A

DESSERTATION REPORT

ON

“STUDY OF DERIVATIVES MARKET IN INDIA”

SUBMITTED TO“UTTARAKHAND TECHNICAL UNIVERSITY”

IN THE PARTIAL FULFILMENT OF“MASTER OF BUSINESS ADMINISTRATION”

(Two Year’s Regular Degree Programme)

SUBMITTED BY: UNDER THE SUPERVISION OF:Gaurav Pandey Prof. (Dr.) Y.P.Singh

M.B.A (4th SEMESTER) Dean (QSB)

Batch: 2014-2016

Mandawar (22KM Milestone), Roorkee-Dehradun Highway(NH-73), Roorkee Uttarakhand

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CERTIFICATE

Quantum School of Business

Mandawar (22 Km Milestone), Roorkee- Dehradun Highway (NH 73), Roorkee-247662

Contact No.- 01332-2781728, +91-9319909777

Approved by AICTE, Ministry of HRD, Government of India

This is to certify that Mr. Gaurav Pandey is a student of MBA final year

of Quantum School of Business, Roorkee of Batch 2014-2016. He has

satisfactory completed the dessertation on the topic “A STUDY OF DERIVATIVES MARKET IN INDIA” as per the rules and guidelines of

Uttarakhand Technical University, Dehradun (Uttarakhand) in the

academic session 2014-2016.

(Signature) (Signature)

Project Mentor Head of Department (HOD)

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CONTENTS

Certificate from Institute I

Acknowledgement II

Executive Summary III

Need/Scope of the study IV

Objective of the study V

1. About Industry/ Introduction

2. About Topic

3. Research Methodology

(a)Primary Data

(b)Secondary Data

4. Analysis & Interpretation

5. Findings

6. Recommendations

Bibliography

Annexure

3

AKNOWLEDGEMENT

With the deep sense of gratitude, I wish to acknowledge the support and

help extended by all the people, in successful completion of this project

work.

I express my gratitude to Dr. Y.P.Singh (Dean QSB) for his consistent

support, Head of the Department (HOD) Mr. Arun Kant Painoli for his

encouragement.

I would like to thank all the faculty members who have been a strong

source of inspiration throughout the project directly or indirectly.

Place:-Quantum Global Campus

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Executive Summary

The emergence of the market for derivatives products, most notably

forwards, futures and options, can be tracked back to the willingness of

risk-averse economic agents to guard themselves against uncertainties

arising out of fluctuations in asset prices.

Derivatives are risk management instruments, which derive their value

from an underlying asset. The following are three broad categories of

participants in the derivatives market Hedgers, Speculators and

Arbitragers. Prices in an organized derivatives market reflect the

perception of market participants about the future and lead the price of

underlying to the perceived future level.

In recent times the Derivative markets have gained importance in terms

of their vital role in the economy. The increasing investments in stocks

(domestic as well as overseas) have attracted my interest in this area.

Numerous studies on the effects of futures and options listing on the

underlying cash market volatility have been done in the developed

markets.

The derivative market is newly started in India and it is not known by

every investor, so SEBI has to take steps to create awareness among

the investors about the derivative segment. In cash market the profit/loss

of the investor depends on the market price of the underlying asset. The

investor may incur huge profit or he may incur huge loss. But in

derivatives segment the investor enjoys huge profits with limited

downside.

Derivatives are mostly used for hedging purpose. In order to increase

the derivatives market in India, SEBI should revise some of their

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regulations like contract size, participation of FII in the derivatives

market. In a nutshell the study throws a light on the derivatives market.

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Need of the Study

In recent times the Derivative markets have gained importance in terms

of their vital role in the economy. The increasing investments in

derivatives (domestic as well as overseas) have attracted my interest in

this area. Through the use of derivative products, it is possible to

partially or fully transfer price risks by locking-in asset prices. As the

volume of trading is tremendously increasing in derivatives market, this

analysis will be of immense help to the investors.

Derivatives act as a risk hedging tool for the investors. The objective is

to help the investor in selecting the appropriate derivates instrument to

the attain maximum risk and to construct the portfolio in such a manner

to meet the investor should decide how best to reach the goals from the

securities available.

The develop and improvement strategies in the with investment policy

formulated. They will help the selection of asset classes and securities in

each class depending up on their risk return attributes.

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Scope of the Study

The study is limited to “Derivatives” with special reference to futures and

options in the Indian context; the study is not based on the international

perspective of derivative markets.

The study is limited to the analysis made for types of instruments of

derivates each strategy is analyzed according to its risk and return

characteristics and derivatives performance against the profit and

policies of the company.

The study has only made a humble attempt at evaluation derivatives

market only in India context. The study is not based on the international

perspective of derivatives markets, which exists in NASDAQ, CBOT etc.

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Objective of the Study To analyze the operations of futures and options.

To find the profit/loss position of futures buyer and seller and also the

option writer and option holder.

To study about risk management with the help of derivatives.

To study the role of derivative in Indian financial market.

Comparison of the profits/losses in cash market and derivative market.

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CHAPTER – 1ABOUT INDUSTRY

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INDUSTRY PROFILEFinancial services

Financial services are the economic services provided by the

finance industry, which encompasses a broad range of organizations

that manage money, including credit unions, banks, credit card

companies, insurance companies, consumer finance companies, stock

brokerages, investment funds and some government sponsored

enterprises.

History of Indian Stock Market The Indian broking industry is one of the oldest trading industries

that have been around even before the establishment of BSE in 1875.

BSE is the oldest stock market in India. The history of India stock trading

starts with 318 persons taking membership in Native share and Stock

Brokers Association, which we know by the name Bombay Stock

Exchange or BSE in short. In 1965, BSE got permanent recognition from

the Government of India. BSE and NSE represent themselves as

synonyms of India stock market. The history of India stock market is

almost the same as the history of BSE

The regulations and reforms been laid down in the equity market

has resulted in rapid growth and development .Basically the growth in

the equity market is largely due to the effective intermediaries. The

broking houses not only act as an intermediate link for the equity market

but also for the commodity market, the foreign currency exchange

market and many more. The broking houses have also made an impact

on foreign investors to invest in India to certain extent. In the last

decade, the Indian brokerage industry has undergone a dramatic

11

transformation. Large and fixed commissions have been replaced by

wafer thin margins, with competition driving down the brokerage fees, in

some cases to a few basis points. There have also been major changes

in the way the business is conducted. The scope of services have

enhanced from being equity products to a wide range of financial

services.

Financial ProductsThe survey also revealed that in the past couple of years, apart

from trading, the firms have started various investment value services.

The sustained growth of the economy in past couple of years has

resulted in broking firms offering many diversified services related to

IPO’s, mutual funds, company research etc.

However, the core trading activity is still the predominant form of

business, forming 90% of the firms in the sample. 67% firms are

engaged in offering IPO related services. The broking industry seems to

have capitalized on the growth of the mutual fund industry, which

pegged at 40% in 2006. More than 50% of the sample broking houses

deal in mutual fund investment services. The average growth in assets

under management in last two years is almost 48% company research

services. Additionally, a host of other value added services such as

fundamental and technical analysis, investment banking, arbitrage etc

are offered by the firms at different levels.

