A SUMMER INTERNSHIP PROJECT

ON
A STUDY TO GUIDE

INVESTORS ON DERIVATIVE
MARKET.

Submitted to Utkal University

For partial fulfilment of the requirement for the
award of the degree of
Master of Finance & Control
SUBMITTED BY
ABHIJIT LENKA
MFC 3rd Semester,
SESSION 2012- 14
UNDER THE GUIDANCE OF
EXTERNAL GUIDE
MR. DEEPAK KU. MOHAPATRA
BRANCH HEAD

INTERNAL GUIDE
MISS. SUKANYA NISITGANDHA
BISWAL

FACULTY OF DEPT OF FINANCE

BHUBANESWAR.

AND MANAGEMENT.
VISWASS, BHUBANESWAR.

VIVEKANANDA INSTITUTE OF SOCIAL WORK AND SOCIAL SCIENCES

(Affiliated to Utkal University)
474, PITAPALLI, KHORDHA.
Roll No. 13759U123001

Regd. No. 17727/09

CERTIFICATE
BY THE
HEAD OF THE DEPARTMENT
Mr. Sanjay Kumar Parida
Head of the Department,
P.G. Department of Finance & Management.

This is to certify that MR. Abhijit lenka, a bonafide student of Master of

Finance and Control has completed the project entitled A STUDY TO
GUIDE INVESTORS ON DERIVATIVE MARKET. This project has
been submitted as a partial fulfilment of the requirement for the Masters
Degree of Finance and Control Examination, 2014.
To the best of my knowledge no work with such caption and content has
been submitted to any other University or institution for the award of any
degree.

Date:Place: -

(MR. SANJAY K. PARIDA)

CERTIFICATE
BY
THE GUIDE
Miss.Sukanya Nisitgandha Biswal
Faculty Member
P.G. Department of Finance & Management.

This is to certify that MR. ABHIJIT LENKA, a bonafide student of

Master of Finance and Control has completed the project entitled A STUDY
TO GUIDE INVESTORS ON DERIVATIVE MARKET. This project
has been submitted as a partial fulfilment of the requirement for the Masters
degree of Finance and Control Examination, 2013.

Date:Place: - Bhubaneswar

(MISS. SUKANYA NISITGANDHA BISWAL)

DECLARATION
I do hereby declare that this project work entitled A STUDY TO
GUIDE INVESTORS ON DERIVATIVE MARKET being submitted
by me for the partial fulfilment of the requirement for the award of
Master of Finance & Control (MFC) is a record of my own research
work. The report embodies the finding based on my study and
observation and has not been submitted earlier for the award of any
degree or diploma to any Institute or University.

Date:

Name: ABHIJIT LENKA

Place: BHUBANESWAR

Roll No: 13759U123001

ACKNOWLEDGEMENT
It is really a great pleasure to have this opportunity to describe the feeling of
gratitude imprisoned in the core of my heart. I convey my sincere gratitude to
Mr.SANJAY K. PARIDA, HOD Finance & Management for giving me the
opportunity to prepare my project works.
I have the proud privilege to express my heartfelt
gratitude to my guide and revered teacher MISS. SUKANYA NISITGANDHA
BISWAL Whose scholarly supervision and creative suggestion have made this
study viable. She was always giving me valuable and timely suggestion all
through my study.
I express my gratitude to the faculty members of PG Department of finance of
VISWASS, who helped me a lot in the collection of materials for the study. Also
I extended my thanks to the staffs of VENTURA SECURITIES PVT.LTD, for
their timely help and co-operation, who have rendered their help in various
ways to accomplish the undertaking.
I wish to express my sincere thanks to my friends, who have rendered their help
in various ways to accomplish the project.
Date:
Place: BHUBANESWAR

Name: Abhijit lenka

Roll No: 13759U123001

CONTENTS
CHAPTER
Chapter-1

Introduction
Needs of the study
Objective of the study
Research methodology
Limitations of the study

Chapter-2
Company profile
Chapter-3

Basics of Derivatives
Derivative Market History & Evolution
Recent Developments in Derivative market
Derivative markets in India
Need & importance for derivative market in India
Participants in derivative market
Types of derivative instruments
Comparison
Risk Faced by the participants in Derivative market

Chapter-4-----INDEX
Introduction to index
Types of stock market indices
Major indices in India
Chapter-5-----Futures & forwards
Introduction to Forwards & Futures
Pay off charts for future
Uses of future

PAGE NO

Chapter-6-----OPTIONS

Basics of option
Types of options & their uses
Strategies
Pay off profiles & charts

Chapter-5
Data analysis & interpretation
Review of questionnaires

Findings
Suggestions
Conclusion
Bibliography
Questionnaires

CHAPTER:1
INTRODUCTION

INTRODUCTION
Derivatives have been associated with a number of high-profile
corporate events that roiled the global financial markets over the past two
decades. To some critics, derivatives have played an important role in the near
collapses or bankruptcies of Barings Bank in 1995, Long-term Capital
Management in 1998, Enron in 2001, Lehman Brothers in and American
International Group (AIG) in 2008. Warren Buffet even viewed derivatives as
time bombs for the economic system and called them financial weapons of mass
destruction (Berkshire Hathaway Inc (2002)).
But derivatives, if properly handled, can bring substantial
economic benefits. These instruments help economic agents to improve their
management of market and credit risks. They also foster financial innovation
and market developments, increasing the market resilience to shocks. The main
challenge to policymakers is to ensure that derivatives transactions being
properly traded and prudently supervised. This entails designing regulations and
rules that aim to prevent the excessive risk-taking of market participants while
not slowing the financial innovation aspect. And it also calls for improved data
quantity and quality to enhance the understanding of derivatives markets.

