CHAPTER 1

1.1 INTRODUCTION

Introduction to Indian financial system-

Indian financial system can be studied under two phases-

Indian financial system on the eve of planning.

Indian financial system in the post- 1950 period.

Indian financial system on the eve of planning-

The scope of Indian financial system was quiet narrow. It was confined only in the

following constitutions of the system. They were-

Currency system.

Banking system

Small savings.

Insurance funds.

Public deposits.

Government securities.

For over 50- 70 years prior to 1950 Indian financial system was operating only in the

above areas. But after 1950 its scope widened.

Indian financial system in the post 1950 period. The political- economic background

of the financial development in India has been determined by the nature of our mixed

economic system. The objectives of this system with respect to growth sectoral priorities

distribution have influenced the functioning and development of Indian financial system.

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The major characteristics, which influenced Indian financial system in the period, are –

Continuous inflation.

Increasing internal fiscal and external deficits.

Industrialization.

Urbanization.

Significant structural transformation.

The striking feature of the Indian financial system in this period has been in terms of size,

diverting sophistication and complexity. Money supply, savings, bank deposits and

credit, primary and secondary issues and so on have increased tremendously. The

supportive factor being the continues and high rate of inflation.

The quantitative growth of the Indian financial system has been accompanied by

significant diversification and innovations in respect of an array of financial institutions

instruments and services. India has witnessed all types of financial innovations of totally

new institutions catering to almost every sector have been set up since 1950. as a result,

today we have a highly diversified structure of financial institutions.

1.2 The functions of Indian financial system -

The Indian financial system performs the following interrelated functions that are

essential to a modern economy -

It provides a payment system for the exchange of goods and services.

It enables the pooling of funds for undertaking large- scale enterprises.

It provides a way for managing, undertaking and controlling risk.

It generates information that helps in co coordinating decentralized decision-making.

It helps in dealing with the problem of informational asymmetry.

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1.3 ORGANISATIONAL STRUCTURE OF INDIAN FINANCIAL SYSTEM -

A broad based organization structure of Indian financial system has emerged in

response to the requirement of the emerging industrial organization. the financial system

of any country consist of specialized and non- specialized financial institutions of

organized and unorganized financial markets of financial instruments and services which

facilitates transfer of funds. Procedures and practices adopted in the markets and financial

interrelations are also part of the system.

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Financial System

Organization structure of Indian financial system

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Equity Market

Financial Market

Financial Instruments

Financial Services

Banking Non-Banking

Primary

Primary

Long Term

Secondary MarketCapital Market

Financial Institution

Secondary

Medium TermShort Term

Secondary

Debt Market Derivative Mkt

1.4 FINANCIAL INSTITUTIONS

Financial institutions are institutional sources of finance to industry. They act as a link

between servers and investors, which results in institutionalization of personal savings.

Their main function is to convert direct sales / instruments / securities issued by corporate

into direct securities. the indirect securities offer to the individual investors better

investments alternative than the direct / primary security by pooling which it is created,

for eg – units of mutual fund, bank deposits and insurance policies and so on.

The present structure comprises financial institutions listed below –

Commercial banks.

Non- banking financial corporations.

Development / public financial institutions.

Mutual fund.

Insurance organization.

Foreign private capital.

1.5 FINANCIAL MAREKETS

Financial markets perform a crucial function in the Savings investment process as

facilitating organization. They are the centers or arrangements that provide facilities for

buying and selling of financial claims and services. They are not sources of finance but

they are link between the savers and investors both individual as well as institutional.

Based on the nature of funds, which are stock -in-trade, the financial markets are

classified into two –

Money market.

Capital market.

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1.5.1MONEY MARKET

It is a market for dealing in monetary assets of short termed nature, generally less than

one year. It refers to that segment of the financial market, which enables the raising up of

short-term funds for meeting temporary shortages of cash and obligations and the

temporary deployment of excess funds for earning returns. The major participants in the

money market are the RBI and commercial banks.

1.5.2 CAPITAL MARKET

It is a market for long-term funds. Its focus is on financial of fixed investments in

contrast to money market, which is institutional source of working capital finance. The

main participants in the capital market are mutual funds, insurance organizations, and

financial institutions, financial institutional investors, corporate and individuals. It is

regulated by SEBI. The capital market has two segments –

1.5.3 PRIMARY / NEW ISSUE MARKET

The primary market deals in new securities that are securities, which were not

previously available and are offered to the investors for the first time. Capital formation

occurs in the primary market as it supplies additional funds to the corporate directly.

1.6 SECONDARY MARKET

The secondary market is a market for old / existing securities that is already issued

and granted security exchange quotation / listing. It plays only an indirect role in

industrial financing by providing liquidity to investments already made.

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1.6.1 FINANCIAL INSTRUMENTS

Financial instruments or securities refer to those documents, which represents

financial claims on assets. It can be classified as -

Primary or direct securities.

Secondary or indirect securities.

The ultimate investors directly issue primary securities to the ultimate savers. Eg –

shares and debentures are directly used to the public. Secondary securities are those,

which are already traded in the secondary market.

INSTRUMENTS OF ISSUE –

Equity shares.

Preference shares and warrants.

Debentures.

Bonds etc.

1.7 NATIONAL STOCK EXCHANGE (NSE)

The NSE has a fully automated, electronic, screen based trading system. It is sponsored

by the IDBI and co-sponsored by other term- lending institutions, LIC, GIC, other

insurance companies, commercial banks and other financial institutions. NSE has 2

separate segments -

The wholesale debt market segment.

The capital market segment.

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National and regional exchanges in India

Apart from stock exchanges in Mumbai, there are 20 other national and regional

exchanges located in metropolitan centers and other cities in India. There are about 40

unofficial exchanges operating as ” brokers association” in India. They are not

recognized by SEBI, but considerable volume of business. In addition there are kerb and

illegal badla markets securities trading business.

Functions of stock exchanges

The stock market occupies a pivotal position in the financial system. It performs

several economic functions and renders invaluable services to the investors, companies

and to the economy as a whole; they may be summarized as follows –

Liquidity and marketability of securities –

Stock exchanges provide liquidity to securities since securities can be converted

into cash at any time according to the discretion of the investors by selling them at the

listed price.

Safety of funds –

Stock exchange ensure safety of funds invested because they have to function under strict

rules and regulations and the bye-laws are meant to ensure safety if invested funds.

Supply of long-term funds –

The securities traded in stock market are negotiable and transferable in character and

such as they can be transferred with minimum of formalities from one hand to another.

Flow of capital to profitable ventures-

The profitability and popularity of companies are reflected in stock prices. The

prices quoted indicate the relative profitability and performance of companies.

Motivation or improved performance-

The performance is reflected on the prices quoted in the stock market. Stock

market provides room for this price quotation for those securities listed by it.

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1.8 RESERVE BANK OF INDIA

RBI is India’s central bank. It was established on 1st aril 1935 and was nationalized on 1 st

Jan 1940.

The preamble prescribes the objectives as “ to regulate the issue of bank notes and

keeping of reserves with a view to securing monetary stability in India and generally to

operate the currency and credit system of the country to its advantage”.

1.8.1 Functions of RBI

Monetary authority

Formulates. Implements and monitors the monitory policy.

Objective-maintaining price stability and ensuring adequate flow of credit to productive

sectors

Regulator and supervisor of the financial system

Prescribes broad parameters of banking operations within in which the countries banking

and financial system functions

Objective- maintaining public confidence in the system protect depositors interest and

provide cost-effective banking services to the public.

Manager of exchange control

Manages the forex management act, 1999.

Objective- to facilitate external trade and payment and promote orderly development and

maintenance of forex market in India.

Issuer of currency

Issues and exchanges or destroys currency and coins not fit for circulation.

Objective- to give the public adequate quantity of supplies of currency notes and coins

and in good quality.

Development role: Performs a wide range of promotional functions to support national

objectives.

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Related functionsBanker to the government – performs merchant-banking function for

the central and the state governments, also acts as their banker.

Derivative is a product whose value is derived from the value of one or more

basic variables, called (underlying asset, index or reference rate), in a contractual manner.

The underlying asset can be equity, forex, commodity or any other asset.

The international monetary fund defines derivatives as “financial instruments that

are linked to a specific financial instrument or indicator or commodity and through which

specific financial risks can be traded in financial markets in their own right. The value of

a financial derivative is derives from the price of an asset or index. Unlike debt securities,

no principal is advanced to be repaid and no investment income accrues”.

The emergence of the market for derivative products, most notably forwards,

futures and options, can be traced back to the willingness of risk averse economic agents

to guard themselves against uncertainties arising out of fluctuations in asset prices. by

their very nature ,high degree of outlay, through the use of derivative products , it is

possible to partially or fully transfer price risks by locking-in asset prices, as in

instruments of risk management, these generally the fluctuations in the underlying asset

prices. However by looking-in asset prices, derivative products minimize the impact of

fluctuations in asset prices on the profitability and cash flow situation of risk averse

investors.

Derivative products initially emerged as a hedging derives against fluctuations in

commodity prices and commodity- linked derivatives remained the form of such products

for almost three hundred years, the financial derivative came into spotlight in post 1970

period due to growing instability in the financial markets. However, since their

emergence, these products have become very popular and by 1990’s, they accounted for

about two third of total transactions in derivative products. In recent years, the market for

financial derivatives has grown tremendously both in terms of variety of instruments

available, their complexity and also turnover.

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1.9 Derivatives markets in India

The first step towards introduction of derivatives trading in India was the

promulgation of the securities laws (amendment) ordinance, 1995, which withdrew the

prohibition on options in securities. The market for derivatives, however did not take off,

as there was no regulatory framework to govern trading of derivatives. SEBI setup a 24-

member committee under the chairmanship of Dr. L.C. Gupta on Nov 18, 1996 to

develop appropriate regulatory framework for derivatives trading in India. The committee

submitted its respect on March 19, 1998 prescribing necessary pre-conditions for

introduction of derivatives trading in India. The committee recommended that derivatives

should be declared as securities so that regulatory framework applicable to trading of

securities could also govern trading of securities. SEBI also setup a group in June 1998

under the chairmanship of Prof. J. R.Varma, to recommend measures for risk

containment in derivatives market in India. The report, which was submitted in October

1998, worked out the operational details of managing system, broker net worth, deposit

requirement and real-time monitoring requirements.

The SCRA was amended in Dec 1999 to include derivatives within the ambit of

‘securities’ and the regulatory framework was developed for governing derivatives

trading. The act also made it clear that derivatives shall be legal and the regulatory

framework was developed for governing derivatives trading. The act also made it clear

that derivatives shall be legal and valid only if such contracts are traded on a recognized

stock exchange, thus precluding OTC derivatives. The government also rescinded in

March 2000, the three-decade old notification, which prohibited forward trading in

securities.

Derivatives trading commenced in India in June 2000 after SEBI granted the final

approval to this effect in may 2000. SEBI permitted the derivatives segments of two

stock exchanges. NSE and BSE and their clearinghouse / corporation to commence

trading and settlement in approval derivatives contracts.

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1.10 Derivatives Trading – Regulatory Framework

With the amendment In the definition of ‘securities’ under SC®A ( to include

derivative contracts in the definition of securities), derivatives trading takes place under

the provisions of the securities contracts( regulation) act, 1956 and the securities and

exchange board of India act, 1992. Dr. L.C Gupta committee constituted by SEBI had

laid down the regulatory framework for derivative trading in India. SEBI has also framed

suggestive bye-law for derivative exchanges/segments and their clearing

corporation/house, which lays down the provisions for the trading and settlement of

derivative contracts. The rules, bye-laws and regulations of the derivative segment of the

exchanges and their clearing corporation/house have to be framed in the line with the

suggestive bye-laws. SEBI has also laid the eligibility conditions for derivative

exchange/segment and its clearing corporation/house. The eligibility conditions have

been framed to ensure that derivative exchange/segment and clearing corporation/house

provide a transparent trading environment, safety and integrity and provide facilities for

redressal of investor’s grievances.

1.11 Market Regulation and Investor Protection

We have seen that pursuant to the recommendations of JR Verma committee

SEBI formulated and approved guidelines to the stock exchanges (NSE/BSE) and

permitted trading in derivatives. We will now discuss the regulatory measures as

envisaged by SEBI.

Futures/options contracts in both index as well as stocks can be bought and sold through

the trading members of national exchange, or the BSE Mumbai stock exchange. Some of

the trading members also provide the Internet facility to trade in the futures and options

market.

The investor is required to open an account with one of the trading members and

complete the related formalities which include signing of member-constituent agreement,

constituent registration form and risk disclosure document.

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The trading member will allot the investor an unique client identification number.

To begin trading, the investor must deposit cash and /or ha may stipulate other collaterals

with his trading member as. SEBI has issued details guidelines for the benefit of the

investor trading in the derivative exchanges. These may be viewed and studied.

Margins are computed and collected on line, real time on a portfolio basis at the client

level. Members are required to collect the margin upfront from the client and report the

same to the exchange.

All the futures and options contracts are settled in cash at the expiry or exercise of the

respective contracts as the case may be, members are not required to hold any stock of

the underlying for dealing in futures/ options market.

Important Eligibility/Regulatory Conditions Specified by SEBI

Derivative trading to take place through an on-line screen based trading system.

The derivatives exchange/segment shall have on-line surveillance capability to monitor

positions, prices and volumes on a real time basis so as to deter market manipulation.

The derivatives exchange/segment should have arrangements for dissemination of

information about traded, quantities and quotas on a real time basis through at least two

information-vending networks, whish are easily accessible to investors across the

country.

The derivatives exchange/segment should have arbitration and investor grievances

redressal mechanism operative from all the four areas/ regions of the country.

The derivatives exchange/segment should have satisfactory system of monitoring

investor complaints and preventing irregularities in trading.

The derivatives segments of the exchange have a separate protection fund.

The clearing corporation/ house shall perform full notation, i.e., the clearing

corporation/house shall interpose itself between both legs of every trade, becoming the

legal counterpart to both or alternatively should provide an unconditional guarantee for

settlement of all trades.

