MAJOR RESEARCH PROJECT SYNOPSIS ON

Analysis of derivatives nse nifty futures and post recession impact on derivative investors of Indore

FOR PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF MBA (FULL TIME) BATCH-2010-2012

GUIDED BY:Ms. NIDHI Vyas MAM

IPS ACADEMY,INDORE

SUBMITED BY:
Kapil Dev
MBA III SEMASTER

IBMR, IPS ACADEMY RAJENDRA NAGAR, A.B.ROAD, INDORE-452012(M.P.) AFFILIATED TO: DEVI AHILYA VISHWAVIDYALAYA, INDORE

Contents

S No.
1. 2. 3. 4. 5. 6. Topic Introduction Literature review Rational of study Objective of study

Particulars

Page no.
1 2 5 7 8 9 9 9 9 9 9 10

Research methodology (a). Research design (b). Sample design (c). Tools for data collection (d). Tools for data analysis (e). Hypothesis

7.

Bibliography

INTRODUCTION:
As Indian securities markets continue to evolve, market participants, investors and regulators are Looking at different ways in which the risk management may be efficiently met through the Introduction of Derivative markets. 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. Derivatives are risk management instruments, which derive their value form an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest etc. banks, and securities Firms, companies and investors to hedge risks, to gain access to cheaper money and to make Profit, uses derivatives. Derivatives are likely to grow even at a faster rate in future. However, the advent of modern day derivative contracts is attributed to the need for farmers to Protect themselves from any decline in the price of their crops due to delayed monsoon, or Overproduction. The first futures. Contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. These were evidently standardized contracts, which made them much like todays futures. The Chicago Board of trade (CBOT), the largest derivative exchange in the orld, was established in 1848 where forward contracts on various commodities were Standardized around 1865. From then on, futures contracts have remained more or less in the same form, as we know them today.

DERIVATIVES
Derivatives are defined as financial instruments whose value derived from the prices of one or More other assets such as equity securities, fixed-income securities, foreign currencies, or Commodities. Derivative is also a kind of contract between two counter parties to exchange Payments linked to the prices of underlying assets. In the Indian context the securities contracts (Regulation)Act, 1956(SC(R)A) defines Derivative to include: A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities.

BACK GROUND:
Derivatives markets have been in existence in India in some form or other for a long time. In the Area of commodities, the Bombay Cotton Trade Association started futures trading in 1875 and, By the early 1900s India had one of the worlds largest futures industries. In 1952 the government Banned cash settlement and options trading and derivatives trading shifted to informal forwards Markets. In recent years, government policy has changed, allowing for an increased role for Market-based pricing and less suspicion of derivatives trading. The ban on futures trading of Many commodities was lifted starting in the early 2000s, and national electronic commodity Exchanges were created. In the equity markets, a system of trading called badla involving some Elements of forwards trading had been in existence for decades. However, the system led to a Number of undesirable practices and it was prohibited off and on till the Securities and Exchange Board of India (SEBI) banned it for good in 2001. A series of reforms of the stock market Between 1993 and 1996 paved the way for the development of exchange-traded equity

Derivatives markets in India. In 1993, the government created the NSE in collaboration with State-owned financial institutions. NSE improved the efficiency and transparency of the stock Markets by offering a fully automated screen-based trading system and real-time price Dissemination. In 1995, a prohibition on trading options was lifted. In 1996, the NSE sent a Proposal to SEBI for listing exchange-traded derivatives. The report of the L. C. Gupta Committee, set up by SEBI, recommended a phased introduction of derivative products, and bilevel regulation (i.e., self-regulation by exchanges with SEBI providing a supervisory and Advisory role). Another report, by the J. R. Varma Committee in 1998, worked out various operational details such as the margining systems. In 1999, the Securities Contracts (Regulation) Act of 1956, or SC(R) A, was amended so that derivatives could be declared securities. This allowed the regulatory framework for trading securities to be extended to derivatives. The Act considers derivatives to be legal and valid, but only if they are traded on exchanges. Finally, a 30-year ban on forward trading was also lifted in 1999. The economic liberalization of the early nineties facilitated the introduction of derivatives based on interest rates and foreign exchange. A system of market-determined exchange rates was adopted by India in March 1993. In August 1994, the rupee was made fully convertible on current account. These reforms allowed increased integration between domestic and international markets, and created a need to manage currency risk. how the volatility of the exchange rate between the Indian Rupee and the U.S. dollar has increased since 1991.7 the easing of various restrictions on the free movement of interest rates resulted in the need to manage interest rate risk.