NEED OF THE STUDY: A vigorous research is need to make a valuable contributions to wisdom
through integrating with review of literature and methodology
developed for the understanding and resolution of management problem
and empirical training done there in .
On the other hand its more important this study is required to meet the
partial fulfilment of the award of the degree i.e., Master of Finance and
Control from Utkal University.
The purpose of summer project report is, it allowed to complete the
within a coherent, organised framework which is also standardised.
The project study is necessary to enhance our understanding and clarity
of the subject, the context of the managerial problem and research
problem

OBJECTIVES OF THE STUDY: To find out the factors for growth of derivative market segment as
compare d to cash segment in recent past era
To know the different risks involved in derivative segment
To know how should futures options be valued and hedged
To find out market sentiments towards the use of derivative product

RESEARCH METHODOLOGY:The research methodology is based on primary and primary and

secondary sources .The information thus collected by market surveys through
the medium of questionnaires direct personal contact with various clients , the
primary source s of collecting data were by way of questionnaires and
interviews .The questionnaires basically contained the profile of clients , his
understanding towards the concept of project apart from this it shows
consumers interest towards entering into such type of contracts. The secondary
sources of collecting g data were from published report, books and various
websites.

LIMITATIONS OF THE STUDY: Time factor was one of the greatest constraints in the study.
Busy schedule and irritating attitude of the interviewees was another
thing.
As area of study was limited for me so its difficult to draw the
conclusion.

CHAPTER-2
COMPANY
PROFILE

ABOUT VENTURA SECURITIES

Ventura Securities Ltd. (VENTURA) commenced operations
in 1994 as a stock broking house. It is the corporate
member of Bombay Stock Exchange & National Stock
Exchange.
We have a total of 23 branches and more than 350
franchises spread across India.
Mumbai, Matunga, Coimbatore, Indore, Jaipur, Pune,
Chennai, New Delhi, & Bhubaneswar, etc.
The head office of Ventura is in Vikroli, Mumbai.
The total work force at Ventura is more than 500.
VENTURA MISSION

Ventura Philosophy

Building and valuing true partnerships:When it comes to our business partners, we see our success reflected in
their progress. We have facilitated them all the way with technology and
marketing strategies and in turn have been rewarded with their
performance and loyalty.

Think and it's there' approach:We envisage all our clients' diverse needs - ranging from financial planning
to wealth management - well in advance and provide them with resources,
tools and solutions to fulfil them.

Constant innovation:Change for the better has become a way of life at Ventura. Innovations
have always been customer centric which has been amply reflected in the

up gradation of systems to facilitate our network partners.

Team Ventura:Our dedicated and well trained people represent the pillar of strength and
success at Ventura. Each of our members has internalized our mission and
is constantly striving to build on it.
THE COMPANY FOLLOWS A GREAT WORK
CULTURE AND VALUE ITS EMPLOYEES

MANAGEMENT OF THE ORGANISATIONKEY PEOPLE

Directors of the company are
Sajid malik,
Hemant Majethia
Juzer Gabajiwala.
SERVICES RENDERED:Offered the services like
Mutual funds,
Commodity broking &
Insurance (both life & general).
OTHER FUNCTIONS: Offer services like medium for buying and selling stocks and shares .
Instead that they provide services which are multidimensional and multi
focused in their scope.
Offer trading on a vast platform; National Stock Exchange and Bombay
Stock Exchange.
Provides comprehensive reports on various industries, besides this thy
also provide special portfolio analysis package.
Provides stock broking services widely across India.

 Over the years they have ensured this success is not their final aim but
just a platform to launch further enhanced quality services which would
be convenient.
Over the years they have ensured that the trust of their customers is their
biggest returns.
It also provides facilities like:

Action watch.
Analyst meets updates.
Technical charts.
Online news and corporate action.
Corporate fundamentals.
Tick list.
Open interest dashboard.
Bulk trades.
Daily pointer.

VENTURA SECURITIES LTD also charges a low percent of brokerage to its

clients and also refunded the amount to the extent of access charge...which is
shown with the help of below table.
Access
charge

Max.
Refundable
Amount

Period

Brokerage
Delivery % Intraday % options
( charged 1 leg
only)

3500
3500
1 year .20
.03
50/lot
5000
5000
1 year .17
.025
35/lot
7500
7500
1 year .15
.02
35/lot
9999
9999
1 year .15
.02
35/lot
10000 10000
6 mths .15
.015
35/lot
15000 15000
6 mths .13
.0125
35/lot
18000 18000
1 year .15
.015
35/lot
25000 25000
1 year .13
.0125
35/lot
30000 30000
1 year .1
.01
35/lot
40000 43000
1 year .1
.01
25/lot
50000 55000
1 year .1
.01
21/lot
72000 80000
1 year .1
.01
18/lot
Minimum Br. Per share: Delivery 2 paisa; Intraday- 1paisa

CHAPTER-3
BASICS OF DERIVATIVE

INTRODUCTION TO DERIVATIVES
Today, derivatives have become most important
part of the day-to-day life for ordinary people in most parts of
the world. The Oxford dictionary defines a derivative as something derived
or obtained from another, coming from a source; not original. In the field of

financial economics, a derivative security is generally referred to a financial

contract whose value is derived from the value of an underlying asset or simply
underlying. There are a wide range of financial assets that have been used as
underlying, including equities or equity index, fixed-income instruments,
foreign currencies, commodities, credit events and even other derivative
securities. Depending on the types of underlying, the values of the derivative
contracts can be derived from the corresponding equity prices, interest rates,
exchange rates, commodity prices and the probabilities of certain credit events.

