ajay project completed!!!

8/8/2019 Ajay Project Completed!!!

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1.1INTRODUCTION

A derivative security is a security whose value depends on the value of together

more basic underlying variable. These are also known as contingent claims. Derivatives

securities have been very successful in innovation in capital markets.

The emergence of the market for derivative products most notably forwards,

futures and options can be traced back to the willingness of risk averse economic agents

to guard themselves against uncertainties arising out of fluctuations in asset prices. By

their very nature, financial markets are market by a very high degree of volatility. Though

the use of derivative products, it is possible to partially or fully transfer price risks by

locking in asset prices. As instrument of risk management these generally dont

influence the fluctuations in the underlying asset prices.

However, by locking-in asset prices, derivative products minimize the impact of

fluctuations in asset prices on the profitability and cash-flow situation of risk-averse

investor.

Derivatives are risk management instruments which derives their value from an

underlying asset. Underlying asset can be Bullion, Index, Share, Currency, Bonds,

Interest, etc.


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TYPES OF DERIVATIVES

Future contract:

A future contract is an agreement between two parties to buy or sell an asset at a

certain time in the future at a certain price.

Forward contract:

A forward contract is an agreement between two parties to exchange an asset for

cash at a predetermined future date for a price that is specified today.

Options:

An option is a right but not the obligation to buy or sell an agreed amount of a

commodity or underlying asset at an agreed price on or before a specified future date.

Swaps: A swap is a derivative in which two counterparties agree to exchange one stream

of cash flow against another stream.


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1.2 NEED OF THE STUDY

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 these

instruments are offering less risk when compared to the other types of securities in the

market.


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1.3 OBJECTIVE OF THE STUDY

y To understand the concept of the Stock futures and stock options.

y To understand the investors profitability who invests in stock futures and stock

options.

y A special study on stock futures and stock options of SBI, DLF & AXIS BANK.


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1.4SCOPE OF THE STUDY

The study is limited to Derivatives With special reference to Futures and Options in the

Indian context and the Indiabulls has been taken as representative sample for the study.

The study cannot be said as totally perfect, any alteration may come. The study has only

made humble attempt at evaluating Derivatives Markets only in Indian Context. The

study is not based on the International perspective of the Derivatives Markets.


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1.5RESEARCH METHODOLOGY

The methodology adopted for the purpose of project study was collected from both

primary and secondary sources of data.

PRIMARY DATA

Primary sources of data are collected through personal interaction with concern

executives of India bulls.

SECONDARY DATA

1. A number of books have been referred for primary and secondary markets

concept.

2. Journals related to primary and secondary market.

3. Information available on internet has been studied.

4. Information provided by the company.

TOOLS AND TECHNIQUES:

Some of the option pricing models are:

1. Block-Scholes option pricing model

2. Future price calculating formula


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2.1 INTRODUCTION TO DERIVATIVES

DERIVATIVES

The emergence of the market for derivative products, most notably forwards, futures and

options, can be traced back to the willingness of risk-averse economic agents to guard

themselves against uncertainties arising out of fluctuations in asset prices. By their very

nature, the financial markets are marked by a very high degree of volatility. Through of

derivatives of products, it is possible to partially or fully transfer price risks by locking

in asset prices. As instruments of risk management, these generally do not influence the

fluctuations underlying prices. However, by locking in asset prices, derivatives products

minimize the impact of fluctuations in asset prices on the profitability and cash flow

situation of riskaverse investors.

DEFINITION

Understanding the word itself, Derivatives is a key to mastery of the topic. The word

originates in mathematics and refers to a variable, which has been derived from another

variable. For example, a measure of weight in pound could be derived from a measure of

weight in kilograms by multiplying by two.

In financial sense, these are contracts that derive their value from some underlying asset.

Without the underlying product and market it would have no independent existence.

Underlying asset can a Stock, Bond, Currency, Index or a Commodity. Some one may

take an interest in the derivative products. Without having an interest in the underlying

product market, but the two are always related and may therefore interact with each other.


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The term Derivative has been defined in Securities Contracts (Regulation) Act 1956, as:

A security derived from a debt instrument, share, loan whether secure 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.

MAJOR PLAYERS IN DERIVATIVE MARKET

There are three major players in their derivatives trading.

1. Hedgers.

2. Speculators.

3. Arbitrageurs.

HEDGERS:

The party, which manages the risk, is known as Hedger. Hedgers seek to protect

themselves against price changes in a commodity in which they have an interest.

SPECULATORS:

They are traders with a view and objective of making profits. They are willing to

take risks and they bet upon whether the markets would go up or come down.


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ARBITRAGEURS:

Risk less profit making is the prime goal of arbitrageurs. They could be making

money even with out putting their own money in, and such opportunities often come up

in the market but last for very short time frames. They are specialized in making

purchases and sales in different markets at the same time and profits by the difference in

prices between the two centers.


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2.2 FUTURES

The future contract is an agreement between two parties two buy or sell an asset

at a certain specified time in future for certain specified price. In this, it is similar to a

forward contract. A futures contract is a more organized form of a forward contract; these

are traded on organized exchanges. However, there are a no of differences between

forwards and futures. These relate to the contractual futures, the way the markets are

organized, profiles of gains and losses, kind of participants in the markets and the ways

they use the two instruments.

Futures contracts in physical commodities such as wheat, cotton, gold, silver,

cattle, etc. have existed for a long time. Futures in financial assets, currencies, and

interest bearing instruments like treasury bills and bonds and other innovations like

futures contracts in stock indexes are relatively new developments.

The futures market described as continuous auction markets and exchanges

providing the latest information about supply and demand with respect to individual

commodities, financial instruments and currencies, etc. Futures exchanges are where

buyers and sellers of an expanding list of commodities; financial instruments and

currencies come together to trade. Trading has also been initiated in options on futures

contracts. Thus, option buyers participate in futures markets with different risk. The

option buyer knows the exact risk, which is unknown to the futures trader.


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FEATURES OF FUTURES CONTRACTS

The principal features of the contract are as fallows.

ORGANIZED EXCHANGES:

Unlike forward contracts which are traded in an over- the- counter market, futures

are traded on organized exchanges with a designated physical location where trading

takes place. This provides a ready, liquid market which futures can be bought and sold at

any time like in a stock market.

STANDARDIZATION:

In the case of forward contracts the amount of commodities to be delivered and

the maturity date are negotiated between the buyer and seller and can be

tailor made to buyers requirement. In a futures contract both these are standardized by

the exchange on which the contract is traded.

CLEARING HOUSE:

The exchange acts a clearinghouse to all contracts struck on the trading floor. For

instance a contract is struck between capital A and B. upon entering into the records of

the exchange, this is immediately replaced by two contracts, one between A and the

clearing house and another between B and the clearing house. In other words the

exchange interposes itself in every contract and deal, where it is a buyer to seller, and

seller to buyer. The advantage of this is that A and B do not have to under take any

exercise to investigate each others credit worthiness. It also guarantees financial integrity

of the market. The enforces the delivery for the delivery of contracts held for until

maturity and protects itself from default risk by imposing margin requirements on traders

and enforcing this through a system called marking to market.


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ACTUAL DELIVERY IS RARE:

In most of the forward contracts, the commodity is actually delivered by the seller

and is accepted by the buyer. Forward contracts are entered into for acquiring or

disposing of a commodity in the future for a gain at a price known today. In contrast to

this, in most futures markets, actual delivery takes place in less than one percent of the

contracts traded. Futures are used as a device to hedge against price risk and as a way of

betting against price movements rather than a means of physical acquisition of the

underlying asset. To achieve, this most of the contracts entered into are nullified by the

matching contract in the opposite direction before maturity of the first.

MARGINS:

In order to avoid unhealthy competition among clearing members in reducing

margins to attract customers, a mandatory minimum margins are obtained by the

members from the customers. Such a stop insures the market against serious liquidity

crises arising out of possible defaults by the clearing members. The members collect

margins from their clients has may be stipulated by the stock exchanges from time to

time and pass the margins to the clearing house on the net basis i.e. at a stipulated

percentage of the net purchase and sale position.

The stock exchange imposes margins as fallows:

1. Initial margins on both the buyer as well as the seller.

2. The accounts of buyer and seller are marked to the market daily.

The concept of margin here is same as that of any other trade, i.e. to introduce a

financial stake of the client, to ensure performance of the contract and to cover day to day

adverse fluctuations in the prices of the securities.


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The margin for future contracts has two components:

y Initial margin

y Marking to market

INITIAL MARGIN:

In futures contract both the buyer and seller are required to perform the contract.

Accordingly, both the buyers and the sellers are required to put in the initial margins. The

initial margin is also known as the performance margin and usually 5% to 15% of the

purchase price of the contract. The margin is set by the stock exchange keeping in view

the volume of business and size of transactions as well as operative risks of the market in

general.

