project - future and options

8/20/2019 Project - Future and Options

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ACKNOWLEDGEMENT

DECLARATION

I, Dominic Anupam Sarkar, hereby declare that this dissertation titled as ‘Future

& Option market’, is my original work under the guidance of ‘Prof. inita

!uk"er#ee’ towards partial fulfillment of the requirements for the PGPBM course

of Internationa$ Sc"oo$ of u%ine%% & !eia. This report has not been submitted

earlier for the award of egree!iploma!Programme by any other "ni#ersity!B$

school.

Place$Bangalore

ate$

%&ignature of &tudent'

(MI)I* +)"P+M &+-+

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CONTENT

2

Seria$

No. Topic Pa'e No.(. INTROD)CTION *

+. CORPORATE ,IERARC,- /0

*. DIFFRENCE ET1EEN CAS,

!AR2ET AND F)T)RE

!AR2ET

3

. F)T)RE CONTRACTS 4/(+

5. OPTIONS CONTRACT (*/(6

0. TER!INOLO7IES IN T,E

STOC2 !AR2ET

+8

3. CONCL)SION +(/++

4. IILO7RAP,- +*

6. NOTES +


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INTROD)CTION

The trading on the stock echange is an online process.

)&/ introduced a nationwide online fully automated screen based trading system%&BT& or Terminal'. There are 01 stock echanges all across India. )&/ became

the leading stock echange in the country, impacting the fortune of other stock

echanges and forcing them to adopt screen based trading system. +lmost 0223 of

trading takes place through electronic order matching. It pro#ides full anonymity

by accepting orders, big or small form without re#ealing their identity, thus

pro#iding the equal access to e#erybody.

The *+PIT+4 M+-/T &5&T/M has 6 types of markets.

0. )ormal market 7 it consists of #arious book types wherein orders are

segregated as regular lot orders, special negotiated trade orders and stop loss

orders depending on their attributes.8. (dd lot market 7 it is used for the limited physical market. The echange has

pro#ided the facility for such trading in the physical scales not eceeding

922 shares. (rders get matched when both the price and the quantity match

: on time priority i.e. orders which ha#e come into the system before willget matched first.

;. etail debt market 7 it is facility on the )/+T system of capital market

segment is used for transactions in retail debt market session.6. +uction market 7 in an auction market auctions are initiated by the echange

on the behalf of trading members for the settlement related regions.There are ; types of participants in the auction market as follows 7 a. Initiator 7 the party who initiates the auction process is called the

Initiator.

b. *ompetitor 7 the party who enters on the same side as of the initiator iscalled *ompetitor.

c. &olicitor 7 the party who enters on the opposite side as of the initiator is

called the &olicitor.

CORPORATE ,IERARC,-

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The trading member has the facility of defining hierarchy among its users of )/+T

system %)ational /change


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continuous basis. Trading in all instruments is allowed unless prohibited by

the echange.;. Market *lose 7 this phase signifies the closing of a market. It also says that

no further orders will be accepted.

6. &urcon %sur#eillance and control' 7 this phase is mainly characteri?ed by theinquiry acti#ities performed by the user.

)/+T &*//)

Title Bar 7 it displays trading system i.e. )/+T, the data and the current

time. Ticker @indow 7 it displays information on all trades in the system as and

when it takes place. &ecurities in ticker can be selected for each market type.

(n the etreme right of the ticker is the on$line inde window that displays

the inde #alue of )&/ indices namely &:P *)A )ifty, &:P *)A

efty, *)A IT, Bank )ifty, etc. the users can scroll within these and #iew

the inde #alue respecti#ely. Tool Bar 7 it has many functional buttons which can be used with the mouse

for quick access to #arious functions such as Buy (rder /ntry, &ell (rder

/ntry, Market By Price %MBP', +cti#ity 4og %+4', (rder &tatus %(&',

Market @atch %M@', &nap uote %&', Market Mo#ement %MM', Market

Inquiry %MI', +uction /nquiry %+/', (rder Modification %(M', (rder

*ancellation %(*A4', &ecurity 4ist, )et Position, (n$4ine Backup,

&upplementary Menu, Inde Inquiry, Inde Broadcast +nd =elp. Market @atch @indow 7 it displays trading information for the selected

securities. Inquiry @indow 7 this screen enables the user to #iew information such as

MBP, PT, ((, +*, etc. &nap uote 7 it allows a trading member to get instantaneous market

information on any desired security. (rder!Trade @indow 7 allows the user to enter!modify!cancel orders. Message @indow 7 it enables the user to #iew messages broadcast by the

echange such as corporate auctions, any market news, auction related

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information etc. It includes other messages such as order confirmation, order

modification, order cancellation etc.

