A

PROJECT WORK ON

DERIVATIVES
AT

HYDERABAD STOCK EXCHANGE

SUBMITTED
TO

OSMANIA UNIVERSITY

IN PRRTIAL FULFILLMENT FOR THE AWARD OF THE DEGREE

“MASTER OF BUSINNESS ADMINISTRATION”

(2004-2006)

BY

Y.CHANDRA SHEKAR REDDY

077-04-0123

SIDDHARTHA TECHNICAL INSTITUTE

(AFFILIATED TO O.U)
OSMANIA UNIVERSITY
 DECLARATION

I here by declare that this project work entitled DERIVATIVES done at HYDERABAD

STOCK EXCHANGE submitted by me in partial fulfillment for the award of the

MASTER OF BUSINESS ADMINISTRATION, at SIDDHARTHA TECHNICAL

INSTITUTE Osmania University, Hyderabad is a record of bonafide work done by me.

I future declare that this work has not been copied or lent and it is not

Submitted to any other University or institutions for the award of any Degree or Diploma

of any other institution.

DATE:
PLACE: Hyderabad. Y.CHANDRA SHEKAR REDDY
 Acknowledgement

I acknowledge my sincere thanks to management of “HYDERABAD STOCK

EXCHANGE LIMITED’.

I extend my thanks to principal “XYZZZ” for his support and guidance.

I express my sincere thanks to librarian of stock exchange Mr.malleshwar for

Providing all the necessary information.

I am grateful to my friends for encouraging and supporting me all though out the project.

Y.CHANDRA SHEKAR REDDY

 OBJECTIVES

 TO STUDY THE VARIOUS TRENDS IN DERIVATIVE MARKET.

 TO STUDY THE ROLE OF DERIVATIVE IN INDIAN FINANCIAL

MARKET.

 TO STUDY IN DETAIL THEROLE OF FEATURES AND OPTIONS.

 TO FIND OUT PROFIT/LOSS OF THE OPTION HOLDER AND OPTION

WRITER.

 TO STUDY ABOUT RISK MANGEMENT WITH THE HELP OF

DERIVATIVES.

METHODOLOGY
To achieve the object of studying the stock market data ha been collected.

Research methodology carried for this study can be two types

1. Primary

2. Secondary

PRMARY

The data, which is being collected for the time and it is the original data is this

project the primary data has been taken from HSE staff and guide of the project.

SECONDARY

The secondary information is mostly from websites, books, journals, etc.

HISTORY OF STOCK EXCHANGE
 The only stock exchange operating in the 19 th century were those of
Bombay set up in 1875 and Ahmedabad set up in 1894 these were organized as voluntary
non-profit making organization of brokers to regulate and protect interest. Before the
control insecurities trading became a central subject under the constitution in 1950, it was
a state subject and the Bombay securities contract (CONTROL) Act of 1952 used to
regulate trade in securities. Under this act, the Bombay stock exchange in 1927 and
Ahmedabad in 1937.

During the war boom, a number of stock exchanges were organized in Bombay,
Ahmedabad and other centers, but they were not recognized. Soon after it became a
central subject, central legislation was proposed and a committee headed by A.D.
Gorwala went in to the bill for securities regulation. On the basis of committee’s
recommendations and public discussions the securities contracts (regulations) Act
became law in 1956.

Definition of stock exchange:

“Stock exchange means any body or individuals whether incorporated or

not, constituted for the purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities.” It is an association of member brokers for the
purpose of self – regulation and protecting the interests of its members. It can operate
only of it is recognized by the govt. Under the securities contract (regulation) Act, 1956.
The recognition is granted under section 3 of the Act by the central government, ministry
if finance.

BYELAWS:

Besides the above act, the securities contract (regulations) rules were also
made in 1975 to regulate certain matters of trading on the stock Exchange. These are also
byelaws of the exchanges, which are concerned with the following subjects. Opening /
closing of the stock exchange, timing of trading, regulation of bank transfer, regulation of
Badla or carryover business, control of settlement, and other activities of stock exchange,
fixations of margin, fixations of market price or marking price, regulation of tarlatan
business (jobbing), regulation of brokers trading, brokerage charges, trading rules on the
exchange, arbitration and settlement of disputes, settlement and clearing of the trading
etc.
Regulations of stock exchange:

