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CHAPTER-1
INRODUCTION
HISTORY OF STOCK EXCHANGE
The only stock exchange operating in the 19th century were those of Bombay set
up in 1875 and Ahmadabad set up in 1894 these were organized as voluntary non-profit
making organization of brokers to regulate and protect interest. Before the control
insecurities trading became a central subject under the constitution in 1950, it was a state
subject and the Bombay securities contract (CONTROL) Act of 1952 used to regulate
trade in securities. Under this act, the Bombay stock exchange in 1927 and Ahmadabad
in 1937.
During the war boom, a number of stock exchanges were organized in Bombay,
Ahmadabad and other centers, but they were not recognized. Soon after it became a
central subject, central legislation was proposed and a committee headed by A.D. Goral
went in to the bill for securities regulation.
recognition is granted under section 3 of the Act by the central government, ministry if
finance.
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BYELAWS
Besides the above act, the securities contract (regulations) rules were also
made in 1975 to regulate certain matters of trading on the stock Exchange. These are also
byelaws of the exchanges, which are concerned with the following subjects. Opening /
closing of the stock exchange, timing of trading, regulation of bank transfer, regulation of
Badla or carryover business, control of settlement, and other activities of stock exchange,
fixations of margin, fixations of market price or marking price, regulation of tarlatan
business (jobbing), regulation of brokers trading, brokerage charges, trading rules on the
exchange, arbitration and settlement of disputes, settlement and clearing of the trading
etc.
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BASIC OF DERIVATIVES
The term Derivatives independent value, i.e. its value is entirely derived
from the underlying asset. The underlying asset can be securities, commodities bullion,
currency, live stock or anything else. In other words, derivative means a forward, future,
option or any other hybrid contract of per determined fixed duration, linked for the
purpose of contract fulfillment to the value of a specified real or financial asset or to an
index of securities.
The Securities Contracts (Regulation) Act 1956 Define Derivatives as Under
Derivative Includes
a contract which derives its value from the prices, or index of price of underlying
Securities
The above definition conveys: Those derivatives are financial products and derive its
value from the underlying assets.
Derivatives is derived from another financial instrument/contract called the
Underlying. In the case of Nifty futures, Nifty index is the underlying.
Significance of Derivatives
Derivatives are Used
1. By Hedgers for protecting (risk-covering) against adverse movement. Hedging is
a mechanism to reduce price risk inherent in open positions. Derivatives are
widely used for hedging. A Hedge can help lock in existing profits. Its purpose is
to reduce the volatility of a portfolio by reducing the risk.
2. Speculators to make quick fortune by anticipating/forecasting future market
movement. Hedgers with to eliminate or reduce the price risk to which they are
already exposed. Speculators, on the other hand are those classes of investors
who willingly take price risks to profit from price change in the underlying.
While the need to provide hedging avenues by means of derivative instruments is
laudable, it call for the existence of speculative traders to play the role of
counter-party to the hedgers. It is for this reason that the role of speculators gains
prominence in a derivatives market.
3. Arbitrageurs to earn risk-free profits by exploiting market importance.
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Type of Derivatives
Derivatives products initially emerged devices against fluctuations in commodity
price, and commodity-linked derivatives remained the sole form of such predicts for
almost three hundred years. Financial derivatives came into spotlight in the post-1970
period due to growing instability in the financial markets. However, since their
emergence, these products have become very popular and by 1990s, they accounted for
about two thirds of total transactions in derivative products. In recent years, the market
for financial derivatives has grown tremendously in term of variety of instruments
available their complexity and also turnover. In the class of equity derivatives the world
over, future and options on stock indices have gained more popularity than on individual
stocks, especially among institutional investors, who are major uses of index-linked
derivatives. Even small investors find these useful due to high correlation of the popular
index with various portfolios and ease of use. The lower costs associated with index
derivatives vis--vis derivative products based on individual securities is another reason
for their growing use. The most commonly used derivatives contracts are forward,
futures and options with we shall discuss in detail later. Here we take a brief look at
various derivatives contracts that have come to be used.
Forwards:
settlement takes place on a specific date in the future at todays pre-agreed price.
Futures: A futures contract is an agreement between two parties to buy or sell an asset
at a certain time in the future at a certain price. Futures contracts are special type of
forward contract in the sense that the former are standardized exchange-trade contracts.
Options: options are of two types- calls and put calls give the buyer right but not the
obligation to buy a give quantity of the underlying asset, at a given price on or before a
given future date. Puts gives the buyer the right, but not the obligation to sell a given
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Classification of Derivatives
The Derivatives Can be Classified as
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payable, not for delivery/settlement at spot, but at a specified future date. India has a
strong dollar-rupee forward market with contract being traded for one, two, and sixmonth expiration. Daily trading volume on this forward Market is around $500 million a
day. Indian users of hedging services are also allowed to buy derivatives involving other
currencies on foreign markets.
FORDWARD CONTRACTS
A forward contract is an agreement to buy or sell an asset on a specified date for a
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specified price. One of the parties to the contract assumes a long position and agrees to
buy the underlying asset on a certain specified future date for a certain specified price.
The other party assumes a short position and agrees to sell the asset on the same date for
the same price. Other contract details like delivery date, the parties to the contracts
negotiate price and quality bilaterally. The forward contracts are normally traded outside
the exchanges.
The Silent Futures of Forward Contract are
The bilateral contracts and hence exposed to counter-party risk.
Each contract is custom designed, and hence is unique in terms of contract size,
Expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go the same
counter Party, which often results in high prices being changed.
However forward contracts in certain markets have become very standardization, as
in the case of foreign exchange, thereby reducing transaction cost and increasing
transactions volume. This process of standardization reaches its limit in the organized
futures market .Forward contracts is very useful in hedging and speculation. The classic
hedging application word is that of an exporter who expects to receive payment in dollars
three Months later he is exposed to the risk of exchange rate fluctuations. By using the
currency forward markets to sell dollars forward, he can lock on to a rate today and
reduce his uncertainty. Similarly an importer who is required to make a payment in
dollars forward if a speculator has information or analysis, which forecasts an upturn in a
price, than he can go long on the forward market instead of the cash market. The
speculator would go long on the forward, wait for the price to rise, and then take a
reversing transaction to book profits. Speculators may well be required to deposit a
margin upfront. However, this is generally a relatively small proportion of the value of
the assets underlying the forward contract. The use of forward markets here supplies
leverage to the speculator.
LIMITATIONS
Forward Markets World-Wide are Afflicted by Several Problems
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Lack of centralization of trading, Liquidity, and Counter party risk in the first two
of these, the basic problem is that of too much flexibility and generality. The forward
market is like a real estate market in that any two consenting adults can form contracts
against each other. This often makes them design terms of the deal, which are very
convenient in that specific situation, but makes the contracts non-tradable. Counter party
risk arises from the possibility of default by any one party to the transaction. When one
of the two sides to the transaction declares bankruptcy, the other suffers. Even when
forward markets trade standardized contracts, and hence avoid the problem of liquidity,
still the counter party risk remains a very serious issue.
