Derivatives and Its Strategies

8/9/2019 Derivatives and Its Strategies

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INTRODUCTION

On the eve of the millennium India is preparing itself to keep pace with the developed

countries in all aspects of the rapidly integrating global economy.

With the expansion of innovative practices in information technology, especially in the trade

and tele-communication systems. There is a growing pressure in the stock exchanges to get

ready to face the new unforeseen challenges.

This studyanalysis the various strategies used in Derivative trading and the usage of these

strategies by Derivative traders with respect to investors of Religare Securities Limited inBangalore.

This study mainly focuses on Derivatives & its strategies used in different conditions and the

purpose of the strategy that is whether it aimed to reduce the market risk of the position or

with the motive to speculate. The study analyses the investment allocation of the investors

into different areas like mutual fund, insurance, derivative, etc.

It also studies the decision making process in investment. It studies the various information

used by investors to make the decision. Whether the investors are going with high technical

analysis or those going with the market information that is the information collected from

family, friends, brokers, market experts etc., or at the end going with the individual analysis.

Financial markets are, by nature, extremely volatile and hence the risk factor is an important

concern for financial agents. To reduce this risk, the concept of derivatives comes into the

picture.

Derivatives are products whose values are derived from one or more basic variables

called bases. These bases can be underlying assets (for example forex, equity, etc), bases or

reference rates. For example, wheat farmers may wish to sell their harvest at a future date to

eliminate the risk of a change in prices by that date. The transaction in this case would be the

derivative, while the spot price of wheat would be the underlying asset.

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The need for a derivatives market

The derivatives market performs a number of economic functions:

They help in transferring risks from risk a verse people to risk oriented people.

They help in the discovery of future as well as current prices.

They catalyze entrepreneurial activity.

They increase the volume traded in markets because of participation of risk adverse

people in greater numbers.

They increase savings and investment in the long run.

The participants in a derivatives market:

Participants

Hedgers Speculators Arbitrageurs

Hedgers use futures or options markets to reduce or eliminate the risk associated with priceof an asset.

Speculators use futures and options contracts to get extra leverage in betting on future

movements in the price of an asset. They can increase both the potential gains and potential

losses by usage of derivatives in a speculative venture.

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Arbitrageurs are in business to take advantage of a discrepancy between prices in two

different markets. If, for example, they see the futures price of an asset getting out of line with

the cash price, they will take offsetting positions in the two markets to lock in a profit.

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

Options: Options are of two types - calls and puts. Calls give the buyer the right but not the

obligation to buy a given quantity of the underlying asset, at a given price on or before a given

future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the

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

Warrants: 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.

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are

options having a maturity of up to three years.

Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is

usually a moving average or a basket of assets. Equity index options are a form of basket

options.

Swaps: Swaps are private agreements between two parties to exchange cash flows in the

future according to a prearranged formula. They can be regarded as portfolios of forward

The two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash flows between the

parties in the same currency.

Currency swaps: These entail swapping both principal and interest between the parties,

with the cash flows in one direction being in a different currency than those in the opposite

direction.

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INTRODUCTION TO FUTURES AND OPTIONS








Futures OptionsExchange traded, with notation Same as futures.

Exchange defines the product Same as futures.

Price is zero, strike price moves Strike price is fixed, price moves.

Price is zero Price is always positive.

Linear payoff Non-Linear payoff

Both long and short at risk Only short at risk.

Strategies of futures

We look here at some strategies of futures contracts. We refer to single stock futures.However since the index is nothing but a security whose price or level is a weighted average

of securities constituting an index, all strategies that can be implemented using stock futures

can also be implemented using index futures.

Hedging: Long security, sell futures

Speculation: Bullish security, buy futures

Speculation: Bearish security, sell futures

Arbitrage: Overpriced futures: buy spot, sell futures

Arbitrage: Under-priced futures: buy futures, sell spot

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Hedging: Long security, sell futures

Futures can be used as an effective riskmanagement tool. Take the case of an investor who

holds the shares of a company and gets uncomfortable with market movements in the shortrun. He sees the value of his security falling from Rs.450 to Rs.390. In the absence of stock

futures, he would either suffer the discomfort of a price fall or sell the security in anticipation

of a market upheaval. With security futures he can minimize his price risk. All he need do is

enter into an offsetting stock futures position, in this case, take on a short futures position.

Assume that the spot price of the security he holds is Rs.390. Twomonth futures cost him

Rs.402. For this he pays an initial margin. Now if the price of the security falls any further, he

will suffer losses on the security he holds. However, the losses he suffers on the security will

be offset by the profits he makes on his short futures position. Take for instance that the price

of his security falls to Rs.350. The fall in the price of the security will result in a fall in the

price of futures. Futures will now trade at a price lower than the price at which he entered into

a short futures position. Hence his short futures position will start making profits. The loss of

Rs.40 incurred on the security he holds, will be made up by the profits made on his short

futures position.

Index futures in particular can be very effectively used to get rid of the market risk of a

portfolio. Every portfolio contains a hidden index exposure or a market exposure. This

statement is true for all portfolios, whether a portfolio is composed of index securities or not.

In the case of portfolios, most of the portfolio risk is accounted for by index fluctuations

(unlike individual securities, where only 3060% of the securities risk is accounted for by

index fluctuations). Hence a position LONG PORTFOLIO + SHORT NIFTY can often

become onetenth as risky as the LONG PORTFOLIO position!

Suppose we have a portfolio of Rs. I million which has a beta of 1.25. Then a complete hedge

is obtained by selling Rs. 1.25 million of Nifty futures.

Warning: Hedging does not always make money. The best that can be achieved using hedging

is the removal of unwanted exposure, i.e. unnecessary risk. The hedged position will make

less profit than the unhedged position, half the time. One should not enter into a hedging

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strategy hoping to make excess profits for sure; all that can come out of hedging is reduced

risk.

Speculation: Bullish security, buy futures

Take the case of a speculator who has a view on the direction of the market. He would like to

trade based on this view. He believes that a particular security that trades at Rs. 1000 is

undervalued and expects its price to go up in the next twothree months. How can he trade

based on this belief? In the absence of a deferral product, he would have to buy the security

and hold on to it. Assume he buys 100 shares which cost him one lakh rupees. His hunch

proves correct and two months later the security closes at Rs.1010. He makes a profit of

Rs.l000 on an investment of Rs. 1, 00,000 for a period of two months. This works out to an

annual return of 6 percent.

Today a speculator can take exactly the same position on the security by using futures

contracts. Let us see how this works. The security trades at Rs. 1000 and the two-month

futures trades at 1006. Just for the sake of comparison, assume that the minimum contract

value is 1, 00,000. He buys 100 security futures for which he pays a margin of Rs.20, 000.

Two months later the security closes at 1010. On the day of expiration, the futures price

converges to the spot price and he makes a profit of Rs.400 on an investment of Rs.20, 000.

This works out to an annual return of 12 percent. Because of the leverage they provide,

security futures form an attractive option for speculators.

Speculation: Bearish security, sell futures

Stock futures can be used by a speculator who believes that a particular security is over

valued and is likely to see a fall in price. How can he trade based on his opinion? In theabsence of a deferral product, there wasnt much he could do to profit from his opinion.

Today all he needs to do is sell stock futures.