The securities contract (regulations) is the basis for operations of the stock exchange in
India. No exchange can operate legally without the government permission or
recognition. Stock exchanges are give monopoly in certain areas under section 19 of the
above Act to ensure that the control and regulation are facilitated. Recognition can be
granted to a stock exchange provided certain are satisfied and the necessary Information
is supplied to the government. Recognition can also be withdrawn, if necessary. Where
there are no stock exchanges, the government can license some to the brokers to perform
the functions of a stock exchange in its absence.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI):

SEBI was set up as an autonomous regulatory authority by the Government of India

in 1988 “to perform the interests of investors in securities and to promote the
development of , and to regulate the securities market and for matters connected there
with or incidental thereto.” It is empowered by two acts namely the SEBI act, 1992 and
the securities contract (regulation) Act 1956 to perform the function of protecting
investor’s rights and regulating the capital markets.
BOMBAY STOCK EXCHANGE

This stock exchange, Mumbai, popularly known as “BSE” was established in 1875
as “The Native share and stock brokers association” as a voluntary non-profit Making
association. It has an evolved over the year into its present status as the premiere Stock
exchange in the country .it may be noted that the stock exchange the oldest one in Asia,
even older than the Tokyo stock exchange, which was founded in 1878.

The exchange, while providing an efficient and transparent

market for trading in securities, upholds the interests of the investors and insurers dressed
of their grievances, whether against the companies or its own member brokers. It also
strives to educate and enlighten the investors by making available necessary informative
inputs and conducting investor education programmers.

A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public

representatives and an executive director is the apex body, which decides the policies and
regulates the affairs of the exchange.

The executive’s directors as the chief executive officer are responsible for
the day today administration of the exchange. The average daily turnover of the exchange
during the year 2000-01(April-March) was Rs 3984.19 corers and average number of
Daily trades 5.69 lakes.

However the average daily turn over of the exchange during the year 2001-02 has
declined to R s. 1244 .10 cores and number of average daily trades during the period to
5.17 lakes.

The average daily turnover of the exchange during the year 2002-03 has
declined and number of average daily trades during the period is also decreased.

The Ban on all deferral products like BLESS AND ALBM in the Indian capital
markets by SEBI with effect from July 2,2001, abolition of account period settlements,
introduction of compulsory rolling settlements in all scripts traded on the exchange with
effect from Dec 31, 2001, etc., have adversely imprecated the liquidity and consequently
there is a considerable decline in the daily turn over of the exchange present scenario is
110363 (laces) and number of average daily trades 1075 (laces).

BSE INDICES:
 In order to enable the market participants, analysts etc., to track the various ups and
downs in the Indian stock market, the exchange has introduced in 1986 an equity stock
index called BSE- SENSEX that subsequently became the barometer of the movements
of the share prices in the Indian stock market. It is a “Market capitalization weighted”
index of 30 component stocks representing a sample of large, well-established and
leading companies. The base year of sensex is 1978-79. The sensex is widely reported in
both domestic and international markets through print as well as electronic media.

Sensex is calculated using a market capitalization weighted method. As per this

methodology, the level of the index reflects the total market value of all 30-component
stocks from different industries related to particular base period. The total market value
of a company is determined by multiplying the price of its stocks by the number of
shares outstanding. Statisticians call an all index of a set of combined variables (such as
price and number of shares) a composite index. An indexed number is used to represent
the results of this calculation in order to market the value easier to work with and track
over a time. It much easier to graph a chart based on indexed values than one based on
actual values world over majority of the well-known indices are constructed using
“Market capitalization weighted method”.

In practice, the daily calculation of SENSEX is done by dividing the aggregate

market value of the 30 companies in the index by a number called the index Divisor. The
Divisor is the only link to the original base period value of the SENSEX. The Divisor
Keeps the Index comparable over a period or time and if the reference point for the entire
index maintenance adjustments. SENSEX is widely used to describe the mood in the
Indian stock markets. Base year average is changed has per the formula new base year
average =old base year average *(new market value/old market value).
NATIONAL STOCK EXCHANGE

The NSE was incorporated in Now 1992 with an equity capital of R s 25 crs.
The international securities consultancy (ISC) of Hong Kong has helped in setting up
NSE. ISE has prepared the detailed business plans and installation of hardware and
software systems. The promotions for NSE were financial institutions, insurances
companies, banks and SEBI capital market Ltd, infrastructure leasing and financial
services ltd and stock holding corporation ltd.

