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DERIVATIVES

ABSTRACT

Market deregulation, growth in global trade, and continuing technological developments have revolutionized the financial marketplace during the past two decades. A by-product of this revolution is increased market volatility, which has led to a corresponding increase in demand for risk management products. This demand is reflected in the growth of financial derivatives from the standardized futures and options products of the 1970s to the wide spectrum of overthe-counter (OTC) products offered and sold in the 1990s. Many products and instruments are often described as derivatives by the financial press and market participants. In this guidance, financial derivatives are broadly defined as instruments that primarily derive their value from the performance of underlying interest or foreign exchange rates, equity, or commodity prices. Financial derivatives come in many shapes and forms, including futures, forwards, swaps, options, structured debt obligations and deposits, and various combinations thereof. Some are traded on organized exchanges, whereas others are privately negotiated transactions. Derivatives have become an integral part of the financial markets because they can serve several economic functions. Derivatives can be used to reduce business risks, expand product offerings to customers, trade for profit, manage capital and funding costs, and alter the risk-reward profile of a particular item or an entire balance sheet. Although derivatives are legitimate and valuable tools for banks, like all financial instruments they contain risks that must be managed. Managing these risks should not be considered unique or singular. Rather, doing so should be integrated into the bank's overall risk management structure. Risks associated with derivatives are not new or exotic. They are basically the same as those faced in traditional activities (e.g., price, interest rate, liquidity, credit risk). Fundamentally, the risk of derivatives (as of all financial instruments) is a function of the timing and variability of cash flows. Risk is the potential that events, expected or unanticipated, may have an adverse impact Accurate measurement of derivative-related risks is necessary for proper monitoring and

control. All significant risks should be measured and integrated As measurement and performance systems have continued to develop, techniques to evaluate business risks and corresponding earnings performance have evolved. The ability to measure and assess the riskreturn relationship of various businesses has resulted in further steps to measure the riskadjusted return on capital. This analysis allows senior management to judge whether the financial performance of individual business units justifies the risks undertaken. Re-evaluate risk measurement models helps in providing a reasonable estimate of risk. Management should ensure that the models are used for their intended purpose and that material limitations of the models are well understood at appropriate levels within the organization. Although VAR is the most common method of measuring price risk, it is important that management and the board understand the systems limitations. VAR is appealing to users because it reduces multiple price risks into a single value-at-risk number or a small number of key statistics. However, VAR results are highly dependent upon assumptions, algorithms, and methods. VAR does not provide assurance that the potential loss will fall within a certain confidence interval (e.g., 99 percent); rather, it estimates the potential loss based on a specific set of assumptions. Value-at-Risk Limits: These sensitivity limits are designed to restrict potential loss to an amount equal to a board-approved percentage of projected earnings or capital. All dealers except Tier II dealers with largely matched positions should use VAR limits VAR limits are useful for controlling price risk. However, as discussed in Evaluating Price Risk Measurement, one limitation of VAR is that the results produced are highly dependent upon the algorithms, assumptions, and methodology used by the model. Changes in any of these elements can produce widely different VAR results. In addition, VAR may be less useful for predicting the effect of large market moves. To address these weaknesses, dealers should complement VAR limits with other types of limits such as notional and loss control limits.

Table of contents
LIST OF TABLES - 5 LIST OF FIGURES - 1 LIST OF APPENDICES

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CONTENT

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CHAPTER I

INTRODUCTION

9 - 11

CHAPTER II

LITERATURE REVIEW

12 - 14

CHAPTER III

INDUSTRY PROFILE, COMPANY PROFILE

15 - 37

CHAPTER IV

THEORETICAL FRAME WORK

38 - 69

CHAPTER V

DATA ANALYSIS & INTERPRETATION

70 - 91

CHAPTER VI

FINDINGS &SUGGESTIONS

92 - 94

CHAPTER VII

SUMMARY & CONCLUSION

95 - 96

CHAPTER VIII

BIBLOGRAPHY APPENDICES

97 - 98

CHAPTER I
INTRODUCTION
Need and significance for the study Objectives of the study Scope of the study Research Methodology

Limitations of the study

NEED OF THE STUDY: To have a general study on derivatives, an insight on risk return analysis and to identify and reduce risk by using hedging strategies and speculation.

OBJECTIVES: 1. To identify and prioritize potential risk events 2. Help develop risk management strategies and risk management plans 3. Use established risk management methods, tools and techniques to assist in the Analysis and reporting of identified risk events 4. Find ways to identify and evaluate risks 5. Develop strategies and plans for lasting risk management strategies

SCOPE OF THE STUDY: Introduction of derivatives in the Indian capital market is the beginning of a new era, which is truly exciting. Derivatives, worldwide are recognized risk management products. These products have a long history in India, in the unorganized sector, especially in currency and commodity markets. The availability of these products on organized exchanges has provided the market participants with broad based risk management tools. This study mainly covers the area of hedging and speculation. The main aim of the study is to prove how risks in investing in equity shares can be reduced and how to make maximum return to the other investment

LIMITATIONS OF THE STUDY: 1. While applying the strategies, transaction cost and impact cost are not taken into Consideration. So, it will reflect in the profit calculation on each month of the study 2. Data were collected only on the basis of NSE trading 3. Hedging strategy is applied on historical data. So the direction of each trend in the stock market is known before hand for the period selected. As a result, some bias could have been done for the application of hedging strategy. 4. Data mining.

5.

In India especially derivatives are became a tool for speculation rather than a

risk management tool.

RESEARCH METHODOLAGY The research design specifies the methods and procedures for conducting a particular study. The type of research design applied here are TITLE OF STUDY The topic, which is selected for the study, is DERIVATIVE MARKET in the firm so the problem statement for this study will be RISK MANAGEMENT IN DERIVATIVES Exploratory research An exploratory research focuses on the discovery of ideas and is generally based on secondary data. DATA COLLECTION METHOD

The sources of data collection method which is being used for the studies:Primary source of data On line trading from NSE Secondary Source Of Data: For having the detailed study about this topic, it is necessary to have some of the secondary information, which is collected from the Following:Books. Magazines & Journals. Websites Newspapers, etc

CHAPTER II
LITERATURE REVIEW

Financial derivatives are so effective in reducing risk because they enable financial Institutions to hedge that is, engage in a financial transaction that reduces or eliminates risk. When a financial institution has bought an asset, it is said to have taken a long position, and this exposes the institution to risk if the returns on the asset are uncertain. Conversely, if it has sold an asset that it has agreed to deliver to another party at a Future date, it is said to have taken a short position, and this can also expose the Institution to risk. Financial derivatives can be used to reduce risk by invoking the following basic principle of hedging: Hedging risk involves engaging in a financial transaction that offsets a long position by taking an additional short position, or offsets a short position by taking an additional long position. In other words, if a financial institution has bought a security and has therefore taken a long position, it conducts a hedge by contracting to sell that security (take a short position) at some future date. Alternatively, if it has taken a short position by selling a security that it needs to deliver at a future date, then it conducts a hedge by contracting to buy that security (take a long position) at a future date. We look at how this principle can be applied using forward and futures PARTICIPANTS OF DERIVATIVE There are three broad categories of participants hedgers, speculators and arbitrageurs. Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculates wish to bet on future movement in the price of an asset. Features and options contracts cangue them an extra leverage; they can increase both the potential gains and losses in a speculative venture. Arbitrageurs are in business To take advantage of a discrepancy between prices in two different markets. Derivative products initially emerged, as hedging devices against fluctuation in Commodity prices and commoditylinked derivatives remained the sole form of such products for almost three hundred years. In recent years, the market for financial derivative has grown tremendously in terms of variety of instruments available. The emergence of the market for derivative products, most notable 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. Though the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. As instrument of risk management, these generally do not influence the fluctuations in the underlying asset prices DEFINITIONS According to JOHN C. HUL A derivatives can be defined as a financial instrument whose value depends on (or derives from) the values of other, more basic underlying variables. According to ROBERT L. MCDONALD A derivative is simply a financial instrument (or even more simply an agreement between two people) which has a value determined by the price of something else With Securities Laws (Second Amendment) Act, 1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts Regulations Act, as:-

Derivative includes: A. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk Instrument or contract for differences or any other form of security; B. contract which derives its value from the prices, or index of prices, of underlying Securities Derivatives were developed primarily to manage, offset or hedge against risk but some were developed primarily to provide the potential for high returns

CHAPTER III
INDUSTRY PROFILE COMPANY PROFILE

INDUSTRY PROFILE In general, the financial market divided into two parts, Money market and capital market. Securities market is an important, organized capital market where transaction of capital is facilitated by means of direct financing using securities as a commodity. Securities market can be divided into a primary market and secondary market. PRIMARY MARKET The primary market is an intermittent and discrete market where the initially listed shares are traded first time, changing hands from the listed company to the investors. It refers to the process through which the companies, the issuers of stocks, acquire capital by offering their stocks to investors who supply the capital. In other words primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is called an initial public offering(IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. SECONDARY MARKET The secondary market is an on-going market, which is equipped and organized with a place, facilities and other resources required for trading securities after their initial offering. It refers to a specific place where securities transaction among many and unspecified persons is carried out

through intermediation of the securities firms, i.e., a licensed broker, and the exchanges, a specialized trading organization, in accordance with the rules and regulations established by the exchanges. A bit about history of stock exchange they say it was under a tree that it all started in1875.Bombay Stock Exchange (BSE) was the major exchange in India Till1994.National tock Exchange (NSE) started operations in 1994. NSE was floated by major banks and financial institutions. It came as a result of Harshad Mehta scam of 1992. Contrary to popular belief the scam was more of a banking scam than a stock market scam. The old methods of trading in BSE were people assembling on what as called a ring in the BSE building. They had a unique sign language to communicate apart from all the shouting. Investors weren't allowed access and the system was opaque and misused by brokers The shares were in physical form and prone to duplication and fraud. NSE was the first to introduce electronic screen based trading. BSE was forced to follow suit The present day trading platform is transparent and gives investors prices on a real time basis. With the introduction of depository and mandatory dematerialization of shares chances of fraud reduced further. The trading screen gives you top 5 buy and sell quotes on every scrip. A typical trading day starts at 10 ending at 3.30. Monday to Friday. BSE has 30 stocks which make up the Sensex .NSE has 50 stocks in its index called Nifty. FII s Banks, financial institutions mutual funds are biggest players in the market. Then there are the retail investors and speculators. The last ones are the ones who follow the market morning to evening Market can be very addictive like blogging though stakes are higher in the former. ORIGIN OF INDIAN STOCK MARKET The origin of the stock market in India goes back to the end of the eighteenth century when long term negotiable securities were first issued. However, for all practical purposes, the real beginning occurred in the middle of the nineteenth century after the enactment of the companies Act in 1850, which introduced the features of limited liability and generated investor interest in corporate securities.

An important early event in the development of the stock market in India was the formation of the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in Ahmedabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion during depressing times subsequently. Stock exchanges are intricacy inter-woven in the fabric of a nation's economic life. Without a stock exchange, the saving of the community- the sinews of economic progress and productive efficiency- would remain underutilized. The task of mobilization and allocation of savings could be attempted in the old days by a much less specialized institution than the stock exchanges. But as business and industry expanded and the economy assumed more complex nature, the need for permanent finance' arose. Entrepreneurs needed money for long term whereas investors demanded liquidity the facility to convert their investment into cash at the stock exchange any given time. The answer was a ready market for investments and this was how came into being. Stock exchange means anybody of individuals, whether incorporated or not, constituted for the purpose of regulating or controlling the business of buying, selling or dealing in securities. These securities include: (i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ii) Government securities; and (iii) Rights or interest in securities. The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Ltd (NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges. However, the BSE and NSE have established themselves as the two leading exchanges and account for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs 851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000 (April - August 1999). NSE has around 1500 shares listed with a total market capitalization of around Rs 9, 21,500 crore.