The concept being used by NSE to compute initial margin on the futures

transactions is called value- at Risk (VAR) where as the options market had SPAN

based margin system.

MARKING TO MARKET:

Marking to market means, debiting or crediting the clients equity accounts with

the losses/profits of the day, based on which margins are sought.

It is important to note that through marking to market process, die clearinghouse

substitutes each existing futures contract with a new contract that has the settle price or

the base price. Base price shall be the previous days closing Nifty value. Settle price is

the purchase price in the new contract for the next trading day.


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FUTURES TERMINOLOGY:

Spot price: The price at which an asset trades in spot market.

Futures price: The price at which the futures contract trades in the futures market.

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 contract size on NSE futures market is 100 Nifties.

Basis/Spread:

In the context of financial futures basis can be defined as the futures price minus

the spot price. There ill be a different basis for each delivery month for each contract. In

formal 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 plus the

interest that is paid to finance the asset less the income earned on the asset.

Multiplier:

It is a pre-determined value, used to arrive at the contract size. It is the price per

index point.

Tick Size: It is the minimum price difference between two quotes of similar nature.


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Open Interest:

Total outstanding long/short positions in the market in any specific point of time.

As total long positions for market would be equal to total short positions for calculation

of open Interest, only one side of the contract is counted.

Long position: Outstanding/Unsettled purchase position at any point of time.

Short position: Out standing/unsettled sales position at any time point of time.

INDEX FUTURES:

Stock Index futures are most popular financial futures, which have been used to

hedge or manage systematic risk by the investors of the stock market. They are called

hedgers, who own portfolio of securities and are exposed to systematic risk. Stock index

is the apt hedging asset since, the rise or fall due to systematic risk is accurately shown in

the stock index. Stock index futures contract is an agreement to buy or sell a specified

amount of an underlying stock traded on a regulated futures exchange for a specified

price at a specified time in future.

Stock index futures will require lower capital adequacy and margin requirement

as compared to margins on carry forward of individual scrips. The brokerage cost on

index futures will be much lower. Savings in cost is possible through reduced bid-ask

spreads where stocks are traded in packaged forms. The impact cost will be much lower

incase of stock index futures as opposed to dealing in individual scrips. The market is

conditioned to think in terms of the index and therefore, would refer trade in stock index

futures. Further, the chances of manipulation are much lesser.

The stock index futures are expected to be extremely liquid, given the speculative nature

of our markets and overwhelming retail participation expected to be fairly high. In the


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near future stock index futures will definitely see incredible volumes in India. It will be a

blockbuster product and is pitched to become the most liquid contract in the world in

terms of contracts traded. The advantage to the equity or cash market is in the fact that

they would become less volatile as most of the speculative activity would shift to stock

index futures. The stock index futures market should ideally have more depth, volumes

and act as a stabilizing factor for the cash market. However, it is too early to base any

conclusions on the volume are to form any firm trend. The difference between stock

index futures and most other financial futures contracts is that settlement is made at the

value of the index at maturity of the contract.

Example:

If NSE NIFTY is at 5800 and each point in the index equals to Rs.50, a contract

struck at this level could work Rs.290000 (5800x50). If at the expiration of the contract,

the NSE NIFTY is at 5900, a cash settlement of Rs.5000 is required (5900-5800) x50).

STOCK FUTURES:

With the purchase of futures on a security, the holder essentially makes a legally

binding promise or obligation to buy the underlying security at same point in the future

(the expiration date of the contract). Security futures do not represent ownership in a

corporation and the holder is therefore not regarded as a shareholder.

A futures contract represents a promise to transact at same point in the future. In

this light, a promise to sell security is just as easy to make as a promise to buy security.

Selling security futures without previously owing them simply obligates the trader to sell

a certain amount of the underlying security at same point in the future.


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Example:

If the current price of the GMRINFRA share is Rs.170 per share. We believe that

in one month it will touch Rs.200 and we buy GMRINFRA shares. If the price really

increases to Rs.200, we made a profit of Rs.30 i.e. a return of 18%.

If we buy GMRINFRA futures instead, we get the same position as

ACC in the cash market, but we have to pay the margin not the entire amount. In the

above example if the margin is 20%, we would pay only Rs.34 per share initially to enter

into the futures contract. If GMRINFRA share goes up to Rs.200 as expected, we still

earn Rs.30 as profit.

PAYOFF FOR FUTURES CONTRACTS

Futures contracts have linear payoffs. In simple words, it means that the losses

as well as profits for the buyer and the seller of a futures contract are unlimited. These

linear payoffs are fascinating as they can be combined with options and the underlying to

generate various complex payoffs.

PAYOFF FOR BUYER OF FUTURES: LONG FUTURES

The payoff for a person who buys a futures contract is similar to the payoff for a

person who holds an asset. He has a potentially unlimited upside as well as potentially

unlimited downside.

Take the case of a speculator who buys a two-month Nifty index futures

contract when Nifty stands at 4800. The underlying asset in this case is Nifty portfolio.

When the index moves up, the long futures position starts making profits, and when index

moves down it starts making losses.


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PAYOFF FOR A BUYER OF NIFTY FUTURES

Profit

4800

0 Nifty

LOSS

PAYOFF FOR SELLER OF FUTURES: SHORT FUTURES

The payoff for a person who sells a futures contract is similar to the payoff for a

person who shorts an asset. He has potentially unlimited upside as well as potentially

unlimited downside.

PAYOFF FOR A SELLER OF NIFTY FUTURES

Profit

4800

0 Nifty

Loss


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Take the case of a speculator who sells a two-month Nifty index futures contract when

the Nifty stands at 4800. The underlying asset in this case is the Nifty portfolio. When the

index moves down, the short futures position starts making profits, and when index

moves up, it starts making losses.

PRICING FUTURES

COST OF CARRY MODEL:We use fair value calculation of futures to decide the no arbitrage limits on the

price of the futures contract. This is the basis for the cost-of-carry model where the price

of the contract is defined as fallows.

F = S + C

Where

F Futures

S Spot price

C Holding cost or Carry cost

This can also be expressed as

F = S (1+r)T

Where

r Cost of financing

T Time till expiration


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PRICING INDEX FUTURES GIVEN EXPECTED DIVIDEND AMOUNT:

The pricing of index futures is also based on the cost of carry model where the

carrying cost is the cost of financing the purchase of the portfolio underlying the index,

minus the present value of the dividends obtained from the stocks in the index portfolio.

Example

Nifty futures trade on NSE as one, two and three month contracts. Money can be

barrowed at a rate of 15% per annum. What will be the price of a new two-month futures

contract on Nifty?

1.

Let us assume that ACC will be declaring a dividend of Rs.10/- per share after 15

days of purchasing of contract.

2. Current value of Nifty is 1200 and Nifty trade with a multiplier of 200.

3. Since Nifty is traded in multiples of 200 value of the contract is

200x1200=240000.

4. If ACC as weight of 7% in Nifty, its value in Nifty is Rs.16800 i.e.

(240000x0.07).

5. If the market price of ACC is Rs.140, then a traded unit of Nifty involves 120

shares of ACC i.e. (16800/140).

6. To calculate the futures price we need to reduce the cost of carry to the extent of

dividend received is Rs.1200 i.e. (120x10). The dividend is received 15 days later

and hence compounded only for the remainder of 45 days. To calculate the futures

price we need to compute the amount of dividend received for unit of Nifty.

Hence, we dividend the compounded figure by 200.

7. Thus futures priceF = 1200(1.15) 60/365 (120x10(1.15) 45/365)/200 = Rs.1221.80.


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PRICING INDEX FUTURES GIVEN EXPECTED DIVIDEND YIELD

If the dividend flow through out the year is generally uniform, i.e. if there are few

historical cases of clustering of dividends in any particular month, it is useful to calculate

the annual dividend yield.

F = S (1+ r-q)T

Where

F Futures price

S Spot index value

r Cost of financing

q Expected dividend yield

T Holding period

Example:

A two-month futures contract trades on the NSE. The cost of financing is 15% and the

dividend yield on Nifty is 2% annualized. The spot value of Nifty is 1200. What is the

fair value of the futures contract?

Fair value = 1200(1+0.15-0.02)60/365

= Rs.1224.35

PRICING STOCK FUTURES

A futures contract on a stock gives its owner the right and the obligation to buy or

sell the stocks. Like, index futures, stock futures are also cash settled: There is no

delivery of the underlying stock.


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PRICING STOCK FUTURES WHEN NO DIVIDEND IS EXPECTED

The pricing of stock futures is also based on the cost of carry model, where the

carrying cost is the cost of financing the purchase of the stock, minus the present value of

the dividends obtained from the stock. If no dividends are expected during the life of the

contract, pricing futures on that stock is very simple. It simply involves the multiplying

the spot price by the cost of carry.

Example:

SBI futures trade on NSE as one, two and three month contracts. Money can be barrowed

at 15% per annum. What will be the price of a unit of new two-month futures contract on

SBI if no dividends are expected during the period?

