A Dissertation Project Report ON: Chitta Ranjan Sahoo
A Dissertation Project Report ON: Chitta Ranjan Sahoo
A Dissertation Project Report ON: Chitta Ranjan Sahoo
ON
SUBMITTED BY
MBA- 2017-19
Reg No.1706247054
1
ACKNOWLEDGEMENT
2
DECLARATION
3
CERTIFICATE BY GUIDE
4
EXECUTIVE SUMMERY
CHAPTER-1
1. INTRODUCTION 7-26
2. LITERATURE REVIEW 27
5. FINDINGS 35
6. SUGGESTIONS 36
7. CONCLUSION 37
8. BIBLIOGRAPHY 38
6
INTRODUCTION
The turnover of the stock exchanges has been tremendously increasing from last
10 years. The number of trades and the number of investors, who are
participating, have increased. The investors are willing to reduce their risk, so
they are seeking for the risk management tools.
Prior to SEBI abolishing the BADLA system, the investors had this
system as a source of reducing the risk, as it has many problems like no strong
margining system, unclear expiration date and generating counter party risk. In
view of this problem SEBI abolished the BADLA system.
After the abolition of the BADLA system, the investors are seeking for
a hedging system, which could reduce their portfolio risk. SEBI thought the
introduction of the derivatives trading, as a first step it has set up a 24 member
committee under the chairmanship of Dr.L.C.Gupta to develop the appropriate
regulatory framework for derivative trading in India, SEBI accepted the
recommendations of the committee on May 11, 1998 and approved the phased
introduction of the derivatives trading beginning with stock index futures.
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There are many investors who are willing to trade in the derivative
segment, because of its advantages like limited loss and unlimited profit by paying
the small premiums.
2. A contract which derives its value from the prices, or index of prices, of
underlying securities.
8
TYPES OF DERIVATIVES:
FORWARDS:
FUTURES:
OPTIONS:
Options are of two types - calls and puts. Calls give the buyer the right
but not the obligation to buy a given quantity of the underlying asset, at a given
price on or before a given future date. Puts give the buyer the right, but not the
obligation to sell a given quantity of the underlying asset at a given price on or
before a given date.
WARRANTS:
LEAPS:
SWAPS:
Swaps are private agreements between two parties to exchange cash flows
in the future according to a prearranged formula. They can be regarded as
portfolios of forward contracts. The two commonly used swaps are:
_ Currency swaps:
These entail swapping both principal and interest between the parties, with
the cash flows in one direction being in a different currency than those in the
opposite Direction.
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PARTICIPANTS:
The following three broad categories of participants in the derivatives market.
HEDGERS:
Hedgers face risk associated with the price of an asset. They use futures or
options markets to reduce or eliminate this risk.
SPECULATORS:
ARBITRAGEURS:
11
FUNCTIONS OF DERIVATIVES MARKET:
The following are the various functions that are performed by the derivatives
markets. They are:
12
FUTURES
DEFINITION:
Locations of settlement
13
TYPES OF FUTURES:
On the basis of the underlying asset they derive, the futures are divided
into two types:
Stock futures:
The stock futures are the futures that have the underlying asset as the individual
securities. The settlement of the stock futures is of cash settlement and the
settlement price of the future is the closing price of the underlying security.
Index futures:
Index futures are the futures, which have the underlying asset as an Index. The
Index futures are also cash settled. The settlement price of the Index futures shall
be the closing value of the underlying index on the expiry date of the contract.
There are two parties in a future contract, the Buyer and the Seller. The buyer of
the futures contract is one who is LONG on the futures contract and the seller of
the futures contract is one who is SHORT on the futures contract.
The pay off for the buyer and the seller of the futures contract are as follows.
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PAYOFF FOR A BUYER OF FUTURES:
CASE 1:
The buyer bought the future contract at (F); if the futures price goes to E1
then the buyer gets the profit of (FP).
CASE 2:
The buyer gets loss when the future price goes less than (F), if the
futures price goes to E2 then the buyer gets the loss of (FL).
15
PAYOFF FOR A SELLER OF FUTURES:
F – FUTURES PRICE
CASE 1:
The Seller sold the future contract at (f); if the futures price goes to E1
then the Seller gets the profit of (FP).
