EXECUTIVE SUMMARY

The emergence of the market for derivatives products, most notably forwards, futures and
options, can be tracked back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices.

Derivatives are risk management instruments, which derive their value from an underlying
asset. The following are three broad categories of participants in the derivatives market Hedgers,
Speculators and Arbitragers. Prices in an organized derivatives market reflect the perception of
market participants about the future and lead the price of underlying to the perceived future
level.

In recent times, the Derivative markets have gained importance in terms of their vital role in the
economy. The increasing investments in stocks (domestic as well as overseas) have attracted my
interest in this area. Numerous studies on the effects of futures and options listing on the
underlying cash market volatility have been done in the developed markets. The derivative
market is newly started in India and it is not known by every investor, so SEBI has to take steps
to create awareness among the investors about the derivative segment.

In cash market, the profit/loss of the investor depends on the market price of the underlying
asset. The investor may incur huge profit or he may incur huge loss. But in derivatives segment
the investor enjoys huge profits with limited downside. Derivatives are mostly used for hedging
purpose. In order to increase the derivatives market in India, SEBI should revise some of their
regulations like contract size, participation of FII in the derivatives market. In a nutshell, the
study throws a light on the derivatives market

1
 Chapter-1
Introduction

2
1.1 Introduction

The emergence of the market for derivatives products, most notably forwards, futures and
options, can be tracked back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very nature,
the financial markets are marked by a very high degree of volatility. Through the use of derivative
products, it is possible to partially or fully transfer price risks by locking-in asset prices. As
instruments of risk management, these generally do not influence the fluctuations in the
underlying asset prices. However, by locking-in asset prices, derivative product minimizes the
impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse
investors.

Stock futures are derivative contracts that give you the power to buy or sell a set of
stocks at a fixed price by a certain date. Once you buy the contract, you are obligated to
uphold the terms of the agreement.

• It allows hedgers to shift risks to speculators.

• It gives traders an efficient idea of what the futures price of a stock or value of an index is
likely to be.

• Based on the current future price, it helps in determining the future demand and supply of
the shares.

• Since it is based on margin trading, it allows small speculators to participate and trade in
the futures market by paying a small margin instead of the entire value of physical
holdings.

1.2 Importance of Study

In recent times, the Derivative markets have gained importance in terms of their vital role in the
economy. The increasing investments in derivatives (domestic as well as overseas) have attracted
my interest in this area. Through the use of derivative products, it is possible to partially or fully
transfer price risks by locking-in asset prices. As the volume of trading is tremendously increasing
in derivatives market, this analysis will be of immense help to the investors.

3
1.3 Scope of study & Time Period

The study is limited to “Derivatives” with special reference to futures in the Indian context and
the Inter-Connected Stock Exchange has been taken as a representative sample for the study.

The study can’t be said as totally perfect. Any alteration may come. The study has only made a
humble attempt at evaluation derivatives market only in India context. The study is not based on
the international perspective of derivatives markets, which exists in NASDAQ, CBOT etc.

1.4 Objectives

• To analyse the operations of futures.

• To find the profit/loss position of futures buyer and seller
• To study about risk management with the help of derivatives.

1.5 Methodology & Sources of Data

Research Methodology is a systematic procedure of collecting information in order to analyse

and verify a phenomenon. The collection of information is done in two principle sources. They
are as follows

Secondary Data:
Various portals,

• www.nseindia.com
• Financial newspapers, Economics times.
• Karvyvalue.com

1.6 Limitations

The following are the limitation of this study.

 This study is only limited to futures in the Derivative market
 The scrip chosen for analysis is WIPRO, TCS, INFOSYS and the contract taken is May
2019 ending one –month contract.
 The data collected is completely restricted to WIPRO, TCS, and INFOSYS of May 2019;
hence this analysis cannot be taken universal.

4
Company Profile

A Profile of Indian Stock Market

Structure of Indian Securities Market

Primary Market

The primary market is where securities are created. It's in this market that firms sell (float) new
stocks and bonds to the public for the first time. For our purposes, you can think of the primary
market as the market where an initial public offering (IPO) takes place. Simply put, an IPO
occurs when a private company sells stocks to the public for the first time. The primary market
is also the market where governments or public sector institutions raise money through bond
offerings.

Secondary Market

Secondary market is an equity trading avenue in which already existing/pre- issued securities
are traded amongst investors. Secondary market could be either auction or dealer market.
While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of
the dealer market.

5
Functions of Stock Exchange

1. Providing a ready market

The organization of stock exchange provides a ready market to speculators and investors
in industrial enterprises. It thus, enables the public to buy and sell securities already in
issue.

2. Providing a quoting market prices

It makes possible the determination of supply and demand on price. The very sensitive
pricing mechanism and the constant quoting of market price allows investors to always
be aware of values. This enables the production of various indexes which indicate trends
etc.

3. Providing facilities for working

It provides opportunities to Jobbers and other members to perform their activities with
all their resources in the stock exchange.

4. Safeguarding activities for investors

The stock exchange renders safeguarding activities for investors which enables them to
make a fair judgment of a securities. Therefore, directors have to disclose all material
facts to their respective shareholders. Thus, innocent investors may be safeguard from
the clever brokers.

5. Operating a compensation fund

It also operate a compensation fund which is always available to investors suffering loss
due the speculating dealings in the stock exchange.

6. Creating the discipline

Its members controlled under rigid set of rules designed to protect the general public and
its members. Thus, this tendency creates the discipline among its members in social life
also.

7. Checking functions
New securities checked before being approved and admitted to listing. Thus, stock
exchange exercises rigid control over the activities of its members.

6
8. Adjustment of equilibrium
The investors in the stock exchange promote the adjustment of equilibrium of demand
and supply of a particular stock and thus prevent the tendency of fluctuation in the prices
of shares.

