. This is achieved

by diversification in such a manner that a

portfolio is not vulnerable to any individual

stock or industry risk. A well diversified index

is more representative of the market. However

there is diminishing returns form

Page | 50



diversification, there is very little gain by

diversifying beyond a point; the more serious

problem lies in the stocks that are included in

the index when it is diversified. We end up

including illiquid stocks, which actually

worsen the index. Since an illiquid stock does

not reflect the current price behavior of the

market, its inclusion in index results in an

index, which reflects, delayed or stale price

behavior rather than current price behavior of

the market.

Including Liquid Stocks

Liquidity is much more than trading

frequency, it is about ability to transact at a

price, which is very close to the current market

price. For example, a stock is considered liquid

if one can buy some shares at around Rs.120.05

and sell at around Rs.119.95, when the market

price is ruling at Rs.120. a liquid stock has very

tight bid ask spread.

Maintaining Professionally

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It is now clear that an index should

contain as many stocks with as little impact

cost as possible. This necessarily means that

the same set of stocks would not satisfy these

criteria at all times, a good index methodology

must therefore incorporate a steady pace of

change in the index set. It is crucial that such

changes are made at a steady pace. It is very

healthy to make a few changes every year, each

of which is small and does not dramatically

alter the character of the index, on a regular

basis, the index set should be reviewed, and

brought inline with the current state of market,

to meet the application needs of users, a time

series of the index sold be available.

Impact cost

Market impact cost is a measure of the

liquidity of the market. It reflects the costs

faced when actually trading an index. For a

stock to qualify for possible inclusion into the

index, it has to have market impact cost of

below 0.75% when doing Nifty trades of half a

crores rupees. The market impact cost on a

Page | 52



trade of Rs.3 million of the full Nifty works out

to be about 0.05%. This means that if Nifty is

at 4000, a buy order goes through at 4002, i.e.

4000+ (4000*0.0005) and a sell order gets

3998 i.e. 4000-(4000*0.0005)

FUTURES AND OPTIONS

An option is different form futures in

several ways. At practical level, the option

buyer faces an interesting situation. He pays for

the options in full at the time it is purchased.

After this, he only has an upside. There is no

possibility of the options position generatingany further losses to him. This is different

form futures, which is free to enter into, but

can generate very large losses. This

characteristic makes options attractive to many

occasional market participants, who cannot put

in the time to closely monitor their futures positions.

Buying put options is buying insurance.

To buy a put option on Nifty is to buy

insurance which reimburses the full extent to

Page | 53



which Nifty drops below the strike price of the

put option. This is attractive to many people,

and to mutual funds creating “guaranteed

return products”.

TRADING UNDERLYING VERSUS

TRADING SINGLE STOCK

FUTURES

The single stock futures market in India

has been a great success story across the world.

NSE ranks first in the world in terms of

number of contracts traded in single stock

futures. One of the reasons for the success

Page | 54



could be the ease of trading and settling these

contracts.

To trade securities, a customer must open

a security trading account with a securities

broker and a demat account with a securities

depository. Buying security involves putting up

all the money upfront. With the purchase of

shares of a company, the holder becomes a part

owner of the company. The shareholder

typically receives the rights and privileges

associated with the security, which may include

the receipt of dividends, invitation to the

annual shareholders meeting and the power to

vote.

Selling securities involves buying the

security before selling it. Even in cases where

short selling is permitted, it is assumed that the

securities broker owns the security and then

“lends” it to the trader so that he can sell it,

besides, even if permitted, short sales on

security can only be executed on an up tick.

To trade futures, a customer must open a

futures trading account with a derivatives

broker. Buying futures simply involves putting

Page | 55



in the margin money. They enable the futures

traders to take a position in the underlying

security without having to open an account

with a securities broker. With the purchase of

futures on a security, the holder essentially

makes a legally binding promise or obligation

to buy the underlying security at some point in

the future. Security futures do not represent

ownership in a corporation and the holder is

therefore not regarded as a shareholder.