Let us understand how this works. Simple arbitrage ensures that futures on an individual

securities move correspondingly with the underlying security, as long as there is sufficient

liquidity in the market for the security. If the security price rises, so will the futures price. If

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the security price falls, so will the futures price. Now take the case of the trader who expects

to see a fall in the price of ABC Ltd. He sells one twomonth contract of futures on ABC at

Rs.240 (each contact for 100 underlying shares). He pays a small margin on the same. Two

months later, when the futures contract expires, ABC closes at 220. On the day of expiration,

the spot and the futures price converges. He has made a clean profit of Rs.20 per share. For

the one contract that he bought, this works out to be Rs.2000.

Arbitrage: Overpriced futures: buy spot, sell futures

As we discussed earlier, the cost-of-carry ensures that the futures price stay in tune with the

spot price. Whenever the futures price deviates substantially from its fair value, arbitrage

opportunities arise.

If you notice that futures on a security that you have been observing seem overpriced, how

can you cash in on this opportunity to earn risk-less profits Say for instance, ABC Ltd. trades

at Rs. 1000. Onemonth ABC futures trade at Rs. 1025 and seem overpriced. As an

arbitrageur, you can make risk-less profit by entering into the following set of transactions.

1. On day one, borrow funds; buy the security on the cash/spot market at 1000.

2. Simultaneously, sell the futures on the security at 1025.

3. Take delivery of the security purchased and hold the security for a month.

4. On the futures expiration date, the spot and the futures price converge. Now unwind the

position.

5. Say the security closes at Rs.1015. Sell the security.

6. Futures position expires with profit of Rs.10.

7. The result is a risk less profit of Rs. 15 on the spot position and Rs. 10 on the futures

position.

8. Return the borrowed fluids.

When does it make sense to enter into this arbitrage? If your cost of borrowing funds to buy

the security is less than the arbitrage profit possible, it makes sense for you to arbitrage. These

are termed as cashandcarry arbitrage. Remember however, that exploiting an arbitrage

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opportunity involves trading in the spot and futures market. In the real world, one has to build

in the transactions costs into the arbitrage strategy.

Arbitrage: Under-priced futures: buy futures, sell spot

Whenever the futures price deviates substantially from its fair value, arbitrage opportunities

arise. It could be the case that you notice the futures on a security you hold seem under-

priced. How can you cash in on this opportunity to earn risk-less profits? Say for instance,

ABC Ltd. trades at Rs. 1000. Onemonth ABC futures trade at Rs. 965 and seem under-

priced. As an arbitrageur, you can make risk-less profit by entering into the following set of

transactions.

1. On day one, sell the security in the cash/spot market at 1000.

2. Make delivery of the security.

3. Simultaneously, buy the futures on the security at 965.

4. On the futures expiration date, the spot and the futures price converge. Now unwind the

position.

5. Say the security closes at Rs.975. Buy back the security.

6. The futures position expires with a profit of Rs. 10.

7. The result is a risk-less profit of Rs.25 on the spot position and Rs. 10 on the futures

position.

If the returns you get by investing in risk-less instruments are more than the return from the

arbitrage trades, it makes sense for you to arbitrage. These are termed as reversecashand

carry arbitrage. It is this arbitrage activity that ensures that the spot and futures prices stay

in line with the costofcarry. As we can see, exploiting arbitrage involves trading on the

spot market. As more and more players in the market develop the knowledge and skills to do

cashandcarry and reverse cashandcarry, we will see increased volumes and lower

spreads in both the cash as well as the derivatives market.

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Strategies of options

We look here at some Strategies of options contracts. We refer to single stock options here.

However since the index is nothing but a security whose price or level is a weighted average

of securities constituting the index, all strategies that can be implemented using stock futurescan also be implemented using index options.

Hedging: Have underlying buy puts

Speculation: Bullish security, buy calls or sell puts

Speculation: Bearish security, sell calls or buy puts

Hedging: Have underlying buy puts

Owners of stocks or equity portfolios often experience discomfort about the overall stock

market movement. As an owner of stocks or an equity portfolio, sometimes you may have a

view that stock prices will fall in the near future. At other times you may see that the market

is in for a few days or weeks of massive volatility, and you do not have an appetite for this

kind of volatility. The union budget is a common and reliable source of such volatility: market

volatility is always enhanced for one week before and two weeks after a budget. Many

investors simply do not want the fluctuations of these three weeks. One way to protect your

portfolio from potential downside due to a market drop is to buy insurance using put options.

Index and stock options are a cheap and easily implemental way of seeking this insurance.

The idea is simple. To protect the value of your portfolio from falling below a particular level,

buy the right number of put options with the right strike price. If you are only concerned

about the value of a particular stock that you hold, buy put options on that stock. If you are

concerned about the overall portfolio, buy put options on the index. When the stock price falls

your stock will lose value and the put options bought by you will gain, effectively ensuring

that the total value of your stock plus put does not fall below a particular level. This level

depends on the strike price of the stock options chosen by you. Similarly when the index falls,

your portfolio will lose value and the put options bought by you will gain, effectively

ensuring that the value of your portfolio does not fall below a particular level. This level

depends on the strike price of the index options chosen by you.

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Portfolio insurance using put options is of particular interest to mutual funds who already own

well-diversified portfolios. By buying puts, the fund can limit its downside in case of a market

fall.

Speculation: Bullish security, buy calls or sell puts

There are times when investors believe that security prices are going to rise. For instance,

after a good budget. Or good corporate results, or the onset of a stable government. How does

one implement a trading strategy to benefit from an upward movement in the underlying

security? Using options there are two ways one can do this:

I. Buy call options; or

2. Sell put options

We have already seen the payoff of a call option. The downside to the buyer of the call option

is limited to the option premium he pays for buying the option. His upside however is

potentially unlimited. Suppose you have a hunch that the price of a particular security is going

to rise in a months time. Your hunch proves correct and the price does indeed rise, it is this

upside that you cash in on. However, if your hunch proves to be wrong and the security price

plunges down, what you lose is only the option premium.

Having decided to buy a call, which one should you buy? Given that there is a number of one

month calls trading, each with a different strike price, the obvious question is: which strike

should you choose? Let us take a look at call options with different strike prices. Assume that

the current price level is 1250, risk-free rate is 12% per year and volatility of the underlying

security is 30%. The following options are available:

1. A one month call with a strike of 1200.





Which of these options you choose largely depends on how strongly you feel about the

likelihood of the upward movement in the price, and how much you are willing to lose should

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this upward movement not come about. There are five onemonth calls and five onemonth

puts trading in the market. The call with a strike of 1200 is deep inthemoney and hence

trades at a higher premium. The call with a strike of 1275 is outofthemoney and trades

at a low premium. The call with a strike of 1300 is deepoutofmoney. Its execution

depends on the unlikely event that the underlying will rise by more than 50 points on the

expiration date. Hence buying this call is basically like buying a lottery. There is a small

probability that it may be inthemoney by expiration, in which case the buyer will make

profits. In the more likely event of the call expiring outofthemoney, the buyer simply

loses the small premium amount of Rs.27.50.

As a person who wants to speculate on the hunch that prices may rise, you can also do so by

selling or writing puts. As the writer of puts, you face a limited upside and an unlimited

downside. If prices do rise, the buyer of the put will let the option expire and you will earn the

premium. If however your hunch about an upward movement proves to be wrong and prices

actually fall, then your losses directly increase with the falling price level. If for instance the

price of the underlying falls to 1230 and youve sold a put with an exercise of 1300, the buyer

of the put will exercise the option and youll end up losing Rs.70. Taking into account the

premium earned by you when you sold the put, the net loss on the trade is Rs.5.20.

