A REPORT ON FUTURES AND OPTIONS

Submitted by GAJANAN BOLEWAR (15) Submitted to Dr. LATHA MURTHY

Acknowledgement
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It has been a great pleasure having gone through as a trainee in icici securities which is Indias well known and starkly established retail brokerage firm. I as a trainee got to learn a lot as I had an opportunity to work with people who are extremely profound. I would like to express my gratitude to Mr. SANJAY MAHALLE {senior sales manager} for giving an opportunity to elongate my knowledge and providing me a pragmatic experience.

Last but not the least I would like to thanks each and every member of the icici securities for being so cooperative and helpful.

Contents
1. Securities Market in India-An Overview 2

2. Products, Participants & Functions

3. 4. 5. 6. 7. 8.

Securities Market and Financial System Secondary Market Stock Exchanges Membership in NSE Introduction of Derivatives Types of Derivatives 9. Derivatives markets in India 10.Futures And Options Forwards Contracts Futures Distinction between Futures & Forwards Contracts Futures terminology Options Options terminology Distinction between Futures & Options 11.Pricing of Derivatives Pricing Futures Pricing Options 1. Trading System Introduction Trading mechanism Entities in the trading system Corporate hierarchy Order types and conditions Market watch window Inquiry window Placing orders on the trading system

Market spread/combination order entry Basket trading Charges 1. Eligibility criteria for securities/indices traded in F&O 2. Products & Contracts Specifications 3. Brokerage Houses dealing in F&O Sharekhan 5Paisa Indiabulls
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 Religare Securities Kotak Securities 1. Bibliography

SECURITIES MARKET IN INDIA- AN OVERVIEW

INTRODUCTION The securities markets in India witnessed several policy initiatives since the year 2000, which further refined the market micro-structure, modernized operations and broadened investment choices for investors. The irregularities in the securities transactions in the 4

last quarter of the previous financial year hastened the introduction and implementation of several reforms. While a Joint Parliamentary Committee was constituted to go into the irregularities and manipulations in all their ramifications in all transactions relating to securities, decisions were taken to complete the process of demutualization and corporatisation of stock exchanges to implement the decision to separate ownership, management and operation of stock exchanges and to effect legislative changes for investor protection, and to enhance the effectiveness of SEBI as the capital market regulator. Rolling settlement on T+5 basis was introduced in respect of most active 251 securities from July 2, 2001 and in respect of balance securities from 31st December 2001. Rolling settlement on T+3 basis commenced for all listed securities from April 1, 2002 and subsequently on T+2 basis from 1, 2003. All deferral products such as carry forward were banned from July 2, 2002. Trading in index options commenced in June 2001 and trading in options on individual securities commenced in July 2001. Futures contracts on individual stock were launched in November 2001. Futures and options contracts on 49 individual securities were made available from August 2003. Interest rate futures contract was launched from June 2003. The year 2001-02 has also been quiet eventful for debt markets in India, with implementation of several important decisions like setting up of a clearing corporation for government securities, a negotiated dealing system to facilitate transparent electronic bidding in auctions and secondary market transactions on a real time basis and dematerialisation of debt instruments. These reforms and developments in the securities market, which support corporate initiatives, finance the exploitation of new ideas and facilitate management of financial risks, hold out necessary impetus for growth, development and strength of the emerging market economy of India.

PRODUCTS, PARTICIPANTS AND FUNCTIONS

Transfer of resources from those with idle resources to others who have a productive need for them is perhaps most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship and thereby decouple these two activities. As a result, the savers and investors are not constrained by their individual abilities, but by the economys abilities to invest and save respectively, which inevitably enhances savings and investment in the economy. Savings are linked to investments by a variety of intermediaries through a range of complex financial products called securities which is defined in the Securities Contracts(Regulation) Act, 1956 to include shares, bonds, gold, stocks or other marketable securities of like nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the central government. There are a set of economic units who demand securities in lieu of funds and others who supply securities for funds. These demand for and supply of securities and funds determine, under competitive market conditions in both goods and securities market, the prices of securities which reflect the present value of future prospects of the issuer, adjusted for risks and also prices of funds. It is not that the users and suppliers of funds meet each other and exchange funds for securities. It is difficult to accomplish such double coincidence of wants. The amount of funds supplied by the supplier may not be the amount needed by the user. Similarly, the 5

risk, liquidity and maturity characteristics of the securities issued by the issuer may not match preference of the supplier. In such cases, they incur substantial search costs to find each other. Search costs are minimized by the intermediaries who match and act as agents to match the needs of users and suppliers of funds for a commission, help suppliers and users in creation and sale of securities for a fee or buy the securities issued by users and in turn, sell their own securities to suppliers to book profit. It is thus, a misnomer that securities market in disintermediates by establishing a direct relationship between the savers and users of funds. The market does not work in a vacuum; it is a risk less intermediation, where the ultimate risk are borne by the savers and not the intermediaries. A large variety and number of intermediaries provide intermediation services in the Indian securities market. The securities market, thus, has essentially three categories of participants, namely the issuers of securities, investors in securities and the intermediaries, the securities, including derivatives. The issuers and investors are the consumers of services rendered by the intermediaries while the investors are consumers (they subscribe for and trade in securities) of securities issued by issuers. In pursuit of providing a product to meet the needs of each investor and issuer, the intermediaries churn out more and more complicated products. They educate and guide them in their dealings and bring them together. Those who receive funds in exchange for securities and those who receive securities in exchange for funds often need the reassurance that it is safe to do so. This reassurance is provided by the law and by the custom, often enforced by the regulator. The regulator develops fair market practices and regulates the conduct of issuers of securities and the intermediaries so as to protect interests of suppliers of funds. The regulator ensures a high standard of service from intermediaries and supply of quality securities and non-manipulated demand for them in the market. SECURITIES MARKET AND FINANCIAL SYSTEM The securities market has two interdependent and inseparable segments, the new issuers (primary market) and the stock (secondary) market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued. The price signals, which subsume all information about the issuer and his business including associated risk, generated in the secondary market, help the primary market in allocation of funds. The issuers of securities issue (create and sell) new securities in the primary market to raise funds for investment and/or to discharge some obligation. They do so either through public issues or private placement. It is a public issue if anybody and everybody can subscribe for the securities. If the issue is made to select people, it is called private placement. In terms of the Companies Act, 1956, an issue becomes public if it results in allotment to more than 50 persons. This means an issue resulting in allotment to less than 50 persons is private placement. There are two major types of issuers who issue securities. The corporate entities issue mainly debt and equity instruments (shares, debentures, etc.), while the governments (central and state governments) issue debt securities (dated securities, treasury bills). The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs. The secondary market has further two components, namely the over-the-counter (OTC) market and the exchange-traded market.OTC is different from the market place provided by the Over The Counter Exchange of India 6

Limited. OTC markets are essentially informal markets where trades are negotiated. Most of the trades in government securities are in the OTC market. All the spot trades where securities are traded for immediate delivery and payment take place in the OTC market. The exchanges do not provide facility for spot trades in a strict sense. Closest to spot market is the cash market where settlement takes place after some time. Trades taking place over a trading cycle, i.e. a day under rolling settlement, are settled together after a certain time (currently 2 working days). All the 23 stock exchanges in the country provide facilities for trading of equities. Trades executed on the leading exchange (National Stock Exchange of India Limited (NSE)) are cleared and settled by a clearing corporation which provides novation and settlement guarantee. Nearly 100% of the trades settled by delivery are settled in demat form. NSE also provides a formal trading platform for trading of a wide range of debt securities including government securities. A variant of secondary market is the forward market, where securities are traded for future delivery and payment. Pure forward is out side the formal market. The versions of forward in formal market are futures and options. In futures market, standardized securities are traded for future delivery and settlement. These futures can be on a basket of securities like an index or an individual security. In case of options, securities are traded for conditional future delivery. There are two types of options-a put option permits the owner to sell a security to the writer of options at a predetermined price while a call option permits the owner to purchase a security from the writer of the option at a predetermined price. These options can also be on individual stocks or basket of stocks like index. Two exchanges, namely NSE and the Stock Exchange, Mumbai (BSE) provide trading of derivatives of securities. The past decade in many ways has been remarkable for securities market in India. It has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and other intermediaries, the number of listed stocks, market capitalization, trading volumes and turnover on stock exchanges, and investor population. Along with this growth, the profiles of the investors, issuers and intermediaries have changed significantly. The market has witnessed fundamental institutional changes resulting in drastic reduction in transaction costs and significant improvements in efficiency, transparency and safety.

SECONDARY MARKET
INTRODUCTION Secondary market is the place for sale and purchase of existing securities. It enables an investor to adjust his holdings of securities in response to changes in his assessment about risk and return. It also enables him to sell securities for cash to meet his liquidity needs. It essentially comprises of the stock exchanges which provide platform for trading of securities and a host of intermediaries who assist in trading of securities and clearing and settlement of trades.

MARKET DESIGN Stock Exchanges 7

The stock exchanges are the exclusive centres for trading of securities. The regulatory framework favours them heavily by almost banning trading of securities outside exchanges. Till recently, they enjoyed territorial monopoly. Listing of companies on the local exchange is mandatory to provide an opportunity to investors to invest in the securities of local companies. The companies wishing to list their securities must get listed on the regional (an exchange is considered regional for the state/Union Territory where it is located) stock exchange nearest to their registered office. If they so wish, they can seek listing on other exchanges also. In a vast country like India, investors long for convenience of trading from a nearby place and take pride also in having stock exchanges in their vicinity. Monopoly of the exchanges within their allocated area, regional aspirations of the people and mandatory listing on the regional stock exchange resulted in multiplicity of exchanges. As a result, we have 24 exchanges (The Capital Stock Exchange, the latest in the list, is yet to commence trading) in the country recognized over a period of time to enable investors across the length and breadth of the country to access the market. Until recently, the area of operation/jurisdiction of an exchange was specified at the time of its recognition, which in effect precluded competition among the exchanges. These are called regional exchanges. However, the three newly set up exchanges (OTCEI, NSE and ICSE) were permitted to have nation wide trading since their inception. All other exchanges have now been allowed to set up trading terminals anywhere in the country. Many of them have already expanded trading operations to different parts of the country. The trading platforms of many exchanges are now accessible from a location. Further, with extensive use of information technology, the trading platforms of a few exchanges are also accessible from anywhere through Internet and mobile devices. This made a huge difference in a geographically vast country like India. It significantly expanded the reach of the exchange to the homes of ordinary investors and assuaged the aspiration of the people to have exchanges in their vicinity. The issuers/investors now prefer to list/trade on exchanges providing nation-wide network rather than on regional exchanges. Consequently, territorial jurisdiction of an exchange, opportunity to invest in securities of local companies through listing on regional exchanges, and convenience of trading from a nearby exchange lost relevance. The trading volumes on exchanges have been witnessing phenomenal growth for last few years. Since the advent of screen based trading system in 1994-95, it has been growing by leaps and bounds and reported a total turnover of Rs. 33, 13,338 crore in 2000-2001.It, however, declined to Rs. 24,79,990 crore during 2002-2003 in view of alleged irregularities in stock market operations. The introduction of rolling settlement also contributed to decline as market participants took some time to adjust to the new settlement regime. The growth of turnover has, however, not been uniform across exchanges. The increase in turnover took place mostly at big exchanges and it was partly at the cost of small exchanges that failed to keep pace with the changes. The business moved away from small exchanges to big exchanges, which adopted technologically superior trading and settlement systems. The huge liquidity and order depth of big exchanges further diverted liquidity of other stock exchanges. As a result, 18 small exchanges put together reported less than 0.01% of total turnover during 2002-03, while two big exchanges accounted for over 98% of turnover. About a dozen exchanges reported nil turnovers during 2001-02.