FUTURES
Futures markets were designed to solve the problems that exist in forward
markets. 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. But unlike forward contracts, the futures
contracts are standardized and exchange traded. To facilitate liquidity in the future
contracts, the exchange specifies certain standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for reference purposes in
settlement) and a standard timing of such settlement. A futures contract may be offset
prior to maturity by entering into an equal and opposite transaction. More than 99% of
futures transactions are offset this way.
The Standardized Items in a Futures Contract are
Quantity of the underlying
Quality of the underlying
The date and month of delivery
The units of price quotations and minimum price changes
Location of settlement.
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Forward contracts are often confused with futures contracts. The confusion is
primarily Became both serve essentially the same economics of allocations risk in the
presence of Future price uncertainly. However futures are a significant improvement over
the forward Contracts as they eliminate counter party risk and offer more liquidity.
FUTURES TERMINOLOGY
Spot price: The price at which an asset trades in the spot market.
Futures price: The price at which the futures contract trades in the futures market.
Contract cycle: The period over which a contract trades. The index futures contracts on
the NSE have one-month, two-month and three-month expiry cycle, which expire on the
last Thursday of the month. Thus January expiration contract expires on the last
Thursday of February. On the Friday following the last Thursday, a new contract having
a three-month expiry is introduced for trading.
Expiry date: It is the date specified in the futures contract. This is the last day on which
the contract will be traded, at the end of which it will case to exist.
Contract size: The amount of the asset that has to be delivered less than one contract. For
instance, the contract size on NSEs futures market is 200 Niftiest.
Basis: In the context of financial futures, basis can be defined as the futures price minus
the spot price. There will be a different basis for each delivery month for each contract.
In a normal market, basis will be positive. This reflects that futures prices normally
exceed spot prices.
Cost of carry: the relationship between futures prices and spot prices can be
summarized.
In terms of what is known as the cost of carry. This measures the storage Cost
plus the interest that is paid to finance the asset less the income earned on the
asset.
Initial margin: the amount that must be deposited in the margin account at the
time a future contract is first entered into is known as initial margin.
Marking-to-market: in the futures market, at the end of each trading day, the
margin.
account is adjusted to reflect the investors gain or loss depending upon the
futures Closing price. This is called marking-to-market.
Maintenance margin: this is somewhat lower than the initial margin. This is set to
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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 and is expected to top up the margin account to
the initial margin level before trading commences on the next day.
OPTIONS
We look at the next derivative product to be traded on the NSE, namely option.
Options are fundamentally different from forward and futures contracts. An option gives
the holder of the option the right to do something. The holder does not have to exercise
this right .in contrast, in a forward or futures contract, the two parties have committed
themselves to doing something. whereas it costs nothing (except margin requirements)to
enter into a futures contract, the purchase of an option requires an up-front payments.
OPTIONS TERMINAOLOGY
Index option: There option has the index as the underlying. Some options are
European while others are American. Like index, futures, contract, index options
Contracts are also cash settled.
Stock options: stock options are options on individual stocks. option currently
trade On over 500 stocks in the United States. A contract gives the holder the
right to buy or sell shares at the specified prices.
Buyer of options: the buyer of an options is the one who by paying the options
Premium buys the right but not the obligation to exercise his option on the
Seller / writer.
Writer of an option: the writer of a call/put options is the one who receives the
option premium and is thereby obliged to sell/buy the asset if the buyer exercises
on him.
There are Two Basic Types of Options, Call Options and Put Options
Call option: a call option gives the holder the right but not the obligation to buy
an Asset by a certain date for a certain price.
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Put option: a put option gives the holder the right but not the obligation to sell
an asset by a certain date for a certain price.
Option price: option prices are the price, which the option buyer pays to option
seller. It is also referred to as option premium.
Expiration date: the date specified in the options contract is known as the
expiration Date, the exercise date, the strike date or the maturity.
Strike price: the price specified in the options contract is known as the strike
price or the exercise price.
American options: American options are options that can be exercised at any
time up to the expiration date. Most exchange-traded options are American.
European options: European options are options that can be exercised only on
the Expiration date itself. European options are easier to analyze than American
options, and Properties of American options are frequently deduced from those
of its European Counterpart.
In-the-money option: an in-the money (ITM) option that would lead to a
Positive cash flow to the holder if it were exercised immediately. A call option
on the Index is said to be in money when the current index is stands at a level
higher than the strike price, (i.e. spot price strike price). If the index is much
higher than the strike price, The call is said to be deep ITM. In the case of a put
is ITM if the index is below the strike price.
At-the-money option: an at-the money (ATM) option is an option that would
lead to Zero cash flow if it were exercised immediately. An option on the index
is at-the money when the current index equals the strike price (i.e. spot price =
strike price.
Out-of the money option: an out-of money (OTM) option is an option that
would lead to a negative cash flow it was exercised immediately. A call option
on the index is out-of-the-money when the current index stands at a level, which
is less than the strike Price (i.e. spot price strike price). If the index is much
lower than the strike price, the call is said to be deep OTM .in the case of a put,
the put is OTM if the index is above the Strike price.
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used for profits and hedging. We can use derivatives as a leverage tool too.
Use of Derivatives as leverage
You can use the derivatives market to raise fund using your stocks. Conversely,
you can also lend funds against stocks.
Different Between Badla and Derivatives
The derivatives product that comes closest to Badla is futures. Futures is not
badla, through a lot of people confuse it with badla. The fundamental difference is badla
consisted of contango and backwardation (undha badla and vyaj badla) in the same
market. Futures is a different market segment altogether. Hence derivatives is not the
same as badla, through it is similar.
Raising Funds from the Derivatives Market
This is fairly simple. Say, you have Infosys, which is trading at R s 3000. You
have shares lying with you and are in urgent need of liquidity. Instead of pledging your
shares and borrowing from banks at a margin, you can sell the stock at R s 3000. Suppose
you need this liquidity only for a month and also do not want to party with Infosys. You
can buy a 1 month future at R s 3050
After a month you get back you Infosys at the cost of additional rs 50. This R s 50
is the financing cost for the liquidity. The other beauty about this is you have already
locked in your purchase cost at R s 3050. This fixes your liquidity cost also and protected
against further price losses.
Lending Funds to The Market
The lending into the market is exactly the reverse of borrowing. You have money
to lend.
You can a stock and sell its future. Say, you buy Infosys at R s 3000 and sell a 1
month future at R s 3100. In effect what you have done is lent R s 3000 to the market for
a month and earned R s 100 on it.
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bearish. When you take a bullish view on the market, you can always sell futures and buy
in the spot market. If you take a bearish view on the market, you can buy futures and sell
in the sport market. Similarly, in the option market, if you are bullish, you should buy
call options. If you are bearish, you should buy put option conversely, if you are bullish,
you should write put options. This is so because, in a bull market, there are lower
changes of the put option being exercised and you can profit from the premium if you are
bearish, you should write call option. This is so because, in a bear market, there are lower
chances of the call option being exercised and you can profit from the premium.