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The clearing corporation/house shall have the capacity to monitor the overall position of

members across both derivatives market and the underlying securities market for those

members who are participating in both.

The level of initial margin on index futures contracts shall be related to the risk of loss on

the position. The concept of value-at-risk shall be used in calculating required level of

initial margins. The initial margins should be large enough to cover the one-day loss that

can be encountered on the position on 99% of the days.

The clearing corporation/house shall establish facilities for Electronic funds Transfer

(EFT) for swift movement of margin payments.

In the event of a member defaulting in meeting its liabilities, the clearing

corporation/house shall transfer client positions and assets to another solvent member or

close-out all open positions.

The clearing corporation/house should have capabilities to segregate initial margins

deposited by clearing members for trades on their own account and on account of his

client. The clearing corporation/house shall hold the clients margin money in trust for the

client purposes only and should not allow its diversion for any other purpose.

The clearing corporation/house shall have a separate trade guarantee fund for the trades

executed on derivative exchange/ segment.

Measures specified by SEBI to enhance protection of the rights of investors in the

derivative market.

SEBI has also specified measures to ensure protection of rights of investors, these

measures are as follows:

Investors money has to be kept separate at all levels and is permitted to be used only

against the liability of the investors and is not available to the trading member or clearing

member or even any other investors.

The trading member is required to provide every investor with a risk disclosure document

whish will disclose the risk associated with the derivatives trading so that investors can

take a conscious decision to trade in derivatives.

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Investor would get the contract note duly time stamped for receipt of the order and

execution of the order. The order will not be accepted by the system. The investor could

also demand the trade confirmation slip with his ID in support of the contract note. This

will protect him from the risk of price favour, if any, extended by the member.

In the derivative markets all money paid towards margins on all open positions is kept in

trust with the clearing house/clearing corporation and in the event of default of trading or

clearing member the amounts paid by the client towards margins are segregated and not

utilized towards the default of the member. However, in the event of default of a member,

losses suffered by the investor, if any, on settled/ closed out position are compensated

from the investor protection fund, as per the rules, bye-laws and regulations of the

derivative segment of the exchanges.

Presently, SEBI has permitted derivative trading on the derivative segment of BSE and

the F&O segment of NSE. Derivative products have been introduces in a phased manner

starting with index futures contracts in June 2000, options and stock options introduced in

June 2001 and July 2001 followed by stock futures in November 2001.

SEBI guidelines for trading in individual stock futures and stock option

The principal guidelines given by the SEBI for trading in individual stock futures and

individual stock options are as follows:

Contracts will have to be settled in cash.

The contracts would be with a maturity period of one month two months and three

months and at a later date 12 months.

There will be margin requirements for continuity risk.

The SEs will monitor exposure limit. The value of the gross open position at any point of

time in all the stock future contract shall not exceed 20 times the avail net worth of a

member.

The exchange will collect mark to market in cash before start of trading next day.

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Eligibility criteria for trading stock futures and stock options

The following are the eligibility criteria for trading of stock futures and stock options:

The stock shall be chosen from amongst the top 500 stocks in terms of average daily

market of capitalization and average daily traded value in the previous six months on a

rolling basis.

The stock medium quarter sigma order size over the last six months shall be at least Rs.

Five lacks. A stocks quarter sigma order size means the order size in value required for

causing a change in the stock price equal to one- quarter of standard deviation.

If a stock fails to meet the aforesaid eligibility for three months consecutively then no

fresh contract would be issued on that stock.

The exchange may compulsorily close out all derivative contracts in a particular

underlying when that underlying has ceased to satisfy the eligibility criteria or exchange

comes to hold the view that the continuation of derivative contracts on such an

underlying is detrimental to interest of the market in respect of its integrity and safety.

Derivatives contracts on a new stock index can be permitted if the stock contributing 90%

weight age is individually eligible for derivative trading as per the eligibility criteria.

1.12 TYES OF DERIVATIVES

The most commonly used derivatives contracts are Forwards, Futures and

Options.

FORWARDS –

A forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the future at today’s pre-agreed price.

FUTURES –

A future contract is an agreement between two parties to buy or sell an asset at a

certain time in future at a certain price. Futures contracts are special types of forward

contracts in the sense that the former are standardized exchange- traded contracts.

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OPTIONS – Options are of two types – call 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 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 upto one year, the majority of options traded on

options exchanges having 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 upto three years.

BASKETS

Basket options are options an option 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

contracts. The two commodity used swaps are as follows.

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 traders in a derivatives market

Hedgers, speculators and arbitrators are the types of traders in derivatives market.

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Hedgers

Hedgers are those who protect themselves from the risk associated with the price of an

asset by using derivatives. A person keeps a close watch upon the prices discovered in

trading and when the comfortable price is reflected according to his wants, he sells

futures contracts. In this way he gets an assured fixed price of his produce.

In general, hedgers use futures for protection against adverse future price movements in

the underlying cash commodity. Hedgers are often businesses, or individuals, who at one

point or another deal in the underlying cash commodity.

Example: A Hedger pay more to the farmer or dealer of a produce if its prices go up. For

protection against higher prices of the produce, he hedge the risk exposure by buying

enough future contracts of the produce to cover the amount of produce he expects to buy.

Since cash and futures prices do tend to move in tandem, the futures position will profit if

the price of the produce raise enough to offset cash loss on the produce.

Derivatives are financial securities whose value is derived from another "underlying"

financial security. Options, futures, swaps, swaptions, structured notes are all examples of

derivative securities. Derivatives can be used hedging, protecting against financial risk, or

can be used to speculate on the movement of commodity or security prices, interest rates

or the levels of financial indices. The valuation of derivatives makes use of the statistical

mathematics of uncertainty, which is very complex.

A derivative financial product is a contrived instrument, the value of which depends

indirectly on the price of a cash instrument. The price of the cash instrument is referred to

as the "underlying" price, quite often. Examples of cash instruments include actual shares

in a company, physical stocks of commodities, cash foreign exchange, etc

The data collected or analyzed through Beta and Volatility to find out the degree of risk

involved in futures. Moreover strategies like Arbitrage strategies, Hedging strategies and

Speculative strategies also employed to analyze the collected data.

This article will give a brief overview of the different ways in which firms approach this

financial price risk and it will introduce the rationale for using derivative products. While

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there has been a great deal of negative attention paid to derivatives in the mainstream

press, the opportunities they provide make derivatives a necessary part of the future of

any corporation. Future articles in this series will identify the benefits and drawbacks of

individual derivatives structures and explain some of the breakdowns in the application of

derivatives by corporate end-users.

One reason why companies attempt to hedge these price changes is because they are risks

that are peripheral to the central business in which they operate. For example, an investor

buys the stock of a pulp-and-paper company in order to gain from its management of a

pulp-and-paper business. She does not buy the stock in order to take advantage of a

falling Canadian dollar, knowing that the company exports over 75% of its product to

overseas markets. This is the insurance argument in favour of hedging. Similarly,

companies are expected to take out insurance against their exposure to the effects of theft

or fire.

By hedging, in the general sense, we can imagine the company entering into a transaction

whose sensitivity to movements in financial prices offsets the sensitivity of their core

business to such changes. As we shall see in this article and the ones that follow, hedging

is not a simple exercise nor is it a concept that is easy to pin down. Hedging objectives

vary widely from firm to firm, even though it appears to be a fairly standard problem, on

the face of it. And the spectrum of hedging instruments available to the corporate

Treasurer is becoming more complex every day.

Another reason for hedging the exposure of the firm to its financial price risk is to

improve or maintain the competitiveness of the firm. Companies do not exist in isolation.

They compete with other domestic companies in their sector and with companies located

in other countries that produce similar goods for sale in the global marketplace. Again, a

pulp-and-paper company based in Canada has competitors located across the country and

in any other country with significant pulp-and-paper industries, such as the Scandinavian

countries.

Companies that are the most sophisticated in this field recognize that the financial risks

that are produced by their businesses present a powerful opportunity to add to their

bottom line while prudently positioning the firm so that it is not pejoratively affected by

movements in these prices. This level of sophistication depends on the firm's experience,

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personnel and management approach. It will also depend on their competitors. If there are

five companies in a particular sector and three of them engage in a comprehensive

financial risk management program, then that places substantial pressure on the more

passive companies to become more advanced in risk management or face the possibility

of being priced out of some important markets. Firms that have good risk management

programs can use this stability to reduce their cost of funding or to lower their prices in

markets that are deemed to be strategic and essential to the future progress of their

companies.

Most importantly, hedging is contingent on the preferences of the firm's shareholders.

There are companies whose shareholders refuse to take anything that appears to be

financial price risk while there are other companies whose shareholders have a more

worldly view of such things. It is easy to imagine two companies operating in the same

sector with the same exposure to fluctuations in financial prices that conduct completely

different policy, purely by virtue of the differences in their shareholders' attitude towards

risk.

Hedging The hedging problem

The core problem when deciding upon a hedging policy is to strike a balance between

uncertainty and the risk of opportunity loss. It is in the establishment of balance that we

must consider the risk aversion, the preferences, of the shareholders. Make no mistake

about it. Setting hedging policy is a strategic decision, the success or failure of which can

make or break a firm.

Consider the example of the Canadian pulp-and-paper company from before, 75% of

whose product is sold in US dollars to customers located all over the world. The US

dollar here is called the price of determination because all sales of pulp-and-paper are

denominated in US dollars.

They close a deal for US$10 million worth of product and they know that in one month's

time they will receive payment into their US dollar accounts. However, they understand

that from the inception of the contract which binds them to have receivables in US dollars

in one month's time they are exposed to changes in the rate of exchange for the Canadian

dollar against the US dollar.

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Immediately, they are faced with a problem. As a Canadian company, they will have to

repatriate those US dollars at some point because they have decided that foreign

exchange risk is not something that they are prepared to carry as it is deemed it to be

peripheral to their core business.

The problem has two dimensions: uncertainty and opportunity.

If they do not hedge the transaction in any way, they do not know with any certainty at

what rate of exchange they can exchange the US$10 million when it is delivered. It could

be at a better rate or at a worse rate than the rate prevailing currently for exchange of that

amount in one month's time.

Let's call the prevailing spot rate, for argument's sake, 1.5300 and the prevailing one

month forward outright rate at which they could hedge themselves 1.5310.

If they do enter into a forward contract in which they obligate themselves to buy

Canadian dollars and sell US dollars for delivery on the same date as the delivery date on

their pulp-and-paper contract, they have removed this uncertainty. They know without

any question at what rate this exchange will be. It will be 1.5310.

But, they have now taken on infinite risk of opportunity loss. If the Canadian dollar

weakens because of some unforeseen event and in one month's time the prevailing spot

rate turns out to be 1.5600, then they have foregone 290,000 Canadian dollars. This is

their opportunity loss.

Are there instruments that address both certainty and opportunity loss? Fortunately, there

are. They are called derivatives or derivative products. Most financial institutions make

markets in a panoply of risk management solutions involving derivative products. Some

of them come as stand-alone solutions and others are presented as packages or

combinations.

A derivative product is a financial instrument whose price depends indirectly on the

behaviour of a financial price.

For example, the price of a foreign exchange option on the Canadian dollar in which our

company had the right but not the obligation to buy Canadian dollars and sell US dollars

at a pre-set strike price will vary on a day-to-day basis with the movement in the

Canadian dollar/US dollar exchange rate. If the Canadian dollar gets stronger, the

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Canadian dollar call becomes more valuable. If the Canadian dollar gets weaker, the

Canadian dollar becomes less valuable.

Instead of entering into a forward contract to buy Canadian dollars, the pulp-and-paper

company could purchase a Canadian dollar call struck at 1.5310 for a premium from one

of its financial institution counterparties. Doing so reduces their certainty about the rate at

which they will repatriate the US dollars but it limits their worst case in exchange for

allowing them to enjoy potential opportunity gains, again conditioned by the premium

they have paid.

Derivatives just like any other economic mechanism are best thought of in terms of

tradeoffs. The tradeoffs here are between uncertainty and opportunity loss.

However, a Canadian dollar call is only one of the possible risk management solutions to

this problem. There are dozens of possible instruments, each of which has a differing

tradeoff between uncertainty and opportunity loss, that the pulp-and-paper company

could use to manage this exposure to changes in the exchange rate.

The key to hedging is to decide which of these solutions to choose. Hedging is not just

about putting on a forward contract. Hedging is about making the best possible decision,

integrating the firm's level of sophistication, systems and the preferences of their

shareholders.

Future articles will discuss in depth the nature of some of these alternative solutions and

the ways in which firms approach these other instruments.

Hedging objectives

The final part of this article will introduce briefly the notion of hedging objectives. Each

of these will be discussed in articles to follow.

Earlier, we noted that a hedge is a financial instrument whose sensitivity to a particular

financial price offsets the sensitivity of the firm's core business to that price.

Straightaway, we can see that there are a number of issues that present themselves.

First, what is the hedging objective of the firm?

Some of the best-articulated hedging programs in the corporate world will choose the

reduction in the variability of corporate income as an appropriate target. This is consistent

with the notion that an investor purchases the stock of the company in order to take

advantage of their core business expertise.

22

Other companies just believe that engaging in a forward outright transaction to hedge

each of their cross-border cash flows in foreign exchange is sufficient to deem

themselves hedged. Yet, they are exposing their companies to untold potential

opportunity losses. And this could impact their relative performance pejoratively.

Second, what is the firm's exposure to financial price risk?

It is important to measure and to have on a daily basis some notion of the firm's potential

liability from financial price risk. Financial institutions whose core business is the

management and acceptance of financial price risk have whole departments devoted to

the independent measurement and quantification of their exposures. It is no less critical

for a company with billions of dollars of internationally driven revenue to do so.

There are three types of risk for every particular financial price to which the firm is

exposed.

Transactional risks reflect the pejorative impact of fluctuations in financial prices on the

cash flows that come from purchases or sales. This is the kind of risk we described in our

example of the pulp-and-paper company concerned about their US$10 million contract.

Or, we could describe the funding problem of the company as a transactional risk. How

do they borrow money? How do they hedge the value of a loan they have taken once it is

on the books?

Translation risks describe the changes in the value of a foreign asset due to changes in

financial prices, such as the foreign exchange rate.