NSE and BSE are the two major exchanges having nationwide operations. NSE operated through 2800 VSATs (Very Small Aperture Terminals) in 358 cities at the end of March 2003. The turnover in the CM segment of NSE from non-Mumbai locations accounted for over 86% of total turnover of other stock exchanges during 2002-03. It is observed that NSE now reports higher turnover from its trading terminals in the home turf of most of the corresponding regional exchanges indicating declining attractiveness of regional exchanges even for local investors. Membership in NSE The trading platform of the Exchange is accessible to investors only through the trading members who are subject to its regulatory discipline. Any person can become a member by complying with the prescribed eligibility criteria and exit by surrendering trading membership without any hidden/over cost. There are no entry/exit barriers to trading membership. The members are admitted to the different segments of the Exchange subject to the provisions of the Securities Contracts(Regulation) Act, 1956., the Securities AND Exchange Board of India Act, 1992, the Rules, circulars, notifications, guidelines, etc., issued there under and Bye laws, Rules and Regulations of the Exchange. The standards for admission of members laid down by the Exchange stress on factors such as, corporate structure, capital adequacy, track record, education, experience, etc. and reflect a conscious effort on the part of NSE to ensure quality broking services so as to build and sustain confidence among investors in the Exchanges operations.

Benefits to the trading membership of NSE include: 1. Access to a nation-wide trading facility for equities, derivatives, debt and hybrid instruments/products. 2. Ability to provide a fair, efficient and transparent securities market to the investors. 3. Use of state-of-the-art electronic trading systems and technology. 4. Dealing with an organization which follows strict standards for trading and settlement at par with those available at the top international bourses. 5. A demutualised Exchange which is managed by independent and experienced professionals, and 6. Dealing with an organization which is constantly striving to move towards a global marketplace in the securities industry. Membership of NSE is open to all persons desirous of becoming trading members, subject to meeting requirements/criteria as laid down by SEBI and the Exchange. The different segments currently available on the Exchange for trading are: 9

A. Capital Market(Equities and Retail Debt) B. Wholesale Debt Market C. Derivatives(Futures and Options) Market Admission to membership of the Exchange to any of the segments is currently open and available. Persons or Institutions desirous of securing admission as Trading Members (Stock Brokers) on the exchange may apply for any of the following segment groups. 1. 2. 3. 4. Wholesale Debt Market(WDM) Segment Capital Market(CM) and Wholesale Debt Market (WDM) segments Capital Market (CM) and Futures & Options (F&O) segments Capital Market (CM), Wholesale Debt Market (WDM) and Futures & Options (F&O) segment

Eligibility Criteria for Membership: An applicant for membership must possess the minimum stipulated net worth. The net worth for the purpose should be calculated by the Exchange/SEBI. In case the company is a member of any other Stock Exchange(s), it should satisfy the combined minimum net worth requirements of all these Stock Exchanges including NSEIL. The minimum paid up capital of a corporate applicant for trading membership should be Rs. 30 lakh.

DERIVATIVES MARKET
DERIVATIVES Introduction Derivative is product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. The International Monitory Fund defines derivatives as financial instruments that are linked to a specific financial instrument or indicator or commodity and through which specific financial risks can be traded in financial markets in their own right. The value of a financial derivative derives from the price of an underlying item, such as an asset or index. Unlike debt securities, no principal is advanced to be repaid and no investment income accrues. The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking- in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in

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asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk averse investors. Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying 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. The financial derivative came into spotlight in post-1970 period due to growing instability in 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 both in terms of variety of instruments available, their complexity and also turnover. The factors generally attributed as the major driving force behind growth of factors generally attributed as the major driving force behind growth of financial derivatives are (a) increased volatility in asset prices in financial markets, (b) increased integration of national financial markets with the international markets, (c) marked improvement in communication facilities and sharp decline in their costs, (d) development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and (e) innovations in the derivatives markets, which optimally combine the risks and returns over a large number of financial assets, leading to higher returns, reduced risk as well as transaction costs as compared to individual financial assets. In the class of equity derivative, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indices 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. Products, participants and functions Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. The following three broad categories of participants hedgers, speculators, and arbitrageurs trade in the derivatives market. Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk. Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets. If, for example, they see the futures price

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of an asset getting out of line with the cash price, they will take offsetting positions in the two markets to lock in a profit. The derivatives market performs a number of economic functions. First, prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivative converge with the prices of the underlying at the expiration of the derivative contract. Thus, derivatives help in discovery of future as well as current prices. Second, the derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. Third, derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. Fourth, speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kinds of mixed markets. Fifth, an important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a history of attracting many bright, creative, well-educated people with an entrepreneurial attitude. They often energise others to create new businesses, new products and new employment opportunities, the benefit of which are immense. Finally, derivatives markets help increase savings and investment in the long run. Transfer of risk enables participants to expand their volume of activity. Types of Derivatives The most commonly used derivatives contracts are forwards, futures and options. Forwards: A forward contract is a customized contract between two entities, where 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 types of forwards contracts in the sense that the former are standardized exchange-traded contracts. Options: Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price or before a given date. Warrants: Options generally have lives of up to one year, the majority of options traded on options exchanges having maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. LEAPS: The acronym LEAPS means Long Term Equity Anticipation Securities. These are options having a maturity of up to three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average or a basket of assets. Equity index options are a form of basket options.

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Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between parties in the same currency Currency Swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction. Swaptions: Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaptions is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating. Derivatives markets in India The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24-member committee under the chairmanship of Dr. L.C. Gupta on November 18, 11996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the chairmanship of Prof. J.R. Varma, to recommend measures for risk containment in derivatives market in India. The report, which was submitted in October 1998, worked out the operational details of margining system, requirement and real-time monitoring requirements. The SCRA was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework were developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three-decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2000. SEBI permitted the derivatives segments of two stock exchanges. NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with, SEBI approved trading in index futures contracts based on S&P CNX Nifty and BSE-30(Sensex) index. This was followed by approval for trading in options commenced in June 2001 and the trading in options on individual Securities commenced in July 2001. Futures and Options contracts on individual securities are available on 41 securities stipulated by SEBI. Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette.

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Membership of NSE NSE admits members on its derivatives segment (more popularly referred to as F&O segment) in accordance with the rules and regulations of the Exchange and the norms specified by SEBI. NSE follows 2-tier membership structure stipulated by SEBI to enable wider participation. Those interested in taking membership on F&O segment are required to take membership of CM and F&O segment or CM, WDM and F&O segment. Trading and clearing members are admitted separately. Essentially, a clearing member (CM) does clearing for all his trading members (TMs). Undertakes risk management and performs actual settlement.

FUTURES AND OPTIONS

In recent years, derivatives have become increasingly important in the field of finance. While futures and options are now actively traded on many exchanges, forward contracts are popular on the OTC market. Forward contracts A forward contract is an agreement to buy or sell an asset on a specified date for a 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, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are normally traded outside the exchanges. The salient features of forward contracts are: They are 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 compulsory go to the same counterparty, which often results in high prices being charged. However, forward contracts in certain markets have become very standardized, as in the case of foreign exchange, thereby reducing transaction costs and increasing transactions volume. This process of standardization reaches its limit in the organized future market. Forward contracts are very useful in hedging and speculation. The classic hedging application would be 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 market 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 two months hence can reduce his exposure to exchange rate fluctuations by buying dollars forward.

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If a speculator has information or analysis, which forecasts ban upturn in a price, then he can go long on the forward market instead of 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. Forward markets world-wide are afflicted by several problems: Lack of centralization of trading Illiquidity Counterparty 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. Counterparty 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 illiquidity, still the counterparty risk remains a very serious issue. Futures Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forwards contracts, 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 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 the month of delivery The units of price quotation and minimum price change Location of settlement Distinction between futures and forwards contracts: Forward contracts are often confused with futures contracts. This confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of future price uncertainty. However futures are significant improvements over the forward contracts as they eliminate counterparty risk and offer more liquidity. Futures Trade on an organized exchange Standardized contract terms Hence more liquid Requires margin payments 15

Follows daily settlement

Forwards OTC in nature Customized contract terms Hence less liquid No margin payment Settlement happens at end of period Futures terminology Spot price: The price at which an asset trades in the spot market. Futures price: The price at which the futures contracts trades in the futures market. Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have 0one month, two-month and three month 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. 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 less than one contract. For instance, the contract size on NSEs futures market is 200 Nifties. 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 than the income earned on the asset. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Marketing-to-market: In the futures market, at the each trading day, the margin account is adjusted to reflect the investors gain or loss depending upon the futures closing [price. This is called marketing-to-market. Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day. Options 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, in a forward or futures contract, the two 16

parties have committed themselves to doing something. Whereas it costs nothing (except margin requirements) to enter into a future contract, the purchase of an option requires an upfront payment. Options terminology Index options: These options have the index as the underlying. Some options are European while others are American. Like index futures contracts index options contracts are also cash settled. Stock options: Stock options are options on individual stocks. Options 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 price. Buyer of an option: The buyer of an option is one who by paying the option 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 option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer wishes to exercise his option. There are two basic types of options, call options and put options. Call options: A call option gives the holder the right but not the obligation to buy to buy an asset by a certain date for a certain price. 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 price is the price which the option buyer pays to the option seller. It is also referred to as the option premium. Expiration date: the date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity. 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 an American option are frequently deducted from those of its European counterpart. In-the-money option: An in-the-option (ITM) option is an 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-the-money when the current value of index stands at a level higher than the strike price (i.e. spot price> strike price). If the value of index is much higher than the strike price, the call is said to be deep ITM. On the other hand, a put option on index said to be ITM if the value of 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 value of current index equals the strike price (i.e. spot price=strike price). Out-of-the-money option: An out-of-the-money (OTM) option that would lead to a negative cash flow it was exercised immediately.

