GAUHATI UNIVERSITY

A Training Report A STUDY ON DERIVATIVE MARKET Submitted in partial fulfillment of the requirements for the award of MASTER OF BUSINESS ADMINISTRATION (Industry Integrated) TO GAUHATI UNIVERSITY By Ms.RADHIKA.K.P Roll No.1001-0218 Under the Guidance of

Dr. SHOBHA KIRAN SRISTY

ASSOCIATE PROFESSOR RAI BUSINESS SCHOOL, CHENNAI

Mr. N.SELVARAJ
BRANCH HEAD STANDARD CHARTERED SECURITIES (INDIA) Ltd.

CERTIFICATE

This is to certify that the Training Report has been submitted in Partial fulfillment of requirements for degree of

MASTER OF BUSINESS ADMINISTRATION (Industry Integrated) TO GAUHATI UNIVERSITY By Radhika.k.p Roll.No.10010216 Under the supervision and guidance of Dr SHOBHA KIRAN SRISTY, and that no part of this report has been submitted for the award of any other degree/diploma/fellowship or similar title prizes and that the work has not been published in any scientific and other magazines. Dr. SHOBHA KIRAN SRISTY ASSOCIATE PROFESSOR

CERTIFICATE OF THE FACULTY GUIDE

This is to certify that the training Report A STUDY ON DERIVATIVE

MARKET at STANDARD CHARTERED SECURITIES (INDIA) Ltd is

completed under my guidance and supervision. It is submitted in partial fulfillment of the Master of Business Administration (Industry Integrated) to Gauhati University by Ms.Radhika.k.p (Roll No 1001-0216) and this has not formed a basis for the award of any degree, diploma or fellowship by any other institutes or universities.

Dr. Shobha Kiran Sristy

STUDENTS DECLARATION

STUDENTS DECLARATION
I hereby declare that the Training report conducted at STANDARD CHARTERED SECURITIES Under the guidance Of Dr.SHOBHA KIRAN SRISTY
ASSOCIATE PROFESSOR RAI BUSINESS SCHOOL, CHENNAI

Submitted in partial fulfillment of the requirements for the Degree of

MASTER OF BUSINESS ADMINISTRATION TO GAUHATI UNIVERSITY

Is my original work and the same has not been submitted for the award of any other degree /diploma/fellowship or other similar titles or prizes.

Place: Chennai Date:

Ms.RADHIKA.K.P Roll No.1001-0218

CERTIFICATE OF THE ORGANIZATION

ACKNOWLEDGEMENT

ACKNOWLEDGEMENT

I take immense pleasure in thanking Lakshminarayanan, training officer, NIAM for having permitted me to carry out this project work. I wish to express my deep sense of gratitude to my Internal Guide, Dr.Shobha kiran sristy for her able guidance and useful suggestions, which helped me in completing the project work, in time. Needless to mention that Mr. SELVARAJ, BRANCH HEAD, Mr. RAVISANKAR, RELATIONSHIP MANAGER, STANDARDCHARTERED SECURITIES (INDIA) Ltd who had been a source of inspiration and for his timely guidance in the conduct of our project work. Finally, yet importantly, I would like to express my heartfelt thanks to my beloved parents for their blessings, my friends/classmates for their help and wishes for the successful completion of this project.

CONTENTS

CONTENTS TOPIC CHAPTER 1 INTRODUCTION

1.1 SECURITIES 11-24

PAGE NO

CHAPTER 2 INDUSTRY PROFILE

1.1 ORIGIN

26-30 30-34

1.2 FUTURE CHAPTER 3 COMPANY PROFILE

1.1 ORIGIN 1.2 GROWTH& PRESENT STATUS

35-36 37-48

CHAPTER 4 OBJECTIVES AND METHODOLOGY

1.1 1.2

SCOPE METHODOLOGY

49-51 51-52

CHAPTER 5 DERIVATIVES MARKET

1.1 1.2

DERIVATIVES DATA ANALYSIS &INTERPRETATION

53-89 90-99

CHAPTER 6 SWOT ANALYSIS OF COMPANY

1.1

SWOT

100-102

CHAPTER 7 CONCLUSION
1.1 1.2

CONCLUSION BIBILIOGRAPHY

103 104

1. INTRODUCTION 1.1 a. SECURITIES:

Securities as per the securities contracts Regulation Act (SCRA) 1956, includes instruments such as shares, bonds, scripts, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities units of

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collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the central government. FUNCTIONS OF SECURITIES MARKET: It is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporate, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporate) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called Securities.

ONE CAN INVEST IN: Shares Government securities Derivative products Units of Mutual funds etc. are some of the securities investors in the securities market can invest in.

SECURITIES MARKETS NEED REGULATORS: The absence of conditions of perfect competition in the securities market makes the role of the regulator extremely important. The regulator ensures that the market participants behave in a

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desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. REGULATION OF SECURITIES MARKET: The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA) Department of Company Affairs (DCA) Reserve Bank of India (RBI) Securities and Exchange Board of India (SEBI)

SEBI AND ITS ROLE: The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment with statutory powers for a) Protecting the interests of investors in securities b) Promoting the development of the securities market and c) Regulating the securities market. Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. in particular, it has powers for:

Regulating the business in stock exchanges and any other securities market

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 Registering and regulating the working of stock brokers, sub-brokers etc Promoting and regulating self-regulatory organizations Prohibiting fraudulent and unfair trade practices
Calling for information from, undertaking inspection, conducting enquiries and audits of

the stock exchanges, intermediaries, self Regulatory organizations, mutual funds and other persons associated with the securities market. PARTICIPANTS OF SECURITIES MARKET: The securities market essentially has three categories of participants, namely, the issuers of securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc. SEGMENTS OF SECURITIES MARKET: The securities market has two interdependent segments: Primary (new issues) market and Secondary market. The Primary market provides the channel for sale of new securities while Secondary market deals in securities previously issued.

1.1 b. PRIMARY MARKET:

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The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporate, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market. FACE VALUE OF SHARES/DEBENTURES: The nominal or stated amount (in Rs.) assigned to a security by the issuer .For shares, it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at maturity. Also, known as par value or simply par. For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price. For a debt security, face value is the amount repaid to the investor when the bond matures (usually, Government securities and corporate bonds have a face value of Rs. 100).The price at which the Security trades depend on the fluctuations in the interest rates in the economy. PURPOSE OF ISSUING SHARES TO PUBLIC: Most companies are usually started privately by their promoter(s). However, the promoters capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a Public Issue. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company.

TYPES OF ISSSUES:

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Primarily, issues can be classified as a Public, Rights or Preferential issues (also known as private placements). While public and rights issues involve a detailed procedure, private placements or preferential issues are relatively simpler. The classification of issues is illustrated below: Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities. A follow on public offering (Further Issue) is when an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document. Rights Issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. A Preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer company has to comply with the Companies Act and the requirements contained in 19th Chapter pertaining to preferential allotment in SEBI guidelines which include pricing, disclosures in notice etc. ISSUE PRICE: The price at which a company's shares are offered initially in the primary market is called as the Issue price. When they begin to be traded, the market price may be above or below the issue price.

MARKET CAPITALIZATION:

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The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs. 100. The market capitalization of company A is Rs. 12000 million. DIFFERENCE BETWEEN PUBLIC ISSUE AND PRIVATE PLACEMENT: When an issue is not made to only a select set of people but is open to the general public and any other investor at large, it is a public issue. But if the issue is made to a select set of people, it is called private placement. As per Companies Act, 1956, an issue becomes public if it results in allotment to 50 persons or more. This means an issue can be privately placed where an allotment is made to less than 50 persons. INITIAL PUBLIC OFFER (IPO): An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuers securities. The sale of securities can be either through book building or through normal public issue. SEBIS ROLE IN AN ISSUE: Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The company can proceed further on the issue only after getting observations from SEBI. The validity period of SEBIs observation letter is three months only i.e. the company has to open its issue within three months period. Indian companies are permitted to raise foreign currency resources through two main sources: a) issue of foreign currency convertible bonds more commonly known as Euro issues and b) issue of ordinary shares through depository receipts namely Global Depository Receipts

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(GDRs)/American Depository Receipts (ADRs) to foreign investors i.e. to the institutional investors or individual investors. AMERICAN DEPOSITARY RECEIPT: An American Depositary Receipt ("ADR") is a physical certificate evidencing ownership of American Depositary Shares ("ADSs"). The term is often used to refer to the ADSs themselves. ADS: An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity ownership in a non-U.S. company. It represents the foreign shares of the company held on deposit by a custodian bank in the company's home country and carries the corporate and economic rights of the foreign shares, subject to the terms specified on the ADR certificate. One or several ADSs can be represented by a physical ADR certificate. The terms ADR and ADS are often used interchangeably. ADSs provide U.S. investors with a convenient way to invest in overseas securities and to trade non-U.S. securities in the U.S. ADSs are issued by a depository bank, such as JPMorgan Chase Bank. They are traded in the same manner as shares in U.S. companies, on the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) or quoted on NASDAQ and the over-the-counter (OTC) market. Although ADSs are U.S. dollar denominated securities and pay dividends in U.S. dollars, they do not eliminate the currency risk associated with an investment in a non-U.S. company. GLOBAL DEPOSITARY RECEIPT: Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering. GDRs may be used in public or private markets inside or outside US. GDR, a negotiable

certificate usually represents companys traded equity/debt. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.

1.1 c. SECONDARY MARKET:

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Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. ROLE OF SECONDARY MARKET: For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduitby facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKET: In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/preissued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market. ROLE OF STOCK EXCHANGE IN BUYING AND SELLING SHARES: The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available with the NSE trading members or the internet based trading facility provided by the trading members of NSE.

SCREEN BASED TRADING: The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and efficiency. In order to

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provide efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully automated screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buy order from a counter party is found. MAXIMUM BROKERAGE THAT A BROKER CAN CHARGE: The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note. NEED TO TRADE ON A RECOGNIZED STOCK EXCHANGE: An investor does not get any protection if he trades outside a stock exchange. Trading at the exchange offers investors the best prices prevailing at the time in the market, lack of any counterparty risk which is assumed by the clearing corporation, access to investor grievance and redressal mechanism of stock exchanges, protection up to a prescribed limit, from the Investor Protection Fund etc. DOS AND DONTS FOR INVESTOR WHILE INVESTING IN STOCK MARKETS: Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate. Enter into an agreement with your broker/sub-broker setting out terms and conditions clearly. Ensure that you give all your details in the Know Your Client form. Ensure that you read carefully and understand the contents of the Risk Disclosure Document and then acknowledge it. Insist on a contract note issued by your broker only, for trades done each day. Ensure that you receive the contract note from your broker within 24 hours of the transaction. Ensure that the contract note contains details such as the brokers name, trade time and number, transaction price, brokerage, service tax, securities transaction tax etc. and is signed by the Authorized Signatory of the broker. To cross check genuineness of the transactions, log in to the NSE website (www.nseindia.com) and go to the trade verification facility extended by NSE. Issue

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account payee cheques/demand drafts in the name of your broker only, as it appears on the contract note/SEBI registration certificate of the broker. While delivering shares to your broker to meet your obligations ensure that the delivery instructions are made only to the designated account of your broker only. Insist on periodical statement of accounts of funds and securities from your broker. Cross check and reconcile your accounts promptly and in case of any discrepancies bring it to the attention of your broker immediately. Please ensure that you receive payments/deliveries from your broker, for the transactions entered by you, within one working day of the payout date. Ensure that you do not undertake deals on behalf of others or trade on your own name and then issue cheques from a family members/ friends bank accounts. Similarly, the Demat delivery instruction slip should be from your own Demat account, not from any other family members/friends accounts. Do not sign blank delivery instruction slip(s) while meeting security pay in obligation. No intermediary in the market can accept deposit assuring fixed returns. Hence do not give your money as deposit against assurances of returns. Portfolio Management Services could be offered only by intermediaries having specific approval of SEBI for PMS. Hence, do not part your funds to unauthorized persons for Portfolio Management. Delivery Instruction Slip is a very valuable document. Do not leave signed blank delivery instruction slip with anyone. While meeting pay in obligation make sure that correct ID of authorized intermediary is filled in the Delivery Instruction Form. Be cautious while taking funding form authorized intermediaries as these transactions are not covered under Settlement Guarantee mechanisms of the exchange. Insist on execution of all orders under unique client code allotted to you. Do not accept trades executed under some other client code to your account.