DERIVATIVE MARKET AT NSE

The derivatives trading on the NSE

commenced with S&P CNX Nifty Index

futures on June 12, 2000. The trading in index

options commenced on June 4, 2001 and

trading in options on individual securities

commenced on July 2, 2001. Single stock

futures were launched on November9, 2001.

Today, both in terms of volume and turnover,

The mini derivative Futures & Options

contract on S&P CNX Nifty was

introduced for trading on January 1,

Page | 56



2008 while the long term option

contracts on S&P CNX Nifty were

introduced for trading on March 3

2008

NSE is the largest derivatives exchange

in India.

Currently, the

derivatives contracts have a maximum of 3-

month expiration cycles. Three contracts are

available for trading, with 1 month, 2 months

and 3 months expiry.

A new contract is introduced on the next

trading day following the expiry of the near

month contract.

INDEX DERIVATIVES

Index derivatives are derivative contracts

which have the index as the underlying. The

most popular index derivatives contract the

world over is index futures and index options.

NSE’s market index, the S&P CNX Nifty was

scientifically designed to enable the launch of

Page | 57



index- based products like index derivatives

and index funds. The first derivative contract to

be traded on NSE’s market was the index

futures contract with the Nifty as the

underlying. This was followed by Nifty options

and thereafter by sectoral indexes, CNX IT and

BANK Nifty contracts.

FUTURES TERMINOLOGY

SPOT PRICE: The price at which an asset

trades in the spot market

FUTURES PRICE: The price at which the

futures contract trades in the futures market.

CONTRACT CYCLE: The period over

which a contract trades. The index futures

contracts on the NSE have one month, two

months and three months expiry cycles whichexpire on the last Thursday of the month. Thus

a January expiration contract expires on the last

Thursday of January.

Page | 58



EXPIRY DATE: It is the date specified in the

futures contract. This is the last day on which

the contract will be traded, at the end of which

it will cease to exist.

CONTRACT SIZE: The amount of asset that

has to be delivered under one contract. For

instance, the contract size on NSE’s futures

market is 200 Nifties.

BASIS: In the context of financial futures,

basis can be defined as the futures price minus

the spot price, there will be a different basis for

each delivery month for each contract. In a

normal market, basis will be positive; this

reflects that futures prices normally exceed

spot prices.

COST OF CARRY: the relationship between

futures prices and spot prices can be

summarized in terms of what is known as the

cost of carry. This measures the storage cost

Page | 59



plus the interest that is paid to finance the asset

less the income earned on the asset.

INITIAL MARGIN: the amount that must be

deposited in the margin account at the time

a futures contract is first entered into is known

as initial margin.

MARKET TO MARKET: in the futures

market, at the end of each trading day, the

margin account is adjusted to reflect the

investor’s gain or loss depending upon the

futures closing price. This is called Marking-to-

market.

MAINTENANCE MARGIN: This is

somewhat lower than the initial margin. This is

set to ensure that the balance in the margin

account never becomes negative. If the balance

in the margin account falls below the

maintenance margin, the investor receives a

margin call and is expected to top up the

margin account to the initial margin level

before trading commences on the next day.

Page | 60



A futures contract is different from the

underlying stock in the following ways:

When we buy a stock, we pay the full

value of the transaction (i.e. the number

of shares multiplied by market price of

each share) whereas in futures we pay

only the margin which is a fraction of the

total transaction value.

There is no time limit of settlement in

cash market but in case of futures

contracts, they are dated. An Indian

futures settlement currently takes place

on the last Thursday of every month. So

the current month’s futures expire on the

month’s last Thursday. If a trader has to

carry his position to the next month, he

has to shift his position to the next

month’s future.

One can only go long in the spot market.

We cannot short sell unless we borrow

the stock, something which is neither

Page | 61



cheaper nor convenient whereas one can

go long or short on the futures depending

on his short term view of the markets.

The cash market has a lot of none, i.e. a

person can buy any stock in the multiple

of one unit where as a futures contract is

the smallest unit which one can trade in

the futures market.

There is no way of taking a position on

the index through the cash market

whereas futures facilitate trading of index

futures.