17

A call option on the index is said to be out-of-the-money when the value of current index is said to be out-of-the-money when the value of 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. On the other hand, a put option on index is OTM if the value of index is above the strike price. Intrinsic value of an option: The option premium can be broken down into two components-intrinsic value and time value. Intrinsic value of an option is the difference between the market value of the underlying security/index in a traded option and the strike price. The intrinsic value of a call is the amount when the option is ITM. If the call is OTM, its intrinsic value is zero. Time value of an option: The time value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually, the maximum time value exists when the option is ATM. The longer the time to expiration, the greater is an options time value, all else equal. At expiration, an option should have no time value. While intrinsic value is easy to calculate, time value is more difficult to calculate. Historically, this made it difficult to value options prior to expiration. Various option pricing methodologies were proposed, but the problem wasnt solved until the emergence of Black-Scholes Theory in 1973.

Distinction between Futures and options Options are different from futures in several interesting sense. At a practical level, the option buyer faces an interesting situation. He pays for the option in full at the time it is purchased. After this, he only has an upside. There is no possibility of the options position generating any further losses to him (other than the funds already paid for the option). This is different from futures, which is free to enter into, but can generate very large losses. This characteristic makes options attractive to many occasional market participants, who cannot put in the time to closely monitor futures positions. Buying put options is buying insurance. To buy a put option on Nifty is to buy insurance which reimburses the full extent to which Nifty drops below the strike price of the put option. This is attractive to many people, and to mutual funds creating guaranteed return products. The Nifty index fund industry will find it very useful to make a bundle of a Nifty index fund and a Nifty put option to crate a new kind of a Nifty index fund, which gives the investor protection against extreme drops in Nifty. Selling put options is selling insurance, so anyone who feels like earning revenues by selling insurance can set himself up to do so on the index options market. More generally, options offer non-linear payoffs whereas futures only have linear payoffs. By combining futures and options, a wide variety of innovative and useful payoffs structures can be created. Distinction between futures and options Futures Exchange traded, with novation Exchange defines the product Price is zero, strike price moves Price is zero 18

Linear payoffs Both long and short at risk

Options Same as futures Same as futures Strike price is fixed, price moves Price is always positive Non-linear payoff Only short at risk

Pricing of Derivatives
Pricing futures: Stock index futures began trading on NSE on the 12th June 2000. Stock futures were launched on 9th November 2001. The volumes and open interest on this market has been steadily growing. Looking at the futures prices on NSEs market, have you ever felt the need to know whether the quoted prices are a true reflection of the price of the underlying index/stock? Have you wondered whether you could make risk-less profits by arbitraging between the underlying and futures markets? If so, you need to know the cost-of-carry to understand the dynamics of pricing that constitute the estimation of fair value of futures. The cost of carry model: we use fair value calculation of futures to decide the noarbitrage limits on the price of a futures contract. This is basis for the cost-of-carry model where the price of the contract is defined as: F=S+C Where, F= Futures price; S= Spot price; C= Holding cost or carry costs This can also be expressed as: F=S (1+r) ^T r= cost of financing and T= Time till expiration of futures contract. If F<S (1+r) ^T or F>S (1+r) ^T, arbitrage opportunities would exist i.e. whenever the futures price moves away from the fair value, there would be chances for arbitrage. We know what the spot and futures prices are, but what are the components of holding cost? The components of holding cost vary with contracts on different assets. At times the holding cost may even be negative. In the case of commodity futures, the holding cost is the cost of financing plus cost of storage and insurance purchased etc. In the case of equity futures, the holding cost is the cost of financing minus the dividends returns. The concept of discrete compounding is used, where interest rates are compounded at discrete intervals, for example, annually or semi-annually. Pricing of options and other complex derivative securities require the use of continuously compounded interest rates. In case the concept of continuous compounding, the above equation would be expressed as: F=Se^ (rT) Where, r=Cost of financing (using continuously compounded interest rate) T= Time till expiration; and e=2.71828 19

Pricing options An option buyer has the right but not the obligation to exercise on the seller. The worst that can happen to a buyer is the loss of the premium paid by him. His downside is limited to this premium, but his upside is potentially unlimited. This optionality is precious and has a value, which is expressed in terms of option price. Just like in other free, markets; it is the supply and demand in the secondary market that drives the price of an option. On dates prior to 31 Dec. 2000, the call option on Nifty expiring on 321 Dec. 2000 with a strike of 1500 will trade at a price that purely reflects supply and demand. There is a separate order book for each option which generates its own price. The values shown in Table are derived from a theoretical model, namely the Black-Scholes option pricing model. Table: Option prices: some illustrative values Option strike price 1400 1450 1500 1550 Calls 1 month 117 79 48 27 3 month 154 119 90 67 Puts 1 month 3 month 8 25 19 39 38 59 66 84

1600 13 48 102 114

Assumption: Nifty spot is 1500, Nifty volatility is 25% annualized, interest rate is 10%, and Nifty dividend yield is 1.5%. If the secondary market price deviate from these values, it would imply the presence of arbitrage opportunities, which (be might expect) would be swiftly exploited. But there is nothing innate in the market which forces the prices in the table to come about. There are various models which help us to get close to the true price of an option. Most of these are variants of the celebrated Black-Scholes model for pricing European options. Today most calculators and spread-sheets come with a built-in Black-Scholes options pricing formula so to price options we dont really need to memorize the formula.

TRADING SYSTEM
Introduction The futures and options trading system of NSE, called National Exchange for AUTOMATED Trading NEAT-F&O trading system, provides a fully automated screenbased trading for Nifty futures & options, stock futures & options and futures on interest rate on a nationwide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market that provides complete transparency of trading operations. It is similar to that of trading of equities in the cash market segment. The software for the F&O market has been developed to facilitate efficient and transparent trading in futures and options instruments. Keeping in view the familiarity of trading members with the current capital market trading system, modifications have been 20

performed in the existing capital market trading system so as to make it suitable for trading futures and options.

Trading mechanism The NEAT F&O system supports an order driven market, wherein orders match automatically. Order matching is essentially on the basis of security, its price, time and quantity. All quantity fields are in units and price in rupees. The lot size on the futures and options market is 200 for Nifty. The exchange notifies the regular lot size and tick size for each security traded on this segment from time to time. Orders, as and when they are received, are first time stamped and then immediately processed for potential match. When any order enters the trading system, it is an active order. If it finds a match, a trade is generated. If a match is not found, then the orders are stored in different books. Orders are stored in price-time priority in various books in the following sequence: Best Price Within Price, by time priority. Entities in the trading system 1. Trading members: Trading members are members of NSE. They can trade either on their own account or on behalf of their clients including participants. The exchange assigns a Trading member ID to reach trading member. Each trading member can have more than one user. 2. Clearing members: Clearing members are members of NSCCL. They carry out risk management activities and confirmation/inquiry of trades through the trading system. 3. Professional clearing members: A professional clearing members is a clearing member who is not trading member. Typically, banks and custodians become professional clearing members and clear and settle for their trading members. 4. Participants: A participant is a client of trading members like financial institutions. These clients may trade through multiple trading members but settle through a single clearing member. 5. Participant Clearing Members: Banks, Financial Institutions and Primary Dealers who are registered with SEBI/ RBI and such other entities as prescribed from time to time, is allowed to become participant clearing members. Corporate hierarchy In the F&O trading software, a trading member has the facility of defining a hierarchy amongst users of the system. This hierarchy comprises corporate manager, Admin. user, branch manager and dealer. 1. Corporate manager: The term Corporate manager assigned to a user placed at a highest level in a trading firm. Such a user can perform all the functions such as order and trade related activities, receiving reports for all branches of trading member firm and also all dealers of the firm. Additionally, a corporate manager 21

can define exposure limits for the branches of the firm. This facility is only available to the corporate manager. 2. Admin User: This user type will facilitate the Trading members and the clearing members to receive and capture on a real-time basis all the trades, exercise requests and give up requests of all the users under him. The clearing members will be able to receive and capture all the above information on a real time basis for the members and participants linked to him. All this information will be written to comma separated files which can be accessed by any other program on a real time basis in a read only mode. Besides this the admin users will be able to take online backup, view and upload net position, view previous trades, view Give-up screens and Exercise request for all the users(Corporate managers, Branch Managers, Dealers) belonging or linked to the member. The Admin User will also be able to view the relevant messages for trades, exercise and give up requests in the message area. 3. Branch manager: The branch manager is a term assigned to a user who is placed under the corporate manager. Such a user can perform and view order and trade related activities for all dealers under that branch. 4. Dealer: Dealers are users at the lower most level of the hierarchy. A dealer can perform view order and trade related activities only for one and does not have access to information on other dealers under the same branch or other branches. .w given cases explain activities possible for specific user categories: 1. Clearing member corporate manager: He can view outstanding orders, previous trades and net position of his client trading members by putting the TM ID (Trading member identification) and leaving the Branch ID and Dealer ID blank. 2. Clearing member and trading member corporate manager: He can view: Outstanding orders, previous trades and net position of his client trading members by putting the TM ID and leaving the Branch ID and the Dealer ID blank. Outstanding orders, previous trades and net positions entered for him by entering his own TM ID, Branch ID and User ID. This is his default screen. Outstanding orders, previous trades and net position entered for his branch by entering his TM ID and Branch ID fields. Outstanding orders, previous trades, and net positions entered for any of his users/dealers by entering his TM ID, Branch ID and user ID fields. 3. Clearing member and trading member dealer: He can only view requests entered by him. 4. Trading member corporate manager: He can view Outstanding requests and activity log for requests entered by him by entering his own Branch AND User IDs. This is his default screen. Outstanding requests entered by his users either by filling the User ID field with a specific user or leaving the User ID field blank. 1. Trading member branch manager: He can view Outstanding requests and activity log for requests entered by him by entering his own Branch and User IDs. This is his default screen. Outstanding requests entered by his users either by filling the User ID field with a specific user or leaving the User ID field blank. 1. Trading member dealer: He can only view requests entered by him. 22