Economic exposure refers to the impact of fluctuations in financial prices on the core

business of the firm. If developing markets economies devalue sharply while retaining

their high technology manufacturing infrastructure, what effect will this have on an

Ottawa-based chip manufacturer that only has sales in Canada? If it means that these

countries will flood the market with cheap chips in a desperate effort to obtain hard

currency, it could mean that the domestic manufacturer is in serious jeopardy.

Third, what are the various hedging instruments available to the corporate Treasurer

and how do they behave in different pricing environments?

When is it best to use which instrument is the question the corporate Treasurer must

answer. The difference between a mediocre corporate Treasury and an excellent one is

their ability to operate within the context of their shareholder-delineated limits and

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choose the optimal hedging structure for a particular exposure and economic

environment. Not every structure will work well in every environment. The corporate

Treasury should be able to tailor the exposure using derivatives so that it fits the

preferences and the view of the senior management and the board of directors.

Importance

It may appear that companies in which individual investors place money do not have

exposures to financial prices. After reading this article, the reader should have some

notion of how dangerous a misconception that can be.

The single most important point to take away from this material is that financial risk

management is critical to the survival of any non-financial corporation. Investors who

have real money at risk must understand the exposures facing the firms in which they

invest, they must know the extent of risk management at these companies and they must

be able to distinguish between good risk management programs and bad ones. Without

this knowledge, they may be in for some ugly surprises.

It is a way of reducing risks when you have the underlying security. In the above

example, let's say you have 100 shares of Infosys bought at Rs 5,000 each and you expect

the stock to fall by Rs 500. So you buy a put option of Infosys at a strike price of Rs

5,000 for a premium of say Rs 100 per share. So, if the Infosys stock does fall by Rs 500,

your loss is restricted to only Rs 10,000 as -you have recovered Rs 400 a share by buying

an Infosys put.

Derivatives offer a number of advantages such as cash settlement, lower transactions

costs, leverage and flexibility as a wide range of payoffs can be achieved by combining

various instruments. Though the perception is that only the well-capitalized high net

worth individual (HNI) can take positions in the derivatives market, the fact is that many

derivatives transactions are within the means of the ordinary investor. According to NSE,

the monthly market size for index futures has increased from Rs 56,000 crore in October

to Rs 80,000 crore in March 2004. In January, index futures touched almost Rs 1,00,000

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crore. FIIs played a key role in the 73% surge in the Indian equity market last year as FIIs

considered Indian equities undervalued and bought significantly.

Small Investors and Lot Sizes in Derivatives Market

Retail investors who wanted to hedge or speculate using the derivatives market were

often kept out of certain counters such as Tata Motors, Mahindra and Mahindra (M&M)

and Tisco because of large market lots, which made the margins unaffordable.

The downward reduction of the market lot of derivatives contracts has enabled the small

investor to participate in the market without too much investment. Globally, futures and

options exchanges keep a standard market lot (generally 100) for all contracts, regardless

of the contract size. However, at the time of introduction of the derivatives contracts in

June 2000, Sebi had prescribed a market lot, corresponding to a contract size of Rs 2 lakh

for each scrip, fearing that small investors may burn their fingers in the leveraged

derivatives market in the absence of such an entry barrier. The reduction of lot sizes was

long-awaited since most stocks have gained in price since the fixing of the lot sizes,

especially in the last one year, and the contract values have shot through the roof. Tata

Motors, for example, has seen its price appreciate from Rs 63 when the contract was

introduced, in 2000, to Rs 466 in January 2004, leading to a contract size of Rs 15 lakh.

The margin per contract of Tata Motors is about Rs 3.5 lakh, which is unaffordable for

many investors. So also in the cases of Mahindra and Mahindra, Bajaj Auto, Ranbaxy

and Tisco. Retail participants have welcomed this move.

Options settled by delivery gives the owner the right to receive delivery (if it is a call) or

to make the delivery (if it is a put), of the underlying when the option is exercised.

Cash settled options gives the owner the right to receive a cash payment based on the

difference between a determined value of the underlying at the time of exercise and the

fixed exercise price of the option. Nifty options are cash settled. Example: You bought

Nifty November call at a strike price of Rs.1400. On expiry of November options, the

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expiration level was Rs. 1430. The cash settlement will be Rs.30 per Nifty and for one

contract, Rs.6000 (i.e.30*200, the minimum contract size).

Assigned writer Option writer who has been assigned an exercise is known as an assigned

writer.

Expiration date is the date on which the option expires. If an option has not been

exercised prior to its expiration, it ceases to exist after the expiration date, i.e. the option

holder shall no longer have any right and the option, no value.

Style Of Option

Refers to the time at/ within which the option is exercisable. Two different styles of

options are: American and European.

American style

Options which may be exercised at any time prior to their expiration.

European style

Options which may be exercised only during a specified period before the option expires.

Generally, they are exercisable on the expiration date.

Opening transaction is a purchase or a sale transaction by which a person establishes or

increases a position either as the holder or the writer of an option.

Closing transaction is a transaction by which a person reduces or cancels out previous

position either as the holder or the writer of that option. For example, an investor, at some

point prior to expiration, may make an offsetting sale of an identical option, if he is an

option holder or make an offsetting purchase of an identical option, if he is an option

writer.

Long and short long refers to a position as the holder of an option. Short refers to a

position as the writer of an option.

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Speculators

Speculators are somewhat like a middleman. They are never interested in actual owing

the commodity. They will just buy from one end and sell it to the other in anticipation of

future price movements. They actually bet on the future movement in the price of an

asset.

They are the second major group. Of futures players. . These participants include

independent floor traders and investors. They handle trades for their personal clients or

brokerage firms.

Buying a futures contract in anticipation of price increases is known as ‘going long’.

Selling a futures contract in anticipation of a price decrease is known as ‘going short’.

Speculative participation in futures trading has increased with the availability of

alternative methods of participation.

.

Speculators have certain advantages over other investments they are as follows:

If the trader’s judgment is good, he can make more money in the futures market faster

because prices tend, on average, to change more quickly than real estate or stock prices.

Futures are highly leveraged investments. The trader puts up a small fraction of the value

of the underlying contract as margin, yet he can ride on the full value of the contract as it

moves up and down. The money he puts up is not a down payment on the underlying

contract, but a performance bond. The actual value of the contract is only exchanged on

those rare occasions when delivery takes place

Arbitrators

According to dictionary definition, a person who has been officially chosen to make a

decision between two people or groups who do not agree is known as Arbitrator. In

commodity market Arbitrators are the person who takes the advantage of a discrepancy

between prices in two different markets. If he finds future prices of a commodity edging

out with the cash price, he will take offsetting positions in both the markets to lock in a

profit. Moreover the commodity futures investor is not charged interest on the difference

between margin and the full contract value.

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Functions of derivatives market

The derivatives market performs a number of economic functions.

It acts as a catalyst for new entrepreneurial activity.

Derivatives markets help increase savings and investment in the long run. Transfer of

risks enables market participants to expand their volume of activity.

Prices in an organized derivatives market reflect the perception of market participants

about the future and lead the prices of underlying to the perceived future level.

The derivatives market helps to transfer risks from those who them but may not like them

to those who have an appetite for them.

Speculative trades shift to a more controlled environment of derivatives market.

FUTURES AND OPTIONS In recent years, derivatives have become increasingly

important in the field of finance. While futures and options are now actively traded on

many exchanges, forward contracts are popular on the OTC market.

FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One of the parties to a contract assumes a long position and agrees to buy

the underlying asset on a certain specified future date for a certain specified price . the

other party assumes a short position and agrees to sell the asset on the same date for the

same price. The parties negotiate other contract details like delivery date, price and

quantity bilaterally by the parties to the contract. The forward contracts are normally

traded outside the exchanges.

The salient features of forward contracts –

They are bilateral contracts and hence exposed to counter-party risk.

Each Contract is custom designed and hence is unique in terms of contract size,

expiration date and the asset type and quality.

The contract price is generally not available in public domain.

On the expiration date, the contract has to be settled by delivery of the asset.

Limitations

Lack of centralization of trading

Lack of liquidity.

Counterparty risk i.e., possibility of default by one of the party to the contract.

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Future contracts

Future contracts is an agreement made and traded on the exchange between two

parties to buy or sell a commodity at a particular time in the future for a pre-defined

price. Since both the parties are unaware of each other, the exchange provides a

mechanism to give the party assurance of honored contract. The exchange specifies

standardized features of the contract. The risk to the holder is unlimited, and because the

pay off pattern is symmetrical, the risk to the seller is unlimited as well.

Money lost and gained by each party on a futures contract are equal and opposite.

In other words, a future trading is a zero-sum game. These are basically forward

contracts, meaning they represent a pledge to make a certain transaction at a future date.

The exchange of assets occurs on the date specified in the contract. These are regulated

by overseeing agencies, and are guaranteed by clearinghouses. Hedgers often trade

Future for the purpose of keeping price risk in check.

Future contracts are often used by commercial enterprises as ‘hedging tools’ to reduce

the risk of expected future purchases or sales of the underlying asset. If used to speculate,

risk increases. So risk depends on the underlying instrument and the use of the future.

Advantages of Futures Contracts

If price moves are favorable, the producer realizes the greatest return with this marketing

alternative.

No premium charge is associated with futures market contracts.

Disadvantages of Future Contracts

Subject to margin calls

Unable to take advantage of favorable price moves

Net price is subject to Basis change

Futures contracts are similar to Options. Both represent actions that occur in future.

But Options are contract on the underlying futures contract where as futures are either to

accept or deliver the actual physical commodity. To make a decision between using a

futures contract or an options contract, producers need to evaluate both alternatives.

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Distinction between futures and forwards

Futures Options

- Trade on an organized exchange - OTC in nature.

- Standardized contract terms. - Customized contract terms.

- Hence more liquid. - Hence less liquid.

- Requires margin payments. - No margin payment.

- Follows daily settlement. - Settlement happens at end of period

OPTIONS

Options are fundamentally different from forwards and futures contracts. An

option gives the holder of the option the right to do something. The holder does not have

to exercise this right. In contrast, in a forward or futures contract, the two parties have

committed themselves to doing something. Whereas it costs nothing (except margin

requirements) to enter into a futures contract, the purchase of an option requires an

upfront payment.

OPTIONS TERMINOLOGY

Index options: these options have the index as the underlying. Some options are European

while others are American. Like indexing futures contracts, indexing options contracts

are also cash settled.

Stock options: stock options are options on individual stocks. Options currently trade on

over 500 stocks ion the United States. A contract gives the holder the right to buy or sell

shares at the specified price.

Buyer of an option: the buyer of an option is the one who by paying the option premium

buys the right but not the obligation to exercise his option on the seller/writer.

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Writer of an option: the writer of a call/put option is the one who receives the option

premium and is thereby obliged to sell/ buy the asset if the buyer wishes to exercise his

option.

There are two basic types of options

CALL OPTION – a call option gives the holder the right but not the obligation to buy an

asset by a certain date for a certain price.

PUT OPTION – a put option gives the holder the right but not obligation to sell an asset

by a certain date for a certain price.

Option price: Option price is the price, which the option buyer pays to the option seller. It

is also referred to as the option premium.

Expiration date: the date specified in the options contract is known as the expiration date,

the exercise date, the strike date or the maturity.

Strike price: the price specified in the options contract is known as the strike price or

exercise price.

American options: American options are options that can be exercised at any time upto

the expiration date. Most exchange-traded options are American.

European options: European options are options that can be exercised only on the

expiration date itself. European options are easier to analyze than American options, and

properties of an American option are frequently deducted from those of its European

counterpart.

Distinction between futures and option

Futures options

- Exchange traded, with novation. - Same as futures.

- Exchange defines the novation. - Same as futures.

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

- Price is zero. - Price is always positive.

- Linear layoff. - Non- linear layoff.

- Both long and short at risk. - Only short at risk.

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SWAPS

Swaps are the agreements between 2 parties to exchange assets or set of financial

obligations or series of cash flows for specified period of time at pre- determined

intervals. They include both spot and forward transactions in one agreement and are

generally customized transactions.

The party can reverse or unwind a swap position before the end of the term by canceling

the agreement and delivering a final difference payment to counter party. Alternatively it

can write a mirror contract to exactly offset the original swap in the second swap market.

Types of swaps: -

The markets have developed variety of swaps. They are as follows-

Interest rate swap.

Currency swap.

Debt equity swap.

The factors generally attributed as the major driving force behind growth of financial

derivatives are as follows

Increased volatility in asset prices in financial markets.

Increased integration of national financial markets with the international markets.

Marked improvements in communication facilities and sharp decline in their

costs.

Development of more sophistical risk management’s tools, providing economic

agents a wider choice of risk management strategies.

Innovations in the derivatives markets, which optimally combine the risks and

returns over a large number of financial assets, leading to higher returns, reduced

risk as well as transaction costs as compared to individual financial assets.

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Logic behind the hedging strategy:

When I am long in Stock Market and market falls, the value of my portfolio

proportionately falls. When market falls, Index falls. When Index falls, value of Index

futures contract also falls. Therefore if I were having short position in Index futures

contract simultaneously I would have gained out of this fall.

Thus, the two strategies for hedging the market risk are :

when long in Stock Market, go short in Index Futures Contract; and

when short in Stock Market, go long in Index Futures Contract.

Hence Index futures contract can be used as a Risk Management technique to

minimise the loss arising out of Market risk. This means that no loss and therefore no

profit out of market fluctuations. The Return out of the performance of scrips are ensured

using these hedging strategies.

Practical Aspects of the Strategy

One has to ascertain how much position he must take in Index Futures contract so

that he has optimally hedged the market risk which his stock market position is exposed

to. A normal measure of a stock market risk is the stock's beta. The beta of a stock shows

how the market price of that stock is likely to change relative to a change in value of the

stock index. For eg. A stock with beta 1.2 would mean if stock index moves up by 1%,

the price of this stock would go up by 1.2%.

A beta greater than one indicates that the stock is more volatile than the market and a

value of less than one suggests that the stock is less volatile than the market.