Using Arbitrage to Make Money in Derivatives Market
Arbitrage is making money on price differential in different markets. For
example, future is nothing but the future value of the spot price. This futures value is
obtained by factoring the interest rate. But if there are differences in the money market
and the interest rates change than the future price should correct itself to factor the
change in interest. But if there is no factoring of this change than it present an
opportunity to make money-an arbitrage opportunity.
Let us take an example.
Example
A stock is quoting for Rs. 1000. The 1-month future of this stock is at rs 1005. the risk
free Interest rate is 12%. What should be the trading strategy?
Solution
The strategy for trading should be: Sell Spot and Buy Futures
Sell the stock for Rs 1000. Buy the future at Rs 1005.
Invest the Rs 1000 at 12%. The interest earned on this stock will be
1000(1+.02) (1/12) = 1009
So net gain the above strategy is Rs 1009-rs 1005= Rs 4
Thus one can make a risk less profit of Rs 4 because of arbitrage. But an important point
is that this opportunity was available due to miss-pricing and the market not correcting
itself. Normally, the time taken for the market to adjust to corrections is very less. So the
time available for arbitrage is also less. As every one to cash in on the arbitrage, the
market corrects itself.
USING FUTURE TO HEDGE POSITION
One can hedge ones by taking an opposite position in the futures market. For
example, if you are sport price, the risk you carry is that of price in the future. You can
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lock this by selling in the futures price. Even if the stock continues falling, your position
is hedge as you have firmed the price at witch you are selling. Similarly, you want to buy
a stock at a later date but face the risk of prices rising. You can hedge against this rise by
buying futures. You can use a combination of futures too to hedge yourself. There is
always a correlation between the index and individual stocks, this correlation may be
negative or positive, but there is a correlation. This is given by the beta of the stock. In
simple terms, terms, what beta indicates is the change in the price of a stock to the
change in index.
For examples
If beta of a stock is 0.8, it means that if the index goes up by the stock goes up by
8. t will also fall a similar level when the index falls.
A negative beta means that the price of the stock falls when the index rises. So, if you
have a position in a stock, you can hedge the same by buying the index at times the
value of the stock.
Example: The beta of HPCL is 0.8. The Nifty is at 1000. If I have Rs 10000 worth of
HPCL, I can hedge my position by selling 800 of Nifty. That is I well sell 8 Nifities.
Scenario 1: If index rises by 10%, the value of the index becomes 8800 I e a loss of R s
800. The value of my stock however goes up by 8% I e it becomes R s 10800 I e a gain
of R s 800.Thus my net position is zero and I am perfectly hedged.
Scenario 2:If index falls by 10%, the value of the index becomes Rs 7200 a gain of Rs
800. But the value of the stock also falls by 8%. The value of this stock becomes Rs 9200
a loss of Rs 800Thus my net position is zero and I am perfectly hedged. But against, beta
is a predicated value based on regression models. Regression is nothing but also analysis
of past data. So there is a chance that the above position may not be fully hedged if the
beta does not behave as per the predicated value.
Using Options in Trading Strategy: Options are a great tool to use for trading. If you
feel the market will go up. You should are a call option at a level lower than what you
expect the market to go up. If you think that the market will fall, you should buy a put
option at a level higher than the level to which you expect the market fall. When we say
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market, we mean the index. The same strategy can be used for individual stocks also. A
combination of futures and options can be used too, to make profits.
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Straddle: The simultaneous purchase and sale of option of the same speculation to
different periods.
Tandem Options: A sequence of options of the same type, with variable strike price and
period.
Bermuda Option: Like the location of the Bermudas, this option is located somewhere
between a European style option with can be exercised only at maturity and an American
style option which can be exercised any time the option holder chooses. This option can
be exercise only on predetermined dates.
RISK MANAGEMENT IN DERIVATIVES
Derivatives are high-risk instrument and hence the exchanges have put up a lot of
measures to control this risk. The most critical aspect of risk management is the daily
monitoring of price and position and the margining of those positions.
NSE uses the SPAN (Standard Portfolio Analysis of Risk). SPAN is a system that
has origins at the Chicago Mercantile Exchange, one of the oldest derivative exchanges
in the world.
The objective of SPAN is to monitor the positions and determine the maximum
loss that a stock can incur in a single day. This loss is covered by the exchange by
imposing mark to market margins.
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SPAN evaluates risk scenarios, which are nothing but market conditions. The
specific set of market conditions evaluated, are called the risk scenarios, and these are
defined in terms of
a) How much the price of the underlying instrument is expected to change over one
trading day, and
b) How much the volatility of that underlying price is expected to change over one
trading day?
Based on the SPAN measurement, margins are imposed and risk covered. Apart
from this, the exchange will have a minimum base capital of Rs. 50 lacks and brokers
need to pay additional base capital if they need margins above the permissible limits.
SETELLEMENT OF FUTURES
Mark to Market Settlement
There is daily settlement for Mark to Market. The profits/losses are computed as
the difference between the trade price or the precious days settlement price as the case
may be and the current days settlement price. The parties who have suffered a loss are
required to pay the mark-to-market loss amount to exchange which is in turning passed
on to the party who has made a profit. This is known as daily mark-to market settlement.
Theoretical daily settlement price for unexpired futures contracts, which are not traded
during the last half on a day, is currently the price computed as per the formula detailed
below.
F = S * e rt
Where
F = theoretical futures price
S = value of the underlying index/stock
r = rate of interest (MIBOR- Mumbai Inter Bank Offer Rate)
t = time to expiration
Rate of interest may be the relevant MIBOR rate or such other rate as may be
specified. After daily settlement, all the open positions are reset to the daily settlement
price. The pay-in and payout of the mark-to-market settlement is on T+1 days (T = Trade
day). The mark to market losses or profits are directly debited or credited to the broker
account from where the broker passes to client account.
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Final Settlement
On the expiry of the futures contracts, exchange market all positions to the final
settlement price and the resulting profit/loss is settlement I cash. The final settlement of
the future contract is similar to the daily settlement process except for the method of
capon of final settlement price. The final settlement profit/loss is completed as the
difference between trade price or the previous days settlement price, as the case may be
and the final settlement price of the relevant futures contract.
Final settlement loss/profit amount is debited/credited to the relevant brokers
clearing bank account on T + 1 day (T = expiry day). This is then passed on the client
from the broker. Open positions in futures contracts cease to exist after their expiration
day.
SETTLEMENT OF OPTIONS
Daily Premium Settlement
Premium settlement is cash settled and settlement style is premium style. The
premium payable position and premium receivable position are netted across all option
contract for each broker at the client level to determine the net premium payable or
receivable amount, at the end of each day.
The brokers who have a premium payable position are required to pay the
premium amount to exchange which is in turn passed on to the members who have a
premium receivable position. This is known as daily premium settlement. The brokers in
turn would take from their clients.