The BSE has over 6000 stocks listed and has a market capitalization of around Rs 9, 68,000 crore. Most key stocks are traded on both the exchanges and hence the investor could buy them on either exchange. Both exchanges have a different settlement cycle, which allows investors to shift their positions on the bourses. The primary index of BSE is BSE Sensex comprising 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The BSE Sensex is the older and more widely followed index. Both these indices are calculated on the basis of market capitalization and contain the heavily traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the exchanges have switched over from the open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE on Line Trading) and NEAT(National Exchange Automated Trading) System. It facilitates more efficient processing, automatic order matching, faster execution of trades and transparency; the scrip's traded on the BSE have been classified into 'A', 'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which are in the carry forward system (Badla). The 'F' group represents the debt market (fixed income securities) segment. The 'Z' group scrip's are the blacklisted companies. The 'C' group covers the odd lot securities in 'A', 'B1' &'B2' groups and Rights renunciations. The key regulator governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other participants in Indian secondary and primary market is the Securities and Exchange Board of India (SEBI) Ltd. Brief History of Stock Exchanges Do you know that the world's foremost marketplace New York Stock Exchange(NYSE), started its trading under a tree (now known as 68 Wall Street) over 200 years ago? Similarly, India's premier stock exchange Bombay Stock Exchange (BSE) can also trace back its origin to as far as 125 years when it started as a voluntary non-profit making association. News on the stock market appears in different media every day. You hear about it any time it reaches a new high or a new low, and you also hear about it daily in statements like'The BSE Sensitive Index rose 5% today'. Obviously, stocks and stock markets are important. Stocks of public limited companies are bought and sold at a stock exchange. But what really are stock exchanges? Known also as the stock market or bourse, a stock exchange is an organized

marketplace for securities (like stocks, bonds, options) featured by the centralization of supply and demand for the transaction of orders by member brokers, for institutional and individual investors. The exchange makes buying and selling easy. For example, you don't have to actually go to a stock exchange, say, BSE - you can contact a broker, who does business with the BSE, and he or she will buy or sell your stock on your behalf.

Market Basics Electronic trading Electronic trading eliminates the need for physical trading floors. Brokers can trade from their offices, using fully automated screen-based processes. Their workstations are connected to a Stock Exchange's central computer via satellite using Very Small Aperture Terminus (VSATs). The orders placed by brokers reach the Exchange's central computer and are matched electronically. Exchanges in India The Stock Exchange, Mumbai (BSE) and the National Stock Exchange (NSE) are the country's two leading Exchanges. There are 20 other regional Exchanges, connected via the InterConnected Stock Exchange (ICSE). The BSE and NSE allow nationwide trading via their VSAT systems. Index An Index is a comprehensive measure of market trends, intended for investors who are concerned with general stock market price movements. An Index comprises stocks that have large liquidity and market capitalization. Each stock is given a weight age in the Index equivalent to its market capitalization. At the NSE, the capitalization of NIFTY (fifty selected stocks) is taken as a base capitalization, with the value set at 1000. Similarly, BSE Sensitive Index or Sensex comprises 30 selected stocks. The Index value compares the day's market capitalization vis--vis base capitalization and indicates how prices in general have moved over a period of time.

Execute an order Select a broker of your choice and enter into a broker-client agreement and fill in the client registration form. Place your order with your broker preferably in writing. Get a trade confirmation slip on the day the trade is executed and ask for the contract note at the end of the trade date.

Need a broker As per SEBI (Securities and Exchange Board of India.) regulations, only registered members can operate in the stock market. One can trade by executing a deal only through a registered broker of a recognized Stock Exchange or through a SEBI-registered sub-broker. Contract note A contract note describes the rate, date, time at which the trade was transacted and the brokerage rate. A contract note issued in the prescribed format establishes a legally enforceable relationship between the client and the member in respect of trades stated in the contract note. These are made in duplicate and the member and the client both keep a copy each. A client should receive the contract note within 24 hours of the executed trade. Corporate Benefits/Action. Split A Split is book entry wherein the face value of the share is altered to create a greater number of shares outstanding without calling for fresh capital or altering the share capital account. For example, if a company announces a two-way split, it means that a share of the face value of Rs 10 is split into two shares of face value of Rs 5 each and a person holding one share now holds two shares. Buy Back As the name suggests, it is a process by which a company can buy back its shares from shareholders. A company may buy back its shares in various ways from existing shareholders on

a proportionate basis; through a tender offer from open market; through a book-building process; from the Stock Exchange; or from odd lot holders. A company cannot buy back through negotiated deals on or off the Stock Exchange, through spot transactions or through any private arrangement. Settlement cycle The accounting period for the securities traded on the Exchange. On the NSE, the cycle begins on Wednesday and ends on the following Tuesday, and on the BSE the cycle commences on Monday and ends on Friday. At the end of this period, the obligations of each broker are calculated and the brokers settle their respective obligations as per the rules, bye-laws and regulations of the Clearing Corporation. If a transaction is entered on the first day of the settlement, the same will be settled on the eighth working day excluding the day of transaction. However, if the same is done on the last day of the settlement, it will be settled on the fourth working day excluding the day of transaction Rolling settlement The rolling settlement ensures that each day's trade is settled by keeping a fixed gap of a specified number of working days between a trade and its settlement. At present, this gap is five working days after the trading day. The waiting period is uniform for all trades. In a Rolling Settlement, all trades outstanding at end of the day have to be settled, which means that the buyer has to make payments for securities purchased and seller has to deliver the securities sold. In India, we have adopted the T+5 settlement cycle, which means that a transaction entered into on Day 1 has to be settled on the Day 1 + 5 working days, when funds pay in or securities pay out takes place. The Advantages of Rolling Settlements As mentioned earlier, this is the system practiced in developed countries. Pay outs are quicker than in weekly settlements, and investors will benefit from increased liquidity. The other benefit of the modified system is that it keeps cash and forward markets separate. In the current system, the trader has five days to square off his transaction which leads to a high level of speculation as people even without funds tend to "play" the market. During volatile markets, especially in a

bearish market, this often leads to a payment problem which has dogged the Indian stock exchanges for a long time. It provides for a higher degree of safety, and once mechanisms such as futures and stock-lending become popular, it would result in quality speculation and genuine investor interest. When does one deliver the shares and pay the money to broker As a seller, in order to ensure smooth settlement you should deliver the shares to your broker immediately after getting the contract note for sale but in any case before the pay-in day. Similarly, as a buyer, one should pay immediately on the receipt of the contract note for purchase but in any case before the pay-in day. Short selling Short selling is a legitimate trading strategy. It is a sale of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers take the risk that they will be able to buy the stock at a more favorable price than the price at which they "sold short." The selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller, Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short. Auction An auction is conducted for those securities that members fail to deliver/short deliver during pay in. Three factors primarily give rise to an auction: short deliveries, un-rectified bad deliveries, and un-rectified company objections Separate market for auctions The buy/sell auction for a capital market security is managed through the auction market. As opposed to the normal market where trade matching is an on-going process, the trade matching process for auction starts after the auction period is over. If the shares are not bought in the auction

If the shares are not bought at the auction i.e. if the shares are not offered for sale, the Exchange squares up the transaction as per SEBI guidelines. The transaction is squared up at the highest price from the relevant trading period till the auction day or at 20 per cent above the last available Closing price whichever is higher. The pay-in and pay-out of funds for auction square up is held along with the pay-out for the relevant auction.

Bad Delivery SEBI has formulated uniform guidelines for good and bad delivery of documents. Bad delivery may pertain to a transfer deed being torn, mutilated, overwritten, defaced, or if there are spelling mistakes in the name of the company or the transfer. Bad delivery exists only when shares are transferred physically. In "Demat" bad delivery does not exist. STOCK&EXCHANGE BOARD OF INDIA REGULATION OF BUSINESS IN THE STOCK EXCHANGES Under the SEBI Act, 1992, the SEBI has been empowered to conduct inspection of stock exchanges. The SEBI has been inspecting the stock exchanges once every year since 1995-96. During these inspections, a review of the market operations, organizational structure and administrative control of the exchange is made to ascertain whether: The exchange provides a fair, equitable and growing market to investors. The exchange's organization, systems and practices are in accordance with the Securities Contracts (Regulation) Act (SC(R) Act), 1956 and rules framed there under. The exchange has implemented the directions, guidelines and instructions issued SEBI from time to time. The exchange has complied with the conditions, if any, imposed on it at the time of renewal/ grant of its recognition under section 4 of the SC(R) Act, 1956. by the

During the year 1997-98, inspection of stock exchanges was carried out with a special focus on the measures taken by the stock exchanges for investor's protection. Stock exchanges were, through inspection reports, advised to effectively follow-up and redress the investors' complaints against members/listed companies. The stock exchanges were also advised to expedite the disposal of arbitration cases within four months from the date of filing. During the earlier years' inspections, common deficiencies observed in the functioning of the exchanges were delays in post trading settlement, frequent clubbing of settlements, delay in conducting auctions, inadequate monitoring of payment of margins by brokers, non-adherence to Capital Adequacy Norms etc. It was observed during the inspections conducted in 1997-98 that there has been considerable improvement in most of the areas, especially in trading, settlement, collection of margins etc. Dematerialization Dematerialization in short called as 'demat' is the process by which an investor can get physical certificates converted into electronic form maintained in an account with the Depository Participant. The investors can dematerialize only those share certificates that are already registered in their name and belong to the list of securities admitted for dematerialization at the depositories. Depository: The organization responsible to maintain investor's securities in the electronic form is called the depository. In other words, a depository can therefore be conceived of as a "Bank for securities. In India there are two such organizations viz. NSDL and CDSL. The depository concept is similar to the Banking system with the exception that banks handle funds whereas a depository handles securities of the investors. An investor wishing to utilize the services offered by a depository has to open an account with the depository through Depository Participant. Depository Participant: The market intermediary through whom the depository services can be availed by the investors is called a Depository Participant (DP). As per SEBI regulations, DP could be organizations involved in the business of providing financial services like banks, brokers, custodians and financial institutions. This system of using the existing distribution channel (mainly constituting DPs) helps the depository to reach a wide cross section of investors spread across a large geographical area at a minimum cost. The admission of the DPs involves a

detailed evaluation by the depository of their capability to meet with the strict service standards and a further evaluation and approval from SEBI. Realizing the potential, all the custodians in India and a number of banks, financial institutions and major brokers have already joined as DPs to provide services in a number of cities. Advantages of a depository services: Trading in demat segment completely eliminates the risk of bad deliveries. In case of transfer of electronic shares, you save 0.5% in stamp duty. Avoids the cost of courier/notarization/ the need for further follow-up with your broker for shares returned for company objection No loss of certificates in transit and saves substantial expenses involved in obtaining duplicate certificates, when the original share certificates become mutilated or misplaced. Lower interest charges for loans taken against demat shares as compared to the interest for loan against physical shares. RBI has increased the limit of loans availed against dematerialized Securities as collateral to Rs 20 lakh per borrower as against Rs 10 lakh per borrower in case of Loans against physical securities. RBI has also reduced the minimum margin to 25% for loans against dematerialized securities, as against 50% for loans against physical securities. Fill up the account opening form, which is available with the DP. Sign the DP-client agreement, which defines the rights and duties of the DP and the person wishing to open the account. Receive your Client account number (client ID) This client id along with your DP id gives you a unique identification in the depository system. Fill up a dematerialization request form, which is available with your DP, Submit your share certificates along with the form; write "surrendered for demat" on the face of the certificate before submitting it for demat) Receive credit for the dematerialized shares into your account Within 15 days Derivatives The term derivative instrument is generally accepted to mean a financial instrument with a payoff structure determined by the value of an underlying security, commodity, interest rate, or index. According to some notable surveys, over 80% of private sector corporations consider derivatives to be important in implementing their financial policies. Derivatives have also