Capital MarketCapital market is a market for securities (debt or equity), where

business enterprises (companies) and governments can raise long-term

funds. Capital market may be classified as primary markets and

secondary markets. In primary market new stock or bond issues are sold

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to investor via a mechanism known as underwriting. In secondary

markets, existing securities are sold and brought among investors or

traders, usually on a security exchange, over the counter or elsewhere.

The capital market includes e stock market (equity securities) and Bond

market (debt).

Primary and Secondary Capital MarketsA company cannot easily attract investors to invest in their

securities if the investors cannot subsequently trade these securities at

will. In other words, securities cannot have a good primary market unless

it is ensured of an active secondary market.

Primary MarketSecurities generally have two stages in their lifespan. The first

stage is when the company initially issues the security directly from its

treasury at a predetermined offering price. Primary market is the market

for issue of new securities. It therefore essentially consist of the

companies issuing securities, the public subscribing to these securities,

the regulatory agencies like SEBI and the Government, and the

intermediaries such as brokers, merchant bankers and banks who

underwrite the issues and help in collecting subscription money from the

public. It is referred to as Initial Public offer (IPO). Investment dealers

frequently buy initial offering on the primary market and the securities on

the secondary market.

Secondary MarketThe second stage is when an investor or dealer makes the shares,

bought from a company treasury, available for sale to other investors on

the secondary market. Secondary market is the market for trading in

13

existing securities, after they have been created in the primary market. It

essentially consists of the public who are buyers and sellers of

securities, brokers, mutual funds, and most importantly, the stock

exchanges where the trading takes place, such as the BSE (Bombay

Stock Exchange) or NSE (National Stock Exchange).

INDIAN STOCK EXCHANGE

Stock MarketA stock market or equity market is a public entity (a loose network

of economic transaction, not a physical facility or discrete entity) for the

trading of company stock (shares) and derivatives at an agreed price;

these are securities listed on a stock exchange as well as those only

traded privately.

Stock ExchangeA stock exchange provides services for stock brokers and traders

to trade stocks, bonds and other securities. Stock exchanges also

provide facilities for issue and redemption of securities and other

financial instruments and capital events including the payment of income

and dividends. Securities traded on stock exchange include shares

issued by companies, unit trusts, derivatives, pooled investment

products and bonds.

Equity/ShareTotal equity capital of a company is divided into equal units of

small denominations, each called a share. For example, in a company

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the total equity capital of Rs. 2,00,00,000 is divided into 20,00,000 units

of Rs 10 each. Each such unit of Rs. 10 is called a share. Thus, the

company then is said to have 20, 00,000 equity share of Rs 10 each.

The holders of such shares are members of the company and have

voting rights. There are now stock markets in virtually every developed

and most developing economy, with the world’s biggest being in the

United States, UK, Germany, France, India and Japan.

Market participantsMarket participants include individual retail investors, institutional

investors such as mutual funds, banks, insurance companies and hedge

funds, and also publically traded corporations trading in their own

shares.

TradingParticipants in the stock market range from small individual stock

investors to large hedge fund traders, who can be based anywhere.

ListingListing means admission of securities of an issuer to trading

privileges on a stock exchange through a formal agreement. The prime

objective of admission to dealing on the Exchange is to provide liquidity

and marketability to securities.

SecuritiesA Security gives the holder an ownership interest in the assets of a

company. For example, when a company issues security in the form of

stock, they give the purchaser an interest in the company’s assets in

exchange for money. There are a number of reasons why a company

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issues securities: meeting a short – term cash crunch or obtaining

money for an expansion are just two.

WHAT IS SEBI AND WHAT IS ITS ROLE?In 1988 the Securities and Exchange Board of India (SEBI) was

established by the Government of India through an executive resolution,

and was subsequently upgraded as a fully autonomous body (a statutory

Board) in the year 1992 with the passing of the Securities and Exchange

Board of India Act (SEBI Act) on 30th January 1992. In place of

Government Control, statutory and autonomous regulatory boards with

defined responsibilities, to cover both development & regulation of the

market, and independent powers have been set up. Paradoxically this is

a positive outcome of the Securities Scam of 1990-91. 

OBJECTIVES OF SEBIThe promulgation of the SEBI ordinance in the parliament gave status to

SEBI in 1992. According to the preamble of the SEBI, the three main

objectives are:

To protect the interests of the investors in securities

To promote the development of securities market

To regulate the securities market

FUNCTIONS OF SEBIThe main functions entrusted with SEBI are:

Regulating the business in stock exchange and any other

securities market

Registering and regulating the working of stock brokers, share

transfer agents, bankers to the issue, trustees of trust deed,

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registrars to an issue, merchant bankers, underwriters, portfolio

managers, investment advisers and such other intermediaries who

may be associated with securities market in any manner.

Registering and regulating the working of collective investment

schemes including mutual funds

Promoting and regulating self-regulatory organizations

Prohibiting fraudulent and unfair trade practices in the securities

market

Promoting investors education and training of intermediaries in

securities market

Prohibiting insiders trading in securities

Regulating substantial acquisition of shares and takeover of

companies

Calling for information, undertaking inspection, conducting

enquiries and audits of the stock exchanges, intermediaries and

self-regulatory organizations in the securities market.

Since its inception SEBI has been working targeting the securities

and is attending to the fulfillment of its objectives with commendable zeal

and dexterity. The improvements in the securities markets like

capitalization requirements, margining, establishment of clearing

corporations etc. reduced the risk of credit and also reduced the market.

SEBI has introduced the comprehensive regulatory measures,

prescribed registration norms, the eligibility criteria, the code of

obligations and the code of conduct for different intermediaries like,

bankers to issue, merchant bankers, brokers and sub-brokers, registrars,

portfolio managers, credit rating agencies, underwriters and others. It

has framed bye-laws, risk identification and risk management systems

for Clearing houses of stock exchanges, surveillance system etc. which

has made dealing in securities both safe and transparent to the end

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investor.

Another significant event is the approval of trading in stock indices

(like S&P CNX Nifty & Sensex) in 2000. A market Index is a convenient

and effective product because of the following reasons:

It acts as a barometer for market behavior;

It is used to benchmark portfolio performance;

It is used in derivative instruments like index futures and index

options;

It can be used for passive fund management as in case of Index

Funds.

Two broad approaches of SEBI is to integrate the securities market at

the national level, and also to diversify the trading products, so that there

is an increase in number of traders including banks, financial institutions,

insurance companies, mutual funds, primary dealers etc. to transact

through the Exchanges. In this context the introduction of derivatives

trading through Indian Stock Exchanges permitted by SEBI in 2000 AD

is a real landmark.

SEBI appointed the L. C. Gupta Committee in 1998 to recommend

the regulatory framework for derivatives trading and suggest bye-laws

for Regulation and Control of Trading and Settlement of Derivatives

Contracts. The Board of SEBI in its meeting held on May 11, 1998

accepted the recommendations of the committee and approved the

phased introduction of derivatives trading in India beginning with Stock

Index Futures. The Board also approved the "Suggestive Bye-laws" as

recommended by the Dr LC Gupta Committee for Regulation and

Control of Trading and Settlement of Derivatives Contracts.