CASE 2:
The Seller gets loss when the future price goes greater than (F), if the futures
price goes to E2 then the Seller gets the loss of (FL).
16
MARGINS:
Margins are the deposits, which reduce counter party risk, arise in a futures
contract. These margins are collected in order to eliminate the counter party risk.
There are three types of margins:
Initial Margin:
Whenever a futures contract is signed, both buyer and seller are required
to post initial margin. Both buyer and seller are required to make security
deposits that are intended to guarantee that they will infact be able to fulfill their
obligation. These deposits are Initial margins and they are often referred as
performance margins. The amount of margin is roughly 5% to 15% of total
purchase price of futures contract.
Maintenance margin:
The investor must keep the futures account equity equal to or greater than
certain percentage of the amount deposited as Initial Margin. If the equity goes
less than that percentage of Initial margin, then the investor receives a call for an
additional deposit of cash known as Maintenance Margin to bring the equity up to
the Initial margin.
17
Role of Margins:
MTM MTM
P/L P/L
1
Contract is
300.00 entered and
initial margin is
deposited.
18
margin.
+15,400 +28,800
287
B got profit, S
4
got loss.
Contract
settled at 305,
totally B got
+21,600 profit and S
got loss.
-21,600
305
The fair value of the futures contract is derived from a model known as the
Cost of Carry model. This model gives the fair value of the futures contract.
F=S (1+r-q) t
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Where
F – Futures Price
r – Cost of Financing
T – Holding Period.
FUTURES TERMINOLOGY:
Spot price:
Futures price:
The price at which the futures contract trades in the futures market.
Contract cycle:
The period over which a contract trades. The index futures contracts on the
NSE have one-month, two-months and three-month expiry cycles which expire on
the last Thursday of the month. Thus a January expiration contract expires on the
last Thursday of January and a February expiration contract ceases trading on the
last Thursday of February. On the Friday following the last Thursday, a new
contract having a three-month expiry is introduced for trading.
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Expiry date:
It is the date specified in the futures contract. This is the last day on which
the contract will be traded, at the end of which it will cease to exist.
Contract size:
The amount of asset that has to be delivered under one contract. For
instance, the contract size on NSE’s futures market is 200 Nifties.
Basis:
In the context of financial futures, basis can be defined as the futures price minus
the spot price. There will be a different basis for each delivery month for each
contract. In a normal market, basis will be positive. This reflects that futures
prices normally exceed spot prices.
Cost of carry:
Open Interest:
Total outstanding long or short positions in the market at any specific time.
As total long positions for market would be equal to short positions, for
calculation of open interest, only one side of the contract is counted.
21
OPTIONS
DEFINITION:
Option is a type of contract between two persons where one grants the other the
right to buy a specific asset at a specific price within a specified time period.
Alternatively the contract may grant the other person the right to sell a specific
asset at a specific price within a specific time period. In order to have this right,
the option buyer has to pay the seller of the option premium.
The assets on which options can be derived are stocks, commodities, indexes etc.
If the underlying asset is the financial asset, then the options are financial options
like stock options, currency options, index options etc, and if the underlying asset
is the non-financial asset the options are non-financial options like commodity
options.
PROPERTIES OF OPTIONS:
Options have several unique properties that set them apart from other securities.
The following are the properties of options:
Limited Loss
High Leverage Potential
Limited Life
22
PARTIES IN AN OPTION CONTRACT:
The writer of a call/put options is the one who receives the option premium and is
there by obligated to sell/buy the asset if the buyer exercises the option on him.
TYPES OF OPTIONS:
The options are classified into various types on the basis of various variables. The
following are the various types of options:
INDEX OPTIONS:
The Index options have the underlying asset as the index.
STOCK OPTIONS:
A stock option gives the buyer of the option the right to buy/sell stock at a
specified price. Stock options are options on the individual stocks, there are
currently more than 50 stocks are trading in this segment.
On the basis of the market movement the options are divided into two types.
They are:
23
CALL OPTION:
A call options is bought by an investor when he seems that the stock price
moves upwards. A call option gives the holder of the option the right but not
the obligation to buy an asset by a certain date for a certain price.