A futures contract price

is the sum of cash price and the monthly cost of

carry. The cost of carry should always be

positive because a futures trade is really a

carried forward product similar to the erstwhile

badla. But just as badla rates sometimes

become negative when the market sentiment is

bearish, the cost of carry can also similarly be

negative when the sentiment is poor.

Page | 62



Business growth of futures and optionsmarket: Turnover (Rs.crore)

Month

Indexfutures

Indexoptions

Stockoptions

Stockfutures

Jun-00 35 0 0

Jun-01 590 195 0

Jun-02 2,123 389 4,642 16

Jun-03 9,348 1,942 15,042 46

Jun-04 64,017 8,473 7,424 78

Jun-05 77,218 16,133 14,799 1,63

Jun-06 2,43,572 57,969 11,306 2,43

Jun-07 2,40,797 92,503 21,928 4,51

Jun-08 3,77,939 3,08,709 21,430 3,75

Source: NCFM Derivative Module Work Book

ELIGIBILITY FOR ANY STOCK TO

ENTER IN DERIVATIVE MARKET

Page | 63



Non promoter holding (free float

capitalization) should not be less than

Rs.750 crores for the last 6 months.

Daily Average Trading value should not

be less than 5 crores in last 6 months

It must be traded least 90% of Trading

days in last 6 months.

Non Promoter Holding must at least be

30%

BETA should not be more than 4 (for

previous 6 months)

TRADING MECHANISM

The futures and options trading system of

NSE, called NEAT-F&O trading system,

provides a fully automated screen-based

trading for Nifty futures & options and stock

futures & options on a nation wide basis and an

online monitoring and surveillance

mechanism. It supports an anonymous order

driven market which provides complete

transparency of trading operations and operates

Page | 64



Rs.35000 crores. A total of 216,883,573

contracts with a total turnover of Rs.

7,356,271 crores were traded during 2006-

2007.

INDEX DERIVATIVES FOR HEDGING

To understand the use and functioning of

the index derivatives markets, it is necessary to

understand the underlying index. By looking at

an index, we know how the market is faring.

Index derivatives allow people to cheaply alter

their risk exposure to an index (hedging) and to

implement forecasts about index movements

(speculation). Hedging using index derivatives

has become a central part of risk management

in the modern economy.

Pricing the Futures

A futures price can be

simply derived by applying the cost of carry

logic, by which the fair value of a futures

Page | 66



contract can be determined. Every time the

observed price deviates form the fair value,

arbitragers would enter into trades to capture

the arbitrage profit. This in turn would push the

futures price back to its fair value. The cost of

carry model used for pricing futures is as

follows:

F=SerT

Where:

r= cost of financing continuously compounded

interest rate

T= Time till expiration in years

e= 2.71828

Example:

Security XYZ ltd trades in the spot market at

Rs. 1150. Money can be invested at 11% p.a.

The fair value of a one month futures contract

on XYZ is calculated as follows:

Page | 67



F = SerT

=1150*e0.11*1/12

=1160

INITIAL MARGIN

At the inception of a contract every client

is required to pay initial margin. This

margin is must to every trading member.

Initial margins are charged on Trade by

Trade basis

Initial margins are charged by NSCCL

Initial margins are charged for the

purpose of recovery and safe guard

against the fluctuation in the market.

A future value is calculated on cost of

carry model.

Page | 68



INITIAL MARGINS CHARGED ON

F&O MARKET

Index futures: 5%

Index options: 3%

Stock options: 7.5%

CONVERGENCE OF FUTURES PRICE

TO SPOT PRICE

As the delivery month of a futures

contract is approached, the futures price

converges to the spot price of the underlying

asset. When the delivery period is reached, the

futures price equals or is very close to the spot

price.

To see why this so, we first suppose that

the futures price is above the spot price during

the delivery period. Traders then have a clear

arbitrage opportunity:

Short a futures contract

Buy the asset

Make the delivery

Page | 69



These steps are

certain to lead to a profit equal to the amount

by which the futures price exceeds the spot

price. As traders exploit this arbitrage

opportunity, the futures price will fall. Suppose

next that the futures price is below the spot

price during the delivery period. Companies

interested in acquiring the asset will find it

attractive to enter into a long futures contract

and then wait for delivery to be made. As they

do so, the futures price will tend to rise.