DERIVATIVES INSTRUMENTS TRADED IN INDIA

In the exchange-traded market, the biggest success story has been derivatives on equity products. Index futures were introduced in June 2000, followed by index options in June 2001, and options and futures on individual securities in July 2001 and November 2001, respectively. As of 2005, the NSE trades futures and options on 118 individual stocks and 3 stock indices. All these derivative contracts are settled by cash payment and do not involve Physical delivery of the underlying product (which may be costly). Derivatives on stock indexes And individual stocks have grown rapidly since inception. In particular, single stock futures have Become hugely popular; accounting for about half of NSE.s traded value in October 2005. In Fact, NSE has the highest volume (i.e. number of contracts traded) in the single stock futures Globally, enabling it to rank 16 among world exchanges in the first half of 2005. Single stock Options are less popular than futures. Index futures are increasingly popular, and accounted for Close to 40% of traded value in October 2005. The growth in volume of futures and options on The Nifty index and shows that index futures have grown more strongly than index options NSE Launched interest rate futures in June 2003 but, in contrast to equity derivatives, there has been Little trading in them. One problem with these instruments was faulty contract specifications, Resulting in the underlying interest rate deviating erratically from the reference rate used by

Market participants. Institutional investors have preferred to trade in the OTC markets, where Instruments such as interest rate swaps and forward rate agreements are thriving. As interest rates In India have fallen, companies have swapped their fixed rate borrowings into floating rates to Reduce funding costs. Activity in OTC markets dwarfs that of the entire exchange-traded Markets, with daily value of trading estimated to be Rs. 30 billion in 2004

TYPES OF DERIVATIVES
1. 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. 2. FUTURES: A futures contract is an agreement between two parties to buy or sell an Asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts 3. OPTIONS: Options are of two types - calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation to sell a Given quantity of the underlying asset at a given price on or before a given date.

4. Warrants: Options generally have lives of up to one year, the majority of options Traded on options exchanges having a maximum maturity of nine months. Longer-dated Options are called warrants and are generally traded over-the-counter. 5. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These Are options having a maturity of upto three years. 6. 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.

7. 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:

A: INTEREST RATE SWAPS: These entail swapping only the interest related cash flows Between the parties in the same currency. B: 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. 8. SWAPTIONS: Swaptions are options to buy or sell a swap that will become operative at the Expiry of the options. Thus a swaption 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.

INTRODUCTION TO 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. Future markets were designed to solve the problems that exist in Forward markets. But unlike forward contracts, the futures contracts ate standardized and Exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain Standard features of the contract. It is a standardized contract with standard underlying Instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or Which can be used for reference purposes in settlement) and a standard timing of such settlement.

Review of Literature
Derivative as Risk Management Tool Bose, Suchismita conducted research on The Indian Derivatives Market Revisited in the year 2006. They found that Derivatives products provide certain important economic benefits such as risk management or redistribution of risk away from risk-averse investors towards those more willing and able to bear risk. Derivatives also help price discovery, i.e. the process of determining the price level for any asset based on supply and demand. These functions of derivatives help in efficient capital allocation in the economy; at the same time their misuse also poses a threat to the stability of the financial sector and the overall economy. Liquidity Routledge, Bryan and Zin, Stanley E of Carnegie Mellon University conducted research on Model Uncertainty and Liquidity in year 2001. Extreme market outcomes are often followed by a lack of liquidity and a lack of trade. This market collapse seems particularly acute for markets where traders rely heavily on a specific empirical model such as in derivative markets. In this paper we capture model-uncertainty explicitly using an Epstein-Wang (1994) uncertainty-averse utility function with an ambiguous underlying asset-returns distribution. To explore the connection of uncertainty with liquidity, we specify a simple market where a monopolist financial intermediary makes a market for a proprietary derivative security. The market-maker chooses bid and ask prices for the derivative, then, conditional on trade in this market, chooses an optimal portfolio and consumption. We explore how uncertainty can increase the bid-ask spread and, hence, reduces liquidity. In addition, "hedge portfolios" for the market-maker, an important component to understanding spreads, can look very different from those implied by a model without uncertainty. Our infinite-horizon example produces short, dramatic decreases in liquidity even though the underlying environment is stationary.

