Potential Riskloss Associated With Derivatives Final Perfact

A COMPREHENSIVE PROJECT REPORT ON AN IN-DEPTH ANALYSIS ON POTENTIAL RISK ASSOCIATED WITH DERIVATIVES
Submitted to SHRI JAYSUKHLAL VADHAR INSTITUTE OF MANAGEMENT STUDIES (COLLEGE CODE: 770)
IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS ASMINISTRATION In Gujarat Technological University
UNDER THE GUIDANCE OF Prof. Rajesh Faldu
Submitted by ROHIT LALA [117700592072] SHRI JAYSUKHLAL VADHAR INSTITUTE OF MANAGEMENT STUDIES (JVIMS, JAMNAGAR) MBA PROGRAMME Affiliated to Gujarat Technological University Ahmedabad
Potential Risks of Derivatives Market
PREFACE
The Indian Financial System has undergone a considerable change in the recent past. Only a few years ago its vital aspects used to be a closed, opaque, classified affair shaped and regulated by the bureaucrat of the finance ministry. Today, it is very different. Since 1991, gradually, it metamorphosed into a substantive, self-regulating system and developed as one obeying no rules or dictates other than those consistent with its own character. It has left the backwaters and entered the open sea and though sometimes buffeted by swift, violent and complex happenings, it has necessarily shaped up as what a free financial system should be.
It has chosen to be competitive, market-oriented, modern, cost-effective, trying to remain afloat and struggling to push ahead, even build a surplus for hard times that may be in store. We may attribute this change to the winds of privatization and liberalization blowing all over the world.
The transformation implies that the components of the Indian financial system, that is, the institutions and markets functioning within it have chosen to be well managed and growth-oriented. It has become a modern, twenty-first century system having features such as derivatives market; new instruments such as deep discount bonds, securitized paper, floating rate bonds; bourses such as NSE, OTCEI etc.
I have tried my best to make it lucid in expression, sufficient in content and full of extracts and references.
J.V.I.M.S, JAMNAGAR
DECLARATION
We, ROHIT LALA & SATISH GANWANI, hereby declare that the report for Comprehensive Project entitled An In depth Analysis On Potential Risk/Loss Associated With Derivatives is a result of our own work and our indebtedness to other work publications,
references, if any, have been duly acknowledged.
___________ Rohit lala En. No.: 117700592072
J.V.I.M.S, JAMNAGAR
ACKNOWLEDGEMENT
This acknowledgement is especially for those people who have been cooperative to me while preparing this report. My heartily thanks to all those who have helped me in preparing this report by providing the necessary information regarding the derivatives market which I had undergone in this research project.
I am thankful to my kind and co-operative to our Dy. Director Dr. Ajay Shah and associate Prof. Rajesh Faldu who suggested and helped me to make research associated with potential risks of derivatives market.
Date:
(Signature)
Place: Jamnagar
ROHIT. K. LALA
J.V.I.M.S, JAMNAGAR
EXECUTIVE SUMMARY
In physics, and life too, things are constantly changing. Specifically, what well be interested with in the physics context is how physical quantities change. For example, how does an objects velocity change over time, or how does the force acting on an object change over a distance traveled. Such changes are described mathematically by derivatives. A derivative is just a fancy name that describes how something is changing with respect to something else. What follows will be a brief summary and insight into this world of ever changing quantities called derivatives. In this era of globalization, the world is a riskier place and exposure to risk is growing. Risk cannot be avoided or ignored. Man, however, is risk-averse. This risk-averse characteristic of human beings has brought about growth in derivatives. Derivatives help the risk-averse individual by offering a mechanism for hedging risks. Derivatives offer a sound-mechanism for insuring against various kinds of risk arising in the world of finance. They offer a range of mechanisms to improve redistribution of risk, which can be extended to every product existing, from coffee to cotton and live cattle to debt instruments. The above few lines does not mean that derivatives are the means to insured fully against the risk, there are some risk associated with trading aspect, which we have covered in this research project and mentioned in the later stages. Equity derivatives trading started in India in June 2000, after a regulatory process which stretched over more than four years. In July 2001, the equity spot market moved to rolling settlement. Thus, in 2000 and 2001, the Indian equity market reached the logical conclusion of the reforms program which began n 1994. It is hence important to learn about the behavior of the equity market in this new regime. Indias experience with the launch of equity derivatives market has been
extremely positive, by world standards. There is an increasing sense that the equity derivatives market is playing a major role in shaping price discovery.
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Contents
Page No.
INTRODUCTION & OVERVIEW TO DERIVATIVES
08
CONCEPTUAL FRAMEWORK
26
REVIEW OF LITERATURE.
42
RESEARCH METHODOLOGY.
45
ANALYSIS, INTERPRETATION & TESTING OF HYPOTHESIS FINDINGS, SUGGESTIONS
49
90
CONCLUSION
91
BIBLOGRAPHY.
93
APPENDIX.
95
10
GLOSSARY.
98
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INTRODUCTION TO DERIVATIVES
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INTRODUCTION
Derivatives are one of the most complex of instruments. The word derivative comes from the verb to derive. It indicates that it has no independent value. A derivative is a contract whose value is derived from the value of another asset, known as the underlying, which could be a share, a stock market index, an interest rate, a commodity, or a currency. The underlying is the identification fag for a derivative contract. When the price of this underlying asset changes, then the value of the derivative also changes. Without an underlying, derivatives do not have any meaning. For instance, the value of a gold future contract derives from the value of the underlying asset, that is, gold.
Derivatives are very similar to insurance. Insurance protects against specific risks, such as fire, floods, theft, and so on. Derivatives, on the other hand, take care of market risks volatility in interest, currency rates, commodity prices, and share prices. Derivatives offer a sound mechanism for insuring against various kinds of risk arising in the world of finance. They offer a range of mechanisms to improve redistribution of risk, which can be extended to every product existing, from coffee to cotton and live cattle to debt instruments.
In this era of globalization, the world is a riskier place and exposure to risk is growing. Risk cannot be avoided or ignored. Man, however, is risk-averse. This risk-averse characteristic of human beings has brought about growth in derivatives. Derivatives help the risk-averse individual by offering a mechanism for hedging risks. Derivatives offer a sound mechanism for insuring against various kinds of risk arising in the world of finance. They offer a range of mechanisms to improve redistribution of risk, which can be extended to every product existing, from coffee to cotton and live cattle to debt instruments.
Derivatives product, several centuries ago, emerged as hedging devices against fluctuations in commodity prices. Commodity futures and options have had a lively existence for several centuries. Financial derivatives came into the limelight in the post 1970 period; today they account for they account for 75 per cent of the financial market activity in Europe, North America, and East Asia. The basic J.V.I.M.S, JAMNAGAR 8
difference between commodity and financial derivatives lies in the nature of the underlying instrument. In commodity derivatives, the underlying is a commodity; it may be wheat, cotton, pepper, turmeric, corn, oats, soybeans, orange, rice, crude oil, natural gas, gold, silver, and so on. In financial derivatives, the underlying includes treasuries, bonds, stocks, stock index, foreign exchange, and euro-dollar deposits.
The market for financial derivatives has grown tremendously both in terms of variety of instruments and turnover. Derivatives can be future, options, swaps, forwards, puts, calls, swap options, index-linked derivatives, and so on.
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THE EXPLOSIVE GROWTH OF DERIVATIVES IN THE DEVELOPED CENTURIES IS FUELLED BY:

The increased volatility in global financial markets. The technological changes enabling cheaper communications and computing power. Breakthrough in modern financial theory, providing economic agents a wider choice of risk management strategies and instruments that optimally combine the risk and returns over a large number of financial assets. Political developments, wherein the role of the government in the economic arena has become more of a facilitator and less of a prime mover. Thus, the move towards market-oriented policies and the deregulation in financial markets has led to increase in financial risk at the individual participants level. Increased integration of domestic financial markets with international markets.
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DERIVATIVES DEFINED UNDER THE SECURITIES CONTRACTS (REGULATION) ACT, 1956

The Securities Contracts (Regulation) [Act SC(R)A], 1956, defines derivatives in the following manner.
Derivatives 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.
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ECONOMIC BENEFITS OF DERIVATIVES

Derivatives reduce risk and thereby increase the willingness to hold the underlying asset. They enable hedging, which is the prime social rational for future trading. Hedging is also the equivalent of insurance facility against risk from market price fluctuations. Derivatives enhance the liquidity of the underlying asset market. A liquid market is a market with enough trading activity to allow traders to readily trade goods for a price that is close to its true value. The trading volume increases in the underlying market as derivatives enable participation by a large number of players. Derivatives lower transaction costs. These costs associated with trading financial derivatives are substantially lower than the cost of trading the underlying instrument. Derivatives enhance the price discovery process. Price discovery is the revealing of information about future cash market prices through the futures market. The prices in the derivatives market reflect the perception of market participants about the future, and lead the prices of the underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of a derivatives contract. Thus, derivatives help in the discovery of future as well as current prices. Derivatives can help the investors to adjust the risk and return characteristics of their stock portfolio carefully. For instance, a risky stock and a risky option may be combined to form a risk less portfolio. They also provide a wide choice of hedging structures each with a unique risk/return profile to meet the exact requirements of each market participant. Derivatives provide information on the magnitude and the direction in which various market indices are expected to move.
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HISTORY OF DERIVATIVES TRADING

Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place on a specified date, existed in ancient Greece and Rome. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain. These contracts were also undertaken between framers and merchants to eliminate the risk arising out of uncertain future prices of grains. Thus, forward contracts have existed for centuries for hedging price risk.
History of Derivatives: A Time Line The Ancient: Derivatives 1400s 1600s 1800s Japanese rice futures Dutch tulip bulb options Puts and options
The Recent: Financial Derivatives Listed Markets 1972 1973 1977 1981 1982 1983 1990 1991 1992 1993 OTC Markets 1981 1982 1983 1987 1988 Currency swaps Interest rate swaps Currency and bond options Equity derivatives markets Hybrid derivatives Financial currency futures Stock options Treasury bond futures Eurodollar futures Index futures Stock Index options Foreign index warrants and leaps Swaps futures Insurance futures Flex options
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NEED FOR FINANCIAL DERIVATIVES

There are several risks inherent in financial transaction and asset liability positions. Derivatives are risk shifting devices; they shift risk from those who have it but may not want it to those who have the appetite and are willing to take it.
The three broad types of price risks are: Market risk: Market risk arises when security prices go up due to reasons affecting the sentiments of the whole market. Market risk is also referred to as systematic risk since it cannot be diversified away because the stock market as whole may go up or down from time to time. Interest rate risk: This risk arises in the case of fixed income securities, such as treasury bills, government securities, and bonds, whose market price could fluctuate heavily if interest rates change. For example, the market price of fixed income securities could fall if the interest rate shot up. Exchange rate risk: In the case of import, exports, foreign loans or investments, foreign currency is involved which gives rise to exchange rate risk.
To hedge these risks, equity derivatives, interest rate derivatives, and currency derivatives have emerged.
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DISTINCTIVE FEATURES OF DERIVATIVES MARKET

The derivatives market is like any other market. It is a highly leveraged market in the sense that loss/profit can be magnified compared to the initial margin. The investor pays only a fraction of the investment amount to take an exposure. The investor can take large positions even when he does not hold the underlying security. Market view is as important in the derivatives market as in the cash market. The profit/loss positions are dependent on the market view. Derivatives are double-edged swords. Derivatives contracts have a definite lifespan or a fixed expiration date. The derivatives market is the only market where an investor can go long and short on the same asset at the same time. Derivatives carry risks that stocks do not. A stock loses its value in extreme circumstances, while an option loses its entire value if it is not exercised.
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TRADERS IN DERIVATIVES MARKET

There are three types of traders in the derivatives market: Hedger Speculator Arbitrageur Hedger A hedge is a position taken in order to offset risk associated with some other position. A hedger is someone who faces risk associated with price movement of an asset and who uses derivatives as a means of reducing that risk. A hedger is a trader who enters the futures market to reduce a pre-existing risk. Speculators While hedgers are interested in reducing or eliminating risk, speculators buy and sell derivatives to make profit and not to reduce risk. Speculators willingly take increased risks. Speculators wish to take a position in the market by betting on the future price movements of an asset. Futures and options contracts can increase both the potential gains and losses in a speculative venture. Speculators are important to derivatives markets as they facilitate hedging, provide liquidity, ensure accurate pricing, and help to maintain price stability. It is the speculators who keep the market going because they bear risks which no one else is willing to bear. Arbitrageur An arbitrageur is a person who simultaneously enters into transactions in two or more markets to take advantage of discrepancy between prices in these markets. For example, if the futures price of an asset is very high relative to the cash price, an arbitrageur will make profit by buying the asset and simultaneously selling futures. Hence, arbitrage involves making profits from relative mispricing. Arbitrageurs also help to make markets liquid, ensure accurate and uniform pricing, and enhance price stability.
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DERIVATIVES MARKET IN INDIA

In India, commodity futures date back to 1875. The government banned futures trading in many of the commodities in the sixties and seventies. Forward trading was banned in the 1960s by the government despite the fact that India had a long tradition of forward markets. Derivatives were not referred to as options and futures but as tezi-mandi. In the case of capital markets, the indigenous 125-year-old badla system was very popular among the broking and investor community. The advent of FIIs in the nineties and a large number of scams led to a ban on badla. The FIIs were not comfortable with this system and they insisted on adequate risk management tools. Hence, the SEBI decided to introduce financial derivatives. 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 24member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 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, methodology for charging initial margins, broker net worth, deposit requirement and realtime monitoring requirements. Derivatives trading formally commenced in June 2000 on the two major stock exchanges. BSE and NSE. Futures trading based on the Sensex commenced at the BSE on June 9, 2000, while future trading based on S&P CNX Nifty commenced at the NSE on June 12, 2000.
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TYPES OF FINANCIAL DERIVATIVES

In recent years, derivatives have become increasingly important in the field of finance. Forwards, futures, options, swaps, warrants, and convertible are the major types of financial derivatives. A complex variety of composite derivatives, such as swaptions, have emerged by combining some of the major types of financial derivatives. Forwards A forward contract is a contract between two parties obligating each to exchange a particular good or instrument at a set price on a future date. It is an OTC agreement and has standardized market features. Futures Futures are standardized contracts between the buyers and sellers, which fix the terms of the exchange that will take place between them at some fixed future date. A futures contract is a legally binding agreement. Futures are special types of forward contracts which are exchange traded, that is, traded on an organized exchange. The major types of futures are stock index futures, interest rate futures, and currency futures. Options Options are contracts between the option writers and buyers which obligate the former and entitles (without obligation) the latter to sell/buy stated assets as per the provisions of contracts. The major types of options are stock options, bond options, currency options, stock index options, futures option, and options on swaps.
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Warrants Warrants are long term options with three to seven years of expiration. In contract, stock options have a maximum life of nine months. Warrants are issued by companies as means of raising finance with no initial servicing costs, such as dividend or interest. They are like a call option on the stock of the issuing firm. A warrant is a security with a market price of its own that can be converted into specific share at a predetermined price and date. If warrants are exercised, the issuing firm has to create a new share which leads to a dilution of ownership. Warrants are sweeteners attached to bonds to make these bonds more attractive to the investor. Most of the warrants are detachable and can be traded in their own right or separately. Warrants are also available on stock indices and currencies. Swaps Swaps are generally customized arrangements between counterparties to exchange one set of financial obligations for another as per the terms of agreement. The major types of swaps are currency swaps, and interest-rate swaps, bond swaps, coupon swaps, and debt-equity swaps.
DERIVATIVES
Options
Futures
Swaps
Forwards
Put
Call
Interest Rate
Currency
Commodity
Security
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DERIVATIVES MARKET AT NSE