9. Maintenance of liquidity
The bank and insurance companies purchase large number of securities from the stock
exchange. These securities are marketable and can be turned into cash at any time.
Therefore banks prefer to keep securities instead of cash in their reserve. This it facilities
the banking system to maintain liquidity by procuring the marketable securities.

10. Promotion of the habit of saving

Stock exchange provide a place for saving to public. Thus, it creates the habit of thrift
and investment among the public. This habit leads to investment of funds incorporate or
government securities. The funds placed at the disposal of companies are used by them
for productive purposes.

11. Refining and advancing the industry

Stock exchange advances the trade, commerce and industry in the country. It provides
opportunity to capital to flow into the most productive channels. Thus, the flow of
capital from unproductive field to productive field helps to refine the large-scale
enterprises.

12. Promotion of capital formation

It plays an important part in capital formation in the country. Its publicity regarding
various industrial securities makes even disinterested people feel interested in
investment.

13. Increasing Govt. Funds

The govt. can undertake projects of national importance and social value by raising funds
through sale of its securities on stock exchange.

According to MARSHAL "Stock exchange are not merely the chief theatres of business
transaction, they are also barometers which indicate the general conditions of the
atmosphere of business."

7
 Role of Stock Exchanges

Stock exchanges have multiple roles in the economy. This may include the following:

Raising capital for businesses

A stock exchange provides companies with the facility to raise capital for expansion through
selling shares to the investing public.

Mobilizing savings for investment

When people draw their savings and invest in shares (through an IPO or the issuance of new
company shares of an already listed company), it usually leads to rational allocation of resources
because funds, which could have been consumed, or kept in idle deposits with banks, are
mobilized and redirected to help companies' management boards finance their organizations.
This may promote business activity with benefits for several economic sectors such as
agriculture, commerce and industry, resulting in stronger economic growth and higher
productivity levels of firms.

Facilitating company growth

Companies view acquisitions as an opportunity to expand product lines, increase distribution
channels, hedge against volatility, increase their market share, or acquire other necessary
business assets. A takeover bid or a merger agreement through the stock market is one of the
simplest and most common ways for a company to grow by acquisition or fusion.

Profit sharing
Both casual and professional stock investors, as large as institutional investors or as small as an
ordinary middle-class family, through dividends and stock price increases that may result in
capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses
may result in capital losses for shareholders.

Corporate governance
By having a wide and varied scope of owners, companies generally tend to improve management
standards and efficiency to satisfy the demands of these shareholders and the more stringent rules
for public corporations imposed by public stock exchanges and the government. Consequently, it
is alleged that public companies (companies that are owned by shareholders who are members of
the general public and trade shares on public exchanges) tend to have better management records
than privately held companies (those companies where shares are not publicly traded, often
owned by the company founders, their families and heirs, or otherwise by a small group of

8
investors). Despite this claim, some well documented cases are known where it is alleged that
there has been considerable slippage in corporate governance on the part of some public
companies. The dot-com bubble in the late 1990s, and the subprime mortgage crisis in 2007–08,
are classical examples of corporate mismanagement.

Creating investment opportunities for small investors

As opposed to other businesses that require huge capital outlay, investing in shares is open to
both the large and small stock investors because a person buys the number of shares they can
afford. Therefore, the Stock Exchange provides the opportunity for small investors to own shares
of the same companies as large investors. Government capital-raising for development
projects

Governments at various levels may decide to borrow money to finance infrastructure projects
such as sewage and water treatment works or housing estates by selling another category of
securities known as bonds. These bonds can be raised through the stock exchange whereby
members of the public buy them, thus loaning money to the government. The issuance of such
bonds can obviate, in the short term, direct taxation of citizens to finance development—though
by securing such bonds with the full faith and credit of the government instead of with collateral,
the government must eventually tax citizens or otherwise raise additional funds to make any
regular coupon payments and refund the principal when the bonds mature.

Barometer of the economy

At the stock exchange, share prices rise and fall depending, largely, on economic forces. Share
prices tend to rise or remain stable when companies and the economy in general show signs of
stability and growth. An economic recession, depression, or financial crisis could eventually lead
to a stock market crash. Therefore, the movement of share prices and in general of the stock
indexes can be an indicator of the general trend in the economy.

9
Main Stock exchanges in India

Bombay Stock Exchange

The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalal Street,
Mumbai (formerly Bombay), Maharashtra, India.

Established in 1875, the BSE is Asia’s first stock exchange, It claims to be the world's fastest
stock exchange, with a median trade speed of 6 microseconds, The BSE is the world's 11th
largest stock exchange with an overall market capitalization of $1.83 Trillion as of March, 2017.
More than 5500 companies are publicly listed on the BSE

National Stock Exchanges

The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India,
located in Mumbai. NSE was established in 1992 as the first demutualized electronic exchange in
the country. NSE was the first exchange in the country to provide a modern, fully automated
screen-based electronic trading system which offered easy trading facility to the investors spread
across the length and breadth of the country.

National Stock Exchange has a total market capitalization of more than US$1.41 trillion, making
it the world’s 12th-largest stock exchange as of March 2016. NSE's flagship index, the NIFTY
50, the 51 stock index (50 companies with 51 securities inclusive of DVR), is used extensively
by investors in India and around the world as a barometer of the Indian capital markets. However,
only about 4% of the Indian economy / GDP is derived from the stock exchanges in India.

10
Chapter-2

11
 Chapter-3
Derivatives

12
3.1 Derivatives

The emergence of the market for derivatives products, most notably forwards, futures and
options, can be tracked back to the willingness of risk-averse economic agents to guard
themselves against uncertainties arising out of fluctuations in asset prices. By their very nature,
the financial markets are marked by a very high degree of volatility. Through the use of
derivative products, it is possible to partially or fully transfer price risks by locking-in asset
prices. As instruments of risk management, these generally do not influence the fluctuations in
the underlying asset prices. However, by locking-in asset prices, derivative product minimizes
the impact of fluctuations in asset prices on the profitability and cash flow situation of risk
averse investors.