For an optimal hedging one should take into account the beta of the scrip. Beta of

a portfolio is weighted average beta of the scrips included in the portfolio. Thus, an

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investor having Rs. 10 lakhs worth long position in stock market and intending to have a

complete hedging should have a short position equivalent to Beta x Portfolio Value. If

Portfolio beta is 1.5, the investor should take a short position of 1.5 x 10lakhs = 15 lakhs

worth contract value.

Illustration

Rajesh bought 5000 shares of Reliance @ 200 (say) per share on 10th of July, 2000. He

wants to hold this investment till September end. The beta of Reliance is say 1.2. He

wants to hedge his market exposure by selling Nifty Futures contract which is available at

1,200 at the moment. Let us find out how he can hedge his position in the following

situations:

On September end, suppose Nifty rises to 1250 and Reliance stock to Rs. 230/-

Suppose Nifty goes down to 1150 and Reliance shares also goes down to Rs.185.

Solution:

Value of Position = 5000 x 200 = 10, 00,000

Position to be hedged = 10, 00,000 x 1.2 = 12, 00,000

Value of one Nifty contract = 1200 x 200 = 2, 40,000

Number of Nifty futures contact to be sold = 5

To hedge the market risk completely Rajesh needs to sell 5 Nifty contracts for Sep., 2000.

On September end, his profit/loss positions in both situations are as below:

Nifty value is 1250 at which he has to settle his short position so he looses 50 x 200 =

10,000 in one contract. He sold 5 contracts so total loss is Rs. 50,000.

Reliance stock value is 230. By selling 5000 shares @230, he earns Rs. 30 x 5000 =

1, 50,000

Total Profit = 1, 00,000

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Nifty value is 1150 at which he settles his short position. Since he is buying Nifty at

lower points so he gains (50 x 200) = 10,000 x 5 = Rs. 50,000/-

Reliance stock value is also reduced to 190 so by selling 5,000 shares, he losses (200

- 190) 5,000.

5,000 x 10 = Rs.50, 000

Net loss/gain = Nil

Thus, in both the situation, he is able to hedge his market exposure.

There are eight basic strategies of Index Futures trading:

Hedging Strategies:

Long in Stock Market, Short in Index Futures;

Short in Stock Market, Long in Index Futures;

Have Portfolio, Short in Index Futures;

Have Fund, Long in Index Futures;

Speculative Strategies:

Bullish Market, go long in Index Futures;

Bearish Market, go short in Index Futures;

Arbitraging Strategies:

Have money, lend it to Market

Have securities, lend it to Market

Highlights on remaining six strategies:

Have Portfolio, short in Index Futures:

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Supposing an investor is holding stocks and is planning to dispose of the same

within three months for. He is clear of his Portfolio value at the current market rate

but is quite uncertain about his Portfolio value by the end of third month. At the

current market value he is quite satisfied with the return but for some reason he does

not want to dispose his portfolio now itself. He wants to retain his portfolio till the

end of third month. He is therefore intending to ensure the receipt of return at current

market price after three months. In other words, he wants to lock the current market

price for three months.

Strategy to adopt:

He has portfolio which he wants to sell after three months. To lock the market, he

should go short in three month Index Futures valuing his portfolio value at the current

market price. After three months he can dispose of his securities in stock market. As

he disposes of his portfolio, he should simultaneously cover his short position in

Index Futures by buying back Index Futures equivalent to the value of scrip’s sold.

By the time he sells his complete portfolio of scrip’s he would have covered his entire

position in Index Futures.

In the falling market, the investor would incur loss in his portfolio but since he is

short in Index futures he would get profit by covering his short position at the lower

rate. Thus loss in Stock Market gets offset by gain in Index Futures.

In the rising market, the investor would get profit from his portfolio but he will

have to forego the same as he would be incurring loss in Index Futures.

Thus, Index Futures is a risk management technique used to reduce market risk and

therefore no profit and no loss from the market movements.

Have Fund, go long in Index Futures

Supposing an investor is going to get some fund in short span of time which he

intends to invest in stocks. He also requires time to analyze the stocks. He is quite

36

bullish about the market. He prefers to purchase the stocks at the current market price

but he has not received the fund. If he waits for the fund to come, the market may go

up and therefore his cost also would go up. To avoid this he wants to lock the market

at the current price. He should go long in Index Futures immediately. As he receives

the fund and buys the scrip’s, he should simultaneously reduce his exposure in the

Index Futures by selling the Index Futures.

In the rising market he would have to pay more to get the securities which he

would get back from Index Futures.

In the falling market he would get the scrip’s at cheaper rates but he will have to pay

off the loss in the Index Futures.

Speculative Strategies In the absence of Derivatives Market, when an investor is bullish

about the market he immediately assumes long position in any of the scrip’s thinking that

the scrip’s will definitely reflect the market trend.

With Index Futures Contract in place when an investor thinks the market is bullish he can

buy the market itself by going long in Futures Index. Similarly if he is bearish about the

market he can sell the market by going short in Futures Index.

Arbitrage Strategies

Have Fund, lend them to the market

Have Securities, lend them to the market

In the liquid market, one can get attractive bid and offer and a trade can take place at less

impact cost. By taking into account the bid price, offer price and the duration of the

contract one can at any point of time analyse and see if he can lend money at attractive

interest rate or if he can receive money from the market by lending securities in the

market.

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Have Fund, lend them to the market

Suppose the Nifty spot is at 1000 and the two month futures are at 1040 and suppose the

transactions costs involved are 0.4% per month. Then the rate of return in loaning money

to the market shall be 1040/1000 over two months, i.e., 1.9% per month less 0.4% = 1.5%

per month.

Thus buy spot and sell Index Futures and earn 1.5% per month a risk free return.

Procedure involved in doing this arbitrage is as follows:

To buy Nifty spot one has to buy one share each of all the scrip’s in the Index. A

simultaneous short position of Index Futures will completely hedge (nullify) the market

exposure. The investor will pay to the Stock Exchange and receive scrip’s on which the

investor may get dividend, an additional income. At the end of the two month period the

investor will sell off all the scrip’s and receive back the fund. Simultaneously, the

position in the Index Futures will get automatically closed out at the spot Nifty.

Have Securities, lend them to the market

Suppose that Nifty spot is 1100 and the two month futures are trading at 1110.

The spot futures basis (1110/1100) is 0.9%. Suppose cash can be risklessly invested

at 1% per month, over two months, funds invested at 1% per month yield 2.01%.

Hence, the total return that can be obtained in stock lending is 2.01% - 0.9% = 0.4%

or 0.71%, over the two month period.

Spread Trading

NSE and BSE offers another attractive trading method involving less risk and

thereby attracting less initial margin of nearly 1%. An investor can assume spread

position. A calendar spread is created by taking simultaneously two opposite

positions in two different expiry months, viz.

a long position in Nifty Index futures in any calendar month and

a short position in Nifty Index future in different calendar month.

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Example of Calendar Spreads - Long in June Nifty Futures and Short in August Nifty

Futures.

Procedure involved.

The investor can assume a calendar spread position today. After some days or before one

of the Index Futures gets expired, the investor would close out the spread position by

reversing both the legs simultaneously.

Receiving the spread involves buying near month futures and simultaneously selling far

month futures and Paying spread position means selling near month futures and buying

far month futures.

When spread received is greater than spread paid the investor gets profit and when spread

received is lesser than spread paid he incurs a loss.

1.13 SECURITY EXCHANGE BOARD OF INDIA (SEBI)

INTRODUCTION:

In 1988 the Securities and Exchange Board of India (SEBI) was established by the

Government of India through an executive resolution, and was subsequently upgraded as

a fully autonomous body (a statutory Board) in the year 1992 with the passing of the

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

of Government Control, a statutory and autonomous regulatory board with defined

responsibilities, to cover both development & regulation of the market, and independent

powers has been set up. Paradoxically this is a positive outcome of the securities scam of

1990-91.

OBJECTIVES

The objectives of SEBI are as follows-

To promote healthy and orderly growth of securities market.

To protect interest of investors, so that there is a steady flow of savings into the capital

market.]

To regulate the securities market and ensure fair practices by the issuer of securities.

39

To promote efficient services by brokers, merchant bankers and other intermediaries.

FUNCTIONS

Sec 11 of the SEBI act specifies the functions as follows-

Regulatory functions-

Regulation of stock exchange of self- regulatory organizations.

Registration and regulation of stockbrokers, sub- brokers, register to all issue, merchant

bankers, underwriters, portfolio managers.

Registration and regulation of the working of collective schemes including mutual funds.

Prohibition of fraudulent and unfair trade practices relating to securities market.

Prohibit inter trading in securities.

Regulating substantial acquisitions of shares and take over of companies.

Developmental functions-

Promote investors education.

Training of intermediaries.

Conduct research and publish information.

Promotion of fair practices.

Promoting self-regulatory organizations

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CHAPTER 2

2.1 TITLE

Derivatives as a hedging tool for instrumental plan

2.2 STATEMENT OF PROBLEM

India is a developing country. It is prone to frequent changes in the market due to

political, social, economic changes. As a result this leads to high volatility in the stock

market.

The players in the Indian stock market are prone to various kinds of risks and level of

risk. This may be due to lack of information regarding trading practices in stock

exchange. This study attempts to provide the derivatives as a hedging tool to reduce the

various risks in the stock market.

2.3 NEEDS FOR OR IMPORTANCE OF THE STUDY

Business concerns and corporate investors worldwide are using various financial

instruments to hedge the risks. Derivatives effectively to reduce substantial loss have

proved that these instruments can effectively reduce risk.

2.4 OBJECTIVES OF THE RESEARCH

To study the trading practices in the derivative market.

To study the various risk associated with derivatives.

To study the financial derivatives as a hedging tool in the stock market

2.5 SCOPE OF THE STUDY

This study is done to know the derivative markets in India. There are various types of

derivatives instruments like commodities, cash market, futures, stock futures but in this

study mainly it is concentrated on the stock futures for finding the risk involved in the

stock futures.

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2.6 METHODOLOGY

This research has been conducted by taking nifty of ten companies for beta calculation.

FORMULA USING BETA

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

2.7 DATA COLLECTION

The report is prepared by using secondary data. The secondary data are collected from

reports, magazines, and journals and also from websites.

Market movements of the ten different companies was observed for one month with

Nifty Index Futures, observation on the price movement of derivative market for the

purpose of analysis of data were collected from the official websites of National Stock

exchange and Derivatives India (www.nseindia.com & derivativesindia.com) The

observation period was from 1ST MARCH to 31ST MARCH 07. The data collected from

websites were used to analyze the strategies and for calculations.

2.8 PLAN OF ANALYSIS

In this study I have used figures, tables, charts, and beta formula for finding the analysis

2.9 LIMITATIONS OF THE RESEARCH

A) Availability of data because the data used for calculating beta is only one month

B) In the stock market various options are available like commodities, cash market,

options except form this I have used stock futures for calculation.

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2.10 CHAPTER SCHEME

Chapter 1: Introduction to financial market, Derivatives, Types of derivatives, Hedging,

SEBI, Function & Objectives

Chapter 2 :Title, Statement of problem, Need for the study, Objectives of the research,

Scope of the study, Methodology, Plan of analysis, Limitation, Chapter scheme

Chapter 3: Industry Profile, Company profile, Nature of business, Products and services.

Chapter 4: Analysis and interpretation of data, tables and charts

Chapter 5: Findings, conclusion, recommendation

CHAPTER 3

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3.1 INDUSTRY PROFILE

A Brief History of Derivatives

The history of derivatives is quite colorful and surprisingly a lot longer than most people

think. A few years ago I compiled a list of the events that I thought shaped the history of

derivatives. That list is published in its entirety in the Winter1995 is sue of Derivatives

Quarterly. What follows here is a snapshot of the major events that I think form the

evolution of derivatives.

 

I would like to first note that some of these stories are controversial. Do they really

involve derivatives? Or do the minds of people like myself and others see derivatives

everywhere?

 

To start we need to go back to the Bible. In Genesis Chapter 29, believed to be about the

year 1700 B.C., Jacob purchased an option costing him seven years of labor that granted

him the right to marry Laban's daughter Rachel. His prospective father-in-law, however,

reneged, perhaps making this not only the first derivative but the first default on a

derivative. Laban required Jacob to marry his older daughter Leah. Jacob married Leah,

but because he preferred Rachel, he purchased another option, requiring seven more years

of labor, and finally married Rachel, bigamy being allowed in those days. Jacob ended up

with two wives, twelve sons, who became the patriarchs of the twelve tribes of Israel, and

a lot of domestic friction, which is not surprising. Some argue that Jacob really had

forward contracts, which obligated him to the marriages but that does not matter. Jacob

did derivatives, one way or the other. Around 580 B.C., Thales the Milesian purchased

options on olive presses and made a fortune off of a bumper crop in olives. So derivatives

were around before the time of Christ.

 

The first exchange for trading derivatives appeared to be the Royal Exchange in London,

which permitted forward contracting. The celebrated Dutch Tulip bulb mania, which you

can read about in Extraordinary Popular Delusions and the Madness of Crowds by

Charles Mackay, published 1841 but still in print, was characterized by forward

contracting on tulip bulbs around 1637. The first "futures" contracts are generally traced

44

to the Yodoya rice market in Osaka, Japan around 1650. These were evidently

standardized contracts, which made them much like today's futures, although it is not

known if the contracts were marked to market daily and/or had credit guarantees.

 

Probably the next major event, and the most significant as far as the history of U. S.

futures markets, was the creation of the Chicago Board of Trade in 1848. Due to its prime

location on Lake Michigan, Chicago was developing as a major center for the storage,

sale, and distribution of Midwestern grain. Due to the seasonality of grain, however,

Chicago's storage facilities were unable to accommodate the enormous increase in supply

that occurred following the harvest. Similarly, its facilities were underutilized in the

spring. Chicago spot prices rose and fell drastically. A group of grain traders created the

"to-arrive" contract, which permitted farmers to lock in the price and deliver the grain

later. This allowed the farmer to store the grain either on the farm or at a storage facility

nearby and deliver it to Chicago months later. These to-arrive contracts proved useful as

a device for hedging and speculating on price changes. Farmers and traders soon realized

that the sale and delivery of the grain itself was not nearly as important as the ability to

transfer the price risk associated with the grain. The grain could always be sold and

delivered anywhere else at any time. These contracts were eventually standardized

around 1865, and in 1925 the first futures clearinghouse was formed. From that point on,

futures contracts were pretty much of the form we know them today.