gained wide acceptance among national and local governments, government sponsored entities, such as the Student Loan Marketing Association and the Federal Home Loan Mortgage Corporation, and supranational, such as the World Bank. Derivatives are used to lower funding costs by borrowers, to efficiently alter the proportions of fixed to floating rate debt, to enhance the yield on assets, to quickly modify the assets payoff structure to correspond to the firm's market view, to avoid taxes and skirt regulations, and perhaps most importantly, to transfer market risk (hedge)- where the term market risk is used to connote the possibility of losses sustained due to an unforeseen price or volatility change. A firm may execute a derivative transaction to alter its market risk profile by transferring to the trade's counter party a particular type of risk. The price that the firm must pay for this risk transfer is the acceptance of another type of risk and/or a cash payment to the counter party. The term "derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the cash asset. A derivative contract or product, or simply derivative", is to be sharply distinguished from the underlying cash asset, i.e. the asset brought / sold in the cash market on normal delivery terms. A general definition of "derivative" may be suggested here as follows: "Derivative" means forward, future or option contract of predetermined fixed duration, linked for the purpose of contract fulfillment to the value of specified real or financial asset or to index of securities. Derivatives offer organizations the opportunity to break financial risks into smaller components and then to buy and sell those components to best meet specific risk management objectives. As both forward contracts and futures contracts are used for hedging, it is important to understand the distinction between the two and their relative merits. Forward contracts are private bilateral contracts and have well established commercial usage. They are exposed to default risk by counter-party. Each forward contract is unique in term of contract size, expiration date and the asset type/ quality. The contract price is not transparent, as it is not publicly disclosed. Since the forward contract is not typically tradable, it has to be settled by delivery of the asset on the expiration date. In contrast, futures contracts are standardized tradable contracts. They are standardized in terms of size, expiration date and all other features. They are traded on specially designed exchanges in a highly sophisticated environment of

stringent financial safeguards. They are liquid and transparent. Their market prices and trading volumes are regularly reported. The futures trading system has effective safeguards against defaults in the form of Clearing Corporation guarantees for trades and the daily cash adjustment (mark to market) to the accounts of trading members based on daily price change. Futures are far more cost-efficient than forward contracts for hedging.

EVOLUTION OF DERIVATIVE FORWARD TRADING It is not clearly established when and where the first forward market came into existence. There are reports that forward trade exited in India as for back as 2000 BC and in Roman times forward training is believed to have been existence in the 12 th century in Japan. The first organized forward market came into existence in late 19th and early 20th century in Kolkata (jute & jute goods)and in Mumbai (cotton) FUTURES TRADING The Dojima rice market can be consider as the first future market in the sense of an organized exchange. The first futures in the western hemisphere were developed in United States in Chicago. First they were started as spot markets and gradually evolved into futures trading. First stage was starting of agreements to buy grain in future a predetermined price with the intention of actual delivery. Gradually these contracts become transferable and during. American civil war, it become commonplace to sell and resell agreements instead of taking delivery of physical produce. Traders found that the agreements were easier to but and sell. This is how modern futures contract came into being. OPTION TRADING

Options trading are of more recent origin. It is estimated that they existing in Greece and Rome as early as 400 BC. Option trading in agriculture products and shares came in us from the 1860s.chicago started the first option market board of trade (CBOT)in 1973.standard maturities , standard strike price, standard delivery arrangement were evolved. The risk of default laws removed by introducing a clearing house and margin system. The introduction of trade option opened the way for the evaluations of more complex derivative. SWAP TRADING The first swap transaction took place between World Bank and IBM (international business machine) they were currency swaps. Interest rates swap also commenced 1981.

COMPANY PROFILE

About us FairWealth Securities Limited is a leading Indian Financial Services firm established in the year 2005 with an objective of becoming a financial powerhouse providing all financial solutions under one roof with dedicated customer service and commitment to provide value for Money to the clients. FairWealth Group has diversified interests in multiple asset classes including Financial Services, Currency and Commodities. The company has its network spread over 300 cities and towns comprising 450 Business Associates, 34 Branch Offices across Pan India. In the Financial Services Domain, FairWealth Securities Ltd. and FairWealth Commodity Broking Pvt. Ltd. provides customer centric services in the areas of Equity and Commodities Broking, Currency Broking, Depository Participant Services, Risk and Investment Planning through Insurance, Mutual Funds, Portfolio Management Services and Deposits. After successfully creating a stable platform for dealing in various Financial Products the Company is perfectly poised to launch its Institutional Business and use its experience and exposure in the Financial Markets to add value to the clients who do not have adequate resources in terms of time or research capabilities.

Produt and services


1.Equity Trading The best way to amass wealth is by investing in the stock market. However, it can be a risky proposition considering the high risk-return trade off prevalent in the stock market. Therefore before investing, the clients should know how to go about it. By opening an account with FairWealth, an investor can avail additional benefits like access to various intraday and fundamental calls.

2.Commodity Broking Investment in commodities is advisable in the portfolio, as it is generally considered as defensive because stocks and bonds witnesses adverse performance during times of inflation. We offer our advisory services with enhanced research and knowledge aims to capitalize the immense potential of the commodities market

3.Derivatives Trading We, at FairWealth Securities, have endeavoured to make trading in derivatives simpler. We strive to educate new entrants in the derivatives trading market so that they are more equipped with knowledge and techniques. 4.Portfolio Management Services Our Portfolio Management Service is well suited for high-net worth customers who want to invest in Indian Equities and desire to create wealth over longer period After understanding varied risk appetites and financial goals of individuals FairWealth has created an Investment Strategy called Wealth- MAX Strategy 5.Research FairWealth carries out extensive research in equity and commodity Equity Research: We have a dedicated research team which is engaged in analyzing the Indian economy and corporate sectors to identify multi-bagger stocks. We provide Weekly Techno Funda Calls based on the weekly outlook. The team also provides positional and medium term calls. Our technical team provides various intraday , BTST and Weekly Calls based on their analysis. It also comes out with a report called Market Pulse on a daily basis. Daily Market Outlook which is a daily newsletter is well-known among the industry. Besides this, we are also into Derivative research which covers Call-Put Strategy and Covered Call strategy. Commodity Research: The commodity research team enables the investors to tap appropriate opportunities in the commodity market.

6.Risk Management through Life and General Insurance We have a sizable presence in the distribution of 3rd party financial products like Life Insurance and General Insurance Products. We provide expert Advisory on Life Insurance and General Insurance. The distribution network is backed by in-house back office support to provide prompt and efficient customer service. 7. Depository Participant Fairwealth Securities Limited is a depository participant with the Central Depository Services (India) Limited for trading and settlement of dematerialized shares. The company as a depository participant offers De-materialization, Re-materialization, Pledge & transfer of shares. SMS Alert Facility for debits and IPO credits in demat account are also available. We ensure safe and secure custody of the customers account as every debit instruction is executed after authentication for the same is established. We offer depository accounts to individual investors as well as corporate houses which enable them to trade in the dematerialized environments. 8. Back Office Fairwealth provides online back-office services to its clients for transparency of their statements and provides the link to view the details of the account online. The account statement that are available includes Financial Ledger, Net Position for the day, E-Contract Note, Ageing Report, PCR Report.

Management

Mr. Dhirendra Gaba Managing Director

Mr. Dhirendra Gaba, Founder and Managing director, could forsee the opportunities offered by the stock market and thus FairWealth Securities was evolved in 2005. Mr Gaba, a law graduate, has a vast experience of 15 years in the stock market. He has been actively associated with the stock markets operations since 1995. Under his leadership, the organization has rapidly expanded and made a widespread presence across India. FairWealth has seamlessly grown into a financial services company par excellence. Mr Gaba is valued for his understanding of the stock market, in analyzing and advising companies, researching and investing in stocks. He is a canny stock picker for long term investment and has a profound knowledge of macro & microeconomics, Much like Mr. Warren Buffet, he buys into the business model of a company and for judging the longevity and growth potential. He gives top priority to 'competitive ability', 'scalability' and 'management quality' of the enterprise. He is a reputed and well-known personality in the financial services domain Mr. Naveen Gaba Director- Sales & Marketing Mr. Naveen Gaba, co-promoter of the Company, is an Art Graduate. He has a wide experience of 15 years. He joined the business as a Director of FairWealth and took charge of the entire marketing and customer support division of the company. He heads the sales and marketing activities Pan India. His prime area of focus is institutional business and maintaining investor relations. He is also responsible for retail business and institutional business development. Mr. Naveen Gaba has been instrumental in encouraging professional marketing in the organization and has immense experience in the marketing of financial products and services. Under his dynamic leadership and experience, FairWealth has opened 40 branches all

over India.

Mr. Rajesh Gupta Chief Investment Officer

Mr. Rajesh Gupta is credited for the acclaimed Research Capabilities at FairWealth. He possesses expertise in equity research. Mr. Gupta started his investment and advisory services in the year 1988-89. His fundamental outlook has provided impetus to the organizations research team When it comes to analyzing the market, Mr. Gupta is truly a genius. His handson experience and fundamental knowledge of the market can predict the market trend in initial stages. He has managed to identify numerous multi-baggers in the past decade, notable being Hyderabad Industries, Shree cement, Banco Products, Jindal Saw and JSPL.

Mr. Prakash Thakkar Director-Commodity

Mr. Prakash Thakkar has a successful track of over two decades in the financial services industry. He has worked with some of the leading broking houses of India and has expertise in Physical Agri Commodities and Commodities Future Market. He has identified major opportunities in the commodities market. He gave a new dimension to the research function at FairWealth by initiating commodity research.

Message from Managing Director


Performance of the company

Reflecting on FY 2009-2010, it gives me great deal of satisfaction. It has been a landmark year in performance and scalability. Incepted in 2005, today we are one of the fastest growing financial institutions and we have diversified interests in multiple asset classes with more than 50,000+ client base in Pan India and a support team of over 800+ professionals extended across 450 locations in more than 300 cities and towns. The values of the company have been a driving factor behind the growth of the company The company has always preferred to walk an extra mile when it comes to servicing clients needs. It believes that the growth of the company lies in the growth of the clients For our company, the interest of the clients is at the forefront. This has come not from the aim of achieving customer satisfaction but the aim to achieve customer delight. The company strongly believes that though the people work hard to make money, the same money should work for them. We here at Fairwealth believe that Transparency is the base of a long term relationship. This has been an important differentiating factor for the company which enjoys enormous amount of trust and goodwill because of the transparent dealings and straightforward approach that it has followed since inception. Till now, we have achieved many goals and reached many milestones. In future also we will try to deliver the best value services to our clients. On the global economic front I would like to say that major economies have started stabilizing except some European economies that are suffering from sovereign debt and unsustainable deficit. A recent IMF report showed that the global economy expanded by nearly 5 percent during the first quarter of 2010. This is primarily on account of robust recovery in the Asian economies. The Indian Economy is also showing positive signs.IMF has projected the Indian Economic growth at 9.4% in 2010, This is significantly higher than the growth rate of 8.5% as projected by the Indian economic advisory. This is a positive indicator for the

Indian economy hand hence the Indian stock Market. I would like to conclude by wishing you all the best for the financial year 2010-11, may 2010-11 prove prosperous for you all Introduction to PMS

In today's complex financial environment, investors have unique needs which are derived from their risk appetite and financial goals. But regardless of this, every investor seeks to maximize his returns on investments without capital erosion. While there are many investment avenues such as fixed deposits, income funds, bonds, equities etc It is a proven fact that Equities as an asset class typically tend to outperform all other asset classes over the long run. Investing in equities, require knowledge, time and a right mind-set. Equity as an asset class also requires constant monitoring may not be possible for you to give the necessary time, given your other commitments. We recognize this, and manage your investments professionally to achieve specific investment objectives and not to forget, relieving you from the day to day hassles which investment require.

Who is it for?

Our Portfolio Management Service is well suited for high-net worth customers:

Who are investing in Indian equities Who desire create wealth over longer period Who appreciate a higher level of service

After understanding your risk appetite and financial goal, we have created Investment Strategy called Wealth- MAX Strategy.