Important things to be noted while trading

In any kind of capital market two conditions occurs which are as follows

0. Buyers want to buy at low price

8. &eller wants to sell at high price

C

DDDDDDDDDDDDDDDDDD E 022

+#erage Traded %+T' C high F low

8

>olatility $ risk in financial markets is the likelihood of fluctuations in the

echange rate of currencies. Therefore, it is a probability measure of the

thread an echange rate mo#ement is to an in#estorsH portfolio in a foreign

currency.

Market *ap C &hare Price E no. of shares outstanding

Difference et9een Ca%" !arket An Future !arket

6

PercentageChange Last Day ClosngPrce

Last Tra!e!

Prce

http://en.mimi.hu/stockmarket/risk.htmlhttp://en.mimi.hu/stockmarket/exchange_rate.htmlhttp://en.mimi.hu/stockmarket/exchange_rate.htmlhttp://en.mimi.hu/stockmarket/portfolio.htmlhttp://en.mimi.hu/stockmarket/currency.htmlhttp://en.mimi.hu/stockmarket/risk.htmlhttp://en.mimi.hu/stockmarket/exchange_rate.htmlhttp://en.mimi.hu/stockmarket/exchange_rate.htmlhttp://en.mimi.hu/stockmarket/portfolio.htmlhttp://en.mimi.hu/stockmarket/currency.html


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a%i% Ca%" !arket Future !arket

Train' &tocks &tocks, Inde, *ommodities

:uantit; Minimum 0 &hare 4ot si?e is fied by the

echange %different for stocks,

indees and commodities'

Time Perio )ot efined efined 7 epiry on last

Thursday of e#ery month

In


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The futures market is a centrali?ed marketplace for buyers and sellers from around

the world who meet and enter into futures contracts. Pricing can be based on an

open cry system, or bids and offers can be matched electronically. The futures

contract will state the price that will be paid and the date of deli#ery.

+ futures contract is an agreement between two parties a short position $ the party

who agrees to deli#er and a long position $ the party who agrees to recei#e.

P+TI/& (<


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The profits and losses of a futures contract depend on the daily mo#ements of themarket for that contract and are calculated on a daily basis.


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farmerLs loss in the futures contract is offset by the higher selling price in the cashmarket $ this is referred to as hedging.

)ow that you see that a futures contract is really more like a financial position, you

can also see that the two parties in the wheat futures contract discussed abo#ecould be two speculators rather than a farmer and a bread maker. In such a case,the short speculator would simply ha#e lost J9,222 while the long speculatorwould ha#e gained that amount. In other words, neither would ha#e to go to thecash market to buy or sell the commodity after the contract epires.'

Economic Importance of t"e Future% !arket Because the futures market is both highly acti#e and central to the globalmarketplace, itLs a good source for #ital market information and sentimentindicators.

Price Di%co


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/ssentially, futures contracts try to predict what the #alue of an inde orcommodity will be at some date in the future. &peculators in the futures market canuse different strategies to take ad#antage of rising and declining prices. The mostcommon are known as going long, going short and spreads.

7oin' Lon' @hen an in#estor goes long $ that is, enters a contract by agreeing to buy andrecei#e deli#ery of the underlying at a set price $ it means that he or she is trying to

profit from an anticipated future price increase.


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contract %one contract is equi#alent to 0,222 barrels' at J89 per barrel, for a total#alue of J89,222.

By March, the price of oil had reached J82 per barrel and &ara felt it was time to

cash in on her profits. +s such, she bought back the contract which was #alued atJ82,222. By going short, &ara made a profit of J9,222N But again, if &araLs researchhad not been thorough, and she had made a different decision, her strategy couldha#e ended in a big loss.

Sprea% +s you can see, going long and going short are positions that basically in#ol#e the

buying or selling of a contract now in order to take ad#antage of rising or declining prices in the future. +nother common strategy used by futures traders is calledOspreads.

&preads in#ol#e taking ad#antage of the price difference between two differentcontracts of the same commodity. &preading is considered to be one of the mostconser#ati#e forms of trading in the futures market because it is much safer thanthe trading of long!short %naked' futures contracts.

There are many different types of spreads, including

Ca$enar Sprea $ This in#ol#es the simultaneous purchase and sale oftwo futures of the same type, ha#ing the same price, but different deli#erydates.

Intermarket Sprea $ =ere the in#estor, with contracts of the samemonth, goes long in one market and short in another market. c"an'e Sprea - This is any type of spread in which each

position is created in different futures echanges.


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)owadays, many in#estorsL portfolios include in#estments such as mutual

funds, stocks and bonds. But the #ariety of securities you ha#e at your disposal

does not end there. +nother type of security, called an option, presents a world of

opportunity to sophisticated in#estors.

The power of options lies in their #ersatility. They enable you to adapt or adKust

your position according to any situation that arises. (ptions can be as speculati#e

or as conser#ati#e as you want. This means you can do e#erything from protecting

a position from a decline to outright betting on the mo#ement of a market or inde.