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SEBI then appointed the J. R. Verma Committee to recommend Risk

Containment Measures (RCM) in the Indian Stock Index Futures Market.

The report was submitted in November1998. 

However the Securities Contracts (Regulation) Act, 1956 (SCRA)

required amendment to include "derivatives" in the definition of securities

to enable SEBI to introduce trading in derivatives. The necessary

amendment was then carried out by the Government in 1999. The

Securities Laws (Amendment) Bill, 1999 was introduced. In December

1999 the new framework was approved. Derivatives have been

accorded the status of `Securities'. The ban imposed on trading in

derivatives in 1969 under a notification issued by the Central

Government was revoked. Thereafter SEBI formulated the necessary

regulations/bye-laws and intimated the Stock Exchanges in the year

2000. The derivative trading started in India at NSE in 2000 and BSE

started trading in the year 2001.

Bombay Stock Exchange (BSE) Bombay Stock Exchange is the oldest stock exchange in Asia with

a rich heritage, now spanning three centuries in its 133 years of

existence. What is now popularly known as BSE was established as

"The Native Share & Stock Brokers' Association" in 1875. BSE is the first

stock exchange in the country which obtained permanent recognition (in

1956) from the Government of India under the Securities Contracts

(Regulation) Act 1956. BSE's pivotal and pre-eminent role in the

development of the Indian capital market is widely recognized. It

migrated from the open outcry system to an online screen-based order

driven trading system in 1995. Earlier an Association of Persons (AOP),

BSE is now a corporatized and demutualised entity incorporated under

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the provisions of the Companies Act, 1956, pursuant to the BSE

(Corporatization and Demutualization) Scheme, 2005 notified by the

Securities and Exchange Board of India (SEBI). With demutualization,

BSE has two of world's best exchanges, Deutsche Borse and Singapore

Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the

Indian corporate sector by providing it with an efficient access to

resources. There is perhaps no major corporate in India which has not

sourced BSE's services in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of

listed companies and the world's 5th in transaction numbers. The market

capitalization as on December 31, 2007 stood at USD 1.79 trillion. An

investor can choose from more than 4,700 listed companies, which for

easy reference, are classified into A, B, S, T and Z groups.

The BSE Index, SENSEX, is India's first stock market index that

enjoys an iconic stature, and is tracked worldwide. It is an index of 30

stocks representing 12 major sectors. The SENSEX is constructed on a

'free-float' methodology, and is sensitive to market sentiments and

market realities. Apart from the SENSEX, BSE offers 21 indices,

including 12 sect oral indices.

BSE has entered into an index cooperation agreement with Deutsche

Borse. This agreement has made SENSEX and other BSE indices

available to investors in Europe and America. Moreover, Barclays Global

Investors (BGI), the global leader in ETFs through its shares brand, has

created the shares BSE SENSEX India Tracker' which tracks the

SENSEX.

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The ETF enables investors in Hong Kong to take an exposure to the

Indian equity market. The first Exchange Traded Fund (ETF) on

SENSEX, called "SPICE" is listed on BSE. It brings to the investors a

trading tool that can be easily used for the purposes of investment,

trading, hedging and arbitrage. SPICE allows small investors to take a

long-term view of the market.

BSE provides an efficient and transparent market for trading in

equity, debt instruments and derivatives. It has a nation-wide reach with

a presence in more than 359 cities and towns of India. BSE has always

been at par with the international standards. The systems and processes

are designed to safeguard market integrity and enhance transparency in

operations.

BSE is the first exchange in India and the second in the world to

obtain an ISO 9001:2000 certifications. It is also the first exchange in the

country and second in the world to receive Information Security

Management System Standard BS 7799-2-2002 certification for its BSE

On-line Trading System (BOLT). BSE continues to innovate. In recent

times, it has become the first national level stock exchange to launch its

website in Gujarati and Hindi to reach out to a larger number of

investors. It has successfully launched a reporting platform for corporate

bonds in India christened the ICDM or Indian Corporate Debt Market and

a unique ticker-cum-screen aptly named 'BSE Broadcast' which enables

information dissemination to the common man on the street. In 2006,

BSE launched the Directors Database and ICERS (Indian Corporate

Electronic Reporting System) to facilitate information flow and increase

transparency in the Indian capital market.

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While the Directors Database provides a single-point access to

information on the boards of directors of listed companies, the ICERS

facilitates the corporate in sharing with BSE their corporate

announcements. BSE also has a wide range of services to empower

investors and facilitate smooth transactions:   Investor Services: The

Department of Investor Services redresses grievances of investors.

BSE was the first exchange in the country to provide an amount of

Rs.1 million towards the investor protection fund; it is an amount higher

than that of any exchange in the country. BSE launched a nationwide

investor awareness programme- 'Safe Investing in the Stock Market'

under which 264 programmes were held in more than 200 cities. The

BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-

line screen based trading in securities. BOLT is currently operating in

25,000 Trader Workstations located across over 359 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world's first

centralized exchange-based Internet trading system, BSEWEBX.com.

This initiative enables investors anywhere in the world to trade on the

BSE platform.

Surveillance: BSE's On-Line Surveillance System (BOSS)

monitors on a real-time basis the price movements, volume positions

and members' positions and real-time measurement of default risk,

market reconstruction and generation of cross market alerts. BSE

Training Institute: BTI imparts capital market training and certification, in

collaboration with reputed management institutes and universities.

It offers over 40 courses on various aspects of the capital market and

financial sector. More than 20,000 people have attended the BTI

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programmes Awards the World Council of Corporate Governance has

awarded the Golden Peacock Global CSR Award for BSE's initiatives in

Corporate Social Responsibility (CSR). The Annual Reports and

Accounts of BSE for the year ended March 31, 2006 and March 31 2007

have been awarded the ICAI awards for excellence in financial reporting.

The Human Resource Management at BSE has won the Asia - Pacific

HRM awards for its efforts in employer branding through talent

management at work, health management at work and excellence in HR

through technology drawing from its rich past and its equally robust

performance in the recent times, BSE will continue to remain an icon in

the Indian capital.

National Stock Exchange (NSE)The National Stock Exchange of India is a stock Exchange that is

located in Mumbai, Maharashtra. The National Stock Exchange basically

function in three market sections, that is, (CM) the Capital Market

Section); F&Q (The Future and Options Market Sections) and WDM

(Wholesale Debt Market Segment).  It is important place where the

trading of shares, debt etc takes place.

It was in year 1992 that the National stock Exchange was for the

first time incorporated in India. It was not regarded as a stock exchange

at once. Rather, the national Stock exchange was incorporated as a tax

paying company and had got the recognition of a stock exchange only in

year 1993 the recognition was given under the provisions of the

Securities Contracts (Regulation) Act, 1956.

The National Stock exchange is highly active in the field of market

capitalization and thus aiming it the ninth largest stock exchange in the

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said field. Similarly, the trading of the stock exchange in equities

and derivatives is so high that it has resulted in high turnovers and thus

making it the largest stock exchange in India.