Basics of Derivative:Derivative is a contract or a product whose value is derived from value of

some other asset known as underlying. Derivatives are based on wide range
of underlying assets. These include:
Metals such as Gold, Silver, Aluminium, Copper, Zinc, Nickel, Tin, Lead.
Energy resources such as Oil and Gas, Coal, Electricity.
Agri commodities such as wheat, Sugar, Coffee, Cotton, Pulses and
Financial assets such as Shares, Bonds and Foreign Exchange.

Derivatives Market History & Evolution:History of Derivatives may be mapped back to the several centuries. Some of
the specific milestones in evolution of Derivatives Market Worldwide are given
below:
12th Century- In European trade fairs, sellers signed contracts promising future
delivery of the items they sold.
13th Century- There are many examples of contracts entered into by English
Cistercian Monasteries, who frequently sold their wool up to 20 years in
advance, to foreign merchants.
1634-1637 Tulip Mania in Holland Fortunes were lost in after a speculative
boom in tulip futures burst.

Late 17th Century- In Japan at Dojima, near Osaka, a futures market in rice was
developed to protect rice producers from bad weather or warfare.
In 1848, The Chicago Board of Trade (CBOT) facilitated trading of forward
contracts on various commodities.
In 1865, the CBOT went a step further and listed the first exchange traded
derivative contract in the US. These contracts were called futures contracts.
In 1919, Chicago Butter and Egg Board, a spin-off of CBOT, was reorganised
to allow futures trading. Later its name was changed to Chicago Mercantile
Exchange (CME).
In 1972, Chicago Mercantile Exchange created International Monetary Market,
which allowed trading in currency futures.
In 1975, CBOT introduced Treasury bill futures contract. It was the first
successful pure interest rate futures.
In 1977, CBOT created T -bond futures contract.
In 1982, CME created Eurodollar futures contract.
In 1982, Kansas City Board of Trade launce.

Derivatives markets:Derivatives are traded either on organised exchanges or in OTC

markets. The differences between the exchange-traded and OTC derivatives are
not confined to where they are traded but also how. In exchange-traded
markets, derivatives contracts are standardised with specific delivery or
settlement terms. Negotiation between traders traditionally was conducted by
shouting on the trading floor (open outcry). But electronic trading system has
become increasingly popular in many major exchanges.
Exchange-traded derivative trades are publicly reported
and cleared in a clearing house. The clearing house will be obliged to honour
the trade if the seller defaults. The solvency of the clearing house was protected
by marking all positions to market daily through a system of margins. By
contrast, derivative trades in OTC markets are bilateral in nature. All contract

terms such as delivery quality, quantity, location, date and prices are negotiable
between the two parties. Transactions can be arranged by telephone or other
communication means.
Exchange traded derivative markets have better price
transparency than OTC markets. Counterparty risks are also smaller in
exchange-traded markets with all trades on exchanges being settled daily with
the clearing house. On the other hand, the flexibility of OTC market means that
they suit better for trades that do not have high order flow and or with special
requirements. In this context, OTC market performs the role as an incubator for
new financial products.

Products in Derivatives Market

Forwards
It is a contractual agreement between two parties to buy/sell an
underlying asset at a certain future date for a particular price that is pre-decided
on the date of contract. Both the contracting parties are committed and are
obliged to honour the transaction irrespective of price of the underlying asset at
the time of delivery. Since forwards are

Negotiated between two parties, the terms and conditions of contracts are
customized. These are OTC contracts.

Futures
A futures contract is similar to a forward, except that the deal is
made through an organized and regulated exchange rather than being negotiated
directly between two parties. Indeed, we may say futures are exchange traded
forward contracts.

Options
An Option is a contract that gives the right, but not an obligation, to
buy or sell the underlying on or before a stated date and at a stated price. While
buyer of option pays the premium and buys the right, writer/seller of option

receives the premium with obligation to sell/ buy the underlying asset, if the
buyer exercises his right.

Swaps
A swap is an agreement made between two parties to exchange cash
flows in the future according to a prearranged formula. Swaps are series of
forward contracts. Swaps help market participants manage risk associated with
volatile interest rates, currency exchange rates and commodity prices.

Market Participants
There are broadly three types of participants in the derivatives
market - hedgers, traders (also called speculators) and arbitrageurs. An
individual may play different roles in different market circumstances.

Hedgers:They face risk associated with the prices of underlying assets and use
derivatives to reduce their risk. Corporations, investing institutions and banks
all use derivative products to hedge or reduce their exposures to market
variables such as interest rates, share values, bond prices, currency exchange
rates and commodity prices.

Speculators:They try to predict the future movements in prices of underlying

assets and based on the view, take positions in derivative contracts. Derivatives
are preferred over underlying asset for speculation purpose, as they offer
leverage, are less expensive (cost of transaction is generally lower than that of
the underlying) and are faster to execute in size (high volumes market).