1. Assume that the spot price of SBI is Rs.228.

2. Thus, futures price F = 228(1.15)60/365

= Rs.223.30.

PRICING STOCK FUTURES WHEN DIVIDENDS ARE EXPECTED

When dividends are expected during the life of futures contract, pricing involves

reducing the cost of carrying to the extent of the dividends. The net carrying cost is the

cost of financing the purchase of the stock, minus the present value of the dividends

obtained from the stock.

Example:

ACC futures trade on NSE as one, two and three month contracts.

What will be the price of a unit of new two-month futures contract on ACC if dividends

are expected during the period?

1. Let us assume that ACC will be declaring a dividend of Rs.10/- per share after 15

days pf purchasing contract.


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2. Assume that the market price of ACC is Rs.140/-

3. To calculate the futures price, we need to reduce the cost of carrying to the extent

of dividend received. The amount of dividend received is Rs.10/-. The dividend is

received 15 days later and hence, compounded only for the remaining 45 days.

4. Thus, the futures price F = 140 (1.15)60/365

10(1.15)45/365

= Rs.133.08.


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2.3 OPTIONS

An option is a derivative instrument since its value is derived from the underlying

asset. It is essentially a right, but not an obligation to buy or sell an asset. Options can be

a call option (right to buy) or a put option (right to sell). An option is valuable if and only

if the prices are varying.

An option by definition has a fixed period of life, usually three to six months. An

option is a wasting asset in the sense that the value of an option diminishes has the date of

maturity approaches and on the date of maturity it is equal to zero.

An investor in options has four choices before him. Firstly, he can buy a call option

meaning a right to buy an asset after a certain period of time. Secondly, he can buy a put

option meaning a right to sell an asset after a certain period of time. Thirdly, he can write

a call option meaning he can sell the right to buy an asset to another investor. Lastly, he

can write a put option meaning he can sell a right to sell to another investor. Out of the

above four cases in the first two cases the investor has to pay an option premium while in

the last two cases the investors receives an option premium.

DEFINITION:

An option is a derivative i.e. its value is derived from something else. In the case

of the stock option its value is based on the underlying stock (equity). In the case of the

index option, its value is based on the underlying index.


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OPTIONS CLEARING CORPORATION

The Options Clearing Corporation (OCC) is guarantor of all exchange-traded

options once an option transaction has been completed. Once a seller has written an

option and a buyer has purchased that option, the OCC takes over it. It is the

responsibility of the OCC who over sees the obligations to fulfill the exercises. If I want

to exercise an ACC November 100-call option, I notify my broker. My broker notifies the

OCC, the OCC then randomly selects a brokerage firm, which is short one ACC stock.

That brokerage firm then notifies one of its customers who have written one ACC

November 100 call option and exercises it. The brokerage firm customer can be chosen in

two ways. He can be chosen at random or FIFO basis. Because, OCC has a certain risk

that the seller of the option cant full the contract, strict margin requirement are imposed

on sellers. This margins requirement act as a performance Bond. It assures that OCC will

get its money.

OPTIONS TERMINOLOGY.

CALL OPTION:

A call option gives the holder the right but not the obligation to buy an asset by a

certain date for a certain price.

PUT OPTION:

A put option gives the holder the right but the not the obligation to sell an asset by

a certain date for a certain price.


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OPTION PRICE:

Option price is the price, which the option buyer pays to the option seller. It is

also referred to as the option premium.

EXPIRATION DATE:

The date specified in the option contract is known as the expiration date, the

exercise date, the straight date or the maturity date.

STRIKE PRICE:

The price specified in the option contract is known as the strike price or the

exercise price.

AMERICAN OPTION:

American options are the options that the can be exercised at the time up to the

expiration date. Most exchange-traded options are American.

EUROPEAN OPTIONS:

European options are the options that can be exercised only on the expiration date

itself. European options are easier to analyze that the American options and properties of

an American option are frequently deduced from those of its European counter part.

IN-THE-MONEY OPTION:

An in-the-money option (ITM) is an option that would lead to a positive cash

flow to the holder if it were exercised immediately. A call option in the index is said to be

in the money when the current index stands at higher level that 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


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deep in the money. In the case of a put option, the put is in the money if the index is

below the strike price.

AT-THE-MONEY OPTION:

An At-the-money option (ATM) is an option that would lead to zero cash flow if

it 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).

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 he money when

the current index stands at a level, which is less than the strike price (i.e. spot price exercise price, there will be profit.

Call Option buyers losses are limited and profits are unlimited.

Conversely, the call option writers profits/loss will be as follows:

At all points where spot prices < exercise price, there will be profit

At all points where spot prices > exercise price, there will be loss

Call Option writers profits are limited and losses are unlimited.


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Following is the table, which explains In the-money, Out-of-the-money and At-the-

money position for a Call option.

Exercise call option Spot price>Exercise price In-The-Money

Do not exercise Spot price


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PAYOFF FOR BUYER OF CALL OPTION: LONG CALL

The profit/loss that the buyer makes on the option depends on the spot price of the

underlying. If upon expiration, the spot price exceeds the strike price, he makes a profit.

Higher the spot price more is the profit he makes. If the spot price of the underlying is

less than the strike price, he lets his option un-exercise. His loss in this case is the

premium he paid for buying the option.

Payoff for buyer of call option

Profit

4850

0 Nifty

86.

Loss

The figure shows the profit the profits/losses for the buyer of the three-month Nifty

4850(underlying) call option. As can be seen, as the spot nifty rises, the call option is In-

The-money. If upon expiration Nifty closes above the strike of 4850, the buyer would

exercise his option and profit to the extent of the difference between the Nifty-close and


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strike price. However, if Nifty falls below the strike of 4850, he lets the option expire and

his losses are limited to the premium he paid i.e. 86.60.

PAYOFF FOR WRITER OF CALL OPTION: SHORT CALL

For selling the option, the writer of the option charges premium. Whatever is the

buyers profit is the sellers 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 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 is less than the strike price, the buyer lets his

option un-exercised and the writer gets to keep the premium.

Payoff for writer of call option

Profit

86.60

4850

0 Nifty

Loss


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The figure shows the profits/losses for the seller of a three-month Nifty 4850 call

option. If upon expiration Nifty closes above the strike of 4850, the buyer would exercise

his option on the writer would suffer a loss to the extent of the difference between the

Nifty-close and the strike price. This loss that can be incurred by the writer of the option

is potentially unlimited. The maximum profit is limited to the extent of up-front option

premium Rs.86.60.

PUT OPTION

An option that gives the seller the right to sell a designated instrument is called

put option. A put option is a contract that gives the owner the right, but not the obligation

to sell a specified number of shares at a specified price on or before a specified date.

An American put option can be exercised on or before the specified date. But, a

European option can be exercised on the specified date only.

The following are the strategies adopted by the parties of a put option.

A put option buyers profit/loss can be defined as follows:

At all points where spot priceexercise price, there will be loss.

Conversely, the put option writers profit/loss will be as follows:

At all points where spot priceexercise price, there will be profit.


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Following is the table, which explains In-the-money, Out-of-the Money and At-the-

money positions for a Put option.

Exercise put option Spot priceExercise price Out-of-The-Money

Exercise/Do not Exercise Spot price=Exercise price At-The-Money

Example:

The current price of RPL share is Rs.250. Holder by a three month put option at

exercise price of Rs.260. (Holder will Exercise his option only if the market price/ spot

price is less than the exercise price).

If the market/Spot price of the RPL share is Rs.245.

then the holder will exercise the option. Means put option holder will buy the share for

Rs.245. In the market and deliver it to the option writer for Rs.260. the holder will gain

Rs.15 from the contract.

PAYOFF FOR BUYER OF PUT OPTION: LONG PUT.

A put option gives the buyer the right to sell the underlying asset at the strike

price specified in the option. The profit/loss that the buyer makes on the option depends

on the spot price of the underlying. If upon the expiration, the spot price is below the

strike price, he makes a profit. Lower the spot price more is the profit he makes. If the

spot price of the underlying is higher than the strike price, he lets his option expire un-

exercised.


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Payoff for buyer of put option

Profit

4850

0

61.70 Nifty

Loss

The figure shows the profits/losses for the buyer of a three-month Nifty 4850

put option. As can be seen, as the spot Nifty falls, the put option is In-The-Money. If

upon expiration, Nifty closes below the strike of 4850, the buyer would exercise his

option and profit to the extent of the difference between the strike price and Nifty-close.

The profits possible on this option can be as high as the strike price. However, if Nifty

rises above the strike of 1250, he lets the option expire. His losses are limited to the

extent of the premium he paid.