Having decided to write a put, which one should you write? Given that there are a number of

one-month puts trading, each with a different strike price, the obvious question is: which

strike should you choose? This largely depends on how strongly you feel about the likelihood

of the upward movement in the prices of the underlying. If you write an atthemoney put.

The option premium earned by you will be higher than if you write an outofthemoney

put. However the chances of an atthemoney put being exercised on you are higher as

well. In the example in Figure 4.10, at a price level of 1250, one option is inthemoney

and one is outofthemoney. As expected, the inthemoney option fetches the

highest premium of Rs.64.80 whereas the outofthemoney option has the lowest

premium of Rs. 18.15.

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Speculation: Bearish security, sell calls or buy puts

Do you sometimes think that the market is going to drop? That you could make a profit by

adopting a position on the market? Due to poor corporate results, or the instability of the

government, many people feel that the stocks prices would go down. How does one

implement a trading strategy to benefit from a downward movement in the market? Today,

using options, you have two choices:

I. Sell call options; or

2. Buy put options

We have already seen the payoff of a call option. The upside to the writer of the call option is

limited to the option premium he receives upright for writing the option. His downside

however is potentially unlimited. Suppose you have a hunch that the price of a particularsecurity is going to fall in a months time. Your hunch proves correct and it does indeed fall,

it is thisdownside that you cash in on. When the price falls, the buyer of the call lets the call

expire and you get to keep the premium. However, if your hunch proves to be wrong and the

market soars up instead, what you lose is directly proportional to the rise in the price of the

security.

Having decided to write a call, which one should you write? Given that there are a number of

one-month calls trading, each with a different strike price, the obvious question is: which

strike should you choose? Let us take a look at call options with different strike prices.

Assume that the current stock price is 1250, risk-free rate is 12% per year and stock volatility

is 30%. You could write the following options:

I. A one month call with a strike of 1200.





Which of these options you write largely depends on how strongly you feel about the

likelihood of the downward movement of prices and how much you are willing to lose should

this downward movement not come about. There are five one-month calls and five one-month

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puts trading in the market. The call with a strike of 1200 is deep in-the-money and hence

trades at a higher premium. The call with a strike of 1275 is out-of-the-money and trades at a

low premium. The call with a strike of 1300 is deep-out-of-money. Its execution depends on

the unlikely event that the stock will rise by more than 50 points on the expiration date. Hence

writing this call is a fairly safe bet. There is a small probability that it may be in-the-money by

expiration in which case the buyer exercises and the writer suffers losses to the extent that the

price is above 1300. In the more likely event of the call expiring out-of-the-money, the writer

earns the premium amount of Rs.27.50.

As a person who wants to speculate on the hunch that the market may fall, you can also buy

puts. As the buyer of puts you face an unlimited upside but a limited downside. If the price

does fall, you profit to the extent the price falls below the strike of the put purchased by you.

If however your hunch about a downward movement in the market proves to be wrong and

the price actually rises, all you lose is the option premium. If for instance the security price

rises to 1300 and youve bought a put with an exercise of 1250, you simply let the put expire.

If however the price does fall to say 1225 on expiration date, you make a neat profit of Rs.25.

Having decided to buy a put, which one should you buy? Given that there are a number of

one-month puts trading, each with a different strike price, the obvious question is: which

strike should you choose? This largely depends on how strongly you feel about the likelihood

of the downward movement in the market. If you buy an at-the-money put, the option

premium paid by you will by higher than if you buy an out-of-the-money put. However the

chances of an at-the-money put expiring in-the-money are higher as well.

Clearing and settlement

National Securities Clearing Corporation Limited (NSCCL) undertakes clearing and

settlement of all trades executed on the futures and options (F&O) segment of the NSE. It also

acts as legal counterparty to all trades on the F&O segment and guarantees their financial

settlement.

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Clearing entities

Clearing and settlement activities in the F&O segment are undertaken by NSCCL with the

help of the following entities:

Clearing members

In the F&O segment, some members, called self clearing members, clear and settle their

trades executed by them only either on their own account or on account of their clients. Some

others called trading membercumclearing member, clear and settle their own trades as

well as trades of other trading members (TMs). Besides, there is a special category of

members, called professional clearing members (PCM) who clear and settle trades executed

by TMs. The members clearing their own trades and trades of others, and the PCMs arerequired to bring in additional security deposits in respect of every TM whose trades they

undertake to clear and settle.

Clearing banks

Funds settlement takes place through clearing banks. For the purpose of settlement all

clearing members are required to open a separate bank account with NSCCL designated

clearing bank for F&O segment. The Clearing and Settlement process comprises of the

following three main activities:

I. Clearing

2. Settlement

Proprietary position of trading member Madanbhai on Day 1

Trading member Madanbbai trades in the futures and options segment for himself and two of

his clients. The table shows his proprietary position.

Note: A buy position 200@ 1000 means 200 units bought at the rate of Rs. 1000.

Trading member Madanbhai

Buy Sell BUY SELL

Proprietary position 200@ 1000 400@ 1010

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Client position of trading member Madanbhai on Day 1

Trading member Madanbhai trades in the futures and options segment for himself and two of

his clients. The table shows his client position.

Trading member Madanbhai

Buy Open Sell Close Sell Open Buy Close

Client position

BUY OPEN SELL CLOSE

Client A 400@1109 200@1000

SELL OPEN BUY CLOSE

Client B 600@1100 200@1099

3. Risk Management

Settlement mechanism

All futures and options contracts are cash settled, i.e. through exchange of cash. The

underlying for index futures/options of the Nifty index cannot be delivered. These contracts,

therefore, have to be settled in cash. Futures and options on individual securities can be

delivered as in the spot market. However, it has been currently mandated that stock options

and futures would also be cash settled. The settlement amount for a CM is netted across all

their TMs/clients, with respect to their obligations on MTM, premium and exercise

settlement.

Settlement of futures contracts

Futures contracts have two types of settlements, the MTM settlement which happens on a

continuous basis at the end of each day, and the final settlement which happens on the last

trading day of the futures contract.

MTM settlement:

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All futures contracts for each member are marked-to-market (MTM) to the daily settlement

price of the relevant futures contract at the end of each day. The profits/losses are computed

as the difference between:

1. The trade price and the days settlement price for contracts executed during the day but not

squared up.

2. The previous days settlement price and the current days settlement price for brought

forward contracts.

3. The buy price and the sell price for contracts executed during the day and squared up.

Final settlement for futures

On the expiry day of the futures contracts, after the close of trading hours, NSCCL marks all

positions of a CM to the final settlement price and the resulting profit/loss is settled in cash.

Final settlement loss/profit amount is debited/ credited to the relevant CMs clearing hank

account on the day following expiry day of the contract.

Settlement prices for futures

Daily settlement price on a trading day is the closing price of the respective futures contracts

on such day. The closing price for a futures contract is currently calculated as the last half an

hour weighted average price of the contract in the F&0 Segment of NSE. Final settlement

price is the closing price of the relevant underlying index/security in the capital market

segment of NSE, on the last trading day of the contract. The closing price of the underlying

Index/security is currently its last half an hour weighted average value in the capital market

segment of NSE.

Settlement of options contracts

Options contracts have three types of settlements, daily premium settlement, exercise

settlement, interim exercise settlement in the case of option contracts on securities and final

settlement.

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Daily premium settlement

Buyer of an option is obligated to pay the premium towards the options purchased by him.

Similarly, the seller of an option is entitled to receive the premium for the option sold by him.