When you are authorizing someone through Power of Attorney for operation of your DP account, make sure that: 1. Your authorization is in favor of registered intermediary only.

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2. Authorization is only for limited purpose of debits and credits arising out of valid transactions executed through that intermediary only. 3. You verify DP statement periodically say every month/ fortnight to ensure that no unauthorized transactions have taken place in your account. 4. Authorization given by you has been properly used for the purpose for which authorization has been given. 5. In case you find wrong entries please report in writing to the authorized intermediary. Dont accept unsigned/duplicate contract note. Dont accept contract note signed by any unauthorized person. Dont delay payment/deliveries of securities to broker. In the event of any discrepancies/disputes, please bring them to the notice of the broker immediately in writing (acknowledged by the broker) and ensure their prompt rectification. In case of sub-broker disputes, inform the main broker in writing about the dispute at the earliest. If your broker/sub-broker does not resolve your complaints within a reasonable period please bring it to the attention of the Investor Services Cell of the NSE. While lodging a complaint with the Investor Grievances Cell of the NSE, it is very important that you submit copies of all relevant documents like contract notes, proof of payments/delivery of shares etc. along with the complaint. Remember, in the absence of sufficient documents, resolution of complaints becomes difficult. Familiarize yourself with the rules, regulations and circulars issued by stock exchanges/SEBI before carrying out any transaction.

PRODUCTS IN SECONDARY MARKETS: Following are the main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds:

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SHARES: Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture. Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share. Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns. Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the companys creditors, bondholders/debenture holders. Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares. Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company. Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows:

Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic holder. The buyer of these bonds receives only one payment, at the maturity of the bond.

interest is

paid. The difference between the issue price and redemption price represents the return to the

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Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements. EQUITY INVESTMENT: If we take the Nifty index returns for the past fifteen years, Indian stock market has returned about 16% to investors on an average in terms of increase in share prices or capital appreciation annually. Besides that on average stocks have paid 1.5% dividend annually. Dividend is a percentage of the face value of a share that a company returns to its shareholders from its annual profits. Compared to most other forms of investments, investing in equity shares offers the highest rate of return, if invested over a longer duration. FACTORS INFLUENCING PRICE OF A STOCK: Broadly there are two factors: (1) stock specific and (2) market specific. The stock-specific factor is related to peoples expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills. The market specific factor is influenced by the investors sentiment towards the stock market as a whole. This factor depends on the environment rather Than the performance of any particular company. Events favorable to an Economy, political or regulatory environment like high economic growth, Friendly budget, stable government etc. can fuel euphoria in the investors.

PORTFOLIO: A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset you own-from shares, debentures, bonds, mutual fund units to items such as

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gold, art and even real estate etc. However, for most investors a portfolio has come to signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units. DIVERSIFICATION: It is a risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Diversification is possibly the best way to reduce the risk in a portfolio.

DEBT INSTRUMENT: Debt instrument represents a contract whereby one party lends money to another on predetermined terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to the lender. In Indian securities markets, the term bond is used for debt instruments issued by the Central and State governments and public sector organizations and the term debenture is used for instruments issued by private corporate sector.

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INDUSTRY PROFILE

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ORIGIN AND DEVELOPMENT OF THE INDUSTRY INDUSTRY PROFILE

1.2 a. ORIGIN AND DEVELOPMENT OF THE INDUSTRY

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The origin of the stock market in India goes back to the end of the eighteenth century when long-term negotiable securities were first issued. However, for all practical purposes, the real beginning occurred in the middle of the nineteenth century after the enactment of the companies Act in 1850, which introduced the features of limited liability and generated investor interest in corporate securities. An important early event in the development of the stock market in India was the formation of the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in Ahmadabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during depressing times subsequently. Stock exchanges are intricacy inter-woven in the fabric of a nation's economic life. Without a stock exchange, the saving of the community- the sinews of economic progress and productive efficiency- would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution than the stock exchanges. But as business and industry expanded and the economy assumed more complex nature, the need for 'permanent finance' arose. Entrepreneurs needed money for long term whereas investors demanded liquidity the facility to convert their investment into cash at any given time. The answer was a ready market for investments and this was how the stock exchange came into being. Stock exchange means any body of individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities. These securities include:

(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ii) Government securities (iii) Rights or interest in securities.

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The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April - August 1999). NSE has around 1500 shares listed with a total market capitalization of around Rs 9, 21,500 crore. The BSE has over 6000 stocks listed and has a market capitalization of around Rs

9, 68,000 crore. Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index. Both these indices are calculated on the basis of market capitalization and contain the heavily traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE on Line Trading) and NEAT (National Exchange Automated Trading) System. The stock exchange facilitates more efficient processing, automatic order matching, faster execution of trades and transparency; the scrip's traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which are in the carry forward system (Badla). The 'F' group represents the debt market (fixed income securities) segment. The 'Z' group scrip's are the blacklisted companies. The 'C' group covers the odd lot securities in 'A', 'B1' & 'B2' groups and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Ltd.

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The securities markets in India have witnessed several policy initiatives, which has refined the market micro-structure, modernized operations and broadened investment choices for the investors. The irregularities in the securities transactions in the last quarter of 2000-01, hastened the introduction and implementation of several reforms. While a Joint Parliamentary Committee was constituted to go into the irregularities and manipulations in all their ramifications in all transactions relating to securities, decisions were taken to complete the process of demutualization and corporatization of stock exchanges to separate ownership, management and trading rights on stock exchanges and to effect legislative changes for investor protection, and to enhance the effectiveness of SEBI as the capital market regulator. Rolling settlement on T+5 basis was introduced in respect of most active 251 securities from July 2, 2001 and in respect of balance securities from 31st December 2001. Rolling settlement on T+3 basis commenced for all listed securities from April 1, 2002 and subsequently on T+2 basis from April 1, 2003. The derivatives trading on the NSE commenced with the S&P CNX Nifty Index Futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. Due to rapid changes in volatility in the securities market from time to time, there was a need felt for a measure of market volatility in the form of an index that would help the market participants. NSE launched the India VIX, a volatility index based on the S&P CNX Nifty Index Option prices. Volatility Index is a measure of markets expectation of volatility over the near term. The Indian stock market regulator, Securities & Exchange Board of India (SEBI) allowed the direct market access (DMA) facility to investors in India on April 3, 2008. To begin with, DMA was extended to the institutional investors. In addition to the DMA facility, SEBI also decided to permit all classes of investors to short sell and the facility for securities lending and borrowing scheme was operationalised on April 21, 2008. The Debt markets in India have also witnessed a series of reforms, beginning in the year 2001-02 which was quite eventful for debt markets in India, with implementation of several important decisions like setting up of a clearing corporation for government securities, a negotiated dealing system to facilitate transparent electronic bidding in auctions and secondary market transactions on a real time basis and dematerialization of debt instruments. Further, there was

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adoption of modified Delivery-versus-Payment mode of settlement (DvP III in March 2004). The settlement system for transaction in government securities was standardized to 12 T+1 cycle on May 11, 2005. To provide banks and other institutions with a more advanced and more efficient trading platform, an anonymous order matching trading platform (NDSOM) was introduced in August 2005. Short sale was permitted in G-secs in 2006 to provide an opportunity to market participants to manage their interest rate risk more effectively and to improve liquidity in the market. When issued (WI) trading in Central Government Securities was introduced in 2006. As a result of the gradual reform process undertaken over the years, the Indian G-Sec market has become increasingly broad-based and characterized by an efficient auction process, an active secondary market, electronic trading and settlement technology that ensure safe settlement with Straight through Processing (STP). This chapter, however, takes a review of the stock market developments since 1990. These developments in the securities market, which support corporate initiatives, finance the exploitation of new ideas and facilitate management of financial risks, hold out necessary impetus for growth, development and strength of the emerging market economy of India.

1.2 b. GROWTH AND PRESENT STATUS OF THE INDUSTRY

The main concern for the emerging market economies (including India) may not be the direct exposure to global financial institutions, but more about access to credit and the slowdown it is causing in America and other European economies.

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Economists point out that the extent of the effect will be decided by the nature of the US recession. If it is shallow (and the US comes out of it quickly), India may not suffer much of an impact. But if it is long and deep, Indias exports will be hit. The Indian stock market is definitely not in one direction, and building positions on both buy and short sides is not a fairly good idea to make money in such a tight market. Analysts believe that the market is definitely going to see some action as soon some breaking news come out, but the effect of such news on the Indian stock market would not be lasting long, and there could be a major pull back leading the market to touch the 13000 levels. Having said that, economists believe that the inflation would inch down to 10% in the coming quarter that would become visible in retail and consumer durable products soon, which would in turn boost consumer confidence. This would definitely push the markets to bounce back from the 13000 levels, and we might see some fresh buying, and both sensex and nifty might witness some rally. These levels could be of great importance for those domestic as well as NRI clients who did not get a chance to make investments into top Indian mutual funds when the market was trading at 18000 levels. A prudent idea would be to invest 25% of your savings at these levels, and when the market drops down 20% from here, another 40% of the savings can be invested. Current market conditions are as such that its very hard to predict the direction of the market, thus it is vital important for both resident as well as non resident investors to act wisely and invest with a proper game plan. The whole idea is to do investing wisely and with common sense, and not forcing one self into rush and landing into unnecessarily diversification of funds into some unwanted financial instruments. For more ideas as to how to go about drafting a portfolio, one should consult a good investment adviser and leave the job of asset allocation to professionals.