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PAYOFF FOR WRITER OF PUT OPTION: SHORT PUT

The figure below shows the profit/losses for the seller/writer of a three-month

put option. As the spot Nifty falls, the put option is In-The-Money and the writer starts

making losses. If upon expiration, Nifty closes below the strike of 4850, the buyer would

exercise his option on writer who would suffer losses to the extent of the difference

between the strike price and Nifty-close.

Payoff for writer of put option

Profit

61.70

4850

0 Nifty

Loss


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The loss that can be incurred by the writer of the option is to a maximum extent

of strike price. Maximum profit is limited to premium charged by him.

PRICING OPTIONS

FACTORS DETERMINING OPTIONS VALUE:

EXERCISE PRICE AND SHARE PRICE:

If the share price is more than the exercise price then the holder of the call

option will get more net payoff, means the value of the call option is more. If the share

price is less then the exercise price then the holder of the put option will get more net

pay-off.

INTEREST RATE:

The present value of the exercise price will depend on the interest rate. The

value of the call option will increase with the rise in interest rates. Since, the present

value of the exercise price will fall. The effect is reversed in the case of a put option. The

buyer of a put option receives exercise price and therefore as the interest increases, the

value of the put option will decrease.

TIME TO EXPIRATION:

The present value of the exercise price also depends on the time to expiration of

the option. The present value of the exercise price will be less if the time to expiration is

longer and consequently value of the option will be higher. Longer the time to expiration

higher is the possibility of the option to be more in the money.


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VOLATILITY:

The volatility part of the pricing model is used to measure fluctuations expected

in the value of the underlying security or period of time. The more volatile the underlying

security, the greater is the price of the option. There are two different kinds of volatility.

They are Historical Volatility and Implied Volatility. Historical volatility

estimates volatility based on past prices. Implied volatility starts with the option price as

a given, and works backward to ascertains the theoretical value of volatility which is

equal to the market price minus any intrinsic value.

BLACK SCHOLES PRICING MODELS:

The principle that options can completely eliminate market risk from a stock

portfolio is the basis of Black Scholes pricing model in 1973. Interestingly, before Black

and Scholes came up with their option pricing model, there was a wide spread belief that

the expected growth of the underlying ought to effect the option price. Black and Scholes

demonstrate that this is not true. The beauty of black and scholes model is that like any

good model, it tells us what is important and what is not. It doesnt promise to produce

the exact prices that show up in the market, but certainly does a remarkable job of pricing

options within the framework of assumptions of the model.

The following are the assumptions;

1. There are no transaction costs and taxes.

2. The risk from interest rate is constant.

3. The markets are always open and trading is continues.

4. The stock pays no dividend. During the option period the firm should not pay any

dividend.


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5. The option must be European option.

6. There are no short selling constraints and investors get full use of short sale

proceeds.

The options price for a call, computed as per the following Black Scholes formula:

VC =PS N (d1)- PX/(e(RF)(T)

) N (d2)

The value of Put option as per Black scholes formula:

VP=PX/(e(RF)(T)

) N (-d2 )-PSN (-d1)

Where

d1= In [PS/PX]+T[RF+(S.D)

2

/ 2] / S.D (sqrt (T))

d2= d1-S.D (sqrt(T)

VC= value of call option

VP= value of put option

PS= current price of the share

PX= exercise of the share

RF= Risk free rate

T= time period remaining to expiration

N (d1)= after calculation of d1, value normal distribution area is to be identified.

N (d2)= after calculation of d2, value normal distribution area is to be identified.

S.D= risk rate of the share

In = Natural log value of ratio of PS and PX


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Pricing Index Option:

Under the assumptions of Black Scholes options pricing model, index options

should be valued in the way as ordinary options on common stock. The assumption is that

the investors can purchase the underlying stocks in the exact amount necessary to

replicate the index: i.e. stocks are infinitely divisible and that the index follows a

diffusion process such that the continuously compounded returns distribution of the index

is normally distributed. To use the black scholes formula for index options, we must

however, make adjustments for the dividend payments received on the index stocks. If

the dividend payment is sufficiently smooth, this merely involves the replacing the

current index value S in the model with S/eqT where q is the annual dividend and T is the

time of expiration in years.

Pricing Stock Options:

The Black Scholes options pricing formula that we used to price European calls

and puts, with some adjustments can be used to price American calls and puts & stocks.

Pricing American options becomes a little difficult because, unlike European options,

American options can be exercised any time prior to expiration. When no dividends are

expected during the life of options the options can be valued simply by substituting the

values of the stock price, strike price, stock volatility, risk free rate and time to expiration

in the black scholes formula. However, when dividends are expected during the life of the

options, it is some times optimal to exercise the option just before the underlying stock

goes ex-dividend. Hence, when valuing options on dividend paying stocks we should

consider exercised possibilities in two situations. One-just before the underlying stock

goes Ex-dividend, Two at expiration of the options contract. Therefore, owing an


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option on a dividend paying stock today is like owing to options one in long maturity

option with a time to maturity from today till the expiration date, and other is a short

maturity with a time to maturity from today till just before the stock goes Ex-dividend.

DIFFERENCE BETWEEN THE FUTURES AND OPTIONS

Futures Options

1. Both the parties are obligated to

perform.

2. In futures either parties pay

premium.

3. The parties to the futures contract

must perform at the settlement

date only. They are obligated to

perform the date.

4. The holder of the contract is

exposed to the entire spectrum of

downside risk and had the

potential for all the upside return.

5. In futures margins are to be paid.

They are approximately 15 to

20% on the current stock price.

1. Only the seller (writer) is

obligated to perform.

2. In options the buyer pays the

seller a premium.

3. The buyer of an options contract

can exercise the option at any

time prior to expiration date.

4. The buyer limits the downside

risk to the option premium but

retain the upside potential.

5. In options premium are to be paid.

But they are less as compare to

margin in futures.


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LITERATURE:1

Futures Trading and Volatility: A Case of S&P CNX Nifty Stocks and Stock

Futures:

Authors: Sibani Prasad Sarangi and Uma Shankar Patnaik.

Publication: Journal of derivatives market.

Year of publication: October 2009.

This paper focuses on the volatile behavior in the equity market in individual stocks

after the introduction of futures trading on individual stocks. One of the innovations in

the financial markets in recent years has been the introduction of derivatives with the

introduction of stock index futures. Futures and options play an important role in price

discovery, portfolio diversification and hedging. This paper examines the stock market

volatility of individual stocks listed on the S&P CNX Nifty index after the introduction of

futures trading. It uses the family of GARCH techniques to capture the time-varying

nature of volatility and volatility clustering phenomenon in the data. The empirical

evidence suggests that in most of the stocks, there is no significant change in the

volatility of the spot market.


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LITERATURE:2

Introduction and expiration effects of index derivatives on S & P Nifty :

Author: Kiran, Asst. Professor at LBS Institute of Management, New Delhi.

The present paper investigates the impact of index derivatives on the return,

efficiency and volatility of the S & P Nifty. For this purpose, the daily opening and

closing price data of the S & P Nifty with other proxy variable have been collected and

analyzed using before and after control sample technique. The results of the study

indicate increased market efficiency and reduced volatility with no price change in the

underlying market due to introduction of derivatives. However, a significant increase in

volatility on the expiration day of derivative contracts has been observed.


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LITERATURE:3

Versatility of Stock Index Future and Options using S & P 500:

Author: V Vijay Kumar Babu.

Publication: Portfolio Organizer.

Year of publication: January 2007.

Stock price index futures and options are contracts that allow effective

buying and selling an extremely well diversified portfolio stocks. They are also

opportunities, chances to make investment decision based on the opinion of the overall

stock market. Stock index futures and option are powerful and versatile instruments,

whether you intend to risk your own capital for investment reward or wish to insulate

your investment capital from risk. This paper describes about the versatility of S & P 500

stock index futures and options. The Chicago Mercantile Exchange have enjoyed

tremendous growth in trading volume.


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LITERATURE:4

Expiration hour effect of futures and options markets on stock

market

This paper studies the effect of expiration day of the Index futures and Options

on the trading volume, variance and price of the underlying shares. The impact of

derivatives trading on the underlying stock market has been widely documented in the

Finance literature. In particular, significant differences in the statistical properties of asset

returns (for instance, mean and variance) during expiration and non-expiration days have

been advanced as an evidence for the destabilization effect (or lack there of) of derivative

instruments. The earlier studies have, however, drawn their conclusions without

rigorously modelling the underlying stochastic data generation process. Given that the

statistical properties mentioned before are merely traits of the asset returns, this approach

can lead to spurious results if analyzed in isolation of the underlying process. We propose

to address this crucial shortcoming by examining the expiration day effect from a

GARCH (Generalized Auto Regressive Conditional Heteroskedastic) framework. We use

both daily and high frequency (5 min and 10 min) data on S&P CNX Nifty Index. Our

central finding using intra-day data is that while there is no pressure downward or

upward on index returns, the volatility is indeed significantly affected by the expiration

of contracts.