The premium payable amount and the premium receivable amount are netted to compute the

net Premium payable or receivable amount for each client for each option contract.

Exercise settlement

Although most option buyers and sellers close out their options positions by an offsetting

closing transaction, an under-standing of exercise can help an option buyer determine whether

exercise might be more advantageous than an offsetting sale of the option. There is always a

possibility of the option seller being assigned an exercise. Once an exercise of an option has

been assigned to an option seller, the option seller is bound to fulfill his obligation (meaning,

pay the cash settlement amount in the case of a cash-settled option) even though he may not

yet have been notified of the assignment.

Interim exercise settlement

Interim exercise settlement takes place only for option contracts on securities. An investor can

exercise his in-the-money options at any time during trading hours, through his trading

member. Interim exercise settlement is effected for such options at the close of the trading

hours, on the day of exercise. Valid exercised option contracts are assigned to short positions

in the option contract with the same series (i.e. having the same underlying, same expiry date

and same strike price), on a random basis, at the client level. The CM who has exercised the

option receives the exercise settlement value per unit of the option from the CM who has been

assigned the option contract.

Final exercise settlement

Final exercise settlement is effected for all open long inthemoney strike price options

existing at the close of trading hours, on the expiration day of an option contract. All such

long positions are exercised and automatically assigned to short positions in option contracts

with the same series, on a random basis. The investor who has long inthemoney options

on the expiry date will receive the exercise settlement value per unit of the option from the

investor who has been assigned the option contract.

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Exercise process

The period during which an option is exercisable depends on the style of the option. On NSE,

index options are European style, i.e. options are only subject to automatic exercise on theexpiration day, if they are inthemoney. As compared to this, options on securities are

American style. In such cases, the exercise is automatic on the expiration day, and voluntary

prior to the expiration day of the option contract, provided they are inthemoney.

Automatic exercise means that all inthemoney options would be exercised by NSCCL on

the expiration day of the contract. The buyer of such options need not give an exercise notice

in such cases. Voluntary exercise means that the buyer of an inthemoney option can

direct his TM/CM to give exercise instructions to NSCCL. In order to ensure that an option is

exercised on a particular day, the buyer must direct his TM to exercise before the cut-off time

for accepting exercise instructions for that day. Usually, the exercise orders will be accepted

by the system till the close of trading hours. Different TMs may have different cutoff times

for accepting exercise instructions from customers, which may vary for different options. An

option, which expires unexercised, becomes worthless. Some TMs may accept standing

instructions to exercise, or have procedures for the exercise of every option, which is inthe

money at expiration. Once an exercise instruction is given by a CM to NSCCL, it cannot

ordinarily be revoked. Exercise notices given by a buyer at anytime on a day are processed by

NSCCL after the close of trading hours on that day. All exercise notices received by NSCCL

from the NEAT F&O system are processed to determine their validity. Some basic validation

checks are carried out to check the open buy position of the exercising client/TM and if option

contract is inthemoney. Once exercised contracts are found valid, they are assigned.

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Assignment process

The exercise notices are assigned in standardized market lots to short positions in the option

contract with the same series (i.e. same underlying, expiry date and strike price) at the clientlevel. Assignment to the short positions is done on a random basis. NSCCL determines short

positions, which are eligible to be assigned and then allocates the exercised positions to any

one or more short positions. Assignments are made at the end of the trading day on which

exercise instruction is received by NSCCL and notified to the members on the same day. It is

possible that an option seller may not receive notification from its TM that an exercise has

been assigned to him until the next day following the date of the assignment to the CM by

NSCCL.

Exercise settlement computation

In case of index option contracts, all open long positions at inthemoney strike prices are

automatically exercised on the expiration day and assigned to short positions in option

contracts with the same series on a random basis. For options on securities, where exercise

settlement may be interim or final, interim exercise for an open long inthemoney option

position can be effected on any day till the expiry of the contract. Final exercise is

automatically effected by NSCCL for all open long inthemoney positions in the expiring

month option contract, on the expiry day of the option contract. The exercise settlement price

is the closing price of the underlying (index or security) on the exercise day (for interim

exercise) or the expiry day of the relevant option contract (final exercise). The exercise

settlement value is the difference between the strike price and the final settlement price of the

relevant option contract. For call options, the exercise settlement value receivable by a buyer

is the difference between the final settlement price and the strike price for each unit of the

underlying conveyed by the option contract, while for put options it is difference between the

strike price and the final settlement price for each unit of the underlying conveyed by the

option contract. Settlement of exercises of options on securities is currently by payment in

cash and not by delivery of securities. It takes place for in-the-money option contracts.

The exercise settlement value for each unit of the exercised contract is computed as follows:

Call options closing price of the security on the day of exercise Strike price

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Put options Strike price Closing price of the security on the day of exercise

For final exercise the closing price of the underlying security is taken on the expiration day

the exercise settlement by NSCCL would ordinarily take place on 3rd day following the day

of exercise. Members may ask for clients who have been assigned to pay the exercise

settlement value earlier.

Special facility for settlement of institutional deals

NSCCL provides a special facility to Institutions/Foreign Institutional Investors (FIIs)/Mutual

Funds etc. to execute trades through any TM, which may be cleared and settled by their own

CM. Such entities are called custodial participants (CPs). To avail of this facility, a CP is

required to register with NSCCL. Through his CM. A unique CP code is allotted to the CP byNSCCL. All trades executed by a CP through any TM are required to have the CP code in the

relevant field on the trading system at the time of order entry. Such trades executed on behalf

of a CP are confirmed by their

Own CM (and not the CM of the TM through whom the order is entered), within the time

specified by NSE on the trade day though the on-line confirmation facility. Till such time the

trade is confirmed by CM of concerned CP, the same is considered as a trade of the TM and

the responsibility of settlement of such trade vests with CM of the TM. Once confirmed by

CM of concerned CP, such CM is responsible for clearing and settlement of deals of such

custodial clients. FIIs have been permitted to trade in all the exchange traded derivative

contracts subject to compliance of the position limits prescribed for them and their sub-

accounts, and compliance with the prescribed procedure for settlement and reporting. A FTI/a

sub-account of the FIT, as the case may be, intending to trade in the F&O segment of the

exchange, is required to obtain a unique Custodial Participant (CP) code allotted from the

NSCCL. FIIs/subaccounts of FIIs which have been allotted a unique CP code by NSCCL

are only permitted to trade on the F&O segment. The FII/subaccount of FTI ensures that all

orders placed by them on the Exchange carry the relevant CP code allotted by NSCCL

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Risk management

NSCCL has developed a comprehensive risk containment mechanism for the F&O segment.

The salient features of risk containment mechanism on the F&O segment are:

1. The financial soundness of the members is the key to risk management. Therefore, the

requirements for membership in terms of capital adequacy (net worth, security deposits) are

quite stringent.

2. NSCCL charges an upfront initial margin for all the open positions of a CM. It specifies the

initial margin requirements for each futures/options contract on a daily basis. It also follows

value-at-risk (VAR) based margining through SPAN. The CM in turn collects the initial

margin from the TMs and their respective clients.

3. The open positions of the members are marked to market based on contract settlement price

for each contract. The difference is settled in cash on a T+l basis.

4. NSCCLs on-line position monitoring system monitors a CMs open positions on a real-

time basis. Limits are set for each CM based on his capital deposits. The on-line position

monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL.

NSCCL monitors the CMs for MTM value violation, while TMs arc monitored for contract-

wise position limit violation.