Order types and conditions The system allows the trading members to enter orders with various conditions attached to them as per their requirements. These conditions are broadly divided into the following three categories. Time conditions Day order: A day order, as the name suggests is an order which is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day. Good till canceled (GTC): A GTC order remains in the system until the user cancels it. Consequently, it spans trading days, if not traded on the day the order is entered. The maximum number of days an order can remain in the system is notified by the exchange from time to time after which the order is automatically cancelled by the system. Each day counted is a calendar day inclusive of holidays. The days counted are inclusive of the day on which the order is placed and the order is cancelled from the system at the end of the expiry period. Good till days/date (GTD): A GTD order allows the user to specify the number of days/date till which the order should stay in the system if not executed. The maximum days allowed by the system are the same as in GTC order. At the end of this date/day, the order is cancelled from the system. Each day/date counted is inclusive of the day/date on which the order is placed and the order is cancelled from the system at the end of the day/date of the expiry period. Immediate or cancel(IOC): An IOC order allows the user to buy or sell a contract as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately. Price condition Stop-loss: This facility allows the user to release an order into the system, after the market price (Last Traded Price) of the security reaches or crosses a threshold price e.g. if for stop-loss buy order, the trigger is 1027.00, the limit price is 1030.00 and the market (last traded) price is 1023.00, then this order is released into the system once the market price reaches or exceeds 1027.00. This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of 1030.00. For the stop-loss sell order, the trigger price has to be greater than the limit price. Other conditions Market price: Market orders are orders for which no price is specified at the time the order is entered (i.e. price is market price). For such orders, the system determines the price. Limit price: Price of the order specified by the user while entering the order. Pro: Pro means that the orders are entered on the trading members own account. Cli: Cli means that the trading member enters the orders bon behalf of a client. Several combinations of the above are allowed thereby providing enormous flexibility to the users. Market watch window 23

The following windows are displayed on the trader workstation screen. Title bar Ticker window of futures and options market Ticker window of underlying(capital) market Tool bar Market watch window Inquiry window Snap quote Order/trade window System message window The purpose of watch is to allow continuous monitoring of contracts of securities that are of specific interest to the user. It displays trading information for contracts selected by the user. The user also gets a broadcast of all the cash market securities on the screen. This function also will be available if the user selects the relevant securities for display on the market watch screen. Display of trading information related to cash market securities will be on Read only format i.e. the dealer can only view the information on cash market but, cannot trade in them through the system. This is the main window from the dealers perspective. Inquiry window The inquiry window enables the user to view information such as Market by Price (MBP), Previous Trades (PT), Outstanding Orders(OO), Activity log(AL), Snap Quote(SQ), Order Status(OS), Market Movement(MM), Market Inquiry (MI), Net Position, On line backup, Multiple index inquiry, Most active security and so on. Placing orders on the trading system For both the futures and the options market, while entering orders on the trading system, members are required to identify orders as being proprietary or client orders. Proprietary orders should be identified as Pro and those of clients should be identified as Cli. Apart from this, in the case of Cli trades, the client account number should also be provided. The futures and options market is a zero sum game i.e. the total number of long in the contract always equals the total number of short in any contract. The total number of outstanding contracts (long/short) at any point in time is called the Open interest. This Open interest figure is a good indicator of the liquidity in the contract. Based on studies carried out in international exchanges, it is found that open interest is maximum in near month expiry contracts. Market spread/combination order entry The NEAT F&O trading system also enables to enter spread/combination trades. This enables the user to input two or three orders simultaneously into the market. These orders will have the condition attached to it that unless and until the whole batch of orders finds a counter match, they shall not be traded. This facilitates spread and combination trading strategies with minimum price risk. 24

Basket trading In order to provide a facility for easy arbitrage between futures and cash markets, NSE introduced basket-trading facility. This enables the generation of portfolio offline order files in the derivatives trading system and its execution in the cash segment. A trading member can buy or sell a portfolio through a single order, once he determines its size. The system automatically works out the quantity of each security to be bought and sold in proportion to their weights in the portfolio. Charges The maximum brokerage chargeable by a TM in relation to trades affected in the contracts admitted to dealing on the F&O segment of NSE is fixed at 2.5% of the contract value in case of futures contracts and 2.5% of notional value of the contract [(Strike price+Premium)*Quantity] in case of options contracts, which is exclusive of statutory levies. The transaction charges payable by a TM for the trades executed by him on the F&O segment are fixed at Rs. 2 per lakh of turnover (0.002%) (each side) or Rs. 1 lakh annually, whichever is higher. The TMs contribute to Investor Protection Fund of F&O segment at the rate of Rs. 10 per crore of turnover (0.0001%) (each side). Eligibility criteria for securities/indices traded in F&O 1. A stock on which stock option and single stock future is proposed to be introduced should confirm with the following broad eligibility criteria: The stock should be chosen from amongst the top 500 stock in terms of average daily market capitalization and average daily traded value in the previous six months on a rolling basis. The stocks median quarter-sigma order size over the last six months should be at least Rs. 5 Lakh. For this purpose, a stocks quarter-sigma order shall mean the order size(in value terms) required to cause a change in the stock price equal to one-quarter of a standard deviation. The Exchange should be guided by the following for the purpose of calculating quarter sigma order size in a stock: Quarter sigma order size should be calculated by taking four snapshots in a day from the order book of the stock in the past six months. These four snapshots should be randomly chosen from within four fixed ten-minutes windows spread through the day. The sigma (standard deviation) or volatility estimate shall be the daily closing volatility estimate which is also used for day end initial margin calculation in derivative contracts on a stock. For stocks on which derivative contracts are not traded, the daily closing volatility estimate should be computed in the manner specified by Prof. J.R.Varma Committee on risk containment measures for Index Futures. The daily closing 25

volatility estimate value should be applied to the days order book snapshots to compute quarter sigma order size. The quarter sigma percentage should be applied to the average of the best bid and offer price in the order book snapshot to compute the order size to move price of the stock by quarter sigma. The median order size to cause quarter sigma price movement should be determined separately for the buy side and the sell side. The average of the median order size for the buy and the sell side should be taken as the median quarter sigma order size. The quarter sigma order size in a stock should be calculated on the 15th of each month, on a rolling basis, considering the order book snapshots in the previous six months. Similarly, the average daily market capitalization and the average traded value should also be computed on the 15th of each month, on a rolling basis, to arrive at the list of top 500 stocks. 1. The number of eligible stocks may vary from month to month depending upon the changes in quarter sigma order sizes, average daily market capitalization & average daily traded value calculated every month on a rolling basis for the past six month. Consequently, the procedure for introducing and dropping stock on which option and future contracts are traded should be as follows: Options and futures may be introduced on new stocks when they meet the eligibility criteria. If a stock fails to meet the aforesaid criteria for three months consecutively, then no fresh month contract shall be issued on that stock. However, the existing unexpired contracts may be permitted to trade till expiry and new strikes may also be introduced in the existing contract months. 1. For unlisted companies coming out with initial public offering, if the net public offer is Rs. 500 crore or more, then the exchanges may consider introducing stock options and stock futures on such stocks at the time of its listing in the cash market. 2. Derivative contracts on a new stock index should be permitted if the stocks contributing 90%weightage in the index are individually eligible for derivative trading as per the eligibility criteria. This requirement should be applied only at the time of introduction of derivative contract on new indices. Products and Contracts specification The F&O segment of NSE provides trading facilities for the following derivative products/Instruments: 1. Index futures 2. Index options 3. Individual stock options 4. Individual stock futures 5. Interest rate futures 26

BROKERAGE HOUSES DEALING IN F&O SEGMENT

1. ICICI SECURITEIS Exchange Board of India allowed trading in equities-based derivative on stock exchanges in June 2000. Accordingly National Stock Exchange and Bombay Stock Exchange introduced trading in futures and options based on Nifty, BSE Sensex and 31 prominent stocks. Stock based futures were launched on November 2, 2001 and ever since volumes in the derivatives segment have grown by leaps and bounds. Today average daily volume in the derivatives segment is about Rs2, 500 crore with the highest volume of Rs4, 172 crore recorded on February 28, 2003. Indeed the derivatives market is fast emerging as an important business segment for both investors and brokers. Investors will find that there are lots of opportunities to make money once they understand the concept of derivatives and its application. Though there are several publications on this subject, a simple and concise write-up is rare. Sharekhans Derivatives Digest explains the concept of derivatives in a simple talk book manner wherein Sharekhan himself replies to a series of questions on derivatives.
Number of stocks trading in Futures & Options (including the minimum quantity) The minimum quantity you can trade in is one market lot. The market lot is different for different stocks/index. Time to time list will keep changing.
ACC Andhra Bank Arvind Mills Bajaj Auto Bank of Baroda Bank of India BEL BHEL BPCL Canara Bank Cipla CNXIT Dr. Reddys GAIL Grasim Ind Gujarat Ambuja HCL Tech HDFC HDFC Bank Hero Honda Hindalco HLL HPCL i-flex ICICI Bank Infosys 1500 4600 4300 400 1400 3800 550 600 550 1600 1000 100 200 1500 350 1100 1300 600 800 400 300 2000 650 300 1400 200

27

IOC IPCL ITC M&M

600 1100 300

Maruti Mastek MTNL Nalco Nifty ONGC Oriental Bank PNB Polaris Ranbaxy REL RIL Satyam SBI SCI Syndicate Bank Tata Motors Tata Power Tata Tea TCS Tisco Union Bank Wipro

625 400 1600 1600 1150 200 300 1200 1200 1400 400 550 600 1200 500 1600 7600 825 800 550 250 1350 4200 600