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LITERATURE:5

Derivatives trading and Its Impact on the Volatility of NSE, India:

(www.indiastudychannel.com)

ABSTRACT

This article examines the impact of introduction of financial derivatives trading

on the volatility of Indian stock market (an emerging stock market). It examines the

theme that the introduction of derivatives in the stock market in India would reduce the

volatility (risk) in the stock market. NSE Nifty 50 index has been used as a proxy of stock

market return. GARCH technique has been employed in the analysis. The conditional

volatility of intraday market returns before and after the introduction of derivatives

products are estimated with the (GARCH) model. The Finding suggests that a derivative

trading has reduced the volatility.


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3.1 INDUSTRY PROFILE

BOMBAY STOCK EXCHANGE

:

This stock exchange, Mumbai, popularly known as BSE was established in

1875 as the native share and stock brokers association; as a voluntary non-profit

making association. It has an evolved over the years into its present status as the premiere

stock exchange in the country. It may be noted that the stock exchange is the older on in

Asia, even older than the Tokyo stock exchange, which was founded in 1878.

The exchange, while providing as an efficient and transparent market for trading

in securities, upholds the interest of the investors and ensures redressed of their

grievances, weather against the companies or this own member brokers, it also strives to

educate and enlighten the investors by making available necessary informative inputs and

conducting investors education programmers.

A governing board comprised of 9 elected directors, 2 SEBI nominees, 7 Public

representatives and an executive director is the apex body, which decides the policies and

regulates the affairs of the exchange.

The executive director as the chief executive officer is responsible for the day

today administration of the exchange. The average daily turnover of the exchange during

the year 2000-01 (April-March) was Rs. 3984.19 crores and average number of daily

trades Rs. 5.69 Lakhs.

The average daily turn over of the exchange during the year 2002-03 has declined

and number of average daily trades during the period is also decreased.


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The ban on all deferral products like BLESS ANDALBM in the Indian capital

markets by SEBI with effect from July 2, 2001 abolition of account period settlements,

introduction of compulsory rolling settlements in all scripts traded on the exchanges with

compulsory rolling settlements in all scripts traded on the exchange with effect from

December 31, 2001 etc. Have adversely impacted the liquidity and consequently there is

a considerable decline in the daily turnover at the exchange. The average daily turnover

of the exchanges present scenario is 110363 (Lakhs) and number of average daily trades

1057 (Lakhs).

BSE INDICES:

In order to enable the market participants, analysts etc.. to track the various tips

and downs in the Indian stock market, the exchanges has introduced in 1986 an equity-

stock index called BSE- SENSEX that subsequently became the barometer of the

moments of the share prices in the Indian stock market. It is a market capitalization

weighted index of 30 components stocks representing a sample of large, well-

established and leading companies. The sensex is widely reported in both domestic and

international markets through print as well as electronic media.

Sensex is calculated using a market capitalization method. As per this

methodology, the level of the index reflects the total market value of all 30 components

stocks from different industry related to determined by multiplying the price of its stock

by the number of shares outstanding. Statisticians call an index of a set of combined

variables (such as price and number of shares) a composite index. An indexed number is

used to represent the results of this calculation in order to make the value easier to work


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with a track over a time. It is much easier to graph a chart based on indexed values than

one based on actual values world over majority of the well known indices are constructed

using market capitalization weighted method indexed.

In practice the daily calculation of SENSEX is done by dividing the aggregate

market value of the 30 as companies in the index by a number called the index divisor.

The divisor is the only link to the original base period value of the SENSEX. The divisor

deeps the index comparable over a period or time and if the reference point for the entire

index maintenance adjustments. SENSEX is widely used to describe the kook in the

Indian stock markets.

Base year average is changed as per the formula new base year average= old year

average *(new market value/old market value).

NATIONAL STOCK EXCHANGE:

The NSE was incorporated in Nov 1992 with an equity capital of Rs.25 crores.

The international security constancy (ISC) of Hong Kong has helped in setting up NSL-

ISC has prepared the detailed business plan and installation of hard ware and soft ware

systems. The promotions for NSE were financial institutions, insurance companies, banks

and SEBI capital market Ltd, infrastructure leasing and financial services ltd and stock

holding corporation ltd.

It has been set up to strengthen the move towards professionalisation of the

capital market as well as provides nation wide securities trading facilities to investors.

NSE is not an exchange in the striding sense where brokers owned and manage the


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exchange. A two-tier administration ser up involving a company board and a governing

aboard of the exchange is envisaged.

NSE is a notional market for shares PSU bonds, debentures and government

securities since infrastructure and trading facilities are provided.

NSE NIFTY:

The NSE on April 22, 1996 launched a new equity indeed. The NSE-50 the new

index, which replaces the existing NSE-100 index, is expected to serve as an appropriate

index for the new segment of futures and options.

Nifty means national index for fifty stocks.

The NSE-50 comprises 50 companies that represent 20 board industry groups

with an aggregate market capitalization of around Rs.170000 crores. All companies

included in the index have a market capitalization in excess of Rs. 500 crores each and

should have traded for 85% of trading days at an impact cost of less than 1.5%

corporation ltd. 85% of the base period for the index is the close of prices on Nov 3 rd

1995. which makes one year of completion of operation of NSEs capital market

segment. The base value of the index has been set at 1000.

NSE- MIDCAP INDEX:

The NSE midcap index or the junior nifty comprises fifty stocks those represents

21 abroad industry groups and will provide proper representation of the midcap segment

of the Indian capital market. All stocks in the index should have market capitalization of

greater than Rs.200 crores and should have traded 85% of the trading day at an impact

cost of less than 2.5%.


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The base period for the index is Nov 4th,1996, which signifies 2 years of

completion of operations of the capital market segment of the operations. The base value

of the index has been set at 1000.

MIDCAP NSE:

Average daily turnover of the present scenario 258212 (Lakhs) and number of

averages daily trades 2160 (Lakhs).

At present there are 24 stock exchanges recognized under the securities contract

(regulation) Act, 1956. They are

NAME OF THE STOCK EXCHANGE YEAR

Bombay Stock Exchange.

Ahmedabad Share and Stock Broker Association.

Calcutta Stock Exchange Association Ltd.

Delhi Stock Exchange Association Ltd.

Madras Stock Exchange Association Ltd.

Indore Stock Brokers Association Ltd.

Bangalore Stock Exchange.

Hyderabad Stock Exchange.

Cochin Stock Exchange.

Pune Stock Exchange.

U.P. Stock Exchange.

1875

1957

1957

1957

1957

1958

1963

1943

1978

1982

1982


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Ludhiana Stock Exchange.

Jaipur Stock Exchange Ltd.

Gauhati Stock Exchange Ltd.

Mangalore Stock Exchange.

Maghad Stock Exchange Ltd, Patna.

Bhuvaneswar Stock Exchange Association Ltd.

Over the counter exchange Association Ltd.

Saurashtra Kuth Stock Exchange Ltd.

Vadodard Stock Exchange Ltd.

Coimbatore Stock Exchange Ltd.

The Meerut Stock Exchange

National Stock Exchange.

Integrated Stock Exchange.

1983

1983-84

1984

1985

1986

1989

1989

1990

1991

1991

1991

1991

1999


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3.2 COMPANY PROFILE

Indiabulls Group is one of the top business house in the country with business interests in

Real Estate, Infrastructure, Financial Services, Retail, Multiplex and Power

Sectors.Indiabulls Group companies are listed in Indian and overseas financial markets.

The net worth of the Group exceeds USD 2 billion.

To be the largest and most profitable financial services organization in Indian retail

market and become one stop shop for all non banking financial products and services for

the retail customers.

Rapidly increase the number of client relationships by providing a broad array of product

offering to emerge as a clear market leader.

Indiabulls Group has four separately listed companies with subsidiaries which

contributed in enhancing scope and profile of the business.


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INDIABULLS FINANCIAL SERVICES LIMITED

Indiabulls Financial Services Limited was incorporated on January 10, 2000 as M/s Orbis

Infotech Private Limited at New Delhi under the Companies Act, 1956. The name of

company was changed to M/s. Indiabulls Financial Services Private Limited on March

16, 2001. In the year 2004, Indiabulls came up with it own public issue & became a

public limited company on February 27, 2004. The name of company was changed to

M/s. Indiabulls Financial Services Limited.

The company was promoted by three engineers from IIT Delhi, and has attracted

more than Rs.700 million as investments from venture capital, private equity and

institutional investors and has developed significant relationships with large commercial

banks such as Citibank, HDFC Bank, Union Bank, ICICI Bank, ABN Amro Bank,

Standard Chartered Bank and IL&FS.