Scheme Details

Wealth- Max Strategy under is designed to invest in stocks with shortmedium term perspective, for a minimum 15-20% move. The investment philosophy is to find Momentum in Value. It follows an active process driven method of profit booking. The stock selection lays greater emphasis on companies which good corporate governance and excellent management track record. It would participate in emerging sector and turn around stories so as to participate and capture sharp rallies. Objective:

Portfolio

The Scheme aims to deliver superior returns in short to medium term by investing in fundamentally strong stocks with momentum approach, coupled with active profit booking.

Portfolio Characteristics:

Investment Approach: "Momentum in Value". Investments with Short-Medium term perspective. Regular Profit Booking.

Investment Philosophy:

Investment in Momentum/Growth Sectors. Identifying the emerging Sector and right Company with a scalable business managed by competent managers. Bandwidth. To look out for companies with transparency, execution capability and Management

Investments in market Leaders, who have the Vision to make it big. The investments are done with a predefined price targets and portfolio follows an active process of Profit Booking.

Investors who like to invest in growth stocks and capitalize on the upside by an active process of profit booking.

PortfolioTenure: MinimumTerm-1Year TicketSize Minimum- 5 Lacs Advantage of PMS

Professional Management : The service offers professional management of your equity investments with an aim to deliver consistent return with an eye on risk. Risk Control : Well defined investment philosophy & strategy acts as a guiding principle in defining the investment universe. We have a very robust portfolio management system that enables the entire construction, monitoring and the risk management processes. Convenience : Our Portfolio Management Service relieves you from all the administrative hassles of your investments. We provide periodic reports on the performance and other aspects of your investments. Constant Portfolio Tracking : We understand the dynamics of equity as an asset class, so we track your investments continuously to maximize the returns. Transparency :

You will get account statements and performance reports on a monthly basis. The following portfolio reports are accessible:

Performance Statements Portfolio Holding Reports Transactions Statements Capital Gain/Loss Statements

CHAPTER IV
THEORETICAL FRAME WORK

Investment Basics What is Investment? The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment. Why should one invest? One needs to invest to: 1. earn return on your idle resources

2. generate a specified sum of money for a specific goal in life 3. make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment's 'real' rate of return, which is the return after inflation. The aim of investments should be to provide return above the inflation rate to ensure that the investment does not decrease in value. For example, if the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won't buy as much today as they did last year. When to start Investing?

The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and7the interest or dividend earned on it, year after year.

The three golden rules for all investors are: Invest early Invest regularly Invest for long term and not short term What care should one take while investing? Before making any investment, one must ensure to: 1. Obtain written documents explaining the investment 2. Read and understand such documents 3. Verify the legitimacy of the investment 4. Find out the costs and benefits associated with the investment 5. Assess the risk-return profile of the investment 6. Know the liquidity and safety aspects of the investment 7. Ascertain if it is appropriate for your specific goals 8. Compare these details with other investment opportunities available 9. Examine if it fits in with other investments you are considering or you Have already made 10. Deal only through an authorized intermediary

11. Seek all clarifications about the intermediary and the investment 12. Explore the options available to you if something were to go wrong, And then, if satisfied, make the investment. These are called the Twelve Important Steps to Investing.

INTRODUCTION TO DERIVATIVES 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, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors. 1.1 DERIVATIVES DEFINED Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a Contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the "underlying". In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines "derivative" to include1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security.

2. A contract which derives its value from the prices, or index of prices, of underlying securities. Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R) A.

1.2 FACTORS DRIVING THE GROWTH OF DERIVATIVES Over the last three decades, the derivatives market has seen a phenomenal growth. A large variety of derivative contracts have been launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are: 1. Increased volatility in asset prices in financial markets, 2. Increased integration of national financial markets with the international markets, 3. Marked improvement in communication facilities and sharp decline in their costs, 4. Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and 5. Innovations in the derivatives markets, which optimally combine the risks and costs as compared to individual financial assets. 1.3 DERIVATIVE PRODUCTS Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. We take a brief look at various derivatives contracts that have come to be used. 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. returns over

a large number of financial assets leading to higher returns, reduced risk as well as transactions

Futures: A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts Options: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. Warrants: Options generally have lives of upto one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of 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 commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction Swaptions: Swaptions are options to buy or sell a swap that will become Operative at the expiry of the options. Thus a Swaptions is an option on a forward Swap. Rather than have calls and puts, the Swaptions market has receiver Swaptions and payer Swaptions. A receiver swaption is an option to receive fixed and pay floating. PARTICIPANTS IN THE DERIVATIVES MARKETS

The following three broad categories of participants - hedgers, speculators, and arbitrageurs trade in the derivatives market. Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit.yer swaption is an option to pay fixed and receive floating. 1.5 ECONOMIC FUNCTION OF THE DERIVATIVE MARKET Inspite of the fear and criticism with which the derivative markets are commonly looked at, these markets perform a number of economic functions 1. 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 prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in discovery of future as well as current prices 2. The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. 3. Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. 4. Speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets. 1.7 NSE's DERIVATIVES MARKET

The derivatives trading on the NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. Today, both in terms of volume and turnover, NSE is the largest derivatives exchange in India. Currently, the derivatives contracts have a maximum of 3-month expiration cycles. Three contracts are available for trading, with 1 month, 2 months and 3 months expiry. A new contract is introduced on the next trading day following the expiry of the near month contract. 1.7.1 Participants and functions NSE admits members on its derivatives segment in accordance with the rules and regulations of the exchange and the norms specified by SEBI. NSE follows 2-tier membership structure stipulated by SEBI to enable wider participation. Those interested in taking membership on F&O segment are required to take membership of CM and F&O segment or CM, WDM and F&O segment. Trading and clearing members are admitted separately. Essentially, a clearing member (CM) does clearing for all his trading members (TMs), undertakes risk management and performs actual settlement. There are three types of CMs: Self Clearing Member: A SCM clears and settles trades executed by him only either on his own account or on account of his clients. Trading Member Clearing Member: TM-CM is a CM who is also a TM. TM-CM may clear and settle his own proprietary trades and client's trades as well as clear and settle for other TMs. Professional Clearing Member PCM is a CM who is not a TM. Typically, banks or custodians could become a PCM and clear and settle for TMs. 1.7.2 Trading mechanism The futures and options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen-based trading for Index futures & options and Stock futures & options on a nationwide basis and an online monitoring and surveillance mechanism. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. It is similar to that of trading of equities in the Cash

Market (CM) segment. The NEAT-F&O trading system is accessed by two types of users. The Trading Members (TM) have access to functions such as order entry, order matching, and order and trade management. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system. Various conditions like Immediate or Cancel, Limit/Market price, Stop loss, etc. can be built into an order. The Clearing. Members (CM) use the trader workstation for they can the purpose of monitoring the trading member(s) for whom they clear the trades. Additionally, enter and set limits to positions, which a trading member can take. CLEARING AND SETTLEMENT National Securities Clearing Corporation Limited (NSCCL) undertakes clearing and settlement of all trades executed on the futures and options (F&O) segment of the NSE. It also acts as legal counterparty to all trades on the F&O segment and guarantees their financial settlement. 6.1 CLEARING ENTITIES Clearing and settlement activities in the F&O segment are undertaken by NSCCL with the help of the following entities: 6.1.1 Clearing members In the F&O segment, some members, called self clearing members, clear and settle their trades executed by them only either on their own account or on account of their clients. Some others, called trading member-cum-clearing member, clear and settle their own trades as well as trades of other trading members (TMs). Besides, there is a special category of members, called professional clearing members (PCM) who clear and settle trades executed by TMs. The members clearing their own trades and trades of others, and the PCMs are required to bring in additional security deposits in respect of every TM whose trades they undertake to clear and settle

.6.1.2 clearing banks Funds settlement takes place through clearing banks. For the purpose of settlement all clearing members are required to open a separate bank account with NSCCL designated clearing bank for F&O segment. The Clearing and Settlement process comprises of the following three main activities: 1) Clearing 2) Settlement 3) Risk Management 6.2 CLEARING MECHANISM The clearing mechanism essentially involves working out open positions and obligations of clearing (self-clearing/trading-cum-clearing/professional clearing) members. This position is considered for exposure and daily margin purposes. The open positions of CMs are arrived at by aggregating the open positions of all the TMs and all custodial participants clearing through him, in contracts in which they have traded. A TM's open position is arrived at as the summation of his proprietary open position and clients' open positions, in the contracts in which he has traded. While entering orders on the trading system, TMs are required to identify the orders, whether proprietary (if they are their own trades) or client (if entered on behalf of clients) through 'Pro/ Cli' indicator provided in the order entry screen. Proprietary positions are calculated on net basis (buy - sell) for each contract. Clients' positions are arrived at by summing together net (buy - sell) positions of each individual client. A TM's open position is the sum of proprietary open position, client open long position and client open short position 6.3 SETTLEMENT MECHANISM

All futures and options contracts are cash settled, i.e. through exchange of cash. The underlying for index futures/options of the Nifty index cannot be delivered. These contracts, therefore, have to be settled in cash. Futures and options on individual securities can be delivered as in the spot market. However, it has been currently mandated that stock options and futures would also be cash settled. The settlement amount for a CM is netted across all their TMs/clients, with respect to their obligations on MTM, premium and exercise settlement. 6.3.1 Settlement of futures contracts Futures contracts have two types of settlements, the MTM settlement which happens on a continuous basis at the end of each day, and the final settlement which happens on the last trading day of the futures contract. MTM settlement: All futures contracts for each member are marked-to-market (MTM) to the daily settlement price of the relevant futures contract at the end of each day. The profits/losses are computed as the difference between: 1. The trade price and the day's settlement price for contracts executed during the day but not squared up. 2. The previous day's settlement price and the current day's settlement price for brought forward contracts. 3. The buy price and the sell price for contracts executed during the day and squared up. Settlement prices for futures Daily settlement price on a trading day is the closing price of the respective futures contracts on such day. The closing price for a futures contract is currently calculated as the last half an hour weighted average price of the contract in the F&O Segment of NSE. Final settlement price is the closing price of the relevant underlying index/security in the capital market segment of NSE, on the last trading day of the contract. The closing price of the underlying Index/security is currently its last half an hour weighted average value in the capital market segment of NSE.