It is the stock exchange wherein there is the facility of electronic

exchange offering investors. This facility is available in almost types of

equitable transactions such as equities, debentures, etc. it is also the

largest stock exchange if calculated in the terms of traded values.

Origin and History of the National Stock ExchangeThe National Stock exchange was incorporated for the first time in

November, 1992. The national stock exchange was not incorporated as

the national stock exchange; rather, it had got the recognition of the

recognized stock exchange in April, 1993. The National stock Exchange

has increased its trading facilities in June 1994 when the WDM

(Wholesale Debt Market Segment) was gone live. It is basically one of

the three market segments in which the national stock Exchange works.

In the same year, 1994 November, the Capital Market (CM) segment of

the stock exchange goes live through VSAT.

The National Stock Exchange has become the first Clearing

Corporation in India by the introduction of NSCCL in April 1995. In the

same year, 1995 July, it has introduced the Investor protection fund

which is a very important function introduced by the national Stock

Exchange.

The National stock Exchange had grown with leaps and bounds

and had shown tremendous growth mainly in all the fields and thus

making it the largest stock exchange of India by October, 1995.

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The concept of NSCCL was extended by the introduction of

clearing and settlement with the help of NSCCL in year 1996. The

National stock Exchange has introduced its Index for the first time in

year April 1996. The index was known as the S&P CNX Nifty Index. In

year June 1996, it has introduced the Settlement Guarantee Fund. The

National Securities Depositor Fund was launched by the National Stock

exchange in year 1996, November, and thus making it the first stock

exchange who becomes the first depository in India.

Because of the efforts and introduction of new concept in the field

of trading, the National stock Exchange has received the BEST IT

USAGE award by the computer Society of India in the year November,

1996. It has also received an award for the TOP IT USER in the name of

“Dataquest award” in year December, 1996.

The National stock exchange has also introduced another index in

year December 1996 in the name of CNX Nifty Junior in year 1996.  It

had again received an award for the BEST IT USAGE award by the

computer Society of India in the year December, 1996. In May, 1998 it

had launched its first website. Further in October 1999, it had launched

the NSE.IT LTD. Further in year October, 2002, it had launched the

Government securities index.

The growth of the National Stock Exchange has been tremendous

in every field. It had introduced several programmes and has achieved

various achievements and awards while working best in the field in

which it is working. The efforts and hard work that is contributed by the

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National Stock exchange has been tremendous and thus making an

important and unique stock exchange in India.

Over the Counter Exchange of India (OTCEI) OTCEI (Over the Counter Exchange of India) was incorporated in

1990 as a Section 25 company under the Companies Act 1956 and is

recognized as a stock exchange under Section 4 of the Securities

Contracts Regulation Act, 1956. The Exchange was set up to aid

enterprising promoters in raising finance for new projects in a cost

effective manner and to provide investors with a transparent & efficient

mode of trading. Modeled along the lines of the NASDAQ market of

USA, OTCEI introduced many novel concepts to the Indian capital

markets such as screen-based nationwide trading, sponsorship of

companies, market making and scrip less trading. As a measure of

success of these efforts, the Exchange today has 115 listings and has

assisted in providing capital for enterprises that have gone on to build

successful brands for themselves like VIP Advanta, Sonora Tiles &

Brilliant mineral water, etc.  

Trading at OTCEI is done over the centers spread across the

country. Securities traded on the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed

on the OTC can be bought or sold at any OTC counter all over the

country and they should not be listed anywhere else Permitted

Securities - Certain shares and debentures listed on other exchanges

and units of mutual funds are allowed to be traded.

Initiated Debentures - Any equity holding at least one lakh debentures

of particular scrip can offer them for trading on the OTC.

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Over the Counter Exchange of India (OTCEI) Is the first screen based nationwide stock exchange in India.

Is the first exchange to introduce Market Making in India.

Is the first exchange to introduce Sponsorship of companies in

India.

Is the only exchange to allow listing of companies with paid-up

below Rs.3 crores.

Is the only exchange to allow companies with less than 3 year

track record to tap capital market.

Has shifted trading from counter receipts to share certificates.

Has introduced Weekly Settlement Cycle.

Allows short selling.

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DETAILS OF STOCK EXCHANGES

Sr. No.

Name of the Exchange Valid Upto

1 Ahmadabad Stock Exchange Ltd. PERMANENT

2 Bangalore Stock Exchange Ltd. PERMANENT

3 Bhubaneswar   Stock Exchange Ltd. June 04, 2012

4 Bombay Stock Exchange Ltd. PERMANENT

5 Calcutta Stock Exchange Ltd. PERMANENT

6 Cochin Stock Exchange Ltd. November 07,

2011

7 Delhi Stock Exchange Ltd. PERMANENT

8 Gauhati Stock Exchange  Ltd. April 30, 2012

10 Interconnected Stock Exchange of India

Ltd.

November 17,

2011

11 Jaipur   Stock Exchange Ltd. January 08, 2012

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12 Ludhiana   Stock Exchange  Ltd. April 27, 2012

13 Madhya Pradesh Stock Exchange Ltd PERMANENT

14 Madras Stock Exchange Ltd. PERMANENT

15 MCX Stock Exchange Ltd September 15,

2011

16 National Stock Exchange of India Ltd. PERMANENT

17  OTC Exchange of India August 22, 2012

18 Pune   Stock Exchange Ltd. September 01,

2012

19 U.P. Stock Exchange Limited June 02, 2012

20 United Stock Exchange of India Limited March 21, 2012

21 The Vadodara   Stock Exchange Ltd. January 03, 2012

COMPANY PROFILEHistory of the Company

29

SBICAP Securities Limited:SBICAP Securities Ltd (SSL) is a 100% subsidiary of SBI Capital

Markets Ltd which is one of the oldest players in the Indian Capital

Market and has a dominant position in the Indian primary capital

markets. SBICAP Securities Limited is a part of the SBI Group.

Business Overview:SBICAP Securities Ltd (SSL) is a 100% subsidiary of SBI Capital

Markets Ltd which is one of the oldest players in the Indian Capital

Market and has a dominant position in the Indian primary capital

markets. SBI Capital Markets Ltd. commenced broking activities in

March 2001 to fulfill the secondary market needs of Financial

Institutions, FIIs,

Mutual Funds, Banks, Corporates, High Net worth Individual, Non-

residential Investors and Retail domestic investors. SBICAP Securities

Ltd. (SSL) is a company, which has been formed to take over the

broking operations of SBI Capital Markets Ltd. SSL commenced

operations in the first quarter of financial year of 2006-2007.

Services currently offered include Institution Equity, Retail Equity,

Derivatives, Broking, Depository Participant services, E-Broking. SSL is

registered with the Securities Exchange Board of India for its various

services, a summary of which is as under:

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SBI GROUPAsset Management Business-SBI Investment

Operate and manage venture capital funds.

SBI Asset ManagementInvestment advisory services, investment trust management.

SBI CapitalOperate and manage buyout and revitalization funds.

SBI Capital SolutionsMezzanine fund management.

SBI VEN CAPITAL Overseas investments.