Trading Mechanisms The futures and options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen-based trading for S&P CNX Nifty futures on a nationwide basis and an online monitoring and surveillance mechanism. It supports an order-driven market and is accessed by two types of users: trading members and clearing members. The trading members (TM) have access to the function such as order trading, order matching order and trade management while the clearing members (CM) use trade workstation for the purpose of monitoring the trade member(s) for whom they clear the trades. The can also enter and set limits to positions which a trading member can take. At present, there are more than 200 derivatives members of NSE. An investor has to sign a client-broker agreement with a member of derivatives segments for undertaking derivatives trading. A fresh is not needed for options trading if an agreement is already signed for index futures trading. The investor has to pay a commission to his broker-member to the value (strike price plus premium) of his contract. Brokerage ranges between 0.1 and 0.2 per cent of the contract values. An option buyer does not have to pay margins but an option seller has to pay daily marked-to-market margins to the exchange. The broker-member is required to give a contract note for all options and futures transactions done by an investor within 48 hours of trade. Clearing and Settlement The National Securities Clearing Corporation Limited (NSCCL) undertakes clearing and settlement of all deals executed on the NSEs derivatives segment. It acts as a legal counterparty to all deals on the derivatives segment and guarantees settlement. NSCCL has developed a comprehensive risk containment mechanism for the derivatives market. The actual margining happens on a daily basis and online position monitoring on an intra-day basis.
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Settlement System Nifty Index futures are cash settle. Index options on the Nifty are Europeans-style, which means that they can only be exercised upon maturity. In case of futures, settlement is done on a daily basis by marking to market all open position on the basis of daily settlement price. Members are required to pay the markto-market losses by T+1 day. The contracts are finally settled on expiry of the Nifty Index Futures Contract. Index options contracts on Nifty have a daily premium settlement and a formal settlement on the exercise day. Mutual Funds and Derivatives SEBI has permitted mutual funds to trade in derivatives. Mutual funds can use derivatives only for hedging and portfolio balancing. Mutual funds have to hold the cash or underlying security equal to the total exposure they take in derivatives. Hence, there is no scope for speculative. In other words, mutual funds cannot use leverage.
The other guidelines of SEBI state that a funds offer document has to clearly state that the fund can use derivatives. The fund has to keep its trustees updated (informed) regularly. The mutual fund has to take an approval of the shareholders to take positions in the derivatives market.
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INSTRUMENT AVAILABLE IN INDIA
Products
Index Futures
Index Options
Futures Individual Securities
on Options Individual Securities 224
on
Underlying Instrument
S&P CNX Nifty
S&P Nifty
CNX 224 securities
securities by
stipulated
stipulated by SEBI SEBI Type Trading Cycle European Maximum of 3 month trading Same cycle. At any point in time, index there will available: 1.near month, 2.mid month & 3.far month duration Expiry Day Last Thursday of the expiry Same month index futures Contract Size Permitted lot size is 200 & Same multiples thereof index futures as As stipulated As stipulated by by NSE (not NSE (not less less than than Rs.2 lacs) as Same as Same as index futures be 3 contracts futures as Same American as Same as index futures
index futures
index futures
Rs.2 lacs) Price Steps Re.0.05 Re.0.05
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Base Price Previous day closing Nifty Theoretical First day of value trading
Previous day Same as index
value of the closing value option options contract arrived based Black scholes model at on of underlying security
Base Price Daily settlement price Subsequent
Daily close Daily price settlement price
Same as index option
Price Bands
Operating ranges are kept at + Operating 10% ranges
Operating
Operating ranges are for are kept at 99
for ranges
are kept at kept at + 20 % of the base 99 % of the % base price Quantity Freeze 20,000 units or greater 20,000 units Lower of 1% Same or greater of market individual as price
wide position futures limit stipulated for open position or crores Rs.5
BSE also offers similar products in the derivatives segment
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CHRONOLOGY OF EVENTS LEADING TO DERIVATIVES TRADING
1956
Enactment of the Securities Contracts (Regulation) Act which prohibited all options in securities
1969 1995
Issue of Notification which prohibited forward trading in securities Promulgation of the Securities Laws (Amendment) Ordinance which withdrew prohibition on options
1996
Setting up of L.C. Gupta Committee to develop regulatory framework for derivatives trading in India
1998
Constitution of J.R.Varma Group to develop measure for risk containment for derivative
1999
Enactment of the Securities Laws (Amendment) Act which defined derivatives as securities
2000 May 2000
Withdrawal of 1969 Notification SEBI granted approval to NSE and BSE to commence trading of derivatives
June 2000 June 2001 July 2001
Trading in index futures commenced Trading in index options commenced Trading in stock options commenced Rolling settlement introduced for active securities
Nov. 2001
Trading in stock futures commenced
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CONCEPTUAL FRAMEWORK
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FORWARDS CONTRACTS
A forward contract is a customized contract between two parties where settlement takes place on a specific date in the future at a price agreed today. They are over-thecounter traded contracts. Forward contract are private agreements between two financial institutions or between a financial institution and its corporate client. In a forward contract, one party takes a long position by agreeing to buy the asset at a certain specified date for a specified price and the other party takes a short position by agreeing to sell the assets on the same date for the same price. The main features of forward contracts are: They are bilateral contracts wherein all the contract details, such as delivery date, price, and quantity and so on, are negotiated bilaterally by the parties to the contract. Being bilateral in nature, they are exposed to counter party risk. Each contract is custom designed in the sense that the terms of a forward contract are individually agreed between two counterparties. Hence, each contract is unique in terms of contract size, expiration date, and the asset type and quality. As each contract is customized, the contract price is generally not available in public domain. The contract has to be settled by delivery of the asset on the expiry date. In case, the party wishes to reverse the contract, it has to compulsorily approach the same counterparty, which being in a monopoly situation can command a high price. Forward markets for some goods are highly developed and have standardized market features. Some forward contracts do have liquid markets. In particular, the forward foreign exchange market and the forward market for interest rates are highly liquid. Forward contracts dominance is very high for the purpose of hedging foreign exchange exposures, particularly in Europe. Forward contracts help in hedging risks arising out of foreign exchange rate fluctuation. For instance, an exporter who expects to receive payments in dollars three months later can sell dollars forward and an importer who is required to make payment in dollars can buy dollars forward, thereby reducing their exposure to exchange-rate fluctuations.
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FUTURES CONTRACTS
Futures are exchange-traded contracts, or agreements, to buy or sell a specified quantity of financial instrument/commodity in a designated future month at a price agreed upon by the seller and buyer. Futures contracts have certain standardized specifications, such as: Quantity of the underlying Quality of the underlying (not required in financial futures) Date and month of delivery Units of price quotation (not the price itself) and minimum change in price (tick size). A tick is a change in the price of a contract be it up or down. Location of settlement
Futures is a type of forward contract. The structure, pay-off profile, and basic utility for both futures and forward are the same. However, futures contracts differ contracts differ from forward contracts in several ways: Futures are exchange-traded contracts, while forwards are OTC contracts, not traded on a stock exchange. Futures contracts being traded on exchange are standardized, that is, have terms standardized by the exchange. Only the price is negotiated. In contrast, all elements of forward contracts are negotiated and each contract is customized. Futures markets are transparent while the forward market are not transparent, forwards are OTC instruments. Futures contracts are usually more liquid than forward contracts, because they are standardized and traded on futures exchanges. Futures contracts frequently involve a range of delivery dates whereas there is generally a single delivery date in a forward contract. The futures trading system has effective safeguards against defaults. Futures do not carry a credit risk, as there is a clearing house, which guarantees both payment and delivery. Forward contracts, on the other hand, are exposed to default risk by counterparty as there is no such clearing house involved.
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HISTORY OF FUTURE MARKETS

Futures markets can be traced back to the middle ages. They were originally developed to meet the needs of farmers and merchants. Consider the position of a farmer in April of a certain year who will harvest grain in June. The farmer is uncertain as to the price he or she will receive for the grain. In years of scarcity, it might be possible to obtain relatively high prices particularly if the farmer if not in hurry to sell. On the other hand, in years of oversupply, the grain might have to be disposed of at fire-sale prices. The farmer and the farmers family are clearly exposed to a great deal of risk It clearly makes sense for the farmer and the merchant to get together in April (or even earlier) and agree on a price for the farmers anticipated production of grain in June. In other words, it makes sense for them to negotiate a type of futures contract. The contract provides a way for each side to eliminate the risk it faces because of the uncertain future price of grain. The Chicago Board of Trade The Chicago Board of Trade (CBOT) was established in 1848 to bring farmers and merchants together. Initially, its main task was to standardize the quantities and qualities of the grains that were traded. Within a few years, the first futures type contract was developed. It was know as a to-arrive contract. Speculators soon became interested in the contract and found trading the contract to be an attractive alternative to trading the grain itself. The CBOT now offers futures contracts on many different underlying assets, including corn, oats, soybeans meal, soybean oil, wheat, silver, treasury bonds, treasury notes, and the Major Market Stock Index. The Chicago Mercantile Exchange In 1874, the Chicago Produce Exchange was established. This provided a market for butter, eggs, poultry, and other perishable agricultural products. In 1898, the butter and egg dealers withdrew from this exchange to form the Chicago Butter and Egg Board. In 1919, this was renamed the Chicago Mercantile Exchange (CME) and was reorganized for futures trading.
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NEED FOR FUTURE MARKETS

Futures markets exist for several reasons: Futures allow hedging against adverse price changes. Hedgers transfer price risk to speculators who willingly undertake risk to take advantage of fluctuations in prices. Futures help in price-discovery. By observing the current futures price, producers and consumers can estimate what the future spot price will be or what future supply and demand of a good will be. Futures prices contain and reflect information which helps in optimal allocation of resources. Futures make transactions across time easier, speedier and less costly
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PRICING FUTURES
The study of futures prices is essential for understanding all features of the futures market. Futures prices bear important relationships with the spot price, expected future spot price, the basis, the spreads, and the cost of storage. These are fundamental factors that affect futures prices. Spot Price The price of a good for immediate delivery. It is also referred to as the cash price or the current price. Basis The difference between cash price and the futures prices of particular good. Basis = Current Cash Price Futures Price.
As the futures contract approaches maturity, the basis narrows. At the maturity of the futures contracts, the basis is zero. This behavior of the basis over time is known as convergence, that is, convergence of futures price towards the spot price. The basis is much more stable than futures price or the cash price. The futures price or the cash price may vary widely when considered in isolation, but basis trends to be relatively stable. Hence, basis is important for speculation and hedging. Arbitrage opportunities can also arise if the basis during the life of a contract is incorrect.
Spread - A spread is the difference between two futures prices. Spreads may be classified as intra-commodity spread and inter-commodity spread. If the two futures prices that form a spread are futures prices for futures contracts on the same
underlying good but with different expiration dates, the spread is an intra-commodity spread. An intra-commodity spread indicates the relative price differentials for a commodity to be delivered at two points in time. If two futures prices that form a spread are futures prices for two underlying goods, such as silver futures and gold futures, then the spread is an inter-commodity spread. Spreads are important for speculators. Spreads are more stable when compared to futures prices. Arbitrage opportunities can arise if the spreads are incorrect.
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Expected future spot price The expectations of market participants also help in determining the futures prices. If market participants believe that silver will sell for Rs 7000 per kg in three months, then the price of the futures contract for delivery of silver in three months cannot be Rs 9000 per kg. Cost of Storage The price for storing the good underlying the futures contract also affects futures prices. The cost of storing is the cost of storing the underlying good from the present to the delivery date. It is the cost of carry related arbitrage that drives the behavior of the futures prices.
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FUTURE TRADING STRATEGIES