28

Derivatives Info Kit for May 18, 2006

FUTURES (% Change) Open Interest Total (Crs) 103.00 10.27 17116.45 154.52 707.11 90.54 41.99 75.18 132.66 256.55 60.68 299.83 189.40 54.61 190.78 213.15 306.03 397.31 38.13 38.32 65.56 45.63 409.94 25.09 57.27 4.95 175.60 3.75 67.33 Change (Crs) -12.02 -0.23 -538.25 -30.86 -161.36 -11.84 -7.59 -6.98 -15.54 -45.16 -13.42 -51.74 -31.28 -8.70 -32.83 -40.61 -22.07 -51.51 -6.04 -4.32 -8.57 -4.20 -102.21 -4.99 -8.84 -0.95 -17.76 -0.32 -8.86 Near Month % 104% 97% 87% 108% 100% 94% 105% 97% 99% 99% 114% 106% 105% 100% 106% 107% 102% 100% 98% 97% 104% 94% 93% 113% 100% 112% 99% 101% 101% PUT/CALL RATIO VOLUME 0.00 0.00 0.66 0.00 0.20 0.43 0.25 0.15 0.06 0.15 0.00 0.00 0.61 0.65 0.00 0.00 0.04 0.00 0.06 0.05 0.00 0.44 0.29 0.00 0.07 0.00 0.06 0.00 0.00 OPEN INT 0.00 0.00 0.81 0.00 0.21 0.14 0.10 0.08 0.11 0.16 0.00 0.00 0.27 0.24 0.67 0.08 0.05 0.00 0.03 0.07 0.01 0.09 0.16 0.20 0.06 0.00 0.05 0.14 0.00

Index / Scrip
BANKNIFTY CNXIT NIFTY ABB ACC ALBK ALOKTEXT ANDHRABANK ARVINDMILL ASHOKLEY AUROPHARMA BAJAJAUTO BANKBARODA BANKINDIA BEL BHARATFORG BHARTI BHEL BILT BONGAIREFN BPCL CANBK CENTURYTEX CESC CHAMBLFERT CHENNPETRO CIPLA COCHINREFN COLGATE

Lot size 100 100 100 200 750 2450 3350 2300 2150 9550 700 200 1400 1900 550 1000 1000 300 1900 2250 550 1600 850 1100 6900 950 2500 1300 1050

Spot Price 4539.5 4157.2 3388.9 2739.75 799.6 85.05 82.2 78.05 86.65 43.35 640.65 3004.95 245.75 132.4 1241.5 368.2 400.4 2118.3 119.75 64.2 407.55 238.85 485 299.3 38.3 236.8 245.35 166.6 375.9

Price -6.47 -5.38 -6.77 -8.69 -12.01 -5.60 -6.59 -6.53 -4.78 -10.62 -4.44 -8.08 -8.40 -8.34 -7.96 -7.67 -3.78 -8.82 -11.00 -6.00 -2.73 -9.97 -14.73 -5.09 -9.13 -5.73 -4.88 -3.59 -9.30

Volume 6 76 120 46 6 1 23 15 22 62 209 -36 43 -13 24 12 0 54 37 -47 16 -8 -21 42 86 121 31 79 68

Open Interest -4 3 3 -9 -9 -8 -11 -3 -7 -7 -14 -7 -7 -6 -7 -9 -3 -3 -3 -5 -9 2 -6 -12 -5 -11 -5 -5 -3

29

CORPBANK CUMMINSIND DABUR DIVISLAB DRREDDY ESCORTS ESSAROIL FEDERALBNK GAIL GESHIPPING GLAXO GNFC GRASIM GUJAMBCEM HCLTECH HDFC HDFCBANK HEROHONDA HINDALC0 HINDLEVER HINDPETRO I-FLEX ICICIBANK IDBI IDFC IFCI INDHOTEL INDIACEM INDUSINDBK INFOSYSTCH IOB IOC IPCL ITC IVRCLINFRA J&KBANK JETAIRWAYS JINDALSTEL JPHYDRO JSTAINLESS KTKBANK LICHSGFIN M&M

600 1900 3600 250 400 2400 5650 1300 1500 1350 300 2950 175 4125 650 300 400 400 1595 2000 650 600 700 2400 5900 15750 350 2900 3850 100 2950 600 2200 2250 2000 600 200 250 6250 2000 2500 850 1250

323.45 199.7 144.7 1532 1568.9 92.9 58.35 209.8 263.5 243.65 1205.6 116.1 1985.3 98 527.85 1292.3 819.65 872.9 192.1 258.25 320.1 1202.15 593.75 80.2 65 11.9 1333.3 178.5 54.1 3033.95 86.85 514.15 238.6 191.15 261.6 415.6 912.95 1809.95 30.8 97.25 97.8 187.1 653.3

-7.35 -8.42 -9.62 -13.99 -4.87 -11.98 -14.51 -5.43 -5.56 -9.20 -8.35 -13.33 -8.30 -9.89 -3.64 -4.58 -2.92 -2.21 -11.84 -6.24 -1.82 -4.98 -5.16 -8.34 -4.83 -12.50 -7.49 -15.28 -11.67 -5.43 -9.44 -3.68 -11.40 -6.44 -12.80 -9.63 -3.36 -10.18 -10.60 -12.47 -7.43 -10.54 -7.84

20 68 -27 65 71 -17 -33 -14 40 11 60 13 -4 4 -32 41 2 13 61 40 26 13 -2 41 -40 51 3 34 -3 16 9 -43 61 28 4 147 59 -40 131 -17 -8 42 -4

-1 -10 7 -5 19 -6 -10 -2 -14 -9 -7 -4 -9 -8 -8 0 -2 -9 -5 -7 1 -9 -2 -5 -7 -2 -6 -10 -3 -7 -4 -3 -8 -13 -7 1 -6 -7 -6 -2 -1 -5 -7

31.32 189.94 64.85 86.29 120.99 75.45 129.73 33.22 251.46 186.90 171.80 100.15 408.57 820.51 79.91 126.27 134.13 131.35 653.86 416.61 95.98 128.17 465.46 301.81 226.92 111.99 375.75 370.22 88.02 849.26 35.05 31.93 496.99 485.31 72.49 17.21 110.16 71.09 89.01 90.56 56.65 66.97 147.65

-2.67 -39.54 -1.60 -19.69 13.79 -14.63 -36.01 -2.63 -51.91 -37.24 -30.03 -19.86 -80.69 -156.08 -10.07 -6.35 -7.34 -16.40 -112.91 -56.94 -0.81 -24.10 -37.11 -44.17 -27.40 -18.16 -57.04 -112.37 -14.25 -99.91 -5.38 -2.12 -108.50 -93.01 -16.76 -1.64 -11.43 -13.90 -15.37 -14.70 -5.34 -11.39 -23.28

100% 106% 83% 101% 82% 96% 101% 93% 109% 106% 104% 101% 104% 101% 103% 99% 101% 109% 100% 104% 95% 111% 100% 100% 90% 90% 100% 105% 96% 103% 102% 99% 104% 107% 102% 96% 104% 106% 98% 100% 99% 99% 103%

0.00 0.00 0.07 0.00 0.00 0.25 0.06 0.00 0.05 0.21 0.00 0.18 0.00 0.16 0.00 0.00 0.00 0.00 0.08 0.28 0.17 0.00 0.57 0.02 0.13 0.16 0.00 0.05 0.03 0.09 0.00 0.00 0.07 0.11 0.02 0.00 0.14 0.00 0.39 0.00 0.06 0.18 0.04

0.00 0.04 0.22 0.00 0.00 0.13 0.06 0.00 0.12 0.14 0.00 0.11 0.32 0.14 0.00 0.00 0.08 0.02 0.12 0.16 0.06 0.00 0.12 0.07 0.10 0.16 0.00 0.14 0.01 0.08 0.00 0.00 0.15 0.13 0.01 0.00 0.09 0.00 0.19 0.03 0.05 0.05 0.10

30

MAHSEAMLES MARUTI MATRIXLABS MPHASISBFL MRPL MTNL NAGARFERT NATIONALUM NDTV NEYVELILIG NICOLASPIR NTPC ONGC ORCHIDCHEM ORIENTBANK PATNI PNB POLARIS PUNJLLOYD RANBAXY REL RELCAPITAL RELIANCE RPL SATYAMCOMP SBIN SCI SIEMENS SRF STAR STER SUNPHARMA SUNTV SUZLON SYNDIBANK TATACHEM TATAMOTORS TATAPOWER TATASTEEL TATATEA TCS TITAN TVSMOTOR

1200 800 1250 1600 4450 1600 14000 1150 1100 2950 1045 3250 300 1050 600 650 600 2800 300 400 550 1100 600 3350 600 500 1600 150 1500 850 1750 450 250 400 3800 1350 825 800 675 550 250 822 2950

315.15 820.5 262.5 194.1 47.4 173.9 16.05 271.25 241.45 78.1 211.25 123.75 1349.2 246.25 236.25 381.75 448.5 101.95 1017.8 459.4 536.4 546.3 1004.8 74.5 716.2 906.35 152.8 5368.75 252 282.8 429.55 863.15 1224.8 1091.05 78.2 228 878.05 545.55 545.05 771.05 1925.65 688.65 140.85

-5.46 -10.09 -6.43 -2.95 -11.73 -13.07 -10.34 -11.57 -7.03 -8.97 -7.91 -5.21 -6.46 -14.29 -2.34 -3.56 -7.46 -8.89 -13.10 -6.18 -10.07 -9.18 -7.49 -5.46 -6.73 -8.42 -4.68 -9.52 -8.25 -6.85 -16.88 -2.51 -4.81 -10.68 -8.64 -10.48 -8.75 -3.60 -10.92 -7.11 -4.51 -11.00 -8.63

178 -21 140 95 -8 69 -23 -16 133 -19 -11 25 25 -17 -7 -42 19 56 -43 -13 61 39 32 -14 15 31 -4 75 199 296 30 2 86 13 -9 36 44 34 13 30 16 24 -5

7 -10 -3 -1 -9 -6 -2 -5 -6 -12 -1 -4 -9 -8 -5 -16 -8 -1 -4 -5 -4 -11 -9 -10 -12 -11 -3 -5 -4 -5 -5 -1 -19 -6 -10 -13 9 -2 -12 -6 -3 -7 -9

124.08 253.70 178.30 68.42 79.25 741.26 55.39 167.32 53.38 56.86 42.92 393.50 697.24 169.49 97.24 42.53 143.35 110.16 229.98 223.38 480.29 598.47 3304.75 621.47 945.94 874.81 77.11 453.07 153.66 34.42 409.53 181.35 25.48 231.08 57.65 155.10 552.57 127.92 1041.88 198.93 355.81 195.01 59.63

0.87 -55.40 -18.50 -2.46 -17.85 -156.95 -7.66 -31.39 -7.78 -12.52 -3.97 -33.84 -109.35 -45.99 -7.26 -10.11 -23.88 -11.50 -45.67 -26.46 -78.08 -133.05 -539.16 -87.29 -180.17 -167.49 -6.09 -72.14 -19.95 -4.31 -110.04 -6.14 -6.98 -45.38 -10.33 -41.68 -6.52 -7.95 -238.56 -29.65 -27.69 -40.46 -11.59