1.2 c. FUTURE OF THE INDUSTRY

India just keeps getting better and better. The economy is growing rapidly surpassing some of Asias biggest economies. India is now becoming the third largest country in Asia economically. It has grown so much and is expected to continue to grow like this for a long time. The Indian Government is doing everything it can do to propel the growth rates in the Indian Industry,

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primarily in: India Stock Market, Indian Companies, Indias manufacturing index, India Business Sector, Indias Company sector and other India investment industries. The yearly salaries are rising and the command to buy is under the command to spend. The Investment GDP ratio is at a high. It is now over 30 percent and between the years 1990 and 2004 the average was only 25 percent. It has been said that, once it reaches 30 percent, it is going to take off rapidly. So India is expected to move rapidly. The down side to Indias big movement is that there is a limit to how high it can go. India has grown so much, making the costs of everything go up so frequently. It can turn into the most expensive country in the world. The companies are now working above their finest ability. A lot of people try to People undervalue Indias accomplishment in growth. The growth rates are very good and it wouldnt be wrong for people to overvalue it. India has created the best growth story that happen over a long time. Although India is growing, there can still be corrections in the market. No matter how well a country is doing, there is always something that can be fixed. Some say that they would like to wait until the market is fixed to invest. It is said that the Reserve Bank of India come up with a way that the domestic credit cycle can last for an extensive time. This credit cycle and the investment cycle, of course, will keep India in the bull market for a long time. They stopped/slowed the growth of the bank credit. The bank is taking control of the credit and loans very well so that India stays on the right track. The Indian share market has been in a bull run since April 2011 and thus corrections are part and parcel for any market. The share markets will see ups and downs but there will be steady growth. There is a good atmosphere for investments in India and the share markets will thrive under the circumstances. Firms which deal with securities will make good business as more and more people will enter the share markets to make investments. In the long run all securities firms have a bright future.

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PROFILE OF THE ORGANISATION STANDERD CHARTERD SECURITIES

2.1 ORIGIN OF THE ORGANIZATION:

STANDARD CHARTERED SECURITIES (INDIA) LIMITED:

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Standard Chartered Securities (India) Limited is a leading broking company that helps retail and institutional investors with their capital market investment requirements. At Standard Chartered Securities, the aim is to offer simplified investment solutions that provide long-term value to the customers. For institutional clients, they offer products such as equity capital markets, equity and derivative broking. Retail division caters to online as well as offline customers, offering products such as equity and derivative broking, depository services, mutual funds, fixed income instruments and company fixed deposits. They have a dedicated team of research analysts who work independently to provide investment and trading recommendation to our institutional and retail customers. A network of relationship managers and customer care executives offer efficient execution backed by in depth research and expertise to customers across the country. SCSI has a large network with pan India presence in 112 locations through 34 branches and 97 authorized centers. Standard Chartered Securities is registered as a trading and clearing member with Bombay Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE) and MCX Stock Exchange Limited (MCX). The Company is also registered as Depository Participant with Central Depository Services (India) Limited (CDSL) as well as National Securities Depository Limited (NSDL). Standard Chartered Securities is part of the Standard Chartered Group, an international financial services group that offers a variety of financial services including Consumer Banking, Wholesale Banking, Corporate Advisory, Capital Market Services, SME Banking, and Private Banking. Standard Chartered PLC, listed on the London, Hong Kong and Mumbai stock exchanges, ranks among the top 20 companies in the FTSE-100 by market capitalization. The London-headquartered Group has operated for over 150 years in some of the world's most dynamic markets, leading the way in Asia, Africa and the Middle East.

The Standard Chartered Group in India is also represented by Standard Chartered Bank, India's largest international Bank with 94 branches across 37 cities. To know more about Standard

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Chartered Bank, India, click on www.standardchartered.co.in. To know about Standard Chartered plc, click on www.standardchartered.com History of Standard Chartered Securities (India) Limited: Standard Chartered Securities (India) Limited is a wholly-owned subsidiary of Standard Chartered Bank (Mauritius) Limited (SCBM), which acquired the company from Securities Trading Corporation of India (STCI) over 2008-2010. Prior to the acquisition, Standard Chartered Securities was known as UTI Securities Limited (UTISEL). On August 23, 2007, SCBM agreed to acquire UTISEL from STCI in three tranches. As a part of first branch, SCBM acquired 49% stake in UTISEL on January 11, 2008, after which, the name of the Company was changed from UTISEL to Standard Chartered-STCI Capital Markets Limited i.e. January 17, 2008. SCBM acquired further 25.9% stake in the Company on December 12, 2008, as a part of second leg of the transaction and increase its total stake from 49% to 74.9% in the Company. As a last part of the acquisition, SCBM increased its stake to 100% in the Company by acquiring the residual stake of 25.1% from STCI on October 08, 2010. Consequently the Company became the wholly owned subsidiary of SCBM and was re-named Standard Chartered Securities (India) Limited.

2.2 GROWTH AND DEVELOPMENT OF THE ORGANIZATION:

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Standard Chartered Bank in India is the countrys largest international bank with 90 branches in 33 cities and India is one of the Groups key markets worldwide. Employing about 19,000 people, Standard Chartered Bank has played a significant role in the history of the banking industry in India since opening its first branch in Kolkata, 150 years ago, on 12 April 1858. Standard Chartered Bank considers India to be one of the prime economic opportunities of the 21st century and is proud to be so strongly positioned here. SCSI have ambitious plans to transform business in the country and to further expand our operations in India. On 11 January 2008, Standard Chartered Bank (Mauritius) Limited acquired 49% stake of erstwhile UTI Securities Limited from Securities Trading Corporation of India (STCI). Accordingly, the name of the Company was changed from UTI Securities Limited to Standard Chartered STCI Capital Markets Limited with effect from 17 January 17 2008. Subsequently, on 12 December 2008, SCBM acquired further 25.9% stake in Standard Chartered STCI Capital Markets Limited to increase its total stake in Standard Chartered STCI Capital Markets Limited from 49% to 74.9%. The institutional division of Standard Chartered Securities (India) Limited has been catering to the ever growing needs of the institution and corporate customers for over 15 years by providing a wide range of financial intermediation services. SCSI has provided consistent service has made them the financial intermediary of choice to over 800 institutional clients which bear testimony to our continuous effort of reaching out to customers requirements. Pan India presence ensures tailor made services for customers at their point of presence ensuring seamless execution of their requirements. Further, parentage with Standard Chartered Bank helps them to provide global transactional capability, to our customers. SERVICES OFFERED BY STANDARD CHARTERED SECURITIES (INDIA) LIMITED:

1.Equity Capital Markets Creation and execution of capitalization strategy

2.Institutional Equities Consistent, quality services,

36 with utmost confidentiality

3.Fixed Income Group Complete solution in the debt segment

and competitive edge

1. EQUITY CAPITAL MARKETS: The Equity Capital Markets division at Standard Chartered Securities (India) Limited aims to offer entrepreneurs, companies and investors, independent financial advice and transaction execution of the highest standard. The endeavor is to provide value to growing and mature companies by helping them in the creation and execution of the best possible capitalization strategy. Capital Markets The experienced professionals of Standard Chartered Securities (India) Limited offer a wide range of services such as:

Initial public offer (IPO) Rights issue Follow on offerings (FPO) Qualified Institutions placement (QIP) / preferential allotments Open offers Equity buyback programs Private equity placements in listed companies (PIPE)

Private Equity SCSI provides advisory solutions to companies on their capitalization/ re-capitalization strategies. The services provided include

Advice on business plan Advice on optimum capital structure Due diligence and preparation of information memorandum Identifying and screening of investors Assistance in valuation and most effective financial structure

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Negotiating the terms of the deal with investors and assisting in drafting of necessary legal documentation for closure Post closure servicing for company and fund

2. INSTITUTIONAL EQUITIES:

The institutional equities division at Standard Chartered Securities (India) Limited caters to the investment needs of corporate and institutional clients. Our endeavor is to provide consistent quality services, enabling our clients to derive maximum benefits out of the markets.

Innovative approach, incisive research, responsive sales teams, and intensive execution method have enabled SCSI to uncompromisingly service our clients in unique and different ways.

SCS have a strong sales team, comprising of top equity professional, which translates the research findings into actionable advice for clients, based on their specific needs. The team services more than 110 institutional clients which include leading domestic mutual funds, insurance companies, domestic financial institutions, banks and FIIs.

3. RETAIL:

Standard Chartered Securities (India) Limited are a leading broking company with 15 years of experience catering to the financial needs of our ever increasing customer base. The aim is to help investors achieve their financial goals by providing high quality investment services, in a simple, direct and cost-effective manner.

SCSI has a large retail network with pan India presence in 112 locations through 34 branches and over 97 authorized centers caters to both online and offline customers.

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The experienced team of retail research analysts backed by in depth research, knowledge and expertise guides customers with appropriate solutions In addition to offline trading through the branches and authorized centers, they also offer comprehensive trading solutions through our online trading portal which is fully equipped to cater to your multiple trading needs.

Standard Chartered Securities (India) Limited 3-in-1 account facility provides seamless integration of bank, demat and trading accounts.

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PRESENT STATUS OF THE ORGANISATION

2.3 PRESENT STATUS OF THE ORGANIZATION:

Standard Chartered Securities (India) Limited is a wholly-owned subsidiary of Standard Chartered Bank (Mauritius) Limited (SCBM), which acquired the company from Securities Trading Corporation of India (STCI) over 2008-2010. Prior to the acquisition, Standard Chartered Securities was known as UTI Securities Limited (UTISEL). On August 23, 2007, SCBM agreed to acquire UTISEL from STCI in three tranches. As a part of first branch, SCBM acquired 49% stake in UTISEL on January 11, 2008, after which, the

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name of the Company was changed from UTISEL to Standard Chartered-STCI Capital Markets Limited i.e. January 17, 2008. SCBM acquired further 25.9% stake in the Company on December 12, 2008, as a part of second leg of the transaction and increase its total stake from 49% to 74.9% in the Company. As a last part of the acquisition, SCBM increased its stake to 100% in the Company by acquiring the residual stake of 25.1% from STCI on October 08, 2010. Consequently the Company became the wholly owned subsidiary of SCBM and was re-named Standard Chartered Securities (India) Limited. Standard Chartered Bank has completed the acquisition of an additional 25.9 per cent stake in Standard Chartered-STCI Capital Markets Limited (formerly UTI Securities Limited) to take its total holding in the company to 74.9 per cent. The company currently offers its services under the brand Standard Chartered Wealth Managers. Standard Chartered bought 49 per cent of UTI Securities Limited from Securities Trading Corporation of India Limited (STCI) in January 2008 following, receipt of regulatory approvals for the transaction. This move by Standard Chartered to increase its existing stake is in line with its original intent reflected in the contract, under which both parties provided for the stake to be increased in stages to 100 per cent by 2010. Regulatory approvals have been received for the additional stake and change in the controlling interest in Standard Chartered-STCI Capital Markets Limited.

Neeraj Swaroop, Regional CEO India and South Asia, Standard Chartered Bank, said: This strategic initiative is a reflection of our long term commitment to the Indian market, despite the current economic slowdown. I am delighted that we have been successful in combining the strengths of Standard Chartered with UTI Securities, a recognized leader in the financial services spectrum.