6.3.2 Settlement of options contracts Options contracts have three types of settlements, daily premium settlement, exercise settlement, interim exercise settlement in the case of option contracts on securities and final settlement. Daily premium settlement Buyer of an option is obligated to pay the premium towards the options purchased by him. Similarly, the seller of an option is entitled to receive the premium for the option sold by him. The premium payable amount and the premium receivable amount are netted to compute the net premium payable or receivable amount for each client for each option contract. Exercise settlement Although most option buyers and sellers close out their options positions by an offsetting closing transaction, an understanding of exercise can help an option buyer determine whether exercise might be more advantageous than an offsetting sale of the option. There is always a possibility of the option seller being assigned an exercise. Once an exercise of an option has been assigned to an option seller, the option seller is bound to fulfill his obligation (meaning, pay the cash settlement amount in the case of a cash-settled option) even though he may not yet have been notified of the assignment. Interim exercise settlement Interim exercise settlement takes place only for option contracts on securities. An investor can exercise his in-the-money options at any time during trading hours, through his trading member. Interim exercise settlement is effected for such options at the close of the trading hours, on the day of exercise. Valid exercised option contracts are assigned to short positions in the option contract with the same series (i.e. having the same underlying, same expiry date and same strike price), on a random basis, at the client level. The CM who has exercised the option receives the exercise settlement value per unit of the option from the CM who has been assigned the option contract. Final exercise settlement

Final exercise settlement is effected for all open long in-the-money strike price options existing at the close of trading hours, on the expiration day of an option contract. All such long positions are exercised and automatically assigned to short positions in option contracts with the same series, on a random basis. The investor who has long in-the-money options on the expiry date will receive the exercise settlement value per unit of the option from the Exercise process The period during which an option is exercisable depends on the style of the option. On NSE, index options are European style, i.e. options are only subject to automatic exercise on the expiration day, if they are in-the-money. As compared to this, options on securities are American style. In such cases, the exercise is automatic on the expiration day, and voluntary prior to the expiration day of the option contract, provided they are in-the-money. Automatic exercise means that all in-the-money options would be exercised by NSCCL on the expiration day of the contract. The buyer of such options need not give an exercise notice in such cases. Voluntary exercise means that the buyer of an in-the-money option can direct his TM/CM to give exercise instructions to NSCCL. In order to ensure that an option is exercised on a particular day, the buyer must direct his TM to exercise before the cut-off time for accepting exercise instructions for that day. Usually, the exercise orders will be accepted by the system till the close of trading hours. Different TMs may have different cut -off times for accepting exercise instructions from customers, which may vary for different options. An option, which expires to exercise, or have procedures for the exercise of every option, which is in the money at expiration. Once an exercise instruction is given by a CM to NSCCL, it cannot ordinarily be revoked. Exercise notices given by a buyer at anytime on a day are processed by NSCCL after the close of trading hours on that day. All exercise notices received by NSCCL from the NEAT F&O system are processed to determine their validity. Some basic validation checks are carried out to check the open buy position of the exercising client/TM and if option contract is in-themoney. Once exercised contracts are found valid, they are assigned. Assignment process The exercise notices are assigned in standardized market lots to short positions in the option contract with the same series (i.e. same underlying, expiry date and strike price) at the client

level. Assignment to the short positions is done on a random basis. NSCCL determines short positions, which are eligible to be assigned and then allocates the exercised positions to any day on which exercise instruction is received by NSCCL and notified to the members on the same day. It is possible that an option seller may not receive notification from its TM that an exercise has been assigned to him until the notification from its TM that an exercise has been assigned to him until the next day following the date of the assignment to the CM by NSCCL. Exercise settlement computation In case of index option contracts, all open long positions at in-the-money strike prices are automatically exercised on the expiration day and assigned to short positions in option contracts with the same series on a random basis. For options on securities, where exercise settlement may be interim or final, interim exercise for an open long in-the-money option position can be affected on any day till the expiry of the contract. Final exercise is automatically affected by NSCCL for all open long in-the-money positions in the expiring month option contract, on the expiry day of the option contract. The exercise settlement price is the closing price of the underlying (index or security) on the exercise day (for interim exercise) or the expiry day of the relevant option contract (final exercise). The exercise settlement value is the difference between the strike price and the final settlement price of the relevant option contract. For call options, the exercise settlement value receivable by a buyer is the difference between the final settlement price and the strike price for each unit of the underlying conveyed by the option contract, while for put options it is difference between the strike prices and the final settlement price for each unit of the underlying conveyed by the option contract. Settlement of exercises of options on securities is currently by payment in cash and not by delivery of securities. It takes place for inthe-money option contracts. The exercise settlement value for each unit of the exercised contract is computed as follows: Call options = Closing price of the security on the day of exercise Strike price Put options = Strike price Closing price of the security on the day of exercise For final exercise the closing price of the underlying security is taken on the expiration day. The exercise settlement value is debited / credited to the relevant CMs clearing bank account on T + 1 day (T = exercise date).

Special facility for settlement of institutional deals NSCCL provides a special facility to Institutions/Foreign Institutional Investors(FIIs)/Mutual Funds etc. to execute trades through any TM, which may be cleared and settled by their own CM. Such entities are called custodial participants (CPs). To avail of this facility, a CP is required to register with NSCCL through his CM. A unique CP code is allotted to the CP by NSCCL. All trades executed by a CP through any TM are required to have the CP code in the relevant field on the trading system at the time of order entry. Such trades executed on behalf of a CP are confirmed by their own CM (and not the CM of the TM through whom the order is entered), within the time specified by NSE on the trade day though the on-line confirmation facility. Till such time the trade is confirmed by CM of concerned CP, the same is considered as a trade of the TM and the responsibility of settlement of such trade vests with CM of the TM. Once confirmed by CM of concerned CP, such CM is responsible for clearing and settlement of deals of such custodial clients. FIIs have been permitted to trade in all the exchange traded derivative contracts subject to compliance of the position limits prescribed for them and their sub accounts, and compliance with the prescribed procedure for settlement and reporting. A FII/a sub-account of the FII, as the case may be, intending to trade in the F&O segment of the exchange, is required to obtain a unique Custodial Participant (CP) code allotted from the NSCCL. FII/sub-accounts of FIIs which have been allotted a unique CP code by NSCCL are only permitted to trade on the F&O segment. The FD/sub-account of FII ensures that all orders placed by them on the Exchange carry the relevant CP code allotted by NSCCL. 6.5 RISK MANAGEMENT NSCCL has developed a comprehensive risk containment mechanism for the F&O segment. The salient features of risk containment mechanism on the F&O segment are: 1. The financial soundness of the members is the key to risk management. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent. 2. NSCCL charges an upfront initial margin for all the open positions of a CM It specifies the initial margin requirements for each futures/options contract on a daily basis. It also follows

value-at-risk (VaR) based margining through SPAN. The CM in turn collects the initial margin from the TMs and their respective clients. .3. The open positions of the members are marked to market based on contract settlement price for each contract. The difference is settled in cash on a T+1 basis. 4. NSCCL's on-line position monitoring system monitors a CM's open positions on a real-time basis. Limits are set for each CM based on his capital deposits. The on-line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs for MTM value violation, while TMs are monitored for contract-wise position limit violation. 5. CMs are provided a trading terminal for the purpose of monitoring the open positions of all the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set up by a CM and whenever a TM exceeds the limits, it stops that particular TM from further trading. 6. A member is alerted of his position to enable him to adjust his exposure or bring in additional capital. Position violations result in withdrawal of trading facility for all TMs of a CM in case of a violation by the CM. 7. A separate settlement guarantee fund for this segment has been created out of the capital of members. The most critical component of risk containment mechanism for F&O segment is the margining system and on-line position monitoring. The actual position monitoring and margining is carried out on-line through Parallel Risk Management System (PRISM). PRISM uses SPAN(r) (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins, based on the parameters defined by SEBI. 6.5.1 NSCCL-SPAN The objective of NSCCL-SPAN is to identify overall risk in a portfolio of all futures and options contracts for each member. The system treats futures and options contracts uniformly, while at the same time recognizing the unique exposures associated with options portfolios, like extremely deep out-of-the money short positions and inter- month risk. Its over-riding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one

day to the next day based on 99% VAR methodology. SPAN considers uniqueness of option portfolios. The following factors affect the value of an option: 1. Underlying market price 2. Strike price 3. Volatility (variability) of underlying instrument 4. Time to expiration 5. Interest rate As these factors change, the value of options maintained within a portfolio also changes. Thus, SPAN constructs scenarios of probable changes in underlying prices and volatilities in order to identify the largest loss a portfolio might suffer from one day to the next. It then sets the margin requirement to cover this one-day loss. The complex calculations (e.g. the pricing of options) in SPAN are executed by NSCCL. The results of these calculations are called risk arrays. Risk arrays, and other necessary data inputs for margin calculation are provided to members daily in a file called the SPAN risk parameter file. Members can apply the data contained in the risk parameter files, to their specific portfolios of futures and options contracts, to determine their SPAN margin requirements. Hence, members need not execute complex option pricing calculations, which are performed by NSCCL. SPAN has the ability to estimate risk for combined futures and options portfolios, and also re-value the same under various scenarios of changing market conditions 6.5.2 Types of margins The margining system for F&O segment is explained below: Initial margin: Margin in the F&O segment is computed by NSCCL upto client level for open positions of CMs/TMs. These are required to be paid up-front on gross basis at individual client level for client positions and on net basis for proprietary positions. NSCCL collects initial margin for all the open positions of a CM based on the margins computed by NSE-SPAN. A CM is required to ensure collection of adequate initial margin from his TMs up-front. The TM is required to collect adequate initial margins up-front from his clients.

Premium margin: In addition to initial margin, premium margin is charged at client level. This margin is required to be paid by a buyer of an option till the premium settlement is complete. Assignment margin for options on securities: Assignment margin is levied in addition to initial margin and premium margin. It is required to be paid on assigned positions of CMs towards interim and final exercise settlement obligations for option contracts on individual securities, till such obligations are fulfilled. The margin is charged on the net exercise settlement value payable by a CM towards interim and final exercise settlement. Client margins: NSCCL intimates all members of the margin liability of each of their client. Additionally members are also required to report details of margins collected from clients to NSCCL, which holds in trust client margin monies to the extent reported by the member as having been collected form their respective clients 6.6 MARGINING SYSTEM Derivatives enable traders to take on leveraged positions. This can be very risky because a small movement in prices of underlying could result in either big gains or big losses. Hence the margining system for derivatives becomes an important aspect of market functioning and determines the integrity of this market. In this chapter we look at some margining concepts and the methodology used for computing margins NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options segment. The most critical component of a risk containment mechanism is the online position monitoring and margining system. The actual margining and position monitoring is done on-line, on an intra-day actual margining and position monitoring is done on-line, on an intra-day basis using PRISM (Parallel Risk Management System) which is the real-time position monitoring and risk management system. The risk of each trading and clearing member is monitored on a real-time basis and alerts/disablement messages are generated if the member crosses the set limits. NSCCL uses the SPAN (Standard Portfolio Analysis of Risk) system, a portfolio based margining system, for the purpose of calculating initial margins. 6.6.1 SPAN approach of computing initial margins

The objective of SPAN is to identify overall risk in a portfolio of futures and options contracts for each member. The system treats futures and options contracts uniformly, while at the same time recognizing the unique exposures associated with options portfolios like extremely deep out-of-the-money short positions, inter- month risk and inter-commodity risk. Because SPAN is used to determine performance bond requirements (margin requirements), its overriding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day. In standard pricing models, three factors most directly affect the value of an option at a given point in time: 1. Underlying market price 2. Volatility (variability) of underlying instrument 3. Time to expiration As these factors change, so too will the value of futures and options maintained within a portfolio. SPAN constructs sixteen scenarios of probable changes in underlying prices and volatilities in order to identify the largest loss a portfolio might suffer from one day to the next. It then sets the margin requirement at a level sufficient to cover this one-day loss. The computation of worst scenario loss has two components. The first is the valuation of each contract under sixteen scenarios. The second is the application of these scenario contract values to the actual positions in a portfolio to compute the portfolio values and the worst scenario loss. The scenario contract values are updated at least 5 times in the day, which may be carried out by taking prices at the start of trading, at 11:00 a.m., at 12:30 p.m., at 2:00 p.m., and at the end of the trading session. 6.6.2 Mechanics of SPAN The complex calculations (e.g. the pricing of options) in SPAN are executed by NSCCL. The results of these calculations are called risk arrays. Risk arrays, and other necessary data inputs for margin calculation are then provided to members on a daily basis in a file called the SPAN Risk Parameter file. Members can apply the data contained in the risk parameter files, to their specific portfolios of futures and options contracts, to determine their SPAN margin requirements. Hence members do not need to execute complex option pricing calculations.

SPAN has the ability to estimate risk for combined futures and options portfolios, and re-value the same under various scenarios of changing market conditions.