Derivatives are risk management instruments, which derive their value from an underlying
asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc... Banks,
Securities firms, companies and investors to hedge risks, to gain access to cheaper money and
to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.

DEFINITION
Derivative is a product whose value is derived from the value of an underlying asset in a contractual
manner. The underlying asset can be equity, forex, commodity or any other asset.

Securities Contracts (Regulation) Act, 1956 (SCR Act) defines “derivative” to secured or
unsecured, risk instrument or contract for differences or any other form of security. A contract
which derives its value from the prices, or index of prices, of underlying securities.

Emergence of Financial Derivative Products

Derivative products initially emerged as hedging devices against fluctuations in commodity

prices, and commodity-linked derivatives remained the sole form of such products 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 terms of variety of instruments available, their complexity and also
turnover. In the class of equity derivatives the world over, futures and options on stock indices
have gained more popularity than on individual stocks, especially among institutional investors,

13
who are major users of index-linked derivatives. Even small investors find these useful due to
high correlation of the popular indexes with various portfolios and ease of use. The lower costs
associated with index derivatives Vis –a– Vis derivative products based on individual securities
is another reason for their growing use.

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 introduced International Monetary Market (IMM),

which allowed trading in currency futures.

• In 1973, Chicago Board Options Exchange (CBOE) became the first marketplace for
trading listed options.

• In 1975, CBOT introduced Treasury bill futures contract. It was the first successful pure
interest rate futures.

• In 1977, CBOT introduced T‐ bond futures contract.

• In 1982, CME introduced Eurodollar futures contract.

• In 1982, Kansas City Board of Trade launched the first stock index futures.

14
 • In 1983, Chicago Board Options Exchange (CBOE) introduced option on stock indexes
with the S&P 100® (OEX) and S&P 500® (SPXSM) Indexes.

Factors influencing the growth of derivative market globally

Over the last four decades, derivatives market has seen a phenomenal growth. Many derivative
contracts were launched at exchanges across the world. Some of the factors driving the growth
of financial derivatives are:

• Increased fluctuations in underlying asset prices in financial markets.

• Integration of financial markets globally.

• Use of latest technology in communications has helped in reduction of transaction costs.

• Enhanced understanding of market participants on sophisticated risk management tools to

manage risk.

• Frequent innovations in derivatives market and newer applications of products

• Indian Derivatives Market

As the initial step towards introduction of derivatives trading in India, SEBI set up a 24–
member committee under the Chairmanship of Dr. L. C. Gupta on November 18, 1996 to
develop appropriate regulatory framework for derivatives trading in India. The committee
submitted its report on March 17, 1998 recommending that derivatives should be declared as

‘Securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern
trading of derivatives.

Subsequently, SEBI set up a group in June 1998 under the Chairmanship of Prof. J. R. Verma,
to recommend measures for risk containment in derivatives market in India. The committee
submitted its report in October 1998. It worked out the operational details of margining system,
methodology for charging initial margins, membership details and net‐ worth criterion, deposit
requirements and real time monitoring of positions requirements.

In 1999, The Securities Contract Regulation Act (SCRA) was amended to include “derivatives”
within the domain of ‘securities’ and regulatory framework was developed for governing

15
derivatives trading. In March 2000, government repealed a three‐ decade‐ old notification,
which prohibited forward trading in securities.
The exchange traded derivatives started in India in June 2000 with SEBI permitting BSE and
NSE to introduce equity derivative segment. To begin with, SEBI approved trading in index
futures contracts based on CNX Nifty and BSE Sensex, which commenced trading in June
2000. Later, trading in Index options commenced in June 2001 and trading in options on
individual stocks commenced in July 2001. Futures contracts on individual stocks started in
November 2001. MCX‐ SX (renamed as MSEI) started trading in all these products (Futures
and options on index SX40 and individual stocks) in February 2013.

PRODUCTS IN DERIVATIVE 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 Over‐ the‐ counter (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.

16
Swaps
A swap is an agreement made between two parties to exchange cash flows in the future
according to a prearranged formula. Swaps are, broadly speaking, 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/Traders:
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 trading
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.

Types of Derivatives Market:

In the modern world, there is a huge variety of derivative products available. They are either
traded on organised exchanges (called exchange traded derivatives) or agreed directly between
the contracting counterparties over the telephone or through electronic media (called Over‐ the

17
counter (OTC) derivatives). Few complex products are constructed on simple building blocks
like forwards, futures, options and swaps to cater to the specific requirements of customers.

Over‐ the‐ counter market is not a physical marketplace but a collection of broker‐ dealers
scattered across the country. Main idea of the market is more a way of doing business than a
place. Buying and selling of contracts is matched through negotiated bidding process over a
network of telephone or electronic media that link thousands of intermediaries. OTC derivative
markets have witnessed a substantial growth over the past few years, very much contributed by
the recent developments in information technology. The OTC derivative markets have banks,
financial institutions and sophisticated market participants like hedge funds, corporations and
high net‐ worth individuals.

OTC derivative market is less regulated market because these transactions occur in private
among qualified counterparties, who are supposed to be capable enough to take care of
themselves.

The OTC derivatives markets – transactions among the dealing counterparties, have following
features compared to exchange traded derivatives:

• Contracts are tailor made to fit in the specific requirements of dealing counterparties.

• The management of counter‐ party (credit) risk is decentralized and located within
individual institutions.

• There are no formal centralized limits on individual positions, leverage, or margining.

• There are no formal rules or mechanisms for risk management to ensure market stability
and integrity, and for safeguarding the collective interest of market participants.

• Transactions are private with little or no disclosure to the entire market.

On the contrary, exchange‐ traded contracts are standardized, traded on organized exchanges
with prices determined by the interaction of buyers and sellers through anonymous auction
platform. A clearing house/ clearing corporation, guarantees contract performance (settlement
of transactions).