The result is that

the futures price is very close to the spot price

during the delivery period.

The convergence of the

futures price to the spot price when

future price is above the spot price

can be pictorially represented as

follow:

Page | 70



Figure: A

The convergence of the futures

price to the spot price when future

price is below the spot price can be

pictorially represented as follows:

Page | 71



Figure: B

MARK TO MARKET (MTM) MARGINS

MTM margins is charged on continuous

Basis t the end of each day on Daily basis

of cumulative net out standing open

position.

CM (clearing member) is responsible to

collect and settle the daily MTM Margins

Page | 72



(Profits/loss) from their trading members

according to their open positions.

TM (Trading Member) are responsible to

collect and settle the daily MTM margins

for pay in/ pay out of their clients

according to the clients open position.

For calculating MTM margin future last

½ hour average price is takes, if it is not

traded on that day or last half hour MTM

is calculated on theoretical price model.

MTM margin balance at he year end

shown in current asset account.

OPEN INTEREST CALCULATION

Open interest means out standing orders of

(long position + short position)

Contracts in a particular point of time.

Page | 73



OPEN INTEREST CALCULATION

(EXAMPLE)

200(Total buy)-400(total sell) = 200 short (net

position)

Client Open Position

Client A 400(Total buy) - 200(total sell) =

200 long net position

Client B 200(total buy) - 400(total sell) =

200 short net position

Client C 500(total buy) - 400(total sell) =

100 long net position

= 500 long + short

Trading Member Total Open Position = 700

long+ short

Clearing member open position: All trading

member open position and custodial

participants

Page | 74



Thus an option is the right to buy or sell a

specified amount of a financial instrument at a

pre- arranged price on, or before, a particular

date.

There are two options which can be exercised:

Call option, a right to buy is referred to

as a call option.

Put option, the right to sell is referred as

a put option.

OPTION TERMINOLOGY

INDEX OPTIONS: these options have the

index as the underlying. Some options are

European while others are American. European

style options can be exercised only on the

maturity date of the option, which is known as

the expiry date. An American style option can be exercised at any time up to, and including,

the expiry date. It is to be noted that the

distinction has nothing to do with geography.

Page | 76



Both type of the option are traded through out

the world

STOCK OPTIONS: Stock options are

options on individual stocks. A contract gives

the holder the right to buy or sell shares at the

specified price.

BUYER OF AN OPTION: the buyer of an

option is the one who by paying the option

premium buys the right but not the obligation

to exercise his options on the seller/writer.

WRITER OF AN OPTION: The writer of a

call/put option is the one who receives the

option premium and is thereby obliged to

sell/buy the asset if the buyer exercised on him.

Page | 77



STRIKE PRICE: the price specified in the

options contract is known as the strike price or

the exercise price.

IN THE MONEY OPTION: An in the

money option is an option that would lead to a

positive cash flow to the holder if it were

exercised immediately. A call option on the

index is said to be in-the-money (ITM) when

the current index stands at a level higher than

the strike price (i.e. spot price> strike price). If

the index is much higher than the strike price,

the call is said to be deep ITM.. In the case of a

put, the put is ITM if the index is below the

strike price.

AT THE MONEY OPTION: An at the

money option is an option that would lead to

zero cash flow if it were exercised

immediately. An option on the index is at the

money when the current index equals the strike

price(i.e. spot price = strike price).

Page | 78



OUT OF THE MONEY OPTION: An out

of the money (OTM) option is an option that

would lead to a negative cash flow if it were

exercised immediately. A call option on the

index is out of the money when the current

index stands at a level which is less than the

strike price(i.e. spot price < strike price). If the

index is much lower than the strike price, the

call is said to be deep OTM. In the case of a

put, the put is OTM if the index is above the

strike price.

INTRINSIC VALUE OF AN OPTION:

The option premium can be broken down into

two components- intrinsic value and time

value. The intrinsic value of a call is the

amount the option is ITM, if it is ITM. If the

call is OTM, its intrinsic value is zero.