 

In the mid 1800s, famed New York financier Russell Sage began creating synthetic loans

using the principle of put-call parity. Sage would buy the stock and a put from his

customer and sell the customer a call. By fixing the put, call, and strike prices, Sage was

creating a synthetic loan with an interest rate significantly higher than usury laws

allowed.

 

One of the first examples of financial engineering was by none other than the beleaguered

government of the Confederate States of America, which is sued a dual currency

optionable bond. This permitted the Confederate States to borrow money in sterling with

45

an option to pay back in French francs. The holder of the bond had the option to convert

the claim into cotton, the south's primary cash crop.

 

Interestingly, futures/options/derivatives trading was banned numerous times in Europe

and Japan and even in the United States in the state of Illinois in 1867 though the law was

quickly repealed. In 1874 the Chicago Mercantile Exchange's predecessor, the Chicago

Produce Exchange, was formed. It became the modern day Merc in 1919. Other

exchanges had been popping up around the country and continued to do so.

 

The early twentieth century was a dark period for derivatives trading as bucket shops

were rampant. Bucket shops are small operators in options and securities that typically

lure customers into transactions and then flee with the money, setting up shop elsewhere.

 

In 1922 the federal government made its first effort to regulate the futures market with

the Grain Futures Act. In 1936 options on futures were banned in the United States. All

the while options, futures and various derivatives continued to be banned from time to

time in other countries.

 

The 1950s marked the era of two significant events in the futures markets. In 1955 the

Supreme Court ruled in the case of Corn Products Refining Company that profits from

hedging are treated as ordinary income. This ruling stood until it was challenged by the

1988 ruling in the Arkansas Best case. The Best decision denied the deductibility of

capital losses against ordinary income and effectively gave hedging a tax disadvantage.

Fortunately, this interpretation was overturned in 1993.

 

Another significant event of the 1950s was the ban on onion futures. Onion futures do not

seem particularly important, though that is probably because they were banned, and we

do not hear much about them. But the significance is that a group of Michigan onion

farmers, reportedly enlisting the aid of their congressman, a young Gerald Ford,

succeeded in banning a specific commodity from futures trading.

46

To this day, the law in effect says, "you can create futures contracts on anything but

onions.”

 

In 1972 the Chicago Mercantile Exchange, responding to the now-freely floating

international currencies, created the International Monetary Market, which allowed

trading in currency futures. These were the first futures contracts that were not on

physical commodities. In 1975 the Chicago Board of Trade created the first interest rate

futures contract, one based on Ginnie Mae (GNMA) mortgages. While the contract met

with initial success, it eventually died. The CBOT resuscitated it several times, changing

its structure, but it never became viable. In 1975 the Merc responded with the Treasury

bill futures contract. This contract was the first successful pure interest rate futures. It was

held up as an example, either good or bad depending on your perspective, of the

enormous leverage in futures. For only about $1,000, and now less than that, you

controlled $1 million of T -bills. In 1977, the CBOT created the T -bond futures contract,

which went on to be the highest volume contract. In 1982 the CME created the

Eurodollar contract, which has now surpassed the T -bond contract to become the most

actively traded of all futures contracts. In 1982, the Kansas City Board of Trade launched

the first stock index futures, a contract on the Value Line Index. The Chicago Mercantile

Exchange quickly followed with their highly successful contract on the S&P 500 index.

 

1973 marked the creation of both the Chicago Board Options Exchange and the

publication of perhaps the most famous formula in finance, the option pricing model of

Fischer Black and Myron Scholes. These events revolutionized the investment world in

ways no one could imagine at that time. The Black-Scholes model, as it came to be

known, set up a mathematical framework that formed the basis for an explosive

revolution in the use of derivatives. In 1983, the Chicago Board Options Exchange

decided to create an option on an index of stocks. Though originally known as the CBOE

100 Index, it was soon turned over to Standard and Poor's and became known as the S&P

100, which remains the most actively traded exchange-listed option.

 

47

The 1980s marked the beginning of the era of swaps and other over-the-counter

derivatives. Although over-the-counter options and forwards had previously existed, the

generation of corporate financial managers of that decade was the first to come out of

business schools with exposure to derivatives. Soon virtually every large corporation, and

even some that were not so large, were using derivatives to hedge, and in some cases,

speculate on interest rate, exchange rate and commodity risk. New products were rapidly

created to hedge the now-recognized wide varieties of risks. As the problems became

more complex, Wall Street turned increasingly to the talents of mathematicians and

physicists, offering them new and quite different career paths and unheard-of money. The

instruments became more complex and were sometimes even referred to as "exotic."

 

In 1994 the derivatives world was hit with a series of large losses on derivatives trading

announced by some well-known and highly experienced firms, such as Procter and

Gamble and Metallgesellschaft. One of America's wealthiest localities, Orange County,

California, declared bankruptcy, allegedly due to derivatives trading, but more accurately,

due to the use of leverage in a portfolio of short- term Treasury securities. England's

venerable Barings Bank declared bankruptcy due to speculative trading in futures

contracts by a 28- year old clerk in its Singapore office. These and other large losses led

to a huge outcry, sometimes against the instruments and sometimes against the firms that

sold them. While some minor changes occurred in the way in which derivatives were

sold, most firms simply instituted tighter controls and continued to use derivatives.

 

These stories hit the high points in the history of derivatives. Even my aforementioned

"Chronology" cannot do full justice to its long and colorful history. The future promises

to bring new and exciting developments

48

3.2 COMPANIES PROFILE

ITC was incorporated on August 24, 1910 under the name of 'Imperial Tobacco

Company of India Limited'. Its beginnings were humble. The Company celebrated its

16th birthday on August 24, 1926, by purchasing the plot of land situated at 37,

Chowringhee, (now renamed J.L. Nehru Road) Kolkata, for the sum of Rs 310,000. This

decision of the Company was historic in more ways than one. It was to mark the

beginning of a long and eventful journey into India's future. The Company's headquarter

building, 'Virginia House', which came up on that plot of land two years later, would go

on to become one of Kolkata's most venerated landmarks. The Company's ownership

progressively Indianised, and the name of the Company was changed to I.T.C. Limited in

1974. In recognition of the Company's multi-business portfolio encompassing a wide

range of businesses - Cigarettes & Tobacco, Hotels, Information Technology, Packaging,

Paperboards & Specialty Papers, Agri-Exports, Foods, Lifestyle Retailing and Greeting

Gifting & Stationery - the full stops in the Company's name were removed effective

September 18, 2001. The Company now stands rechristened 'ITC Limited'.

ITC’s corporate strategies are :

 Create multiple drivers of growth by developing a portfolio of world class businesses

that best matches organisational capability with opportunities in domestic and export

markets.

 Continue to focus on the chosen portfolio of FMCG, Hotels, Paper, Paperboards &

Packaging, Agri Business and Information Technology.

 Benchmark the health of each business comprehensively across the criteria of Market

Standing, Profitability and Internal Vitality.

 Ensure that each of its businesses is world class and internationally competitive.

 Enhance the competitive power of the portfolio through synergies derived by blending

the diverse skills and capabilities residing in ITC’s various businesses.

 Create distributed leadership within the organisation by nurturing talented and focused

top management teams for each of the businesses.

49

ABB COMPANY

The history of ABB goes back to the late nineteenth century, and is a long and illustrious

record of innovation and technological leadership in many industries.

Having helped countries all over the world to build, develop and maintain their

infrastructures, ABB has in recent years gone over from large-scale solutions to

alternative energy and the advanced products and technologies in power and automation

that constitute its Industrial IT offering.

Business Description

ABB Limited (India). The Company's principal activity is to provide power and

automation technologies that enable utility and industry customers to improve

performance while lowering environmental impact. The Company operates in two

segments: Power Technology and Automation Technology. Power Technology segment

manufactures, engineers, supplies and provides solutions for power transmission, power

distribution and control and protection systems for power plants. The products include

transformers, switchgears, breakers, capacitors, power line carrier communication

equipment and relay control panels. Automation Technology segment provides products,

systems, software and services for automation and optimisation of discrete, process and

batch manufacturing operations and related services. These technologies include

measurement control, instrumentation, process analysis, drives and motors, power

electronics, robots and low-voltage products.

Click below for a few of the many innovations that ABB has brought to the world in the

past 120 years.

ABB is a global leader in power and automation technologies that enable utility and

industry customers to improve their performance while lowering environmental impact.

The ABB Group of companies operates in around 100 countries and employs about

109,000 people.

50

Ingersoll Rand is a leading diversified industrial company providing products,

services and integrated solutions to industries ranging from transportation and

manufacturing to food retailing, construction, and agriculture. With a 135-year-old

heritage of technological innovation, we help companies worldwide to be more

productive, efficient and innovative. In every line of our business, Ingersoll Rand enables

companies and their customers to create progress.

The company features a portfolio of worldwide businesses comprising an enviable roster

of leading industrial and commercial brands, such as Bobcat compact equipment; Club

Car golf cars; Hussmann stationary refrigeration equipment; Ingersoll Rand industrial and

construction equipment; Schlage locks and Thermo King transport temperature-control

equipment. These, and many other Ingersoll Rand brands, are positioned as number one

or two in their markets.

OneCompany.EndlessPossibilities.

At Ingersoll Rand, we empower employees to inspire progress by unleashing the

potential of our people. Together we transform work into progress, helping our customers

and societies advance and realize their greater potential. With over 80 manufacturing

facilities around the globe, today’s Ingersoll Rand is the result of the passion, ideas and

hard work of its 40,000 employees who, over 100 years, have built one of the world’s

foremost industrial companies.

We look for people who understand and share the passion for bringing about bold shifts

in how people, economies and societies operate. As part of our diverse and global

workforce, you will work in an environment that fosters teamwork and the sharing of

ideas across functions, businesses and geographies. You will be valued as an individual

and offered developmental opportunities that challenge, reward and encourage your

professional and personal growth. Whether you are just starting a career or you are

already established, you will be exposed to all aspects of our business and empowered to

contribute from day one.

51

NDTV

Uttar Pradesh is the fifth largest and the most populous state in India, with an estimated

population of 175 million.

Before January 12 1950, the state was known as Sanyukt Prant (United Province), which

was formed combining the states of Awadh and Agra.

However, it was renamed by its first chief minister Govind Ballabh Pant, who was in

power on four separate occasions before and after the Indian Constitution came into

existence.

During the first Assembly polls in Uttar Pradesh, there were 347 seats. However, at

present, there are 403 seats. The legislative capital of the state is Lucknow, while the

court is based in Allahbad.

Uttar Pradesh was the first state in India to have a woman chief minister - Sucheta

Kriplani who was sworn in in October 1963 and was in power till March 1967.

Economy

The state is the second largest economy in India, following Maharashtra, with its Gross

State Domestic product for 2004 at $1.2 trillion in current prices.

According to official estimates 43 per cent of the economic activity in the state is

agriculture based while services account for 37 per cent and manufacturing 20 per cent of

activity.

The state is also a major contributor to national foodgrain stock and is also home to 78

per cent of the national livestock population.

52

Politics

Given both its political importance and sheer size, whatever happens in Uttar Pradesh

affects the rest of the polity.

The relevance of the state in central politics is further underscored by the fact that seven

of the country's fourteen Prime Ministers hail from the state.

Caste and religion have always played an important role in the political landscape of the

state. According to the 2001 census, 81 per cent of the population of Uttar Pradesh

follows Hinduism, while around 18 per cent are Muslim.

However, besides religion and caste, among the key issues in the 2007 Assembly

elections have been development, law and order and the criminalisation of politics.

Among the key parties contesting the 2007 elections are the ruling Samajwadi Party,

BSP, BJP and the Congress Party.

The elections are being held in seven different phases from April 7, 2007, to May 8,

2007, with around 840 candidates contesting.

53

BANK OF BARODA

Bank of Baroda was founded by Maharaja Sayajirao Gaekwad of Baroda on July 20,

1908 with a paid up capital of Rs 10 lakhs. Since then bank has traversed an eventful and

successful journey of almost 100 years. Today, Bank of Baroda has a network of 2737

branches including 39 overseas branches spread over 20 countries.

In mid-eighties, the Bank of Baroda diversified into areas of merchant banking, housing

finance, credit cards and mutual funds. In 1995 the Bank raised Rs 300 crores through a

Bond issue. In 1996 the Bank tapped the capital market with an IPO of Rs 850 crores.

Bank of Baroda took the lead in shifting from manual operating systems to a

computerized work environment. Today, the Bank has 1918 computerized branches,

covering 70% of its network and 91.64% of its business.

Bank of Baroda gives high priority to quality service. In its quest for quality, the Bank

has secured the ISO 9001:2000 certifications for 15 branches. By end of the 2005-06, the

Bank is targeting 54 more branches for this quality certification

54

WIPRO

Azim Premji is a graduate in Electrical Engineering from Stanford University, USA. On

the sudden demise of his father in 1966, Premji took on the mantle of leadership of Wipro

at the age of 21. Premji started off in Wipro with a simple Vision – to build an

organization on a foundation of Values.

The largest independent R&D Services provider in  the world

Over half billion revenue from R&D

Among the top 3 offshore BPO services provider in  the world

A strategic partner to five of the top ten most  innovative companies in the world

Only Indian company to be ranked among the top 10 global outsourcing providers in

IAOP's

Wipro Technologies is a global services provider delivering technology-driven business

solutions that meet the strategic objectives of our clients. Wipro has 40+ ‘Centers of

Excellence’ that create solutions around specific needs of industries. Wipro delivers

unmatched business value to customers through a combination of process excellence,

quality frameworks and service delivery innovation. Wipro is the World's first CMMi

Level 5 certified software services company and the first outside USA to receive the

IEEE Software Process Award.