18
3.2 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. The futures contracts are standardized and exchange traded.
To facilitate liquidity in the futures contracts, the exchange specifies certain standard features
of the contract. It is a standardized contract with standard underlying instrument, a 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.

The standardized items in a futures contract are:

• Quantity of the underlying
• Quality of the underlying
• The date and the month of delivery
• The units of price quotation and minimum price change
• Location of settlement


Futures contracts in physical commodities such as wheat, cotton, gold, silver, cattle,
etc. have existed for a long time. Futures in financial assets, currencies, and interest-
bearing instruments like treasury bills and bonds and other innovations like futures
contracts in stock indexes are relatively new developments.

The futures market described as continuous auction markets and exchanges providing
the latest information about supply and demand with respect to individual
commodities, financial instruments and currencies, etc.

Futures exchanges are where buyers and sellers of an expanding list of commodities;
financial instruments and currencies come together to trade. Trading has also been
initiated in options on futures contracts. Thus, option buyers participate in futures
markets with different risk. The option buyer knows the exact risk, which is unknown
to the futures trader.

19
Future Contract
Suppose you decide to buy a certain quantity of goods. As the buyer, you enter into an
agreement with the company to receive a specific quantity of goods at a certain price
every month for the next year. This contract made with the company is similar to a
futures contract, in that you have agreed to receive a product at a future date, with the
price and terms for delivery already set. You have secured your price for now and the
next year - even if the price of goods rises during that time. By entering into this
agreement with the company, you have reduced your risk of higher prices.


So, a futures contract is an agreement between two parties: a short position - the party
who agrees to deliver a commodity - and a long position - the party who agrees to
receive a commodity. In every futures contract, everything is specified: the quantity
and quality of the commodity, the specific price per unit, and the date and method of
delivery. The “price” of a futures contract is represented by the agreed-upon price of
the underlying commodity or financial instrument that will be delivered in the future.

Features of Futures Contracts:

The principal features of the contract are as follows.

Organized Exchanges: Unlike forward contracts which are traded in an over–the
counter market, futures are traded on organized exchanges with a designated physical
location where trading takes place. This provides a ready, liquid market which futures
can be bought and sold at any time like in a stock market.

Standardization: In the case of forward contracts the amount of commodities to be
delivered and the maturity date are negotiated between the buyer and seller and can be
tailor made to buyer’s requirement. In a futures contract both these are standardized by
the exchange on which the contract is traded.

Clearing House: The exchange acts a clearinghouse to all contracts struck on the
trading floor. For instance, a contract is struck between capital A and B. upon entering
into the records of the exchange, this is immediately replaced by two contracts, one
between A and the clearing house and another between B and the clearing house. In
other words, the exchange interposes itself in every contract and deal, where it is a
buyer to seller, and seller to buyer. The advantage of this is that A and B do not have
to undertake any exercise to investigate each other’s credit worthiness. It also
guarantees financial integrity of the market. The enforce the delivery for the delivery

20
 of contracts held for until maturity and protects itself from default risk by imposing
margin requirements on traders and enforcing this through a system called marking –
to – market


Actual delivery is rare: In most of the forward contracts, the commodity is delivered
byte seller and is accepted by the buyer. Forward contracts are entered into for acquiring
or disposing of a commodity in the future for a gain at a price known today. In contrast
to this, in most futures markets, actual delivery takes place in less than one percent of
the contracts traded. Futures are used as a device to hedge against price risk and as a
way of betting against price movements rather than a means of physical acquisition of
the underlying asset. To achieve, this most of the contracts entered into are nullified by
the matching contract in the opposite direction before maturity of the

First.

Margins: In order to avoid unhealthy competition among clearing members in reducing

margins to attract customers, a mandatory minimum margin are obtained by the
members from the customers. Such a stop insures the market against serious liquidity
crises arising out of possible defaults by the clearing members. The members collect
margins from their clients has may be stipulated by the stock exchanges from time to
time and pass the margins to the clearing house on the net basis i.e. at a stipulated

Percentage of the net purchase and sale position.

Future 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 months expiry cycles which expire on the last
Thursday of the month. Thus, a January expiration contract expires on the last Thursday of
January and a February expiration contract ceases trading 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.

21
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 cease to exist.
Contract size: The amount of asset that has to be delivered under one contract. Also called as
lot size.

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.

MARGINS:
Margins are the deposits which reduce counter party risk, arise in a futures contract.
These margins are collected in order to eliminate the counter party risk. There are three
types of margins:

Initial Margins:
Whenever a futures contract is signed, both buyer and seller are required to post initial margins.
Both buyer and seller are required to make security deposits that are intended to guarantee that
they will in fact be able to fulfil their obligation. These deposits are initial margins.

Marking to market margins:

The process of adjusting the equity in an investor’s account in order to reflect the change in the
settlement price of futures contract is known as MTM margin.

Maintenance margin:
The investor must keep the futures account equity equal to or greater than certain percentage
of the amount deposited as initial margin. If the equity goes less than that percentage of
initial margin, then the investor receives a call for an additional deposit of cash known as
maintenance margin to bring the equity up to the initial margin.

22
TYPES OF FUTURES
On the basis of the underlying asset they derive, the futures are divided into two types:
• Stock Futures

• Index Futures

PARTIES IN THE FUTURES CONTRACT

There are two parties in a futures contract, the buyers and the seller. The buyer of the futures
contract is one who is LONG on the futures contract and the seller of the futures contract is who
is SHORT on the futures contract.

The pay-off for the buyers and the seller of the futures of the contracts are as follows:

PAY-OFF FOR A BUYER OF FUTURES

P
PROFIT

E2

LOSS F E1

F = FUTURES PRICE
E1, E2 = SATTLEMENT PRICE

CASE 1: - The buyers bought the futures contract at (F); if the futures
Price Goes to E1 then the buyer gets the profit of (FP).
CASE 2: - The buyers gets loss when the futures price less then (F);
if The Futures price goes to E2 then the buyer the loss of (FL).