Strategies are game plans created by an investor. These game plans are based on investors expectations of how the market will move. Usually, there are four views that an investor can take on market movements.
Bullish: The investor anticipates a price rise. Bearish: The investor anticipates a price decline. Volatile: The investor anticipates a significant and rapid movement either in the market or scrip but he is not clear of the direction of the movement Neutral: The Investor believes that market or scrip will not move significantly in any direction. It is opposite of the volatile view.
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OPTIONS CONTRACT
Options are contracts that give the holder the option to buy/sell specified quantity of the underlying assets at a particular (strike) price on or before a specified time period. The word option implies that the holder of the options has the right but not the obligation to buy or sell underlying assets. The underlying may be physical commodities such as wheat/rice/cotton/oilseeds/gold or financial instruments such as equity shares, stock index, bonds and so on. In a forward or futures market, the two parties commit to buy and sell, while the option gives the holder of the option the right to buy or sell. However, the holder of the options has to pay the price of the options, termed as the premium. If the holder does not exercise the option, he loses only the premium. Hence, options are fundamentally different from forward or futures. It should be emphasized that an option gives the holder the right to do something. The holder does not have to exercise this right. This fact distinguishes options from futures contracts. The holder of a long futures contract has committed himself or herself to buying an asset at a certain price at a certain time in the future. By contrast, the holder of call option has a choice as to whether he or she buys the asset at a certain price at a certain time in the future. It costs nothing to enter into a futures contract. By contrast, an investor must pay an up-front fee or price for an options contract. Buyers are referred to as having long positions; sellers are referred to as having short positions. Selling an option is also known as writing the option.
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HISTORY OF OPTIONS MARKET

The first trading in puts and calls began in Europe and in the United States as early as the eighteenth century. In the early years, the market got a bad name because of certain corrupt practices. One of these involved brokers being given options on a certain stock as an inducement for them to recommend the stock to their clients. Put and Call Brokers and Dealer Association In the early 1900s, a group of firms set up what was known as the Put and Call Brokers and Dealers Association. The aim of this association was to provide a mechanism for bringing buyers and sellers together. If someone wanted to buy an option, he or she would contact one of the member firms. This firm would attempt to find a seller or writer of the option from either its own clients or those of other member firms. If no seller could be found, the firm would undertake to write the option itself in return for what was deemed to be an appropriate price. A market created in this way is known as an over-the-counter market, since traders do not physically meet on the floor of an exchange. The options market of the Put and Call Brokers and Dealers Association suffered from two deficiencies. First, there was no secondary market. The buyer of an option did not have the right to sell it to another party prior to expiration. Second, there was no mechanism to guarantee the writer of the option would honor the contract. If the writer did not fulfill his or her part of the bargain when the option was exercised, the buyer had to resort to costly lawsuits.
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The Formation of Options Exchange In April 1973, the Chicago Board of Trade set up a new exchange, the Chicago Board Options Exchange, specifically for the purpose of trading stock options. Since then option markets have become increasingly popular with investors. The American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading options in 1975. By the early 1980, the volume of trading had grown so rapidly that the number of shares underlying the option contracts sold each day exceeded the daily volume of shares traded on the New York Stock Exchange. In the 1980s, market developed for options in foreign exchange, options on stock indices, and options on futures contracts. The Philadelphia Stock Exchange is the premier exchange for trading foreign exchange options. The Chicago Board Options Exchange trades options on the S&P 100 and the S&P 500 stock indices while the American Stock Exchange trades options on the Major Market Stock Index, and the New York Stock Exchange trades options on the NYSE index. Most exchange offering futures contracts now also offer options on these futures contracts. Thus, the Chicago Board of Trade offers options on corn futures, the Chicago Mercantile Exchange offers options on live cattle futures, and the International Monetary Markets offers options on foreign currency futures, and so on. Both options and futures markets have been outstandingly successful. One of the reasons for this is that they have attracted many different types of traders. Three broad categories of traders can be identified: hedgers, speculators, and arbitrageurs.
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TYPES OF OPTIONS
Options are of two basic types call option and put option. A call option is a right to buy an underlying asset at a specified price on or before a particular day by paying a premium. A put option is a right to sell an underlying asset at a specified price on or before a particular day by paying a premium. There are two other important types of options: European-style options and American-style options. European-style options can be exercised only on the maturity date of the option, which is known as the expiry date. American-style options can be exercised at any time before and on the expiry date. The American option permits early exercise while a European option does not. Both these types are traded throughout the world. European options are easier to analyze than American options and properties of an American option are frequently deduced from those of its European counterpart. Options can be over the counter and exchange traded. Over-the-counter (OTC) options are private agreements between two parties and are tailor-made to the requirements of the party buying the options. Exchange-traded options are bought and sold on an organized exchange and are standardized contracts. Most exchange-traded options are American-style options.
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SALIENT FEATURES OF OPTIONS

1 Options have a fixed maturity date on which they expire; this is termed expiry date. European-style option can be exercised only on the expiry date while American-style options can be exercised on any day before the expiry date. The expiry date is also known as the exercise date, the strike date, or the maturity date. 2 The price at which the option is exercised is called the exercise price, or strike price. The exercise price is specified in the contract. 3 The person who writes the option is the option writer. The seller of an option is usually referred to as writer. The option writer is obliged to buy/sell the shares if the holder (buyer) exercises his option. The writer of a call option is generally bearish and writer of a put option is generally bullish. The writer of a call option must deliver the stock and the writer of a put option must buy the stock at the strike prices if the option buyer or seller chooses to exercise his right. The profits/loss of options writers equals the losses/profits of the buyers. The maximum profit for the writer in case of an option unexercised is the premium received. The writer of a call has unlimited loss potential, while the writer of a put has limited loss potential. Option writing is risky and hence it requires a higher degree of understanding risk management ability and an active, regular presence in the derivatives market regularly. 4 5 The option premium is the price paid for the option by the buyer to the seller. The value of option (premium) depends on the exercise price, the time of expiration, the price of the asset involved, the variance of returns of the asset concerned, the risk free rate, and the dividends expected during the life of the option. The value of a call generally increases as the current stock price, the time to expiration, the volatility, and the risk free interest rate increase. The value of a call decreases as the strike price and expected dividends increase. The value of a put generally increases as the strike price, the time to expiration, the volatility, and the expected dividends increase.
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OPTIONS TERMINOLOGY
In-the-money option: when the underlying asset price (S) is greater than the strike price (X) of the call option, that is, S>X. An in-the-money option would lead to a positive cash flow to the holder if it were exercised immediately. Out-of-the-money option: when the underlying asset price (S) is the less than the strike price (X of the call option) , that is, S<X. An out-of-the-money option would lead to a negative cash flow if exercised immediately. At-the-money option: when the options underlying asset price is equal to the options strike price, that is, S=X. It would lead to zero cash flow if exercised immediately. Call Option In the money Put Option
Spot price of underlying asset Spot price of underlying > Strike Price (S>X) asset < Strike Price (S<X)
At the money*
Spot price of underlying asset Spot price of underlying = Strike price. asset = strike price.
Out of the money
Spot price of underlying asset Spot price of underlying < Strike price (S<X) asset > Strike Price (S>X)
*When market price is very near the strike price, the option is called near-the-money option
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OPTION PREMIUM
The option premium can be broken down into two components intrinsic value of an option and time value of an option. Intrinsic value of Options: The intrinsic value of an option is the greater of zero, or the amount that is in-the-money. Only in-the-money options have intrinsic value. It is defined as the amount by which an option is in the money or the immediate exercise value of the option when the underlying position is marked-to-market. For a Call option: Intrinsic Value = Spot Price Strike Price. For a Put option: Intrinsic Value = Strike Price Spot Price. The intrinsic value of an option must be a positive number of zero (0). It cannot be negative. For a call option, the strike price must be less than the price of the underlying asset for the call to have an intrinsic value greater than zero. In other words the intrinsic value of a call is max (S X, O), which means the intrinsic value of a call is the greater of S X or O. For a put option, the strike price must be greater than the underlying price for it to have intrinsic value. In other words, the intrinsic value of a put is max (X S, O). Time Value of Options: The time value of an option is the difference between its premium and its intrinsic value. Time value is the amount option buyers are willing to pay for the possibility that the option may become profitable prior to expiration due to favorable change in the price of the underlying. Thus, it is a payment for the possibility that the intrinsic value might increase prior to the expiry date. The magnitude of the options time value reflects the potential of the option to gain intrinsic value during its life. Prior to expiration, options will almost have some time value; the exceptions are deep in-the-money European options. When an option is sold, rather than exercised, time value is received in addition to the intrinsic value. Time value cannot be negative. An option loses its time value as its expiration date nears. Time value premium decreases at an accelerated rate as the option approaches maturity. At expiration, an option is worth only its intrinsic value.
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A call that is out of the money or at the money has only time value. Usually, the maximum time value exists when the option is at the money. One of the factors that determine time value is the market expectation or price volatility. If the market expectation of price volatility of an underlying asset is high, the time value will also be high, reflecting the strong possibility of substantial increases in intrinsic value.
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REVIEW OF LITERATURE
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ALLAYANNIS, G. OFEK, E. (2001), Exchange rate exposure, hedging, and the use of foreign currency derivatives, Journal of International Money and Finance, Vol. 20, pp. 273-296. ANSON, M. J. P. (2001), Accounting and tax rules for derivatives, Wiley and Sons, London. BARRIEU, P. EL-KAROU, N. (2002), Optimal design of derivatives in illiquid markets, Quantitative Finance, No. 2, Vol. 3, pp.181-188. BHASIN, V. (1996), On the credit risk of OTC derivatives users, Board of Governors of the Federal reserve System, Washington D.C.. BIS (1995), Issues of measurement related to market size and macroprudential risks in derivatives markets, Basle. BIS (1996), Macroeconomic and monetary policy issues raised by the growth of derivatives markets, Basle. BREWER, E. MINTON, B.A. MOSER, J.T. (2000), Interest rate derivatives and bank lending, Journal of Banking and Finance, Vol. 24, No. 3, pp. 353-379. BROWN, G.W. TOFT, K.B. (2002), How firms should hedge, Review of Financial Studies, Fall, Vol. 15, no.4, pp. 1283-1324. COHEN, B. (1999), Derivatives, volatility and price discovery, International Finance, Vol. 2, No. 2, pp. 167-202. CONRAD, J. (1989), The price effect of option introduction, Journal of Finance, vol. XLIV, N. 2, June, pp. 487-498. DARBY, M.R. (1994), Over-The-Counter derivatives and systemic risk to the global financial system, NBER Working Paper, No. 4801, Cambridge, MA. DONMEZ, C.A. YILMAZ, M.K (1999), Do derivatives markets constitute a potential threat to the stability of the global financial system?, ISE Review, Vol. 3, No. 11, pp. 51-82.
EDWARDS, F.R. (1995), Off-exchange derivatives markets and financial fragility, Journal of Financial Services Research, No. 9, pp. 259290.
GARBER, P.M. (1998), Derivatives in International Capital Flow, NBER Working Paper, No. 6623, Cambridge, MA.
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GOODHART, C.A.E. (1995), Financial globalization, derivatives, volatility, and the challenge for the policies of central banks, Special Paper 74, ESRC Research Centre, London. HAUGH, M.B. LO, A.W. (2001), Asset allocation and derivatives, Quantitative Finance, Vol. 1, No. 1, pp. 45-72. HEAT, R. (1998), The statistical measurement of financial derivatives, IMF Working Paper, n.24, Washington D.C.. HENTSCHEL, L. KOTHARI, S.P. (2001), Are Corporations Reducing or Taking Risks with Derivatives?, Journal of Financial and Quantitative Analysis, March, Vol. 36, No.1, pp. 93-118. HOGAN, A.M.B. MALMQUIST, D.H. (1999), Barriers to depository uses of derivatives: an empirical analysis, Journal of Multinational Financial Management, Vol. 9, No. 3-4, pp. 419-440. HOOYMAN, C.J. (1993), The use of foreign exchange swap by central banks: a survey, IMF Working Paper, N. 64, Washington D.C.. HULL, J. (2002), Options, futures and other derivatives, fifth edition, Prentice Hall. HUNTER, W.C. MARSHALL, D. (1999), Thoughts of financial derivatives, systemic risk, and central banking: Some recent developments, Federal Reserve Bank of Chicago Working Paper, n. 20, Chicago. KROSZNER, R.S. (1999), Can the financial markets privately regulate risk? The development of derivatives clearinghouses and recent OTC innovations, Journal of Money Credit and Banking, Vol. 31, No. 3, pp. 596618. LATTER, T. (2001), Derivatives from a Central Bank Point of View, speech at Hong Kong, 5 November 2001.
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RESEARCH METHODOLOGY
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Objectives of the study
The main aim of analysis is to find out the potential risks which are associated with the derivatives market in India. The project report is not a research based it is based on the secondary data and simple analysis is carried out i.e. the impact of risks on financial derivatives segment. As each research / analysis has some or the other objectives the following are the objectives of this analysis: To highlight all the potential risk which have a impact on Indian stock market or financial derivatives. To study the effectiveness in managing or hedging the risk associated in equity investment. To study the effectiveness of Derivative instruments in respect to Speculation, Hedging, Investment, Arbitrage. To compare the risk and return with equity and derivatives. To come out with suitable recommendations to the investors
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STATEMENT OF PROBLEM
POTENTIAL RISK ASSOCIATED WITH DERIVATIVES
DATA COLLECTION
The task of data collection begins after a objective is decided, problem has been defined and research/analysis design/plan chalked out. While designing about the method of data collection to be used for the study. The details of data are as follows: The underlying instruments is S&P CNX Nifty The underlying sector are Bank, IT, FMCG, PSE, MNC, Service, Energy, Pharma All data collected on secondary basis i.e. from www.nseindia.com
RESEARCH DESIGN Sample size 12 stocks of different sectors

