report

A REPORT ON

“DERIVATIVES AND INTRA DAY CHARTS”

BYRAHUL OJHA

13BSP1249

T.S. THAPAR AND CO. (LSE)

A REPORT ON

“DERIVATIVES AND INTRA DAY CHARTS”

BYRAHUL OJHA (13BSP1249)

“T.S. thapar and co. (LSE)

A report submitted in partial fulfillment of the requirements of PGPM program of IBS, Pune

Date: - 14th April, 2014

Abstract

Learning of how to trade in markets. Approaches in different markets

Learned of normal buying and selling of stocks what things should be kept in mind.

Future contracts (derivative contract)

Options contract (call and put)

Swaps

Learning to read intraday charts

Talking to costumers to invest in future contracts the costumers are small business owner. Meeting them and telling them about it to invest through T.S. thapar and co.

Introduction

Future contracts – futures contract is an agreement between two parties to buy or sell an asset at a certain time in future at a certain price. These are basically exchange traded; standardized contract with the help of these contracts counterparty risk is largely eliminated the buyers of future contract are considered having a long position whereas the sellers are considered to be having a short position.

In India future contracts are started in year 2000 with the future trading index s&p CNX nifty index.

Options contracts- options give the buyer a right but not an obligation to buy or sell an asset in future. Options are of two types – calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price or before a future date. Puts give the buyer of underlying assets. When one buys the right, but not the obligation to sell a given quantity for the asset

Swaps- swaps are private agreements two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts

Participants in the market

Hedgers: these are investors with a present or anticipated exposure to the underlying asset which is subject to risks. Hedgers use the derivatives markets primarily for price risk management assets and portfolios.

Speculators: these are individuals who take a view on the future direction of the markets. They take a view weather prices would rise or fall in the future and accordingly buy sell futures and options to try and make profits from the future price movements of the underlying assets

Arbitrageurs: they take positions in financial markets to earn riskless profits. The arbitrageurs take short and long positions in the same or different contracts at the same time to create a position which can generate a riskless profit.

Charts:

Intraday chart-Intraday price movements are particularly important to short-term traders looking to make many trades over the course of a single trading session. The term intraday is occasionally used to describe securities that trade on the markets during regular business hours, such as stocks.

LEARNING TILL DATE

Future contract is an agreement between two parties.

TERMINOLOGY of futures contract

Spot price: the piece at which an underlying asset trades in the spot market

Futures price: the price that is agreed upon at the time of the contract for the delivery of an asset at a specific date.

Contract cycle: it is the period over which a contract trades. The index futures contracts on the NSE and BSE in India we have one month , two month and three month expiry cycles which expire on the last Thursday of the month on the Friday following Thursday, a new contract having there month expiry is introduced for trading.

Expiry date: IS the date on which the final settlement of the contract takes place

Contract size: the amount of asset that has to be delivered under one contract this is called the lot size.

Basis: basis is defined as the future price minus the spot price. There will be a different basis for each delivery month for each contract

Cost of carry: measures the storage cost plus the intrest that is paid to finance the asset less the income earned on the asset.

Initial margin: The amount must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin.

Marking-to-market: in the futures market, at the end of each trading day , the margin account is adjusted to reflect the investor’s gain or loss depending upon the futures closing price. This is called marking to market

Maintenance margin: investors are required to place margins with their trading members before they are allowed to trade. If the balance in the margin account falls below the maintains margin, The investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.

OPTIONS CONTRACTS: Options are the most recent and evolved derivative contracts they have non linear or asymmetrical profit profiles making them fundamentally very different from futures and forward contracts. Options have allowed both theoreticians as well as practitioner’s to explore wide range of possibilities for engineering different and sometimes exotic pay off profiles. Option contracts help a hedger reduce his risk with a much wider variety of strategies.

Terminology of options:

Index options: have the index as the underlying. They can be European or American. They are also cash settled.

Stock options: they are options on individual stocks and give 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.

There are basically to type of options:

Call option: it give the holder the right but not the obligation to buy an asset by a certain date for a certain price.

Put option: it gives the holder the right but not the obligation to sell an asset by a certain date for a certain price.

Option price/premium: it 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.

Intrinsic value of an option: the option premium value has two components – intrinsic value and time value. Intrinsic value of an option at a given time is the amount the holder of the option will get if he exercises the option at that time. The intrinsic value of a call is greater than 0.

Time value of an option: the time value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. The longer the time expiration, the greater is an option’s time value, all else equal. At expiration, an option should have no time value.

Meeting to costumers: the co. has a big reputation in the market as one of the biggest broking house in the city. My industrial guide has asked me to talk to a few small business owners and telling them about future and option contracts and how they can earn a good return by investing in them through our broking house. We tell them about how we have created values for them.

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