Spot Future Relationship Dheeraj Mishra, R Kannan and Sangeeta D Mishra (2006), tried to find out the spot future parity relationship in case of index futures in the Indian stock market. NSE Nifty has been chosen as underlying asset. It also aims at exploring different factors responsible for the violation of spot-future parity relationship. It was found that there exists a theoretical relationship between spot, futures and other relevant variables as dividend yield, maturity etc. the paper also aimed at finding out whether there exists an arbitrage profit due to violation of spot future. It was found that arbitrage profits are higher for far month future contracts than for near month future contracts. Arbitrage profits are more for undervalued future markets than overvalued future markets.

Volatility in the Market due to Derivative Trading Sen Shankar Som and Ghosh Santanu Kumar (2006) studied the relationship between stock market liquidity and volatility and risk. The paper also deals with time series data by applying Cochrane Orchutt two step procedures. An effort has been made to establish a relation between liquidity and volatility in this paper. It has been found that here is a statistically significant negative relationship between risk and stock market liquidity. Finally it is concluded that there is no significant relationship between liquidity and trading activity in terms of turnover. Arbitrage Opportunities in Derivative Market June2000. Individuals often invest in securities based on approximate rule of thumb, not strictly in tune with market conditions. Their emotions drive their trading behavior, which in turn drives asset (stock) prices. Investors fall prey to their own mistakes and sometimes others mistakes, referred to as herd behavior. Markets are efficient, increasingly proving a theoretical concept as in practice they hardly move efficiently. The purely rational approach is being subsumed by a broader approach based upon the trading sentiments of investors. The present paper documents the role of emotional biases towards investment (or disinvestment) decisions of individuals, which in turn force stock prices to move. INDIAN DERIVATIVES MARKETS1 Asani Sarkar Abstract : In terms of the growth of derivatives markets, and the variety of derivatives users, the Indian market has equalled or exceeded many other regional markets.13 While the growth is being spearheaded mainly by retail investors, private sector institutions and large corporations, smaller companies and state-owned institutions are gradually getting into the act. Foreign brokers such as JP Morgan Chase are boosting their presence in India in reaction to the growth in derivatives. The variety of derivatives instruments available for trading is also expanding. There remain major areas of concern for Indian derivatives users. Large gaps exist in the range of derivatives products that are traded actively. In equity derivatives, NSE figures show that almost 90% of activity is due to stock futures or index futures, whereas trading in options is limited to a few stocks, partly because they are settled in cash and not the underlying stocks. Exchange-traded derivatives based on interest rates and currencies are virtually absent.

RATIONALE OF STUDY :

OBJECTIVES

The following are the major objectives of the study.

To present a theoretical framework relating to derivative market in India.

To explain the risk involved in derivative futures

RESEARCH METHODOLOGY

TOOLS FOR DATA COLLECTION : Questionnaire method of sampling is used to collect the data from 50 respondents who are the clients of various broking houses of Indore. HYPOTHESIS : NULL : Ho :There is no significant relation between derivative investment pattern and impact of recession on investors of derivative. H1 : There is significant relationship between derivative market and recession

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Derivatives: Evidence from India, The Icfai University Journal of Applied Economics, Vol. VII, No. 5, pp. 5975, September 2008. rs Derivative, Sixth Edition and Third Impression 2007

and Developed Markets with Special Reference to India, Quarterly Review of Economics and Finance, 2007, Volume: 37, Page: 859-885 Overview, The Icfai Journal of Accounting Research, Vol. 7, No. 1, pp. 24-35, January 2008. n Spot Market Volatility: A Study on Nifty, T.A. Pai Management Institute, Icfai Journal of Derivatives Markets, Vol. IV, No. 1, pp. 716, January 2007

2006. p://www.bseindia.com