Arbitrageurs
Arbitrage is a deal that produces profit by exploiting a price
difference in a product in two different markets. Arbitrage originates when a
trader purchases an asset cheaply in one location and simultaneously arranges to

sell it at a higher price in another location. Such opportunities are unlikely to

persist for very long, since arbitrageurs would rush in to these transactions, thus
closing the price gap at different locations.

Risk Faced By the Investor :Obviously investment in derivative involves risk as it is more
volatile and provides more returns with a less investment than other investment
mediums. But it is the duty of the investor to assess the risk factor and trade
coolly.
Types of risks faced:Risks are divided into few elementary forms such as
Operational risk: - the risk of loss arising due to procedure errors
omissions or failures of internal control systems.
Market risk: - the risk of loss arising out of adverse market rate
movements. E.g., foreign exchange.
Interest rate Risk: - the change in capital values of an investment
resulting from changes in prevailing interest rate levels.
Credit risk:- the risk of losses arising from defaults by the counterparty
Liquidity risk: - the risk of losses arising from a derivative market
becoming liquid.
Business risk: - the risk that one transaction or a small group of
transactions causing losses, exposes the firm to risk of failure.
Political risk: - this includes tax, trade, regulation, education and social
policies.

MANAGEMENT OF RISK
The risk management and control of risk requires an in-depth knowledge of
risks, how they are identified, hoe they are measured and where possible, how

they are controlled, this requires both deep understanding of how the business is
actually conducted and how critical areas within the business process can be
measured.

Why an investor manages risk?

An investor needs to manage risks in order to overcome various factors.
Which are as follows?

Changes in accounting practices.

Regulatory initiatives.
Market events.
Optimisation of capital.
Increase in complexity of financial markets.
Technology advances.

CHAPTER-4
INDEX

INTRODUCTION TO INDEX
Index is a statistical indicator that measures changes in the
economy in general or in particular areas. In case of financial markets, an index
is a portfolio of securities that represent a particular market or a portion of a
market. Each Index has its own calculation methodology and usually is
expressed in terms of a change from a base value. The base value might be as
recent as the previous day or many years in the past. Thus, the percentage
change is more important than the actual numeric value. Financial indices are

created to measure price movement of stocks, bonds, T-bills and other type of
financial securities.

Significance of Index
A stock index is an indicator of the performance of overall market or a
particular sector.
It serves as a benchmark for portfolio performance - Managed portfolios,
belonging either to individuals or mutual funds; use the stock index as a
measure for evaluation of their performance.
It is used as an underlying for financial application of derivatives Various
products in OTC and exchange traded markets are based on indices as
underlying asset.

Popular indices in India

Sensex and Nifty were earlier designed on market capitalization
weighted method. Indeed, both Sensex and Nifty, over a period of time, have
moved to free float basis.

Price-Weighted Index
A stock index in which each stock influences the index in proportion to
its price. Stocks with a higher price will be given more weight and therefore,
will have a greater influence over the performance of the index. Dow Jones
Industrial Average and Nikkei 225 are popular price-weighted indices.

Equal Weighted Index

An equally-weighted index makes no distinction between large and
small companies, both of which are given equal weighting. The value of the
index is generated by adding the prices of each stock in the index and dividing
that by the total number of stocks.

Major Indices in India

These are few popular indices in India.

BSE Sensex

BSE Midcap

BSE-100

BSE-200

BSE-500

S&P CNX Nifty

CNX Nifty Junior

S&P CNX Defty

CNX Midcap

S&P CNX 500

CHAPTER-5
FUTURES &
FORWARDS

Introduction to forwards
Forward contract is an agreement made directly between two
parties to buy or sell an asset on a specific date in the future, at the terms
decided today. Forwards are widely used in commodities, foreign exchange,
equity and interest rate markets. Unlike future contracts they are not traded in an

exchange rather in the Over The Counter (OTCs) market usually between a
financial institution and between a financial & one of its clients.

Features: Forward are bilateral contracts & hence are exposed to counter
party risk. This is the risk of non payment of obligation by either
party.
Each contract is custom designed & hence is unique in terms of
contract size, expiration date, asset type & quality.
In forward contracts one of the parties takes long position by
agreeing to buy the asset at a certain specified future date .The
other party assumes a short position by agreeing to sell the same
asset at the same date for a same specified price.

INTRODUCTION TO FUTURES
A future is a contract to buy or sell an asset at a specified future date at a
specified price. These contracts are traded in stock exchanges and it can change
many hands before settlement.
The advantage in future contracts is that it eliminates counterparty risk
due to exchange guarantees in trade.

MARGIN
Margin is the deposit money that needs to be paid to buy or sell each
contract Margin Account As exchange guarantees the settlement of all the
trades, to protect itself against default by either counterparty, it charges various
margins from brokers. Brokers in turn charge margins from their customers.
Generally there are four types of margins in future contracts. They are as
follows.

1) Initial margin

This amount is deposited at the time entering into the

contract. This margin is meant to cover the largest potential loss in one
day.

2) Maintenance margin:A trader is entitled to withdraw any balance in the margin

account in excess of the initial margin. To ensure that the balance in the
margin account never becomes negative.