55

RANBAXY

When we set out on our way in 1961, little did we realise the impact we would make on

the Indian and global pharmaceutical industry

The Indian pharmaceutical industry is at the center stage in the global pharmaceutical

arena and Ranbaxy is at the forefront in delivering the India centric advantages to the

advanced and developing countries of the world.

From a small domestic company at inception in late 60’s, Ranbaxy has grown formidably

to be an integrated, research based, international pharmaceutical company with over a

billion dollar global sales, as envisioned by the Chief architect and visionary of today's

Ranbaxy, Late Dr Parvinder Singh, Chairman and Managing Director, in the early 90's.

It is with the unwavering ' dedication ' and the ' will to win ' of Team Ranbaxy across the

globe that we have traversed this journey so far.

We are committed to provide quality generics at affordable prices to the patients

worldwide with a view to help bring down the healthcare costs. We are confident that our

efforts would see the Company grow from strength to strength in the global generic space

in the years to come. Whilst we continue to enhance the momentum of our generics

business in over 125 markets, we are also accelerating our drug discovery program

through collaborations and alliances.

As we move ahead we are determined to capitalize on the new opportunities based on our

strong fundamentals of innovation, entrepreneurship and aggressive marketing. We

remain committed to enhancing shareholder value as we actively pursue our strategy of

growth through organic and inorganic means.

Today, we are amongst the Top 10 global generic companies; we are well placed to

realize our aspirations of being amongst the top 5 generic companies and attain a size of

US$ 5 Bn by 2012. As we step into the next phase, we are driven by our ambition,

willing to invest in the growth of our people and business, marching

towards the new horizon of global leadership."

56

TATATEA

Set up in 1964 as a joint venture with UK-based James Finlay and Company to develop

valued-added tea, the Tata Tea Group of Companies, which includes Tata Tea and the

UK-based Tetley Group, today represent the world's second largest global branded tea

operation with product and brand presence in 40 countries. Among India's first

multinational companies, the operations of Tata Tea and its subsidiaries focus on branded

product offerings in tea but with a significant presence in plantation activity in India and

Sri Lanka.

The consolidated worldwide branded tea business of the Tata Tea Group contributes to

around 86 per cent of its consolidated turnover with the remaining 14 per cent coming

from bulk tea, coffee, and investment income. The company has its headquarters in

Kolkata, and 51 tea estates in the states of Assam, West Bengal, Tamil Nadu and Kerala

and one coffee estate in Tamil Nadu.

Products and brands

The company has five major brands in the Indian market — Tata Tea, Tetley, Kanan

Devan, Chakra Gold and Gemini — catering to all major consumer segments for tea. The

Tata Tea brand leads market share in terms of value and volume in India and has been

accorded "Super Brand" recognition in the country. Tata Tea's distribution network in the

country with 38 C&F agents and 2,350 stockists caters to over 1.7 million retail outlets

(ORG Marg Retail Audit) in India.

The company has a 100 per cent export-oriented unit (KOSHER & HACCP certified)

manufacturing instant tea in Munnar, Kerala, which is the largest such facility outside the

United States. The unit's product is made from a unique process, developed in-house, of

extraction from tea leaves, giving it a distinctive liquoring and taste profile. Instant tea is

used for light density 100 per cent teas, iced tea mixes and in the preparation of ready-to-

drink (RTD) beverages.

With an area of 26,500 hectares under tea cultivation, Tata Tea produces around 60

million kg of black tea annually.

57

.

Associate companies

Tata Tea has a substantial interest in the Sri Lankan tea industry through Watawala

Plantations, Sri Lanka, where it focuses on production and marketing of tea, rubber and

palm oil.

Kanan Devan Hills Plantation Company, established on March 31, 2005, has major

interests in production and manufacture of black tea at its 17 estates in Kerala. Tata Tea

has a minority stake in the entity.

and a product development centre at Bangalore focused on the entire gamut of tea

operations.

Overseasbusiness

The Tata Tea and Tetley portfolios of branded offerings sourced from the India based JV,

caters specifically to the Australian, Middle East, West Asia, North Africa, Poland,

Russia and Kazakhstan markets. This is independent of the manufacturing and supply

operations of its Tetley and other subsidiary companies.

Subsidiaries

Tata Tea has subsidiaries in Great Britain, United States and India.

Community welfare

Tata Tea contributes significantly to social and community development on its estates

through comprehensive labour welfare programmes that offer free housing, healthcare

and other benefits. The company has set-up and manages hospitals, adult-literacy centres,

childcare centres and schools to educate the children of its nearly 40,000 employees. In

addition, the company has special facilities to look after "differently abled" children of

the workers who are taught how to operate in the environment by enhancing their skills

and abilities.

58

Tata Tea has institutionalised a process of Annual Welfare Audit conducted by renowned

WHO experts, among the first Indian companies to do so.

Committed to running its business responsibly, Tetley works with stakeholders around

the world to understand the social, ethical and environmental impacts of its business and

identify how to manage and improve the most significant of these. This approach results

in a range of local activities and corporate initiatives - from waste management

programmes at our Eaglescliffe Tea Factory to the provision of safe water for people in

the tea growing areas of Malawi.

The Tetley Group also manages its social impacts by building partnerships with charities

and non government organisations, focusing on causes with a clear relevance to its

business. These partnerships go beyond traditional corporate fundraising, involving

activities that change both the Tetley business and the partner organisation for the better.

This means encouraging our staff to become personally involved in the partnerships,

donating their time and skills, as well as money

59

TITAN

Titan's beginnings reach back to the year of 1896 when a Czech engineer named Spalek

started a small business. He chose the location of former Bucar's mill an started

manufacturing padlocks and mortise locks and doorframes.

After a turbulent course of changes in the period from 1912 to 1915 (the company

changing hands, surviving bankruptcy and being hit by fire), the company's first cupola

furnace for the smelting of white iron started production in 1920, while the company

acquired its present name.

In the years before World War 2 the company enjoyed a rapid course of evolution. In

1933 the company redirected its production towards the manufacturing of fittings,

furniture locks, scales, weights and various household appliances. Fortunately the

company was left undamaged by the war, leaving it to continue with the intense

production of these product lines.

In 1995 we were awarded the ISO 9001 Quality Certificate, and the DIN quality

Certificate for the quality of our cylinder locks, which enabled us to remain present on

existing markets and also help to conquer new ones.

In 1970 the company started to introduce its food processing plans which were later

dropped and in addition to this it introduced its single pipe heating production line, which

it still successfully markets.

1996 Titan has been registered as a public limited company in compliance with

Slovenia's Ownership Transformation Act.

Over these years our company had undergone several organizational and statutory

changes. Since 1996 Titan has been registered as a public limited company in compliance

with Slovenia's Ownership tranformation Act. However, since 2001 the foundry

production is covered by PS Cimos, TITAN livarna d.o.o. with the range of services and

products unchanged.

After the takeover TITAN started the year 2003 in major property of French companies

Securidev and Decayeux Industrie and became a member of Securidev group.

60

INDIACEM

The India Cements Ltd was established in 1946 and the first plant was setup at

Sankarnagar in Tamilnadu in 1949 . Since then it has grown in stature to seven plants

spread over Tamilnadu and Andhra Pradesh . The capacities as on March 2002 have

increased multifold to 9 million tons per annum

Coromandel King, Sankar Sakthi and Raasi Gold are high strength cements to meet the

needs of the consumer for high strength concrete. As per BIS requirements the minimum

28 days compressive strength of 53 Grade OPC should not be less than 53 Mpa. For

certain specialised works such as prestressed concrete and certain items of precast

concrete requiring consistently high strength concrete, the use of 53 Grade OPC is found

very useful. 53 Grade OPC produces higher-Grade concrete at very economical cement

content. In concrete mix design, for concrete M-20 and above Grades a saving of 8 to

10% of cement may be achieved with the use of above mentioned 53 Grade

The Company is the largest producer of cement in South India.

The Company's plants are well spread with three in Tamilnadu and four in Andhra

Pradesh which cater to all major markets in South India and Maharashtra.

The Company is the market leader with a market share of 28% in the South. It

aims to achieve a 35% market share in the near future. The Company has access

to huge limestone resources and plans to expand capacity by de-bottlenecking and

optimisation of existing plants as well as by acquisitions.

The Company has a strong distribution network with over 10,000 stockists of

whom 25% are dedicated.

The Company has well established brands- Sankar Super Power, Coromandel

Super Power and Raasi Super Power.

Regional offices in all southern states and Maharasthra offices/representative in

every district

CHAPTER 4

61

4. ANALYSIS AND INTERPRETATION OF DATA

TABLE 4.1 NIFTY RETURNS

 DATE OPEN CLOSE X X2

1-Mar-07 378.5 381.44 0.77675 0.603341

2-Mar-07 383 376.55 -1.68407 2.836102

5-Mar-07 376 360.43 -4.14096 17.14753

6-Mar-07 399 369.07 -7.50125 56.2688

7-Mar-07 373.5 365.17 -2.23025 4.974034

8-Mar-07 367 376.54 2.599455 6.757167

9-Mar-07 350 374.61 7.031429 49.44099

12-Mar-07 398 376.46 -5.41206 29.2904

13-Mar-07 375 377.89 0.770667 0.593927

14-Mar-07 366 366.96 0.262295 0.068799

15-Mar-00 370 367 -0.81081 0.657414

16-Mar-07 367 363.96 -0.82834 0.686144

19-Mar-07 374 369.79 -1.12567 1.267129

20-Mar-07 372.1 372.52 0.112873 0.01274

21-Mar-07 390 379.69 -2.64359 6.988567

22-Mar-07 385 390.03 1.306494 1.706925

23-Mar-07 389.5 390.19 0.17715 0.031382

26-Mar-07 393.01 386.76 -1.59029 2.529023

28-Mar-07 383.75 377.86 -1.53485 2.355775

29-Mar-07 376.85 381.67 1.279023 1.635901

30-Mar-07 384.9 384.04 -0.22343 0.049923

         

      -15.4094  

NIFTY = CLOSE – OPEN

OPEN * 100

= 7888.63 – 7952.11 * 10 = -15.4094

7952.11

62

TABLE 4.2

ABB and BETA CALCULATION

 DATE  OPEN CLOSE  ABB X y XY X21-Mar-

07 344 342.75 -1.25 0.77675 -0.36337 -0.28225 0.6033412-Mar-

07 345 347.3 2.3 -1.68407 0.666667 -1.12272 2.8361025-Mar-

07 345.5 320.7 -24.8 -4.14096 -7.178 29.7238 17.147536-Mar-

07 325 322.3 -2.7 -7.50125 -0.83077 6.23181 56.26887-Mar-

07 322 307.25 -14.75 -2.23025 -4.58075 10.21623 4.9740348-Mar-

07 312 328.45 16.45 2.599455 5.272436 13.70546 6.7571679-Mar-

07 334 326.05 -7.95 7.031429 -2.38024 -16.7365 49.4409912-Mar-

07 328 323.75 -4.25 -5.41206 -1.29573 7.012578 29.290413-Mar-

07 323.75 320.7 -3.05 0.770667 -0.94208 -0.72603 0.59392714-Mar-

07 316.5 312.25 -4.25 0.262295 -1.34281 -0.35221 0.06879915-Mar-

00 315.95 311.2 -4.75 -0.81081 -1.5034 1.218975 0.65741416-Mar-

07 315 316.25 1.25 -0.82834 0.396825 -0.32871 0.68614419-Mar-

07 319.5 316.95 -2.55 -1.12567 -0.79812 0.898421 1.26712920-Mar-

07 318.9 336.35 17.45 0.112873 5.471935 0.617633 0.0127421-Mar-

07 340 331.55 -8.45 -2.64359 -2.48529 6.570098 6.98856722-Mar-

07 334.2 333.2 -1 1.306494 -0.29922 -0.39093 1.70692523-Mar-

07 334.25 330.15 -4.1 0.17715 -1.22663 -0.2173 0.03138226-Mar-

07 333 327.05 -5.95 -1.59029 -1.78679 2.84151 2.52902328-Mar-

07 326 338.9 12.9 -1.53485 3.957055 -6.0735 2.35577529-Mar-

07 336.95 345.05 8.1 1.279023 2.403917 3.074667 1.63590130-Mar-

07 347.2 351.9 4.7 -0.22343 1.353687 -0.30246 0.049923                       -15.4094 -7.49069 55.57859 185.902                       1051.723 3666.491 0.286847  

SOURCE: SECONDARY DATA

63

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

= 21* 55.578959 –(-15.4094) (-7.49069)

21* 185.902 -237.4511

= 0.286847

TABLE 4.2 shows the returns for one month between 1 March to 31 March 07 of ABB.

It indicates positive return; since it is less than .5 it is less volatile. It means that when the

stock return is high the company return is also high.

Figure 1

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1 3 5 7 9 11 13 15 17 19 21

X

y

64

Table 4.3

BOB AND NIFTY return and Beta calculation.