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Mr. Rajiv Rattan

Co-Founder &

Vice Chairman

(Indiabulls Group)

Mr. Sameer Gelhaut

Chairman

(Indiabulls Group)

Mr. Saurabh K Mittal

Director

(Indiabulls Group)

The company headquarters are co-located in Mumbai and Delhi, allowing it to access the

two most important regions for Indian financial markets, The marketing and sales efforts

are headquartered out of Mumbai, with a regional headquarter in Delhi. Back office, risk

management, internal finances etc. are headquartered out of Delhi/NCR allowing the

company to scale these processes efficiently for the nationwide network.

Company is listed on:

National Stock Exchange

Bombay Stock Exchange

Luxemburg Stock Exchange

Market capitalization:

Rs 1,092.26 Cr (27th July , 2009)

Net worth:

USD 905 million (31st December, 2007).


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[

Highest Ratings from CRISIL. CRISIL is India's leading Ratings, Research, Risk and

Policy Advisory Company.

Broad array of product offering

Loans & mortgage

Home Loans/Home Equity

Small Medium Enterprises

Commercial Vehicle

Commercial Credit

Life Insurance

Advisory Services

IPO Financing


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STRATEGIC UPDATES

Indiabulls Financial Services limited (IBFSL) completed the de-merger of its real estate

business into a separate publicly traded company, (IBREL) unlocked over Rs. 10000

crore of shareholder wealth.

DE-MERGER:

De-merger of Indiabulls Securities Limited from Indiabulls financial services

limited. Each shareholder of Indiabulls Financial Services Limited received a share of

Indiabulls Securities Limited.

SARFAESI ACT NOTIFICATION:

Indiabulls Housing Finance Limited, a wholly owned subsidiary of Indiabulls Financial

Services Limited has been notified as a Financial Institution for the purpose of

SARFAESI Act, 2002. This notification is being effectively used by the Company to

yield positive results in speedy recoveries of delinquent mortgage loans.

NEW BUSINESS VENTURE UPDATE:

Life Insurance Venture: Indiabulls Financial Services Limited (IBFSL) has

entered into an MOU with Sogecap, the insurance arm of Societe Generale (SocGen) for

its upcoming life insurance joint venture. Sogecap will invest Rs.150 crore to subscribe to

26% of the paid up capital in the joint venture.

COMMODITIES EXCHANGE:

Indiabulls Financial Services Limited has entered into a MOU with MMTC

Limited, the largest commodity trading business in India to establish a Commodities

Exchange with 26% ownership with MMTC. Ministry of Commerce, Govt. of India has


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given its in-principle approval and the formal approval of the Forward Markets

Commission is awaited.

ASSET MANAGEMENT BUSINESS:

Indiabulls Financial Services Limited proposes to set up an asset management

company to manage mutual funds and has applied to SEBI for its approval and the same

is awaited.

INDIABULLS REAL ESTATE LIMITED

Indiabulls stepped into the real estate market as Indiabulls Real Estate Limited

(IREL) in 2005. A joint venture between Indiabulls and a US based investment major

Farallon Capital Management LLC resulted in bringing FDI (Foreign Direct Investment)

for the first time in the Indian Real Estate Market. Another joint venture amongst

Indiabulls and DLF, Kenneth Builders and Developers (KBD), has brought up projects

for development of residential apartments.

[

OUR PROJECTS:

Indiabulls is currently evaluating many large-scale projects worth several hundred

million dollars.


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Jupiter Mills

Elphinstone Mills

Sonepat Township

Castlewood

Raigarh SEZ

Gurgaon Housing

Goa Luxury Resort

Nashik SEZ

Chennai Housing

Thane SEZ

Chennai Township

Mumbai Township

INDIABULLS SECURITIES LIMITED

Indiabulls Securities Limited is the jewel in the crown of Indiabulls group.

The products and services offered include securities, credit services, demat account for

share trading, mutual fund news, commodity and review along with technical analysis of

the market.

Indiabulls also provide commodity brokerage services under Indiabulls

Commodities Limited (ICL). It deals in research work and formation of reports on agri-

commodites and metals. ICL has one of the largest retail branch networks in the country.


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PRODUCTS OFFERED EQUITIES AND DERIVATIVES

Offers purchase and sale of securities (stock,bonds,debentures etc.)

Broker assisted trade execution

Automated online investing

Access to all IPO's

Equity Analysis

Helps to build ideal portfolio

Satisfies need by rating stocks based on facts-based measures

Free of cost for all securities clients

Depository Services

Depository participant with NSDL and CDSL.

Helps in trading and settlement of dematerialized shares

Performs clearing services for all securities transactions

Offers platform to execute trade and settle transaction

Top Sales Team Structure

Sales Force in Indiabulls securities Limited is divided into two groups. i.e. Online &

Offline

Mentioned below are the names of EVP's managing respective regions.


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EVP's Name

(Online)

Vijay Babbar Amiteshwar Chaudhay

Prasenjeet

Mukherjee

Region

Managing NCR and UP,

Punjab,Haryana,Uttranchal,

Rajasthan and Gujarat

Managing Mahrashtra and

Goa, Kerala, Karnataka,

Andhra Pradesh

and Tamil Nadu

Managing West

Bengal,

Orissa, Bihar and

Jharkhand

EVP's Name

(Offline)

Nirdosh GaurHemanshu

Kamdar

Anirban

Bhattacharya

Manoj

Srivastava

Region

Managing NCR and

Haryana,

Punjab, Uttar Pradesh

and

Madhya Pradesh

Managing Bengal,

Andhra Pradesh

,Tamil Nadu,

Karnataka and part of

Mumbai and Gujarat

Managing

Mumbai,

Pune and other

surrounding

regions

Managing

Rajasthan,

part of Gujarat

and Mumbai

Customer Care Department providing solution to the queries of customers as well as

branches from a centralized location based out of gurgaon

Clients

Client Helpline Number 0124 4572444

39407777

(Local dialing from 25 cities)

Securities client can E-mail at [email protected]


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Available from 25 cities: Ahmedabad, Bangalore, Bhopal, Chandigarh, Chennai,

Coimbatore, Delhi, Ernakulam, Hyderabad, Jaipur, Jalandhar, Kolkata, Kozhikode,

Ludhiana, Lucknow, Mumbai, Mangalore, Nashik,Pune, Salem, Surat, Vadodra,

Vadodra - Alkapuri, Vishakhapatnam.

Branch

Branch Helpline Number 0124-3989444

Queries E-mail at

Funds related [email protected]

Reallocation related [email protected]

Documents related [email protected]

MILESTONES ACHIEVED

Developed one of the first Internet trading platforms in India

Amongst the first to develop in-house real-time CTCL (computer to computer link) with

NSE.

Introduction of integrated accounts with automatic gateways to client bank accounts.

Development of Products such as Power Indiabulls for high volume traders.

Indiabulls Signature Account for self-directed investors

Indiabulls Group Professional Network for information and trading service.


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CORPORATE INFORMATION

Registered Office

F-60, Malhotra Building, 2nd Floor,

Connaught Place, NEW DELHI - 110001, INDIA.

Website: www.indiabulls.com

Corporate Offices

S.P.Centre, C Wing, 41/44, Minoo Desai


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Road, Near Radio Club, Colaba,

MUMBAI 400005

Indiabulls House

448-451, Udyog Vihar, Phase V

GURGOAN 122001.

ORGANISATIONAL STRUCTURE


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4.1 FUTURES

4.1.1 Table showing market and future prices of SBI BANK

DATE MARKET PRICE FUTURE PRICE

27-Jan-2010 1968.00 1999.4828-Jan-2010 2002.00 2034.03

29-Jan-2010 2050.00 2082.80

01-Feb-2010 2018.00 2050.29

03-Feb-2010 1991.00 2022.86

04-Feb-2010 1934.10 1965.05

05-Feb-2010 1897.55 1927.92

06-Feb-2010 1922.00 1952.75

08-Feb-2010 1947.95 1979.12

09-Feb-2010 1950.75 1981.96

10-Feb-2010 1912.40 1942.99

11-Feb-2010 1924.00 1954.78

15-Feb-2010 1896.00 1956.33

16-Feb-2010 1927.00 1957.83

17-Feb-2010 1954.30 1985.57

18-Feb-2010 1941.00 1372.06

19-Feb-2010 1909.00 1939.54

22-Feb-2010 1913.00 1943.61

23-Feb-2010 1915.90 1946.55

24-Feb-2010 1923.00 1953.77

25-Feb-2010 1928.55 1959.41

26-Feb-2010 1971.00 2002.5402-Mar-2010 1996.10 2028.04

03-Mar-2010 2023.70 2056.08

04-Mar-2010 2033.95 2066.49

05-Mar-2010 2051.00 2083.81

08-Mar-2010 2071.85 2104.99

09-Mar-2010 2045.30 2078.03

10-Mar-2010 2040.90 2073.55

11-Mar-2010 2052.10 2084.93

12-Mar-2010 2045.00 2077.72

15-Mar-2010 2014.00 2046.22

16-Mar-2010 2018.50 2050.8017-Mar-2010 2030.05 2062.53

18-Mar-2010 2048.95 2081.73

19-Mar-2010 2061.00 2093.97

22-Mar-2010 2041.70 2074.37

23-Mar-2010 2048.05 2080.82

25-Mar-2010 2049.50 2082.29


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4.1.1 Graph showing market and future prices of SBI BANK

0

500

1000

1500

2000

2500

1/27

/201

0

2

/3/201

0

2/10/201

0

2/17/201

0

2/24

/201

0

3

/3/201

0

3/10/201

0

3/17/201

0

3/24

/201

0

MARKET PRICE FUTURE PRICE

INTERPRETATION:

If a person buys a future of SBI on 27th

January 2010 and sells on 25th

March 2010 then

he will get profit of 2049.5-1968=81.5 per share.