3) Additional margin:Marking to Market (MTM)

In futures market, while contracts have maturity of several
months, profits and losses are settled on day-to-day basis called mark to
market (MTM) settlement. The exchange collects these margins (MTM
margins) from the loss making participants and pays to the gainers on day-today.

FUTURE PAYOFFs
Generally future contracts have linear or symmetrical payoffs. It
means that the profits as well as losses for both the buyers and sellers are
unlimited. And this can be generating various complex payoffs when it
combines with options.

Payoff for buyer of futures: Long futures

The payoff for a person who is having long future is just similar to
a person who holds an underlying. He has a potentially unlimited upside as well
as a potentially unlimited downside.
Suppose a speculator who buys a two-month nifty index
futures contract when the nifty stands at 4000.
So, the underlying asset in this case is the nifty portfolio. When the index
moves up the long futures position start making profits, similarly when the
index moves downward it starts making losses.

So the graph will be like

Profit
4000

Nifty

Loss

PAYOFF FOR SELLER OF FUTURES: SHORT FUTURES

The payoff for a person who is having short the futures contract is
similar to who shorts an asset. He has unlimited upside risk as well as
downside .
Suppose , A speculator who sells a two month nifty index futures
contract when nifty stands at 4000.
So, his reward starts when index moves down, when the index
moves up, it starts making losses.
Pay off graph for a seller of nifty futures:

Profit

4000
0

Loss

Nifty

CHAPTER-6
OPTIONS

INTRODUCTION TO OPTION
Other instruments like, forwards and futures having many drawbacks like
counter party risk, default risk, margin risk etc. So in order to overcome these
risks OPTION system has developed. Accordingly, options emerged as a
financial instrument, which restricted the losses with a provision of unlimited
profits on buy or sell of underlying asset.

An Option is a contract that gives the right, but not an obligation, to buy
or sell the underlying asset on or before a stated date, at a stated price. The party
taking a long position i.e. buying the option is called buyer/ holder of the option
and the party taking a short position i.e. selling the option is called the seller/
writer of the option. The option buyer has the right but no obligation with
regards to buying or selling the underlying asset. While the option writer has the
obligation in the contract. Therefore, option holder will exercise his option only
when the situation is favourable to him. But, when he decides to exercise,
option writer would be legally bound to honour the contract.
Options may be categorized into two types: Call Options
Put Options

Call option:A call option gives the holder(buyer/one who is long call) the right to buy
specified quantity to underlying asset at the strike price on or before expiration
date.
Put option :A put is an option to sell. A put gives its holder has the privilege of
selling to a second party a fixed amount of underlying at a stated price on or
before predetermined date .

A comparison between FUTURES and OPTIONS:-

In futures the Exchange defines the product.

But in options the Exchange fixes the lot size.
It is not possible to minimise risks in futures .
But Option is a risk minimising tool.

 In futures there is carry forward system .

But there is no carry forward system in option.

OPTION STRATEGIES
There are number of strategies are invented for option investors in order
to hedge against risk. These strategies are known as option strategies. Which
may be a single option or may be combination of more than one options . Out of
those some important strategies are discussed are under

STRATEGY-1

LONG CALL :Buying a call is the most basic of all option strategies . For an
aggressive investor who are very bullish about the prospects for a stock/index .
Buying a call can be excellent way to capture upside potential with limited
downside risk.
Buying a call means you are very bullish and expects the
underlying stock / index to rise in future.
WHEN TO USE:- When investor is very bullish on the stock / index.
RISK :- Limited to the premium paid (i.e., maximum loss if market
expires at or below the option strike price)
REWARD:- Unlimited.
BREAKEVEN:-option strike price + premium.

EXAMPLE:Mr. Ambani is bullish on nifty on 1st July, when the nifty is at 4000. So he
buys a call option with a strike of 4500 at a premium of 35 expiring on 31st July.

SOLLUTION:

Current nifty 4000

Call option strike price -4500
Premium paid -35
Breakeven point = Strike Price + Premium
=4500+35= 4535

INTERPRETATION:If the nifty goes above 4535 Mr. Ambani will make unlimited profit. In
case if the nifty stay at or falls below 4500, the contract become worthless with
a maximum loss of premium i.e., Rs. 35.

Graph

Profit Unlimited

4000

4500

5000

Loss Limited

STRATEGY-2
Short call:This strategy is just opposite of long ca
ll. When an investor is bearish about the stock or index & expects the price to
fall, he can sell call options. This position offers limited profit potential and
possibility of large losses in big advances in underlying prices.

 WHEN TO USE: - When an investor is very aggressive & he is bearish

about the stock or index.
RISK:- Unlimited
REWARD: - Limited to the amount of premium received.
BREAK EVEN POINT :- strike price + premium received
For example:Mr. Mittal is bearish about NIFTY & expects it to fall. He sells a
call option with a strike price of 3000 at a premium of 150, when the current
nifty is at 3100. I f the NIFTY stays at 3000 or below the call option will not be
exercised by the buyer of the call option. Mr. Mittal can retain the entire
premium of Rs.150.

CURRENTG NIFTY: - 3100

CALL OPTION STRFIKE PRICE:-3000
PREMIUM RECEIVED:-150
BREAK EVEN POINT:-3000+150=3150

INTERPRETATION:If the nifty goes above 3150 Mr. Mittal will make unlimited loss. In case
if the nifty stay at or falls below 3ooo, the contract become worthless with a
maximum profit of premium i.e., Rs. 150.