The pay-in and pay-out of the premium settlement is on T + 1) days (T = Trade
day). The premium payable amount and premium receivable amount are directly debited
or credited to the broker, from where it is passed on to the client.
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exercise settlement value is the difference between the strike price and the settlement
price of the relevant option contract. Exercise settlement value is debited/credited to the
relevant option broker account on T + 3 days (T = exercise date). From there it is passed
on to clits.
Final Exercise Settlement
Final Exercise settlement is effected for option positions at in-the-money strike
price existing at the close of trading hours, on the expiration day of an option contract.
Long position at in-the money strike price are automatically assigned to short positions in
option contracts with the same series, on a random basis. For index option individual
securities, exercise style is American style. Final Exercise is Automatic on expiry of the
option contracts.
Exercise settlement is cash settled by debiting/crediting of the clearing account
or the relevant broker with the respective Clearing Bank, from where it is passed
debited/credited to the relevant broker clearing bank account on T + 1 day (T = expiry
day), from where it is passed Final settlement loss/profit amount for option contracts on
Individual Securities is debited/credited to the relevant broker clearing bank account on T
+ 3 days (T = expiry day), from where it is passed Open positions, in option contracts,
cease to exist after their expiration day.
The model
C = SN (d1) Ke {-rt} N (d2)
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Business of dealing therein and by providing for certain other matters connected
therewith. This is the principal Act, which governs the trading of securities in
India. The term securities has been defined in the SC(R) A. as per section 2(h), the
securities include.
1. Shares, scraps, stocks, bonds, debenture stock or other marketable securities of a like
Nature in or of any incorporated company or other body corporate. Derivative
2. Units or any other instrument issued by any collective investors in such schemes
To the investors in such schemes,
risk Government
securities.
Such other
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law for the time being in force, contracts in derivative shall be legal and valid
if such contracts are :
Traded on a recognized stock exchange settled on the clearing hose of the
recognized stock exchange, in accordance with the rules and bye loss of
such stock exchanges
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stock broker is allowed to buy, sell or deal in securities, unless he or she holds a
certificate of registration granted by SEBI. A stock broker applies for registration to
SEBI through a stock exchange or stock exchanges of which he or she is admitted as a
member. SEBI may grant a certificate to a stock-broker [as per SEBI (stock Brokers and
Sub-Brokers) Rules, 1992] subject to the conditions that,
1. He holds the membership of stock exchange.
2. Sell abide by the rules, regulations and buy-laws of the stock exchange or stock
exchange of which he is a member.
3. In case of any change in the status and constitution, he shall obtain prior
permission of SEBI to continue to buy, sell or deal in securities in any stock
exchange.
4. He shall pay the amount of fees for registration in the prescribed manner, and
5. He shall take adequate steps for redressed of grievances of the investors within
one month of the date of the receipt of the complaint and keep SEBI informed
about the number, nature and other particulars of the complaints as per
SEBI(Stock Brokers) Regulations, 1992,SEBI shall take into account for
considering the grant of a certificate all matters relating to buying, selling, or
dealing in securities and in particular the following namely,
Whether the Stock Broker
(a) Is eligible to be admitted as a member of a stock exchange.
(b) Has the necessary infrastructure like adequate office space, equipment and man
power to effectively discharge his activities.
(c) Has any past experience in the business of buying, selling or dealing in securities.
(d) Is subjected to disciplinary proceeding under the rules, regulations and buy-laws of a
stock exchange with respect to his business as a stock-broker involving either himself
or any of his partners, directors or employees.
REGULATION FOR DERIVATIVES TRADING
SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta
to develop the appropriate regulatory framework for derivatives trading in India. The
committee submitted its report in March 1998. On May 11, 1998 SEBI accepted the
recommendations of the committee and approved the phased introduction of
derivatives trading in India beginning with stock index futures. SEBI also approved
the suggestive bye-laws recommended by the committee for regulation and control
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Fixed assets
Pledged securities
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Members card
Bad deliveries
Prepaid expenses
Intangible asset
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6. The minimum contract value shall not to be less than Rs. 2 Lakh. Exchanges should
also submit details of the futures contract they propose to introduce.
7. The initial margin requirement, exposure limits linked to capital adequacy and
margin demands related to the risk of loss on the position shall be prescribed by
SEBI/Exchange from time to time.
8. The L .C. Gupta committee report requires strict enforcement of know your
customer Rules and requires that every client shall be registered with the derivative
broker. The Members of the derivatives segment are also required to make their clients
aware of the Risks involved in derivatives trading by issuing to the client the risk
disclosure Document and obtain a copy of the same duly signed by the client. A trading
members are required to have qualified approved user and sales person who have passed
a certification programmed approved by SEBI.
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Membership
Membership for the new segment in both the exchanges is not automatic and has
To be separately applied fir.
All members will also have to be separately registered with SEBI before they can
be accepted.
In addition for every TM be wishes to clear for the CM has to deposit Rs.10 lakh.
Trading Member (TM)
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In addition for every TM he wishes to clear for the CM has to deposit R s. 10 lake with
The following break-up.
I.Cash R s. 2.5 lakh
II.Cash Equivalents R s. 25 lakh
III.Collateral Security Deposit R s. 5 lakh
Trading Member (TM)
The non-refundable fees paid by the members are exclusive and will be a total of R s. 8
Lakh if the member has both clearing and trading rights.
Trading Systems
NSEs trading system for its futures and options segment is called NEAT F&O.
BSEs trading system for its derivatives segment is called DTSS. It is built on a
Platform different from the BOLT system though most of the features are
common
Table 1.1
LOT SIZE OF DIFFERENT COMPANIES
CODE
LOT
SIZE
ACC
188
ANDHRA BANK
2300
COMPANY NAME
ASSOCIATES CEMENT COMPANIES
LTD.
ANDHRA BAKS.
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ARIVENDMILLS
4300
ARIVENDMILLS LTD
BAJAJAUTO
200
BANK BARODA
700
BANK OF BRODA.
BANK INDIA
950
BANK OF INDIA.
BEL
138
BHEL
75
BPCL
550
CANBK
800
CANARABANK
CIPLA
1250
CIPLA LTD.
CNXIT
1200
IT INDEX
DABUR
2700
DABUR LTD.
DRREDDY
400
GAIL
1125
GRASIM
88
GUJAMBCEMENT
4125
HCLTECH
650
HDFC
75
HDFE BANK
200
HERO HONDA
400
HINDALCO
1759
HINDLEVER
2000
HINDPETROL
1300
I-FLEX
600
HINDUSTAN PETROLEUM
CORPORATIONLTD.
I-FLEX SOLUTIONS
ICICI BANK
175
INFOSYSTECH
200
30
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IDBI
1200
IPCL
2200
ITC
1125
MATRIX
1250
MATRIX LAB.