31

Registered with/as Registration No.

SEBI – Stock Broker – NSE INB231052938

SEBI – Stock Broker – BSE INB011053031

SEBI – Stock Broker – NSE

– F&O

INF231052938

SEBI – Depository

Participant

IN – DP – CDSL – 370

– 2006

SEBI – Portfolio Manager INP000002098

BROKERAGE & INVESTMENT BANKING

BUSINESS

SBI SecuritiesComprehensive online securities company.

SBI Fund BankConsulting of mutual fund sales and operation of mutual funds

information website based on its unique evaluation and analysis.

SBI Liquidity MarketOffering market Infrastructure and services of Forex trading to

financial firms and developing related systems and products.

FINANCIAL SERVICES BUSINESS

SBI InsuranceNon-life insurance company using primarily the Internet.

SBI LeaseComprehensive leasing business.

SBI CardCredit card business.

SBI Business SolutionsBack Office support services.

32

SBI MarketingAdvertising agency.

SBI Business SupportContact center and temporary staff service for corporations.

HOUSING AND REAL ESTATE BUSINESS

SBI MortgageLong-term, fixed-rate housing loans.

SBI PlannersArchitectural construction and consulting services.

OTHERSSBI Net Systems

R & D, Sales and Maintenance for financial system and provision

of information security products and solution services.

33

CHAPTER - 2ABOUT TOPIC

34

DERIVATIVESDefinition of Derivatives

One of the most significant events in the securities markets has been

the development and expansion of financial derivatives. The term

“derivatives” is used to refer to financial instruments which derive their

value from some underlying assets.

The underlying assets could be equities (shares), debt (bonds, T-

bills, and notes), currencies, and even indices of these various assets,

such as the Nifty 50 Index.

Derivatives derive their names from their respective underlying

asset. Thus if a derivative’s underlying asset is equity, it is called equity

derivative and so on. Derivatives can be traded either on a regulated

exchange, such as the NSE or off the exchanges, i.e., directly between

the different parties, which is called “over-the-counter” (OTC) trading. (In

India only exchange traded equity derivatives are permitted under the

law.)

The basic purpose of derivatives is to transfer the price risk

(inherent in fluctuations of the asset prices) from one party to another;

they facilitate the allocation of risk to those who are willing to take it. In

so doing, derivatives help mitigate the risk arising from the future

uncertainty of prices.

For example, on November 1, 2009 a rice farmer may wish to sell

his harvest at a future date (say January 1, 2010) for a pre-determined

35

fixed price to eliminate the risk of change in prices by that date. Such a

transaction is an example of a derivatives contract. The price of this

derivative is driven by the spot price of rice which is the "underlying".

Origin of Derivatives

While trading in derivatives products has grown tremendously in

recent times, the earliest evidence of these types of instruments can be

traced back to ancient Greece. Even though derivatives have been in

existence in some form or the other since ancient times, the advent of

modern day derivatives contracts is attributed to farmers’ need to protect

themselves against a decline in crop prices due to various economic and

environmental factors.

Thus, derivatives contracts initially developed in commodities. The

first “futures” contracts can be traced to the Yodoya rice market in

Osaka, Japan around 1650. The farmers were afraid of rice prices falling

in the future at the time of harvesting. To lock in a price (that is, to sell

the rice at a predetermined fixed price in the future), the farmers entered

into contracts with the buyers.

These were evidently standardized contracts, much like today’s

futures contracts.

In 1848, the Chicago Board of Trade (CBOT) was established to

facilitate trading of forward contracts on various commodities. From then

on, futures contracts on commodities have remained more or less in the

same form, as we know them today.

36

While the basics of derivatives are the same for all assets such as

equities, bonds, currencies, and commodities, we will focus on

derivatives in the equity markets and all examples that we discuss will

use stocks and index (basket of stocks).

Derivatives in India

In India, derivatives markets have been functioning since the

nineteenth century, with organized trading in cotton through the

establishment of the Cotton Trade Association in 1875.Derivatives, as

exchange traded financial instruments were introduced in India in June

2000.The National Stock Exchange (NSE) is the largest exchange in

India in derivatives, trading in various derivatives contracts. The first

contract to be launched on NSE was the Nifty 50 index futures contract.

In a span of one and a half years after the introduction of index futures,

index options, stock options and stock futures were also introduced in

the derivatives segment for trading. NSE’s equity derivatives segment is

called the Futures & Options Segment or F&O Segment. NSE also

trades in Currency and Interest Rate Futures contracts under a separate

segment.

A series of reforms in the financial markets paved way for the

development of exchange-traded equity derivatives markets in India. In

1993, the NSE was established as an electronic, national exchange and

it started operations in 1994. It improved the efficiency and transparency

of the stock markets by offering a fully automated screen-based trading

system with real-time price dissemination. A report on exchange traded

derivatives, by the L.C. Gupta Committee, set up by the Securities and

Exchange Board of India (SEBI), recommended a phased introduction of

37

derivatives instruments with bi-level regulation (i.e., self-regulation by

exchanges, with SEBI providing the overall regulatory and supervisory

role). Another report, by the J.R. Verma Committee in 1998, worked out

the various operational details such as margining and risk management

systems for these instruments. In 1999, the Securities Contracts

(Regulation) Act of 1956, or SC(R) A, was amended so that derivatives

could be declared as “securities”. This allowed the regulatory framework

for trading securities, to be extended to derivatives. The Act considers

derivatives on equities to be legal and valid, but only if they are traded

on exchanges.

MILESTONES IN THE DEVELOPMENT OF

INDIAN DERIVATIVE MARKET

November 18,

1996

L.C. Gupta Committee set up to draft a policy

framework for introducing derivatives

May 11, 1998 L.C. Gupta committee submits its report on the policy

Framework

May 25, 2000 SEBI allows exchanges to trade in index futures

June 12, 2000 Trading on Nifty futures commences on the NSE

38

June 4, 2001 Trading for Nifty options commences on the NSE

July 2, 2001 Trading on Stock options commences on the NSE

November 9,

2001

Trading on Stock futures commences on the NSE

August 29, 2008 Currency derivatives trading commences on the NSE

August 31, 2009 Interest rate derivatives trading commences on the

NSE

February 2010 Launch of Currency Futures on additional currency

pairs

October 28,

2010

Introduction of European style Stock Options

October 29,

2010

Introduction of Currency Options

Two important terms-Before discussing derivatives, it would be useful to be familiar with

two terminologies relating to the underlying markets. These are as

follows:

Spot Market

39

In the context of securities, the spot market or cash market is a

securities market in which securities are sold for cash and delivered

immediately. The delivery happens after the settlement period. Let us

describe this in the context of India. The NSE’s cash market segment is

known as the Capital Market (CM) Segment. In this market, shares of

SBI, Reliance, Infosys, ICICI Bank, and other public listed companies

are traded.

The settlement period in this market is on a T+2 basis i.e., the

buyer of the shares receives the shares two working days after trade

date and the seller of the shares receives the money two working days

after the trade date.

IndexStock prices fluctuate continuously during any given period. Prices

of some stocks might move up while that of others may move down. In

such a situation, what can we say about the stock market as a whole?