GRAPH

LIMITED PROFIT

2600

2700

2800

3000

3150

3200
UNLIMITED LOSS

STRATEGY- 3
LONG PUT:Long put strategy is just opposite of Long Call. When an investor
is bearish, he can buy a put option. A put option gives a buyer of the put a right
to sell the stock at a pre specified price & there by limit his risk.
A long put is a bearish strategy to take advantage of the falling market an
investor can buy put option.

WHEN TO USE: - Investor is bearish about the stock or index.

RISK: - Limited to the amount of premium paid.
REWARD: - Unlimited.
BREAK EVEAN POINT:- STRIKE PRICE PREMIUM

For example:MR. BIRLA bearish on NIFTY on 24th jan when NIFTY is at 2694. He
buys a put option with a strike price of 2600 at a premium of 50, expiring on
31st mar . If the NIFTY goes below 2550 MR. BIRLA will make a profit on
exercising the option . If the NIFTY goes above 2600 he can forego the option with
a max loss of the premium.

Current NIFTY:- 2694

Put option strike price :- 2600
MR. BIRLA pays a premium of :- 50
BREAK EVEN POINT:- Strike price premium
=2600-50= 2550

So the GRAPH will be Like:-

Profit unlimited

2400 2500 2550

2600

2700

Loss limited

STRATEGY-4
PROTECTIVE CALL
This is a strategy where is an investor has gone short a stoc2k and buys a call to
hedge .The investor shorts a stock and buts an ATM or slightly OTM call . The
net effect of this is that the investor creates a profile of payoff like a long put.
When an investor shorts a stock, the risk arises when stock moves
upward, so as the investor buys a call option in order to minimises the loss
because the long call option has potential when the stock rises. Hence this
strategy hedges the upside in the stock position while retaining downside profit
potential.
WHEN TO USE- If the investor is of the view that the market will is of
go down but wants to protect against any unexpected rise in the price of
the stock.
RISK-Limited
MAX. RISK-Call strike price stock price +premium
REWSARD- Unlimited
BREAK EVEN-Stock price call premium paid

e.g:- Suppose Mr. TATA is trading at 4455 in June. An investor Mr. buys a
4500 call option for 100, while shorting the stock at 4455.
Solution:o
o
o
o
o

Current market priced= 4455

Buys a call option at strike of 4500@100
Call option break even= 4500+100=4600
Strategy breakeven =4455-100=4355
Maximum risks= (4500-4455) +100=145

Hence this strategy says that when the stock price rises there arises unlimited
profit and when the price falls it creates limited loss.
So the graph will be like
unlimited profit
limited loss

STRATEGY-5
COVERED CALL:
Under this strategy an investor buys a stock , which he feels is good for
medium to long term , but is neutral or bearish for the near term. At the same
time the investor doesnt want to exit at the target price. The investor can sell a
call option at the strike price at which he would be fine exiting the stock.
By selling the call option the investor earns a premium. Now the position of the
investor is that of a call seller. Who owns a underlying stock. If the stock price
stays at a below the strike price, the call buyer wont exercise the call, so the
premium is received by the investor.

 When to use: - this is often employed when an investor has a shortterm neutral to moderately bullish view on the stock he holds.

e.g. Mr. Ambani bought x ltd for 3800 & simultaneously sell a call option at the
strike price 4000 at 80.

Current market price: - 3800

Short call option strike price: - 4000 at premium of 80
Call option breakeven: - 4000+80=4080
Option breakeven: - stock price paid premium received
=3800-80= 3720

Thus if the price wont move the investor will earn a sure income. But if
the stock price decreases the investor has unlimited loss.

So the graph will be

Limited profit

Unlimited loss

STRATEGY-6
LONG CALL BUTTERFLY:A long call butterfly is to be adopted when the investor is expecting very little
movement in the stock price. The investor is looking to gain from low volatility
at a low cost. The strategy offers a good risk/reward ratio together with low
cost.
The strategy can be done by selling two ATMs call, buying one ITM call, &
buying one OTM call option, but there must be equal distance between the
strike price.
The result will be positive in case the stock remains range bound. The max
reward in this strategy is how ever restricted & takes place when stock is at
middle strike at expiration. The maximum losses are also limited.
When to use:- when an investor is neutral on market direction & is
bearish on volatility.
Risk:- net debit paid.
Reward:- Difference between adjacent Strike minus Net Debit.
Breakeven point: Upper Breakeven: - strike price of higher strike long call- Net premium
Paid
Lower breakeven:- strike price of ITM + Net premium paid

Lets take an example..

For example:Suppose NIFTY is at 3200. Mr.Mittal expects a very little
movement in NIFTY. He sells 2 ATM NIFTY call options with a strike price of
97.90 each. Buys 1 ITM NIFTY call option with a strike price of 3100 at a

premium of 141.55 &again buys 1 OTM NIFTY call option with a strike price
of 3300at a premium of 64.