Data collection source is secondary data. Scope of the study is Limited to some the of the selected stocks and for the time period from 2008 to 2012 only. Statistical Tool used in the study is t - Test
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LIMITATION OF THE STUDY

The limitations of this study could be the many, but the main limitations which must be one of the constraints during preparation of the Analysis Report are: Secondary Data: o The most and crucial limitation of this study is the use of secondary data. Personal Bias: o Some articles and literature may have had personal bias due to which they may not have given the correct information and due to which the right conclusion may not be have been derived at. Selection Criteria: o The sectors which are chosen may not fall under the right risk i.e. Systematic of Unsystematic and the companies under that sector may not have the ideal representative.
Human Constraints: o The human constraints were also important limitation because the type of analytical process took place in once mine may have different from others.
Time Limit: o The time limit taken for conducting the research was very less it could also be one of the limitations of the study.
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ANALYSIS AND INTERPRETATION & TESTING OF HYPOTHESIS
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CNX BANK INDEX

The Indian banking Industry has been undergoing major changes, sparkly a number of essential developments. Advancement in communication and information technology has facilitated growth in internet-banking, ATM Network, Electronic transfer of funds and quick diffusion of information. Structural reforms in the banking sector have improved the health of the banking sector. The reforms recently introduced include the enactment of the Securitization Act to step up loan recoveries, establishment of asset reconstruction companies, initiatives on improving recoveries from Non-performing Assets (NPAs) and change in the basis of income recognition has raised transparency and efficiency in the banking system. In order to have a good benchmark of the Indian banking sector, India Index Service and Product Limited (IISL) has developed the CNX Bank Index.
CNX Bank Index is an index comprised of the most liquid and large capitalized Indian Banking stocks. It provides investors and market intermediaries with a benchmark that captures the capital market performance of Indian Banks. The index will have 12 stocks from the banking sector which trade on the National Stock Exchange.
Among these 12 stocks the major Banks covered under these research projects are: STATE BANK OF INDIA (SBI) HDFC BANK LTD.,
Systematic Risk Associated with Bank Index or (Banking Sector) is: MARKET RISK INTEREST RATE RISK
Unsystematic Risk Associated with Bank Index or (Banking Sector) is: BUSINESS RISK
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STATE BANK OF INDIA (SBI)

S&P CNX Nifty Date 4-Jan-11 11-Jan-11 18-Jan-11 25-Jan-11 1-Feb-11 8-Feb-11 15-Feb-11 22-Feb-11 29-Feb-11 7-Mar-11 14-Mar-11 One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 One Week Change -172.8 -2 -90 88 -196.65 -76 267 -145 -19 -73 -161 SBI Bank % Change -7.12 -0.08 -3.6 3.79 -8.15 -3.33 13.09 -6.39 -0.9 -3.82 -8.57
Per Centage Comparison

15 10
Gain/Lose in %
S&P CNX Nifty
SBI Bank
5 0 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar -5
-10
Date
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T-TEST
Null hypothesis (Ho): There is no significant difference between portfolio return and benchmark return. Alternative hypothesis (H1): There is significant difference between portfolio return and benchmark return.
t-Test: Two-Sample Assuming Unequal Variances Variable 2 -2.28 0.51727 39.93814 24.1 11 11 0 19 -0.73057 0.236977 1.729133 0.473955 2.093024 Variable 1
Mean Variance Observations Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail
INTERPRETATION
On the basis of the above calculation, it can be interrelated that there is no significant difference between scheme return and benchmark return and return of fund is higher than the benchmark return as t-calculated value is less then t-tabulated value. So, null hypothesis is accepted.
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HDFC BANK LTD.