TIME VALUE OF AN OPTION: The time

value of an option is the difference between its

premium and its intrinsic value. Usually, the

maximum time value exists when the option is

ATM. The longer the time to expiration, the

greater is an option’s time value, or else equal.

Page | 79



At expiration, an option should have no time

value.

STRATEGIES IN FUTURES

AND OPTIONS

The following are the four basic

strategies in options market which can be

further designed in combination of one or more

of the basic strategies, but all the complex

strategies are based on the following 4 basic

kind of strategies, so the understanding of these

4 strategies is very essential before we go any

further:

BUYING A CALL OPTION

Page | 80



The following is the graphical representation of

the above strategy:

CALL OPTION PAYOFF

-50

0

50

100

150

200

250

300

PRICE

P A Y O F F

GROSS PAYOFF

NET PAYOFF

400 450 500 550 600 650 700 750

Figure: C

In the above example when GMR falls to

a price of Rs.400, the buyer of the option can

purchase the share form the market at Rs.400

with out exercising the right to buy the stock at

Rs.500. However, on that he incurs a loss of

Rs.25 as the premium being paid for the option

remaining unexercised. But suppose that the

Page | 82



share prices rise to Rs.750 then the holder of

the option has the right to purchase that share

at a price of Rs.500 form the seller of the

option. In this case any price level above

Rs.525 (500+25), which is the breakeven point,

results in a profit for the buyer of the option.

Investment in the above option is

Rs.25*1000=Rs.25000.

In the above diagram we can notice that

the payoffs are one to one after the price of the

underlying security rises above the exercise

price. When the security price is less than the

exercise price, the option is referred to as out of

the money.

Form the above figure it can be seen that

the investor who is already long i.e. holds a

stock bears a loss only to the extent of Rs.25

because no matter if the share price fall below

Rs.500 the investor is not holding any stock.

Once the investor is either long or short the

stock he can adopt any of these strategies to

hedge his risk.

The above strategy was applied in the

month of June

Page | 83



The following are the updates

DATE STRIKE

PRICE

OPEN HIGH LOW

01-06-2009 500 27 27 23

15-06-2009 500 54 64.75 52.45

21-06-2009 500 99 104.50 99

27-06-2009 500 200.90 249 200.90

Table: B

As it can be seen from the above table

that the call option price of the stock has given

a fantastic return of over 900% on investment

of Rs.25000 only. Here the risk of the above

investment was limited only to Rs.25000

BUYING A PUT

The second strategy is the put strategy where

the buyer of the put option has to pay a

premium(price) for the option to sell a

specified quantity at a specified price any time

prior to the maturity of the option. Here wetake the example of buying a put option on the

stock of AIR DECCAN. The exercise price was

Rs.140. The premium paid on the above option

Page | 84



was Rs.4.10 on 04-06-2009. investment in the

above strategy is Rs.4.10*2500=Rs.10,250.

The pay off form a put can be illustrated.

Notice that the payoffs are one to one when the

price of the security is less than the exercise

price.

PRICE GROSS PAYOFF NET PAYOFF

110 30 24.9

120 20 14.9

130 10 4.9

140 0 -4.1

150 0 -4.1

160 0 -4.1

170 0 -4.1

Table: C

Following are the update of the above option

DATE STRIKE

PRICE

OPEN HIGH LOW

04-06-2009 140 4.40 4.40 4.40

Page | 85



07-06-2009 140 4.00 4.00 4.00

08-06-2009 140 4.90 8.75 4.90

27-06-2009 140 6.75 6.75 6.75

Table: D


the above strategy:

PUT OPTION PAYOFF

-10

-5

0

5

10

15

20

25

30

35

PRICE

P A Y O F F

GROSS PAYOFF

NET PAYOFF

110 120 130 140 150 160 170

Figure: D

A put option is a contact giving its owner

the right to sell a fixed amount of a specified

underlying asset at a price at any time on or

before a fixed date. On the expiration date, the

value of the put on a per share basis will be the

Page | 86



larger of the exercise price minus the stock

price or zero.

In the above diagram we can notice how

the down side risk is minimized if the stock is

volatile and the share prices may fall.