5. CMs arc provided a trading terminal for the purpose of monitoring the open positions of all

the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing

and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set

up by a CM and whenever a TM exceed the limits, it stops that particular TM from further

trading.

6. A member is alerted of his position to enable him to adjust his exposure or bring in

additional capital. Position violations result in withdrawal of trading facility for all TMs of aCM in case of a violation by the CM.

7. A separate settlement guarantee fund for this segment has been created out of the capital of

members.

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The most critical component of risk containment mechanism for F&O segment is the

margining system and on-line position monitoring. The actual position monitoring and

margining is carried out online through Parallel Risk Management System (PRISM).

PRTSM uses SPAN(r) (Standard Portfolio Analysis of Risk) system for the purpose of

computation of on-line margins, based on the parameters defined by SEBI.

NSCCLSPAN

The objective of NSCCLSPAN is to identify overall risk in a portfolio of all futures and

options contracts for each member. The system treats futures and options contracts uniformly,

while at the same time recognizing the unique exposures associated with options portfolios,

like extremely deep outofthemoney short positions and intermonth risk. Its over

riding objective is to determine the largest loss that a portfolio might reasonably be expected

to suffer from one day to the next day based on 99% VAR methodology. SPAN considers

uniqueness of option portfolios. The following factors affect the value of an option:

1. Underlying market price

2. Strike price

3. Volatility (variability) of underlying instrument

4. Time to expiration

5. Interest rate

As these factors change, the value of options maintained within a portfolio also changes.

Thus, SPAN constructs scenarios of probable changes in underlying prices and volatilities in

order to identify the largest loss a portfolio might suffer from one day to the next. It then sets

the margin requirement to cover this oneday loss. The complex calculations (e.g. the

pricing of options) in SPAN are executed by NSCCL. The results of these calculations are

called risk arrays. Risk arrays, and other necessary data inputs for margin calculation are

provided to members daily in a file called the SPAN risk parameter file. Members can applythe data contained in the risk parameter files, to their specific portfolios of futures and options

contracts, to determine their SPAN margin requirements. Hence, members need not execute a

complex option pricing calculation, which is performed by NSCCL. SPAN has the ability to

estimate risk for combined futures and options portfolios, and also revalue the same under

various scenarios of changing market conditions.

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Types of margins

The margining system for F&O segment is explained below:

Initial margin: Margin in the F&O segment is computed by NSCCL upto client level for

open positions of CMs/TMs. These are required to be paid up-front on gross basis at

individual client level for client positions and on net basis for proprietary positions. NSCCL

collects initial margin for all the open positions of a CM based on the margins computed by

NSE-SPAN. A CM is required to ensure collection of adequate initial margin from his TMs

up-front. The TM is required to collect adequate initial margins up-front from his clients.

Premium margin: In addition to initial margin, premium margin is charged at client level.

This margin is required to be paid by a buyer of an option till the premium settlement iscomplete.

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RESEARCH DESIGN

STATEMENT OF THE PROBLEM

The study is basically aim to analyze the various derivative strategies used by investors while

trading. This study attempts to analyze the effectiveness of hedging in terms of reducing the

risks and also various kinds of strategies to be used in a bull market, bear market, and also in a

stable market and project Title is a study of the derivatives and its strategies used by

investors conducted at Religare Securities Limited Bangalore.

NEED FOR STUDY

The derivative market in India is rapidly growing, and at the same time it is providing a very

good opportunity for the investors and traders to trade in the derivative market, and maximize

their returns on the investment. Derivative market connects the local market with the global

market.

The futures contracts are designed to deal directly with the credit risk involved in

Locking-in prices and obtaining forward cover. These contracts can be used for hedging price

risk and discovering future prices. For commodities that compete in world or National

markets, the discovering the future price or the market movement will help fulls the traders to

use the strategies in a profitable way and also at the same time to avoid the losses. To predict

the market movement, one should master the methods and tools used to study the market

movements.

Hence the study helps the traders or the investors of the derivative market in predicting

the market movements and strategies used for trading. The study provides the method or the

tool which are very help full to study the market movement. And accordingly the risk is

minimized. The traders can well utilize the opportunity and make the profits. The organization

or the management can also use these methods or the tools to advise their customers, to trade

profitably.

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REVIEW OF LITERATURE

In this dissertation many international and national literatures related to the topic have

been reviewed. None of these are giving a clear idea about this topic. Many books andmagazines are focusing only the international market i.e. US and Europe. There are no

special books for the Indian context.

In the Indian context only very few studies relating to the topic is noticed. But these

studies are taken before the introduction of Indian derivative market. These studies

have their own limitations. No studies are covering the present system of derivative

trading in India in detail.

The book futures and options by N.D.Vohra and B.R.Bagri published by Tata

McGraw Hill giving a general idea about the option and its strategies. But this book is

mainly referring the international examples and the book is published before the

introduction of the derivatives in India. So it lacks the current information about the

topic.

The report presented by Shah A & Thomas S (1997) published by Oxford University

Press is giving the information of recent developments of Futures and options in

Indian market. But it lacks the current system of derivatives in India.

Apart from these books other old projects and articles in various magazines such as

southern economists and business world (personal finance) referred.

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OBJECTIVES OF THE STUDY

To analyze the growth of derivative market in India.

To study the strategies of future and options trading.

To understand the effectiveness of hedging.

OPERATIONAL DEFINITION OF CONCEPTS

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.

Hedgers use futures or options markets to reduce or eliminate the risk associated with price

of an asset.

Speculators use futures and options contracts to get extra leverage in betting on future

movements in the price of an asset. They can increase both the potential gains and potential

losses by usage of derivatives in a speculative venture.

Arbitrageurs are in business to take advantage of a discrepancy between prices in two

different markets. If, for example, they see the futures price of an asset getting out of line with

the cash price, they will take offsetting positions in the two markets to lock in a profit.

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.




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Warrants: 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.

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are

options having a maturity of up to three years.

Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is

usually a moving average or a basket of assets. Equity index options are a form of basket

options.

Swaps: Swaps are private agreements between two parties to exchange cash flows in the

future according to a prearranged formula. They can be regarded as portfolios of forward

The two commonly used swaps are:

Interest rate swaps: These entail swapping only the interest related cash flows between the

parties in the same currency.

Currency swaps: These entail swapping both principal and interest between the parties,

with the cash flows in one direction being in a different currency than those in the opposite

direction.

Types of margins

The margining system for F&O segment is explained below:

Initial margin: Margin in the F&O segment is computed by NSCCL upto client level for

open positions of CMs/TMs. These are required to be paid up-front on gross basis at

individual client level for client positions and on net basis for proprietary positions. NSCCL

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collects initial margin for all the open positions of a CM based on the margins computed by

NSE-SPAN. A CM is required to ensure collection of adequate initial margin from his TMs

up-front. The TM is required to collect adequate initial margins up-front from his clients.

Premium margin: In addition to initial margin, premium margin is charged at client level.

This margin is required to be paid by a buyer of an option till the premium settlement is

complete.

SCOPE OF THE STUDY

The scope of the study is clearly seen as it helps in understanding the various derivative

markets. It helps to evaluate the effectiveness of hedging in the derivative trading. The study

reveals some vital information regarding reduction of market risk and maximizing profit

before applying investment strategies.

SAMPLING DESIGN

The sampling procedure adopted is Random sampling. This involved picking up of samples or

units of population on a random basis with out any prejudice.

Sample size.

Time and place of survey.