Solution:Current nifty=3200
Sells 2 ATM call option of 3200 strike at 97.9
ATM call Break even=3200+97.9=3297.9
Buy 1 ITM strike of 3100 at a premium of 141.55
ITM Break even=3100+141.55+3241.55
Buys 1 OTM strike of 3300 at a premium of 64.
OTM Break even=3300+64=3364
Net premium paid = 141.55+ 64(2*97.9)=9.75
Upper Break even =higher long call-net premium
=3300-9.75=3290.25
Lower Break even= lower long call + Net premium
=3100+9.75=3109.75

So from the above analysis its clear that, when the stock is within the range of
two upper & lower break even, then the investor gets maximum profit of
90.25. But when the stock price goes upward or downward by breaking the
range the investor incurred a limited loss of 9.75, which is also maximum risk
So the graph will be like.

Max. Profit

Limited loss

CHAPTER-7

DATA
ANALYSIS

DATA ANALYSIS AND INTERPRETATIO

INDIAN FINANCIAL DERIVATIVE MARKET
INDIAN derivative markets have achieved a drastic success for its advancement in
different peculiar sectors and attract s investor s more and more for investing.
Apart from that particularly in this section we have to analyse what actually
derivative market and how an investor can easily enter into it and invest wisely and earned an
income without unlimited risk of loss.
Besides traditional financial markets two more markets are emerging namely the derivative
market recently and bancassurance market, which is likely very important way once banks
start undertaking insurance business derivatives in India are recently barring trade in forward
contracts in forex markets .futures market in commodity segment however have existed for a
long time . Recently Over the Counter (OTC) as well as EXCHANGE TRADED
DERRIVATIVES have been introduced marking an important structure in Indian financial
market. This offers a greater liquidity than OTC contracts and is negotiated between counter
parties and tailor and also offer centralised limits on individual positions. In India, OTC
derivatives, viz., Interest rate swaps (IRS) and Forward rate agreements (FRA) were

introduced in july 1999 while an ETD viz., stock index futures was introduced by two largest
stock exchanges in June 2000.The IRS and FRA were introduced with a view to deepening
the money market as also enable banks, primary dealers and financial institutions to hedge
interest rate risk. In Indian market accounting for nearly all of the 928 deals, amounting to
12620 crore of notional principal as on November 17, 2000. Forward contracts also has
emerged as an important segment of the fore x market.
The most notable development in secondary segment of Indian capital market is
the introduction of derivatives trading in June 2000.SEBI approved derivatives trading based
on futures contracts at both BSE and NSE in accordance with rules and regulations of the
stock exchanges. Trading in index derivatives involves low transaction cost in comparison
with underlying stocks. While the BSE introduced stock index futures for BSE SENSEX
comprising 30scrips, the NSE introduced stock index futures for S&P CNX nifty comprising
50 scrips .As of now index futures on S&P nifty and CNXIT, INDEX OPTION on CNX nifty
and CNXIT and futures on 52 individual securities band option on 52 individual securities
specified by SEBI are available in NSE. To effectively manage risk in the derivative segment
adequate risk containing measures have been put in place, which require s net worth of
brokers and its composition, margining system based on 99 percent Value at risk (VaR)
Some of the extra factors behind securities derivative market have been discussed
below.
In derivative trading process scrip that are being traded in lots
In derivative by giving only margin money a huge volume of trade can be carried out.
Through this activity hedging activity can be done by taking off setting position.

Turnover of derivative market, cash market in NSE are shown in below

YEAR
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13

DERIVATIVE
MARKET
101926
439862
2130610
2546982
4824174
7356242
10356242
35356242

CASH
MARKET
513167
617989
1099535
1140071
1569556
1945285
2446287
2850567

TOTAL

From the aforesaid table it is noticed that d derivatives market s in

India is growing faster than its counterpart i.e., cash market the turnover in the
derivatives segment has grown to 35356242 crores in 2012-13 from 101926
crores in 2005-06. While the turnover of cash segment is only 2850567 in

2010-11 as against 513167 in 2005-06 .the average trade size of at the NSE
derivative segment rose significantly from the year 2005 to 2013.however as
brought out by the economic survey in India has yet to attain the multiple spot
market turnover which are prevalent in successful derivatives exchanges
internationally.
As we see previously that the turnover in derivative segment increased
day by day. Thus it reflects more & more investors are attracting towards capital
market as the trading turnover increases but people are less involved in
derivative segment, because of high variance of risk. but derivative segment
provides a wide scope to earn more.
Apart from all, people with risk adverse attitude always prefer a
risk free area for investment with slow and low rate of return. But the flavour
presents in derivative is really interesting. So this critical report is based on
HOW TO GUIDE INVESTORS IN DERIVATIVE MARKET will definitely
help the investors in derivative segment because it will provide a unique theme
of concept and strategies for derivative trading.
As we discussed a small amount of pre3mium is paid to enter into
derivative segment. So in derivative chance of risk of loss is high as well as
possibility of gain is also high due to high volatility. Hence it needs a little bit
analysis, as a result of which investor s can earn like anything. Derivative is a
instrument basically used for hedging purposes. hence this study focuses on
applying strategies in different market situations like purely bullish and bearish,
mildly bullish and bearish, zero volatility, and strategies like butterfly,
protective call etc., Which helps investors to earn unlimited profits with limited
risk.

Some basic rules for derivative market.....

Stay away from deep in the money options.

Stay away from deep out of the money options.
Trade slightly OTM, ATM or slightly ITM options.
Know your market.
Use options to hedge profitable future positions.