M&M
312
MARUTI
200
MPHASIS
800
MPHASIS BFL
MTNL
1600
NATIONAL ALUM
575
NDTV
550
NIIT
1450
ONGC
225
ORIENT BANK
1200
ORIENTAL BANK.
PNB
600
POLARIS
2800
RANBAXY
800
RELIANCE
75
REL
550
SBIN
132
SCI
1200
SYNDIBANK
1900
SYNDICATE BANK
TATAMOTORS
425
TATA MOTORS
TATAPOWER
200
TATASTEEL
382
TATATEA
275
TSICO
2800
UNION BANK
2100
CHAPTER-2
INDUSTAL PROFILE
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downs in the Indian stock market, the exchange has introduced in 1986 an equity stock
index called BSE- SENSEX that subsequently became the barometer of the movements
of the share prices in the Indian stock market. It is a Market capitalization weighted
index of 30 component stocks representing a sample of large, well-established and
leading companies. The base year of sensex is 1978-79. The sensex is widely reported in
both domestic and international markets through print as well as electronic media.
Sensex is calculated using a market capitalization weighted method. As per this
methodology, the level of the index reflects the total market value of all 30-component
stocks from different industries related to particular base period. The total market value
of a company is determined by multiplying the price of its stocks by the number of shares
outstanding. Statisticians call an all index of a set of combined variables (such as price
and number of shares) a composite index. An indexed number is used to represent the
results of this calculation in order to market the value easier to work with and track over
a time. It much easier to graph a chart based on indexed values than one based on actual
values world over majority of the well-known indices are constructed using Market
capitalization weighted method.
In practice, the daily calculation of SENSEX is done by dividing the aggregate
market value of the 30 companies in the index by a number called the index Divisor. The
Divisor is the only link to the original base period value of the SENSEX. The Divisor
Keeps the Index comparable over a period or time and if the reference point for the entire
index maintenance adjustments. SENSEX is widely used to describe the mood in the
Indian stock markets. Base year average is changed has per the formula new base year
average =old base year average *(new market value/old market value).
NATIONAL STOCK EXCHANGE
The NSE was incorporated in Now 1992 with an equity capital of R s 25 Crs.
The international securities consultancy (ISC) of Hong Kong has helped in setting up
NSE. ISE has prepared the detailed business plans and installation of hardware and
software systems. The promotions for NSE were financial institutions, insurances
companies, banks and SEBI capital market Ltd, infrastructure leasing and financial
services ltd and stock holding corporation ltd.
It has been set up to strengthen the move towards professionalisation of the capital
market as well provided nation wide securities trading facilities to investors.NSE is not
an exchange in the traditional sense where brokers own and manage the exchange. A two
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tier administrative set up involving a company board and a governing aboard of the
exchange envisaged. NSE is a national market for shares PSU bonds, debentures and
government securities since infrastructure and trading facilities are provided.
NSE-NIFTY
The NSE on April 22, 1996 launched a new equity index. The NSE-50. The new
index, which replaces the existing NSE-100 index, is expected, to serve as an appropriate
index for the new segment of futures and options. Nifty means national index for fifty
stocks.
The NSE-50 comprises 50 companies that represent 20 broad industry groups with
An aggregate market capitalization of around R s .1,70,000 crs. All companies included
in the index have a market capitalization in excess of R s 500 crs each and should have
traded for 85% of trading days at an impact cost of less than 1.5%.
The base period for the index is the close of prices on Nov 3, 1995, which makes
one year of completion of operation of NSEs capital market segment. The base value of
the index has been set at 1000.
NSE MIDCAP INDEX
The NSE madcap index or the junior nifty comprises 50 stocks that represent 21
a board industry groups and will provide proper representation of the madcap segment of
the Indian capital market. All stocks in the index should have market capitalization of
greater than R s list of 200 cores and should have traded 85% of the trading days at an
impact cost of less 2.5%.
The base period for the index is Nov4, 1996, which signifies two years for
completion of operations of the capital market segment of the operations. The base value
of the Index has been set at 1000.
Average daily turnover of the present scenario 258212(laces) and number of
averages daily trades 2160(laces) At present, there are 24 stocks exchanges recognized
under the securities contracts (regulations) Act, 1956. They are
Table No: 2.1
Name of The Stock Exchanges
NAMEOF THE STOCK EXCHANGE
YEARS
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1875
1957
1957
1957
1957
1958
1963
1943
1978
1982
1982
1983
1984
1984
1985
1986
1989
1989
1990
1991
1991
1991
1991
1999
COMPANY PROFILE
THE INDIA INFOLINE LIMITED
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Origin
India Infoline Ltd., was founded in 1995 by a group of professional with
impeccable educational qualifications and professional credentials. Its institutional
investors include Intel Capital (world's) leading technology company, CDC (promoted by
UK government), ICICI, TDA and Reeshanar.
India Infoline group offers the entire gamut of investment products including
stock broking, Commodities broking, Mutual Funds, Fixed Deposits, GOI Relief bonds,
Post office savings and life Insurance. India Infoline is the leading corporate agent of
ICICI Prudential Life Insurance Co. Ltd., which is India' No. 1 Private sector life
insurance company.
www.indiainfoline.com has been the only India Website to have been listed by
none other than Forbes in it's 'Best of the Web' survey of global website, not just once but
three times in a row and counting... A must read for investors in south Asia is how they
choose to describe India Infoline. It has been rated as No.l the category of Business News
in Asia by Alexia rating.
Stock and Commodities broking is offered under the trade name 5paisa. India
Infoline Commodities Pvt Ltd., a wholly owned subsidiary of India Infoline Ltd., holds
membership of MCX and NCDEX
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researched securities
VISION STATEMENT OF THE COMPANY
Our
vision is to be the most respected company in the financial services space In India.
Products: the India Infoline Pvt ltd offers the following products
A. E-broking.
B. Distribution
C. Insurance
D. PMS
E. Mortgages
A. E-Broking
It refers to Electronic Broking of Equities, Derivatives and Commodities
under
the
Equities
2.
Derivatives
3.
Commodities
B. Distribution
1.
Mutual funds
2.
3.
Fixed deposits
C. Insurance
1.
2.
General Insurance.
3.
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The corporate structure has evolved to comply with oddities of the regulatory
framework but still beautifully help attain synergy and allow flexibility to adapt to
dynamics of different businesses.
The parent company, India Infoline Ltd owns and managers the web properties
www.Indiainfoline.com and www.5paisa.com. It also undertakes research Customized
and off-the-shelf.
Indian Infoline Securities Pvt. Ltd. is a member of BSE, NSE and DP with
NSDL. Its business encompasses securities broking Portfolio Management services.
India Infoline.com Distribution Co. Ltd., Mobilizes Mutual Funds and other
personal investment products such as bonds, fixed deposits, etc.
India Infoline Insurance Services Ltd. Is the corporate agent of ICICI Prudential
Life Insurance, engaged in selling Life Insurance, General Insurance and Health
Insurance products.