Here an investor will get profits only if the

stock falls below Rs.134.9

In this option the investor has gained 64.6%

with in a month.

WRITING THE CALL OPTIONS

A call option gives the buyer the right to

buy the underlying asset at the strike price

specified in the option. For selling the option,

the writer of the option charges a premium. The

profit/loss that the buyer makes on the option

depends on the spot price of the underlying.

Whatever is the buyer’s profit is the seller’s

loss. If upon expiration, the spot price exceeds

the strike price, the buyer will exercise the

option on the writer. Hence as the spot price

Page | 87



increases the writer of the option starts making

losses. Higher the spot price more is the loss he

makes, if upon expiration the spot price of the

underlying is less than the strike price, the

buyer lets his option expire unexercised and the

writer gets to keep the premium.

As the options are always costly at the

beginning of the month we have written a call

option on CAIRN INDIA LIMITED ON 1st of

June at a strike price of Rs.140 with a premium

of Rs.8.5,

Following is the payoff chart for the above

option:


110 0 8.5

120 0 8.5

130 0 8.5

140 0 8.5

150 -10 -1.5

160 -20 -11.5

170 -30 -21.5

Table: E

Page | 88



Following are the updates of the option rates in

the market:

DATE STRIKE

PRICE

OPEN HIGH LOW

01-Jun-2009 140.00 8.5 8.5 8.5

12-Jun-2009 140.00 2.4 4.2 2.1

20-Jun-2009 140 4.35 4.85 2.35

28-Jun-2009 140 4.30 4.90 4.2

Table: F


the above strategy:

CALL WRITTING PAYOFF CHART

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

PRICE

P A Y O F F

GROSS PAYOFF

NET PAYOFF

110 120 130 140 150 160 170

Figure: E

From the above we can notice that the

liability is potentially unlimited when a

investor are writing options.

Page | 89



Here we can see that the investment in

this option is nil, as the call writer will get the

premium at which he is writing. The net return

on this option at the expiry period was

Rs.10,624.

WRITING OF PUT OPTIONS

A put option gives the buyer the right to

sell the underlying asset at the strike price

specified in the option. For selling the option,

the writer of the option charges a premium, the

profit/loss that the buyer makes on the option

depends on the spot price of the underlying.

Whatever is the buyer’s profit is the seller’s

loss. If upon expiration, the spot price of the

underlying happens to be below the strike

price, the buyer will exercise the option on the

writer. If upon the expiration the spot price of

the underlying is more than the strike price, the

buyer lets his option expire un-exercised and

the writer gets to keep the premium.

Page | 90



The put writer will first get a premium of

amount Rs.9375

Following is the payoff chart of writing the put

option


650 -150 -125

700 -100 -75

750 -50 -25800 0 25

850 0 25

900 0 25

Table: G


the above strategy:

Page | 91



WRITING PUT OPTION PAYOFF

-200

-150

-100

-50

0

50

PRICE

P A Y O F F

GROSS PAYOFF

NET PAYOFF

650 700 750 800 850 900

Figure: F

As with the written call, the upside is limited to

the premium of the option (the initial price).

The downside is limited to the minimum asset

price-which is zero. We can clearly see from

these diagrams that the investor, depending

upon his risk appetite and the outlook about the

market conditions, can minimize his losses.

The net return on this option at the expiry

period was Rs.8, 212.5

Page | 92



FIRDAY MARKET ANALYSIS

DATE 1 2 3 4 5DIFFERENC

E

06-Mar 8198 8104 8348 8047 8326 12

13-Mar 8344 8481 8793 8481 8757 41

20-Mar 9002 8951 9000 8867 8967 -3

27-Mar 100031003

71012

8 99131004

8 4

17-Apr 109471106

81134

01094

61102

3 7

24-Apr 111351115

01136

31107

01132

9 19

08-May 121171209

21218

11176

51187

6 -24

15-May 118721194

91221

91194

91217

2 30

22-May 137361366

31393

71361

11388

7 15

29-May 14296

1432

0

1472

7

1432

0

1462

5 32

1PRE'S

CLOSED

2 Open

3 HIGH

4 LOW

5 CLOSING

Page | 93



Page | 95



Page | 96



Page | 97



Page | 98



Conclusions according to mystudy

Volatile markets are characterized by

wide price fluctuations and heavy

trading.