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He further commented, We are extremely confident that with this partnership, we will continue to offer our customers both competitive investment avenues and remain a provider of choice in this challenging environment. Somasundaram PR, Managing Director, Standard Chartered Capital Markets also said, This has been a challenging year for the business but the acquisition of an additional stake at this time reflects the underlying confidence of Standard Chartered Bank in the Indian economy as a whole and in the Indian equity capital markets specifically. We have tested our plans in both the institutional and retail segments of this business in the last year and we are convinced we have a significant opportunity here and a global strategic fit. The company currently offers its services under a global brand Standard Chartered Wealth Managers. Standard Chartered will also invest additional capital of US $4.5 million in line with the FDI guidelines with the increase in stake. Standard securities have a good standing in the market and the sale of securities and trading is on the upswing. The future securities as an industry are good and have a bright future.

2.4 FUNCTIONAL DEPARTMENTS OF THE ORGANIZATION:

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1.Online Broking

2.Offline Broking

3.Distribution of financial products

Online trading portal is a single gateway for your multiple investment needs.

Investing in equities with SCSI truly empowers you to meet your financial needs

Wide range of services to meet ever increasing financial objectives

1. ONLINE BROKING: Customer convenience is our top-most priority. Keeping this in mind, Standard Chartered Securities (India) Limited brings The power of 3 at the convenience of 1'. With the 3in-1 account, SCSI offers seamless integration of bank, trading and demat accounts. The bank account offered is Standard Chartered Bank account while the broking and demat accounts will be with Standard Chartered Securities (India) Limited. The easy to use features of 3in1 account include:

Single login facility this feature enables direct access to details of all 3 accounts with a single log-in - no need to remember multiple user names and passwords.

Hassle-free and convenient trading No need to write cheques or issue TIFD (DIS) slips. Instant update on status of purchase/sale orders. Automated pay-in of shares and pay-out of funds/shares to and from your DP/bank account.

Access to multiple products Invest/trade online in multiple products - equity and derivatives trading, IPO, GOI bonds and mutual funds. You can place orders online or through the Phone-2-Trade facility.

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TRADING PLATFORM: EASY TRADE:

Easy Trade Customers can trade on website that is easy to navigate with advanced stock trading features. They can manage your account and trade on exchanges.

Benefits of EASY Trade:

Trading on NSE & BSE Integrated Bank, Demat and Trading Account Get Current Order Status Monitor your orders Updated buying power Any where access Access to back end reports

ADVANCE TRADE:

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Customers can trade on website with live streaming quotes. They can create multiple watch lists to track market movements. Benefits of ADVANCED Trade:

Streaming quotes Market Depth Window Trading on NSE & BSE Create Multiple Watch lists Equity and Derivatives orders in single window Hot Key Navigation
Access to back end reports

Super Trade Customers can trade from their desktop with live streaming quotes and advanced technical tools.

Benefits of SUPER Trade

Personalized Stock Quote Lists Fully Customizable display Streaming Intraday, Daily and Weekly Charts Streaming Quotes Alert capabilities Track your orders real time Real time position updates Lock terminal option

2. OFFLINE BROKING
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Standard Chartered Securities (India) Limited, offers the convenience of trading in equity, derivatives and currency derivatives through our network of 34 branches and over 97 authorized centers.

Equity
Investing in equities with Standard Chartered Securities (India) Limited truly empowers customers to meet your financial needs. Different investors foray into equities for different reasons. SCSI understands the expectations of customers and accordingly offers a wide range of products and services. To serve the varied customers, SCSI offer both delivery and intra-day trading. The extensive network of dealers provides prompt and efficient service, helping customers to take quick and right decisions, to maximize your gains. SCSI provides both market and limit orders, offering customers a choice to take time-based or price-based decisions as they deem fit. SCSI are member of Bombay Stock Exchange Limited (BSE) and National Stock Exchange (NSE).

Derivatives
If customers are looking at hedging your investments, or wish to gain through your estimates about the movement of the Index or stocks, SCSI offers derivatives trading on Future and Options segment of the NSE (National Stock Exchange).

Currency Derivatives
A new investment opportunity from Standard Chartered Securities (India) Limited for all Resident Indians. Currency Derivatives are standardized foreign exchange contracts traded on an exchange to buy or sell one currency against another on a specified future date. The contracts will be traded online through the order-driven market mechanism, quite similar to equity derivatives.

3. DISTRIBUTION OF FINANCIAL PRODUCTS:

The financial products that are being offered in the markets today provide an opportunity to the investor to participate in the stock market with a small investment size.

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Standard Chartered Securities (India) Limited has a large retail network with pan India presence in 112 locations through 34 branches, saver 97 business associates caters to the investment needs of both offline and online clients. SCSI representatives who have been trained and facilitated with the best tools, enables them to offer customers with the best services and deals. SCSI brings a wide array of products such as IPOs, fixed income bonds and different schemes from leading mutual funds to help you diversify investments.

IPO
Initial Public Offer (IPO) offers an excellent opportunity to be part of a companys growth story right from its foray into markets. All that is required is the Buying Power and we take care of the rest for you.

Mutualfund
Mutual funds are today an integral part of an investors portfolio. SCSI offers a wide variety of Mutual Funds schemes ranging from plain vanilla funds to exchange traded funds. SCSI network offers customers with products from leading asset management companies (AMCs) operating in the market. With online platform, mutual fund investment is just at the click of a button.

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OBJECTIVES & METHODODLOGY

SCOPE O F T H E PR O J E C T : Approach customers. Reactivate the existing inactive customers.

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 Enroll non-existing customers to increase activation rate. Interaction with existing customers for feedback. DATA COLLECTION METHOD Types of Data and Data Collection: Data that I have received for making the project is a combination of both primary and secondary data. Primary Data The data collected through 1) Daily analysis of share market 2) Derivatives market. 3) Portfolio analysis. These analyses are done by watching the trade terminal in standard chartered securities.

Secondary Data Secondary data collection is from various sites like money control site, nseindia.com, and from magazines like capital market and Dallal Street

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Sampling plan The sample size for non traders was 307 and that of customers is 71 ready to start the trade again. Remaining is not ready. In ST without DP balance 205 customers out of which 23 are interested and others are not interested.

STUDENTS WORK PROFILE:

JOB PROFILE: Name: RADHIKA. K.P

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Designation: Department: Process Handled:

winter Intern Trainee Finance department online trading & customer relationship management

ROLES & RESPONSIBILITIES:

Called corporate clients and enquired about their present status in trading. I have done accurate follow up of interested clients for continuous trading. Called and explained the benefits and use of 3 in 1 account to customers for the easiness of their trading.

Watched market daily, and understood the reasons behind the flexuations in the market. Created portfolio for the amount of Rs 500000/- and watched and traded that for 10 days found out the profit on the last day.

Took seminar on different topics given by the relationship manager. Noted down high and low rate of nifty index, top gainers and losers of the the day. Did trading of futures and options Did hedging of futures and options as per the condition of market.

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DERIVATIVES

1.1 DERIVATIVES:
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DERIVATIVES DEFINED A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. In our earlier discussion, we saw that wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying in this case.

TYPES OF DERIVATIVES: Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index. Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of two types - Calls and Puts options: Calls give the buyer the right but not the obligations to buy a given quantity of the underlying asset, at a given price on or before a given future date.

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Puts give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date. Presently, at NSE futures and options are traded on the Nifty, CNX IT, BANK Nifty and 116 single stocks. Warrants: Options generally have lives of up to one year. The majority of options traded on exchanges have maximum maturity of nine months. Longer dated options are called Warrants and are generally traded over-the counter. COMMODITY: FCRA Forward Contracts (Regulation) Act, 1952 defines goods as every kind of movable property other than actionable claims, money and securities. Futures trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA. COMMODITY DERIVATIVES MARKET: Commodity derivatives market trade contracts for which the underlying asset is commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc. DIFFERENCE IN COMMODITY AND FINANCIAL DERIVATIVES: The basic concept of a derivative contract remains the same whether the underlying happens to be a commodity or a financial asset. However there are some features which are very peculiar to commodity derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and do not need special facility for storage. Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as financial underlying are concerned. However in the case of commodities, the quality of the asset underlying a contract can vary at times.

ORIGIN OF DERIVATIVES

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The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth, although favorable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be futures-type contract, which would enable both parties to eliminate the price risk. In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the to-arrive contract that permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price charges. These were eventually standardized, and in 1925 the first futures clearing house came into existence. Today derivatives contracts exist on variety of commodities such as corn, pepper, cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc.

3.1 . The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts in commodities all over India. As per this the Forward Markets Commission (FMC) continues to have jurisdiction over commodity futures contracts. However when derivatives trading in securities was

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introduced in 2001, the term security in the Securities Contracts (Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets. Derivatives are securities under the SCRA and hence the trading of derivatives is governed by the regulatory framework under the SCRA. The Securities Contracts (Regulation) Act, 1956 defines derivative to includeA security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities

Figure.1 Types of Derivatives Market 3.2 TYPES OF DERIVATIVES MARKET

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Exchange Traded Derivatives

Over The Counter Derivatives

National Stock Exchange Bombay Stock Exchange National Commodity & Derivative exchange

Index Future Futures

Index option

Stock option

Stock future

Interest rate

3.3 TYPES OF DERIVATIVES

Derivative s

Future

Option

Forward

Swaps

FORWARD CONTRACTS

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A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. exchanges. The forward contracts are n o r m a l l y traded outside the

The salient features of forward contracts are: They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size,

expiration date and the asset type and quality. The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counterparty, which often results in high prices being charged. However forward contracts in certain the case of foreign exchange, markets have become very standardized, thereby reducing transaction as in

costs and increasing

transactions volume. This process of standardization reaches its limit in the organized futures market. Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially th e same economic functions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity.

FUTURE CONTRACT

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In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price. The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date. A futures contract gives the holder the right and the obligation to buy or sell, which differs from an options contract, which gives the buyer the right, but not the obligation, and the option writer (seller) the obligation, but not the right. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing out the futures position and its contract obligations. Futures contracts are exchange traded derivatives. The exchange acts as counterparty on all contracts, sets margin requirements, etc. BASIC FEATURES OF FUTURE CONTRACT 1. Standardization: Futures contracts ensure their liquidity by being highly standardized, usually by specifying:

The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc.

The currency in which the futures contract is quoted. The grade of the deliverable. In case of bonds, this specifies which bonds can be delivered. In case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. The delivery month.

The last trading date. Other details such as the tick, the minimum permissible price fluctuation.

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2. Margin: Although the value of a contract at time of trading should be zero, its price constantly fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange, who always acts as counterparty. To minimize this risk, the exchange demands that contract owners post a form of collateral, commonly known as Margin requirements are waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as determined by historical price changes, which is not likely to be exceeded on a usual day's trading. It may be 5% or 10% of total contract price. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the "settlement" or mark-to-market price of the contract. To understand the original practice, consider that a futures trader, when taking a position, deposits money with the exchange, called a "margin". This is intended to protect the exchange against loss. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will debit his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid. 3. Settlement Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract: Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - that is, buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index.