Has the market moved up or has it moved down during a given period?

Similarly, have stocks of a particular sector moved up or down?

To identify the general trend in the market (or any given sector of

the market such as banking), it is important to have a reference

barometer which can be monitored. Market participants use various

indices for this purpose. An index is a basket of identified stocks, and its

value is computed by taking the weighted average of the prices of the

constituent stocks of the index.

A market index for example consists of a group of top stocks

traded in the market and its value changes as the prices of its

40

constituent stocks change. In India, Nifty Index is the most popular stock

index and it is based on the top 50 stocks traded in the market. Just as

derivatives on stocks are called stock derivatives, derivatives on indices

such as Nifty are called index derivatives.

Definitions of Basic DerivativesThere are various types of derivatives traded on exchanges across

the world. They range from the very simple to the most complex

products. The following are the three basic forms of derivatives, which

are the building blocks for many complex derivatives instruments (the

latter are beyond the scope of this book):

Forwards

Futures

Options

Knowledge of these instruments is necessary in order to

understand the basics of derivatives. We shall now discuss each of them

in detail.

ForwardsA forward contract or simply a forward is a contract between two

parties to buy or sell an asset at a certain future date for a certain price

that is pre-decided on the date of the contract. The future date is referred

to as expiry date and the pre-decided price is referred to as Forward

Price. It may be noted that Forwards are private contracts and their

terms are determined by the parties involved.

41

A forward is thus an agreement between two parties in which one

party, the buyer, enters into an agreement with the other party, the seller

that he would buy from the seller an underlying asset on the expiry date

at the forward price. Therefore, it is a commitment by both the parties to

engage in a transaction at a later date with the price set in advance. This

is different from a spot market contract, which involves immediate

payment and immediate transfer of asset. The party that agrees to buy

the asset on a future date is referred to as a long investor and is said to

have a long position. Similarly the party that agrees to sell the asset in a

future date is referred to as a short investor and is said to have a short

position. The price agreed upon is called the delivery price or the

Forward Price.

Forward contracts are traded only in Over the Counter (OTC)

market and not in stock exchanges. OTC market is a private market

where individuals/institutions can trade through negotiations on a one to

one basis.

FuturesLike a forward contract, a futures contract is an agreement

between two parties in which the buyer agrees to buy an underlying

asset from the seller, at a future date at a price that is agreed upon

today. However, unlike a forward contract, a futures contract is not a

private transaction but gets traded on a recognized stock exchange. In

addition, a futures contract is standardized by the exchange. All the

terms, other than the price, are set by the stock exchange (rather than

by individual parties as in the case of a forward contract). Also, both

buyer and seller of the futures contracts are protected against the

counter party risk by an entity called the Clearing Corporation. The

42

Clearing Corporation provides this guarantee to ensure that the buyer or

the seller of a futures contract does not suffer as a result of the counter

party defaulting on its obligation. In case one of the parties defaults, the

Clearing Corporation steps in to fulfill the obligation of this party, so that

the other party does not suffer due to non-fulfillment of the contract. To

be able to guarantee the fulfillment of the obligations under the contract,

the Clearing Corporation holds an amount as a security from both the

parties. This amount is called the Margin money and can be in the form

of cash or other financial assets. Also, since the futures contracts are

traded on the stock exchanges, the parties have the flexibility of closing

out the contract prior to the maturity by squaring off the transactions in

the market.

The basic flow of a transaction between three parties, namely

Buyer, Seller and Clearing Corporation is depicted in the diagram below:

Options

43

Like forwards and futures, options are derivative instruments that

provide the opportunity to buy or sell an underlying asset on a future

date.

An option is a derivative contract between a buyer and a seller,

where one party (say First Party) gives to the other (say Second Party)

the right, but not the obligation, to buy from (or sell to) the First Party the

underlying asset on or before a specific day at an agreed-upon price. In

return for granting the option, the party granting the option collects a

payment from the other party. This payment collected is called the

“premium” or price of the option.

The right to buy or sell is held by the “option buyer” (also called the

option holder); the party granting the right is the “option seller” or “option

writer”. Unlike forwards and futures contracts, options require a cash

payment (called the premium) upfront from the option buyer to the option

seller. This payment is called option premium or option price. Options

can be traded either on the stock exchange or in over the counter (OTC)

markets. Options traded on the exchanges are backed by the Clearing

Corporation thereby minimizing the risk arising due to default by the

counter parties involved. Options traded in the OTC market however are

not backed by the Clearing Corporation.

There are two types of options—

Call Options

Put Options

Call option

44

A call option is an option granting the right to the buyer of the

option to buy the underlying asset on a specific day at an agreed upon

price, but not the obligation to do so. It is the seller who grants this right

to the buyer of the option. It may be noted that the person who has the

right to buy the underlying asset is known as the “buyer of the call

option”.

The price at which the buyer has the right to buy the asset is

agreed upon at the time of entering the contract. This price is known as

the strike price of the contract (call option strike price in this case).

Since the buyer of the call option has the right (but no obligation)

to buy the underlying asset, he will exercise his right to buy the

underlying asset if and only if the price of the underlying asset in the

market is more than the strike price on or before the expiry date of the

contract. The buyer of the call option does not have an obligation to buy

if he does not want to.

Put optionA put option is a contract granting the right to the buyer of the

option to sell the underlying asset on or before a specific day at an

agreed upon price, but not the obligation to do so. It is the seller who

grants this right to the buyer of the option.

The person who has the right to sell the underlying asset is known

as the “buyer of the put option”. The price at which the buyer has the

right to sell the asset is agreed upon at the time of entering the contract.

This price is known as the strike price of the contract (put option strike

price in this case).

45

Since the buyer of the put option has the right (but not the

obligation) to sell the underlying asset, he will exercise his right to sell

the underlying asset if and only if the price of the underlying asset in the

market is less than the strike price on or before the expiry date of the

contract. The buyer of the put option does not have the obligation to sell

if he does not want to.

Terminology of DerivativesIn this section we explain the general terms and concepts related

to derivatives.

Spot Price (ST)Spot price of an underlying asset is the price that is quoted for

immediate delivery of the asset.

For example, at the NSE, the spot price of Reliance Ltd. at any

given time is the price at which Reliance Ltd. shares are being traded at

that time in the Cash Market Segment of the NSE. Spot price is also

referred to as cash price sometimes.

Forward Price or Futures Price (F)Forward price or futures price is the price that is agreed upon at

the date of the contract for the delivery of an asset at a specific future

date. These prices are dependent on the spot price, the prevailing

interest rate and the expiry date of the contract.

Strike Price (K)The price at which t he buyer of an option can buy the stock (in the

case of a call option) or sell the stock (in the case of a put option) on or

before the expiry date of option contracts is called strike price. It is the

46

price at which the stock will be bought or sold when the option is

exercised. Strike price is used in the case of options only; it is not used

for futures or forwards.

Expiration Date (T)In the case of Futures, Forwards, Index and Stock Options,

Expiration Date is the date on which settlement takes place. It is also

called the final settlement date.