23
PAY-OFF FOR A SELLER OF FUTURES

PROFIT
E2
E1 F

LOSS

F = FUTURES PRICE
E1, E2 = SATTLEMENT PRICE

CASE 1: - The seller sold the future contract at (F); if the future goes to

E1 Then the seller gets the profit of (FP).

CASE 2: - The seller gets loss when the future price goes greater than (F);
If the future price goes to E2 then the seller gets the loss of (FL).

HOW THE FUTURE MARKET WORKS

The futures market is a centralized marketplace for buyers and sellers from around
the world who meet and enter futures contracts. Pricing can be based on an open outcry
system, or bids and offers can be matched electronically. The futures contract will state
the price that will be paid and the date of delivery. Almost all futures contracts end without
the actual physical delivery of the commodity.

24
PRICING OF FUTURES
The Fair value of the futures contract is derived from a model knows as the cost of carry model.
This model gives the fair value of the contract.

Cost of Carry:

F = S (1+r-q) t

Where,
F- Futures price
S- Spot price of the underlying
r- Cost of financing q-
Expected Dividend yield t-
Holding Period.

Suppose, we buy an index in cash market at 8000 level i.e. purchase of all the stocks
constituting the index in the same proportion as they are in the index, cost of financing is
12% and the return on index is 4% per annum. Given these statistics, fair price of index three
months down the line should be:

=Spot price (1+cost of financing-holding period return) ^ (time to expiration/365)

=8000 (1+0.12-0.04) ^ (90/365)

=8,153.26
If index future is trading above 8,153, we can buy index stocks in cash market and
simultaneously sell index futures to lock the gains equivalent to the difference between
future price and future fair price (the cost of transaction, taxes, margins etc. are not
considered while calculating the future fair value).

The presence of arbitrageurs would force the price to equal the fair value of the asset. If the futures
price is less than the fair value, one can profit by holding a long position in the futures and a short
position in the underlying. Alternatively, if the futures price is more than the fair value, there is a
scope to make a profit by holding a short position in the futures and a long position in the
underlying. The increase in demand/ supply of the futures (and spot) contracts will force the futures
price to equal the fair value of the asset.

25
RELATIONSHIP OF FUTURE PRICE WITH SPOT PRICE IF FUTURE
PRICE HIGHER THAN THE CASH PRICE
Here futures price exceeds the cash price which indicates that the cost of carry is
negative and the market under such circumstances is termed as a backwardation market or
inverted market.

EXAMPLE
Suppose the RELIANCE share is trading at Rs.400 in the spot market. While RELIANCE
FUTURES are trading at Rs. 406.Thus in this circumstance the normal strategy followed by
investors is buy the RELIANCE in the spot market and sell in the futures. On expiry, assuming
RELIANCE closes at Rs 450, you make Rs.50 by selling the RELIANCE stock and lose Rs.44
by buying back the futures, which is Rs 6 overall profit in a month. Thus, Futures prices are
generally higher than the cash prices, in an overbought market.

IF CASH PRICE HIGHER THAN THE FUTURE PRICE

Here cash price exceeds the futures price which indicates that the cost of carry is positive and
this market is termed as oversold market. This may be due to the fact that the market is cash
settled and not delivery settled, so the futures price is more a reflection of sentiment, rather
than that of the financing cost.

EXAMPLE
Now let us assume that the RELIANCE share is trading at Rs.406 in the spot market. While
RELIANCE FUTURES is trading at Rs. 400.Thus in this circumstance the normal strategy
followed by investors is buy the RELIANCE FUTURES and sell the RELIANCE in the spot
market. So at expiry if Reliance closes at Rs 450, the investor will buy back the stock at a
loss of Rs 44 and make Rs 50 on the settlement of the futures position. This is applied when
the cost of carry is high.

RISK MANAGING USING FUTURES-HEDGING:

Uses of Index futures

Equity derivatives instruments facilitate trading of a component of price risk, which is inherent
to investment in securities. Price risk is nothing but change in the price movement of asset,
held by a market participant, in an unfavourable direction.

26
It is possible to manage only the systematic/market risk component of the price risk using
index-based derivative products. Prior to looking at market risk management with the help of
index futures.

This risk broadly divided into two components ‐ specific risk or unsystematic risk and market
risk or systematic risk.

Unsystematic Risk
Specific risk or unsystematic risk is the component of price risk that is unique to events of the
company and/or industry. This risk is inseparable from investing in the securities.

This risk could be reduced to a certain extent by diversifying the portfolio.

Systematic Risk
An investor can diversify his portfolio and eliminate major part of price risk i.e. the
diversifiabl e/unsystematic risk but what is left is the non‐ diversifiable portion or the market
risk‐ called systematic risk. Variability in a security’s total returns that are directly
associated with overall movements in the general market or economy is called systematic
risk. Thus, every portf olio is exposed to market risk. This risk is separable from investment
and tradable in the market with the help of index based derivatives. When this particular risk
is hedged perfectly with the he LP of index‐ based derivatives, only specific risk of the
portfolio remains.

Now, let us get to management of systematic risk. Assume you are having a portfolio worth
Rs.9, 00,000 in cash market. You see the market may be volatile due to some reasons. You
are not comfortable with the market movement in the short run. At this point of time, you
have two options:

(1) sell the entire portfolio in the cash market and buy it again after the prices falls and
(2) As he is already protected against unsystematic risk as a result of diversification,
now he can use index futures to protect the value of his portfolio from the expected
fall in the market.

As an investor, you are comfortable with the second option. If the prices fall, you make loss
in cash market but make profits in futures market. If prices rise, you make profits in cash
market but losses in futures market.