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A futures contract might also opt to settle against an index based on trade in a related spot market. Expiry is the time when the final prices of the future are determined. For many equity index and interest rate futures contracts, this happens on the Last Thursday of certain trading month. On this day the t+2 futures contract becomes the t forward contract. Pricing of future contract In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. In other words, the rational forward price represents the expected future value of the underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the future/forward, will be found by discounting the present value return . at time to maturity ,

by the rate of risk-free

This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields. Any deviation from this equality allows for arbitrage as follows. In the case where the forward price is higher: 1. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. 2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed forward price. 3. He then repays the lender the borrowed amount plus interest. 4. The difference between the two amounts is the arbitrage profit. In the case where the forward price is lower: 1. The arbitrageur buys the futures contract and sells the underlying today (on the spot market); he invests the proceeds. 2. On the delivery date, he cashes in the matured investment, which has appreciated at the risk free rate. 3. He then receives the underlying and pays the agreed forward price using the matured investment. [If he was short the underlying, he returns it now.] 4. The difference between the two amounts is the arbitrage profit. TABLE 1-

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DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS FEATURES Operational Mechanism FORWARD CONTRACT FUTURE CONTRACT

Traded directly between two Traded on the exchanges. parties (not traded on the exchanges).

Contract Specifications Counter-party risk

Differ from trade to trade.

Contracts are standardized contracts.

Exists.

Exists. However, assumed by the clearing corp., which becomes the counter party to all the trades or unconditionally guarantees their settlement.

Liquidation Profile

Low, as contracts are tailor needs of the needs of the parties.

High,

as

contracts

are

standardized

made contracts catering to the exchange traded contracts.

Price discovery

Not efficient, as markets are Efficient, as markets are centralized and all scattered. buyers and sellers come to a common platform to discover the price.

Examples

Currency market in India.

Commodities, futures, Index Futures and Individual stock Futures in India.

OPTIONS

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A derivative transaction that gives the option holder the right but not the obligation to buy or sell the underlying asset at a price, called the strike price, during a period or on a specific date in exchange for payment of a premium is known as option. Underlying asset refers to any asset that is traded. The price at which the underlying is traded is called the strike price. There are two types of options i.e., CALL OPTION AND PUT OPTION.

a. CALL OPTION:

A contract that gives its owner the right but not the obligation to buy an underlying asset-stock or any financial asset, at a specified price on or before a specified date is known as a Call option. The owner makes a profit provided he sells at a higher current price and buys at a lower future price. b. PUT OPTION: A contract that gives its owner the right but not the obligation to sell an underlying asset-stock or any financial asset, at a specified price on or before a specified date is known as a Put option. The owner makes a profit provided he buys at a lower current price and sells at a higher future price. Hence, no option will be exercised if the future price does not increase. Put and calls are almost always written on equities, although occasionally preference shares, bonds and warrants become the subject of options. 4. SWAPS Swaps are transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. They can be regarded as portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a SWAP. In case of swap, only the payment flows are exchanged and not the principle amount. The two commonly used swaps are:

INTEREST RATE SWAPS:

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Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed rate interest payments to a party in exchange for his variable rate interest payments. The fixed rate payer takes a short position in the forward contract whereas the floating rate payer takes a long position in the forward contract. CURRENCY SWAPS: Currency swaps is an arrangement in which both the principle amount and the interest on loan in one currency are swapped for the principle and the interest payments on loan in another currency. The parties to the swap contract of currency generally hail from two different countries. This arrangement allows the counter parties to borrow easily and cheaply in their home currencies. Under a currency swap, cash flows to be exchanged are determined at the spot rate at a time when swap is done. Such cash flows are supposed to remain unaffected by subsequent changes in the exchange rates. FINANCIAL SWAP: Financial swaps constitute a funding technique which permit a borrower to access one market and then exchange the liability for another type of liability. It also allows the investors to exchange one type of asset for another type of asset with a preferred income stream.The other kind of derivatives, which are not, much popular are as follows: 5. BASKETS Baskets options are option on portfolio of underlying asset. Equity Index Options are most popular form of baskets.

6. LEAPS Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities.

7. WARRANTS

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Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. 8. SWAPTIONS Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

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3.1 HISTORY OF DERIVATIVES:

The history of derivatives is quite colourful and surprisingly a lot longer than most people think. Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place on a specified date, existed in ancient Greece and Rome. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain. These contracts were also undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices of grains. Thus, forward contracts have existed for centuries for hedging price risk. The first organized commodity exchange came into existence in the early 1700s in Japan. The first formal commodities exchange, the Chicago Board of Trade (CBOT), was formed in 1848 in the US to deal with the problem of credit risk and to provide centralized location to negotiate forward contracts. From forward trading in commodities emerged the commodity futures. The first type of futures contract was called to arrive at. Trading in futures began on the CBOT in the 1860s. In 1865, CBOT listed the first exchange traded derivatives contract, known as the futures contracts. Futures trading grew out of the need for hedging the price risk involved in many commercial operations. The Chicago Mercantile Exchange (CME), a spinoff of CBOT, was formed in 1919, though it did exist before in 1874 under the names of Chicago Produce Exchange (CPE) and Chicago Egg and Butter Board (CEBB). The first financial futures to emerge were the currency in 1972 in the US. The first foreign currency futures were traded on May 16, 1972, on International Monetary Market (IMM), a division of CME. The currency futures traded on the IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc, the German Mark, the Australian Dollar, and the Euro dollar. Currency futures were followed soon by interest rate futures. Interest rate futures contracts were traded for the first time on the CBOT on October 20, 1975. Stock index futures and options emerged in 1982. The first stock index futures contracts were traded on Kansas City Board of Trade on February 24, 1982.The first of the several networks, which offered a trading link between two exchanges, was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7, 1984.

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Options are as old as futures. Their history also dates back to ancient Greece and Rome. Options are very popular with speculators in the tulip craze of seventeenth century Holland. Tulips, the brightly coloured flowers, were a symbol of affluence; owing to a high demand, tulip bulb prices shot up. Dutch growers and dealers traded in tulip bulb options. There was so much speculation that people even mortgaged their homes and businesses. These speculators were wiped out when the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the option terms. The first call and put options were invented by an American financier, Russell Sage, in 1872. These options were traded over the counter. Agricultural commodities options were traded in the nineteenth century in England and the US. Options on shares were available in the US on the over the counter (OTC) market only until 1973 without much knowledge of valuation. A group of firms known as Put and Call brokers and Dealers Association was set up in early 1900s to provide a mechanism for bringing buyers and sellers together. On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up at CBOT for the purpose of trading stock options. It was in 1973 again that black, Merton, and Scholes invented the famous Black-Scholes Option Formula. This model helped in assessing the fair price of an option which led to an increased interest in trading of options. With the options markets becoming increasingly popular, the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975. The market for futures and options grew at a rapid pace in the eighties and nineties. The collapse of the Bretton Woods regime of fixed parties and the introduction of floating rates for currencies in the international financial markets paved the way for development of a number of financial derivatives which served as effective risk management tools to cope with market uncertainties. The CBOT and the CME are two largest financial exchanges in the world on which futures contracts are traded. The CBOT now offers 48 futures and option contracts (with the annual volume at more than 211 million in 2001).The CBOE is the largest exchange for trading stock options. The CBOE trades options on the S&P 100 and the S&P 500 stock indices. The Philadelphia Stock Exchange is the premier exchange for trading foreign options.

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The most traded stock indices include S&P 500, the Dow Jones Industrial Average, the Nasdaq 100, and the Nikkei 225. The US indices and the Nikkei 225 trade almost round the clock. The N225 is also traded on the Chicago Mercantile Exchange. 3.5 INDIAN DERIVATIVES MARKET Starting from a controlled economy, India has moved towards a world where prices fluctuate every day. The introduction of risk management instruments in India gained momentum in the last few years due to liberalisation process and Reserve Bank of Indias (RBI) efforts in creating currency forward market. Derivatives are an integral part of liberalisation process to manage risk. NSE gauging the market requirements initiated the process of setting up derivative markets in India. In July 1999, derivatives trading commenced in India Chronology of instruments 1991 14 December 1995 18 November 1996 Liberalization process initiated NSE asked SEBI for permission to trade index futures. SEBI setup L.C.Gupta Committee to draft a policy framework for index futures. 11 May 1998 7 July 1999 L.C.Gupta Committee submitted report. RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps. 24 May 2000 SIMEX chose Nifty for trading futures and options on an Indian index. 25 May 2000 9 June 2000 12 June 2000 25 September 2000 2 June 2001 SEBI gave permission to NSE and BSE to do index futures trading. Trading of BSE Sensex futures commenced at BSE. Trading of Nifty futures commenced at NSE. Nifty futures trading commenced at SGX. Individual Stock Options & Derivatives

3.6 Need for derivatives in India today

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In less than three decades of their coming into vogue, derivatives markets have become the most important markets in the world. Today, derivatives have become part and parcel of the dayto-day life for ordinary people in major part of the world. Until the advent of NSE, the Indian capital market had no access to the latest trading methods and was using traditional out-dated methods of trading. There was a huge gap between the investors aspirations of the markets and the available means of trading. The opening of Indian economy has precipitated the process of integration of Indias financial markets with the international financial markets. Introduction of risk management instruments in India has gained momentum in last few years thanks to Reserve Bank of Indias efforts in allowing forward contracts, cross currency options etc. which have developed into a very large market.

3.7 Myths and realities about derivatives In less than three decades of their coming into vogue, derivatives markets have become the most important markets in the world. Financial derivatives came into the spotlight along with the rise in uncertainty of post-1970, when US announced an end to the Bretton Woods System of fixed exchange rates leading to introduction of currency derivatives followed by other innovations including stock index futures. Today, derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world. While this is true for many countries, there are still apprehensions about the introduction of derivatives. There are many myths about derivatives but the realities that are different especially for Exchange traded derivatives, which are well regulated with all the safety mechanisms in place. What are these myths behind derivatives? Derivatives increase speculation and do not serve any economic purpose Indian Market is not ready for derivative trading Disasters prove that derivatives are very risky and highly leveraged instruments Derivatives are complex and exotic instruments that Indian investors will find difficulty in understanding Is the existing capital market safer than Derivatives?

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Derivatives increase speculation and do not serve any economic purpose Numerous studies of derivatives activity have led to a broad consensus, both in the private and public sectors that derivatives provide numerous and substantial benefits to the users. Derivatives are a low-cost, effective method for users to hedge and manage their exposures to interest rates, commodity Prices or exchange rates. The need for derivatives as hedging tool was felt first in the commodities market. Agricultural futures and options helped farmers and processors hedge against commodity price risk. After the fallout of Bretton wood agreement, the financial markets in the world started undergoing radical changes. This period is marked by remarkable innovations in the financial markets such as introduction of floating rates for the currencies, increased trading in variety of derivatives instruments, on-line trading in the capital markets, etc. As the complexity of instruments increased many folds, the accompanying risk factors grew in gigantic proportions. This situation led to development derivatives as effective risk management tools for the market participants. Looking at the equity market, derivatives allow corporations and institutional investors to effectively manage their portfolios of assets and liabilities through instruments like stock index futures and options. An equity fund, for example, can reduce its exposure to the stock market quickly and at a relatively low cost without selling off part of its equity assets by using stock index futures or index options. By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated, derivatives have strengthened these important linkages between global markets increasing market liquidity and efficiency and facilitating the flow of trade and finance.