Participants in the Derivatives MarketAs equity markets developed, different categories of investors

started participating in the market. In India, equity market participants

currently include retail investors, corporate investors, mutual funds,

banks, foreign institutional investors etc. Each of these investor

categories uses the derivatives market to as a part of risk management,

investment strategy or speculation. Based on the applications that

derivatives are put to, these investors can be broadly classified into three

groups:

Hedgers

Speculators

Arbitrageurs

HedgersThese investors have a position (i.e., have bought stocks) in the

underlying market but are worried about a potential loss arising out of a

change in the asset price in the future. Hedgers participate in the

derivatives market to lock the prices at which they will be able to transact

in the future. Thus, they try to avoid price risk through holding a position

in the derivatives market. Different hedgers take different positions in the

47

derivatives market based on their exposure in the underlying market. A

hedger normally takes an opposite position in the derivatives market to

what he has in the underlying market.

SpeculatorsA Speculator is one who bets on the derivatives market based on

his views on the potential movement of the underlying stock price.

Speculators take large, calculated risks as they trade based on

anticipated future price movements. They hope to make quick, large

gains; but may not always be successful. They normally have shorter

holding time for their positions as compared to hedgers. If the price of

the underlying moves as per their expectation they can make large

profits. However, if the price moves in the opposite direction of their

assessment, the losses can also be enormous.

ArbitrageursArbitrageurs attempt to profit from pricing inefficiencies in the

market by making simultaneous trades that offset each other and

capture a risk-free profit. An arbitrageur may also seek to make profit in

case there is price discrepancy between the stock price in the cash and

the derivatives markets.

48

FUNCTION OF DERIVATIVES MARKETS: The following are the various functions that are performed by the

derivatives markets. They are:

Prices in an organized derivatives market reflect the perception of

market participants about the future and lead the price of

underlying to the perceived future level.

Derivatives market helps to transfer risks from those who have

them but may not like them to those who have an appetite for

them.

Derivatives trading acts as a catalyst for new entrepreneurial

activity.

Derivatives markets help increase saving and investment in long

run.

49

CHAPTER – 3

RESEARCH METHODOLOGY

50

INTRODUCTION

Business research can be defined as a systematic and objective

process of gathering, recording, and analyzing data that provides

information to guide business decisions. It is used either to understand

market trends, to find the optimal marketing mix, to devise effective HR

policies, or to find the best investment options.

In the present fast track business environment marked by cutthroat

competition, many organizations rely on business research to gain a

competitive advantage and greater market share. A good research

study helps an organization understand processes, products,

customers, markets and competition and to develop policies, strategies,

and tactics that are most likely to succeed.

ROLE OF BUSINESS RESEARCH IN DECISION-MAKING

For effective planning and implementation of business decisions,

accurate information about the internal and external business

environments is of primary importance. The key objective of business

research is to provide accurate, relevant, and timely information to the

top management, so that they can make effective decisions.

The business decision-making process in an organization going

through the following key interrelated stages:

Problem/opportunity Identification.

Problem/opportunity prioritization and selection.

Problem/opportunity resolution.

Implementing the selected course of action.

51

RESEARCH METHODOLOGY

DATA COLLECTION METHOD Primary Data

Secondary Data

Primary Data- Primary research consists of a collection of

original primary data collected by the researcher. It is often

undertaken after the researcher has gained some insight into the

issue by reviewing secondary research or by analyzing previously

collected primary data.

Secondary Data- Under Secondary sources, information was

collected from internal & external sources. I made use of Internet

sources.

SAMPLING DESIGN

Sampling Size: 100

Sampling Method: Convenience Sampling

52

CHAPTER – 4

ANALYSIS AND INTERPRETATION

53

ANALYSIS AND INTERPRETATION

1. Gender of the respondentsTable 1: What is your Gender? Frequency Percent Valid

PercentCumulativePercent

Male 84 84 84 84Female 16 16 16 100Total 100 100 100

Interpretation: From the questionnaire it is observed that 84% of the

respondents are Male and 16% of them are Female.

54

2. Age of the respondentsTable 2: What is your Age?

Frequency

Percent Valid Percent

Cumulative Percent

Between 18 – 24 23 23.0 23.0 23.0

Between 25 - 34 22 22.0 22.0 45.0

Between 35 - 44 46 46.0 46.0 91.0

Between 45 -54 9 9.0 9.0 100.0

Total 100 100.0 100.0

Interpretation: 46% of the respondents fall under the age category of 35

– 44 years, 23% of them fall under 18 -24 years were as 22% of the

respondents are between the age category of 25 -34 years and 9% of

the respondents are Between the age group of 45 – 54 years.

55

3. Occupation of the respondentsTable 3: Which of the following best describes your current

Occupation?Frequency Percent Valid

PercentCumulative

Percent

Employee 37 37.0 37.0 37.0

Businessman 34 34.0 34.0 71.0

Student 10 10.0 10.0 81.0

Professional 19 19.0 19.0 100.0

Total 100 100.0 100.0

Interpretation: From the above chart it is clear that majority of the

respondents are employee with a weightage of 37% , Next are

56

Businessman with a total of 34% and Professionals being 19% and

Students 10%.

4. Educational Qualification of the respondents

Table 4: What is your Educational Qualification?Frequency Percent Valid

PercentCumulative

PercentUndergraduate 33 33.0 33.0 33.0

Graduate 35 35.0 35.0 68.0

Post Graduate 21 21.0 21.0 89.0

Professional Degree

11 11.0 11.0 100.0

Total 100 100.0 100.0

57

Interpretation: Majority of the respondents are Graduate being 35% were

are Undergraduate are closely followed with 33%, Post graduates

consist of 21% and Professional Degree Holders are 11%.

5. Income per Annum of the respondents

Table 5: What is your approximate Income per Annum?Frequency Percent Valid

PercentCumulative

PercentBelow 1,50,000/- 15 15.0 15.0 15.0

Between 1,50,001 - 3,00,000/- 39 39.0 39.0 54.0

Between 3,00,001 - 4,50,000 14 14.0 14.0 68.0

4,50,000/- and Above 32 32.0 32.0 100.0Total 100 100.0 100.0

58

Interpretation: 39% of the respondents have annual income between

1,50,001 – 3,00,000/- were as respondents having income above

4,50,000/- are 32%, between 3,00,001/- - 4,50,000/- are 14% and below

1,50,000/- are 15%.

6. Percentage of monthly income available for investment in Derivatives

Table 6: What percentage of your monthly household income would you invest in Derivatives?Frequency Percent Valid Percent Cumulative

PercentBetween 5 - 10% 27 27.0 27.0 27.0

Between 11 - 15% 41 41.0 41.0 68.0

Between 16 - 20% 32 32.0 32.0 100.0Total 100 100.0 100.0

59

Interpretation: 41% of the respondents invest between 11 – 15% of the monthly household income in Derivatives, were as 32% of the respondents would invest between 16-20% and 27% of the respondents invest between 5 – 10% in Derivatives Market.