S&P CNX Nifty One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 HDFC Bank One Week Change 0 0 0 0 0 -126.4 153.9 -88.4 30.85 -106 6.25
Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar
% Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42
% Change 0 0 0 0 0 -8.05 10.87 -5.67 2.16 -7.68 0.48
Per Centage Comparison 15 10

Gain/Lose in %
S&P CNX Nifty
HDFC Bank
5 0 4-Jan -5 11Jan 18Jan 25- 1-Feb 8-Feb 15Jan Feb 22Feb 29Feb 7-Mar 14Mar
-10
Date
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T-TEST
INTERPRETATION
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CNX IT INDEX
Information Technology (IT) industry has played a major role in the Indian economy during the last few years. A number of large, profitable Indian companies today belong to the IT sector and a great deal of investment interest is now focused on the IT sector. In order to have a good benchmark of the Indian IT sector, IISL has developed the CNX IT sector index. CNX IT provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market. Companies in this index are those that have more than 50% of their turnover from IT related activities like software development, hardware manufacture, vending, support and maintenance. Among these highly turnover stocks the major companies covered under these research projects are: TCS INFOSYS
Systematic Risk Associated with IT Index or (Information Technology Sector) is: EXCHANGE RATE
Unsystematic Risk Associated with IT Index or (Information Technology Sector) is: OPERATIONAL RISK FINANCIAL RISK BUSINESS RISK
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TCS
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 TCS One Week Change 0 -143 -54.5 82 30 -82 -29 48 -34.95 -2 -27 0 -12.6 -5.59 9.94 3.31 -8.39 -3.21 5.64 -3.87 -0.23 -3.24

15 10
Gain/Lose in %
S&P CNX Nifty
TCS
5 0 4-Jan -5 11Jan 18Jan 25Jan 1-Feb 8-Feb 15Feb 22Feb 29Feb 7-Mar 14Mar
-10 -15
Date
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T-TEST
INTERPRETATION
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INFOSYS
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 INFOSYS One Week Change 194 -45 -76 113 134 -92 13 27 -85 -26 -52 % Change 12.59 -2.71 -4.87 8.01 9.16 -5.59 0.89 1.74 -5.27 -1.78 -3.64

15 10
Gain/Lose in %
S&P CNX Nifty
INFOSYS
-10
Date
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T-TEST
t-Test: Two-Sample Assuming Unequal Variances Variable Variable 1 2 9.545455 -38.4091 9512.673 68092.87 11 11 0 13 0.570926 0.288893 1.770933 0.577786 2.160369
INTERPRETATION
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CNX FMCG INDEX

FMCGs (Fast Moving Consumer Goods) are those goods and products, which are non-durable, mass consumption products, available off the shelf. The CNX FMCG Index is a 15 stock Index from the FMCG sector that trade on the National Stock Exchange.
Among these 15 stocks the major companies covered under these research projects are: DABUR ITC
Systematic Risk Associated with FMCG Index or (FMCG Sector) is: GOVERNMENT POLICIES BUDGET
Unsystematic Risk Associated with IT Index or (Information Technology Sector) is: BUSINESS RISK FINANCIAL RISK
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DABUR
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 Dabur One Week Change 0 0 0 0 -13.5 -0.1 1.05 5.45 -1.5 0.6 -0.35 % Change 0 0 0 0 -11.79 -0.1 1.11 5.65 -1.48 0.61 -0.35

15 10
Gain/Lose in %
S&P CNX Nifty
Dabur
-10 -15
Date
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T-TEST
t-Test: Two-Sample Assuming Unequal Variances Variable Variable 1 2 -0.75909 -38.4091 20.94591 68092.87 11 11 0 10 0.478458 0.321306 1.812461 0.642613 2.228139
INTERPRETATION
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ITC
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 ITC One Week Change 0 0 0 -2.3 10.9 -10.7 19.6 -9.48 -1.8 -0.5 1.55 % Change 0 0 0 -1.17 5.59 -5.18 10.65 -4.55 -0.88 -0.26 0.81

15 10
Gain/Lose in %
S&P CNX Nifty
ITC
-10
Date
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T-TEST
Null hypothesis (Ho): There is no significant difference between portfolio return and benchmark return. Alternative hypothesis (H1): There is significant difference between portfolio return and benchmark.
t-Test: Two-Sample Assuming Unequal Variances Variable 1 Variable 2 Mean 0.660909 -38.4091 Variance 71.37081 68092.87 Observations 11 11 Hypothesized Mean Difference 0 df 10 t Stat 0.49632 P(T<=t) one-tail 0.315198 t Critical one-tail 1.812461 P(T<=t) two-tail 0.630396 t Critical two-tail 2.228139
INTERPRETATION
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CNX PSE INDEX As part of its agenda to reform the Public Sector Enterprises (PSE), the Government has selectively been disinvesting its holdings in public sector enterprises since 1991. With a view to provide regulators, investors and market intermediaries with an appropriate benchmark that captures the performance of this segment of the market, as well as to make available an appropriate basis for pricing forthcoming issues of PSEs, IISL has developed the CNX PSE Index, comprising of 20 PSE stocks. The CNX PSE Index includes only those companies that have over 51% of their outstanding share capital held by the Central Government and/or State Government, directly or indirectly.
Among these 20 stocks the major companies covered under these research projects are: NTPC ONGC
Systematic Risk Associated with PSE Index or (Public Sector) is: GOVERNMENT POLICIES MARKET RISK
Unsystematic Risk Associated with PSE Index or (Public Sector) is: BUSINESS RISK FINANCIAL RISK
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NTPC
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 NTPC One Week Change 0 0 0 0 -13.5 -0.1 1.05 5.45 -1.5 0.6 -0.35 % Change 3.43 0.72 -17.635 8.17 -3.98 -6.01 9.13 -4.27 -1.22 -1.56 5.5

15 10
Gain/Lose in %
S&P CNX Nifty
NTPC
5 0 -5 4-Jan 11Jan 18Jan 25Jan 1-Feb 8-Feb 15Feb 22Feb 29Feb 7-Mar 14Mar
-10 -15 -20

Date
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T-TEST
INTERPRETATION
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ONGC
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 ONGC One Week Change 47.25 -43 -60 -76 36.4 -70.85 104.05 -20.8 -9.9 -23.9 35.95 % Change 3.71 -3.23 -4.65 -7 3.6 -6.74 11.32 -2.07 -0.98 -2.48 3.72

15 10
Gain/Lose in %
S&P CNX Nifty
ONGC
-10
Date
J.V.I.M.S, JAMNAGAR
67
T-TEST
INTERPRETATION
J.V.I.M.S, JAMNAGAR
68
CNX MNC INDEX

The CNX MNC Index comprises 50 listed companies in which the foreign shareholding is over 50% and / or the management control is vested in the foreign company. Among these stocks the major companies covered under these research projects are: SESA GOA MARUTI
Systematic Risk Associated with MNC Index or (Multinational Companies Sector) is: GOVERNMENT POLICIES MARKET RISK
Unsystematic Risk Associated with IT Index or (Information Technology Sector) is: BUSINESS RISK FINANCIAL RISK
J.V.I.M.S, JAMNAGAR
69
SESA GOA
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 SESA GOA One Week Change 0 0 -473.4 0 795 -200.75 340 -39.65 242.65 -104.65 0 % Change 0 0 -12.62 0 32.99 -6.17 11.93 -1.18 7.6 -3.16 0

40 30
Gain/Lose in %
S&P CNX Nifty
SESA GOA
20 10 0 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15Feb 22Feb 29Feb 7-Mar 14Mar
-10 -20
Date
J.V.I.M.S, JAMNAGAR
70
T-TEST
INTERPRETATION
J.V.I.M.S, JAMNAGAR
71
MARUTI
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 MARUTI One Week Change 0 0 0 0 25 -108 8.3 -43 68.6 52 -58 % Change 0 0 0 0 2.87 -11.8 1.02 -5.3 8.57 5.99 -6.48

15 10
Gain/Lose in %
S&P CNX Nifty
MARUTI
5 0 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb -5 15Feb 22Feb 29Feb 7-Mar 14Mar
-10 -15
Date
J.V.I.M.S, JAMNAGAR
72
T-TEST
INTERPRETATION
J.V.I.M.S, JAMNAGAR
73
CNX SERVICE SECTOR INDEX

The Indian Economy has seen structural changes in the last couple of years. According to RBI data, the services sector remained the principal driver of the Indian economy, contributing 57 per cent of the growth of real GDP in 2003-04. The key driver for the growth of the service sector has been industries like IT, Banks, Tourism, Telecommunication etc. Going forward, the service sector will grow manifold mainly on account of the Indias low cost advantage, increasing demand for Customer services and the booming knowledge economy. To capture the performance of the companies belonging to this sector, IISL has developed CNX Service Sector Index to capture the performance of the companies in this sector.
The CNX Service Sector Index is 30 stocks index and includes companies belonging to services sector like Computers Software, Banks, Telecommunication services, Financial Institutions, Power, Media, Courier, Shipping etc. Among these 30 stocks the major companies covered under these research projects are: RCOM MTNL
Systematic Risk Associated with Service Sector Index or (Service Sector) is: GOVERNMENT POLICIES MARKET RISK
Unsystematic Risk Associated with Service Sector Index or (Service Sector) is: BUSINESS RISK FINANCIAL RISK
J.V.I.M.S, JAMNAGAR
74
RCOM
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 RCOM One Week Change 10 3 -106 56 -24 -49 28.3 -33.8 -20.7 -1.25 -40.3 % Change 1.303 0.37 -12.911 8.99 -3.73 -7.05 4.81 -5.48 -3.48 -0.23 -7.2

15 10
Gain/Lose in %
S&P CNX Nifty
RCOM
-10 -15
Date
J.V.I.M.S, JAMNAGAR
75
T-TEST
INTERPRETATION
J.V.I.M.S, JAMNAGAR
76
MTNL
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 MTNL One Week Change 6.95 -31.45 -18 -10.9 -13.1 -5.05 6.15 -4.83 -2.45 -6.3 -9.35 % Change 3.21 -14.07 -9.375 -7.46 -9.67 -3.97 5.16 -3.86 -2.02 -5.45 -8.5

15 10
Gain/Lose in %
S&P CNX Nifty
MTNL
5 0 -5 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15Feb 22Feb 29Feb 7-Mar 14Mar
-10 -15 -20