India Infoline Commodities Pvt. Ltd. is a registered commodities broker MCX and
offers futures trading in commodities.
India Infoline Investment Services Pvt Ltd., is proving margin funding and NBFC
services to the customers of India Infoline Ltd.,
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Seshadri Bharathan-
S Sriram-
Toral Munshi-
Anil Mascarenhas-
Chief Editor
Pinkesh Soni
Financial controller
Harshad Apte
Human Resources
I.
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Personnel assigned to various tasks are suitably qualified with formal job
training, education, and / or experience.
II.
Work Environment
It is determined and managed the work environment need to achieve conformity
to product requirements.
To become one of the best forging company in south India with press
technology
Core values
Quality
Service at any cost
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category four identified levels are present. They are Manger, Asst. Manager, officer &
Assistant. Minimum competence details are given in the chart.
In the technical category C.E.O. is Chief lead a technical and a business
qualification. In the top-management category G. Manager, Dy. Gen. Manager, and Asst.
Gen. Manager levels are there, these report to C.E.O. In the middle management category
the levels are Manager, Asst. Manager, Sales manager , team manager, relationship
managers, dealers are in the Junior Management category.
The work force of consists of operators (experienced and skilled), apprentice, and
helper. The details are given in organization chart.
TRADING IN DERIVATIVES
Indian securities market has indeed waited for too long for derivatives trading to
emerge. Mutual fund, FIIs and other inventors who are deprived of hedging opportunities
will now have a derivatives market to bank on. First to emerge are the globally popular
variety index futures.
While derivatives markets flourished in the developed world Indian markets remain
deprived of financial derivatives to the beginning of this millennium. While the rest of
the world progressed by leaps and bounds on the derivatives front, Indian market lagged
behind. Having emerging in the market of the developed nations in the 1970s, derivatives
markets grew from strength to strength. The trading volumes nearly doubled in every
Three years marking it a trillion-dollar business. They became so ubiquitous that, now,
one cannot think of the existence of financial markets without derivatives. Two broad
approaches of SEBI is integrate the securities market at the national level, And also to
diversify the trading products, so that more number of traders including Banks, financial
institutions, insurance companies, mutual fund, primary dealers etc. Choose to transact
through the ex change. In this context the introduction of derivatives trading through
Indian stock exchange permitted by SEBI IN 2000 AD is a real landmark.
SEBI first appointed the L.C Gupta Committee in 1998 to recommend the regulatory
Frame work for derivatives trading and to recommend suggestive bye-laws for regulation
And control of trading and settlement of derivatives contracts. The broad of SEBI in its
Meeting held on May 11,1998 accepted the recommendations of the Dr L.C Gupta
Committee and approved the phased introduction of derivatives trading in India
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beginning with Stock Index Futures. The Board also approved the Suggestive Byelaws recommended by the committee for regulation and control of trading and
settlement of Derivatives Contracts.
SEBI subsequently appointed the J. R. Varna Committee to recommend Risk
containment Measures in the Indian stock index Futures Market. The report was
submitted in the same year (1998) in the month of November by the said committee.
However the Securities Contracts (REGULATION) Act, 1956 (SCRA0 need
amendment to include derivatives in the definition of securities to enable SEBI to
introduce trading in derivatives. The government in the year 1999 carried out the
necessary amendment. The securities laws (amendment) bill 1999 was introduced to
bring about the much-needed changes. In December 1999 the new framework has been
approved. Derivatives have been accorded the statues of securities. The ban imposed on
trading in derivatives way back in 1969 under a notification issued by the central
government has been revoked. Therefore SEBI formulated the necessary regulation/byelaws and intimated the stock exchange in year 2000, while derivative trading started in
India at NSE in the same Year and BSE started trading in the year 2001. In this module
we are covering the different types of derivative products and their features, which are
traded in the stock exchanges in India.
. In the equity markets both the national stock exchange of India Ltd. (NSE)
and The stock exchange, Mumbai (BSE) was quick to apply to SEBI for setting
Up There derivatives segment.
NSE as stated earlier commends derivatives trading in the same year i.e. 2000
AD, while BSE followed after a few months in 2001.
NSEs Futures & Options Segment was launched with Nifty futures as the first
Production.
BSEs Derivatives Segment, started with sensex futures as its first product.
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Stock options and stock futures were introduced in both the Exchange in the year
2001.
Thus started trading in Derivatives in India Stock Exchanges (both BSE & NSE)
Covering index options, Index Futures, and Stock Options & Futures in the wake of the
new millennium in a short span of three years the volume traded in the derivatives
Market has outstripped the turnover of the cash market.
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by leaps and bounds and the total amount issued globally is estimated to approach $80
trillion by the advent of the new millennium. Derivatives position has growth at
compounding rate 20% since 1990. In Indian through derivatives were introduced very
recently in2001, the trading turnover has already surpassed that of the equity segment. In
NSE alone as per a report on ors website the total turnover of the derivates segment for
the month of May 2003 stood at Rs. 53424 crores. During the month of May 2003, the
percentage of derivatives segment as a percentage of the cash segment was 97.68%.
However in the earlier two month the turnover of Derivatives was higher than that of the
cash segment.
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contract introductions marked the first time future that contracts were written on
stock indexes.
The third major innovation of the 1980s was the introduction of exchange-traded
option contracts written on UNDERLYING other than individual common
stocks. The CBOE and AMEX listed interest rate options in October 1982 and the
Philadelphia Stock Exchange (PHILX) listed currency options in December 1982
as also options and gold futures.
In January 1983, the CME and year New York Futures Exchanges (NYFE) began
to list options directly on stock index futures, and, March 1983, the CBOE began
to list options on stock indexes.
These two decades if innovation has transformed the nature of derivatives
trading activates on exchanges. While derivatives exchange were originally
developed to help market participants manage the price risk of physical commodities,
todays trading activates is focused on hedging the financial risks associated with
unanticipated price movement in stock, bonds, and currencies.
CHAPTER-3
RESARESH METHODLGY
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OBJECTIVES
The objective of this analysis is to evaluate the profit/loss position of option
Holder/writer. This analysis is done based on the sample data. The sample is taken as
ICICI & NTPC scripts of JUNE 2006. The lot size of the scrip is 175&1625. The option
contract starting period is 01/06/09 and its maturity date is on 29/06/09. As the scripts of
ICICI BANK & NTPC Companies are volatile, they are chosen as the sample for
analysis. The data is collected from various news papers, like Economic Times, Business
standard and Business Line off course from the Hyderabad stock exchange.
METHODOLOGY
To achieve the object of studying the stock market data has been collected from
1. Primary
2. Secondary
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PRMARY
The primary data collected from the original trade in time to time process and the
data is taken from IIFL staff and from my project guide.
SECONDARY
The secondary information is mostly from websites, books, journals, etc.
CHAPTERISATION
The study has been presents in Five chapters as flows
Chapter 1:- Introduction, Which Deals With the Importance of Derivatives.
Chapter 2:- Profile of The Company, Which Deals with Industry Profile.