Risk arrays The SPAN risk array represents how a specific derivative instrument (for example, an option on NIFTY index at a specific strike price) will gain or lose value, from the current point in time to a specific point in time in the near future, for a specific set of market conditions which may occur over this time duration. The results of the calculation for each risk scenario i.e. the amount by which the futures and options contracts will gain or lose value over the look-ahead time under that risk scenario - is called the risk array value for that scenario. The set of risk array values for each futures and options contract under the full set of risk scenarios, constitutes the risk array for that contract. In the risk array, losses are represented as positive values, and gains as negative values. Risk array values are represented in Indian Rupees, the currency in which the futures or options contract is denominated Risk scenarios The specific set of market conditions evaluated by SPAN, are called the risk Scenarios and these are denned in terms of: 1. How much the price of the underlying instrument is expected to change? Over one trading day, and 2. How much the volatility of that underlying price is expected to change over? SPAN further uses a standardized definition of the risk scenarios, defined in terms of: 1. The underlying price scan range or probable price change over a one day Period, and

2. The underlying price volatility scan range or probable volatility change of the underlying over a one day period.

RISK MANAGEMENT

Risk is defined in ISO 31000 as the effect of uncertainty on objectives (whether positive or negative). Risk management can therefore be considered the identification, assessment, and

prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities. Risks can come from uncertainty in financial markets, project failures, legal liabilities, credit risk, accidents, natural causes and disasters as well as deliberate attacks from an adversary. Several risk management standards have been developed including the Project Management Institute, the National Institute of Science and Technology, actuarial societies, and ISO standards. Methods, definitions and goals vary widely according to whether the risk management method is in the context of project management, security, engineering, industrial processes, financial portfolios, actuarial assessments, or public health and safety. The strategies to manage risk include transferring the risk to another party, avoiding the risk, reducing the negative effect of the risk, and accepting some or all of the consequences of a particular risk Certain aspects of many of the risk management standards have come under criticism for having no measurable improvement on risk even though the confidence in estimates and decisions increase. Introduction This section provides an introduction to the principles of risk management. The vocabulary of risk management is defined in ISO Guide 73, "Risk management. Vocabulary." In ideal risk management, a prioritization process is followed whereby the risks with the greatest loss and the greatest probability of occurring are handled first, and risks with lower probability of occurrence and lower loss are handled in descending order. In practice the process can be very difficult, and balancing between risks with a high probability of occurrence but lower loss versus a risk with high loss but lower probability of occurrence can often be mishandled. Intangible risk management identifies a new type of a risk that has a 100% probability of occurring but is ignored by the organization due to a lack of identification ability. For example, when deficient knowledge is applied to a situation, a knowledge risk materializes. Relationship risk appears when ineffective collaboration occurs. Processengagement risk may be an issue when ineffective operational procedures are applied. These risks directly reduce the productivity of knowledge workers, decrease cost effectiveness, profitability, service, quality, reputation, brand value, and earnings quality. Intangible risk

management allows risk management to create immediate value from the identification and reduction of risks that reduce productivity. Risk management also faces difficulties allocating resources. This is the idea of opportunity cost. Resources spent on risk management could have been spent on more profitable activities. Again, ideal risk management minimizes spending and minimizes the negative effects of risks. For the most part, these methods consist of the following elements, performed, more or less, in the following order. 1. identify, characterize, and assess threats 2. assess the vulnerability of critical assets to specific threats 3. determine the risk (i.e. the expected consequences of specific types of attacks on specific assets) 4. identify ways to reduce those risks 5. prioritize risk reduction measures based on a strategy Principles of risk management The International Organization for Standardization identifies the following principles of risk management: Risk management should:

Create value. Be an integral part of organizational processes. Be part of decision making. Explicitly address uncertainty. Be systematic and structured. Be based on the best available information.

Be tailored. Take into account human factors. Be transparent and inclusive. Be dynamic, iterative and responsive to change. Be capable of continual improvement and enhancement.

Risk management tools: 1. capital protection 2. using stop losses 3. always buy fund 4. buy news not rumors 2. Stop Losses: A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price). With a stop order, the trader does not have to actively monitor how a stock is performing. However because the order is triggered automatically when the stop price is reached, the stop price could be activated by a short-term fluctuation in a security's price. Once the stop price is reached, the stop order becomes a market order or a limit order. In a fast-moving volatile market, the price at which the trade is executed may be much different from the stop price in the case of a market order. Alternatively in the case of a limit order the trade may or may not get executed at all. This happens when there are no buyers or sellers available at the limit price.

1.TYPE OF STOP LOSS ORDER A stop loss limit order is an order to buy a security at no more (or sell at no less) than a specified limit price. This gives the trader some control over the price at which the trade is executed, but maypreventtheorderfrombeingexecuted. A stop loss buy limit order can only be executed by the exchange at the limit price or lower. For example, if an trader is short and wants to protect his short position but doesn't want to pay more than Rs.100 for the stock, the investor can place a stop loss buy limit order to buy the stock at any price up to Rs.100. By entering a limit order rather than a market order, the investor will not Alternatively a stop loss sell limit order can only be executed at the limit price or higher. The main advantage of a stop loss limit order is that the trader has total control over the price at which the order is executed. The main disadvantage of the stop loss limit order is that in a fast moving volatile market your stop loss order may not get executed if there are no buyers/sellers at the limit price. 2) StopLossMarketOrder A stop loss market order is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit). In other words a stop loss market order is a order to buy or sell a security at the current market price prevailing at the time the stop order is triggered. This type of stop loss order gives the trader no control over the price at which the trade will be executed. A sell stop market order is a order to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an trader holds a stock currently valued at Rs.100 and is worried that the value may drop, he/she can place a sell stop order at Rs.90. If the share price drops to Rs.90, the exchange will sell the order at the next available price. This can limit the traders losses (if the stop price is at or below the purchase price) or lock in some of the profits.

A buy stop market order is typically used to limit a loss (or to protect an existing profit) on a short sale. A buy stop price is always above the current market price. For example, if an trader sells a stock short hoping the stock price goes down in order to book profits at a lower price, the trader may use a buy stop order to protect himself against losses if the price goes too high AREA OF RISK MANAGEMENT INTRADAY TRADING SWING TRADING POSITION TRADING

INTRADAY TRADING Intraday Trading is trading for that one day only. Whereas some day traders hold positions overnight intraday traders maintain no overnight positions. Scalp trading is a form of intraday trading. Let Trade-Ideas Take Your Trading to the Next Level The old formula of nights spent preparing and forecasting a basket of stocks for a day of watching and waiting was a variation of Thomas Edison's formula for invention: 99% perspiration and 1% inspiration. Our decision support tool flips the equation by leveraging statistical analysis and your trading preferences against the universe of equities in real time. SWING TRADING Swing trading is commonly defined as a stock, index, or commodities trading practice whereby the instrument is bought or sold at or near the end of an up or down price swing caused by daily or weekly price volatility. A swing trade position is typically open longer than a day, but shorter than trend following trades or buy and hold investment strategies. Swing traders engage in prospecting changes in an instrument's price caused by oscillations between its price being bid up by optimism and alternatively being sold down by pessimism over a period of a few days, weeks, or months. Profits can be sought by engaging in either long or short trading.

POSITION TRADING Position trading is a long term style of trading where trades are held for anywhere from several days to several months. This style of trading is the style of trading that most long term investors fit into, but many of them do not utilize positions trading to its full potential. Position trading uses long timeframe charts, including daily, weekly, and monthly charts. Chart based position trading really only includes one type of trade Trend Trading - Long term trades that may last anywhere from several days to several weeks, or even longer if the trend continues, with profit targets of several hundreds of ticks. Trend trading is performed using a graphical chart, with or without indicators, with trades following the current market direction. Position trading is probably the most common trading styles, as it includes the general public buying and holding onto stocks, regardless of the market's direction. Position trading is also performed using fundamental information, such as earnings reports and other financial news.

CHAPTER V
DATA ANALYSIS & INTERPRETATION

DERIVATIVES The word DERIVATIVES is derived from the word itself derived of a underlying asset. It is a future image or copy of a underlying asset which may be shares, stocks, commodities, stock indices, etc. Derivatives is a financial product (shares, bonds) any act which is concerned with lending and borrowing (bank) does not have its value borrow the value from underlying asset/ basic variables. Derivatives is derived from the following products: A. Shares B. Debentures C. Mutual funds D. Gold

E. Steel F. Interest rate G. Currencies. Derivatives is a type of market where two parties are entered into a contract one is bullish and other is bearish in the market having opposite views regarding the market. There cannot be derivatives having same views about the market. In short it is like a INSURANCE market where investors cover their risk for a particular position. Derivatives are financial contracts of pre-determined fixed duration, whose values are derived from the value of an underlying primary financial instrument, commodity or index, such as: interest rates, exchange rates, commodities, and equities. Derivatives are risk shifting instruments. Initially, they were used to reduce exposure to changes in foreign exchange rates, interest rates, or stock indexes or commonly known as risk hedging. Hedging is the most important aspect of derivatives and also its basic economic purpose. There has to be counter party to hedgers and they are speculators. Speculators dont look at derivatives as means of reducing risk but its a business for them. Rather he accepts risks from the hedgers in pursuit of profits. Thus for a sound derivatives market, both hedgers and speculators are essential. Derivatives trading have been a new introduction to the Indian markets. It is, in a sense promotion and acceptance of market economy, that has really contributed towards the growing awareness of risk and hence the gradual introduction of derivatives to hedge such risks. Initially derivatives were launched in America called Chicago. Then in 1999, RBI introduced derivatives in the local currency Interest Rate markets, which have not really developed, but with the gradual acceptance of the ALM guidelines by banks, there should be an instrumental product in hedging their balance sheet liabilities. The first product which was launched by BSE and NSE in the derivatives market was index Futures BACKGROUND

Consider a hypothetical situation in which ABC trading company has to import a raw material for manufacturing goods. But this raw material is required only after 3 months. However in 3 months the prices of raw material may go up or go down due to foreign exchange fluctuations and at this point of time it cannot be predicted whether the prices would go up or come down. Thus he is exposed to risks with fluctuations in forex rates. If he buys the goods in advance then he will incur heavy interest and storage charges. However, the availability of derivatives solves the problem of importer. He can buy currency derivatives. Now any loss due to rise in raw material prices would be offset by profits on the futures contract and vice versa. Hence the company can hedge its risk through the use of derivatives INTRODUCTION TO FUTURE MARKET Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. There is a multilateral contract between the buyer and seller for a underlying asset which may be financial instrument or physical commodities. But unlike forward contracts the future contracts are standardized and exchange traded. PURPOSE The primary purpose of futures market is to provide an efficient and effective mechanism for management of inherent risks, without counter-party risk. It is a derivative instrument and a type of forward contract the future contracts are affected mainly by the prices of the underlying asset. As it is a future contract the buyer and seller has to pay the margin to trade in the futures market. It is essential that both the parties compulsorily discharge their respective obligations on the settlement day only, even though the payoffs are on a daily marking to market basis to avoid default risk. Hence, the gains or losses are netted off on a daily basis and each morning starts with a fresh opening value. Here both the parties face an equal amount of risk and are also required to pay upfront margins to the exchange irrespective of whether they are buyers or sellers. Index based financial futures are settled in cash unlike futures on individual stocks which are very rare and yet to be launched even in the US. Most of the financial futures

worldwide are index based and hence the buyer never comes to know who the seller is, both due to the presence of the clearing corporation of the stock exchange in between and also due to secrecy reasons. EXAMPLE The current market price of INFOSYS COMPANY is Rs.2628. There are two parties in the contract i.e. Hitesh and Kishore. Hitesh is bullish and kishore is Bearish in the market. The initial margin is 10.8%. paid by the both parties. Here the Hitesh has Purchased the one month contract of INFOSYS futures with the price of Rs.2628.5.The lot size of Infosys is 200 shares. Suppose the stock rises to 3000.

372

172

0 2200 2400 2600 2800 3000

Unlimited profit for the buyer (Hitesh) = Rs.525700 [(3000-2628*200)] and notional profit for the buyer is 372 Unlimited loss for the buyer because the buyer is bearish in the market Suppose the stock falls to Rs.2000

0 2200 2400 2600 2800 3000

Unlimited profit for the seller = Rs..[(2628-2000*200)] and notional profit for the seller is 628 Unlimited loss for the seller because the seller is bullish in the market. Finally, Futures contracts try to "bet" what the value of an index or commodity will be at some date in the future. Futures are often used by mutual funds and large institutions to hedge their positions when the markets are rocky. Also, Futures contracts offer a high degree of leverage, or the ability to control a sizable amount of an asset for a cash outlay, which is distantly small in proportion to the total value of contract MARGIN Margin is money deposited by the buyer and the seller to ensure the integrity of the contract. Normally the margin requirement has been designed on the concept of VAR at 99% levels.