PUT OPTION:
A put option is bought by an investor when he seems that the stock price
moves downwards. A put option gives the holder of the option right but not
the obligation to sell an asset by a certain date for a certain price.
On the basis of the exercising of the option, the options are classified into two
categories.
AMERICAN OPTION:
American options are options that can be exercised at any time up to the
expiration date, most exchange-traded options are American.
EUROPEAN OPTION:
European options are options that can be exercised only on the expiration date
itself. European options are easier to analyze than American options.
24
FACTORS AFFECTING THE PRICE OF AN OPTION:
The following are the various factors that affect the price of an option.
They are:
Stock price:
The pay-off from a call option is the amount by which the stock price
exceeds the strike price. Call options therefore become more valuable as the
stock price increases and vice versa. The pay-off from a put option is the amount;
by which the strike price exceeds the stock price. Put options therefore become
more valuable as the stock price increases and vice versa.
Strike price:
In the case of a call, as the strike price increases, the stock price has to
make a larger upward move for the option to go in-the –money. Therefore, for a
call, as the strike price increases, options become less valuable and as strike price
decreases, options become more valuable.
Time to expiration:
Both Put and Call American options become more valuable as the time to
expiration increases.
Volatility:
25
well or very poor increases. The value of both Calls and Puts therefore increase
as volatility increase.
The put option prices decline as the risk – free rate increases whereas the
prices of calls always increase as the risk – free interest rate increases.
Dividends:
Dividends have the effect of reducing the stock price on the ex-dividend
date. This has a negative effect on the value of call options and a positive effect
on the value of put options.
The scrip selection is done on a random basis and the scrip selected is
RELIANCE COMMUNICATIONS. The lot size of the scrip is 500. Profitability
position of the option holder and option writer is studied.
2. Data collection:
The data of the RELIANCE COMMUNICATIONS has been collected from the “The
Economic Times” and the internet. The data consists of the March contract and
the period of data collection is from 30th December 2008 to 31st January 2008.
3. Analysis:
The analysis consists of the tabulation of the data assessing the profitability
positions of the option holder and the option writer, representing the data with
graphs and making the interpretations using the data
26
LITERATURE REVIEW
The purpose of this chapter is to review the studies dealing with the impact of
derivatives on financial markets both outside India and within it, with a view to
crystallizing the focus, scope and methodology to be adopted for the present
research and to identify gaps which the present study proposes to fill.
According to Greenspan (1997) “By far the most significant event in finance
during the past decades has been the extraordinary development and expansion
of financial derivatives…”
Gagan Kukreja(2012) has found in his research that age, educational qualification,
tax advantages, liquidity and investment attributes are mediating factor for
investors’ perception. Investment influences and investment benefits are having
high relevance.
Kim (2004) examined the relationship between trading activities of the Korea
Stock Price Index 200 derivative contracts and their underlying stock market
volatility by using EGARCH and ARIMA. He found positive relationship between
stock market volatility and derivative volume while the relationship is negative
between volatility open interests.
Some other studies (e. g., Kamara et al., 1992; Jagadeesh and Subrahmanyam,
1993; Narasimhan and Subrahmanyam, 1993; Peat and Mc Crrory, 1997) show
that the volatility of the prices of underlying assets increases after the
introduction of derivative trading.
27
RESEARCH METHODOLOGY
One of the most important users of Research Methodology is that it helps in
identifying the problem, collecting, analyzing the required information or data
and providing an alternative solution to the problem. It also helps in collecting the
vital information that is required by the Top Management to assist them for the
better decision making both day to day decisions and critical ones.
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LIMITATIONS OF THE STUDY:
The scrip chosen for analysis is STATE BANK OF INDIA and the contract taken is
March 2005 ending one-month contract.
The data collected is completely restricted to the STATE BANK OF INDIA of
March 2005; hence this analysis cannot be taken as universal.