Chapter 3:- Provides Research Methodology, Which Deals With Objectives, Data
Collection and Limitations.
Chapter 4:- Deals with Data presentation, Interpretation and Analysis.
Chapter5:- Deals with Conclusions, Suggestions.
LIMITATIONS
The sample size chosen as ICICIBANK & NTPC Companies scrips of the month
of July.
The study is confined to June month only.
The data gathered is completely restricted to the ICICIBANK & NTPC
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CHAPTER-4
ANALYSIS
INTERDUCTION TO ANALYSIS
The following table explained the amount transaction between the option
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writer and option holder. The table has various columns, which explain various factors
involved in derivatives trading.
Date - the day on which trading took place.
Closing premium premium for that day.
Open interest no of that did not get exercised.
Trading quantity no of options traded on bourses on that day.
Value - total value of the options on that particular day.
50
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Close pre
Open int
Trad
qul
Volume
Close
pre
Open
int
Trade Volume
qul
17K
104.67
63.50
64K
16K
01/06/09
80.00
2L
02/06/09
87.00
2L
05/06/09
106.75
2L
73K
444.3
87.60
73K
18K
06/06/09
128.50
2L
61K
369.4
93.65
74K
11K
07/06/09
82.75
3L
3L
1781.59
75.00
91K
48K
09/06/09
62.00
3L
3L
2177.89
53.00
1L
21L
12/06/09
62.00
2L
76K
465.9
43.10
2L
70K
13/06/09
68.00
2L
38K
233.95
29.65
2L
27K
14/06/09
43.00
2L
36K
223.85
34.20
2L
22K
15/06/09
57.25
2L
37K
227.24
21.20
2L
25K
16/06/09
33.45
2L
24K
145.64
27.20
2L
22K
19/06/09
39.50
2L
42K
254.74
18.80
2L
33K
20/06/09
30.60
2L
42K
253.58
10.75
2L
20K
21/06/09
19.70
2L
26K
156.58
3.15
2L
23K
22/06/09
6.20
2L
22K
134.92
3.50
2L
5K
23/06/09
7.60
2L
20K
132.96
1.05
2L
4K
27/06/09
3.60
2L
23K
130.95
0.85
2L
6K
28/06/09
10.80
2L
24K
131.92
3.30
2L
5K
29/06/09
9.25
2L
18K
128.65
0.05
2L
8K
66.35
The above call options details have revalues that, the premium/price of the
call has shown a decreasing nature as the time to expiate in decrease as but at some
places there is rise the price due to increase in the index .
51
140.34
126.14
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CA NTPC (180)
Date
7/20/2012
CA NTPC (190)
Close
pre
Open
int
Trade
qul
Volume
Close
pre
Open
int
Trade
qul
Volume
01/06/09
5.85
4L
2L
237.86
3.1
12L
10L
1102.36
02/06/09
6.25
2.65
14L
3L
405.96
05/06/09
06/06/09
7.9
3L
3L
364.01
3.9
14L
11L
1362.69
07/06/09
8.95
3L
2L
217.18
4.2
13L
7L
864.36
09/06/09
9.9
3L
59K
70.05
5.05
12L
5L
545.8
12/06/09
12.25
2L
1L
138.01
7.25
11L
11L
1349.72
13/06/09
11.15
2L
2L
283.51
6.3
6L
3L
391.29
14/06/09
6.2
4L
1L
153.03
15/06/09
4.8
4L
72K
85.83
16/06/09
9.5
3L
2L
299.75
19/06/09
9.45
3L
62K
76.89
20/06/09
21/06/09
22/06/09
14
49K
10K
12.1
9.6
3L
3K
4.05
23/06/09
19.2
46K
23K
28.84
14.4
3L
3L
348.87
27/06/09
22.5
26K
10K
4.9
18.5
1L
13K
17.56
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PA ICICI (390)
Date
Close
pre
Open
int
Trade
qul
51K
8K
01/06/09
10.85
02/06/09
18.30
05/06/09
24.6
33K
33K
06/06/09
37
27K
07/06/09
15
09/06/09
PA ICICI (400)
Volume
Close
pre
51.36
Open
int
Trade
qul
Volume
34
204.5
19K
120.12
61K
63K
387.68
11.8
29K
69K
419.57
19.5
18K
19K
120.85
12/06/09
14.2
94K
50K
309.53
13/06/09
12.9
90K
29K
176.15
14/06/09
15/06/09
14.4
84K
21K
16/06/09
19/06/09
20/06/09
19.2
68K
29K
176.86
21/06/09
11.05
53K
26K
160.71
22/06/09
23.75
1K
700
437
23/06/09
8.2
52K
6K
34.22
27/06/09
10.75
50K
4K
25.56
128.89
_
_
PA NTPC (160)
PA NTPC (170)
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Date
Page 54
Close
pre
Open
int
01/06/09
1.5
2L
02/06/09
1.30
Trade
qul
7/20/2012
Volume
Close
pre
Open
int
137.77
4.4
2L
2L
208.76
2.4
3L
2L
217.29
07/06/09
1.55
4L
2L
231.12
09/06/09
1.35
4L
72K
83.19
12/06/09
1.05
5L
1L
158.64
13/06/09
0.85
5L
1L
139.4
14/06/09
0.65
5L
2L
255.86
0.2
5L
1L
153.56
22/06/09
0.1
5L
3K
3.74
23/06/09
0.05
5L
3K
3.74
1L
Trade
qul
Volume
3.60
05/06/09
06/06/09
0.95
3L
55K
61.29
15/06/09
16/06/09
19/06/09
20/06/09
21/06/09
FUTURES OF JUNE09
Table No: 4.5 FUTURES JUNE, 2009 ON ICICI BANK
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OPEN
CLOSE
OPEN INT
TURN IN L
NO OF CON
01/06/09
454.70
465.90
108L
17L
26812
02/06/09
468.15
470.75
105L
05/06/09
486.50
497.75
114L
29L
40189
06/06/09
498.80
522.40
123L
24L
63821
07/06/09
525.20
468.60
110L
8771
09/06/09
459.95
454.90
110L
68L
63014
12/06/09
444.90
436.10
110L
46L
49409
13/06/09
435.00
423.00
114L
24L
49583
14/06/09
430.00
441.15
115L
13L
37757
15/06/09
428.90
408.20
122L
23L
50809
16/06/09
412.10
424.00
123L
17L
27879
19/06/09
421.35
413.45
120L
9L
20/06/09
405.00
396.90
116L
20L
43269
21/06/09
374.70
368.40
104L
22L
76052
22/06/09
375.00
378.35
95L
20L
55638
23/06/09
372.00
363.95
85L
20L
67488
27/06/09
368.40
380.45
57L
23L
75488
28/06/09
382.00
407.50
33L
24L
55846
29/06/09
410.00
417.85
24L
20L
44256
26831
28748
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DATE
OPEN
CLOSE
OPEN INT
TURN IN L
NO OF CON
01/06/09
180.90
182.20
315L
13646.44
3141
02/06/09
182.80
183.95
320L
25144.70
05/06/09
184.95
180.80
312L
19420.49
733
06/06/09
180.00
176.40
320L
26255.30
2005
07/06/09
177.10
170.00
296L
31257.67
2098
09/06/09
167.45
175.20
324L
32884.12
1345
12/06/09
175.05
168.00
286L
30265.57
2903
13/06/09
164.00
164.75
289L
29679.20
1365
14/06/09
167.40
166.05
295L
25088.80
1065
15/06/09
162.50
162.05
294L
23749.49
719
16/06/09
162.20
176.15
291L
44308.00
4749
19/06/09
177.00
175.25
290L
16720.10
20/06/09
172.25
182.20
318L
60257.27
1922
21/06/09
178.80
176.65
274L
64879.22
1313
22/06/09
178.00
175.30
253L
28409.57
895
23/06/09
174.05
174.30
221L
31261.29
4003
27/06/09
175.50
187.70
183L
48546.79
620
28/06/09
188.00
189.15
148L
32078.49
29/06/09
189.75
190.15
119L
41181.56
2696
513
729
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SPOT PRICE
01/06/09
465.90
02/06/09
470.75
05/06/09
497.75
06/06/09
522.40
07/06/09
468.60
09/06/09
454.90
12/06/09
436.10
13/06/09
423.00
14/06/09
441.15
15/06/09
408.20
16/06/09
424.00
19/06/09
413.45
20/06/09
396.90
21/06/09
368.40
22/06/09
378.35
23/06/09
27/06/09
28/06/09
29/06/09
363.95
380.45
408.50
410.00
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Table No: 4.8 - Effect of an increase in each variable on the value of the option.