27
Now, the question arises how many contracts you have to sell to make a perfect hedge?
Perfect hedge means if you make Rs. 90,000 loss in cash market then you should make Rs.
90,000 profit in futures market. To find the number of contracts for perfect hedge ‘hedge ratio’
is used. Hedge ratio is calculated as:

Number of contracts for perfect hedge = Vp * βp / Vi

Vp – Value of the portfolio βp – Beta of the portfolio

Vi – Value of index futures contract

Let us assume, Beta of your portfolio is 1.3 and benchmark index level is 8000, then hedge
ratio will be (9, 00, 000*1.3/8000) = 146.25 indices. Assume one Futures contract has a lot
size of 75. You will have to hedge using 146.25/ 75 = 1.95 contracts. Since you cannot hedge
1.95 contracts, you will have to hedge by 2 futures contracts. You have to pay the broker
initial margin in order to take a position in futures.

Important terms in hedging

Long hedge: Long hedge is the transaction when we hedge our position in cash market by
going long in futures market. For example, we expect to receive some funds in future and
want to invest the same amount in the securities market. We have not yet decided the specific
company/companies, where investment is to be made. We expect the market to go up in near
future and bear a risk of acquiring the securities at a higher price. We can hedge by going
long index futures today. On receipt of money, we may invest in the cash market and
simultaneously unwind corresponding index futures positions. Any loss due to acquisition of
securities at higher price, resulting from the upward movement in the market over
intermediate period, would be partially or fully compensated by the profit made on our
position in index futures.

Short hedge: Short Hedge is a transaction when the hedge is accomplished by going short in
futures market. For instance, assume, we have a portfolio and want to liquidate in near future
but we expect the prices to go down in near future. This may go against our plan and may result
in reduction in the portfolio value. To protect our portfolio’s value, today, we can short index
futures of equivalent amount. The amount of loss made in cash market will be partly or fully
compensated by the profits on our futures positions.

28
Cross hedge: When futures contract on an asset is not available, market participants look
forward to an asset that is closely associated with their underlying and trades in the futures
market of that closely associated asset, for hedging purpose. They may trade in futures in this
asset to protect the value of their asset in cash market. This is called cross hedge.

For instance, if futures contracts on jet fuel are not available in the international markets then
hedgers may use contracts available on other energy products like crude oil, heating oil or
gasoline due to their close association with jet fuel for hedging purpose. This is an example of
cross hedge.

Arbitrage opportunities in futures market

Arbitrage is simultaneous purchase and sale of an asset or replicating asset in the market in an
attempt to profit from discrepancies in their prices. Arbitrage involves activity on one or
several instruments/assets in one or different markets, simultaneously. Important point to
understand is that in an efficient market, arbitrage opportunities may exist only for shorter
period or none at all. The moment an arbitrager spots an arbitrage opportunity, he would
initiate the arbitrage to eliminate the arbitrage opportunity.

Arbitrage occupies a prominent position in the futures world as a mechanism that keeps the
prices of futures contracts aligned properly with prices of the underlying assets. The
objective of arbitragers is to make profits without taking risk, but the complexity of activity
is such that it may result in losses as well. Well‐ informed and experienced professional
traders, equipped with powerful calculating and data processing tools, normally undertake
arbitrage.

Arbitrage in the futures market can typically be of three types:

Cash and carry arbitrage: Cash and carry arbitrage refers to a long position in the cash
or underlying market and a short position in futures market.
Reverse cash and carry arbitrage: Reverse cash and carry arbitrage refers to long position
in futures market and short position in the underlying or cash market.

Inter‐ Exchange arbitrage: This arbitrage entails two positions on the same contract in two
different markets/ exchanges

29
30
 Chapter-4

Data Analysis &

Interpretation of Futures
in I.T Sectors

31
Data Analysis & Interpretation of Futures in I.T Sectors

ANALYSIS OF WIPRO:
The objective of this analysis is to evaluate the profit/loss position of futures. This analysis is
based on sample data taken of WIPRO scrip. This analysis considered the May 2019 contract
of WIPRO. The lot size of WIPRO is 3200, the time period in which this analysis done is
from 02-05-2019 to 31-05-2019.

Table-1
Date Underlying Future Open Int No. of
Value price contracts
02-May-19 293.65 294.45 29190400 1962
03-May-19 290.9 293.15 29091200 3304
06-May-19 290.85 292.9 29056000 2211
07-May-19 293.85 294.05 28937600 1680
08-May-19 290.85 293 28704000 2595
09-May-19 291.05 292.2 28857600 2170
10-May-19 290.35 290.95 28995200 1978
13-May-19 289.1 289.05 28848000 2779
14-May-19 284.6 284.75 30662400 5118
15-May-19 283 283.9 30924800 2639
16-May-19 285.35 286 29772800 3025
17-May-19 286.4 286.4 30444800 4289
20-May-19 290.25 290.15 31670400 3131
21-May-19 286.9 286.5 32451200 2120
22-May-19 283.1 283.6 34556800 3273
23-May-19 282.2 282.65 35606400 2500
24-May-19 282.9 282.6 35414400 3190
27-May-19 280.5 280.1 36217600 4370
28-May-19 282.95 283.9 18684800 12978
29-May-19 285.7 285.65 10275200 6302
30-May-19 288 288.4 8358400 3518
31-May-19 286.4 282.45 38768000 3416

32
 Graph-1:

GRAPH SHOWING THE PRICE MOVEMENT OF WIPRO

FUTURES
Future price
300

295

290

285

280

275

270

OBSERVATIONS AND FINDINGS:

• If a person buys 1 lot i.e. 3200 futures of WIPRO on 2nd May, 2019 and sells on 31st
May, 2019 then he will get a loss of Rs288.4 –Rs294.45= Rest -6.05 per share. So, he
will get a loss of Rs -19,360 i.e.,-6.05*3200.

• The trading week showed a high and low strike prices or exercising prices for the WIPRO
futures.

• There always exist an impact of price movements on open interest and contracts traded.
The futures market is also influenced by cash market, NIFTY index future, and news
related to the underlying assed or sector (industry), FII’S involvement, national and
international affairs etc.