Based on the value at risk of the stock/index margins are calculated. In general margin ranges between 10-50% of the contract value. PURPOSE The purpose of margin is to provide a financial safeguard to ensure that traders will perform on their contract obligations. TYPES OF MARGIN INITIAL MARGIN: It is a amount that a trader must deposit before trading any futures. The initial margin approximately equals the maximum daily price fluctuation permitted for the contract being traded. Upon proper completion of all obligations associated with a traders futures position, the initial margin is returned to the trader. OBJECTIVE The basic aim of Initial margin is to cover the largest potential loss in one day. Both buyer and seller have to deposit margins. The initial margin is deposited before the opening of the position in the Futures transaction. MAINTENANCE MARGIN: It is the minimum margin required to hold a position. Normally the maintenance is lower than initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call to top up the margin account to the initial level before trading commencing on the next level. ILLUSTRATION On MAY 15th two traders, one buyer and seller take a position on June NSE S and P CNX nifty futures at 1300 by depositing the initial margin of Rs.50,000with a maintenance margin of 12%.The lot size of nifty futures =200.suppose on MAY 16 th The price of futures settled at

Rs.1950. As the buyer is bullish and the seller is bearish in the market. The profit for the buyer will be 10,000 [(1350-1300)*200] Loss for the seller will be 10,000[(1300-1350)] Net Balance of Buyer = 60,000(50,000 is the margin +10,000 profit for the buyer) Net Balance of Seller = 40,000(50,000 is the margin -10,000 loss for the seller) Suppose on may 17th nifty futures settled at 1400. Profit of buyer will be 10,000[(1450-1350)*200] Loss of seller will be 10,000[(1350-1400)*200] Net balance of Buyer =70,000(50, 000 is the margin +20,000 profit for the buyer) Net Balance of Seller = 30,000(50,000 is the margin -20,000 loss for the seller) As the sellers balance dropped below the maintenance margin i.e. 12% of 1400*200=33600 while the initial margin was 50,000.Thus the seller must deposit Rs.20, 000 as a margin call. Now the nifty futures settled at Rs.1390.

Loss for Buyer will be 2,000 [(1390-1400)*200] Profit for Seller will be 2,000 [(1390-1400)*200] Net balance of Buyer =68,000(70,000 is the margin -2000 loss for the buyer) Net Balance of Seller = 52,000(50,000 is the margin +2000 profit for the seller) Therefore in this way each account each account is credited or debited according to the settlement price on a daily basis. Deficiencies in margin requirements are called for the broker, through margin calls. Till now the concept of maintenance margin is not used in India. ADDITIONAL MARGIN:

In case of sudden higher than expected volatility, additional margin may be called for by the exchange. This is generally imposed when the exchange fears that the markets have become too volatile and may result in some crisis, like payments crisis, etc. This is a preemptive move by exchange to prevent breakdown. CROSS MARGINING: This is a method of calculating margin after taking into account combined positions in Futures, options, cash market etc. Hence, the total margin requirement reduces due to cross-Hedges VALUE AT RISK: In financial mathematics and financial risk management, Value at Risk (VaR) is a widely used risk measure of the risk of loss on a specific portfolio of financial assets. For a given portfolio, probability and time horizon, VaR is defined as a threshold value such that the probability that the mark-to-market loss on the portfolio over the given time horizon exceeds this value (assuming normal markets and no trading in the portfolio) is the given probability level For example, if a portfolio of stocks has a one-day 5% VaR of $1 million, there is a 5% probability that the portfolio will fall in value by more than $1 million over a one day period, assuming markets are normal and there is no trading. Informally, a loss of $1 million or more on this portfolio is expected on 1 day in 20. A loss which exceeds the VaR threshold is termed a VaR break. VaR has five main uses in finance: risk management, risk measurement, financial control, financial reporting and computing regulatory capital. VaR is sometimes used in non-financial applications as well. Important related ideas are economic capital, backtesting, stress testing and expected shortfall .DETAILS: Common parameters for VaR are 1% and 5% probabilities and one day and two week horizons, although other combinations are in use. The reason for assuming normal markets and no trading, and to restricting loss to things measured in daily accounts is to make the loss observable. In some extreme financial events it can be impossible to determine losses, either because market

prices are unavailable or because the loss-bearing institution breaks up. Some longer-term consequences of disasters, such as lawsuits, loss of market confidence and employee morale and impairment of brand names can take a long time to play out, and may be hard to allocate among specific prior decisions. VaR marks the boundary between normal days and extreme events. Institutions can lose far more than the VaR amount; all that can be said is that they will not do so very often. The probability level is about equally often specified as one minus the probability of a VaR break, so that the VaR in the example above would be called a one-day 95% VaR instead of one-day 5% VaR. This generally does not lead to confusion because the probability of VaR breaks is almost always small, certainly less than 0.5. Although it virtually always represents a loss, VaR is conventionally reported as a positive number. A negative VaR would imply the portfolio has a high probability of making a profit, for example a one-day 5% VaR of negative $1 million implies the portfolio has a 95% chance of making more than $1 million over the next day. Varieties of VaR The definition of VaR is no constructive, it specifies a property VaR must have, but not how to compute VaR. Moreover, there is wide scope for interpretation in the definition. This has led to two broad types of VaR, one used primarily in risk management and the other primarily for risk measurement. The distinction is not sharp, however, and hybrid versions are typically used in financial control, financial reporting and computing regulatory capital. To a risk manager, VaR is a system, not a number. The system is run periodically (usually daily) and the published number is compared to the computed price movement in opening positions over the time horizon. There is never any subsequent adjustment to the published VaR, and there is no distinction between VaR breaks caused by input errors (including Information Technology breakdowns, fraud and rogue trading), computation errors (including failure to produce a VaR on time) and market movements.

A frequenters claim is made, that the long-term frequency of VaR breaks will equal the specified probability, within the limits of sampling error, and that the VaR breaks will be independent in time and independent of the level of VaR. This claim is validated by a backrest, a comparison of published VaRs to actual price movements. In this interpretation, many different systems could produce VaRs with equally good backtests, but wide disagreements on daily VaR values. For risk measurement a number is needed, not a system. A Bayesian probability claim is made, that given the information and beliefs at the time, the subjective probability of a VaR break was the specified level. VaR is adjusted after the fact to correct errors in inputs and computation, but not to incorporate information unavailable at the time of computation. In this context, back test has a different meaning. Rather than comparing published VaRs to actual market movements over the period of time the system has been in operation, VaR is retroactively computed on scrubbed data over as long a period as data are available and deemed relevant. The same position data and pricing models are used for computing the VaR as determining the price movements. Although some of the sources listed here treat only one kind of VaR as legitimate, most of the recent ones seem to agree that risk management VaR is superior for making short-term and tactical decisions today, while risk measurement VaR should be used for understanding the past, and making medium term and strategic decisions for the future. When VaR is used for financial control or financial reporting it should incorporate elements of both. For example, if a trading desk is held to a VaR limit, that is both a risk-management rule for deciding what risks to allow today, and an input into the risk measurement computation of the desks risk-adjusted return at the end of the reporting period VaR risk management Supporters of VaR-based risk management claim the first and possibly greatest benefit of VaR is the improvement in systems and modeling it forces on an institution. In 1997, Philippe Jorion wrote:

[T]he greatest benefit of VAR lies in the imposition of a structured methodology for critically thinking about risk. Institutions that go through the process of computing their VAR are forced to confront their exposure to financial risks and to set up a proper risk management function. Thus the process of getting to VAR may be as important as the number itself. Publishing a daily number, on-time and with specified statistical properties holds every part of a trading organization to a high objective standard. Robust backup systems and default assumptions must be implemented. Positions that are reported, modeled or priced incorrectly stand out, as do data feeds that are inaccurate or late and systems that are too-frequently down. Anything that affects profit and loss that is left out of other reports will show up either in inflated VaR or excessive VaR breaks. A risk-taking institution that does not compute VaR might escape disaster, but an institution that cannot compute VaR will not. The second claimed benefit of VaR is that it separates risk into two regimes. Inside the VaR limit, conventional statistical methods are reliable. Relatively short-term and specific data can be used for analysis. Probability estimates are meaningful, because there are enough data to test them. In a sense, there is no true risk because you have a sum of many independent observations with a left bound on the outcome. A casino doesn't worry about whether red or black will come up on the next roulette spin. Risk managers encourage productive risk-taking in this regime, because there is little true cost. People tend to worry too much about these risks, because they happen frequently, and not enough about what might happen on the worst days. Outside the VaR limit, all bets are off. Risk should be analyzed with stress testing based on long-term and broad market data.[ Probability statements are no longer meaningful Knowing the distribution of losses beyond the VaR point is both impossible and useless. The risk manager should concentrate instead on making sure good plans are in place to limit the loss if possible, and to survive the loss if not.[ One specific system uses three regimes 1. Out to three times VaR are normal occurrences. You expect periodic VaR breaks. The loss distribution typically has fat tails, and you might get more than one break in a short period of time. Moreover, markets may be abnormal and trading may exacerbate losses,

and you may take losses not measured in daily marks such as lawsuits, loss of employee morale and market confidence and impairment of brand names. So an institution that can't deal with three times VaR losses as routine events probably won't survive long enough to put a VaR system in place. 2. Three to ten times VaR is the range for stress testing. Institutions should be confident they have examined all the foreseeable events that will cause losses in this range, and are prepared to survive them. These events are too rare to estimate probabilities reliably, so risk/return calculations are useless. 3. Foreseeable events should not cause losses beyond ten times VaR. If they do they should be hedged or insured, or the business plan should be changed to avoid them, or VaR should be increased. It's hard to run a business if foreseeable losses are orders of magnitude larger than very large everyday losses. It's hard to plan for these events, because they are out of scale with daily experience. Of course there will be unforeseeable losses more than ten times VaR, but it's pointless to anticipate them, you can't know much about them and it results in needless worrying. Better to hope that the discipline of preparing for all foreseeable three-to-ten times VaR losses will improve chances for surviving the unforeseen and larger losses that inevitably occur. "A risk manager has two jobs: make people take more risk the 99% of the time it is safe to do so, and survive the other 1% of the time. VaR is the border.

VAR risk measurement The VaR risk measure is a popular way to aggregate risk across an institution. Individual business units have risk measures such as duration for a fixed income portfolio or beta for an equity business. These cannot be combined in a meaningful way. It is also difficult to aggregate results available at different times, such as positions marked in different time zones, or a high

frequency trading desk with a business holding relatively illiquid positions. But since every business contributes to profit and loss in an additive fashion, and many financial businesses mark-to-market daily, it is natural to define firm-wide risk using the distribution of possible losses at a fixed point in the future. In risk measurement, VaR is usually reported alongside other risk metrics such as standard deviation, expected shortfall and Greeks (partial derivatives of portfolio value with respect to market factors). VaR is a distribution-free metric that is it does not depend on assumptions about the probability distribution of future gains and losses. The probability level is chosen deep enough in the left tail of the loss distribution to be relevant for risk decisions, but not so deep as to be difficult to estimate with accuracy. Risk measurement VaR is sometimes called parametric VaR. This usage can be confusing, however, because it can be estimated either parametrically (for examples, variance-covariance VaR or delta-gamma VaR) or nonparametric ally (for examples, historical simulation VaR or resampled VaR). The inverse usage makes more logical sense, because risk management VaR is fundamentally nonparametric, but it is seldom referred to as nonparametric VaR.