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Indian Market is not ready for derivative trading Often the argument put forth against derivatives trading is that the Indian capital market is not ready for derivatives trading. Here, we look into the pre-requisites, which are needed for the introduction of derivatives, and how Indian market fares:

PRE-REQUISITES Large market Capitalization

INDIAN SCENARIO India is one of the largest market-capitalized countries in Asia with a market capitalization of more than Rs.765000 crores.

High Liquidity in the underlying The daily average traded volume in Indian capital market today is around 7500 crores. Which means on an average every month 14% of the countrys Market capitalization gets traded. These are clear indicators of high liquidity in the underlying. Trade guarantee The first clearing corporation guaranteeing trades has become fully functional from July 1996 in the form of National Securities Clearing Corporation (NSCCL). NSCCL is responsible for guaranteeing all open positions on the National Stock Exchange (NSE) for which it does the clearing. A Strong Depository National Securities Depositories Limited (NSDL) which started functioning in the year 1997 has revolutionalised the security settlement in our country. A Good legal guardian In the Institution of SEBI (Securities and Exchange Board of India) today the Indian capital market enjoys a strong, independent, and innovative legal guardian who is helping the market to evolve to a healthier place for trade practices.

What kind of people will use derivatives?

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Derivatives will find use for the following set of people: Speculators: People who buy or sell in the market to make profits. For example, if you will the stock price of Reliance is expected to go upto Rs.400 in 1 month, one can buy a 1 month future of Reliance at Rs 350 and make profits Hedgers: People who buy or sell to minimize their losses. For example, an importer has to pay US $ to buy goods and rupee is expected to fall to Rs 50 /$ from Rs 48/$, then the importer can minimize his losses by buying a currency future at Rs 49/$ Arbitrageurs: People who buy or sell to make money on price differentials in different markets. For example, a futures price is simply the current price plus the interest cost. If there is any change in the interest, it presents an arbitrage opportunity. We will examine this in detail when we look at futures in a separate chapter. Basically, every investor assumes one or more of the above roles and derivatives are a very good option for him. 3.8 Comparison of New System with Existing System Many people and brokers in India think that the new system of Futures & Options and banning of Badla is disadvantageous and introduced early, but I feel that this new system is very useful especially to retail investors. It increases the no of options investors for investment. In fact it should have been introduced much before and NSE had approved it but was not active because of politicization in SEBI.

The figure 3.3a 3.3d shows how advantages of new system (implemented from June 20001) v/s the old system i.e. before June 2001

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New System Vs Existing System for Market Players Figure 3.3a Speculators

Existing

SYSTEM

New

Approach 1) Deliver based Trading, margin trading& carry forward transactions. 2) Buy Index Futures hold till expiry.

Peril &Prize Approach 1) Both profit & loss to extent of price change.

Peril &Prize 1)Buy &Sell stocks on delivery basis 2) Buy Call &Put by paying premium 1)Maximum loss possible to premium paid

Advantages Greater Leverage as to pay only the premium. Greater variety of strike price options at a given time.

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Figure 3.3b

Arbitrageurs

Existing

SYSTEM

New

Approach 1) Buying Stocks in one and selling in another exchange. forward transactions. 2) If Future Contract

Peril &Prize Approach 1) Make money whichever way the Market moves.

Peril &Prize 1) B Group more promising as still in weekly settlement 2) Cash &Carry arbitrage continues 1) Risk free game.

more or less than Fair price

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Price = Cash Price + Cost of Carry.

Figure 3.3c

Hedgers

Existing

SYSTEM

New

Approach 1) Difficult to offload holding during adverse

Peril &Prize 1) No Leverage available risk

Approach

Peril &Prize 1) Additional cost is only premium.

1)Fix price today to buy latter by paying premium.

reward dependant 2)For Long, buy ATM Put on market prices Option. If market goes up, long position benefit else exercise the option. 3)Sell deep OTM call option with underlying shares, earn

market conditions as circuit filters limit to curtail losses.

premium + profit with increase prcie

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Advantages Availability of Leverage

Figure 3.3d Small Investors

Existing

SYSTEM

New

Approach 1) If Bullish buy stocks else sell it.

Peril &Prize Approach 1) Plain Buy/Sell implies unlimited profit/loss.

Peril &Prize 1) Buy Call/Put options 1) Downside

based on market outlook remains 2) Hedge position if holding underlying stock protected & upside unlimited.

Advantages Losses Protected.

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Exchange-traded vs. OTC derivatives markets

The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalisation of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative contracts offer many benefits, the former have rigid structures compared to the latter. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in financial markets in 1998. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets. The OTC derivatives markets have the following features compared to exchange-traded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual institutions, 2. There are no formal centralized limits on individual positions, leverage, or margining, 3. There are no formal rules for risk and burden-sharing, 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, and 5. The OTC contracts are generally not regulated by a regulatory authority and the exchanges self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance.

Some of the features of OTC derivatives markets embody risks to financial market stability.

The following features of OTC derivatives markets can give rise to instability in institutions, markets, and the international financial system: (i) the dynamic nature of gross credit exposures;

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(ii) information asymmetries; (iii) the effects of OTC derivative activities on available aggregate credit; (iv) the high concentration of OTC derivative activities in major institutions; and (v) the central role of OTC derivatives markets in the global financial system. Instability arises when shocks, such as counter-party credit events and sharp movements in asset prices that underlie derivative contracts, occur which significantly alter the perceptions of current and potential future credit exposures. When asset prices change rapidly, the size and configuration of counter-party exposures can become unsustainably large and provoke a rapid unwinding of positions. There has been some progress in addressing these risks and perceptions. However, the progress has been limited in implementing reforms in risk management, including counter-party, liquidity and operational risks, and OTC derivatives markets continue to pose a threat to international financial stability. The problem is more acute as heavy reliance on OTC derivatives creates the possibility of systemic financial events, which fall outside the more formal clearing house structures. Moreover, those who provide OTC derivative products, hedge their risks through the use of exchange traded derivatives. In view of the inherent risks associated with OTC derivatives, and their dependence on exchange traded derivatives, Indian law considers them illegal.

3.9 FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES: Factors contributing to the explosive growth of derivatives are price volatility, globalisation of the markets, technological developments and advances in the financial theories. A. PRICE VOLATILITY A price is what one pays to acquire or use something of value. The objects having value maybe commodities, local currency or foreign currencies. The concept of price is clear to almost everybody when we discuss commodities. There is a price to be paid for the purchase of food grain, oil, petrol, metal, etc. the price one pays for use of a unit of another persons money is called interest rate. And the price one pays in ones own currency for a unit of another currency is called as an exchange rate. Prices are generally determined by market forces. In a market, consumers have demand and producers or suppliers have supply, and the collective interaction of demand and supply in the market determines the price. These factors are constantly interacting in the market causing changes

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in the price over a short period of time. Such changes in the price are known as price volatility. This has three factors: the speed of price changes, the frequency of price changes and the magnitude of price changes. The changes in demand and supply influencing factors culminate in market adjustments through price changes. These price changes expose individuals, producing firms and governments to significant risks. The break down of the BRETTON WOODS agreement brought and end to the stabilizing role of fixed exchange rates and the gold convertibility of the dollars. The globalization of the markets and rapid industrialization of many underdeveloped countries brought a new scale and dimension to the markets. Nations that were poor suddenly became a major source of supply of goods. The Mexican crisis in the south east-Asian currency crisis of 1990s has also brought the price volatility factor on the surface. The advent of telecommunication and data processing bought information very quickly to the markets. Information which would have taken months to impact the market earlier can now be obtained in matter of moments. Even equity holders are exposed to price risk of corporate share fluctuates rapidly. These price volatility risks pushed the use of derivatives like futures and options increasingly as these instruments can be used as hedge to protect against adverse price changes in commodity, foreign exchange, equity shares and bonds. B. GLOBALISATION OF MARKETS Earlier, managers had to deal with domestic economic concerns; what happened in other part of the world was mostly irrelevant. Now globalization has increased the size of markets and as greatly enhanced competition .it has benefited consumers who cannot obtain better quality goods at a lower cost. It has also exposed the modern business to significant risks and, in many cases, led to cut profit margins In Indian context, south East Asian currencies crisis of 1997 had affected the competitiveness of our products vis--vis depreciated currencies. Export of certain goods from India declined because of this crisis. Steel industry in 1998 suffered its worst set back due to cheap import of steel from south East Asian countries. Suddenly blue chip companies had turned in to red. The fear of china devaluing its currency created instability in Indian exports. Thus, it is evident that globalization of industrial and financial activities necessitates use of derivatives to guard against future losses. This factor alone has contributed to the growth of derivatives to a significant extent.

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C. TECHNOLOGICAL ADVANCES A significant growth of derivative instruments has been driven by technological break through. Advances in this area include the development of high speed processors, network systems and enhanced method of data entry. Closely related to advances in computer technology are advances in telecommunications. Improvement in communications allow for instantaneous world wide conferencing, Data transmission by satellite. At the same time there were significant advances in software programmes without which computer and telecommunication advances would be meaningless. These facilitated the more rapid movement of information and consequently its instantaneous impact on market price. Although price sensitivity to market forces is beneficial to the economy as a whole resources are rapidly relocated to more productive use and better rationed overtime the greater price volatility exposes producers and consumers to greater price risk. The effect of this risk can easily destroy a business which is otherwise well managed. Derivatives can help a firm manage the price risk inherent in a market economy. To the extent the technological developments increase volatility, derivatives and risk management products become that much more important. D ADVANCES IN FINANCIAL THEORIES Advances in financial theories gave birth to derivatives. Initially forward contracts in its traditional form, was the only hedging tool available. Option pricing models developed by Black and Scholes in 1973 were used to determine prices of call and put options. In late 1970s, work of Lewis Edeington extended the early work of Johnson and started the hedging of financial price risks with financial futures. The work of economic theorists gave rise to new products for risk management which led to the growth of derivatives in financial markets. The above factors in combination of lot many factors led to growth of derivatives instruments

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3.10 BENEFITS OF DERIVATIVES Derivative markets help investors in many different ways: 1. RISK MANAGEMENT Futures and options contract can be used for altering the risk of investing in spot market. For instance, consider an investor who owns an asset. He will always be worried that the price may fall before he can sell the asset. He can protect himself by selling a futures contract, or by buying a Put option. If the spot price falls, the short hedgers will gain in the futures market, as you will see later. This will help offset their losses in the spot market. Similarly, if the spot price falls below the exercise price, the put option can always be exercised. 2. PRICE DISCOVERY Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices are believed to contain information about future spot prices and help in disseminating such information. As we have seen, futures markets provide a low cost trading mechanism. Thus information pertaining to supply and demand easily percolates into such markets. Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. Options markets provide information about the volatility or risk of the underlying asset. 3. OPERATIONAL ADVANTAGES As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they offer greater liquidity. Large spot transactions can often lead to significant price changes. However, futures markets tend to be more liquid than spot markets, because herein you can take large positions by depositing relatively small margins. Consequently, a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to a transaction of the same magnitude in the spot market. Finally, it is easier to take a short position in derivatives markets than it is to sell short in spot markets. 4. MARKET EFFICIENCY The availability of derivatives makes markets more efficient; spot, futures and options markets are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is possible to exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help to ensure that prices reflect true values. 5. EASE OF SPECULATION

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Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions. Also, the amount of capital required to take a comparable position is less in this case. This is important because facilitation of speculation is critical for ensuring free and fair markets. Speculators always take calculated risks. A speculator will accept a level of risk only if he is convinced that the associated expected return is commensurate with the risk that he is taking. The derivative market performs a number of economic functions. The prices of derivatives converge with the prices of the underlying at the expiration of derivative contract. Thus derivatives help in discovery of future as well as current prices. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity.