88% 108% 101% 89% 100% 101% 94% 101% 104% 105% 89% 96% 106% 88% 95% 116% 107% 96% 87% 92% 100% 109% 99% 87% 108% 104% 98% 102% 98% 102% 101% 99% 119% 102% 100% 102% 89% 99% 103% 105% 100% 106% 105%

0.00 0.17 0.00 0.00 0.12 0.05 0.08 0.00 0.00 0.00 0.00 0.13 0.04 0.00 0.01 0.00 1.43 0.11 0.00 0.32 0.00 0.10 0.25 0.10 0.13 0.22 0.08 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.21 0.03 0.11 0.00 0.15 0.00 0.02 0.00 0.00

0.00 0.16 0.00 0.00 0.11 0.10 0.16 0.04 0.00 0.09 0.00 0.15 0.08 0.00 0.04 0.00 0.21 0.18 0.00 0.20 0.01 0.21 0.17 0.12 0.27 0.15 0.07 0.03 0.01 0.00 0.02 0.00 0.05 0.04 0.21 0.04 0.19 0.09 0.22 0.03 0.10 0.02 0.00

31

UNIONBANK UTIBANK VIJAYABANK VSNL WIPRO WOCKPHARMA

2100 900 3450 1050 600 600

118.1 325.35 45.55 407.55 507.55 422.8

-6.49 -5.42 -7.98 -13.52 -6.69 -6.44

-13 6 6 1 16 14

5 -7 0 -7 -2 -5

53.62 27.47 45.67 336.78 265.15 110.38

-1.36 -3.83 -3.94 -77.33 -25.02 -13.43

83% 106% 92% 104% 96% 89%

0.13 0.00 0.10 0.14 0.06 0.00

0.08 0.00 0.05 0.15 0.02 0.01

Open Interest Break Up BANKNIFTY Future Call Put Total Near Month Far Months 103.00 0.00 0.00 103.00 106.81 -3.81 CNXIT 10.27 0.00 0.00 10.27 9.94 0.33 NIFTY 9674.73 4112.16 3329.56 17116.45 14836.20 2280.26 STOCK 25656.17 2904.90 441.54 29002.60 29310.59 -307.99 TOTAL 35444.17 7017.06 3771.10 46232.33 44156.72 2075.60 Put-Call Ratio (Vol) Put-Call Ratio (Ol) 0.26 0.19 Open Interest Change in OI 46232.33 5319.3 -10%

2. 5 PAISA ITS ALL ABOUT MONEY, HONEY! Trade @ the Speed of Thought You can now buy and sell shares on 5paisa.com with speeds comparable and at times better than NSE's NEAT Terminal. This speed and reliability comes only with perseverance of pioneer backed by huge investment in technology! One Click Wonder Be it your intra day positions, order positions, trade positions, marked to market performance, limits, fund transfer, consulting research information, your BackOffice accounts, DP holding or any thing you can wish for, it just takes one click. Incredible but true! Even squaring off all your positions or canceling all pending orders takes one click and a confirmation of action. What's more? Intra day price alerts that you can set, customize market watch screen, intra day tick by tick time and price data with chart, for any number of scrips. Technical experts making live calls, our news desk supplying you with fastest information

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updates. Even if you load CNX 500 with 500 scrips, it will appear with all live prices in a fraction of a second. 5paisa Products and services
5paisa is the trade name of India Infoline Securities Private Limited (5paisa), member of National Stock Exchange and The Stock Exchange, Mumbai. 5paisa is a wholly owned subsidiary of India Infoline Ltd, Indias leading and most popular finance and investment portal. 5paisa has emerged as one of leading players in ebroking space in India. Our key product offerings are as follows:

Investor Terminal (IT) Investor Terminal is recommended for infrequent investors, who fall into the "Buy and Hold" school of investing, made very popular by Warren Buffet - the Oracle of Omaha. A typical retail investor is a busy corporate executive or a businessman who makes equity investments for long term and does not trade everyday. He prefers a trading interface which works behind proxy and firewalls as they access the Internet and the stock markets from their work place, where a direct connection is difficult because of corporate IT security policies. This product does not have intra-day tick by tick charts. Trader Terminal (TT) Trader Terminal is for the dedicated day traders, who churn their portfolio on minor movements in the market, sometimes several times a day. Their rapid and high volume trading requires a powerful interface for lightning fast order execution. They monitor marked to market positions on a minute-to-minute basis, with facilities for panic exit. They need all the analysis - fundamental and technical, market gossip, price and volume information and much more - all at one click. 5paisa Investor Terminal Target customer segment Investor Terminal (IT) is targeted at Investors, who invest quite often, churn their portfolios regularly and keep a close watch on the market. They need to watch live quotes and live charts. Active stock market traders with medium volumes Students and researchers who need live streaming quotes and intra day charts Corporate treasury people

5paisa Trader Terminal Target customer segment

33

Trader Terminal is almost a substitute for NSE NEAT terminal and VSAT. In fact, it has many more powerful features that only a premium trader can appreciate. Target customer segments are It is for dedicated day traders, who churn their portfolio on minor movements in the market, sometimes several times a day. Their rapid and high volume trading requires a powerful interface for lightening fast order execution. High Net worth Individuals with large and active equities portfolio who need to monitor and action swiftly. Large corporate or trusts who have dedicated staff to monitor, analyze and shuffle their portfolios.

3. INDIABULLS Equity and Derivatives- Ease, Convenience Reliability- It all starts here. Investment services as individual as you are. Our Retail Equity Business caters to the needs of individual Indian and NRI investors. Indiabulls offers broker assisted trade execution, automated online investing and access to all IPOs Through various types of brokerage accounts, Indiabulls offers the purchase and sale of securities which includes Equity, Derivatives and Commodities Instrument listed on National Stock Exchange of India Ltd.(NSEIL), The Stock Exchange, Mumbai(BSE) and NCDEX. Power Indiabulls-Trading just got faster. Active Trader- Get More at Indiabulls. Regardless of how the market is performing on which way the economic winds are blowing, you, as a trader, are researching, charting, crafting a strategy buying and selling. You are getting in, getting out and moving on to the next trade. Choose from a comprehensive offering of accounts, platforms and products. Customize our tech. and services to support the way you work. Advanced Trading Tools Trade smarter on Power Indiabulls. Choose from a broad spectrum of sophisticated trading tools using a fast desktop. Trading Software- Trading just got faster. Features of Power Indiabulls: Live Streaming Quotes Fast Order Entry Tic by Tic Live Charts Technical Analysis Live News and Alerts 34

Extensive Reports for Real-time Accounting

4. RELIGARE SECURITIES Values that bind Nurturing the relationship of trust and confidence Equity and derivatives Religare is one of the heavyweight equity players in India with membership of National Stock Exchange of India and Bombay Stock Exchange both major exchanges of India. We believe in innovative services that could cater a range of customers according to their requirements. Religare equity and derivative trading is offered in two unique ways: MAT: Manage Account Trading NAT: Net Account Trading MAT & NAT accounts are designed for different classes of customers keeping in mind their needs and requirements. This helps to change conventional investments with a world class touch and expertise for investors while trading on Indian Exchanges.

Derivative reports Derivative summary sums up end of the day F/O market trades in brief; covering Trade statistics, Nifty futures volume-price, most active contracts in stock options and stock futures, Put-Call Ratio, and Most active Calls/Puts. The page also provides alternative to get trade statistics for individual stocks. Nifty Futures Expiry Date May06 Jun06 Jul06 LTP 3258.00 3246.00 3230.00 Change Traded Value (Nos.) (Rs. Lakhs) -105.85 58108.07 -104.95 691.68 -119.00 59.53
Select

Trade Statistics: 19/05/2006 Product FUTIDX FUTSTK OPTIDX OPTSTK TOTAL No. of Contracts 530,300 426,651 110,488 14,293 1,081,732 Top of Form Most Active Contract - Stk Options 35 Turnover (Rs. Cr.) 17,535.13 18,274.95 0.00 0.00 35,810.08

Contracts for Bottom of Form Most Active Contract - Stk Futures

Symbol

Expiry Date 25/5/06 25/5/06 25/5/06 25/5/06 25/5/06

No. of Contract Traded 46109 2694 7470 20117 23255

RIL SUZLON RELINCE SBI TATA ST

Traded Value (Rs. Lakhs) 91740.30 89513.15 86463.49 80689.53 75538.00

Symbol

Expiry Option Strike No. of Date Type Price Contract Traded NSE IND 25/5/06 CE 3500 11,709.0 IFCI 25/5/06 CA 12.5 71.0 IFCI 25/5/06 CA 12.5 71.0 NSE IND 25/5/06 CE 3400 9,494.0 IFCI 25/5/06 CA 15 48.0

Most Active Calls SymbolSID RIL RIL SBI O:1-Mon:CA:1000.00 36.00 O:1-Mon:CA:1200.00 4.00 O:1-Mon:CA:900.00 24.05

Most Active Puts LTPVolume SymbolSID 555 RIL 392 RIL 287 RIL LTP Volume 255 100 59 O:1-Mon:PA:1000.00 50.00 O:1-Mon:PA:980.00 38.00 O:1-Mon:PA:960.00 30.00

5. KOTAK SECURITIES "Risk comes from not knowing what you're doing." - Warren Buffet If you are not averse to taking risks, Easy Derivatives can prove to be a good investment option especially with our research. We, at Kotak Securities, make investing in derivatives simpler. Our derivatives seminars educate new entrants in the derivatives market more equipped with knowledge and techniques. Once you have the knowledge of investing in derivative instruments our daily derivative reports will provide you with strategies to yield good returns. Further still during market hours you can trust our SMS alerts to provide you with even more strategies. To start trading in Derivatives, all you need to do is open an online trading account. Choose from our wide range of accounts to suit your investment needs. You can call us and we will have our representative meet you. You can also email us at easyderivatives@kotaksecurities.com. Our executive will get in Symbol RIL SUZLON RELINCE SBI TATA ST touch with you. Expiry Date 25/5/06 25/5/06 25/5/06 25/5/06 25/5/06 No. of Contract Traded 46109 2694 7470 20117 23255 Traded Value (Rs. Lakhs) 91740.30 89513.15 86463.49 80689.53 75538.00