    BANKBARODA   X y XY X21-Mar-

07 211.6 222.65 11.05 0.77675 5.222117 4.056281 0.6033412-Mar-

07 225.9 214.45 -11.45 -1.68407 -5.06861 8.535917 2.8361025-Mar-

07 210 205.8 -4.2 -4.14096 -2 8.281915 17.147536-Mar-

07 211.9 200.7 -11.2 -7.50125 -5.28551 39.64796 56.26887-Mar-

07 205.8 190.35 -15.45 -2.23025 -7.50729 16.74316 4.9740348-Mar-

07 192 206.75 14.75 2.599455 7.682292 19.96977 6.7571679-Mar-

07 207.9 200.2 -7.7 7.031429 -3.7037 -26.0423 49.4409912-Mar-

07 206 204.9 -1.1 -5.41206 -0.53398 2.889935 29.290413-Mar-

07 206 205.25 -0.75 0.770667 -0.36408 -0.28058 0.59392714-Mar-

07 203.1 199.35 -3.75 0.262295 -1.84638 -0.4843 0.06879915-Mar-

00 203.9 196.45 -7.45 -0.81081 -3.65375 2.962501 0.65741416-Mar-

07 195.3 193 -2.3 -0.82834 -1.17768 0.975513 0.68614419-Mar-

07 193.75 194.9 1.15 -1.12567 0.593548 -0.66814 1.26712920-Mar-

07 197 199.7 2.7 0.112873 1.370558 0.154699 0.0127421-Mar-

07 208.9 212.9 4 -2.64359 1.914792 -5.06192 6.98856722-Mar-

07 216.9 226.75 9.85 1.306494 4.541263 5.933131 1.70692523-Mar-

07 224 220.55 -3.45 0.17715 -1.54018 -0.27284 0.03138226-Mar-

07 222.7 216.65 -6.05 -1.59029 -2.71666 4.320277 2.52902328-Mar-

07 214 215.5 1.5 -1.53485 0.700935 -1.07583 2.35577529-Mar-

07 214 212.85 -1.15 1.279023 -0.53738 -0.68733 1.63590130-Mar-

07 216.7 215.05 -1.65 -0.22343 -0.76142 0.170128 0.049923                       -15.4094 -14.6711 80.06793 185.902                       237.4511                             1455.353 3666.491 0.396933  

65

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

= 21. 80.06793 –(-15.4094) (-14.6711)

21. 185.902 - 237.4511 = 0.396933

TABLE 4.3 Shows the returns for one month between 1 March to 31 March 07 of

company bank of Baroda.It indicates positive return; since it is less than .5 it is less

volatile. It means that when the stock return is high the company return is also high.

Figure 2

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66

Table 4.4

INGERRAND WITH NIFTY CALCULATION USING BETA

      INGERRAND X y XY X21-Mar-

07 320 326.55 6.55 0.77675 2.046875 1.589911 0.6033412-Mar-

07 331 323.45 -7.55 -1.68407 -2.28097 3.841315 2.8361025-Mar-

07 316 304.7 -11.3 -4.14096 -3.57595 14.80785 17.147536-Mar-

07 304.45 297.75 -6.7 -7.50125 -2.20069 16.50793 56.26887-Mar-

07 324 294.8 -29.2 -2.23025 -9.01235 20.09982 4.9740348-Mar-

07 290 302.7 12.7 2.599455 4.37931 11.38382 6.7571679-Mar-

07 328 298.8 -29.2 7.031429 -8.90244 -62.5969 49.4409912-Mar-

07 305 301.35 -3.65 -5.41206 -1.19672 6.476728 29.290413-Mar-

07 299 298 -1 0.770667 -0.33445 -0.25775 0.59392714-Mar-

07 292.25 292.3 0.05 0.262295 0.017109 0.004488 0.06879915-Mar-

00 301.45 287.15 -14.3 -0.81081 -4.74374 3.846275 0.65741416-Mar-

07 295 285.65 -9.35 -0.82834 -3.16949 2.62541 0.68614419-Mar-

07 299.75 293.35 -6.4 -1.12567 -2.13511 2.403429 1.26712920-Mar-

07 295 285.95 -9.05 0.112873 -3.0678 -0.34627 0.0127421-Mar-

07 290 282.85 -7.15 -2.64359 -2.46552 6.517816 6.98856722-Mar-

07 289.9 284.05 -5.85 1.306494 -2.01794 -2.63642 1.70692523-Mar-

07 288.5 282.2 -6.3 0.17715 -2.18371 -0.38684 0.03138226-Mar-

07 281.2 281.3 0.1 -1.59029 0.035562 -0.05655 2.52902328-Mar-

07 278.1 280.5 2.4 -1.53485 0.862999 -1.32458 2.35577529-Mar-

07 278.05 284.55 6.5 1.279023 2.337709 2.989985 1.63590130-Mar-

07 289.75 278.85 -10.9 -0.22343 -3.76186 0.840531 0.049923                       -15.4094 -41.3692 26.33003 185.902                       237.4511                  BETA          -84.5452 3666.491 -0.02306  

Source: secondary data

67

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

= 21* 26.33003 – (-15.4094) (-41.3696)

21* 185.902 – 237.4511

= -0.02360

Table 4.4

Company Ingerrand has a negative beta value that the stock return moves in the opposite

direction to the market return. A stock with negative 0.02 would provide a return of 2%

change if the market return decline by 2% and vice versa.

Figure 3

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68

Table 4.5

Company Indiacem with nifty returns and beta calculation

    INDIACEM   X y XY X21-Mar-

07 178 173.8 -4.2 0.77675 -2.35955 -1.83278 0.6033412-Mar-

07 173.9 168.6 -5.3 -1.68407 -3.04773 5.132598 2.8361025-Mar-

07 164.75 158.1 -6.65 -4.14096 -4.03642 16.71464 17.147536-Mar-

07 161 162.1 1.1 -7.50125 0.68323 -5.12508 56.26887-Mar-

07 168 151.8 -16.2 -2.23025 -9.64286 21.50602 4.9740348-Mar-

07 151 167.1 16.1 2.599455 10.66225 27.71604 6.7571679-Mar-

07 168 153.3 -14.7 7.031429 -8.75 -61.525 49.4409912-Mar-

07 154.9 155.1 0.2 -5.41206 0.129116 -0.69878 29.290413-Mar-

07 156 153.65 -2.35 0.770667 -1.50641 -1.16094 0.59392714-Mar-

07 140.3 159.3 19 0.262295 13.54241 3.552107 0.06879915-Mar-

00 160.05 160.9 0.85 -0.81081 0.531084 -0.43061 0.65741416-Mar-

07 153.3 157.8 4.5 -0.82834 2.935421 -2.43152 0.68614419-Mar-

07 160 162.3 2.3 -1.12567 1.4375 -1.61815 1.26712920-Mar-

07 164 172.85 8.85 0.112873 5.396341 0.609101 0.0127421-Mar-

07 171 164.8 -6.2 -2.64359 -3.62573 9.584945 6.98856722-Mar-

07 166.15 165.3 -0.85 1.306494 -0.51159 -0.66838 1.70692523-Mar-

07 165 164.35 -0.65 0.17715 -0.39394 -0.06979 0.03138226-Mar-

07 161.55 163.65 2.1 -1.59029 1.299907 -2.06723 2.52902328-Mar-

07 163.2 159.35 -3.85 -1.53485 -2.35907 3.620825 2.35577529-Mar-

07 158.95 159.75 0.8 1.279023 0.503303 0.643736 1.63590130-Mar-

07 160.5 161.95 1.45 -0.22343 0.903427 -0.20186 0.049923                       -15.4094 1.790699 11.2499 185.902                       237.4511                             263.8416 3666.491 0.07196  

Source : secondary data

69

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

= 21* 11.2499 – (-15.4094) (1.790699)

21 * 185.902 – 237.4511

= 0.07196

Table 4.5 Shows the returns for one month between 1 March to 31 March 07 of company

of Indiacem .It indicates positive return; since it is less than .5 it is less volatile compared

to the market. It means that when the stock return is high the company return is also high.

Figure 4

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70

Table 4.6

Company ITC with nifty and beta calculation

    ITC     X y XY X21-Mar-

07 172.7 172.5 -0.2 -0.00116 0.77675 -0.11581 -0.08995 0.6033412-Mar-

07 172.1 166.7 -5.4 -0.03138 -1.68407 -3.13771 5.284134 2.8361025-Mar-

07 166 162.15 -3.85 -0.02319 -4.14096 -2.31928 9.604028 17.147536-Mar-

07 164.8 162.05 -2.75 -0.01669 -7.50125 -1.66869 12.51726 56.26887-Mar-

07 163 158.2 -4.8 -0.02945 -2.23025 -2.94479 6.56762 4.9740348-Mar-

07 160 159.95 -0.05 -0.00031 2.599455 -0.03125 -0.08123 6.7571679-Mar-

07 162 154.15 -7.85 -0.04846 7.031429 -4.84568 -34.072 49.4409912-Mar-

07 150.3 148.6 -1.7 -0.01131 -5.41206 -1.13107 6.121425 29.290413-Mar-

07 149 148.95 -0.05 -0.00034 0.770667 -0.03356 -0.02586 0.59392714-Mar-

07 146.1 142.9 -3.2 -0.0219 0.262295 -2.19028 -0.5745 0.06879915-Mar-

00 145 147.3 2.3 0.015862 -0.81081 1.586207 -1.28611 0.65741416-Mar-

07 148.9 145.05 -3.85 -0.02586 -0.82834 -2.58563 2.141774 0.68614419-Mar-

07 145.5 142 -3.5 -0.02405 -1.12567 -2.4055 2.707794 1.26712920-Mar-

07 144.5 140.85 -3.65 -0.02526 0.112873 -2.52595 -0.28511 0.0127421-Mar-

07 141 144.6 3.6 0.025532 -2.64359 2.553191 -6.74959 6.98856722-Mar-

07 145.9 149.35 3.45 0.023646 1.306494 2.364633 3.089378 1.70692523-Mar-

07 149 144.15 -4.85 -0.03255 0.17715 -3.25503 -0.57663 0.03138226-Mar-

07 145 142.25 -2.75 -0.01897 -1.59029 -1.89655 3.016068 2.52902328-Mar-

07 142 143.35 1.35 0.009507 -1.53485 0.950704 -1.45919 2.35577529-Mar-

07 144 146.95 2.95 0.020486 1.279023 2.048611 2.620222 1.63590130-Mar-

07 147 151.15 4.15 0.028231 -0.22343 2.823129 -0.63078 0.049923                           -15.4094 -18.7603 7.838687 185.902                           237.4511                                                  -124.473 3666.491 -0.03395  

71

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

= 21* 7.838687 – (-15.4094) ( -18.7603)

21 * 185.902 – 237.4511

= -0.03395

TABLE 4.6 shows Company ITC has a negative beta value that the stock return moves in

the opposite direction to the market return. A stock with negative 0.02 would provide a

return of 2% change if the market return decline by 2% and vice versa.

FIGURE 5

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72

Table 4.7

Company NDTV with nifty and beta calculation

      NDTV X y XY X21-Mar-

07 321 316.5 -4.5 0.77675 -1.40187 -1.0889 0.6033412-Mar-

07 318.5 323.7 5.2 -1.68407 1.632653 -2.74951 2.8361025-Mar-

07 314.9 298.1 -16.8 -4.14096 -5.33503 22.09212 17.147536-Mar-

07 305 293.8 -11.2 -7.50125 -3.67213 27.54559 56.26887-Mar-

07 295.25 272.7 -22.55 -2.23025 -7.6376 17.03378 4.9740348-Mar-

07 278 290.8 12.8 2.599455 4.604317 11.96871 6.7571679-Mar-

07 294 283.6 -10.4 7.031429 -3.53741 -24.8731 49.4409912-Mar-

07 293 287.75 -5.25 -5.41206 -1.79181 9.697378 29.290413-Mar-

07 278.65 301.5 22.85 0.770667 8.200251 6.31966 0.59392714-Mar-

07 300 289.9 -10.1 0.262295 -3.36667 -0.88306 0.06879915-Mar-

00 290 292.7 2.7 -0.81081 0.931034 -0.75489 0.65741416-Mar-

07 299 288.45 -10.55 -0.82834 -3.52843 2.922731 0.68614419-Mar-

07 290.3 297.2 6.9 -1.12567 2.376852 -2.67555 1.26712920-Mar-

07 299.8 307.5 7.7 0.112873 2.568379 0.2899 0.0127421-Mar-

07 309 310.35 1.35 -2.64359 0.436893 -1.15497 6.98856722-Mar-

07 315 313.5 -1.5 1.306494 -0.47619 -0.62214 1.70692523-Mar-

07 317.05 312.35 -4.7 0.17715 -1.48242 -0.26261 0.03138226-Mar-

07 312.1 307.3 -4.8 -1.59029 -1.53797 2.445817 2.52902328-Mar-

07 304.5 296.55 -7.95 -1.53485 -2.61084 4.007253 2.35577529-Mar-

07 293 302.9 9.9 1.279023 3.37884 4.321615 1.63590130-Mar-

07 308.85 310.95 2.1 -0.22343 0.679942 -0.15192 0.049923                     -15.4094 -11.5692 73.42792 185.902                       237.4511                             1363.712 3666.491 0.371939  

Source: secondary data

73

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

= 21* 73.42792 – (-15.4094) ( -18.7603)

21 * 185.902 – 237.4511

= 0.371939

Table 4.7 shows company NDTV has a positive value. It shows 1%change in market

index return causes 0.5% change in the stock return

Figure 6

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74

Table 4.8

Company Ranbaxy with nifty and beta calculation

    RANBAXY  X y XY X2

1-Mar-07 344 342.75 -1.25 0.77675 -0.36337 -0.28225 0.603341

2-Mar-07 345 347.3 2.3 -1.68407 0.666667 -1.12272 2.836102

5-Mar-07 345.5 320.7 -24.8 -4.14096 -7.178 29.7238 17.14753

6-Mar-07 325 322.3 -2.7 -7.50125 -0.83077 6.23181 56.2688

7-Mar-07 322 307.25 -14.75 -2.23025 -4.58075 10.21623 4.974034

8-Mar-07 312 328.45 16.45 2.599455 5.272436 13.70546 6.757167

9-Mar-07 334 326.05 -7.95 7.031429 -2.38024 -16.7365 49.44099

12-Mar-07 328 323.75 -4.25 -5.41206 -1.29573 7.012578 29.2904

13-Mar-07 323.75 320.7 -3.05 0.770667 -0.94208 -0.72603 0.593927

14-Mar-07 316.5 312.25 -4.25 0.262295 -1.34281 -0.35221 0.068799

15-Mar-00 315.95 311.2 -4.75 -0.81081 -1.5034 1.218975 0.657414

16-Mar-07 315 316.25 1.25 -0.82834 0.396825 -0.32871 0.686144

19-Mar-07 319.5 316.95 -2.55 -1.12567 -0.79812 0.898421 1.267129

20-Mar-07 318.9 336.35 17.45 0.112873 5.471935 0.617633 0.01274

21-Mar-07 340 331.55 -8.45 -2.64359 -2.48529 6.570098 6.988567

22-Mar-07 334.2 333.2 -1 1.306494 -0.29922 -0.39093 1.706925

23-Mar-07 334.25 330.15 -4.1 0.17715 -1.22663 -0.2173 0.031382

26-Mar-07 333 327.05 -5.95 -1.59029 -1.78679 2.84151 2.529023

28-Mar-07 326 338.9 12.9 -1.53485 3.957055 -6.0735 2.355775

29-Mar-07 336.95 345.05 8.1 1.279023 2.403917 3.074667 1.635901

30-Mar-07 347.2 351.9 4.7 -0.22343 1.353687 -0.30246 0.049923

  RANBAXY           

       -15.4094 -7.49069 55.57859 185.902

               

        237.4511     

               

        1051.723 3666.491 0.286847 

75

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑

= 21* 55.57859 – (-15.4094) ( -18.7603)

21 * 185.902 – 237.4511

= 0.286847

Table 4.8 Shows the returns for one month between 1 March to 31 March 07 of company

of Ranbaxy .It indicates positive return; since it is less than .5 it is less volatile compared

to the market. It means that when the stock return is high the company return is also high.