Some secrecy of success in options....:-

 When market is CHEAP or EXPENSIVE there probably is

reason.
Have a plan before trade, and then work it!
Money management is the key.
Success comes easier when you specialise.
Patience pays!
The markets reaction to the news is crucial.
Never trade when sick or tired.
Overtrading is one of your greatest enemies.
Diversify.
CRITICAL REVEIW OF QUESTIONAIRE
The total no of samples taken is 50. Basically the samples were taken from
Bhubaneswar market.
AGE GROUP

NO. OF PERSON

PERCENTAGE

Below 25
25-35

8
15

16
30

35-45
45-60
60&above
Total

20
4
3
50

40
8
6
100

Graphically been shown as:

45
40
35
30
25

NO. OF PERSON

20

PERCENTAGE

15
10
5
0
Below 25 25-35

35-45

45-60 60 & above

2. The following depicts the occupation of the respondents that are being taken
OCCUPATION

NO OF PERSONS

PERCENTAGE

STUDENT

10

20

GOVT.
PROFESSIONAL
PVT.
PROFESSIONAL
BUSINESS MEN

14

15

30

15

30

RETIRED

TOTAL

50

100

Graphically been shown as:

35
30
25
20
15
10

NO. OF PERSONS

PERCENTAGE

3. The following depicts the monthly savings of the respondents that are being
taken.
MONTHLY
SAVINGS

NO OF PERSONS

PERCENTAGE

12

23

46

18

36

50

100

Below 5000
5000-10000
10000-15000
15000 & above
Total

Graphically been shown as:

50
45
40
35
30
25
20
15
10
5
0

No of persons
Percentage

4. The following shows the preference of savings of the respondents that are
being taken.

PREFERENCE OF
SAVINGS

NO. OF
PERSONS
20

PERCENTAGE

13

26

10

20

14

50

100

40

Bank
Mutual fund
Postal
Securities
TOTAL

Graphically been shown as:

40
35
30
25
No. Of persons

20

Percntage

15
10
5
0
Bank

Mutual fund

Postal

Securities

CHAPTER-8
FINDINGS,
SUGGESTIONS &
conclusions.

FINDINGS
As the data so collected from the market through survey, and it is found that
more and more people have now facing towards capital market rather normal
savings by the passage of the time basically in derivative segment.
As derivatives have also two instruments such as futures
and options .these two instruments are mainly used for hedging purposes.
People also more involved in future trading than options .cause are as follows
Most of the students and job holders they didnt hear the word OPTION
they found the con concept more complicated.
Most of the people are not aware of the risks associated with option
market.
I found another thing the students and executives who are related with
financial institutions only they know about trading in derivative.
The most important thing is availability of inefficient advisory services
regarding derivative market as there involved high volatility.
People dont involve in option market because some stock broking houses
are charging high brokerage.

SUGGESTIONS
During this 45 days of study what i felt about the market is lacking want to
suggest that.
As interest swaps reduce the exchanges rate risk, so swaps are very useful
for Indian traders.
As there is no separate exchange for futures so SEBI must take certain
initiatives for that.
As options are quietly costly so $/ options are not in existence.
Investors are not properly aware of the Risk Management Systems, so
proper RMS must be taught through trainers.

CONCLUSION
The study so conducted on how to guide investors in derivative market and
within these 45 days i realised that hoe derivative market operates. The text
book theory and its practical application are quite exciting. And from these 45
days of study I am able to conclude that.
People of India are less involved in trading activities, basically less in
derivative segment.
People of India are less capable of assessing the risks involved in
derivative market.
No separate exchange for futures like in London.
People are less experienced and efficient and less use of strategies.
The RBI has planned for a phased introduction of currency futures and
options.
For the development of the currency market there need to be some
institutional development.
In options cross currency options are allowed since they are quit costly as
compared to other derivatives.

BIBLIOGRAPHY

BOOKS REFERRED
Financial Derivatives & Risk Management. By V.K. BHALLA, ISBN:
81-219-2094-9.
Investment Management By S.CHAND, ISBN: 81-219-1248-2

WEB BIBLIOGRAPHY
http://en.wikipedia.org/wiki/derivatives_ market.
http://www.nseindia.com/eqity derivative
http://www.wisegeek.com/what
is
a
derivative
market.htm

QUESTIONARE.
Personal profile:

Name: ..................................................
Age: ......................................................
Gender: ................................................
Occupation: ...........................................
Annual income: ......................................
Address: ...................................................
..................................................................
.................................................................
Phone no: ................................................
E-mail: ......................................................

1. Did you like to invest your surplus Earning?

Yes
No
2. Where do you want to invest your surplus?

Insurance sector
Mutual fund
Capital market
All of the above

3. Do you have any idea about stock market?

Yes
No
4. Do you want to invest in stock market?
Yes
No

5. For what purpose do you invest your money?

 Speculative purpose
Daily transaction
Precautionary purpose
Other purpose
6. Do you want to invest in equity?
Yes
No
7. Do you have any idea about online share trading?
Yes
No
8. Do you feel online investment is safe & better?
Yes
No
9. Do you know about Demat service?
Yes
No
10. Would you like to invest at VENTURA SECURITIES PVT. LTD?
Yes
No
11. What benefits do you look for an Equity Investment?

To meet future uncertainty

Regular source of income
Income after retirement
Liquidity
All of the above

12. Do you have any suggestion regarding services and other things related
to VENTURA SECURITIES pvt.ltd which are necessary to improve in
future?

ANS:.......................................................................................................................
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