Sample unit and size

Existing customers of Religare securities Ltd. The sample chosen to collect data consists of

100 investors. The data collected is used for final tabulation and analysis.

SOURCES OF DATA

Primary Data

Secondary Data

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TOOLS OF DATA COLLECTION

The study has used both primary data as well as secondary data. The collection of primary

data was through questionnaire method. The information was collected from derivativesinvestors of Religare Securities Limited, from all the branches in Bangalore.

The Secondary datas were collected from Journals, Books and websites.

STATISTICAL TOOLS USED:

Tabulation of data is the simplest and most revealing device for summarizing data and

presenting them in a meaningful fashion in the statistical table. A table is a systematic

arrangement of statistical data in columns and rows. The purpose of a table is to simplify the

presentation and to facilitate comparisons

LIMITATION OF THE STUDY

Some of the investor are not ready to give there financial states. And this final decision taken

from the investors opinion.

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INDUSTRY PROFILE

The first derivative product to be introduced in the Indian securities market is going to be

"INDEX FUTURES".

In the world, first index futures were traded in U.S. on Kansas City Board of Trade (KCBT)

on Value Line Arithmetic Index (VLAI) in 1982.

BSE created history on June 9, 2000 by launching the first Exchange traded Index DerivativeContract i.e. futures on the capital market benchmark index - the BSE Sensex. The

inauguration of trading was done by Prof. J.R. Varma, member of SEBI and chairman of the

committee responsible for formulation of risk containment measures for the Derivatives

market. The first historical trade of 5 contracts of June series was done on June 9, 2000 at

9:55:03 a.m. between M/s Kaji & Maulik Securities Pvt. Ltd. and M/s Emkay Share & Stock

Brokers Ltd. at the rate of 4755.

In the sequence of product innovation, the exchange commenced trading in Index Options on

Sensex on June 1, 2001. Stock options were introduced on 31 stocks on July 9, 2001 and

single stock futures were launched on November 9, 2002.

September 13, 2004 marked another milestone in the history of Indian Capital Markets, the

day on which the Bombay Stock Exchange launched Weekly Options, a unique product

unparallel in derivatives markets, both domestic and international. BSE permitted trading in

weekly contracts in options in the shares of four leading companies namely Reliance, Sat

yam, State Bank of India, and Tisco in addition to the flagship index-Sensex.

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TYPES OF PRODUCTS

Index Futures

A futures contract is a standardized contract to buy or sell a specific security at a future date at

an agreed price.

An index future is, as the name suggests, a future on the index i.e. the underlying is the index

itself. There is no underlying security or a stock, which is to be delivered to fulfill the

obligations, as index futures are cash settled. As other derivatives, the contract derives its

value from the underlying index. The underlying indices in this case will be the variouseligible indices and as permitted by the Regulator from time to time.

Index Options

Options contract give its holder the right, but not the obligation, to buy or sell something on or

before a specified date at a stated price. Generally index options are European Style.

European Style options are those option contracts that can be exercised only on the expiration

date. The underlying indices for index options are the various eligible indices and as permittedby the Regulator from time to time.

Stock Futures

A stock futures contract is a standardized contract to buy or sell a specific stock at a future

date at an agreed price. A stock future is, as the name suggests, a future on a stock i.e. the

underlying is a stock. The contract derives its value from the underlying stock. Single stock

futures are cash settled.

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Stock Options

Options on Individual Stocks are options contracts where the underlying are individual stocks.Based on eligibility criteria and subject to the approval from the regulator, stocks are selected

on which options are introduced. These contracts are cash settled and are American style.

American Style options are those option contracts that can be exercised on or before the

expiration date.

Weekly Options

Equity Futures & Options were introduced in India having a maximum life of 3 months.These options expire on the last Thursday of the expiring month. There was a need felt in the

market for options of shorter maturity.

To cater to this need of the market participants BSE launched weekly options on September

13, 2004 on 4 stocks and the BSE Sensex. Weekly options have the same characteristics as

that of the Monthly Stock Options (stocks and indices) except that these options settle on

Friday of every week. These options are introduced on Monday of every week and have a

maturity of 2 weeks, expiring on Friday of the expiring week.

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COMPANY PROFILE

HISTORY

Religare is driven by ethical and dynamic process for wealth creation. Based on this, the

company started its endeavor in the financial market.

Registered Office

55, Hanuman Road, Connaught Place, , New

Delhi, Delhi - 110001

Tel: 23346875, , ,

Fax: 23346876,

Registrar & Share Transfer Agent

Intime Spectrum Registry Ltd.

A-31, 3rd Floor, Near PVR, Naraina

Industrial Area, Phase I, New Delhi - 110028,

Delhi.

Tel: 51410592, 51410593, 51410594

Key Officials

Name Designation

Harpal Singh Chairman / Chair Person

Sunil Godhwani Managing Director

Other Details

Business Group Ranbaxy Group

Industry Finance - Leasing & Hire Purchase

Listings BSE , NSE

ISIN No. INE991C01018

Incorporation 23/03/1994

Public Issue Date 02/01/1995

Religare Enterprises Limited (A Ranbaxy Promoter Group Company) through Religare

Securities Limited, Religare Finvest Limited, Religare Commodities Limited and Religare

Insurance Broking Limited provides integrated financial solutions to its corporate, retail and

wealth management clients. Today, we provide various financial services which include

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Investment Banking, Corporate Finance, Portfolio Management Services, Equity &

Commodity Broking, Insurance and Mutual Funds. Plus, theres a lot more to come your way.

Religare is proud of being a truly professional financial service provider managed by a highlyskilled team, who have proven track record in their respective domains. Religare operations

are managed by more than 3000 highly skilled professionals who subscribe to Religare

philosophy and are spread across its country wide branches.

Today, we have a growing network of more than 300branches and more than 580 business

partners spread across more than 300 cities/towns in India and a fully operational international

office at London. However, our target is to have 500 branches and 1000 business partners inIndia and 7 International offices by March 2008.

Unlike a traditional broking firm, Religare group works on the philosophy of partnering for

wealth creation. We not only execute trades for our clients but also provide them critical and

timely investment advice. The growing list of financial institutions with which Religare is

empanelled as an approved broker is a reflection of the high level service standard maintained

by the company.

Vision

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To be India's first Multinational providing complete financial services solution across the

globe.

Mission

Providing integrated financial care driven by the relationship of trust and confidence.

GROUP COMPANIES:

Religare Enterprises Limited group comprises of Religare Securities Limited, Religare

Commodities Limited, Religare Finvest Limited and Religare Insurance Broking Limited,

which deal in equity, commodity and financial services business.

NATURE OF BUSINESS

RELIGARE SECURITIES LTD:

RSL is one of the leading broking houses of India and are dealing into Equity Broking,

Depository Services, Portfolio Management Services, Institutional Equity Brokerage &

Research, Investment Banking and Corporate Finance.

Extension of services has been a constant feature in Religare to regard the needs of our

clients. Consequently, company is soon going to launch Internet Trading and Merchant

Banking. This would take care of different investment needs of different classes of investors.

To facilitate free and fare trading process Religare is a member of major financial institutions

like, National Stock Exchange of India, Bombay Stock Exchange of India, Depository

Participant with National Securities Depository Limited and Central Depository Services (I)

Limited, and a SEBI approved Portfolio Manager.

RSL serves a platform to all segments of investors to avail the opportunities offered by

investing in Indian equities either on their own or through managed funds in Portfolio

Management.