SECONDARY DATA
29
DATA ANALYSIS
The objective of this analysis is to evaluate the profit/loss position of option
holder and option writer. This analysis is based on the sample data, taken
RELIANCE COMMUNICATIONS scrip. This analysis considered the March ending
contract of the SBI. The lot size of SBI is 500. The time period in which this
analysis is done is from 30/12/2007To31/01/2008
NET NET
PROFIT PROFIT PROFIT
TO TO TO
MARKE CALL VOLUM PREMIU HOLDE HOLDER BUYER
T PRICE S E ('000) M ('000) R ('000) ('000) ('000)
-
51831.52 51831.52
654.8 680 2008 51831.53 0 5 5
-
74881.92 74881.92
654.8 720 3796.5 74881.93 0 5 5
30
OBSERVATIONS AND FINDINGS:
Six call options are considered with six different strike prices.
The current market price on the expiry date is Rs.654.80 and this is considered
as final settlement price.
The premium paid by the option holders whose strike price is far and greater
than the current market price have paid high amounts of premium than those
who are near to the current market price.
The call option holders whose strike price is less than the current market price
are said to be In-The-Money. The calls with strike price 640 are said to be In-
The-Money, since, if they exercise they will get profits.
The call option holders whose strike price is less than the current market price
are said to be Out-Of-The-Money. The calls with strike price of 660,
680,700,720,740 are said to be Out-Of-The-Money, since, if they exercise, they
will get losses.
31
GRAPH SHOWING THE PREMIUM AMOUNT TRANSACTED FOR A CALL OPTION
90000
85603.45
80000
74881.925
70000
60000
51831.525
PREMIUM ('000)
50000
PREMIUM
40000
30208.4
30000
21600.35
20000
10000
3634.15
0
1 2 3 4 5 6
CALL OPTIONS
FINDINGS:
The premium of the options with strike price of 700 and 720 is high, since most of
the period of the contract the cash market is moving around 700 mark.
3500
3000 2952.6
2500
PROFIT ('000)
2000
PROFIT
1500
1000
500
0 0 0 0 0 0
1 2 3 4 5 6
CALL OPTIONS
32
FINDINGS:
The contracts with strike price 660, 680, 700, 720, 740 get no profit, since
their strike price is more than the settlement price.
The contract with strike price 640 gets the profit.
NET
PROFIT NET PROFIT
TO PROFIT TO TO
MARKET VOLUME PREMIUM HOLDER HOLDER WRITER
PRICE PUTS ('000) ('000) ('000) ('000) ('000)
-
654.8 700 1858 30871.28 83981.6 53110.325 53110.325
-
654.8 720 1468.5 23727.83 95746.2 72018.375 72018.375
33
OBSERVATIONS AND FINDINGS:
Six put options are considered with six different strike prices.
The current market price on the expiry date is Rs.654.80 and this is considered
as the final settlement price.
The premium paid by the option holders whose strike price is far and greater
than the current market price have paid high amount of premium than those
who are near to the current market price.
The put option holders whose strike price is more than the current market
price are said to be In-The-Money. The puts with strike price 660,680,700,720
are said to be In-The-Money, since, if they exercise they will get profits.
The put option holders whose strike price is less than the current market price
are said to be Out-Of-The-Money. The puts with strike price of 600,640 are
said to be Out-Of-The-Money, since, if they exercise their puts, they will get
losses.
34
FINDINGS
35
SUGGESTIONS
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 order to increase the derivatives market in India, SEBI should revise some of
their regulations like contract size, participation of FII in the derivatives
market.
Contract size should be minimized because small investors cannot afford this
much of huge premiums.
SEBI has to take further steps in the risk management mechanism.
SEBI has to take measures to use effectively the derivatives segment as a tool
of hedging.
36
CONCLUSION
In bullish market the call option writer incurs more losses so the investor is
suggested to go for a call option to hold, where as the put option holder
suffers in a bullish market, so he is suggested to write a put option.
In bearish market the call option holder will incur more losses so the investor
is suggested to go for a call option to write, whereas the put option writer will
get more losses, so he is suggested to hold a put option.
In the above analysis the market price of State Bank of India is having low
volatility, so the call option writers enjoy more profits to holders.
37
BIBLIOGRAPHY
BOOKS:
WEBSITES:
www.nseindia.com
www.equitymaster.com
www.peninsularonline.com
NEWS EDITIONS:
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