A STUDY ON EVOLUTION, OPERATIONS AND PRICING OF DERIVATIVE MARKET IN INDIA

A STUDY ON EVOLUTION, OPERATIONS AND PRICING OF DERIVATIVE MARKET IN INDIAG RAVISH GOWDA

USN: 1OY11MBA23

Specialization: Finance

The oxford college of engineering, Bengaluru. guidesINTERNAL GUIDEEXTERNAL GUIDEProf. G Koteshwar Rao MBA Programme The Oxford College Of Engineering, Bengaluru Mr. Sayeesh Branch manager Fortune Commodities and Derivatives (IND) Pvt Ltd Basavanagudi, BangaloreCOMPANY PROFILE

Fortune Group which comprises the holding company Fortune Financial Services (India) Limited and its wholly-owned subsidiaries, is engaged in providing a range of financial services right from Equities and Derivatives trading, Equity Research, Commodities Trading, Portfolio Management Services, Distribution of Mutual Funds, IPO & Insurance products and also Investment banking services. Fortune Financil Services (India) Limited was incorporated in the year 1991 by Mr. J. T. Poonja, Chairman and Mr. Nimish C Shah, Vice Chairman and Managing Director.

STATEMENT OF THE PROBLEMVolatility is the most important input in the pricing of a derivative. It is well known that prices of related securities like prices in spot and futures markets cannot diverge without bound because they are linked by an arbitrage relationship. The link between these arbitrage relationships may diverse due to short term disequilibrium. Here the prices are steady. Hence we need to ascertain the intrinsic value of the stock futures and the Index future.OBJECTIVES OF THE STUDYTo study the evolution of derivative market in India.

To study the trading and settlement procedures of the derivative instruments in India.

To ascertain the intrinsic value of select stock and index futures.

To ascertain whether the stock and the index futures are underpriced or overpriced compared to the intrinsic value.

METHODOLOGY To achieve the objective of the study, the stock market data has been collected.Research methodology carried for this study can be two types

PrimarySecondary

Following are the variables considered for analysis,

NIFTY index points.Trading volume of NSE Futures & Options.NIFTY Stock Futures prices and their underlying asset prices.Nifty Index Future price.

PRIMARY DATA:The data, which is being collected for the first time and it, is the original data of this project.The primary data has been taken from FFSIL staff and guide of the project.

SECONDARY DATA: Data were collected mainly from secondary sources. Secondary data are those which are obtained indirectly from sources such as a book or computer database, website, magazines and newspapers, etc. STASTICAL TOOLS: A simple statistical technique such as tabulation is used for tabulating the raw data. Tools such as charts, graphs etc have been used for the better understanding of the data for interpretation.

SCOPE OF THE STUDYThe study covers Derivatives with special reference to futures (Stock future) and options in the Indian context. The study is not based on the international perspective of derivative markets.

The present study on futures and options is very much appreciable on the grounds that it gives deep insights about the F&O market. It would be essential for the perfect way of trading in F&O.

An investor can choose the right underlying asset or portfolio for investment which is risk free. The study would assist in understanding the F&O segments.

The study assists in knowing the intrinsic value of the select stock futures & nifty index future. The study provides information related to the byelaws of F&O trading.

LIMITATIONS OF THE STUDYData used for analysis is collected on 8th FEB 2013

Here we are considering that the securities provides no income i.e. dividend

The study is restricted to select stock futures from NATIONAL STOCK EXCHANGE.

Time constraint was another limitation. As no efficient research can be done in this short period of time.

Summary Of Findings Showing the percentage change of closing price with respect to future price of the Stock Future & Index Future.

The price of stock future TCS

Of February month contract has been found `1392.26. The percentage change of closing price with respect to future price of the contract was found to be -0.17%.i.e. The February month contract is quoting at discount or unerpriced.

Of March month contract has been found 1399.23 The percentage change of closing price with respect to future price of the contract was found to be -017% i.e. The March month contract is quoting at discount or underpriced.

Of April month contract has been found `1405.81 The percentage change of closing price with respect to future price of the contract was found to be -0.03% i.e. The April month contract is quoting at discount or underpriced.

The price of stock future HEROMOTOCORP

Of February month contract has been found 1762.34. The percentage change of closing price with respect to future price of the contract was found to be -0.04% i.e. The February month contract is quoting at discount or underpriced.

Of March month contract has been found `1771.39. The percentage change of closing price with respect to future price of the contract was found to be -0.55% i.e. The March month contract is quoting at discount or undrpriced.

Of April month contract has been found `.1779.59. The percentage change of closing price with respect to future price of the contract was found to be 0.87% i.e. The April month contract is quoting at Premium or overpriced.

The price of stock future RELIANCE

Of February month contract has been found `.876.1. The percentage change of closing price with respect to future price of the contract was found to be -0.11% i.e. The February month contract is quoting at discount or underpriced.Of March month contract has been found 880.6. The percentage change of closing price with respect to future price of the contract was found to be 0.04% i.e. The March month contract is quoting at PREMIUM or overerpriced.Of April month contract has been found `.884.63. The percentage change of closing price with respect to future price of the contract was found to be 3.46% i.e. The April month contract is quoting at premium or overpriced.

The price of stock future AIRTELOf February month contract has been found `321.27. The percentage change of closing price with respect to future price of the contract was found to be - 0.02% i.e. The February month contract is quoting at discount or underpriced.Of March month contract has been found `322.092. The percentage change of closing price with respect to future price of the contract was found to be 0.37% i.e. The March month contract is quoting at premium or overpriced.Of April month contract has been found `328.408 The percentage change of closing price with respect to future price of the contract was found to be -1.34% i.e. The April month contract is quoting at discount or underpriced.

CONCLUSIONThe futures market is a global marketplace, initially created as a place for farmers and merchants to buy and sell commodities for eitherspot or future delivery. This was done to lessen the risk of commodity scarcity. And later it was introduced to the financial market.The players in the futures market are hedgers and speculators. A hedger tries to minimize risk by buying or selling now in an effort to avoid rising or declining prices. Conversely, the speculator will try to profit from the risks by buying or selling now in anticipation of rising or declining prices. Futures accounts are credited or debited daily depending on profits or losses incurred. The futures market is also characterized as being highly leveraged due to its margins, although leverage works as a double-edged sword. It's important to understand the arithmetic of leverage when calculating profit and loss, as well as the minimum price movements and daily price limits at which contracts can trade. Going long, going short, and spreads are the most common strategies used when trading on the futures market. Once you make the decision to trade in derivatives, there are several ways to participate in the futures market. All of them involve risk some are more than the others. The investors must use the above mentioned market strategies to optimize their returns, and minimize the lossesSUGGESTIONInvestors are suggested to use the following strategies to optimize their returns, and minimize the losses:Instead of taking short position in the stock futures market in the anticipation of fall in market, when the present value of future contract is less than the future value i.e. FS0ert , then an investor may buy the asset by borrowing an amount equal to S0 for the period of t at the risk free rate and take short position in future contract. At the time of maturity, the asset will be delivered for a price of F and the amount borrowed will be repaid by paying an amount equal to S0ert, and deal would result in the net profit of F-S0ert.

Investors are advised to sell the April month stock future contract of Reliance, as it is quoting at premium

Investors are advised to sell the April month stock future contract of DLF, as it is quoting at premium

Investors are advised to sell the April month stock future contract of RANBAXY, as it is quoting at premium

THANK YOU