CALUCATION OF VAR:

stock1 HDFC
Close Date Price X (X-X) (X-X)
6/7/2012 5/7/2012 4/7/2012 3/7/2012 2/7/2012 29/06/2012 28/06/2012 27/06/2012 26/06/2012 25/06/2012 22/06/2012 21/06/2012 20/06/2012 19/06/2012 18/06/2012 15/06/2012 14/06/2012 13/06/2012 12/6/2012

2,712.85 2,637.60 2,663.95 2,610.80 2,585.95 2,621.25 2,626.05 2,693.05 2,735.45 2,728.15 2,695.35 2,676.20 2,715.85 2,701.95 2,700.90 2,660.40 2,604.90 2,584.20 2,587.70

2.85 2.45 -0.99 -1.39 2.04 1.64

6.0025 1.9321 2.6896 0.3136 3.0625 0.3364 8.3521 3.8025 0.169 0.6724 0.1024 3.4596 0.0121 0.1296 1.2544 2.9929 0.16 0.2916 0.5929

0.96 0 .56 -1.35 -0.18 -2.49 -1.55 0.27 1.22 0.72 -1.46 0.51 0.04 1.52 2.13 0.80 -0.14 -0.37 -1.75 -0.58 -2.89 -1.95 -0.13 0.81 0.32 -1.86 0.11 -0.36 1.12 1.73 0.40 -0.54 -0.77

11/6/2012 8/6/2012

2,597.40 2,552.85 TOTAL

1.75 2.11 8.39

1.35 1.71

1.8225 2.9241 40.93566

Formulas: 1. X= today closing price yesterday closing price Yesterday closing price 2. X= sum of x No of events = 8.39 =0.4 21

3. (x-x )2

40.93566

=6.398

Stock 2 DR.REDDY

Close Date Price X (X-X) 2 (X-X)


6/7/2012 5/7/2012 4/7/2012 3/7/2012 2/7/2012 29/06/2012

1,276.80 1,262.80 1,268.65 1,284.30 1,314.05 1,300.10

1.11 0.55 -0.46 -1.02 -1.22 -1.78 -2.26 -2.82 1.07 0.51 2.73 2.17

0.302 1.040 3.168 7.952 0.260 4.708

28/06/2012 27/06/2012 26/06/2012 25/06/2012 22/06/2012 21/06/2012 20/06/2012 19/06/2012 18/06/2012 15/06/2012 14/06/2012 13/06/2012 12/6/2012 11/6/2012 8/6/2012

1,265.60 1,251.20 1,231.30 1,230.10 1,219.80 1,198.85 1,170.95 1,167.40 1,165.15 1,168.45 1,168.55 1,154.05 1,156.40 1,167.35 1,135.60 TOTAL 11.93

1.15 0.59 1.62 1.06 0.10 -0.46 0.84 0.28 1.75 1.19 2.38 1.82 0.30 -0.26 0.19 -0.37 -0.28 -0.84 -0.01 -0.57 1.26 0.7 -0.20 -0.76 -0.94 1.5 2.80 2.24 -0.62 -1.18

0.348 1.123 0.211 0.078 1.416 3.312 0.067 0.136 0.705 0.324 0.49 0.577 2.25 5.017 1.392 34.876

1. X= today closing price yesterday closing price Yesterday closing price

2. X = sum of x No of events

= 11.93 =0.56 21

3. (x-x)2

34.876 = 5.90

STOCK 3 GMR INFRASTRUCTURE

Close Date Price X 62.7 62.35 61.65 60.6 59.9 57.6 57.2 58.55 59.1 58.2 57.65 57.1 0.561347 1.135442 1.732673 1.168614 3.993056 0.699301 -2.30572 -0.93063 1.546392 0.954033 0.963222 0.794351 (X-X) -0.059 0.515 1.112 0.548 3.373 0.079 -2.925 -1.55 0.926 0.334 0.343 0.174 2 (X-X) 0.003 0.265 1.236 0.300 11.377 0.006 8.555 2.402 0.857 0.111 0.117 0.030

6/7/2012 5/7/2012 4/7/2012 3/7/2012 2/7/2012 29/06/2012 28/06/2012 27/06/2012 26/06/2012 25/06/2012 22/06/2012 21/06/2012

20/06/2012 19/06/2012 18/06/2012 15/06/2012 14/06/2012 13/06/2012 12/6/2012 11/6/2012 8/6/2012

56.65 57.3 57.4 57.3 58.2 58.8 58.1 58.4 55.35 TOTAL 13.081

-1.13438 -0.17422 0.17452 -1.54639 -1.02041 1.204819 -0.5137 5.510388 1.00365

-1.754 0.554 -0.446 -2.168 -1.64 0.384 -1.133 4.89 0.383

3.076 0.301 0.198 4.691 2.689 0.241 1.283 23.912 0.146 61.896

1. X= today closing price yesterday closing price Yesterday closing price 2. X = sum of x No of events 3. (X-X)2 = = 13.081 = 0.62 21 61.89 =7.867

STOCK 4 JET AIRWAYS

Close Date Price X (X-X)


6/7/2012 5/7/2012 4/7/2012 3/7/2012 2/7/2012 29/06/2012 28/06/2012 27/06/2012 26/06/2012 25/06/2012 22/06/2012 21/06/2012 20/06/2012 19/06/2012 18/06/2012 15/06/2012 14/06/2012 13/06/2012 12/6/2012 11/6/2012 8/6/2012

2 (X-X) 0.222 1.397 0.059 0.383 1.444 4.210 0.427 4.169 0.006 17.631 4.072 7.584 10.491 0.006 4.644 9.006 2.458 0.008 6.507 38.266 198.697 311.687

480.05 478 468.25 462.95 461.65 463.05 468.45 467.3 472.7 468.85 484.85 471.1 480 491.5 487.5 493.7 504.3 492.15 488.2 496.4 463.55 TOTAL 19.004

0.42887 2.082221 1.144832 0.281599 -0.30234 -1.15274 0.246095 -1.14237 0.821158 -3.29999 2.918701 -1.85417 -2.33978 0.820513 -1.25582 -2.10192 2.46876 0.809095 -1.65189 7.086614 14.99628

-0.472 1.182 0.244 -0.619 -1.202 -2.052 -0.654 -2.042 -0.079 -4.199 2.018 -2.754 -3.239 -0.08 -2.155 -3.001 1.568 -0.091 -2.551 6.186 14.096

1. X= today closing price yesterday closing price Yesterday closing price 2. X = sum of x No of events = 19.004 21 = 0.90

3. (X-X)2

311.687

=17.654

STOCK5 SUN TV

Date

closing price 2 x (x-x) 1.794202 -0.63754 -1.06296 4.211808 -0.74906 -0.16886 -0.89649 0.649663 -0.78778 -2.02316 3.736504 1.203192 -1.45191 1.026769 0 0.061155 -1.04091 7.215157 0.338542 2.100505 1.114 -0.7437 -1.742 3.531 -0.069 -0.512 -1.576 -0.031 -1.467 -2.703 3.056 0.523 -2.131 0.3467 -0.68 -0.619 -1.72 6.535 -0.342 1.46 (x-x) 1.240 0.553 3.034 12.457 0.004 0.262 2.483 0.000 2.152 7.306 9.339 0.273 4.541 0.119 0.462 0.383 2.958 2.958 42.706 0.116

6/7/2012 5/7/2012 4/7/2012 3/7/2012 2/7/2012 29/06/2012 28/06/2012 27/06/2012 26/06/2012 25/06/2012 22/06/2012 21/06/2012 20/06/2012 19/06/2012 18/06/2012 15/06/2012 14/06/2012 13/06/2012 12/6/2012 11/6/2012

428.35 420.8 423.5 428.05 410.75 413.85 414.55 418.3 415.6 418.9 427.55 412.15 407.25 413.25 409.05 409.05 408.8 413.1 385.3 384

8/6/2012

376.1 total 14.47

1.855112

1.17

1.368 93.897

1. X= today closing price yesterday closing price Yesterday closing price 2. X = sum of x No of events = 14.47 21 = 0.68

3. (X-X)2

93.897

=9.6900

CHAPTER VI
FINDINGS &SUGGESTIONS

FINDINGS The following findings are made on the basis of data analysis from the previous Chapter.

1. The study reveals the effectiveness of risk reduction using hedging strategies. It has found out that risk cannot be avoided. But can only be minimized 2. through the study. it has found out that, the hedging provides a safe position on an Underlying security. The loss gets shifted to a counter party. Thus the hedging covers the Loss and risk. Sometimes, the market performs against the expectation. This will trigger strategic and positive thinker. 3. The anticipation of the hedger regarding the trend of the movement in the prices of the strategy applied. 4. It has been found that, all the strategies applied on historical data of the period of the substantially. 5. If the trader is not sure about the direction of the movement of the profits of the current Position, he can counter position in the future contract and reduces the level of risks. 6. The trader can effectively use the strategy for return enhancement provided he has the correct Market anticipation. Study were able to reduce the loss that rose from price risk Underlying security plays a key role in the result of the Losses. So the hedger should be a

7. In general, the anticipation of the strategies purely for return enhancement is a risky Affair, because, if the anticipation about the

performance of the market and the underlying taker would end up in higher losses

Goes wrong, the position

SUGGEESTIONS

If an investor wants to hedge with portfolios; it must consist of scripts from different Industries, since they are convenient and represent true nature of the securities market as a whole. The hedging tool to reduce the losses that may arise from the market risk. Its primary objective is loss minimization, not profit maximization .The profit from futures or shares will be offset from the losses from futures or shares, as the case may be. as a result, a hedger. The hedger will have to be a strategic thinker and also one who think positively. He Should be able to comprehend market trends and fluctuations. Otherwise, the strategies Adopted by him earn him earn losses. The hedging tool is suitable in the short term period. They can be specifically adopted by the investor, who are facing high risks and has hedger will earn a lower return compared to that of an unhedger. But the unhedger faces a high risk than a

sufficient liquid cash with them. Long

term investor should beware from

the market, because of the volatile nature of the market A lot more awareness needed about the stock market and investment pattern, both in spot and future market. The working of BSE Training Institute and NSE Institutes are apprehensible in this regard.

CHAPTER VII
SUMMARY & CONCLUSION

CONCLUSION

1. At present scenario the derivatives market is increased to a great position. Approximately its daily turnover reaches to the equal stage of cash market, the Avgas daily turnover of the NSE in derivatives market is 4, 00,000(vol). 2. Presently the available scraps in the futures and options segment are 55. 3. The derivative market is newly stated in India and its is not know by everyone so SEBI should take necessary actions to create awareness among investors. 4. In cash market the profit/loss of the investor may be unlimited, but in the Derivative market. 5. The investor can enjoy unlimited profits and minimize the losses incurred. 6. In derivatives market the investors enjoys the privilege of paying less amount in Case of options 7. Derivatives are mostly used for hedging purpose.

8. In derivatives market the profit/loss of the investors depends upon the market fluctuations, especially with the prices of the securities 9. In bearish market the investor is suggested to option for put options in order to minimized his losses. 10. In bullish market the investor is suggested to option for call options in order to Maximize the profits.

CHAPTER VIII

BIBLOGRAPHY

BOOKS

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT - PUNITHAVATHY PANDYAN SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT - KEVIN DERIVATIVES AND FINANCIAL INNOVATION - THE BOMBAY STOCK EXCHAHGE PUBLICATION FUTURES AND OPTIONS - N.D. VOHRA AND B. R. BAGRI POTFOLIO MANAGEMENT HAND BOOK

ROBORT.A.STRONG SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT - JEFFERY.V.BAILERY

Websites www.nseindia.com www.bseindia.com www.capitaline.com www.geojit.com www.derivativeindia.com www.capitalmarket.com www.indiabulls.com

APPENDICES

FORMULAES: MEAN:

MEDIAN:

VAR: Today closing price yesterday closing price Yesterday closing price

STANDARD DEVIATION: