52232983 Ludhiana Stock Excahnge

8/13/2019 52232983 Ludhiana Stock Excahnge

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STUDY OF DERIVATIVES

LUDHIANA STOCK EXCHANGE LIMITED

LUDHIANA

TRAINING REPORT SUBMITTED IN THE PARTIAL

FULFILMENT FOR THE DEGREE OF

BACHELOR OF BUSINESS ADMINISTRATION

YEAR 2008-200

A!"#$ %&'()!"

SUBMITTED TO SUBMITTED BY

PUN*ABI UNIVERSITY SIMRANDEEP SINGH

PATIALA +,2

RIMT-INSTITUTE OF MANAGEMENT AND COMPUTER TECHNOLOGY

MANDIGOBINDGARH

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ACKNOWLEDGEMENT

Our personalities are based on the foundation of education imparted by our

teachers who are next to god.

I acknowledge our deepest sense of gratitude and sincere feeling of

indebtedness to my major advisor, r. !hammi "holi, under whose guidance I

was able to complete my project.

#ithout their immaculate and intellectual guidance, sustained efforts and

encouraging attitude, it would have been difficult to achieve the results in such a

short span of time.I am grateful to r. $.!. !idhu %anaging &irector' of (!) for permitting me to

take the training at (!) (td. I also want to express our sincere gratitude to r.

*.!. +rneja %!enior anager -raining In charge' and all the staff members of

(!) for spending time and valuable information they have shared with me and

helped me in my project to be a success. -he acknowledgement would not be

completed without expressing my thanks to the faculty of my college for showing

me the right path and guided me to solve my problems.

I extent my gratitude to our Director Mr. B.S. Bhatia and all the related

teachers. -he help and cooperation they offered at each stage of my study is

ineffable. -heir valuable suggestions and constant encouragement made this

study interesting and useful.

inally, I would like to acknowledge the support I got from my parents and /od. It

was their blessing that kept me motivated throughout till the completion of the

project.

Simrandeep Singh

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STUDENT DECLAAT!ON

I here by &eclare that study of "Stud# o$ Deri%ati%e&' $as been exclusively

done by us for the degree of BAC(ELO O) BUS!NESS ADM!N!STAT!ON

+nd not for any other degree, &iploma or fellowship. -his is our own study done

under the guidance of manager of the company.

I hereby declare that the contents of this report are true and best to my

knowledge.

0lace1 (2&$I+3+

%!I4+3&))0 !I3/$'

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*E)ACE

One should always work with an objective in its mind. -o accomplish that

objective efficient management of material, time and financial resources is very

important. +bove this coordination is must that determines the degree of

success.

+wareness at each level of life is necessary for a human being keeping all this is

view in this report on !tudy of &erivatives55. -he rounded encouraging support

by r. *! +rneja towards this report has created in me confidence regarding the

approval of the subject matter.

I feel that it was a great opportunity for me to spend time in (!) and gettingmyself aware of the ups and downs of capital market.

!o would like to say that this report is a result of an assignment, to improve

myself and gain confidence.

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CONTENTS

C(A*TE + !NTODUCT!ON TO OGAN!SAT!ON

+ . STOCK E,C(ANGE

- . LUD(!ANA STOCK E,C(ANGE

. LSE SECU!T!ES L!M!TED

C(A*TE - *O/ECT OB/ECT!0ES

A LEAN!NG OB/ECT!0ES

6 I3-4O&27-IO3 -O &)4I8+-I8)!

9 -:0)! O &)4I8+-I8)!

; )7O3OI7 2-I(I-: O &)4I8+-I8)!

< O=*)7-I8)! O &)4I8+-I8)!

> I3!-42)3-! O &)4I8+-I8) -4+&I3/

? 4I!" +3+/))3-

@ +4/I3

B ANAL1S!S O) DE!0AT!0ES

C(A*TE ESEAC( MET(ODOLOG1

C(A*TE 2 DATA ANAL1S!S AND !NTE*ETAT!ON

C(A*TE 3 SUGGEST!ONS AND CONCLUS!ONS

=I=(IO/+40$: +3& +33)A24)!

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L!ST O) TABLES

T.%$# N'/ T)$# O1 T.%$# P."# N'/

TABLE 1.1 LIST OF VARIOUS STOCK EXCHANGES IN INDIA 5

TABLE 1.2 BOARD OF DIRECTORS ( LSE) 8

TABLE 1.3 BOARD OF DIRECTORS (LSE SECURITIES) 15

TABLE 1.4 SETTLEENT C!CLE SCHEDULE 1"

TABLE 1.5 SCHEDULE OF ANNUAL LISTING FEE 23

TABLE 1.# ACHIEVEENTS OF LUDHIANA STOCK EXCHANGE 3$

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LIST OF DIAGRAMS

F)"/ N'/ T)$# '1 # D)."&.3 P."# N'

I/24) 6.6 !O247)! O 23& O4 -$) :)+4 9BB>CB? 9D

O (!)!(

I/24) 6.9 !O247)! O 23& O4 -$) :)+4 9BB 9E

O (!)!(

I/24) 9.6 0+:O I3&)A 2-24)! %=2:)4' >B

I/24) 9.9 0+:O I3&)A 2-24)! %!)(()4' >6

I/24) 9.; 0+: O 7+(( O0-IO3 %=2:)4' >>

I/24) 9.< !)(()4 7+(( O0-IO3 >?

I/24) 9.> 02- O0-IO3 =2:)4 >@

I/24) 9.? 0+: O 02- O0-IO3 %!)(()4' >D

I/24)


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I/24)


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STOCK E,C(ANGE

+ !-O7" )A7$+3/) is a platform where buyers and sellers of securities

issued by government, financial institutions, corporate houses, etc meet and

where the trading of these corporate securities takes place. -his is a market of

speculations. If the speculation of investor becomes wrong then the investor

loses. 3obody knows what will happen even after a second.

+ stock exchange refers to that segment of the capital market where the

securities issued by corporate entities are trade. It is an open auction market

where buyers and sellers meet and evolve a competitive price for the securities.

It reflects hopes, aspirations and fears of people regarding the performance of

the economy. It provides necessary mobility to capital and directs the flow of

capital into profitable and successful enterprises.

!ince buying and selling of different types of securities takes place in stock

exchange. -he prices of particular securities reflect their demand and supply. In

fact, stock exchange is said to be a barometer of economic and financial health.

-he stock exchanges are the nerve center of capital market. -he stock exchange

discharges three essential functions in the process of capital formation not in

raising resources for the corporate sector.

It provides place for sale and purchase of securities i.e. shares, bonds etc.

It provides linkages between the savings of household sector and investment in

corporate sector or economy.

It provides market Fuotation for share, debentures and bonds and serves as a

role of barometer, not only of the state of health of individual companies, but also

of the economy as a whole.

-herefore, by providing market place Fuotations of the price of shares and bondsor sort of collective judgment. !imultaneously reached by many buyers and

sellers in the market, the stock exchanges serve the role of barometer, not only

of the state of health of individual companies but also of the nation5s economy as

a whole.

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)EATUES O) STOCK E,C(ANGE

o It is the place where listed securities are bought and sold.

o It is an association of persons known as members.

o -rading in securities is allowed under rules and regulations of stock

exchange.

o embership is must for transacting business.

o Investors and speculators, who want to buy and sell securities, can do so

through members of stock exchanges i.e. brokers.

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)UNCT!ONS O) STOCK E,C(ANGE

-he stock exchange provides appropriate conditions where purchase and sale of

securities takes place at reasonable and fair prices. -he bargained prices of

buyers and sellers are recorded, on the basis of which each investor is able to

evaluate the securities held by him and thus knows the worth of his holdings at a

particular time.-he stock exchange provides a ready market for the conversion of

existing securities into cash and vice versa.

0eople having surplus funds invest in securities and these funds are securities

and these funds are used for industrialiGed and economic development of the

country that leads to capital formation.

!tock exchange protects the investor of investors through strict enforcement of

rules and regulations with respect of dealings. 0unishment %including fine,

suspension' may be there if brokers adopt any malpractice in dealing with

investor like charging excessively high commission etc.

-he stock exchange acts as the center of providing business information relating

to the enterprise whose securities are traded as the listed companies are to

present their financial and other statements to it.

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(!STO1 O) STOCK E,C(ANGE

-he trading in securities in India was started in the early of 6E@;. -he stock

exchange operating in the 6Ethcentury was those of =ombay set up in 6D@> and

+hmedabad set up in 6DEB. It was a state subject and the

=ombay securities contact %control' act, 6E9> used to regulate trading in

securities. 2nder this act, =ombay stock exchange was securities in 6E9@ and

+hmedabad stock exchange in 6E9@ and +hmedabad stock exchange in 6E;@.

&uring the war boom, a number of stock exchanges were organiGed at =ombay,

+hmedabad and other centers but they were not recogniGed soon after it became

a central subject, central legislation was proposed and a committee headed by

sh. +.&. /O4#+(+ went into bill for securities regulation. On the basis

securities regulation. On the basis securities contracts %control' at became law in

6E>?. +t present there are 9; recogniGed stock exchanges in India. 3umber of

Investors is increasing day by day.

-he stock exchange is a double auction market. Huite distinct from the common

market in which only one seller and many buyers in a stock exchange a number

of potential buyers and potential sellers coCexist all competing both among

themselves and with one another in making bids, counterCbids, offers and

counterCoffers.

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W(O BENE)!TS )OM STOCK E,C(ANGE4

o !N0ESTOS5 It provides them liFuidity, marketability, safety etc. of

Investment.

o COM*AN!ES5It provides them access to market funds, higher rating and

public interests.

o BOKES5-hey receive commission in lien of their services to investors.

o ECONOM1 AND COUT15-here is large of saving, better growth moves

industries, higher income.

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L!ST O) 0A!OUS STOCK E,C(ANGES !N !ND!A

TABLE 1.1

S.

No.

Name o$ &toc6 e7change 1ear& o$

e&ta89i&hment

T#pe o$ organi:ation

+=ombay !tock exchange 6D@> 8oluntary 3onCprofit

organiGation

-+hmedabad !tock

exchange

6DE@ 8oluntary 3onCprofit

organiGation

7alcutta !tock exchange 6EBD 0ublic limited company

2 .0. !tock exchange,

Indore

6E;B 8oluntary 3onCprofit

organiGation

3adras !tock exchange 6E;@ 7o. limited by guarantee

;$yderabad !tock exchange 6E7ochin stock exchange 6E@D 0ublic limited company

+?2.0. !tock exchange,

"anpur

6ED9 0ublic limited company

++0une !tock exchange 6ED9 7o. limited by guarantee

+-(udhiana !tock exchange 6ED; 0ublic limited company

+ *aipur !tock exchange 6ED; 0ublic limited company

+2/uahati !tock exchange 6ED< 0ublic limited company

+3"annaar !tock exchange 6ED> 0ublic limited company

+;agadh !tock exchange 6ED? 7o. limited by guarantee

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+ of its

eFuity should be offered to the public for the listing company is also reFuired to

make a deposit 6 issue price with the stock )xchange and it can not be

released before the expiry of six months provided there is a compliance of preC

listings and postClisting reFuirements of the company. 7ompany has also to

comply with the conditions enunciated in listing clause.

-he schedule of annual (isting fee and up front listing fee payable triennially is

given below1

*aid up capita9 Annua9 Li&ting )ee &.2pto 6 crores D crores 6?DBB> to 6B crores 9DBBB6B to 9B crores >?BBB9B to ;B crores DB crores 6

7ompanies which have paid up capital of more than 4s. >B crores will pay

additional fee of 4s. 9DBB for every increase of 4s. > crores or part there of. -he

annual listing fees referred to above are applicable only if the exchange is a

4egional !tock )xchange otherwise the fees will be >B of the fees indicated

above.

ACCOUNTS SECT!ON

ost of the work in account section (!) is done manually, although help is taken

through computers for the purpose of making -rial =alance, Income and

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)xpenditure statement and =alance !heet. -he annual report of (!) is generally

published in +ugust every year. !ome of the important polices of (!) are

o -he company follows accrual system of accounting recogniGes income

and expenditure accordingly.

o &epreciation is provided on written down, value method in accordance

with and din the manner specified in schedule AI8 of the 7ompanies +ct

6E>?.

o ixed costs are stated at historical costs less depreciation.

o !tockNInventory %stationery' is valued at cost.

o Interest on funds borrowed which is attributable to construction of fixed

assets and other indirect expenditure during construction is included under

work in progress.

-he company has the procedure of receiving shares, scrips of various

companies as securities against the performance of the contract. 3o accounting

entries in such transaction are made in respect of defaulting members by

crediting security account and debiting memberPs investment aNc. -he shares in

such cases are valued at prices on the date of transfer deeds.

)unction& o$ Account& Section5

-he account section performs the following function.

o -o make and receive payments to the outside agencies, these agencies

include companies listed at (!) and brokers working at (!).

o -o disburse personnel expenses.

o -o keep the records of all incoming and outgoing money depreciation of

financial statements at the end of financial year.o -o get their accounts audited from the third party.

o

Source& o$ $und& o$ LSE5

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o embership fee from brokers at the beginning.

o Initial listing fee from companies i.e. 4s. 6,BBBNC

o +nnual listing fee from companies.

o +nnual fee from brokers %4s. >BBB' and their authoriGed representatives.

%4s. >BB each' as broker member is allowed to have maximum < authoriGed

representatives.

o Interest income from deposits of companies for listing, which are made at

6 of issue amount and minimum capital for this purpose is 4s. BBB'

o (ibrary charges from brokers %4s. 9BB' p.a.'

o =rokers contribution to investor protection fund %4s. >BB p.a'

o ines and penalties form brokers.

o aintenance charges 4s. 6;.>B per sF. feet, per Fuarter from those

members having rooms and those not having rooms all those not having rooms

are charges at till rate of 4s. 6>BBNC pa.

o #ater and electricity charges 4s. @>B per Fuarter, whose area is less than

9BB sF. feet and EBBNC per Fuarter which is having area of more than 9BB sF. feet.

-he members who are not having rooms are charged at the rate of 4s. ;BBNC

%p.a.'

o Interest earned affixed deposits.

=illing of members is done on annual basis for annual fees and other

aboveC mentioned charges. On 6st+pril of each year and they are to make

payment in 6DB days up to ;B !eptember. =eyond it, they are charged interest

on due amount Q 69 p.a. still in case of nonpayment, broker member is served

a show cause notice for ?B days on 6st+pril next year. If member fails to, comply

with notice then he can be expelled.

App9ication O$ )und& O$ LSE5

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6. > of listing fees to !)=I each year.

9. 9B for providing services to investors out, or listing fee annually to

investor service fund.

;. +dministrative expenses %I' )lectricity 7harges. %II' !ecurity 7harges

%III' -elephone 7harges %I8' 8!+- 7harges %8' 0rinting and stationary

!alaries


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#hen two broker or outside clients do not settle their claims in between

themselves and move to court, the legal section comes into the picture to fight for

the cause of investors and against the defaulting members. (egal section also

assist the member investor to settle their disputes through the arbitration

committee investors grievance committee.

&isciplinary committee, defaulting committee, so that there

maybe settled at the earlier without incurring heavy due on amount regarding

court fee, advocate fee etc. -he objective of the legal section is to make effective

the bylaws and regulation of the stock exchange and to see that the guidelines,

circular and any amendments in rules made by the !)=I are enforced at

appropriate time so that the future complications may be reduced or avoided. +s

the name legal section suggests it is clearly mentioned and understood that each

of every matter involving legality is to be solved by the legal department.

*ESONNEL DE*ATMENT

(udhiana stock exchange does not have a personnel department in its

OrganiGation chart. -his department carries out all activities relating to therecruitment of the personnel, whenever and wherever a vacancy arises,

maintenance of attendance register. -his department also deals with the

appointment or removal of floor clerks or authoriGed representatives of brokers.

-hese departments also maintain records of leaves and overtime of employees.

MEMBES(!* DE*ATMENT

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-his department deals with membership of exchange. -he trade in market is

done through the authoriGed members who are registered with concerned stock

exchange and !)=I.

-here are two types of members in stock exchanges.

o 7orporate members

o Individual member

ollowing are the reFuirements to be an individual member of exchange.

Age Limit5 -o be member of stock exchange there is age limit inimum

age is 96 yrs aximum age is ?B yrs.Fua9i$ication5 -o be member minimum Fualification atriculation is plus

person has threeCyear experience interview. Including writtentest and membership department deal with all above

reFuirements of members.

ollowing reFuirements are for corporate members1C

6. 7ompany must be registered uNs ;99 of the company +ct i.e. &irectors

with unlimited liability.

9. -wo copies of O+ +O+.

;. Hualification 0roof of age of at least two directors, who will deal in

securities.

SOUCES O) )UND )O T(E 1EA -??3?;

O) LSESL

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I/24) 6.6

SOUCES5

%6' embership ee R B.D9%9' (isting ee R 6;.9@

%;' Interest on deposits R 9E.B;

%;.?>

SOUCES O) )UND )O T(E 1EA -??2?3

O) LSESL

6

9

;

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I/24) 6.9

SOUCES5

6' -urnover 7harge =!) R >.6B

9' -urnover 7harge 3!) R ' Other income R ?.D;

SSSSSSSS

6BB

AC(!E0EMENTS O) LUD(!ANA STOCK E,C(ANGE

6

9

;

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OB/ECT!0ES

A LEAN!NG OB/ECT!0ES

!t inc9ude&

6 I3-4O&27-IO3 -O &)4I8+-I8)!

9 -:0)! O &)4I8+-I8)!

; )7O3OI7 2-I(I-: O &)4I8+-I8)!

< O=*)7-I8)! O &)4I8+-I8)!

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> I3!-42)3-! O &)4I8+-I8) -4+&I3/

? 4I!" +3+/))3-

@ +4/I3

B ANAL1S!S O) DE!0AT!0ES MAKET

!NTODUCT!ON TO DE!0AT!0ES

0rimary market is used for raising money and secondary market is used

for trading in the securities, which have been used in primary market. =ut

derivative market is Fuite different from other markets as the market is used for

minimiGing risk arising from underlying assets.

-he work derivative originates from mathematics. It refers to a variable,

which has been derived from another variable.

i.e. A R f%:'

#here A %dependent variable' R &)4I8+-I8) 04O&27-

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: %independent variable' R 23&)4(:I3/ +!!)-

+ financial derivative is a product that derives value from the market of

another product. $ence derivative market has no independent existence without

an underlying asset. -he price of the derivative instrument is contingent on the

value of underlying assets.

+s a tool of risk management we can define it as, a $inancia9 contract

ho&e %a9ue i& deri%ed $rom the %a9ue o$ an under9#ing a&&etderi%ati%e

&ecurit#H. A99 deri%ati%e& are 8a&ed on &ome ca&h product. The under9#ing

a&&et& can 8e 5

a. +ny type of agriculture product of grain %not prevailing in India'

b. 0rice of precious and metals gold

c. oreign exchange rates

d. !hort term as well as longCtern bond of securities of different type issue


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6. + security derived from a debt instrument, !hare, (oan whether secured

or unsecured, 4isk instrument or contract for difference or any other form

of security.

+ contract which derives its value from the prices of prices of underlying

securities.

(!STO!CAL AS*ECT O) DE!0AT!0ES

-he need for derivatives as hedging tool was first felt in the commodities

market. +gricultural O helped farmers and 04O7)!!O4! hedge against

commodity price risk. +fter the fallout of =4I-+I3 #OO& +/4)))3-, the

financial markets in the world stared undergoing radical changes, which give rise

to the risk factor. -his situation led to development of derivatives as effective

4isk anagement tools.

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1. (edger 5 $edgers face risk associated with the price of an asset. -hey

use futures or options markets to reduce the risk. -hus, they are operation

who want to eliminate the risk composing of their portfolio.

2. Specu9ator& 5 -hey wish to be on future movements in the price of an

asset. + speculator may buy securities in anticipation of rise in price. If this

expectation comes true he sells the securities at a higher price and makes

a profit. 2sually the speculator does not take delivery of securities sold by

him. $e only receives and pays the differences between the purchase and

sale prices.

3. Ar8itrageur& 5-hey are in business to take advantage of discrepancy

between price in two different markets. If for example, they see the future

price of an asset getting out of line with cash price, they will take off

setting positions in two markets to lock in profit.

T1*ES O) DE!0AT!0ES

-he most commonly used derivatives contract is forwards, futures and

options1

1. )orard& 5 + forward contract is a customiGed contract between two

entities, where settlement takes place on a specific date in the futures at

today5s preCagreed price.

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2. )uture& 5+ future contract is an agreement between two parties to buy or

sell an asset at a certain time the future at the certain price. utures

contracts are the special types of forward contracts in the sense that are

standardiGed exchange traded contracts.

3. Option& 5It is of two types 1 call and put options.

2nderlying asset, at a give price on or before a given future date. 02-!

give the buyer the right but not the obligation to sell a give Fuantity of the

underlying asset at a given price on or before a given date.

4. Leap& 53ormally option contracts are for a period of 6 to 69 months.

$owever, exchange may introduce option contracts with a maturity period

of 9C; years. -hese longCterm option contract are popularly known as

(eaps pr (ong term )Fuity +nticipation !ecurities.

5. Ba&6et& 5=askets options are option on portfolio of underlying asset.

)Fuity Index Options are most popular form of baskets.

#. Sap& 5-hese are private agreements between two parties to exchange

cash flows in the future according to a prearrange formula. -hey can be

regarded as portfolios of forward5s contracts. -he two commonly used

swaps are1

&) !ntere&t rate &ap& 5 -hese entail swapping both 0rincipal and

interest between the parties , with the cash flow in one direction

being in a different currency than those in the opposite direction.

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') Currenc# &ap& 5 -hese entail swapping both 0rincipal and

interest between the parties, with the cash flow in one direction

being in a different currency than those in the opposite direction.

T(E DE!0AT!0ES MAKETS *E)OM A NUMBE O) ECONOM!C

)UNCT!ONS5

4/ *rice Di&co%er#5 0rices in organiGed derivatives markets reflects the

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

underlying to perceived future level. -he prices of derivatives converge

with the prices of the underlying at the expiration of the derivative contract.

-hus derivatives help in discovery of future as well current price.

2/ Tran&$er o$ ri&65 -he derivative market helps to transfer to the risks from

those who have them but may like them those who have an appetite for

them. #e can also term the derivative market as the insurance company,

whereby certain players assumes the risk by receiving premium amount.

,/ !ncrea&ed %o9ume in the ca&h mar6et 5C &erivatives due to their inherent

nature are linked to the underlying cash markets. #ith the introduction of

derivative, the underlying market, witness higher trading volumes because

of participation by more players who would not otherwise participate for

lack of an arrangement to transfer risk.

5/ Ne Entrepreneuria9 acti%itie& 5 &erivatives have a history of attracting

many bright, creative, wellCeducated people with an entrepreneurial, new

products and new employment opportunities, the benefits of which areimmense.

6/ !ncrea&e in &a%ing 5 &erivatives market helps increase savings and

investments in the long run -ransfer of risk enables market participants to

expand their volume of activities.

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+/ Trading in contro99ed en%ironment 5C -he introduction of the derivatives

has shifted the trading in speculative dealings in controlled market and the

counter party risk has been eliminated.

*articipant& in deri%ati%e mar6et

6. )xchange, trading members, clearing members.

9. $edgers, arbitrageurs, speculators.

;. 7learing, clearing bank.

. !tock lenders and borrowers.

EASON )O STAT!NG DE!0AT!0ES

6. 7ounter party risk on the part of broker, in case it ask money from us but

before giving delivery of shares goes bankrupt.

9. (iFuidity risk in the form that the particular scrip might not be traded on

exchange.;. 2nsystematic risk in the form that the price of scrip may go up or down

due to 7ompany !pecific 4easons.

4. utual funds may find it difficult to invest the funds raised by them

properly as the scrip in which they want to invert might not be available at

the right price.

OB/ECT!0ES O) DE!0AT!0E TAD!NG

4/ (edging5 :ou own a stock and you are confident about the prospects of

the company. $owever at the same time you feel that overall market may

not perform as good and therefore price of your stock may also fall in line

with overall marked trend.

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:ou except that some adverse economic or political vent affect the marker

sentiments, though fundamentals of the company will remain good,

therefore, it is good to retain the stock.

In both these situations you would like to insure portfolio against any such

market fall. !uch insurance is known as hedging.

$edging is a tool to reduce the inherent risk in an investment. 8arious

strategies designed to reduce investment risk using call option, put

options, short selling, and futures are used for hedging. -he basic purpose

of a hedge is to reduce the risk of loss.

2/ Ar8itrage 5 -he future price of an underlying asset is function of spot

price and cost of carry adjusted for any return on investment. $owever,

due to uncertainly about interest rates, distortions in spot prices, or

uncertainly about future income stream, prices in futures market may not

truly reflect the expected spot price in future. -his imbalance in future and

spot price gives rise to arbitrage opportunities. -ransactions made to take

advantage of temporary distortions in the market are known as arbitrage

transactions.

,/ Specu9ation&1 C :ou may have very strong opinion about the future

market price of a particular asset based on past trends, current

information and future expectation. (ikewise you may also have opinion

about the overall marker trend. -o take advantage of such opinion,

individual asset or the entire market %index' could be sold or purchased.

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T(E EFU!EMENTS )O SETT!NG U* )UTUE AND O*T!ON TAD!NG

AE OUTL!NES BELOW5

6. 7reation of an Options 7learing 7orporation %O77' as the single

guarantor of every traded option. In case of default by a party to a

contract, the clearing house has to bear the cost of necessary to carry out

the contract.

9. 7reation of a strong cash market %secondary market'. -his is because

after the exercise of an option contract, the investors move to the

secondary market to book profits.

;. 7reation of paperCless trading and bookCentry transfer system.

. 2niformity of rules and regulation in all the stock exchanges.

?. !tandardiGation of the terms governing the options contracts. -his would

decrease the transaction costs. or a given underlying security, all

contracts on the options exchange should have an expiry date, a strike

price, and a contract price, only the premium should be negotiated on the

floor of the exchange.

@. (arge, financially sound institutions, members and number of marketmakers, who can write the options contracts. !trict capital adeFuacy

norms to be out and followed.

45


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55/110

!M*OTANCE O) DE!0AT!0ES TAD!NG

6. 4eduction of borrowing cost.

9. )nhancing the yield on assets.

;. odifying the payment structure of assets to correspond to investor

market view.

. Increase in hedger, speculator and arbitrageurs.

?. It does not totally eliminate speculation, which is basic need of Indian

investors.

4%


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-he speculator would go long on the forward, wait for the price to rise, and

then take a reversing transaction to book profits. !peculator may well be reFuired

to deposit a margin upfront. $owever, this is generally a relatively small

proportion of the value of assets underlying the forward contract.

E$$ect o$ change in price 5

+s mentioned above the value of such a contract in Gero for both the

parties. =ut later as the price the underlying asset changes, it gives positive or

negative value for contract.

0rice 2nderlying

+ssets

$older long position $older !hort 0osition

Increase

&ecrease

0ositive 8alue

3egative 8alue

3egative 8alue

0ositive 8alue

).g. + agrees to deliver 6BB eFuity shares of 4eliance to = on !ept. ;B,

9BB9 at a 4ate of 4s. 69B per share. 3ow if the price of share on that is 4s. 6


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for each contract. In a normal market, basis will be positive. -his reflects that

futures prices normally exceed spot prices.

!nitia9 margin 5 -he amount that must be deposited in the margin account at a

time a future contract is first entered into is known as initial margin.

Mar6etingtomar6et 5 In the futures market, at the end of each trading day, the

margin account is adjusted to reflect the investor5s margin gain or loss depending

upon the future5s closing price.

Maintenance margin 5 -his is somewhat lower than initial margin. -his is set to

ensure that the balance in the margin account never becomes negative. If the

balance amount falls below the maintenance margin, the investor receives a

margin call and is expected to top up the margin account to the initial margin

level before trading commences on the next day.

T1*E O) )UTUE CONTACTS

!nde7 )uture& 5 Of the financial futures, index future contracts are key contracts,

introduced in 2.!.+., in 6ED9 by the 7ommodity utures -rading 7ommission

%7-7' by approving the "ansas =oard proposal. Index utures began trading in

India in *une 9BBB of -rade %"!=-'5s utures derive its value from the underlyingindexCe.g. 3!)5s futures. 7ontracts are based on ! 0 73A 3I-:

+t present it has become the most liFuid contract in the country, the arbitrage

between the futures eFuity market is further expected to reduce impact cost. DBC

EB of retail participation is expected in India because

51


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TEND O) BULL!S( MAKET

6>th

eels the market will rise

=uys 9BB nifty contracts with expiry date C ;6th at 699B costing

4s. 9


61/110

TEND O) BEA!S( MAKET

F 6>th

feels the market will fall

!ells 9BB 3ifties *uly 7ontract

3ifty *uly contract is trading at 699B

$is position is worth 4s. 9


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)OWAD 0S. )UTUES

)eature& )orard )uture

COperational -raded between -rade on

echanism two parties )xchange

C7ontract &iffer from !tandardiGed

!pecifications traded to trade 7ontracts

C7ounter party )xists such 3o such

4isks risk risk

C(iFuidity (ow $igh

C0rice 3ot $ighly

&iscovery )fficient )fficient

C!ettlement +t end of period &aily

argin 3o such margin argin reFuiredfor trading

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O*T!ONS

Options are fundamentally different from forward and futures. +n option gives the

holderNbuyers of the option the right to do something. -he holder does not have

committed himself to doing something. In contrast, in a forward or futures

contract, the two parties have committed them self to doing something. #hereas

it nothing %except margin reFuirement' to enter in to a futures he purchases of an

option reFuire an up front payment.

(i&torica9 8ac6ground o$ Option5

+lthough options have exercised for a long time, they were traded O-&, without

much knowledge of valuation. -oday exchangeCtraded options are actively traded

on stocks, stock indices, foreign currencies and futures contracts.

-he first trading is options began in )urope and 2.!. as early as the

century. It was only in early, 6EEBs that a group of firms set up what is known as

the put and ca99 8ro6er& and dea9er& a&&ociationH with the aim of providing a

mechanism for bringing buyers and sellers together. It someone wanted to buyan option, he or she would contract one of the member firms. -he firm would

then attempt to find a seller or writer of option either from its own client of those

of other member firms. If no seller could be found, the firm would undertake to

write the option itself in return of price. -he two deficiencies in above markets

were

6. 3o secondary market

9. 3o mechanism to guarantee the writer of option would honor it

In 6E@;, =lack, arton, !choles invented the =lackC!choles formula. In +pril

6E@;, 7=O) was set up specially for the purpose of trading options. -he market

for options develop so rapidly that by early DB5s number of share underlying the

What i& Option 4

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+n options is the right, but not the obligation to buy to sell a specified amount

%and Fuality' of a commodity, index or financial instruments a to buy of sell a

specified number of underlying futures contracts, at a specified price on a before

a give date in the future.

-hus, option like futures, also provide a mechanism by which one can acFuire a

certain commodity on other assets, or take position in order to make profits or

cover risk for a price. In this type of contract as well, there are two parties1

a. -he buyer %or the holder, or owner of options'

b. -he seller %or writer of options'

#hile the buyer take J9ong po&itionHthe seller take J&hort po&itionH

!o every option contract can either be Jca99 optionH or Jput optionH options are

created by selling and buying and for every option that is buyer and seller.

T1*ES O) O*T!ON CONTACTS

1. !nde7 Option& 5 Index options are also financial exchange traded

contracts with the underlying assets as the index, whereby the buyer of

the options acFuire the right to buy or sell predefined Fuantity of the indexfor a consideration paid to the seller or the writer of the option. +ll option

contracts are also standardiGed and the clearing house or the cooperation

guarantees the performance of the contracts.

2. Stoc6 Option& 5 -hese are the stock exchange traded contracts

whereby, buyer of the option gets the right to buy the contracts stocks for

a consideration paid to the seller of the option. $e does not have any

obligation, but on the other hand the writer %seller' of the option is under

the obligation to honour the contract since he has received the premium in

lieu of the obligations. !tock options are similar to index options, but with

a basic difference is that the underlying assets are individual

. T1*ES O) O*T!ONS

5#


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66/110

Wh# &e99 Option 5 If u think market will remain neutral or slightly bearish .

E7amp9e

!ell a call with a strike price of 4s.9;


67/110

It gives the holder the right to sell a specific Fuantity of underlying asses at an

agreed price on date of maturity he gets the right to sell.

Wh# Bu# a *ut Option Bu#er

If u think market will fall

E7amp9e

=uy a 0ut with a strike of 4s.9;?B%3ifty' at a premium of 4s.9>

aximum 0rofit 0otential 1 !ubstantial

aximum 4isk 0otential.

=reak )ven 1 9;;>

&esired ovement 5 Beari&h

*ut Option Bu#er

0rofit

B 9;?B

index

loss

I/24) 9.>

*ut Option &e99er

5"


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Wh# Se99 a *ut Option

If u think market will remain neutral or moderately bullish

E7amp9e

!ell a put with a strike of 4s.9;?B%3ifty' at a premium of 4s.>B

aximum 0rofit 0otential 1 4s >B

aximum 4isk 0otential 1 !ubstantial

=reak )ven 1 4s. 9;6B

&esired ovement 1 arket will not go down

0ay off put option %seller'

profit

B 9;?B

index

loss

I/24) 9.?

O*T!ON TEM!NOLOG1

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4/ Bu#er o$ an option 5 -he buyer of an option is the one who by paying the

option premium buys the right but not the obligation exercise his option on

the sellerNwriter.

2/ Writer o$ an option 5 -he writer of a callNput option is the one who

receives the option premium and is thereby obliged to sellNbuy the asset if

the buyer exercise on him.

,/ Option price 5 Option price is the price, which the option buyer pays to

the option seller. It is also referred as option premium.

5/ E7piration date 5-he date specified in the options contract is known as

expiration date, the exercise date, the strike date or the maturity.

6/ Stri6e *rice 5-he price specified in the options contract is known as

strike price or the exercise price.

+/ American option& 5these are the options that can be exercised at any

time upto the expiration date. ost exchangeCtraded options are

+mericans.

7/ European option&5-hese are the options that can be exercised only on

the expiration date itself. -hese are easier or analyGe than +merican

option, and properties of +merican options are freFuently deducted from

those of its )uropean counterpart.

8/ !n the mone# option 5+n in the money option is an option that would

lead to a positive cash flow to the holder if it will exercise immediately. +

call option in the index is set to be inCtheCmoney when the current index

stands at a level higher than the strike price %i.e. spot priceUstrike price'. If

the index is much higher than the strike price, the call is set to deep I-.

In the case of a put, the put is I- if the index is below the strike price.

/ Atmone# option 5 ATM option is an option that would lead to Gero cash

flow if it were exercised immediately. +n option on the index is atCtheC

money when the current index eFuals the strike price.

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40/Outo$the mone# option 5 OTM options is an option that would lead to

a negative cash flow it was exercised immediately. + call option on the

index is O- when the current index stands at a level, which is less than

the strike price %spot priceVstrike price'. If the index is much lower than the

strike price, the call is set to be deep O-. In the case of a put, the put is

O- if the index is above the strike price.

AME!CAN 0S EUO*EAN O*T!ON

Its owner can exercise an +merican option at any time on or before the expiration

date.

+ )uropean style option gives the owner the right to use the option only on

expiration date and not before.

Option *remium

+ glance at the rights and obligations of buyer and seller reveals that option

contracts are skewed. One way naturally wonder as to why the seller %writer' of

an option would always be obliged to sellNbuy an asset whereas the other partygets the right. -he answer is that writer of an option receives, a consideration for

2ndertaking the obligation. -his is known as the price or premium to the seller for

the option.

-he buyer pays the premium for the option to the seller shelter he exercise the

option is not exercised, it becomes worthless and the premium becomes the

profit of the seller.

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)actor& A$$ecting *ricing

6. !upply and demand in !econdary market

9. )xercise price

;. 4isk free interest rate

. -ime to expiration

?. &ividend on underlying

#3


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!SK MANAGEMENT

3!77( have developed a comprehensive risk containment mechanism for the

O !egment. -he salient features of risk containment mechanism of the O

segment are 1

6. -he financial soundness of the members is the key to risk management.

-herefore, the reFuirements for membership in term of capital adeFuacy

%net worth, security deposits' are Fuite stringent.

9. 3!77( charges an upfront initial margin for all the open positions of a

7. It specifies the initial margin reFuirements for each futuresNoptions

contract on a daily basis. It also follows valueCatCrisk %8+4' based

margining through !0+3. -he 7 in turn collects the initial margin form

the -s and their respective clients.

;. -he open positions of the members are marked based on contract

settlement price for each contract. -he difference is settled in cash on - J

6 basis.

. 7s are provided a trading terminal for the purpose of monitoring the

open position of all the -s clearing and setting through him. + 7 may

set exposure limits for a - clearing and settling through him. 3!77(

assists the 7m to monitor the intraCday exposure limits set up by a 7

and whenever a - exceed the limits, it stops that particular - from

further trading.

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?. + member is altered of his position to enable him to adjust his exposure or

bring in additional capital. 0osition violates result in withdrawal of trading

facility for all -s a 7 is case of violation by the 7.

-he most critical component of risk containment mechanism for O

segment is the margining system and onCline position monitoring. -he actual

position monitoring and margining is carried out onCline through 0arallel 4isk

anagement !ystem %04I!'. 04I! uses !0+3 %r' %!tandard 0ortfolio

+nalysis of risk' !ystem for the purpose of computation of onCline margins,

based on the parameters defined by !)=I.

M!N!MUM BASE CA*!TAL

+ clearing ember %7' is reFuired to meet with the =ase inimum 7apital

%=7' reFuirements prescribed by 3!77( before activation. -he 7 has also to

ensure that =7 is maintained in accordance with the reFuirements of 3!77( at

all points of time, after activation.

)very 7 is reFuired to maintain =7 of 4s. >B lakhs with 3!77( in the

following manner 1

6. 4s.9> lakhs in the form of cash.

9. 4s. 9> lakhs in any one form or combination of the below forms1

7ash

ixed &eposit 4eceipts %&4s' issued by approved banks and deposited

with approved 7ustodians or 3!77(.

=ank /uarantee in favour of 3!77( from approved banks in the specified

format.

+pproved securities in demat form deposited with approved 7ustodians.

+ny failure on the part of a 7 to meet with the =7 reFuirements

#5


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at any point of time, will be treated as a violation of the 4ules, =yeC(aws and

4egulations of 3!77( and would attract disciplinary action interCalia including,

withdrawal of trading facility and Nor clearing facility, closing out of outstanding

positions etc.

Additiona9 Ba&e Capita9

7learing members may provide additional marginNcollateral deposit

%additional base capital' to 3!77( andNor may wish to retain deposits andNor

such amounts which are receivable from 3!77(, over and above their minimum

deposit reFuirements, towards initial margin and N or other obligations.

##


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MAG!NS

3!77( has developed a comprehensive risk containment mechanism for the

utures Options segment. -he most critical component of a risk containment

mechanism for 3!77( is the online position monitoring and margining system.

-he actual margining and position monitoring is done onCline, on an intraCday

basis. 3!77( uses the !0+3 %!tandard 0ortfolio +nalysis of 4isk' system for

the purpose of margining, which is a portfolioCbased system.

!nitia9 Margin

3!77( collects initial margin upCfront for all open positions of a 7 based

on the margins computed by 3!77(C!0+3. + 7 is in turn reFuired to collect

the initial margin from the -s and his respective clients. !imilarly, a - should

collect upfront margins from his clients.

Initial margin reFuirements are based on EE value at risk over a one day

time horiGon. $owever, in the case of futures contracts %on index or individual

securities', where it may not be possible to collect mark to market settlementvalue, before the commencement of trading on the next day, the initial margin

may be computed over a twoCday time horiGon, applying the appropriate

statistical formula. -he methodology for computations of 8alue at 4isk

percentage is as per the recommendations of !)=I from time to time.

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!nitia9 margin reIuirement $or a mem8er5

or client positions L shall be netted at the level of individual client and

grossed across all clients, at the -radingN7learing ember level, without any

setoffs between clients.

or proprietary positions L shall be netted at -radingN7learing ember

level without any setoffs between client and proprietary positions.

or the purpose of !0+3 argin, various parameters are specified from

time to time.

In case a trading member wishes to take additional trading positions his

7 is reFuired to provide +dditional =ase 7apital %+=7' to 3!7(. +=7 can be

provided by the members in the form of 7ash, =ank /uarantee, ixed &eposit

4eceipts and approved securities.

*remium Margin

In +ddition to Initial argin, 0remium argin would be charged to members. -he

premium margin is the client wise margin amount payable for the day and will be

reFuired to be paid by the buyer till the premium settlement is complete.

*a#ment o$ Margin&

-he initial margin is payable upfront by 7learing embers. Initial margins can be

paid by members in the form of 7ash, =ank /uarantee, ixed &eposit 4eceipts

and approved securities.

3onCfulfillment of either the whole or part of the margin obligations will be treated

as a violation of the 4ules, =yeC(aws and 4egulations of 3!77( and will attract

#8


77/110

penal charges Q B.BE per day of the amount not paid throughout the period of

nonCpayment. In addition 3!77( may at its discretion and without any further

notice to the clearing member, initiate other disciplinary action, interCalia

including, withdrawal of trading facilities and N or clearing facility closing out of

outstanding positions, imposing penalties, collecting appropriate deposits,

invoking bank guarantees N fixed deposit receipts etc

DE!0AT!0ES TAD!NG !N !ND!A

-he first step towards introduction of derivatives trading in India was the

promulgation of the securities laws %amendment' ordinance, 6EE> which

withdrew the prohibition on options in securities. -he market for derivatives,

however, did not take off, as there was no regulatory framework to govern trading

of derivatives.

!)=I set up a 9< members committee under the 7hairmanship of &r. (.7.

/upta on 6Dth3ovember, 6EE? top develop appropriate regulatory framework for

derivatives trading in India. -he committee submitted its report on 6@ tharch,

6EED prescribing necessary preCconditions for introduction of derivatives trading

in India. -he committee recommended that derivatives should be declared asKsecurities5 so that regulatory framework applicable to trading of Ksecurities5 could

also govern trading of securities. !)=I also set up a group in *une 6EED under

the 7hairmanship of 0rof. *.4. 8arma, to recommend measures for risk

containment in derivatives market in India. -he report, which was submitted in

October, 6EED, worked out the operational details of margining system,

methodology for changing initial margins, broker net worth, deposit reFuirement

and real time monitoring reFuirements.

-he !74+ was amended in &ec, 6EEE to include derivatives within the

ambit of Ksecurities5 and the regulatory framework was developed for governing

derivatives trading.

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!nde7 Option& 5 Index Options are financial contracts whereby the right is given

by the option seller in consideration of a premium to the option buyer to buy or

sell the underlying index at a specific price %strike price' on or before a specific

date %expiry date'.

Stoc6 )uture& 5 !tock utures are financial contracts where the underlying asset

is an individual stock. !tock futures contract is an agreement to buy or sell a

specified Fuantity of underlying eFuity share for a future date at a price agreed

upon between the buyer and seller. *ust like Index derivatives, the specifications

are preCspecified.

Stoc6 Option& 5 !tock Options are instruments whereby the right of purchase

and sale is given by the option seller in consideration of a premium to the option

buyer to buy or sell the underlying stock at a specific price %strike price' on or

before a specific date %expiry date'.

O*EAT!ONAL MEC(AN!SM O) DE!0AT!0ES

4/ egi&tration ith 8ro6er 5 -he first step towards trading in thederivatives market is selection of a proper broker with whom the investor

would trade. Investors should complete all the registration formalities with

the broker before commencement of trading in the derivatives market. -he

investors should also ensure to deal with a broker %member of the

exchange' who is a !)=I registered broker and possesses a !)=I

registration certificate.

2/ C9ient Agreement 5 -he investor should sign the 7lient +greement with

the broker before the broker can place any order on his behalf. -he client

agreement includes provisions specified by !)=I and the derivatives

segment.

,/ UniIue C9ient !denti$ication Num8er 5 +fter signing the client

agreement, the investors gets a uniFue identification number %I&'. -he

%1


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broker would key this identification number in the system at the time of

placing the order on behalf of the investors. -his I& is broker specific i.e. if

the investors chooses to deal with different brokers, he needs to sign the

client agreement with each one of them and resultantly, he would have

different Ids.

5/ i&6 Di&c9o&ure Document& 5+s stipulated in the =yeC(aws provide his

particulars to the investors. -he particulars would include his !)=I

registration number, the name of the employees who would be primarily

responsible for the client5s affairs, the precise nature of his liability towards

the client in respect of the business done on behalf of the investor. -he

broker must also apprise the investor about the risk associated with the

business in derivative trading and the extent of his liability. -his

information forms part of the 4isk &isclosure document, which the broker

issues to the client. -he investor should carefully read the risk disclosure

document and understand the risks involved in the derivatives trading

before committing any position in the market. -he risk disclosure

document has to be sign;ed by the client and a copy of the same is

retained by the broker for his records.

6/ )ree Cop# o$ e9e%ant egu9ation& 5 -he client is also entitled to a freecopy of the extracts or relevant provisions governing the rights and

obligations of clients, relevant manuals, notifications, circulars and any

additions or amendments etc. of the derivatives segment or of any

regulatory authority to the extent it governs the relationship between the

broker and the client.

+/ *9acing order ith the 8ro6er 5 -he investor should place orders only

after understanding the monetary implications in the event of execution of

the trade. +fter the trade is executed, the investor can reFuest for a copy

of the trade confirmation slip generated on the systems on execution of

the trade. -he investor should also obtain from the broker, a contract note

for the trade executed within 9< hours. -he contract note should be time

%order receipt and order execution' and price stamped. )xecution prices,

%2


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brokerage and other charges, if any, should be separately mentioned in

the contract note. If desired, the investors may change an order anytime

before the same is executed on the exchange.

7/ Margining S#&tem in Deri%ati%e& 5 -he aim of margin money is to

minimiGe the risk of default by either counterCparty. -he payment of

margin ensures that the risk is limited to the previous day5s price

movement on each outstanding position. -he different types of margins

are1

. !nitia9 Margin 5 -he basic aim of initial margin is to cover the

largest potential loss in one day. =oth buyer and seller have to

deposited before the opening of the position in the futures

transaction. -his margin is calculated by !0+3 by considering the

worst case scenarion.

% Mar6 to mar6et margin 5 +ll daily losses must be met by

depositing of further collateralCknown as variation margin, which is

reFuired by the close of business, the following day. +ny profits on

the contract are credited to the client5s variation margin account.

8/ !n%e&tor& *rotection )und5 -he derivatives segment has established an

Investors 0rotection und which is independent of the cash segment to

protect the interest of the investors in the derivatives market.

/ Ar8itration 5 In case of any dispute between the members and the clients

arising out of the trading or in relation to tradingNsettlement, the party

thereto shall resolve such complaint, dispute by arbitrations procedure as

defined in the rules and regulations and =yeC(aws of the respective

exchanges.

%3


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EGULATO1 )AMEWOK

-he trading of derivatives is governed by the provisions contained in the !7 %4'

+, the !)=I +ct, the rules and regulations framed there under and the rules and

byeClaws of stockCexchanges.

Securitie& contract& egu9ation Act@ +>3;

!7%4' + aims at preventing undesiarable transactions in securities by regulating

the business of dealing therein and by providing for certain other matters

connected therewith. -his is the principal +ct, which governs the trading of

securities in India. -he term securities has been defined in the !7%4'+. +s per

!ection 9%h', the K!ecurities5 include1

6. !hares, scrips, stock, bonds, debentures, stock or other marketable

securities of a like nature in or of any incorporated company or other body

corporate.

9. &erivative

;. 2nits or any other instrument issued by any collective investment schemeto the investors in such schemes.

. !uch other instruments as may be declared by the 7entral /overnment to

be securities.

?. 4ights or interests in securities

&erivative is defined to includes1

+ security derived from a debt instrument, share, loan whether secured or

unsecured, risk instrument or contract differences or any other form of

security.

+ contract which derives its value from the prices, or index of price, of

underlying securities.

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!ection 6D+ provides that notwithstanding anything contained in any other

law for the time being in force, contracts in derivative shall be legal and

valid if such contracts are1

-raded on a recogniGed stock exchange.

!ettled on the clearing house of the recogniGed stock exchange, in accordance

with the rules and byeClaws of such stock exchanges.

%5


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ESEAC( MET(ODOLOG1

4esearch is a procedure of logical and systematic application of the

fundamentals of science to the general and overall Fuestions of a study and

scientific techniFue by which provide precise tools, specific procedures and

technical, rather than philosophical means for getting and ordering the data prior

to their logical analysis and manipulations.

&ifferent type of research design is available depending upon the

nature of research project, availability of able manpower and circumstances.

-he study about +3+(:!I! O &)4I8+-I8)! +4")- is

exploratory as well as descriptive in nature .&iscussion with experts, internet

surfing, and journals were studied to explore more about the concerned objective

and better understanding of the problem. +fter that Fuestionnaire was prepared

to meet the desired objective

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Source& o$ Data5

-he source of data includes primary and secondary data sources.

*rimar# Source&

0rimary data is data collected for first time specially for the

purpose for which study is being conducted i.e. the problem under study..

Secondar# Source&

-he secondary data is data, which is collected and compiled for the

different purpose, which are used in research for this study. -he secondary data

include material collected from1

3ewspaper

agaGine.

Internet.

Data Co99ection !n&trument&

-he various methods of data gathering involves the use of

appropriate recording forms. -hese are called Ktools5 or Kinstruments of data

collection. &ata was collected through structured Fuestionnaire administered by

sitting with guide and discussing problems

Samp9ing TechniIue

-he small representative selected out of large population is

selected at random is called sample. #ellCselected sample may reflect fairly,

accurately the characteristic of population. -he chief aim of sampling is to make

an inference about unknown parameters from a measurable sample statistics.

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!ampling techniFue used was !nowball sampling was used for the purpose of

data collection as reference was taken form sample to reach other sample.

Samp9e Si:e 5!ample siGe refers to the number of items to be selected from the

universe to constitute a sample. &ue to constraints of cost and time, the sample

siGe selected for the research is 9> investors and ;> brokers

Samp9ing Unit 1 -he sampling unit was the person who had an account and

was investing in stock market and broker who were trading in stock market

.

.

%"


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L!M!TAT!ONS O) T(E STUD1

3o study is complete in itself, however, good it may and every

study has some limitations1

-ime is the main constraint of my study.

+vailability of information was not sufficient because of less awareness

among investors N brokers.

!ample siGe is not enough to have a clear opinion.

8$


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81


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1. TAD!NG *E!OD !N DE!0AT!0ES

B

>

6B

6>

9B

9>

No.o$ 8ro6er&

and in%e&tor&

(ess

than 6

year

6 year 9 years ; years ore

than ;

years

*E!OD

!eries6

I/24)


91/110

2. EASONS BE(!ND !TS ADO*T!ON

purpo&e

hedging

-3K

ri&6

management

-K

&pecu9ation

2?K

9iIuidit#

+-K

4easons behind adoption of derivatives are different by brokers, investors and

dealers e.g. liFuidity, risk management hedging, investor demand %speculation'

etc. Out of ?B brokers, investors dealing in derivatives 6< %9;' adopt it due tocharacteristics of risk management, 6> %9>' due to hedging, 9< %


92/110

;. !n hich &egment #ou ha%e 9arger turno%er4

7apital arket !egment %9B'

O !egment.

)Fual in both above %6>'

7an5t !ay.

&egment ha%ing 9arge turno%er

6@


93/110

E

B

>

6B

6>

9B

9>

;B

No. o$ 8ro6er&

and in%e&tor&

9 (+7! 9 (+7! C

> (+7!

> (+7! C

6B (+7!

+ny Other

Amount

Amout in%e&ted in deri%ati%e&

!eries6

I/24) (acs and 6> %9>' invested

between > lacs to 6B lacs, and remaining have invested in other amounts.

4easons behind this is that those are investing from many years are taking the

risk of investing huge amount.

85


94/110

8#


95/110

3 TADED *E!OD !N DE!0AT!0ES

B

>

6B

6>

9B

9>

No. o$ 8ro6er&

and in%e&tor&

#eekly onthly ore

than 6

month

ore

than 9

months

Traded *eriod

Traded period $or Deri%ati%e !n%e&tment

!eries6

I/24)

6; %99 investors and brokers are investing weekly in derivatives, 9; %;D'

investing monthly, 6E %;9' investing after more than 6 month and only > %D'

investing too late after 9 months.

8%


96/110

; !M*ACT ON CUSTOME BASE

B

>

6B

6>

9B

9>

No. o$ 8ro6er&

Increase &ecrease 4emain

same!mpact

!eries6

I/24) brokers , ; %>' of brokers said that it does not increase their customer

base because introducing small savings as investment, but derivatives increase

customer base of 9< %@B' which is more than half. It is basically beneficial for

those who are investing from last 9 or more years. In investment sector need

minimum of 4s. 9,BB,BBB as investment so it is basically for corporate and

investment sector only not for small investors. D %9>' said their customer base

88


97/110

remains same because they have started just now for investing in derivatives in

future it will increase their customer base.

@. ELAT!ONS(!* W!T( CAS( MAKET

B

>

6B

6>

9B

9>

;B

No o$ 8ro6er&

and in%e&tor&

0ositive 3egative 7anPt !ay

e9ation

!eries6

I/24)


98/110

brokers and with the support of their close relatives those are investing for last

many years.

D. DE!0AT!0ES AND !SK

)very broker says that there is a risk factor %upto some extent in

derivatives also.

S(OTCOM!NGS !N !ND!AN DE!0AT!0E S1STEM

9@;6

9

B

>

6B

6>

9B

9>

;B

;>

No. o$ 8ro6er&

and in%e&tor&

domestic

technical

expertise

lack of

awareness

in investors

market

failure

&hort coming&

Short coming in indian deri%ati%e &tem

!eries;

I/24)


99/110

9@ %' brokers, investors respond towards shortage of domestic

technical expertise. ;6 %>9' feel lack of awareness in investors about

derivatives and remaining 9 %;' market failure.

E.. Which too9 o$ deri%ati%e according to #ou i& 8etter4

a Index future

8 !tock future

9 Index option

d !tock option

;B

>B

6>

9>

@

69

D6;

Index .uture

!tock .uture

Index Option

!tock Option

I/24)


100/110

I got mix view on this Fuestion. =ut most of the informants i.e. >B

are in the favour of index future and rests are having some different different

attraction .

ESULTS )!ND!NGS

=rokers not dealing in derivatives at present are also not going to

adopt it in futures.

$edging and 4isk anagement is the most important feature of

derivativesW

It is not for small investors.

It ahs increased brokers turnovers as well as helpful in aggregate

investment.

=rokers haven5t adeFuate knowledge about options, so most of them

are dealing in futures only.

-here is a risk factor in derivative also.

ost of the investors are not investing in derivatives.

0eople are not aware of derivatives, even people who have invested

in it, has not adeFuate knowledge about it. -hese people are

interested to take it in their future portfolio also. -hey consider it as atool of risk management.

-hey normally invest in future contracts.

-hey are investing in future contract, because futures have up to

some extent Fuality at =adla.

"2


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EASONS BE(!ND LESS DE0ELO*MENT O) ) O SEGMENT

.

!ecurities and contract5s regulations act has recogniGed index as a

security very later i.e. in 3ov. 9BB6. It will take time to take position

in derivative or capital market.

-he (imited mutual faith in the parties involved.

It hasn5t a legaliGed market.

7ommodity O arket has not yet been come to India. -his will

make easy to understand and take simple investor under investor

base of derivative trading.

arket failures

!candals.

InadeFuate infrastructures.

!hortage to domestic technical expertise, in India even most of the

people are not aware of concept derivatives.

(arge lot siGe, so small investors are not able to come under

derivative segment.

-here are less scripts under derivatives segment.

$igh margin as compared to =adla.

In India there cannot be a long term trading in O, it is only for 6 to

9 or maximum for ; months.

"3


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"4


103/110

SUGGEST!ONS

6. LOT S!E5

(ot siGe should be reduced so that the major segment of an Indian

society i.e. small saving class can come under O trading. -here is strong

need for revision of lot siGes as the lot siGes of some of the individual scrips that

were worth of 4s. 9BBBBB in starting, now same lot siGe amount to a much larger

value.

9. SUB BOKES

!ubCbroker concept should be added and the actual brokers should

give all rights of brokers in O segment also.

;. SC!*S5

ore scrips of reputed companies etc. should be introduced in

O !egment.


104/110

>. TA!N!NG CLASSES O SEM!NAS

-here should be proper classes on derivatives for investors,

traders, brokers, students and employees of stock exchanges. =ecause lack of

knowledge is the main reason of its less development. -he first step towards it

should be seminars provided to brokers and (!) employees and secondly

seminar to students.

CONCLUS!ON

On the basis of overall study on derivatives it was found that

derivative products initially emerged as hedging devices against fluctuation and

commodity prices and commodity linked derivatives remained the soul form of

such products. -he financial derivatives came in spotlight in 6E@9 due o growing

instability in financial market.I was really surprised to see during my study that a layman or a

simple investor does not even know how to hedge and how to reduce risk on his

portfolios. +ll these activities are generally performed by big individual investors,

mutual funds etc.

3o doubt that derivative growth towards the progress of economy is

positive. =ut the problem confronting the derivative market segment are giving it

a low customer base. -he main problem that it confronts are unawareness and

bit lot siGes etc. these problems could be overcome easily by revising lot siGes

and also there should be seminar and general discussions on derivatives at

varied places.

"#


105/110

JWe %ie them a& time 8om8& 8oth $or the partie& that dea9 in them

and the economic &tem. !n our %ie deri%ati%e& are $inancia9

eapon& o$ ma&& de&truction WMD@ carr#ing danger& that@ hi9e

no 9atent@ are potentia99# 9etha9.H

Warren Bu$$et.

"%


106/110

B!BL!OGA*(1

BOOKS

37 on derivatives core modules by 3!)I(.

$.!.!I&$2 Indian 7apital arket 6EE?, 6st )dition

-he Indian 7ommodityC&erivatives arket in Operations.

Indian !ecurities arket L + 4eview.

MAGA!NES NEWS*A*E5

3!) 3ews.

)7O3OI7! -I)

!NTENET S!TES5

www.nseindia.com C historical data L business growth.

www.bseindia.com

www.derivativesindia.com

&erivatives in India1 reFuently +sked Huestions,

http1NNwww.mayin.orgNajayshahN0&&O7!N!hah-homas9BBBSdfF.

pdf

"8


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108/110

c' 9 :ear d' ; year e' ore than ; year.

9' #hat is your purpose for trading in derivativesW

a' $edging b' !peculation

c' 4isk anagement d' (iFuidity

;' . In which segment you have larger turnover W %=4O")4! O3(:'

a ' 7apital arket !egment

b' O !egment.

*) )Fual in both above

+) 7an5t !ay.

, BB,BBB to 4s. 6B, BB,BBB

d' +ny other amountSSSSSSSSSSSSSS

>' $ow often do you tradeW

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a' #eekly b' onthly c' ore than 6 month

d' ore than 9 month

?' #hat is your customer base with introduction of derivativesW %O4 =4O")4!'

a' Increase b' &ecrease c' 4emains same.

@' #hat according to you is relationship between derivative market and

cash marketW

a' 0ositive b' 3egative c' 7an5t say.

D' #hat shortcomings do you feel in Indian derivative marketW

a' (ack of awareness among the investors about derivatives.

b' !hortage of domestic technical expertise.

c' If any other SSSSSSSSSSSSSSSSSSSSSSSSSSS

E' . #hich tool of derivative according to you is betterW

a' Index future

b' !tock future

c' Index option

1$1


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d' !tock option

6B' #hat suggestions do you want to make with regard to investors

education in derivatives market in IndiaW

SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS

SSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSSS

.

52232983 Ludhiana Stock Excahnge

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