Inverters get time to pay money ie

clearing of cheque will be on monday.

Settlement day or closing day of

week.

Page | 99



In my study its

says that to invest on Thursday and

withdraw on firday . stock broker says

Monday as black monday

CONCLUSIONS

1) Derivatives in equity specially are more

suited to provide for hedging and more

cost effective. It has less risky and more

profitable.

2) As the stock Index Futures and Options

are available, the FII’s buying /selling

operations can be performed at greater

speed and less cost and without adding

too much to market volatility.

Page | 100



3) Most of investors are trading not only in

derivatives for hedging, but also for other

purposes.

4) Derivatives do not create any new risk.

They simply manipulate risks and

transfer them to those who are willing to

bear these risks.

5) Hedging through derivatives reduces the

risk of owning a specified asset, which

may be share currency etc.

6) All derivative instruments are very

simple to operate. Treasury managers

and portfolio managers can hedge all

risks without going through the tedious

process of hedging each day and

amount/share separately.

7) Derivatives also offer high liquidity. Just

as derivatives can be contracted easily, it

is also possible for companies to get out

of positions in case that market reacts

Page | 101



otherwise. This also does not involve

much cost.

8) Derivatives are not only desirable but

also necessary to hedge the complex

exposure and volatility that the financial

companies generally face in the capital

markets today.

9) All derivative products are low cost

products. Companies can hedge a

substantial portion of their balance sheet

exposure, with a low margin requirement.

There is no

assured route for success. This is a fact which is

universally applicable and so in case of

investment. There is no short cut formula which

could be applied instantly and make money out

of it instantly in the stock market. Therefore, a

good investment takes time, patience, hard

work and perseverance to achieve success.

Over the next ten – twenty years, Indian capital

market and stock market may offer some of the

Page | 102



best and lucrative opportunities to make big

money as compared to other investment

avenues.

SUGGESTIONS

1. There is a need to educate the investor in

futures and options market, due to its

complex nature an investor fails to

understand the risk reward of a particular

strategy, which may result into losses for

the investor.

2. An investor must also be thought as to

which strategy must be applied at what

situation, as application of appropriate

strategy at appropriate situation will

results into profitable transactions

3. An investor must also be suggested to

write certain derivative exams conducted

by leading financial organization in the

Page | 103



country for proper understanding of the

derivative market.

4. The research reports must be made more

explanatory which must show the risk

covered in a particular strategy and the

return which the investor can expect, it

must be accompanied by payoff chart

along with the line graph of the strategy

suggested.

5. Anand Rathi Securities can conduct

certain investor education camps in

collaboration with leading media

channels, which will serve both the

purpose which are brand advertisement

and investor awareness.

6. There is a need to start derivative trading

at all stock exchanges in all over India.

As of now it’s limited to BSE and NSE.

7. A formal mechanism should be

established for co-ordination between

Page | 104



SEBI and RBI in respect of all financial

derivatives

8. Administrative machinery of existing

stock exchanges should be strengthened

wherever necessary. Tight supervision is

essential for successful derivative

trading.

9. SEBI has to implement more powerful

rules and regulations and implement

certain measures for taking strict action

against all illegal transactions.

Page | 105



BIBLIOGRAPHY

• WWW.GOOGLE.COM

• WWW.WIKIPEDIA.COM

• WWW.BSEINDIA .COM• WWW.NSEINDIA.COM

• WWW.ANANDRATHI.COM

• WWW.MONEYCONTROL.COM

http://www.google.com/

http://www.wikipedia.com/

http://www.mcx.com/

http://www.nseindia.com/

http://www.anandrathi.com/

http://www.moneycontrol.com/

http://www.google.com/

http://www.wikipedia.com/

http://www.mcx.com/

http://www.nseindia.com/

http://www.anandrathi.com/

http://www.moneycontrol.com/

17765525 equities market

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