This #ersatility, howe#er, does not come without its costs. (ptions are comple

securities and can be etremely risky.

(ption trading in#ol#es risk, especially if you donLt know what you are doing.

Because of this, many people suggest you steer clear of options and forget their

eistence.

(n the other hand, being ignorant of any type of in#estment places you in a weak

position. Perhaps the speculati#e nature of options doesnLt fit your style. )o

problem $ then donLt speculate in options. But, before you decide not to in#est in

options, you should understand them. )ot learning how options function is asdangerous as Kumping right in without knowing about options you would not only

forfeit ha#ing another item in your in#esting toolbo but also lose insight into the

workings of some of the worldLs largest corporations. @hether it is to hedge the

risk of foreign$echange transactions or to gi#e employees ownership in the form

of stock options, most multi$nationals today use options in some form or another.

(ption Market

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efinition $ +n option is a contract that gi#es the buyer the right, but not the

obligation, to buy or sell an underlying asset at a specific price on or before a

certain date. +n option, Kust like a stock or bond, is a security. It is also a bindingcontract with strictly defined terms and properties. (ptions are traded only on

premium.

Types of (ptions

*all (ption

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+ call gi#es the holder the right to buy at a certain price within a specific period of

time. *alls are similar to ha#ing a long position on a stock. Buyers of calls hope

that the stock will increase substantially before the option epires.

This has direct relationship with cash market i.e. if the price of the share traded

goes up in the cash market one earns profit here.

Put (ption

+ put gi#es the holder the right to sell %no obligation' at a certain price within a

specific period of time. Puts are #ery similar to ha#ing a short position on a stock.

Buyers of puts hope that the price of the stock will fall before the option epires.

This has the indirect relationship with the cash market i.e. if the price of the share

traded goes down in cash market one earns profit here.

/ercise ate

The date at which the option is eercised

&trike Price

+t the time of entering into the contract, the parties agree upon a price at which the

underlying asset may be bought or sold. +t this price the buyer of a call option can

buy the asset from the seller and the buyer of the put option can sell the asset to the

writer of the option. The strike price is fied by the echange. It is further categori?ed in three main heads

0. In the money 7 less than market price

8. +t the money 7 at the market price

;. (ut of the money 7 abo#e the market price

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These three are taken into the picture because of hedging.

/piration period

It is the period being specified by the echange during which the option can be

eercised or traded. epending on the epiration period, an option can be short$

term or long$term in nature.

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No9 $et u% uner%tan in ?rief t"e %oft9are u%e to trae in

%tock market.

&oftware name 7 (I) %made by financial technologies' @=I*= I& "&/ I)


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Operation of t"e %oft9are

0. Press


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0. Buying a call when you are bullish.

8. Buying a put when you are bearish.

;. Buying a lower call and selling a higher call.

6. Buying higher put and selling a lower put.

9. Buying a put and call at the same strike price 7 &traddle

Q. &elling put and sell a call at same strike price 7 ange Bound &traddle

S. Buying at higher call and buying a lower put 7 &trangle

#. Buying a call at OA strike price and selling two calls at OF0 strike

price then buying one more call at “X+2” – Butterfly

Term% an termino$o'ie% in %tock market

1$


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0. +rbitrage 7 buy in one counter and sell in another with a #ery small price

difference. This can only be profitable if transactions are done in bulk.

8. Trade to trade 7 buy today and sell only after the deli#ery.

;. Portfolio management 7 basket of shares you buy.

6. =edging 7 minimi?ation of risk.

9.


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• The futures market is a global marketplace, initially created as a place forfarmers and merchants to buy and sell commodities for either spot or future

deli#ery. This was done to lessen the risk of both waste and scarcity.• ather than trade in physical commodities, futures markets buy and sell

futures contracts, which state the price per unit, type, #alue, quality andquantity of the commodity in question, as well as the month the contractepires.

• The players in the futures market are hedgers and speculators. + hedger triesto minimi?e risk by buying or selling now in an effort to a#oid rising ordeclining prices. *on#ersely, the speculator will try to profit from the risks

by buying or selling now in anticipation of rising or declining prices.• The *


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• There are four types of participants in options markets buyers of calls,sellers of calls, buyers of puts, and sellers of puts.

• Buyers are often referred to as holders and sellers are also referred to aswriters.

• The price at which an underlying stock can be purchased or sold is called thestrike price.

• The total cost of an option is called the premium, which is determined byfactors including the stock price, strike price and time remaining untilepiration.

• + stock option contract represents 022 shares of the underlying stock.• In#estors use options both to speculate and hedge risk.• /mployee stock options are different from listed options because they are a

contract between the company and the holder. %/mployee stock options donot in#ol#e any third parties.'

IILO7RAP,-

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0. -=+) M.5., *orporate finance, Tata Mc Graw =ill

8. )*


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