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4.1 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary preconditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk containment in derivatives market in India. The report, which was submitted in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and realtime monitoring requirements. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework were developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE30 (Sense) index. This was followed by approval for trading in options based on these two indexes and options on individual securities.

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The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on S&P CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following are some observations based on the trading statistics provided in the NSE report on the futures and options (F&O): Single-stock futures continue to account for a sizable proportion of the F&O segment. It

constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options, as the former closely resembles the erstwhile badla system. On relative terms, volumes in the index options segment continue to remain poor. This may

be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips. Put volumes in the index options and equity options segment have increased since January

2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. Farther month futures contracts are still not actively traded. Trading in equity options on

most stocks for even the next month was non-existent.

84

Daily option price variations suggest that traders use the F&O segment as a less risky

alternative (read substitute) to generate profits from the stock price movements. The fact that the option premiums tail intra-day stock prices is evidence to this. If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one impact on the option premiums.
The spot foreign exchange market remains the most important segment but the

derivative segment has also grown. In the derivative market foreign exchange swaps account for the largest share of the total turnover of derivatives in India followed by forwards and options. Significant milestones in the development of derivatives market to undertake have been (i) permission to banks to undertake cross currency foreign currency swaps that contributed to the derivative transactions subject to certain conditions (1996) (ii) allowing corporates long term development of the term currency swap market (1997) (iii) allowing dollar rupee options (2003) and (iv) introduction of currency futures (2008). I would like to emphasise that currency swaps allowed companies with ECBs to swap their foreign currency liabilities into rupees. However, since banks could not carry open positions the risk was allowed to be transferred to any other resident corporate. Normally such risks should be taken by corporates who have natural hedge or have potential foreign exchange earnings. But often corporate assume these risks due to interest rate differentials and views on currencies. This period has also witnessed several relaxations in regulations relating to forex markets and also greater liberalisation in capital account regulations leading to greater integration with the global economy.
Cash settled exchange traded currency futures have made foreign currency a separate

asset class that can be traded without any underlying need or exposure a n d on a leveraged basis on the recognized stock exchanges with credit risks being assumed by the central counterparty Since the commencement of trading of currency futures in all the three exchanges, the value of the trades has gone up steadily from Rs 17, 429 crores in October 2008 to Rs 45, 803 crores in December 2008. The average daily turnover in all the exchanges has also increased from Rs871 crores to Rs 2,181 crores during the same period. The turnover in the currency futures

85

market is in line with the international scenario, where I understand the share of futures market ranges between 2 3 per cent. 5. National Exchanges In enhancing the institutional capabilities for futures trading the idea of setting up of National Commodity Exchange(s) has been pursued since 1999. Three such Exchanges, viz, National Multi-Commodity Exchange of India Ltd., (NMCE), Ahmedabad, National Commodity & Derivatives Exchange (NCDEX), Mumbai, and Multi Commodity Exchange (MCX), Mumbai have become operational. National Status implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance of byelaws and contract specifications by the FMC. While the NMCE, Ahmedabad commenced futures trading in November 2002, MCX and NCDEX, Mumbai commenced operations in October/ December 2003 respectively.

MCX MCX (Multi Commodity Exchange of India Ltd.) an independent and de-mutulised multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank of India, Bank of Baroda CaneraBank,CorporationBank. Headquartered in Mumbai, MCX is led by an expert management team with deep domain knowledge of the commodity futures markets. Today MCX is offering spectacular growth opportunities and advantages to a large cross section of the participants including Producers / Processors, Traders, Corporate, Regional Trading Canters, Importers, Exporters, Cooperatives, Industry Associations, amongst others MCX being nation-wide commodity exchange, offering multiple commodities for trading with wide reach and penetration and robust infrastructure. MCX, having a permanent recognition from the Government of India, is an independent and demutualised multi commodity Exchange. MCX, a state-of-the-art nationwide, digital Exchange, facilitates online trading, clearing and settlement operations for a commodities futures trading.

86

NMCE National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). While various integral aspects of commodity economy, viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities, research and training were adequately addressed in structuring the Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions. NMCE facilitates electronic derivatives trading through robust and tested trading platform, Derivative Trading Settlement System (DTSS), provided by CMC. It has robust delivery mechanism making it the most suitable for the participants in the physical commodity markets. It has also established fair and transparent rule-based procedures and demonstrated total commitment towards eliminating any conflicts of interest. It is the only Commodity Exchange in the world to have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE was the first commodity exchange to provide trading facility through internet, through Virtual Private Network (VPN). NMCE follows best international risk management practices. The contracts are marked to market on daily basis. The system of upfront margining based on Value at Risk is followed to ensure financial security of the market. In the event of high volatility in the prices, special intra-day clearing and settlement is held. NMCE was the first to initiate process of dematerialization and electronic transfer of warehoused commodity stocks. The unique strength of NMCE is its settlements via a Delivery Backed System, an imperative in the commodity trading business. These deliveries are executed through a sound and reliable Warehouse Receipt System, leading to guaranteed clearing and settlement.

87

NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23,2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency. Forward Markets Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. It is located in Mumbai and offers facilities to its members in more than 390 centres throughout India. The reach will gradually be expanded to more centers. NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chili, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow soya bean meal.

88

DATA ANALYSIS & INTERPRETATION (OPTION TRADING OF TATA CONSULTANCYSERVICES FOR NOVEMBER AND DECEMBER)

89

NOVEMBER CALL OPTION 2011 (STRIKE PRICE 1100)

Symb ol

Date

Expiry

Ope n

High

Low

Clos e

LTP

Settle Price

No. of contrac ts

Turnov er in La cs 462.60

TCS

28Oct2011 31Oct2011 01Nov2011 02Nov2011 03Nov2011 04Nov2011 08Nov2011 09Nov2011 11Nov2011 14Nov2011 15Nov2011 16Nov2011

24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011

45.0 0

76.7 5

41.9 5

48.3 5

50.3 0

48.35

161

TCS

42.8 5

54.0 0

42.8 5

44.4 5

45.0 0

44.45

72

206.44

TCS

45.0 0

47.0 0

33.3 0

39.7 0

39.7 5

39.70

78

222.00

TCS

39.0 0

46.0 0

35.0 0

37.1 5

35.0 0

37.15

73

208.33

TCS

35.0 0

37.0 0

27.0 0

35.0 0

33.3 5

35.00

138

390.08

TCS

39.0 5

40.2 0

27.0 0

31.2 0

32.0 0

31.20

111

314.16

TCS

29.0 0

36.3 5

29.0 0

31.4 0

31.2 5

31.40

140

396.88

TCS

32.0 0

55.0 0

31.5 0

39.4 5

42.8 5

39.45

263

750.55

TCS

39.5 0

52.0 0

31.7 0

43.0 5

46.9 0

43.05

106

303.23

TCS

50.5 5

59.9 0

39.9 0

41.7 5

44.8 5

41.75

44

126.59

TCS

38.2 5

47.5 0

35.0 0

35.8 0

35.0 0

35.80

40

113.98

TCS

40.7 0

40.7 5

22.8 0

30.3 0

32.3 5

30.30

136

384.28

90

TCS

17Nov2011 18Nov2011 21Nov2011 22Nov2011 23Nov2011 24Nov2011

24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011 24Nov2011

27.0 0

33.5 0

23.9 0

25.6 0

27.0 0

25.60

96

270.93

TCS

23.8 0

23.8 5

9.25

11.2 5

11.9 0

11.25

437

1,217.9 2

TCS

8.60

9.35

2.80

3.50

4.75

3.50

359

991.88

TCS

2.00

11.0 0

2.00

5.40

5.15

5.40

570

1,577.9 2

TCS

2.25

3.50

0.65

1.20

1.00

1.20

238

655.63

TCS

1.00

1.00

0.05

0.50

0.30

0.00

84

231.09

INTERPRETATION:

Buyers Pay OFF:

As bought 1 Lot of TCS that is 250 those who buy for1100 paid 45 Premium Per

Share. Settlement Price is 1043.

Spot price Strike price Amount Premium Paid (-) Net loss

1043 1100 -57 45 -12*250=-3000

Buyer loss = Rs 3000 (Net Amount) Because it is negative it is OUT THE MONEY contract, so the buyer who is going for call option will get loss.

91

SELLERS PAY OFF:

It is out the money for buyer ,so for the seller it is in the money and will get profit . Strike price 1100 Spot price 1043 Amount 57 Premium Received Profit = 45 12*250= 3000

Seller profit = Rs 3000(profit) Because it is positive it is IN will get profit.

THE MONEY, so the seller who is going for call option

DECEMBER CALL OPTION 2011(strike price 1100)

92

Symbol

Date

Expiry

Open

High

Low

Close

LTP

Settle Price

No. of contract s 291

Turnover in Lacs

TCS

25-Nov2011 28-Nov2011 29-Nov2011 30-Nov2011 01-Dec2011 02-Dec2011 05-Dec2011 07-Dec2011 08-Dec2011 09-Dec2011 12-Dec2011 13-Dec2011 14-Dec2011 15-Dec2011 16-Dec2011 19-Dec2011 20-Dec2011 21-Dec2011 22-Dec2011 23-Dec2011 26-Dec2011 27-Dec2011

29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011

28.0 0 29.0 0 31.0 0 31.0 0 54.5 0 59.9 5 87.6 0 105. 00 90.0 0 82.0 0 79.9 0 92.0 5 90.0 0 69.0 0 66.0 0 40.0 5 60.0 0 52.1 0 52.8 5 57.0 0 69.3 5 0.00

32.5 0 37.0 0 39.0 0 45.7 5 66.4 0 92.0 0 92.0 0 105. 00 92.0 5 90.0 0 84.5 0 95.5 5 90.0 0 94.0 0 66.0 0 60.0 0 60.0 0 59.0 0 60.0 0 58.1 5 92.0 0 0.00

23.1 0 28.7 5 29.2 0 29.0 0 53.0 0 59.2 5 81.0 0 94.0 0 85.0 0 79.5 0 68.1 0 85.0 0 89.1 0 69.0 0 58.0 0 39.0 0 47.0 0 47.0 0 50.0 0 53.0 0 69.3 5 0.00 93

25.4 0 34.4 5 33.5 5 43.4 5 58.6 0 89.0 0 92.0 0 94.0 0 85.0 0 81.1 5 84.5 0 85.0 0 89.1 0 91.5 0 58.0 0 59.5 0 47.0 0 59.0 0 60.0 0 53.1 0 90.7 5 90.7 5

24.1 0 34.1 0 33.5 5 43.5 5 58.9 5 91.0 0 92.0 0 94.0 0 85.0 0 80.0 0 84.5 0 85.0 0 89.1 0 91.0 0 58.0 0 58.0 0 47.0 0 59.0 0 60.0 0 53.1 0 91.1 5 91.1 5

25.40

820.47

TCS

34.45

332

940.52

TCS

33.55

347

983.87

TCS

43.45

902

2,564.19

TCS

58.60

167

483.70

TCS

89.00

92

269.38

TCS

92.00

14.82

TCS

94.00

14.99

TCS

85.00

19

56.39

TCS

81.15

45

133.29

TCS

84.50

13

38.41

TCS

85.00

14.90

TCS

89.10

10

29.75

TCS

91.50

27

79.80

TCS

58.00

16

46.43

TCS

59.50

141

402.79

TCS

47.00

11

31.78

TCS

59.00

25

71.99

TCS

60.00

22

63.36

TCS

53.10

23.13

TCS

90.75

48

142.01

TCS

80.05

0.00

INTERPRETATION:

Buyers Pay OFF:

As bought 1 Lot of TCS that is 250 those who buy for1100 paid 28 Premium Per

Share. Settlement Price is 1152.