Date
J.V.I.M.S, JAMNAGAR
77
T-TEST
INTERPRETATION
J.V.I.M.S, JAMNAGAR
78
CNX ENERGY INDEX

Energy sector is universally recognized as one of the most significant inputs for economic growth. The growth of a nation, encompassing all sectors of the economy and all sections of society, is contingent on meeting its energy requirements adequately. As a fast-growing economy, India has become one of the largest energy intensive countries in the World. Energy is a crucial input for India's development process. The need of the hour, therefore, is to meet the energy needs of all segments of India's population in the most efficient and cost-effective manner while ensuring long-term sustainability. IISL has developed CNX Energy Index to capture the performance of the companies in this sector. Energy sector Index will include companies belonging to Petroleum, Gas and Power sub sector. Among these stocks the major companies covered under these research projects are: CAIRN ENERGY GAIL
Systematic Risk Associated with Energy Index or (Energy Sector) is: GOVERNMENT POLICIES MARKET RISK
Unsystematic Risk Associated with Energy Index or (Energy Sector) is: BUSINESS RISK FINANCIAL RISK
J.V.I.M.S, JAMNAGAR
79
CAIRN ENERGY
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 CAIRN One Week Change 0 -22 -14.25 10 -3 -20.6 23.62 -13.8 12.8 -13.13 6.5 % Change 0 -8.24 -5.82 5.13 -1.46 -9.6 12.36 -6.26 6.01 -5.94 2.92

15 10
Gain/Lose in %
S&P CNX Nifty
CAIRN
-10 -15
Date
J.V.I.M.S, JAMNAGAR
80
T-TEST
INTERPRETATION
J.V.I.M.S, JAMNAGAR
81
GAIL
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 GAIL One Week Change 0 0 28.4 0 5 -8 44 -45 12 -10 28 % Change 0 0 5.18 0 1.22 -1.83 11.43 -10.37 2.95 -2.51 7.12

15 10
Gain/Lose in %
S&P CNX Nifty
GAIL
-10 -15
Date
J.V.I.M.S, JAMNAGAR
82
T-TEST
INTERPRETATION
J.V.I.M.S, JAMNAGAR
83
CNX PHARMA INDEX Pharmaceuticals sector is one of the key sectors where Indian companies have created a global brand for themselves besides software. Indian companies have taken advantage of the opportunities in the regulated generics market in the western countries and made deep inroads especially in providing low cost equivalents of expensive drugs. Pharma outsourcing into India and low cost Healthcare services are expected to be the key areas of growth in the near future. In addition, the inherent potential of biotechnology has also attracted many new companies and this is also a key growth area for Indian companies. IISL has developed CNX Pharma Index to capture the performance of the companies in this sector. Among these stocks the major companies covered under these research projects are: BIOCON CIPLA
Systematic Risk Associated with Pharma Index or (Pharma Sector) is: GOVERNMENT POLICIES MARKET RISK
Unsystematic Risk Associated with Pharma Index or (Pharma Sector) is: BUSINESS RISK FINANCIAL RISK
J.V.I.M.S, JAMNAGAR
84
BIOCON
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 BIOCON One Week Change 58.85 -128.6 22 -122 0 0 -52.8 -2 16.1 -23 11 % Change 10.15 -20.14 4.31 -22.93 0 0 -10.85 -0.47 3.75 -5.25 2.63

Gain/Lose in %
S&P CNX Nifty
BIOCON
5 0 -5 4-Jan 11Jan 18Jan 25- 1-Feb 8-Feb 15Jan Feb 22Feb 29- 7-Mar 14Feb Mar
-10 -15 -20 -25

Date
J.V.I.M.S, JAMNAGAR
85
T-TEST
INTERPRETATION
J.V.I.M.S, JAMNAGAR
86
CIPLA
S&P CNX Nifty Date 4-Jan 11-Jan 18-Jan 25-Jan 1-Feb 8-Feb 15-Feb 22-Feb 29-Feb 7-Mar 14-Mar One Week Change 114.4 -81 -474 181.1 52 -361 475 -181 0 -168 20 % Change 1.86 -1.29 -7.63 3.48 0.98 -6.63 9.99 -3.44 0 -3.43 0.42 CIPLA One Week Change 0 0 0 -44.55 3 -3.95 -1 11 5.9 -10.05 6 % Change 0 0 0 -20.29 1.66 -1.97 -0.54 5.95 2.94 -4.77 3

Gain/Lose in %
S&P CNX Nifty
CIPLA
5 0 -5 4-Jan 11Jan 18Jan 25- 1-Feb 8-Feb 15Jan Feb 22Feb 29- 7-Mar 14Feb Mar
-10 -15 -20 -25