Variable
Put premium
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Increase
Decrease
Decrease
Increase
Volatility ()
Increase
Increase
Time to
expiration (t)
Increase
Increase
Increase
Decrease
Dividend (D)
Decrease
Increase
In the nutshell, we can formulate the basic rules for options pricing as follows:
For calls
Lower the strike (exercise) price, the more valuable the call.
Different in call prices cannot exceed difference in the exercise price.
A call must be worth at least the stock price less the present value of the exercise
price.
More the time till expiration, greater the call price.
More the volatility, higher the call option premium.
Higher the interest rates, more the call value.
For puts
Higher the exercise price, more valuable the put.
The price difference between two puts cannot exceed the different in exercise
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prices.
Before expiration, a put must be worth at least the difference between the
exercise
price and the stock price.
Longer the time to expiration, the more voluble the put.
More the volatility, higher the put premium.
Higher the interest rate, lower the put value.
2. STRIKE
PRI CE
3. SPOT
PRICE
4.
PREMIUM
5. STRICK
PRICE
+PREMIUM
6. SPOT
5
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15/06/09
400
396.40
12.25
412.25
-15.85
15/06/09
420
396.40
6.00
426.00
-30
2. STRIKE
PRI CE
3. SPOT
PRICE
4.
PREMIUM
6. SPOT
5
23.7
5. STRICK
PRICE
+PREMIUM
423.7
23/06/09
400
394.40
23/06/09
420
394.40
12.00
432.00
-39.6
-29.3
2. STRIKE
PRI CE
3. SPOT
PRICE
4.
PREMIUM
15/06/09
400
396.40
14.4
5. STRICK 6. SPOT
PRICE
5
-PREMIUM
385.6
10.8
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420
396.40
7/20/2012
420
23.6
2. STRIKE
PRI CE
3. SPOT
PRICE
4.
PREMIUM
29/06/09
400
394.40
10.85
29/06/09
420
394.40
5. STRICK 6. SPOT
PRICE
5
-PREMIUM
389.15
5.25
420.00
-26.6
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DATE
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SPOT PRICE
01/06/09
182.20
02/06/09
183.95
05/06/09
180.80
06/06/09
176.40
07/06/09
170.00
09/06/09
175.20
12/06/09
168.00
13/06/09
164.75
14/06/09
166.05
15/06/09
162.05
16/06/09
176.15
19/06/09
175.25
20/06/09
182.20
21/06/09
176.65
22/06/09
175.30
23/06/09
27/06/09
28/06/09
29/06/09
174.30
187.70
189.15
190.15
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2. STRIKE
PRI CE
3. SPOT
PRICE
4.
PREMIUM
6. SPOT
5
11.15
5. STRICK
PRICE
+PREMIUM
121.15
11/06/09
110
121.10
11/06/09
115
121.10
6.3
121.3
-0.2
11/06/09
120
121.10
2.85
122.85
-1.75
-0.05
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1. DATE
2. STRIKE
PRI CE
3. SPOT
PRICE
4.
PREMIUM
23/06/09
110
129.45
23/06/09
115
23/06/09
120
7/20/2012
6. SPOT
5
5.85
5. STRICK
PRICE
+PREMIUM
115.85
129.45
3.1
118.1
11.35
129.45
1.3
121.3
8.15
13.6
2. STRIKE
PRI CE
3. SPOT
PRICE
4.
PREMIUM
11/06/09
110
121.10
5. STRICK 6. SPOT
PRICE
5
-PREMIUM
110
11.1
11/06/09
115
121.10
0.85
114.15
6.95
11/06/09
120
121.10
2.6
117.4
3.5
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1. DATE
2. STRIKE
PRI CE
3. SPOT
PRICE
4.
PREMIUM
23/06/09
110
129.45
1.5
5. STRICK 6. SPOT
PRICE
5
-PREMIUM
108.5
20.95
23/06/09
115
129.45
4.4
110.6
18.85
23/06/09
120
129.45
120.00
9.45
CHAPTER-5
SUMMARY
Derivatives market is on innovation to cash market, approximately its daily turn
over reaches to equal stage of cash market. The average daily turn over of the
NSE derivative segment is.
Presently the available scrip sin futures and options segment are in cash market.
The profit/ loss of the investor depends on the market price of the under lying
asset. the investor may incur huge profit or he may incur huge loss.
But in derivative segment the investor enjoys huge profit with limited down side.
In cash market the investor as to pay the total money. But in derivatives the
investor as to pay premium or margins which are some percentage of total
money.
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CONCLUSION
at present scenario the derivatives market is increased to a grate 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).
Presently the available scraps in the futures and options segment are 55.
The derivative market is newly stated in India and its is not know by every one so
SEBI should take necessary actions to create awareness among investors.
In cash market the profit/loss of the investor may be unlimited, but in the
Derivative market.
The investor can enjoy unlimited profits and minimize the losses incurred.
In derivatives market the investors enjoys the privilege of paying less amount in
case of options.
Derivatives are mostly used for hedging purpose.
In derivatives market the profit/loss of the investors depends upon the market
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BIBLIOGRAPHY
BOOKS:
Futures and options
Future and options
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www.dervativesindia.com
www.peninsular.com
www.5paisa.com
www.sify.com
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