Spot price Strike price Amount Premium Paid (-) Net loss

1152 1100 52 28 24*250= 6000

Buyer profit = Rs 6000 (Net Amount) Because it is positive it is IN THE MONEY contract, so the buyer who is going for call option will get profit.

SELLERS PAY OFF:

It is in the money for buyer, so for the seller it is out the money and will get loss .

Strike price 1100 Spot price 1152 Amount -52 Premium Received (-) 28 Profit = -24*250= -6000

94

Seller loss = Rs -6000(loss) Because it is negative it is OUT THE option will get loss.

MONEY, so the seller who is going for call

NOVEMBER PUT OPTION 2011(strike price 1100)

Symbol Date Expiry Open High Low Close LTP Settle Price No. of contracts Turnover in Lacs 1,047.49 525.38 1,094.50 779.22 424.66 382.69 378.25 1,769.30 1,626.98 1,517.81 1,049.24 2,360.46 1,603.80 1,904.69 578.61 225.23 302.65 85.58

TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS TCS

28-Oct-2011 31-Oct-2011 01-Nov-2011 02-Nov-2011 03-Nov-2011 04-Nov-2011 08-Nov-2011 09-Nov-2011 11-Nov-2011 14-Nov-2011 15-Nov-2011 16-Nov-2011 17-Nov-2011 18-Nov-2011 21-Nov-2011 22-Nov-2011 23-Nov-2011 24-Nov-2011

24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011 24-Nov-2011

35.00 19.00 23.80 28.00 28.50 21.25 20.50 20.00 13.00 9.00 12.80 11.10 12.10 17.00 24.00 34.00 32.50 45.00

35.00 27.00 33.95 31.50 36.00 31.80 23.40 20.00 17.40 13.00 13.25 16.80 15.80 28.55 43.45 42.00 57.00 54.00

15.00 18.25 21.30 20.65 26.00 18.75 18.90 9.00 10.65 6.35 7.95 9.05 10.20 14.00 24.00 17.00 29.00 7.00

23.50 25.65 26.80 27.45 26.50 24.75 21.20 14.05 13.25 12.10 11.10 12.95 14.25 20.45 40.80 24.50 39.40 11.00

22.70 25.00 26.30 28.90 27.35 25.50 22.50 14.00 12.60 13.00 11.05 10.25 14.40 20.00 34.00 23.00 36.60 7.00

23.50 25.65 26.80 27.45 26.50 24.75 21.20 14.05 13.25 12.10 11.10 12.95 14.25 20.45 40.80 24.50 39.40 0.00

373 187 388 277 150 136 135 636 585 547 378 848 576 680 204 80 106 30

INTERPRETATION:

Buyers Pay OFF:

As bought 1 Lot of TCS that is 250 those who buy for1100 paid 35 Premium Per

Share.

95

 Settlement Price is 1008.

Strike price 1100 Spot price Amount Premium Paid (-) Net profit 1008 92 35 57*250= 14250

Buyer profit = Rs 14250 (Net Amount) Because it is positive it is IN THE MONEY contract, so the buyer who is going for put option will get profit.

SELLERS PAY OFF:

It is in the money for buyer, so for the seller it is out the money and will get loss .

Spot price

1008

Strike price 1100 Amount -92 Premium Received (-) 35 Profit = -57*250= -14250 Seller loss = Rs -14250(loss) Because it is negative it is OUT THE option will get loss.

MONEY, so the seller who is going for put

DECEMBER PUT OPTION FOR 2011(strike price 1000)

Symb ol Date Expiry Ope n Hig h Low Clos e LTP Settle Price No. of contracts Turnov er in La cs

96

TCS

25-Nov2011 28-Nov2011 29-Nov2011 30-Nov2011 01-Dec2011 02-Dec2011 05-Dec2011 07-Dec2011 08-Dec2011 09-Dec2011 12-Dec2011 13-Dec2011 14-Dec2011 15-Dec2011 16-Dec2011 19-Dec2011 20-Dec2011 21-Dec2011 22-Dec2011 23-Dec2011

29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011

17.0 0 14.0 0 11.0 0 10.2 0 4.50

21.1 0 14.4 0 11.3 5 11.5 0 5.70

16.6 0 10.5 5 8.40

19.5 0 11.0 5 9.70

21.0 0 11.0 0 9.50

19.50

177

450.64

TCS

11.05

121

306.22

TCS

9.70

149

376.23

TCS

7.30

7.80

7.75

7.80

143

360.62

TCS

4.10

4.35

4.50

4.35

173

434.53

TCS

4.00

4.80

2.90

3.15

2.90

3.15

193

484.32

TCS

3.00

3.45

2.65

2.80

2.70

2.80

61

152.96

TCS

2.45

2.75

2.45

2.55

2.55

2.55

12

30.08

TCS

2.35

3.70

2.35

3.40

3.30

3.40

41

102.81

TCS

5.50

5.50

2.70

3.45

3.50

3.45

23

57.69

TCS

2.80

3.45

2.45

2.85

3.00

2.85

49

122.83

TCS

2.25

2.45

1.90

2.10

2.00

2.10

35

87.69

TCS

2.00

2.50

2.00

2.15

2.15

2.15

23

57.62

TCS

2.30

2.85

2.20

2.25

2.25

2.25

43

107.76

TCS

2.15

3.10

2.00

2.75

2.60

2.75

33

82.70

TCS

3.00

4.95

1.20

2.55

2.45

2.55

140

351.15

TCS

2.55

2.55

1.70

2.35

2.50

2.35

41

102.72

TCS

1.25

2.35

1.00

1.30

1.50

1.30

50

125.16

TCS

1.30

1.65

1.00

1.20

1.20

1.20

34

85.11

TCS

1.00

1.00

0.75

0.80

0.75

0.80

10

25.02

97

TCS

26-Dec2011 27-Dec2011 28-Dec2011 29-Dec2011

29-Dec2011 29-Dec2011 29-Dec2011 29-Dec2011

0.10

0.40

0.10

0.25

0.20

0.25

32

80.03

TCS

0.30

0.30

0.20

0.20

0.20

0.20

10

25.01

TCS

0.15

0.25

0.10

0.15

0.15

0.15

22.50

TCS

0.05

0.10

0.05

0.05

0.05

0.00

69

172.51

INTERPRETATION:

Buyers Pay OFF:

As bought 1 Lot of TCS that is 250 those who buy for1000 paid 17 Premium Per Share.

Settlement Price is 923.

Spot price 923 Strike price 1000 Amount Premium Paid (-) Net loss -77 17 -60*250= -15000

Buyer loss = Rs 15000 (Net Amount)

Because it is negative it is OUT THE MONEY contract, so the buyer who is going for put option will get loss.

SELLERS PAY OFF:

It is out the money for buyer ,so for the seller it is in the money and will get profit .

Strike price Spot price

1000 923

98

Amount 77 Premium Received (-) 17 Profit = 60*250= 15000 Seller profit = Rs 15000(profit) Because it is positive it is IN will get profit.

THE MONEY, so the seller who is going for put option

99

SWOT ANALYSIS OF THE COMPANY AND INDIVIDUAL LEARNING CURVE

4.1 SWOT ANALYSIS OF COMPANY: SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective.

100

A SWOT analysis must first start with defining a desired end state or objective. A SWOT analysis may be incorporated into the strategic planning model. Strategic Planning has been the subject of much research.

Strengths: characteristics of the business or team that give it an advantage over Weaknesses: are characteristics that place the firm at a disadvantage relative to Opportunities: external chances to make greater sales or profits in the environment. Threats: external elements in the environment that could cause trouble for the

others in the industry.

others.

business. In this internship project, we were asked to find the SWOT analysis of the company. They are as follows. Strength:

Standard charterd securities having strong privilege clients. More importance for maintaining a good customer relationship. Offers for customer retaining. Accurate achievement of targets. Good work culture and supportive managers.

Weaknesses: No team for the accurate follow up of inactive clients.

Opportunities:

101

I learned more details about security market and portfolio anaysis. Got opportunity to interact with customers.

Threats: Less brokerage and more attractive offers of competitors. Lack of accurate follow up of customers.

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CONCLUSION
After doing this project I understood that, In terms of the growth of derivatives markets, and the variety of derivatives users, the Indian market has equaled or exceeded many other regional markets. While the growth is being spear headed mainly by retail investors, private sector institutions and large corporations, smaller companies and state-owned institutions are gradually getting into the act. Foreign brokers such as JP Morgan Chase are boosting their presence in India in reaction to the growth in derivatives. The variety of derivatives instruments available for trading is also expanding. There remain major areas of concern for Indian derivatives users. Large gaps exist in the range of derivatives products that are traded actively. In equity derivatives, NSE figures show that almost 90% of activity is due to stock futures or index futures, whereas trading in options is limited to a few stocks, partly because they are settled in cash and not the underlying stocks. Liquidity and transparency are important properties of any developed market. Liquid markets require market makers who are willing to buy and sell, and be patient while doing so. A lack of market liquidity may be responsible for inadequate trading in some markets. Transparency is achieved partly through financial disclosure. As Indian derivatives markets grow more sophisticated, greater investor awareness will become essential. NSE has programmes to inform and educate brokers, dealers, traders, and market personnel. In addition, institutions will need to devote more resources to develop the business processes and technology necessary for derivatives trading.

BIBILIOGRAPHY

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1. Websites
www.nseindia.com www.yourmoneysite.com www.moneycontrol.com www.bseindia.com www.rediffmoney.com

2. Magazines Capital market Dallal market

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