36

Derivative summary Derivative summary sums up end of the day F/O market trades in brief; covering Trade statistics, Nifty futures volume-price, most active contracts in stock options and stock futures, Put-Call Ratio, and Most active Calls/Puts. The page also provides alternative to get trade statistics for individual stocks. Nifty Futures Expiry Date May06 Jun06 Jul06 Most Active Contracts (Stock Futures) Most Active Contracts (Stock Options) Symbol NSE IND IFCI IFCI NSE IND IFCI Expiry Date Option Type 25/5/06 25/5/06 25/5/06 25/5/06 25/5/06 CE CA CA CE CA Strike Price 3500 12.5 12.5 3400 15 No. of Contract Traded 11,709.0 71.0 71.0 9,494.0 48.0 LTP 3258.00 3246.00 3230.00 Change (Nos.) -105.85 -104.95 -119.00 Traded Value (Rs. Lakhs) 58108.07 691.68 59.53

37

Get Quote

View all contracts for Current Statistics

Select

Derivatives Market Watch End-of-Day Statistics

Daily Settlement Price FII Statistics

Most Active Puts Most Active Calls Most Active Contracts

Trade Statistics: 19/05/2006 Product FUTIDX FUTSTK OPTIDX OPTSTK TOTAL No. of Contracts 530,300 426,651 110,488 14,293 1,081,732 Turnover (Rs. Cr.) 17,535.13 18,274.95 0.00 0.00 35,810.08 Symbol NAGARFERT PNB DABUR BANKBARODA S&P CNX NIFTY Expiry 25/05/2006 25/05/2006 25/05/2006 25/05/2006 27/07/2006 Put/Call OI Put/Call 1.82 1.38 1.00 0.96 0.75 0.09 0.56 0.05 0.22 42.85

Most Active Calls Symbol RIL RIL SBI SID O:1-Mon:CA:1000.00 O:1-Mon:CA:1200.00 O:1-Mon:CA:900.00 LTP 36.00 4.00 24.05 Volume 555 392 287 Value 3474.06 2834.82 1329.23 Open Interest 5892 12108 1185

Most Active Puts Symbol RIL RIL RIL SID O:1-Mon:PA:1000.00 O:1-Mon:PA:980.00 O:1-Mon:PA:960.00 LTP 50.00 38.00 30.00 Volume 255 100 59 Value 1589.36 606.53 347.91 Open Interest 1560 714 444

Bibliography

Our main source of information has come from both primary as well as secondary sources.

38

 PRIMARY SOURCE : 1. BOOKS :

Investment Futures & Options

( By William Sharpe, Belly ) ( By Vohra and Bagri )

Options, Futures & other Derivatives ( Hull )

1. INTERVIEWS : RELIGARE SECURITIES SHAREKHAN. SECONDARY SOURCE : 1. INTERNET SITES : nse-india.com bseindia.com sharekhan.com 5paisa.com indiabulls.com religaresecurities.com kotaksecurities.com

39

Dematerialisation of Securities Share Dematerialisation is the process by which physical securities of an investor are converted to an equivalent number of securities in electronic form and credited in the investor's account with the DP. One can do this for shares in pledged condition also though with the permission of the pledgee. One can dematerialise odd lot shares also. Requests for dematerialisation shall need to be submitted only in a Dematerialisation Request Form (DRF). 2.1. Documents required 2.1.1. Completely filled up Demat Request Form (DRF) in triplicate for each ISIN along with defaced physical securities. 2.1.2. Transposition form, if applicable 2.2. Availability of forms 2.2.1. Ensure adequate stock of DRFs with you. 2.2.2. Requisition for DRF should be put to dematrating@ as per procedure mentioned in Requisitioning Stationery from CPO section. 2.3. Scrutiny of the demat request: Each demat request must be scrutinised by the branch at the time of accepting the same from the customers. If there is any discrepancy then it should be immediately pointed out to the client advising the steps for rectification. Advice the customer to take the help of Sample Filled in DRF for filling up the DRF correctly. The scrutiny of Demat request involves the following:

40

2.3.1. Eligibility of Security for Demat: It must be ensured that security mentioned on the certificates is eligible for Demat. To check eligibility, refer to the ISIN Book. You may also check the same in the New ISIN Query on DeposisWeb. Enter the first few characters of the company name in the text box for the same. Select the type of security from the drop down. Also specify the face value of the security. On hitting 'Go' the matching results are displayed. Check if the status is 'Active' and that it is 'Available for Demat'. Scrips that are not available for Demat have been highlighted with Red Colour with a remark "Scrip not available for demat". If the name of a company has changed, it is expected that the customer will bring the certificates in the new company name. However, even if the certificates are in the old company name, they can be dematerialised under the same ISIN as earlier. When you use the ISIN query using the old name or the new name, the appropriate record will come up automatically showing the old company name also in brackets. We need not now rely on the customer's information that the name has changed and end up accepting requests which may not have been under demat. Branch officials are advised not to accept any certificates for Dematerialisation from customers under the ISINs for National Savings Certificate (NSC)/Kisan Vikas Patra. 2.4. Following guidelines are to be followed for accepting dematarialisation requests from NRI customers: 2.4.1. NRI-Repatriable category accounts: 2.4.1.1. Duly filled in DRF along with the physical share certificates should be accepted by the branch official. 2.4.1.2. The RBI approval should be present on the share certificate. In case the approval is not present the branch official should obtain any of the below mentioned documents: (i) Copy of letter of Allotment issued by the Company / Registrar (ii) Copy of the letter from the company stating that the shares were allotted on repatriable basis under RBI permission No. 2.4.1.3. Copy of the share application which will state that the share application is on repatriation basis and linking of the application to the allotment letter whose quantity will match with the shares to be dematerialised. 2.4.1.4. In absence of any of the above-mentioned documents the DRFs will to be rejected. 2.4.2. Resident / NRI- Non Repariable category: 2.4.2.1. If the certificates submitted for demat are in Repatriable category, the following should be adhered: 1. Inform the client about the mismatch between the account and the certificates category. 41

2. If the client confirms that he wants to still dematerialize the same with intention, the branch official should obtain a declaration letter addressed to the company from the client confirming his change of status signed by all the holders. 2.5. Demat request forms (DRFs) submitted at branches are scrutinized at the Central Processing Office, Mumbai (CPO) before being forwarded to the Registrar. Any rejection during this scrutiny means that the certificates are sent back to the customer. Since the certificates have been punched and stamped, the customer has to first get duplicate certificates from the Registrar. To avoid customer dissatisfaction arising from such rejections, it is imperative that the DRFs are scrutinized meticulously at the branch on receipt from the customer and the DRFs should be returned to the customer for rectification, if required. To assist you in such scrutiny, we have made modifications in the ISIN search module - we have introduced a Remarks Column, which will help you to guide the customer and reduce rejections arising from some common errors. An illustration of the remarks in each situation is given below: There are also instances where there is an inordinate delay on the part of Registrar to confirm the demat request. NSDL maintains a list of such errant companies/registrars. To enable you to alert customers when accepting demat requests from them, the following remark will be given against such ISINs : As per NSDL - Company with long pending demat requests and not responding/ services stopped by the RTA. Please alert client that dematerialisation may get inordinately delayed . There are cases where the name of a company has changed. In such cases, the certificates could be in old name as well as new name. Both need to be processed under the same ISIN. The old name is also updated and the ISIN can be queried using both the new name and the old name. Sub-division/consolidation of shares - face value is different There are instances where the shares of a company are split or consolidated. In a split, the share of a company with face value Rs. 10 may be split into 10 shares of face value Rs. 1 each. In such cases, the certificates and the ISIN representing the share of face value Rs. 10 are discontinued. A new ISIN is allotted to the share of face value Re. 1 and new certificates are sent to the share holders by the company. In such cases, if a shareholder comes with a demat request with the old certificates, the same should not be accepted. Demat requests with only new certificates can be accepted. In the ISIN query, in such cases, two rows will appear one with the face value Rs. 10 but it will not be available for demat another with the face value Re. 1 and available for demat 42

To avoid incorrect acceptance, apart from matching the name of the company and the security on the screen, also verify that the face value on the certificates matches exactly with the face value appearing on the screen for the ISIN and that ISIN is available for demat. 2.6. Single ISIN in one DRF: Securities having the same ISIN only can be submitted under a single DRF. However, multiple folio nos. of the same pattern of holders relating to the same ISIN can be dematerialised under a single DRF. Certificates of the same security having different ISIN (this is possible in case of partly paid up shares and non-pari passu shares) should not be accepted in the same DRF form. 2.7. Partly Paid up shares and Pari Passu Status: NSDL provides different ISIN to Non Pari Passu shares and to partly paid-up shares of a company. Verify the certificates carefully and mention the correct ISIN. A non-pari passu share is one, which is issued after the last record date and is eligible for dividend on pro- rata basis. 2.8. Lock - in status: Locked-in certificates of a security must be submitted under separate DRF. The same should not be mixed with free securities. In case of lockedin securities the lock-in reason & lock-in release date must be filled up in the DRF. Amongst lock-in securities belonging to the same ISIN but having different lock-in release dates or lock-in reason, separate DRF requests have to be made. 2.9. Names differing on account of full name and initials: Demat requests received from client(s) with name(s) not matching exactly with the name(s) appearing on the certificates merely on account of initials not being spelt out fully or put after or prior to the surname, can be processed. However, the client should be informed this is possible only if the signature(s) of the client(s) on the DRF tallies with the specimen signature(s) available with the Issuers or its R & T agent. To give an example, the shareholder may have opened the depository account in the name of Sushil Ramesh Shah but his name on the share certificate may appear as S. R. Shah or Sushil R Shah etc. 2.10. Holding Pattern: The combination and the order of holders' names on DRF and as printed on the Certificates should be identical with that in the DP account. For knowing the holding pattern of the account, check the same in DeposisWeb Queries & Reports - Account Information. 2.11. If the shares are in the name of X, Y (X as first holder and Y as second holder) it cannot be dematerialised in the account of either X or Y alone. Also if the shares are in the name of X, they cannot be dematerialised in the account of X, Y (X as first holder and Y as second holder). 2.12. Further, if the shares are in the name of X, Y (X as first holder and Y second holder) and the account is in the name of Y, X (Y as first holder and X as second holder), then these shares cannot be dematerialised in this account only on the basis of DRF (see exception below). The dematerialisation can be done in the account where the holding pattern is X., Y (X as first holder and Y as second holder). 43