RELIGARE COMMODITIES LTD:

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Religare is a member of NCDEX and MCX and provides platform for trading in commodities,

which is an online facility also.

RCL provides platform to both agro and non-agro commodity traders to derive the actual

price of the commodity and also to trade and hedge actively in the growing commodity

trading market in India.

With this realization, Religare Commodities is coming up with its branches at 42 mandi

locations. It is a flagship effort from our team, which would be helpful in facilitating trade and

speculating price of commodities in future.

RELIGARE FINVEST:

Religare Finvest Limited (RFL), a Non Banking Finance Company (NBFC) is aggressively

making a name in the financial services arena in India. In a fast paced, constantly changing

dynamic business environment, RFL has delivered the most competitive products and

services.

RFL is primarily engaged in the business of providing finance against securities in the

secondary market. It also provides finance for application in Initial Public Offers to non-retail

clients in the primary market.

RFL is also planning to initiate personal loan portfolio as fund based activity and mutual fund

distribution as fee based activities.

Along with this, the company also undertakes non-fund based advisory operations in the field

of Corporate Financing in the nature of Credit Syndication which includes inter alia, bills

discounting, inter corporate deposit, working capital loan syndication, placement of private

equity and other structured products.

RELIGARE INSURANCE BROKING LTD:

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Religare has been taking care of financial services for long but there was a missing link.

Financial planning is incomplete without protective measure i.e. structured products to take

care of event of things that may go wrong.

Consequently, Religare is soon coming up with Religare Insurance Broking Limited. As

composite insurance broker, we would deal in both insurance and reinsurance, providing our

clients risk transfer solutions on life and non-life sides.

This service will take benefit of Religares vast business empire spread throughout the

country -- providing our valued clients insurance services across India. We aim to have a wide

reach with our services literally! Thats why we are catering the insurance requirements of

both retail and corporate segments with products of all the insurance companies on life and

non-life side.

Still, there is more in store. We also cater individuals with a complete suite of insurance

solutions, both life and general to mitigate risks to life and assets through our existing

network of over 150 branches expected to reach 250 by the end of this year!

For corporate clients, we will be offering value based customized solutions to cover all risks

which their business is exposed to. An operations team equipped with the best of technology

support will support our clients.

Religare Insurance Broking aims to provide neutral, transparent and professional risk transfer

advice to become the first choice of India.

Religare team is led by a very eminent Board of Directors who provide policy guidance and

work under the active leadership of its CEO & Managing Director and support of its Central

Guidance Team.

Board of Directors:

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PRODUCTS AND SERVICES:

EQUITY AND DERIVATIVE:

For the first time Religare brings investing community the power to be associated with the

elite dealing rooms and freedom to execute trade on their own. That is, you may trade from

our branches or trade on your own over the net and with that you get our expertise and

assistance.

R-ALLY

It has been designed to provide world class experience and expertise to investors.

R-ALLY as the name suggests is the perfect partner for savvy investors. Clients opting for

this service would be provided services managed by a team of dedicated relationship

managers and experienced trade dealers. They would not only assist the client in information

dissemination but would also take care of all post trade requirements.

R-ACE

This product comes as RACE, RACElite and RACEpro. It gives you the power of trading

from your home, office or while traveling and trade in the market of equity and derivatives.You can log on and get started from your computers or your mobile devices. These products

have very exciting features like integrated DP, hot key functions and much more...

COMMODITIES:

Commodities as a word originated from the French word commdite meaning benefit,

profit. Rightly so! The kind of continuously growing turnover which commodities market has

seen is incredible, benefiting both producers and buyers. These amazing results have

transformed commodities as a most sought after asset class. And this has caught attention of

the whole world.

Commodities market is particularly significant to our country as India is essentially a

commodity based economy. Therefore, it should not be surprising to see that Indian

Commodities Market is also taking giant strides, growing at a scorching pace and is well

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poised to occupy its rightful place in the world. This has provided the Indian investors with

new emerging investment opportunities in the arena of commodities.

Commodity Derivatives trading in India is now done through the electronic trading platform

of two popular exchanges NCDEX (National Commodity & Derivative Exchange Limited)

and MCX (Multi Commodity Exchange). The various commodities being traded on the

exchanges include precious metals, crude oil, agro-commodities amongst others.

Religare Commodities Limited is a member of both the exchanges (MCX & NCDEX) that

allows you to trade in all the commodities traded at both the exchanges. At present, trading in

commodities is restricted to futures contracts only.

BENEFIT OF TRADING:

One thing especially luring about commodities is that it offers equally great incentives to all

involved in the trade.

To Producer: Producer of a commodity can hedge against the price fluctuations by selling the

futures contracts of the commodity, thereby locking in a desired price to sell produce. It

would insulate producer from adverse market movements as losses in spot market would be

offset by profits in the futures market. Thus, risk gets reduced by paying a small amount as

brokerage.

To Investors: Investors always look for alternative investment avenues where they can

diversify their funds to achieve their financial goals. In financial markets, commodity futures

have rapidly emerged as a major investment tool as they help in diversifying investments and

to hedge against inflation, greatest threat to any investor.

Commodities as an investment option also offer following advantages to an investor:

High degree of leverage.

Higher reward compared to stocks and other financial instruments.

Better chance of intraday day trades than other financial instruments.

Presence of the international commodities like gold, silver, crude oil, aluminum, steel

etc. which can be tracked based on the international market movements as well.

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OFFERINGS

We offer four different schemes to investors according to their varying tastes, objectives and

risk tolerance.

Each benefits from professional management that aims to provide you consistent returns at areduced level of risk.

Aims to achieve gradual growth in the portfolio value over a period of

time by way of careful and judicious investment in fundamentally strong

and attractive valued shares.

more...

Aims to achieve higher returns by taking aggressive positions across

sectors and market capitalization.

more...

Aims to generate steady return over a longer period by investing in

securities selected only from BSE 100 index.

more...

The scheme seeks to provide medium to long term capital appreciation by

investing in stocks across the market capitalization range

more...

Scheme aims to achieve capital appreciation over along period of time by

investing in a diversified portfolio.

INTERNATIONAL EQUITY AND COMMODITY:

International Equity and Commodities division scales up investment horizon for investors by

tapping into huge potential of international markets. This lets an investor partake a share of

international profits.

OFFERINGS:

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Religare takes pride in introducing our

International equity partner

Wall Street*E is a full service online brokerage firm

Barron's Best Online Broker Review for six consecutive years

Forbes Best of the Web

Optionetics as the #1 site for trading options two years in a row

Enabling the client with technology

Like web based high performance trading, investment and risk management tools.

Carrying out functions that assure compliance with all rules and regulations that

affect their relationships with clients

Giving direct on-line access to:

Clearing spot trades

Execution option

Margin derivatives

Trading Features

Ease of operation

Real time account balances

Detailed client holdings/history

Risk management of accounts

Execution of trade-time / price bound

E-mail centre contract notes

Single or multiple order entry for stocks, options, mutual funds, spread order entry

for options

View intraday order status and electronic confirmations

Ease of operation

NAQ quotes, charts, news

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All orders electronically exposed to price improvement

Online trading module

International Commodities Partner: XPRESSTRADE

XPRESSTRADE is one of the premier players in internet based futures and

forex brokerage, headquartered in the Chicago Mercantile Exchange Centre,

right in the centre of the world's futures trading capitol.

XPRESSTRADE is a 100% web-based broker, so there's no software to

download or install. Easy website trading access anywhere in the world. Unique,

timesaving features -- like EZ Offset, EZ Reverse, and EZ Stop.