Date
J.V.I.M.S, JAMNAGAR
87
INTERPRETATION
J.V.I.M.S, JAMNAGAR
88
FINDINGS
As we have found that there is significant impact of risk and return and a positive relation with is. Higher the risk, higher the return. All 12 stocks are accepted by t-test.
SUGGESTIONS
As market is uncertain investor should invest by hedging the risk by using Derivatives & can lock the price and hedge the risk. Investors should study the market trends and see the volume of stock traded in market. In bullish market stocks should be sold at higher prices @ at bearish market stocks should be purchased at lower prices.
J.V.I.M.S, JAMNAGAR
89
CONCLUSION
J.V.I.M.S, JAMNAGAR
90
Conclusion
Our assessment is that impact of Systematic risk on Indian Stock Market or one of the segments of market i.e. financial derivative has a significant co-relation. The above facts and figure reveals that, the Indian market is more reactive to Systematic risk rather to Unsystematic risk. We should not forget that Indian stock market seems to be taking its cues from what is happening in the markets in the US and Asia. Hong Kong, Shanghai and Tokyo markets open before India and so their impact is felt in the Indian market. If you are the kind who follows the business press and news channels very closely, then chances are that, in the last one week, you would have heard stock market experts blaming US subprime defaults for the fall in the Indian Markets. Its the world of globalization, where when America sneezes, and India catches cold. The world money markets are so closely linked, that when one big market like US sneezes, other global markets catch a cold. But these days it is America that has got a chill and the rest of the world is in shiver. All thanks to the word Subprime. Along with Subprime risk we have also showed different risk like, business risk, financial risk, change in global investment and etc. All risk has their own significance and also affect the financial derivatives by means of directly or indirectly. The most important risk associated with the derivatives market is of Margin. There are various types Margin i.e. Initial Margin, Marking-to-margin, Maintenance margin, Addition margin, variation of mark-to-market margin, and all these margin changed according to the change in nature of stock market i.e. Ups and Down. The Indian economy has grown at 9 percent in 2010 and projections indicate robust performance in the coming years. Indias exports may record a decline if the US slows down. In 2010 & 2011, roughly 25 per cent of Indias exports about 18 per cent of Indias GDP was directed to the US. The negative impact can be partly offset by exports of services.
J.V.I.M.S, JAMNAGAR
91
BIBLOGRAPHY
J.V.I.M.S, JAMNAGAR
92
BIBLIOGRAPHY
Following sources has given me the right platform to start my analysis Websites: www.moneypore.com www.nseindia.com www.bseindia.com www.moneycontrol.com
Books: Indian Financial System Bharati V. Pathak Investment Analysis V.K. Bhalla Research Methodology C.R. Kothari
Various Magazines and News Papers: Business World Business Today Economics Times Capital Market
J.V.I.M.S, JAMNAGAR
93
APPENDIX
J.V.I.M.S, JAMNAGAR
94
APPENDIX
Constituents list of S&P CNX Nifty SECURITY
ABB LTD. ACC LIMITED AMBUJA CEMENTS LTD AXIS BANK LIMITED BHARTI AIRTEL LIMITED BHEL BHARAT PETROLEUM CORP LT CAIRN INDIA LIMITED CIPLA LTD DLF LIMITED GAIL (INDIA) LTD GRASIM INDUSTRIES LTD HCL TECHNOLOGIES LTD HDFC LTD HDFC BANK LTD HERO HONDA MOTORS LTD HINDALCO INDUSTRIES LTD HINDUSTAN UNILEVER LTD. ICICI BANK LTD. IDEA CELLULAR LIMITED INFOSYS TECHNOLOGIES LTD ITC LTD LARSEN & TOUBRO LTD. MAHINDRA & MAHINDRA LTD MARUTI SUZUKI INDIA LTD. NATIONAL ALUMINIUM CO LTD NTPC LTD OIL AND NATURAL GAS CORP. PUNJAB NATIONAL BANK POWER GRID CORP. LTD. RANBAXY LABS LTD RELIANCE COMMUNICATIONS L RELIANCE CAPITAL LTD RELIANCE INDUSTRIES LTD RELIANCE INFRASTRUCTU LTD RELIANCE PETROLEUM LTD. RELIANCE POWER LTD. STEEL AUTHORITY OF INDIA STATE BANK OF INDIA SIEMENS LTD STERLITE INDS (IND) LTD
WEIGHTAGE
0.48 0.57 0.59 0.9 6.52 3.71 0.66 1.66 0.88 1.81 1.49 0.78 0.4 2.25 2.16 1.06 0.43 2.33 2.32 0.86 3.89 3.36 2.43 0.63 1.1 0.64 7.25 8.45 0.71 1.84 0.33 2.03 0.57 12.97 0.71 2.3 1.44 2.11 3.72 0.47 1.29
J.V.I.M.S, JAMNAGAR
95
SUN PHARMACEUTICALS IND. SUZLON ENERGY LIMITED TATA COMMUNICATIONS LTD TATA MOTORS LIMITED TATA POWER CO LTD TATA STEEL LIMITED TATA CONSULTANCY SERV LT UNITECH LTD WIPRO LTD
1.21 0.43 0.72 0.5 0.88 0.81 2.78 0.42 2.19
J.V.I.M.S, JAMNAGAR
96
GLOSSARY
J.V.I.M.S, JAMNAGAR
97
GLOSSARY (F & O)
American style options An option contract that may be exercised at any time between the date of purchase and the expiration date. Arbitrage The purchase or sale of a security in one market and the simultaneous purchase or sale in another to take advantage of price differentials. At-the-money An option is said to be at the money if it would lead to zero cash flow if exercised immediately. When the price of the underlying security is equal to the strike price, an option is at-the-money. Bear market A market where the prices are falling. Brokerage fee A fee charged by a broker for execution of a transaction. The fee may be a flat amount or a percentage. Bull market A market in which prices are continuously rising. Call option A call option gives the buyer the right but not the obligation, to buy the underlying security at a specific price for a specified time. The seller of a call option has the obligation to sell the underlying security should the buyer exercise his option to buy. Class of options Options contracts of the same type(call or put) and style( American or European) that covers the same underlying asset. Close out A purchase or sale transaction leaving a trader with a zero net position.
J.V.I.M.S, JAMNAGAR
98
Closing buy transaction Means a buy transaction which will have the effect of partly or fully offsetting a short position. Closing sell transaction Means a sell transaction which will have the effect of partly or fully offsetting a long position. Contango Under normal market conditions, futures contracts are priced above the expected future spot price. This is known as contango Cost of carry Costs incurred in warehousing a physical commodity including interest for purchase storage & insurance 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. Day trader Speculators who take positions in futures or options contracts and liquidate them prior to the close of the same trading day, thereby avoiding overnight margin calls. Derivative instruments A derivative instrument is an instrument whose value is derived from the value of one or more underlying which can be commodities, precious metals, currency, bonds, stock, stock indices etc.. European style options An option contract that may be exercised only during a specified period of time just prior to its expiration Exercise settlement amount The difference between the exercise price of the option and the exercise settlement value of Index on the day an exercise notice is tendered, multiplied by the index multiplier.
J.V.I.M.S, JAMNAGAR
99
Expiration date The last day on which an option may be exercised. Forward contracts A forward contract is contract between two parties where settlement takes place on a specific date in future at a price agreed today. Futures Futures are exchange traded contracts to sell or buy financial instruments or physical commodities for Future delivery at an agreed price. Give up trades The purpose of this functionality is to provide the clearing member users to confirm or reject the trades, on orders entered by other trading members, on behalf of Participants, clearing through the clearing member. GTC A Good Till Cancelled (GTC) order remains in the system until it is cancelled by the user. GTD A Good Till Days (GTD) order allows the user to specify the number of days / date till which the order should stay in the system if not executed. Hedge A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position. In-the-money An option is said to be in the money if it would lead to a positive cash flow to the holder if it were exercised immediately. A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in the money if the strike price is greater than the market price of the underlying security. Initial margin The amount of money required to be paid by market participant in the F&O segment at the time they place orders to buy or sell contracts.
J.V.I.M.S, JAMNAGAR
100
Intrinsic value The amount by which an option is in the money IOC An Immediate or Cancel (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. Leverage The ability to control large monetary amounts of a financial instrument or commodity with comparatively small amount of capital. Long Position Long Position in a derivatives contract means outstanding purchase obligations in respect of a permitted derivatives contract at any point of time. Maintenance margin The amount that is set aside to ensure that the balance in the margin account never becomes negative is called maintenance margin. It is usually lower than the initial margin. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call. Mark to market Process of revaluing positions daily using daily settlement prices to obtain profit or loss. Market order An order to buy or sell a contract at whatever price is available at the time of entering the order on the system. Net position The difference between the buy and sell contracts held by a trader. Offer Willingness to sell a contract at a given price.
J.V.I.M.S, JAMNAGAR
101
Open Interest Open Interest means the total number of Derivatives Contracts of an underlying security that have not yet been offset and closed by an opposite Derivatives transaction nor fulfilled by delivery of the cash or underlying security or option exercise. For calculation of Open Interest only one side of the Derivatives Contract is counted. Opening buy transaction Means a buy transaction which will have the effect of creating or increasing a long position.
Opening sell transaction Means a sell transaction which will have the effect of creating or increasing a short position Out-of-money An option is said to be out of money if it would lead to a negative cash flow to the holder if it were exercised immediately. A call option is out of money if the strike price is greater than the market price of the underlying security. A put option is out of money if the strike price is less than the market price of the underlying security. Option holder The person who buys the option contract is known as the holder of an option. In purchasing the option, the buyer makes payments and receives rights to buy or sell the underlying on specific terms. Option premium The premium is the price at which the contract trades. The premium is the price of the option and is paid by the buyer to the writer or seller of the option. In return, the writer, of a call option is obligated to deliver the underlying security to an option buyer if the call is exercised or buy the underlying security if the put is exercised. The writer keeps the premium whether or not the option is exercised. Price priority Price priority means that if two orders are entered into the system, the order having the best price gets the priority.
J.V.I.M.S, JAMNAGAR
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Put option A put option gives the buyer the right, but not the obligation, to sell an underlying security at a specific price for a specified time. The seller of a put option has the obligation to buy the underlying security should the buyer choose to exercise his option to sell. Regular lot/Market Lot Means the number of units that can be bought or sold in a specified derivatives contract as specified by the F&O Segment of the Exchange from time to time. Series All option contracts of the same class that have the same expiration date and strike price. Settlement Date Means the date on which the settlement of outstanding obligations in a permitted Derivatives contract are required to be settled as provided in these Regulations. Short Position Short position in a derivatives contract means outstanding sell obligations in respect of a permitted derivatives contract at any point of time. Spread Taking a position in two or more options of the same type. Strike price The stated price per unit for which the underlying index may be purchased (incase of a call) or sold(in the case of a put) by the option holder upon exercise of the option contract. Time priority Time priority means if two orders having the same price are entered, the order which entered the trading system first gets the highest priority. Type The classification of an option contract as either a call or put. Writer The seller of an option contract. J.V.I.M.S, JAMNAGAR 103
Exercise / Assignment When you buy an option you have the right either to purchase or sell the underlying at a predetermined price. When if you choose to purchase or sell the underlying at the predetermined price you are said to be exercising your right. When you sell an option you now have an obligation to sell or purchase the underlying. You have or may not have to fulfill that obligation. When you are required to fulfill the obligation to either purchase or sell the underlying you are said to be assigned. Typically this occurs when the option is in the money.
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A COMPREHENSIVE PROJECT REPORT ON AN IN-DEPTH ANALYSIS ON POTENTIAL RISK ASSOCIATED WITH DERIVATIVES

UNDER THE GUIDANCE OF Prof. Rajesh Faldu

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

references, if any, have been duly acknowledged.

___________ Rohit lala En. No.: 117700592072

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

INTRODUCTION & OVERVIEW TO DERIVATIVES

ANALYSIS, INTERPRETATION & TESTING OF HYPOTHESIS FINDINGS, SUGGESTIONS

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

THE EXPLOSIVE GROWTH OF DERIVATIVES IN THE DEVELOPED CENTURIES IS FUELLED BY:

Potential Risks of Derivatives Market

DERIVATIVES DEFINED UNDER THE SECURITIES CONTRACTS (REGULATION) ACT, 1956

Potential Risks of Derivatives Market

ECONOMIC BENEFITS OF DERIVATIVES

Potential Risks of Derivatives Market

HISTORY OF DERIVATIVES TRADING

Potential Risks of Derivatives Market

NEED FOR FINANCIAL DERIVATIVES

Potential Risks of Derivatives Market

DISTINCTIVE FEATURES OF DERIVATIVES MARKET

Potential Risks of Derivatives Market

TRADERS IN DERIVATIVES MARKET

Potential Risks of Derivatives Market

DERIVATIVES MARKET IN INDIA

Potential Risks of Derivatives Market

TYPES OF FINANCIAL DERIVATIVES

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

DERIVATIVES MARKET AT NSE

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

INSTRUMENT AVAILABLE IN INDIA

Futures Individual Securities

on Options Individual Securities 224

S&P CNX Nifty

CNX 224 securities

Rs.2 lacs) Price Steps Re.0.05 Re.0.05

Potential Risks of Derivatives Market

Previous day Same as index

Base Price Daily settlement price Subsequent

Daily close Daily price settlement price

Same as index option

Operating ranges are kept at + Operating 10% ranges

Operating ranges are for are kept at 99

BSE also offers similar products in the derivatives segment

Potential Risks of Derivatives Market

CHRONOLOGY OF EVENTS LEADING TO DERIVATIVES TRADING

2000 May 2000

June 2000 June 2001 July 2001

Trading in stock futures commenced

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

Potential Risks of Derivatives Market

HISTORY OF FUTURE MARKETS

Potential Risks of Derivatives Market

NEED FOR FUTURE MARKETS

Potential Risks of Derivatives Market