• The closing price of WIPRO at the end of the contract period is Rs 288.4 and this is
considered as settlement price.

33
Table showing Mark to Market Profit & loss of WIPRO futures:
Table-2

Date M to M Settlement price

02-May-19 0 294.45
03-May-19 -4160 293.15
06-May-19 -800 292.9
07-May-19 3680 294.05
08-May-19 -3360 293
09-May-19 -2560 292.2
10-May-19 -4000 290.95
13-May-19 -6080 289.05
14-May-19 -13760 284.75
15-May-19 -2720 283.9
16-May-19 6720 286
17-May-19 1280 286.4
20-May-19 12000 290.15
21-May-19 -11680 286.5
22-May-19 -9280 283.6
23-May-19 -3040 282.65
24-May-19 -160 282.6
27-May-19 -8000 280.1
28-May-19 12160 283.9
29-May-19 5600 285.65
30-May-19 8800 288.4
31-May-19 -19040 282.45

34
Graph-2

GRAPH SHOWING MARK TO MARKET PROFIT & LOSS

FOR WIPRO FUTURE
M to M
15000

10000

5000

-5000

-10000

-15000

-20000

-25000

35
 Graph-3
GRAPH SHOWING THE PRICE MOVEMENT OF SPOT AND
FUTURES OF WIPRO
Chart Title
300
295

290
285
280

275
270

Underlying Value Future price

OBSERVATIONS AND FINDINGS

The future price of WIPRO is moving along with the market price.

• If the buy price of the future is less than the settlement price, than the buyer of a future
gets profit.

• If the selling price of the future is less than the settlement price, than the seller incurs
losses.

36
ANALYSIS OF TCS: -

The objective of this analysis is to evaluate the profit/loss position of futures. This analysis is
based on sample data taken of TCS scrip. This analysis considered the May 2019 contract of
TCS. The lot size of TCS is 250, the time period in which this analysis done is from 02-05-2019
to 31-05-2019.

Table-3

Date Underlying Future price Open Int No. of

Value contracts
02-May-19 2215.4 2215.75 6041750 8595
03-May-19 2132 2142.35 6358750 17798
06-May-19 2157.85 2165.6 6162000 10738
07-May-19 2151.95 2150.05 6172000 7825
08-May-19 2152.85 2161.75 6020000 8162
09-May-19 2172.55 2166.7 5972750 8735
10-May-19 2135.8 2137.15 5929500 8645
13-May-19 2128.75 2134.7 5879000 7250
14-May-19 2092.35 2099.15 5787500 10234
15-May-19 2095.4 2096.75 5611750 8699
16-May-19 2108.75 2110.3 5722500 7683
17-May-19 2095.45 2102.5 5809750 9427
20-May-19 2143.95 2145.5 5663250 14876
21-May-19 2109.75 2110.15 5763250 8509
22-May-19 2081.75 2089.55 6164250 10135
23-May-19 2054.05 2060.45 6504000 16108
24-May-19 2048 2053.7 6569250 8277
27-May-19 2055.15 2054.8 6375000 13508
28-May-19 2073.75 2076.75 5132000 19556
29-May-19 2107.55 2103.65 2353750 24418
30-May-19 2146.3 2146.6 2042500 13906
31-May-19 2196.55 2185.2 12631750 17676

37
 Graph-4

GRAPH SHOWING THE PRICE MOVEMENT OF TCS

FUTURES
Future price
2250

2200

2150

2100

2050

2000

1950

OBSERVATIONS AND FINDINGS

• If a person buys 1 lot i.e. 250 futures of TCS on 2nd May, 2109 and sells on 31st May,
2019 then he will get a loss of 2146.6– 2215.75= Rs-69.15 per share. So, he will get a
loss of Rs – 17280.5 i.e., Rs 39.15*250.

The closing price of TCS at the end of the contract period is Rs 2,146.30 and this is considered
as settlement price

38
Table showing Mark to Market Profit & loss of TCS futures:
Table-4
Date M TO M Settle Price
02-May-19 0 2215.75
03-May-19 -18350 2142.35
06-May-19 5812.5 2165.6
07-May-19 -3887.5 2150.05
08-May-19 2925 2161.75
09-May-19 1237.5 2166.7
10-May-19 -7387.5 2137.15
13-May-19 -612.5 2134.7
14-May-19 -8887.5 2099.15
15-May-19 -600 2096.75
16-May-19 3387.5 2110.3
17-May-19 -1950 2102.5
20-May-19 10750 2145.5
21-May-19 -8837.5 2110.15
22-May-19 -5150 2089.55
23-May-19 -7275 2060.45
24-May-19 -1687.5 2053.7
27-May-19 275 2054.8
28-May-19 5487.5 2076.75
29-May-19 6725 2103.65
30-May-19 10662.5 2146.3
31-May-19 9725 2185.2

39
Graph-5

Chart Title
15000

10000

5000

15-May-19
02-May-19
03-May-19
04-May-19
05-May-19
06-May-19
07-May-19
08-May-19
09-May-19
10-May-19
11-May-19
12-May-19
13-May-19
14-May-19

16-May-19
17-May-19
18-May-19
19-May-19
20-May-19
21-May-19
22-May-19
23-May-19
24-May-19
25-May-19
26-May-19
27-May-19
28-May-19
29-May-19
30-May-19
31-May-19
-5000

-10000

-15000

-20000

M TO M Settle Price

Graph-6

Chart Title
2250
2200
2150

2100
2050
2000

1950

Future price Underlying Value

OBSERVATIONS AND FINDINGS

• The future price of TCS is moving along with the market price.
• If the buy price of the future is less than the settlement price, than the buyer of a
future gets profit.

• If the selling price of the future is less than the settlement price, than the seller
incurs losses

40
ANALYSIS OF INFOSYS: -
The objective of this analysis is to evaluate the profit/loss position of futures. This analysis is
based on sample data taken of INFOSYS scrip. This analysis considered the May 2019
contract of INFOSYS. The lot size of INFOSYS is 500, the time period in which this analysis
done is from 02-05-2019 to 31-05-2019.