Figure 7

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76

Table 4.9

Company Tatatea and nifty and beta calculations

    TATATEA   X y XY X21-Mar-

07 606.3 609.95 3.65 0.77675 0.602012 0.467613 0.6033412-Mar-

07 605 597.1 -7.9 -1.68407 -1.30579 2.199038 2.8361025-Mar-

07 590 568.7 -21.3 -4.14096 -3.61017 14.94956 17.147536-Mar-

07 575 575.5 0.5 -7.50125 0.086957 -0.65228 56.26887-Mar-

07 572.25 572 -0.25 -2.23025 -0.04369 0.097434 4.9740348-Mar-

07 567 587.35 20.35 2.599455 3.589065 9.329614 6.7571679-Mar-

07 590 589.7 -0.3 7.031429 -0.05085 -0.35753 49.4409912-Mar-

07 595 599.35 4.35 -5.41206 0.731092 -3.95672 29.290413-Mar-

07 599.35 614.55 15.2 0.770667 2.536081 1.954473 0.59392714-Mar-

07 581 611.05 30.05 0.262295 5.172117 1.356621 0.06879915-Mar-

00 615 617.6 2.6 -0.81081 0.422764 -0.34278 0.65741416-Mar-

07 615 605.9 -9.1 -0.82834 -1.47967 1.225671 0.68614419-Mar-

07 607 627.1 20.1 -1.12567 3.311367 -3.7275 1.26712920-Mar-

07 632 632.1 0.1 0.112873 0.015823 0.001786 0.0127421-Mar-

07 633.25 629.8 -3.45 -2.64359 -0.54481 1.44025 6.98856722-Mar-

07 630.05 626.95 -3.1 1.306494 -0.49202 -0.64283 1.70692523-Mar-

07 646 625.95 -20.05 0.17715 -3.10372 -0.54982 0.03138226-Mar-

07 621.35 622.75 1.4 -1.59029 0.225316 -0.35832 2.52902328-Mar-

07 597.85 615 17.15 -1.53485 2.868613 -4.4029 2.35577529-Mar-

07 610 600.75 -9.25 1.279023 -1.51639 -1.9395 1.63590130-Mar-

07 602 607.35 5.35 -0.22343 0.888704 -0.19857 0.049923  TATATEA                    -15.4094 8.302806 15.89331 185.902                       237.4511                             461.7011 3666.491 0.125925  

77

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

=21* 15.89331 – (-15.4094) ( -18.7603)

21 * 185.902 – 237.4511

= 0.125925

Table 4.5 Shows the returns for one month between 1 March to 31 March 07 of company

of Tatatea .It indicates positive return; since it is less than .5 it is less volatile compared to

the market. It means that when the stock return is high the company return is also high.

Figure 8

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78

Table 4.10

Company Titan and beta calculation

    TITAN   X y XY X21-Mar-

07 828 847.75 19.75 0.77675 2.385266 1.852756 0.6033412-Mar-

07 854.7 864.4 9.7 -1.68407 1.134901 -1.91126 2.8361025-Mar-

07 808 811.9 3.9 -4.14096 0.482673 -1.99873 17.147536-Mar-

07 822.7 811.75 -10.95 -7.50125 -1.33098 9.984043 56.26887-Mar-

07 827.7 790.25 -37.45 -2.23025 -4.52459 10.09098 4.9740348-Mar-

07 797.7 833.75 36.05 2.599455 4.519243 11.74757 6.7571679-Mar-

07 833 810.6 -22.4 7.031429 -2.68908 -18.908 49.4409912-Mar-

07 820 803.35 -16.65 -5.41206 -2.03049 10.98912 29.290413-Mar-

07 807.7 827.75 20.05 0.770667 2.482357 1.91307 0.59392714-Mar-

07 756.65 799.4 42.75 0.262295 5.649904 1.481942 0.06879915-Mar-

00 812.7 799.2 -13.5 -0.81081 -1.66113 1.346862 0.65741416-Mar-

07 801 785.35 -15.65 -0.82834 -1.95381 1.618413 0.68614419-Mar-

07 800 824.85 24.85 -1.12567 3.10625 -3.49661 1.26712920-Mar-

07 834 830.5 -3.5 0.112873 -0.41966 -0.04737 0.0127421-Mar-

07 831 836.05 5.05 -2.64359 0.607702 -1.60651 6.98856722-Mar-

07 840 845.8 5.8 1.306494 0.690476 0.902103 1.70692523-Mar-

07 849.7 852.65 2.95 0.17715 0.347181 0.061503 0.03138226-Mar-

07 856 839.9 -16.1 -1.59029 -1.88084 2.991083 2.52902328-Mar-

07 831.9 812.15 -19.75 -1.53485 -2.37408 3.64387 2.35577529-Mar-

07 816 825.85 9.85 1.279023 1.207108 1.543919 1.63590130-Mar-

07 830.7 842.8 12.1 -0.22343 1.456603 -0.32546 0.049923  TITAN                    -15.4094 5.205005 31.87326 185.902                       237.4511                             749.5447 3666.491 0.204431  

79

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

= 21* 31.87326 – (-15.4094) ( -18.7603)

21 * 185.902 – 237.4511

= 0.204431

Table 4.5 Shows the returns for one month between 1 March to 31 March 07 of company

of Titan .It indicates positive return; since it is less than .5 it is less volatile compared to

the market. It means that when the stock return is high the company return is also high.

Figure 9

-10

-8

-6

-4

-2

0

2

4

6

8

1 3 5 7 9 11 13 15 17 19 21

X

y

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Table 4.11

Company Wipro and nifty with beta calculation

    X Y XY X2

1-Mar-07 13.8 0.77675 2.388783 1.855488 0.603341

2-Mar-07 -10.8 -1.68407 -1.84615 3.109058 2.836102

5-Mar-07 -33.05 -4.14096 -5.79825 24.01029 17.14753

6-Mar-07 38.3 -7.50125 7.092593 -53.2033 56.2688

7-Mar-07 -34.15 -2.23025 -5.80782 12.95292 4.974034

8-Mar-07 17.5 2.599455 3.153153 8.19648 6.757167

9-Mar-07 -12.35 7.031429 -2.13668 -15.0239 49.44099

12-Mar-07 1.8 -5.41206 0.315789 -1.70907 29.2904

13-Mar-07 6.9 0.770667 1.195841 0.921594 0.593927

14-Mar-07 -19.75 0.262295 -3.43478 -0.90093 0.068799

15-Mar-00 -9.7 -0.81081 -1.6958 1.374976 0.657414

16-Mar-07 0.25 -0.82834 0.044248 -0.03665 0.686144

19-Mar-07 8.25 -1.12567 1.447368 -1.62926 1.267129

20-Mar-07 -6.1 0.112873 -1.05263 -0.11881 0.01274

21-Mar-07 31.5 -2.64359 5.724671 -15.1337 6.988567

22-Mar-07 6.7 1.306494 1.139456 1.488692 1.706925

23-Mar-07 2.25 0.17715 0.378119 0.066984 0.031382

26-Mar-07 -18.1 -1.59029 -3.01767 4.798975 2.529023

28-Mar-07 -24.6 -1.53485 -4.21449 6.46863 2.355775

29-Mar-07 -4.1 1.279023 -0.7193 -0.92 1.635901

30-Mar-07 -10.6 -0.22343 -1.85965 0.41551 0.049923

           

    -15.4094 -8.70321 -23.016 185.902

           

    237.4511     

           

    -617.448 3666.491 -0.1684 

81

Beta = n. Σxy – (Σx) (Σy)

n. Σx↑2-(Σx) ↑2

= 21. – 23.016 –(15.4094) (-8.70321)

21. 237.4511 – (-15.4094

= - 0.1684

This beta value and the Volatility are low compared to other companies. It shows the risk

and variability of Wipro for the month of March 07.

Figure 10

-10

-8

-6

-4

-2

0

2

4

6

8

1 3 5 7 9 11 13 15 17 19 21X

y

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Table 4.12

COMPANY BETA CALCULATION WITH THE NIFTY AND THE FINAL RESULTS

FOR THE MONTH OF MARCH 07

 SERIAL

NO  COMPANIES

BETA

CALCULATIONS

1 ABB 0.286847

2 BOB 0.396933

3 INDERRAND -0.02306

4 INDIA CEM 0.07196

5 ITC -0.03395

6 NDTV 0.371939

7 RANBAXY 0.286847

8 TATATEA 0.125925

9 TITAN 0.204431

10 WIPRO -0.1684

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Figure 11

It shows the bar chart of the companies and its beta value movements

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

Series1

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CHAPTER 5

FINDINGS, RECOMMENDATIONS &CONCLUSION

5.1 FINDINGS

1. Company ABB has got a beta value of 0.286847. Since it is less than .5 the stock is

less risky when compared to the market value of other companies.

2. Company BOB has got a highest beta value when compared to other 9 companies but

its beta value is less than .5 it is less volatile compared to the market.

3. Company INGERSOLLRAND has a negative beta value of -0.02306. The beta value

indicates that the stock return moves in the opposite direction to the market situation

4. Indiacem has got a beta value 0.07196 it has got the least beat value of all the

companies. It is less volatile.

5. Company ITC has got a beta value of -0.03395. it indicates that the stock return moves

in the opposite to the market return.

6. Company NDTV has got a positive beta value of 0.371739. This stock value is less

volatile compared to the market.

7. Company RANBAXY has got beta value of 0.286847 it is less volatile.

8. Tatatea as got the less positive value it is less volatile and has high stock return.

9. Titan company has got positive value it is less volatile.

10. Wipro has got a negative value the stock moves in the opposite direction to the

market.

 

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5.2 CONCLUSION

Derivatives trading in India are definitely gaining ground into its fourth year; derivatives

trading in India are clearly growing at scorching pave. Volumes and the number of

traders on the National Stock Exchange are often touching new highs. Globally the Indian

derivatives market is one of the fastest growing markets with the stock futures segment

clocking one of the highest numbers of contracts.

Future contracts on securities differ from options in some important ways. The most

significant difference include the absence of premiums on futures, the duty of both parties

to the contract to perform at the settlement date, and exposure of the future holder to the

till spectrum of downside risk coupled with the potential for all upside return.

Stock Index Futures owe their existence to the volatility of the stock market and the lack

of insurance contracts on stock portfolios. The close association between the price

movements on Future contract and the underlying cash entrustments permit traders and

investors to hedge price uncertainty, to arbitrage differentials between cash and Future,

and to speculate on stock market and interest rate changes.

Even though the Future is widely accepted as a hedging tool. We will able to make profit

with the minimum possibility of loss. If the investor is able to know all the changes in the

market and about the strategies he can make good return from the mar

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5.3 RECOMMENDATION

1) ABB company on calculating the beta value for the month of March is 0.286847 we

see that investing in the company is good option. Investors will be advised to invest their

money in ABB and be confident of good returns for their investment.

2) BOB company on calculating the beta value for the month of March is 0.396933 we

see that investing in the company is good option. Investors will be advised to invest their

money in BOB and be confident of good returns for their investment.

3) Ingerrand on the calculated value of beta in this a negative value is -0.02306 which

shows a very less risk. Investors will be advised to invest in this company since there is

hardly any risk involved and guaranteed high returns.

4) Indiacem company on calculating the beta value for the month of March is 0.07196 we

see that investing in the company is good option. Investors will be advised to invest their

money in Indiacem and be confident of good returns for their investment.

5) Company ITC on the calculated value of beta in this a negative value is -0.02306

which shows a very less risk. Investors will be advised to invest in this company since

there is hardly any risk involved and guaranteed high returns.

6) NDTV company on calculating the beta value for the month of March is 0.07196 we

see that investing in the company is good option. Investors will be advised to invest their

money in NDTV and be confident of good returns for their investment.

7) RANBAXY company on calculating the beta value for the month of March is 0.07196

we see that investing in the company is good option. Investors will be advised to invest

their money in RANBAXYand be confident of good returns for their investment.

8) TATATEA company on calculating the beta value for the month of March is 0.07196

we see that investing in the company is good option. Investors will be advised to invest

their money in TATATEA and be confident of good returns for their investment.

9) TITAN company on calculating the beta value for the month of March is 0.07196 we

see that investing in the company is good option. Investors will be advised to invest their

money in TITANand be confident of good returns for their investment.

10) Company ITC on the calculated value of beta in this a negative value is -0.02306

which shows a very less risk. Investors will be advised to invest in this company since

there is hardly any risk involved and guaranteed high returns

87

BIBLIOGRAPHY

1. NCFM derivatives – NSE India limited

WWW.NSEINDIA.COM /EQUITIES

WWW.NSEINDIA.COM//EQUITIES/ INDEX

2. Investment Management – Prasanna Chandra 2nd edition

3. Security Analysis and Portfolio Management – Fisher and Jorden 5th edition

Black, Fischer and Myron Scholes. "The Pricing of Options and Corporate Liabilities." The Journal of Political Economy 81,637-654. Chance, Don M. "A Chronology of Derivatives." Derivatives Quarterly 2 (Winter, 1995), 53-60.Mackay, Charles. Extraordinary Popular Delusions and the Madness of Crowds. New York; Harmony Books (1841, current version 1980).

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