Exception: Where the combination of holders is the same in the certificates and in the demat account, and the difference is only in the order in which the name of the holders appear on the share certificates and in the demat account, dematerialisation is possible. Here, the customer has to submit a Transposition Request Form along with the DRF. 2.13. Signature Verification: The DRF must be signed by all the account holder's and should be in the same order. Branches should verify clients signatures affixed on the DRF and ensure that signatures perfectly match as per our system records. On verifying the signature on the DRF, if branch finds that there is a mismatch in the signature as signed on the DRF with that of the records in the system then they should not accept the DRF and request the client to affix the correct signature as per DP records. Simultaneously branch should check with the client if he has a different signature registered with the Company / Registrar, and if so request the client to affix the signatures on the DRF with a remark Signature as per R & T". If the demat request is being submitted by a PoA (Power of Attorney) holder, a copy of the PoA should be submitted. Where the customer claims that the PoA is already registered with the Registrar, the PoA Registration No. should be mentioned on the DRF. 2.14. Details of Certificates: The details of certificates such as the folio no., certificate no., & distinctive no. must be filled up correctly in the DRF. Also, the number of certificates annexed with the DRF should tally with the number of certificates mentioned on the DRF. The certificates should be attached in the same order as mentioned in the DRF. CAUTION: Verify this properly because if there are any mismatches between the certificate details mentioned on the DRF and the certificates attached with the DRF, the liability is on ICICI Bank for any missing certificates. 2.15. Defacing of the Certificates: All the certificates must be defaced by putting a stamp or by writing ''SURRENDERED FOR DEMATERIALISATION by the client. However, defacing should be done only after checking the eligibility of security, as defaced securities cannot be sold in physical form. If defacing has been done by mistake then the customer should be advised to send the same to registrar for replacement. However, the request should not be accepted if the certificates are mutilated or defaced in such a way that the material information is not readable. In case of government securities, the same should not be defaced or mutilated either by punching holes or by any other means. 2.16. Transfer - cum - Demat: SEBI has withdrawn Transfer cum Demat since Feb. 10, 2004. Hence the branch should entertain no request under this facility. 2.17. Transmission - cum - Demat: 44

In case of certificates held jointly, on the death of any one or more of the joint holder(s) mentioned on the certificate, the surviving joint holder(s) can get the name(s) of the deceased deleted from the physical certificate(s) and get the securities dematerialised in the DP account of the surviving holder(s) by following the procedures mentioned below: 2.17.1. The following documents should be submitted along with the DRF : A copy of the death certificate duly attested by notary. Transmission form for Dematerialisation / Deletion cum Demat form. 2.17.2. Verify that the certificates are registered in the name of the Client(s) along with the name(s) of the deceased and the order of the names of the surviving holders is the same as in the Demat account. 2.18. Receiving Demat Request and acknowledging the same 2.18.1. The DRF is in triplicate. 2.18.2. Branches should ask the customer to write / stamp 2.18.3. DP ID and CLIENT ID on the face of EVERY Physical Share Certificate submitted by him for demat. ("DP ID and CLIENT ID" should be clearly visible on the share certificates. It should not be mentioned on the printed details of the certificates). This will ensure better control for the certificates submitted by the client. 2.18.4. "Surrendered for dematerialisation" should be mentioned on the face of every share certificate. Kindly ensure that the DRF accepted at the branch bears the date of submission, date of acceptance, branch stamp and signature of the demat officer on all copies of the DRFs. Failure to do so will invite audit observations. 2.18.5. On receipt of duly filled DRF, Branch should cancel the physical share certificates by drawing two parallel lines across the physical share certificates and punch two holes on the top of the share certificates (i.e. name of the company should be punched ) and then forward the physical share certificates to CPO - Goregaon Office for processing . 2.18.6. All DRFs accepted are to be dispatched to Central Processing Office (CPO) on the date of receipt from the client. Failure to dispatch on time causes delay in processing and dispatch of certificates to respective registrars. Dispatch of DRFs (to Registrar) after 7 days from the date of receipt invites monetary penalty from NSDL / SEBI. 2.18.7. Kindly ensure that the DRF accepted at the branch bears the date of submission, date of acceptance, branch stamp and signature of the demat officer on all copies of the DRFs. Failure to do so will invite audit observations. 2.18.8. If everything is proper, issue the acknowledgement to the customer from Registrar's Copy (white copy). Retain the Branch copy (yellow colour) at the branch. Send the Registrar's copy & CPO copy (white and blue) to the Central Processing Office (CPO) at Goregaon, Mumbai. 45

2.19. Inwarding in the System The DRF should be immediately inwarded in the Inwarding module on DeposisWeb. In case the system is not available, then the DRF's must be inwarded at end of day. Please refer to DeposisWeb section for help on inwarding of DRF. 2.20. Packeting & Depspatching of DRF At the end of the day, all DRFs inwarded for the day should be 'packeted' and 'despatched' in DeposisWeb along with other documents received during the day. 2.21. Despatch of Demat Requests to Central Processing Office (CPO): The DRF along with the physical securities should be despatched to the CPO with a covering letter. In case the DRF cannot be inwarded due to unavailability of the system then a covering letter should be prepared in the below mentioned format The POD (courier receipt) must be filed along with the copy of covering letter for your records. 2.22. Processing of DRFs at Central Processing Office (CPO) 2.22.1. Entry of DRF: The DRF team at CPO does the entry of the DRFs received at the CPO. At this level the complete details provided by the client in the DRF is captured in the Deposis (Back office system for ICICI Bank Demat Services). 2.22.2. Objection of DRF: If there is any discrepancy in the DRF the same is objected in the system. 2.22.2.1. An Objection reason is attached to the objected DRF. 2.22.2.2. The Demat Request is returned to the client alongwith a letter mentioning the objection reason at his correspondence address. 2.23. Generation of Demat Request Number. 2.23.1. If the DRF is in order, another user verifies the entered details and the DRF are authorised. 2.23.2. At the end of the day all the authorised DRFs are uploaded in the NSDL system and the Demat Request No. (DRN) is generated. 2.23.3. The DRNs are released in the DPM (NSDL system); this transmits the electronic request to the respective registrar. 2.24. Despatch of DRF to the Registrar 2.24.1. The DRN is updated on the Demat Request Forms. 2.24.2. The DP Authorised section is completed. 2.24.3. The DRFs along with the security certificates and a covering letter are despatched to the respective Issuer or its Registrar & Transfer Agent not later than seven days of accepting the same from the customer. 2.25. Processing of Demat Request by the Registrar 2.25.1. Confirmation of Demat Request 2.25.2. The registrar on receipt of Demat request verifies the details with that in his record. 46

2.25.3. If the Demat Request is in order the registrar confirms the DRN in the NSDL system and the physical securities are destroyed. The free account of the client gets credited with equivalent quantity of securities. 2.26. Rejection of Demat Request 2.26.1. Demat requests submitted at branches, after due scrutiny, are forwarded by the Central Processing Office, Mumbai (CPO) to the respective Registrars. Registrars, after due scrutiny, confirm the requests enabling credit in the demat account of the customer. 2.26.2. If the request is rejected by CPO, the certificates are sent back to the customer directly by post. If the request is rejected by the Registrar, the certificates are sent back to the DP (at the CPO) and CPO sends the same to the customers directly by post. 2.26.3. For such rejected requests, DeposisWeb now provides the following information also : If the request has been rejected by the Registrar, whether the certificates have been received by CPO or not and the date on which the same have been received at CPO. If the certificates sent by CPO to the customer by post have been returned undelivered, the date on which it was received back at CPO and the reason for the return. Further if the certificates have been redispatched on request by the customer/branch, the date of such redespatch. 2.26.4. The information is available under "Status of Request" on DeposisWeb. On the page, specify demat account no., DRF as the document type and DRF no. as document no. and submit. On the result page, click the Indoc no. hyperlink for details. The details page would include the following two additional blocks. These blocks are: "Certificates Received Back" as given below : The date is the date on which the lot of certificates was received. Quantity is the quantity of securities represented by the lot of certificates. If this block does not appear for a rejected demat request, it means that the certificates are yet to be received at CPO. Return By Post Details" as given below: RBP No. Is a system-generated no. for each instance of return by post. The return date is the date on which the certificates were received back at CPO. Remarks contains the reason for the return. If the certificates have been redispatched, Redispatch date and Redispatch Out no. will contain the date of such redespatch and the system-generated Outward No. The current status of certificates sent back to customer will appear in the Status of RBP column. If redispatched certificates are returned undelivered again, another record will appear below the earlier record. If this block does not appear for a rejected demat request, it means that certificates have not been returned to CPO. They are either delivered to the customer or are in transit. 2.27. Loss of documents after accepting from the client 47

2.27.1. After the DRF and certificates are submitted by the Client at the branch, in exception circumstances, they may get lost in the following ways: Misplaced at the Branch before they are sent to the CPO Intercepted in transit between Branch and CPO Misplaced at the CPO before entering the same on the NSDL system In case the DRF is rejected either at the CPO itself (where certificates are sent back to the customer from CPO) or at the Registrar end (where certificates are sent to the CPO and there onwards to the customer), any misplacement/interception in between. 2.27.2. In the above cases, inform the CPO immediately. In these cases, the CPO requests the Registrar for the procedure to be followed to resolve the case. The procedure typically requires execution of an indemnity by the client. 2.27.3. The CPO executes the indemnity on non-judicial stamp paper and forwards the same to the client for them to sign and return to the CPO. The CPO sends the same to the Registrar along with the forwarding letter for issue duplicate share certificate/credit in the demat account. 2.27.4. Where required, the Registrar will issue Duplicate Share Certificate(s) and send the same to the Client directly. Subsequently, Client may submit the same with fresh DRF for demat. In other cases, the Registrar may also directly credit the demat account. 2.28. Storage of DRF copy at Branch: The status of the DRF is 'Sent to CPO' on inwarding the request at the Branch. Subsequently, the status changes after being processed by the CPO. Branches are supposed to store a copy of each DRF forwarded by them to CPO. It is suggested that Branches after inwarding and forwarding the DRF request to CPO, should file the branch copies of DRF date-wise. Every Monday, they should verify in Deposis - Status of Request for all DRFs inwarded during the week previous to the previous week for confirming change in Status. Accordingly, the copies should be destroyed. Care should be taken to ensure that the destruction of the Branch copy is done only after confirming the change in the status of the request.

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