Table-5

Date Underlying FUTURE Open Int No. of

Value PRICE contracts
02-May-19 730.8 734.7 45874800 7155
03-May-19 723.6 727.6 46669200 7390
06-May-19 718.4 721.35 47601600 12094
07-May-19 724.55 727.65 47436000 7078
08-May-19 719.35 722.8 48226800 7171
09-May-19 721.05 723.15 47733600 7313
10-May-19 716.85 718.5 49708800 9052
13-May-19 719.7 721.35 50307600 6552
14-May-19 713.85 714.75 49664400 10936
15-May-19 716.1 717.3 49113600 6487
16-May-19 733.1 734.25 48487200 8592
17-May-19 723.9 726.1 47414400 9136
20-May-19 722.4 724.3 46402800 12204
21-May-19 709.3 709.15 47046000 9826
22-May-19 709.75 711.2 46962000 7353
23-May-19 701.05 703.2 46711200 8988
24-May-19 709.2 710 44576400 7558
27-May-19 708.1 707.45 37954800 12847
28-May-19 728.1 726.75 28093200 21971
29-May-19 727.8 726.4 11638800 20330
30-May-19 733.55 733.8 6052800 12337
31-May-19 737.75 728.95 49383600 9120

41
Graph-7

GRAPH SHOWING THE PRICE MOVEMENT OF INFOSYS

FUTURES
FUTURE PRICE
740
735
730
725
720
715
710
705
700
695
690
685

OBSERVATIONS AND FINDINGS:

• If a person buys 1 lot i.e. 500 futures of INFOSYS on 2st May, 2109 and sells on
31st May, 2019 then he will get a profit of 733.8=734.7 Rs -0.9 per share. So, he
will get a Loss of Rs 1080 i.e., Rs 0.9*1200

• The closing price of INFOSYS at the end of the contract period is Rs 733.5 and
this is considered as settlement price.

42
Table showing Mark to Market Profit & loss of INFOSYS futures:
Table-6
Date M to M Settle Price
02-May-19 0 734.7
03-May-19 -880912 727.6
06-May-19 -872399 721.35
07-May-19 -864892 727.65
08-May-19 -872457 722.8
09-May-19 -866637 723.15
10-May-19 -867062 718.5
13-May-19 -861479 721.35
14-May-19 -864905 714.75
15-May-19 -856983 717.3
16-May-19 -860026 734.25
17-May-19 -880374 726.1
20-May-19 -870596 724.3
21-May-19 -868451 709.15
22-May-19 -850269 711.2
23-May-19 -852737 703.2
24-May-19 -843130 710
27-May-19 -851293 707.45
28-May-19 -848213 726.75
29-May-19 -871374 726.4
30-May-19 -870946 733.55
31-May-19 -879531 728.95

43
 Graph-8

Chart Title
100000
0
-100000
-200000
-300000
-400000
-500000
-600000
-700000
-800000
-900000
-1000000

M to M Settle Price

Graph-9

GRAPH SHOWING THE PRICE MOVEMENT OF

Chart Title
750
740
730
720
710
700
690
680

FUTURE PRICE Underlying Value

OBSERVATIONS AND FINDINGS

• The future price of INFOSYS is moving along with the market price.
• If the buy price of the future is less than the settlement price, than the buyer of a
future gets profit.

• If the selling price of the future is less than the settlement price, than the seller
incurs losses

44
 Chapter-5
Conclusion

45
5.1 Conclusion

Stock futures are derivative contracts that give you the power to buy or sell a set of stocks
at a fixed price by a certain date. Once you buy the contract, you are obligated to uphold the
terms of the agreement.

• It allows hedgers to shift risks to speculators.

• It gives traders an efficient idea of what the futures price of a stock or value of an index is
likely to be.

• Based on the current future price, it helps in determining the future demand and supply of
the shares.

• Since it is based on margin trading, it allows small speculators to participate and trade in
the futures market by paying a small margin instead of the entire value of physical
holdings.

In my Analysis all the future stock price are moving with the market value of underlying assets.
From all companies I have chosen Wipro, TCS, and Infosys

• Infosys Future Prices are mostly more than underlying asset value so the investors mostly
makes profits

• Where as compared to Wipro and Tics the value of future prices and value of underlying
assets are almost same the investors are making normal profits

46
5.2 Findings

 Derivatives market is an innovation to cash market. Approximately its daily turnover

reaches to the equal stage of cash market. The average daily turnover of the NSE derivative

segments

 In cash market the profit/loss of the investor depends on the market price of the underlying

asset. The investor may incur huge profits or he may incur huge losses. But in derivatives

segment the investor enjoys huge profits with limited downside.

 In cash market the investor has to pay the total money, but in derivatives the investor has

to pay premiums or margins, which are some percentage of total contract.

 Derivatives are mostly used for hedging purpose.

 In derivative segment the profit/loss of the option writer purely depends on the fluctuations

of the underlying asset.

5.3 Recommendation

 The derivatives market is newly started in India and it is not known by every investor, so

SEBI has to take steps to create awareness among the investors about the derivative

segment.

 In order to increase the derivatives market in India, SEBI should revise some of their

regulations like contract size, participation of FII in the derivatives market.

 Contract size should be minimized because small investors cannot afford this much of huge

premiums.

 SEBI has to take further steps in the risk management mechanism.

 SEBI has to take measures to use effectively the derivatives segment as a tool of hedging.

47
Bibliography

1. www.nseindia.com

2. www.bseindia.com

3. www.karvyonline.com

4. Economictimes.indiatimes.org

5. www.moneycontrol.com

6. Equity Derivatives Workbook (version Sep-2015)

7. Derivatives and Financial Innovations - By Manish Bansal and Navneeth Bansal

48