If he sells on 19th February 2010 then he will get a loss of 1968-1909=59 per share.

If the person sells it on 8th March 2010 then he will get a profit of 2071.85-1968=103.85

per share

The closing price of SBI at the end of the contract period is 2049.5 and this is considered

as settlement price.


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4.1.2 Table showing market and future prices of AXIS BANK


27-01-2010 970.00 988.43

28-01-2010 1015.00 1034.29

29-01-2010 1023.95 1043.4001-02-2010 1061.55 1081.72

03-02-2010 1061.00 1081.16

04-02-2010 1046.35 1066.23

05-02-2010 1028.20 1047.74

06-02-2010 1030.00 1049.57

08-02-2010 1025.00 1044.48

09-02-2010 1038.00 1057.72

10-02-2010 1022.00 1041.42

11-02-2010 1036.40 1056.09

15-02-2010 1027.00 1046.51

16-02-2010 1029.35 1048.9117-02-2010 1064.00 1084.22

18-02-2010 1091.00 1111.73

19-02-2010 1090.00 1110.71

22-02-2010 1101.55 1122.48

23-02-2010 1097.90 1118.76

24-02-2010 1091.15 1111.88

25-02-2010 1097.00 1117.84

26-02-2010 1027.50 1047.02

02-03-2010 1156.35 1178.32

03-03-2010 1147.75 1169.55

04-03-2010 1126.60 1148.00

05-03-2010 1105.00 1125.99

08-03-2010 1128.00 1149.42

09-03-2010 1113.25 1134.40

10-03-2010 1132.00 1153.51

11-03-2010 1151.45 1173.33

12-03-2010 1151.90 1173.79

15-03-2010 1143.00 1164.72

16-03-2010 1147.20 1168.99

17-03-2010 1145.50 1167.26

18-03-2010 1165.60 1187.7519-03-2010 1156.65 1178.63

22-03-2010 1147.90 1169.71

23-03-2010 1162.00 1184.08

25-03-2010 1155.30 1177.25


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4.1.2Graph showing market and future prices of AXIS BANK

0

200

400

600

8001000

1200

1400

27-01-20

10

122010

522010

922010

15-02-20

10

18-02-20

10

23-02-20

10

26-02-20

10

432010

932010

1232010

17-03-20

10

22-03-20

10

MARKE PR CE FU URE PR CE

INTERPRETATION

If a person buys a future of AXIS BANK on 27th

January 2010 and sells on 25th

March

2010 then he will get profit of 1155.30-970=185.3 per share.

If he sells on 18th March 2010 then he will get a max profit of 1165.60-970=195.6 per

share.

The closing price of AXIS BANK at the end of the contract period is 1155.30 and this is

considered as settlement price.


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4.1.3 Table showing market and future prices of DLF


06-02-2010 316.20 319.99

08-02-2010 312.80 316.55

09-02-2010 307.00 310.6810-02-2010 302.58 306.21

11-02-2010 308.50 312.20

15-02-2010 304.40 308.05

16-02-2010 312.00 315.74

17-02-2010 307.20 310.59

18-02-2010 303.35 306.99

19-02-2010 291.85 295.35

22-02-2010 283.65 287.05

23-02-2010 291.40 294..89

24-02-2010 290.00 293.48

25-02-2010 290.50 293.9926-02-2010 292.50 296.01

02-03-2010 294.00 297.53

03-03-2010 299.50 303.09

04-03-2010 305.65 309.32

05-03-2010 317.00 320.80

08-03-2010 317.90 321.71

09-03-2010 311.00 314.73

10-03-2010 316.25 320.05

11-03-2010 313.55 317.31

12-03-2010 310.20 313.92

15-03-2010 309.30 313.01

16-03-2010 315.00 318.78

17-03-2010 313.50 317.26

18-03-2010 318.00 321.82

19-03-2010 312.75 316.50

22-03-2010 300.45 304.06

23-03-2010 296.00 299.55

25-03-2010 298.50 302.08


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4.1.3 Graph showing market and future prices of DLF

260

270

280

290

300

310

320

330

6/2/20

10

9/2/20

10

11/2/201

0

16-02-20

10

18-02-20

10

22-02-20

10

24-02-20

10

26-02-20

10

3/3/20

10

5/3/20

10

9/3/20

10

11/3/201

0

15-03-20

10

17-03-20

10

19-03-20

10

23-03-20

10

MARK R C FU UR R C

INTERPRETATION

If a person buys a future of DLF on 6th

February 2010 and sells on 25th

March 2010 then

he will get loss of 316.20-298.50=17.7 per share.

If he sells on 8th

March 2010 then he will get a profit of 317.90-316.20=1.7 per share.

The closing price of DLF at the end of the contract period is 298.50 and this is considered

as settlement price.


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4.2 OPTIONS

4.2.1 Table showing the call option of SBI

Date Market Price Strike Prices

1900 1950 2000 2050 2100 215001-02-2010 2016.85 151.85 101.85 51.80 35.00 35.00 35.00

03-02-2010 1997.55 131.5 81.50 34.00 34.00 34.00 34.00

04-02-2010 1938.75 71.75 33.00 33.00 33.00 33.00 33.00

05-02-2010 1898.10 32.00 32.00 32.00 32.00 32.00 32.00

06-02-2010 1914.30 45.30 31.00 31.00 31.00 32.00 31.00

08-02-2010 1941.00 71.00 30.00 30.00 30.00 31.00 30.00

09-02-2010 1954.60 83.60 33.60 29.00 29.00 30.00 29.00

10-02-2010 1904.75 32.75 28.00 28.00 28.00 29.00 28.00

11-02-2010 1922.30 49.30 27.00 27.00 27.00 28.00 27.00

15-02-2010 1897.40 26.00 26.00 26.00 26.00 27.00 26.00

16-02-2010 1923.30 48.30 25.00 25.00 25.00 26.00 25.0017-02-2010 1954.75 78.75 28.75 24.00 24.00 25.00 24.00

18-02-2010 1941.20 64.20 23.00 23.00 23.00 24.00 23.00

19-02-2010 1909.75 31.75 22.00 22.00 22.00 23.00 22.00

22-02-2010 1915.00 36.00 21.00 21.00 21.00 21.00 21.00

23-02-2010 1917.85 37.85 20.00 20.00 20.00 20.00 20.00

24-02-2010 1921.95 40.95 19.00 19.00 19.00 19.00 19.00

25-02-2010 1918.00 46.00 18.00 18.00 18.00 18.00 18.00

26-02-2010 1976.90 93.90 43.90 17.00 17.00 17.00 17.00

02-03-2010 1993.45 109.45 59.45 16.00 16.00 16.00 16.00

03-03-2010 2023.05 188.05 113.05 88.05 15.00 15.00 15.00

04-03-2010 2033.40 147.40 97.40 47.40 14.00 14.00 14.00

05-03-2010 2053.25 166.25 116.25 66.25 16.25 13.00 13.00

08-03-2010 2073.20 185.20 135.20 85.20 35.20 12.00 12.00

09-03-2010 2045.25 156.25 106.25 56.25 11.00 11.00 11.00

10-03-2010 2038.65 148.65 98.65 48.65 10.00 10.00 10.00

11-03-2010 2048.20 157.20 107.20 57.20 9.00 9.00 9.00

12-03-2010 2049.65 157.65 107.65 57.65 8.00 8.00 8.00

15-03-2010 2016.05 123.05 73.05 23.05 7.00 7.00 7.00

16-03-2010 2022.75 128.75 78.75 28.75 6.00 6.00 6.00

17-03-2010 2028.60 133.60 83.60 33.60 5.00 5.00 5.00

18-03-2010 2035.00 139.00 89.00 39.00 4.00 4.00 4.0019-03-2010 2065.25 168.25 118.25 68.25 18.25 3.00 3.00

22-03-2010 2041.20 143.20 93.20 43.20 2.00 2.00 2.00

23-03-2010 2048.80 149.60 99.60 49.60 1.00 1.00 1.00

25-03-2010 2049.55 149.55 99.55 49.55 0.00 0.00 0.00


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INTERPRETATION :

Buyer of the Call Option

Market View Bullish

Action Buy a call option

Profit Potential Unlimited

Loss Potential Limited

To make a profit from an expected increase in the price of an underlying share during

options life:

DATE Share price

(Cash

market)

Strike

Price

Call

Premium

CALL OPTION VALUE

1st

Feb Rs.2016.85 2000 51.85 Buy 1 March 2000 Call @

Rs.51.85

25t

Mar Rs. 2049.55 2000 49.55 1. Sell 1 Mar contract (expiry)

Net gain Rs.32.7 per share

Analysis Rises by

Rs.32.7.