7. Kind of risk perceive while investing in DerivativesTable 7: What kind of risk do you perceive while investing?

Frequency Percent Valid Percent

Cumulative Percent

Uncertainty of Returns

43 43.0 43.0 43.0

Slump in Market 34 34.0 34.0 77.0

Fear of Company Windup

9 9.0 9.0 86.0

Others 14 14.0 14.0 100.0Total 100 100.0 100.0

60

Interpretation: 43% of the respondents feel that Uncertainty of Returns

is the major risk they perceive while investing in Derivative Market, were

as 34% of the respondents feel Slump in Market and 9% of the

respondents feel that fear of company windup is the risk they perceive

while investing in Derivatives.

8. Purpose of Investing in Derivatives Market

Table 8: What is the purpose of investing in Derivative Market?Frequency Percent Valid

PercentCumulative

PercentTo Hedge Funds

33 33.0 33.0 33.0

Risk Control 29 29.0 29.0 62.0

Stable Income 21 21.0 21.0 83.0

Direct Investment

17 17.0 17.0 100.0

Total 100 100.0 100.0

61

Interpretation: 33% of the respondents invest in Derivatives to hedge funds, 29% of them invest for risk control, 21% of the respondents for stable income and 17% invest as a direct investment.

9. Participation in different type of Derivative instrument

Table 9: In which of the following would you like to participate?Frequency Percent Valid

PercentCumulative

PercentIndex Futures 16 16.0 16.0 16.0

Index Options 29 29.0 29.0 45.0

Stock Futures 19 19.0 19.0 64.0

Stock Options 24 24.0 24.0 88.0

Currency Futures/Options

12 12.0 12.0 100.0

Total 100 100.0 100.0

62

Interpretation: From the above chart we find that 29% of the

respondent would like to participate in Index Options were as 24% of the

respondents’ would like to invest in Stock Options, Stock Futures and

Index Futures attract 19 and 16% respectively and respondents liking to

invest in Currency Futures and Options are 12%.

10. Interest of investment in terms of time frame

Table 10: Which contract maturity period would interest you for trading in?

Frequency Percent Valid Percent

Cumulative Percent

1 Month 34 34.0 34.0 34.0

2 Months 9 9.0 9.0 43.0

3 Months 27 27.0 27.0 70.0

6 Months 22 22.0 22.0 92.0

1 Year 8 8.0 8.0 100.0Total 100 100.0 100.0

63

Interpretation: 34% of the respondents would like to invest their money

for 1 Month, 27% of them for 3 months, 22% of the respondents for 6

months, 9% of the respondents for 2 months and 8% of the respondents

for 1 Year.

11. Investment in Derivatives market Table 11: How often do you invest in Derivative Market?

Frequency Percent Valid Percent

Cumulative Percent

Between 1 - 10 times 62 62.0 62.0 62.0

Between 11 - 25 times

14 14.0 14.0 76.0

26 - 50 times 15 15.0 15.0 91.0

Regularly 9 9.0 9.0 100.0Total 100 100.0 100.0

64

Interpretation: Majority of the respondents 60% of them invest between

1 – 10 times a year in Derivatives, were as respondents investing

between 11 – 25 times, 26 – 50 times and regularly are 14%, 15% and

9% respectively.

12. Result of Investment

Table 12: What was the result of your Investment?

Frequency Percent Valid Percent

Cumulative Percent

Great Results 17 17.0 17.0 17.0

Moderate but acceptable

50 50.0 50.0 67.0

Disappointed 33 33.0 33.0 100.0Total 100 100.0 100.0

65

Interpretation: 50% of the respondents are moderate about their results

in investing in Derivatives market, 17% of the respondents have great

results and 33% of the respondents are disappointed with their

investment in Derivatives Market.

FINDINGS 84% of the respondents are Male and 16% of them are Female.

Most of the investors who invest in derivatives market are

graduate.

Majority of the investors who invest in derivative market have a

income of above 1,50,001 – 3,00,00/-

66

46% of the respondents fall under the age category of 35 – 44

years

Investors generally perceive uncertainty of returns type of risk

while investing in derivative market.

Most of investor’s purpose of investing in derivative market is to

hedge their funds.

Most of investors participate in Index Options.

From this survey we come to know that most of investors make a

contract of 1 month maturity period.

Investors invest 1 -10 times a year in Derivatives Market.

The result of investment in derivative market is generally moderate

but acceptable.

RECOMMENDATIONS Knowledge needs to be spread concerning the risk and return of

derivative market.

Investors should have knowledge of technical analysis, especially

5 Day moving averages as derivatives trading is for a short period

of time Investors should analysis their script with the help of 5 Day

moving average before making their trades.

67

Investors’ portfolio should only consist of 15 – 20% Derivatives

contracts or scripts. As derivatives trading is very risky investors

should have only a small portion of their portfolio consisting of

derivatives.

SEBI should conduct seminars regarding the use of derivatives to

educate individual investors.

As FII play a prominent role in Derivatives trading, an individual

investor should keep himself updated with various economic

trends, government policies, and company and industry

announcements.

BIBLIOGRAPHY

nseindia.com

bseindia.com

sebi.gov.in

Ashutosh Vashishtha and Satish Kumar “Development of Financial Derivatives Market in India- A Case Study”

68

Dr. Premalata Shenbagaraman “Do Futures and Options trading increase stock market volatility?”

Golaka C Nath “Behaviour of Stock Market Volatility after Derivatives”

O.P. Gupta “Effect Of Introduction Of Index Futures On Stock Market Volatility: The Indian Evidence”

ANNEXURE

SURVEY QUESTIONNAIRE FOR INVESTORS

Dear Sir/Maim,

This questionnaire is meant for educational purposes only.

69

The information provided by you will be kept secure and confidential.

1. Name: ___________________________________________

2. Gendera) Male b) Female

3. Agea. Below 18 Years

b. Between 18 – 24 Years

c. Between 25- 34 Years

d. Between 45 -54 Years

e. Above 55 Years

4. Occupationa. Employee

b. Business

c. Student

d. Professional

5. Educational Qualification a. Undergraduate

b. Graduate

c. Post Graduate

d. Professional Degree Holder

6. Income per Annum

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a. Below 1,50,000

b. 1,50,000 – 3,00,000

c. 3,00,000 – 5,00,000

d. Above 5,00,000

7. Normally what percentage of your monthly household income could be available for investment?a. Between 5% to 10%

b. Between 11% to 15%

c. Between 16% to 20%

d. Between 21% to 25%

e. More than 25%

8. What kind of risk do you perceive while investing in the stock market?a. Uncertainty of returns

b. Slump in stock market

c. Fear of being windup of company

d. Other

9. What is the purpose of investing in Derivative market?a. To hedge funds

b. Risk control

c. More stable

d. Direct investment

10. In which of the following would you like to participate?a. Index Futures

b. Index Options

c. Stock Futures

d. Stock Options

e. Currency Futures / Options

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11. What contract maturity period would interest you for trading in?a. 1 month

b. 2 months

c. 3 months

d. 6 months

e. 9 months

f. 12 months

12. How often do you invest in Derivative market?a. 1-10 times in a year

b. 11-50 times

c. More than 50 times

d. Regularly

13.What was the result of your Investment?a. Great results

b. Moderate but acceptable

c. Disappointed

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