Trade futures and forex through a single online broker, with 24 hours access to

the leading future exchanges in the world. This includes 20 exchanges and more

than 300 future products and easy access to the spot currency rates.

Risk Management of Accounts.

Offers special and innovative order types like One-Triggers-Others, One-

Cancels-Others and Alert-Triggered-Orders apart from conventional orders.

Fast and accurate order execution. Direct-access order routing system sends your

orders straight-through to both electronic and traditional open/outcry markets. In

many cases, you'll see a confirmed fill in your account (as well as by e-mail)

online, in literally 1-2 seconds!

Gain from real-time futures and options snapshot quotes, interactive java charts,

FX charting tools.

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on-going basis, through products like corporate debt, private equity, IPO, ECB, FCCB,

GDR/ADR etc.

Investment Banking Division offers the following services:

Corporate Finance

We focus on finding partner for our client, who not only help in adding value but also

improve the future valuation of the organization. We specialize in structured financing and

providing advisory services related to financial planning, modeling and advising on financial

requirement.

Corporate finance products offered by us:

Placement of Debt

1. Working Capital Facility

2. Project Finance

3. Term Loan

4. Short Term unsecured loan (ICD/Loans against shares/Bill discounting)

5. Promoter funding

6. Interest rate swaps and other structured instruments

Corporate Advisory Group- (CAG):

Religare has set up a new TOP level sales force named Corporate Advisory Group- (CAG) in

order to create, maintain and serve excellent relationship by providing various solutions to the

corporate and Institutional sector globally.

CAG is a segmentric approach where for one segment all the products will be offered by us.

CAG will be the one point for relationship for all big and small corporate, banks, financial

institution.

OFFERINGS: Corporate Advisory Group provides various solutions to corporates, banks

and FIs on the management of debt, equity and investments. While we give them solutions,

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based upon the models of debt structuring and garnering short term and long term funds from

the market, we also help them in public and private placements of equity.

Needless to say that our services extend from advising our clients to earn maximum profits by

investing through selected papers/schemes like MF/PMS etc. The CAG can help you in

Equity Management

Placement of equity

Public offers and right issues

Promoter funding

Private placement of shares

Capital Restructuring

Debt Services

Syndication of loans from Banks/FI and project financing

Bridging short term working capital

Other Debts like Inter Corporate Deposits,etc

Placement of long/short term debt papers like debentures & bonds

Sourcing medium/short term papers

Investment Solutions

Treasury operations

Non- SLR investments

Cash flow Management

Mutual Fund Investments

Portfolio Management Services

Group Insurance for your Staffs

General Insurance for your assets

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ORGANISATION STRUCURE

Figure no: 3.1

COMPETITORS

Geojit Financial Services Ltd.

India Bulls Financial services Ltd.

Karvy Financial services.

Way to Wealth Securities Ltd.

Kotak Securities Ltd.

Table no: 3.1 CAPTIAL STRUCTURE

Share Holding Pattern as on : 31/12/2006 30/09/2006 30/06/2006

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Religare Insurance

Broking Ltd.

Chairman

Mr. Harpal Singh

Managing directorMr. Sunil Godhwani

Religare Securities

Limited Religare Finvest

Executive Director Chief Executive Officer Executive Director


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Table no: 4.1

Age group Frequency Percentage

61 2 2%

Total 100 100%

Figure no: 4.1

AGE GROUP

>61

41-60

26-40


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2) Table showing occupation of the respondents.

Table no: 4.2

Occupation Frequency Percentage

Business 28 28%Professional 38 38%

Salaried 32 32%

Other 2 2%

Total 100 100%

Figure no: 4.2

Analysis;

From the above data collected, 38% of the respondents were Professionals.

32% are salaried and 28% of them were business.

The rest of the respondents belonged to other occupation.

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OCCUPATIONOTHER

SALARIED

PROFESSIONAL

BUSINESS


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3) Monthly income of the respondents.

Table no: 4.3

Income level Frequency Percentage

50001 18 18%

Total 100 100%

Figure no: 4.3

MONTHELY INCOME

>50001

30001-50000

10001-30000


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5) Table showing allocation of total investment by investors.

Table no: 4.5

Types of investment frequency Percentage

Equity trading 30 30%

Fixed deposits 10 10%

Insurance 20 20%

Mutual fund 35 35%

Other investment 5 5%

Total 100 100%

Figure no:

Analysis;

From the above data collected, 35% of the respondents are investing in mutual fund.

30% are equity traders and 20% of them are investing in insurance.

The rest of the respondents belonged to other investments.

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30%

10%

20%

35%

5%

Equity trading

Fixed deposits

Insurance

Mutual fundOther investment


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6) Rank the investment objectives.

Table no: 4.6

Investment objective Frequency PercentageHigh return 56 56%

Tax benefit 6 6%

Future return 31 31%

Capital gain 7 7%

Total 100 100%

Figure no: 4.6

Analysis:

From the above data collected, 56% of the respondents investment objective is to get high

return. 31% respondents investment objective is to get future benefit.The rest of the respondents belonged to other investment objective.

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INVESTMENT OBJECTIVE

CAPITAL GAIN

FUTURE RETURN

TAX BENEFITS

HIGH RETURN


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7) Information using in derivative trading.

Table no: 4.7

Information Frequency PercentageTechnical

information

8 8%

Market information 27 27%

Individual

information

26 26%

All of the above 39 39%

Total 100 100%

Figure no: 4.7

USING INFORMATION TO TRADE DERIVATIVE

ALL OF THE ABOVE

INDIVIDUAL ANALYSIS

MARKET INFORMATION

TECHNICAL INFORMATIO

Analysis:

The above table shows the different information used for derivatives trading such as technical

information, market information and individual analysis. 39% of the respondents use all the

information.

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8) Derivative products using by the investors.

Table no: 4.8

Derivative products Frequency Percentage

Option 44 44%Futures 26 26%

Forwards 23 23%

Swaps 7 7%

Total 100 100%

Figure no: 4.8

Analysis:

From the above data collected, 44% of the respondents spend maximum portion of their

investment on options, 26% are futures trading and 23% of them on forwards trading.

The rest of the respondents belonged to other derivative product.

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MOST USING THE DERIVATIVE PRODUCT

SWAPS

FORWARDS

FUTURES

OPTIONS


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9) The investors feeling towards risk in trading derivatives.

Table no:4.9

Risk Frequency Percentage

High risk 32 32%

Low risk 44 44%

Moderate risk 14 14%

No risk 10 10

Total 100 100%

Figure no: 4.9

THE RISK INVOLVED IN DERIVATIVE TRADING

NO RISK

MODERATE RISK

LOW RISK

HIGH RISK

Analysis:

From the above data collected, 44% of the respondents feel trading in derivatives is of low

risk. 32% feel that the risk is high and 14% of them feel the risk is moderate.

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10) Investment strategy using by investor at bullish market.

Table no: 4.10

Strategies Frequency Percentage

Long index futures 41 41%

Long index call 27 27%

Long call 15 15%

Long futures stock 17 17%

Total 100 100%

Figure no: 4.10

INVESTMENT STARATEGIES AT BULLISH MARKE

LONG FUTURES STOCK

LONG CALL

LONG INDEX CALL

LONG INDEX FUTURES

Analysis:

From the above data collected, 41% of the respondents were using long index futures at the

time of the market being bullish. 27% are using long index call.

The rest of the respondents belonged to other strategies.

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Derivatives and Its Strategies

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