2000 Gain: Option sale = 2049.55

Premium Paid = Rs.51.85.

Net Profit = Rs.32.7 per share.


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Buyer of a Put Option

4.2.2 Table showing put option of SBI

Date Market Price Strike Prices

1900 1950 2000 2050 2100 215001-02-2010 2016.85 35.00 35.00 35.00 68.15 118.15 168.15

03-02-2010 1997.55 34.00 34.00 34.00 86.45 136.45 186.45

04-02-2010 1938.75 33.00 33.00 94.25 144.25 194.25 245.25

05-02-2010 1898.10 33.90 83.90 133.90 183.90 233.90 283.90

06-02-2010 1914.30 31.00 66.70 116.70 166.70 216.70 266.70

08-02-2010 1941.00 30.00 39.00 89.00 139.00 189.00 239.00

09-02-2010 1954.60 29.00 29.00 74.40 124.40 174.40 224.40

10-02-2010 1904.75 28.00 73.25 123.25 173.25 223.25 273.25

11-02-2010 1922.30 27.00 54.70 104.70 154.70 204.70 254.70

15-02-2010 1897.40 26.00 78.60 128.60 178.60 228.60 278.60

16-02-2010 1923.30 25.00 51.70 101.70 151.70 201.70 251.7017-02-2010 1954.75 24.00 24.00 69.25 119.25 169.25 219.25

18-02-2010 1941.20 23.00 31.80 89.80 131.80 181.80 231.80

19-02-2010 1909.75 22.00 62.25 112.25 162.25 212.25 262.25

22-02-2010 1915.00 21.00 56.00 106.00 156.00 206.00 256.00

23-02-2010 1917.85 20.00 52.15 102.15 152.15 202.15 252.15

24-02-2010 1921.95 19.00 47.05 97.05 147.05 197.05 247.05

25-02-2010 1918.00 18.00 50.00 100.00 150.00 200.00 250.00

26-02-2010 1976.90 17.00 17.00 40.10 90.10 140.10 190.10

02-03-2010 1993.45 16.00 16.00 22.50 72.55 122.55 172.55

03-03-2010 2023.05 15.00 15.00 15.00 41.95 91.95 141.95

04-03-2010 2033.40 14.00 14.00 14.00 30.60 80.60 130.60

05-03-2010 2053.25 13.00 13.00 13.00 13.00 59.75 109.75

08-03-2010 2073.20 12.00 12.00 12.00 12.00 38.80 88.80

09-03-2010 2045.25 11.00 11.00 11.00 15.75 65.75 115.15

10-03-2010 2038.65 10.00 10.00 10.00 21.35 71.35 121.35

11-03-2010 2048.20 9.00 9.00 9.00 10.80 60.80 110.80

12-03-2010 2049.65 8.00 8.00 8.00 9.00 59.00 109.00

15-03-2010 2016.05 7.00 7.00 7.00 40.95 90.95 140.95

16-03-2010 2022.75 6.00 6.00 6.00 33.05 83.05 133.05

17-03-2010 2028.60 5.00 5.00 5.00 26.40 76.40 126.40

18-03-2010 2035.00 4.00 4.00 4.00 19.00 69.00 119.0019-03-2010 2065.25 3.00 3.00 3.00 3.00 38.00 88.00

22-03-2010 2041.20 2.00 2.00 2.00 11.00 61.00 111.00

23-03-2010 2048.80 1.00 1.00 1.00 2.2.00 52.20 102.20

25-03-2010 2049.55 0.00 0.00 0.00 0.45 50.45 100.45


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INTERPRETATION

Market View Bearish

Action Buy a Put option



To make profit, from a fall in value of share price:

Action: Buy 1 Rs.2016 Put at Rs.35.

Share price

(Cash market) Option market

1st Feb Rs.2016.85 Buy 1 SBI Feb put at Rs.35.

25th Mar Rs.2049.55 Sell 1 Mar contract.

Net loss Rs.35 ( Spot

>strike)

Analysis .

Net loss = Rs.35 per share.


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4.2.3 Table showing call option of AXIS BANK

Date Market

Price

Strike Prices

950 1000 1050 1100 1150

27-01-2010 970 60.00 40.00 40.00 40.00 40.00

28-01-2010 1015 104.00 54.00 39.00 39.00 39.0029-01-2010 1023.95 111.95 61.95 38.00 38.00 38.00

01-02-2010 1061.55 148.55 98.55 48.55 37.00 37.00

03-02-2010 1061 147.00 97.00 47.00 36.00 36.00

04-02-2010 1046.35 131.35 81.35 35.00 35.00 35.00

05-02-2010 1028.20 112.20 62.20 34.00 34.00 34.00

06-02-2010 1030.00 113.00 63.00 33.00 33.00 33.00

08-02-2010 1025.00 107.00 57.00 32.00 32.00 32.00

09-02-2010 1038.00 119.00 69.00 31.00 31.00 31.00

10-02-2010 1022.00 102.00 52.00 30.00 30.00 30.00

11-02-2010 1036.40 115.40 65.40 29.00 29.00 29.00

15-02-2010 1027.00 105.00 55.00 28.00 28.00 28.0016-02-2010 1029.35 106.35 56.35 29.00 27.00 27.00

17-02-2010 1064.00 140.00 90.00 40.00 26.00 26.00

18-02-2010 1091.00 166.00 116.00 66.00 25.00 25.00

19-02-2010 1090.00 164.00 114.00 64.00 24.00 24.00

22-02-2010 1101.55 174.55 124.55 74.55 24.55 23.00

23-02-2010 1097.90 169.90 119.90 69.90 22.00 22.00

24-02-2010 1091.95 162.15 112.15 62.15 21.00 21.00

25-02-2010 1097.00 167.00 117.00 67.00 20.00 20.00

26-02-2010 1127.50 196.50 146.50 96.50 46.50 19.00

02-03-2010 1156.35 224.35 174.35 124.35 74.35 24.35

03-03-2010 1147.75 214.75 164.75 114.75 64.75 17.00

04-03-2010 1126.60 192.60 142.60 92.60 42.60 16.00

05-03-2010 1105.00 170.00 120.00 70.00 20.00 15.00

08-03-2010 1128.00 192.00 142.00 92.00 42.00 14.00

09-03-2010 1113.25 176.10 126.65 76.25 26.25 13.00

10-03-2010 1132.00 194.00 144.00 94.00 44.00 12.00

11-03-2010 1151.45 212.45 162.45 112.45 62.45 12.45

12-03-2010 1151.90 211.90 161.90 111.90 61.90 11.90

15-03-2010 1143.00 202.00 152.00 102.00 52.00 9.00

16-03-2010 1147.20 205.20 15520 105.20 55.20 8.00

17-03-2010 1145.50 202.50 152.50 102.50 52.50 7.0018-03-2010 1165.60 221.60 171.60 121.60 71.60 21.60

19-03-2010 1156.65 211.65 161.65 111.05 61.65 11.65

22-03-2010 1147.09 201.90 151.90 101.90 51.90 4.00

23-03-2010 1162.00 213.00 163.00 113.00 63.00 13.00

25-03-2010 1155.30 205.30 155.30 105.30 55.30 5.30


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INTERPRETATION

Buyer of the Call Option

Market View Bullish

Action Buy a call option



To make a profit from an expected increase in the price of an underlying share during

options life:

DATE Share price

(Cash

market)

Strike

Price

Call

Premium

CALL OPTION VALUE

27th

January

Rs.970 1050 40.00 Buy 1 March 2000 Call @

Rs.40.00

25th

Mar Rs.1155.30 1050 105.30 1. Sell 1 Mar contract (expiry)

Net gain Rs.185.30 per share

Analysis Rises by

Rs.185.30.

1050 Gain: Option sale = 1105.50

Premium Paid = Rs.40.00.

Net Profit = Rs.185.30 per share.


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4.2.4 Table showing put option of AXIS BANK

Date Market

Price

Strike Prices

950 1000 1050 1100 1150

27-01-2010 970 39.00 70.00 120.00 170.00 220.00

28-01-2010 1015 38.00 39.00 74.00 124.00 174.0029-01-2010 1023.95 37.00 38.00 64.05 114.05 164.05

01-02-2010 1061.55 36.00 37.00 37.00 75.45 125.45

03-02-2010 1061 35.00 35.00 37.00 74.00 124.00

04-02-