It has been set up to strengthen the move towards professionalisation of the

capital market as well provided nation wide securities trading facilities to investors.

NSE is not an exchange in the traditional sense where brokers own and manage
the exchange. A two tier administrative set up involving a company board and a
governing aboard of the exchange envisaged. NSE is a national market for shares PSU
bonds, debentures and government securities since infrastructure and trading facilities are
provided.

NSE-NIFTY:

The NSE on April 22, 1996 launched a new equity index. The NSE-50. The new
index, which replaces the existing NSE-100 index, is expected, to serve as an appropriate
index for the new segment of futures and options.” Nifty” means national index for fifty
stocks.
The NSE-50 comprises 50 companies that represent 20 broad industry groups with
An aggregate market capitalization of around R s .1,70,000 crs. All companies included
in the index have a market capitalization in excess of R s 500 crs each and should have
traded for 85% of trading days at an impact cost of less than 1.5%.

The base period for the index is the close of prices on Nov 3, 1995, which makes
one year of completion of operation of NSE‘s capital market segment. The base value of
the index has been set at 1000.

NSE –MIDCAP INDEX:

The NSE madcap index or the junior nifty comprises 50 stocks that represent 21
a board industry groups and will provide proper representation of the madcap segment of
the Indian capital market. All stocks in the index should have market capitalization of
greater than R s list of 200 cores and should have traded 85% of the trading days at an
impact cost of less 2.5%.
 The base period for the index is Nov 4, 1996, which signifies two years for
completion of operations of the capital market segment of the operations. The base value
of the Index has been set at 1000.

Average daily turnover of the present scenario 258212(laces) and number of

averages daily trades 2160(laces) At present, there are 24 stocks exchanges recognized
under the securities contracts (regulations) Act, 1956. They are
NAMEOF THE STOCK EXCHANGE YEARS

Bombay stock exchange, 1875

Ahmedabad share and stock brokers association, 1957

Calcutta stock exchange associations Ltd, 1957

Delhi stock exchange association Ltd, 1957

Madras stock exchange association Ltd, 1957

Indoor stock brokers association Ltd, 1958

Bangalore stock exchange, 1963

Hyderabad stock exchange, 1943

Cochin stock exchange, 1978

Prune stock exchange, 1982

U.P. stock exchange, 1982

Ludhiana stock exchange, 1983

Jaipur stock exchange Ltd, 1983_84

Gauhati stock exchange Ltd, 1984

Mangalore stock exchange, 1985

Maghad stock exchange Ltd, patna, 1986

Bhuvaneshwar stock exchange association Ltd, 1989

Over the counter exchange of India, Bombay, 1989

Saurastra kuth stock exchange Ltd, 1990

Vsdodard stock exchange Ltd, 1991

Coimbatore stock exchange Ltd, 1991

The meerut stock exchange, 1991

I National stock exchange, 1991

Integrated stock exchange, 1999

 THE HYDERABAD STOCK EXCHANGE
LIMITED
ORIGIN:
Rapid growth in industries in the erstwhile Hyderabad State saw efforts at starting
the Stock Exchange. In November, 1941 some leading bankers and brokers formed the
share and stock brokers Association. In 1942, Mr. Gulab Mohammed, the Finance
Minister formed a Committee for the purpose of constituting /rules and Regulations of
the Stock Exchange. Sri Purushothamdas Thakurdas, president and Founder Member of
the Hyderabad Stock Exchange performed the opening ceremony of the Exchange on 14-
11-1943 under Hyderabad Companies Act, Mr. Kamal Yar Jung Bahadur was the first
President of the Exchange. The HSE started functioning under Hyderabad Securities
Contract Act of No. 21 of 1352 under H.E.H. Nizam’s Government as a Company
Limited by guarantee. It was the 6th Stock Exchange recognized under Securities Contract
Act, after the premier Stock Exchanges, Ahmedabad, Bombay, Calcutta, Madras and
Bangalore Stock Exchange. All deliveries were completed every Monday or the next
working day.
The Securities Contracts (Regulations) Act, 1956 was enacted by the Parliament,
passed into Law and the rules were also framed in 1957. The Act and the Rules were
brought into force from 20th February 1957 by the Government of India.
The HSE was first recognized by the Government of India on 29th September
1958 as Securities Regulation Act was made applicable to twin cities of Hyderabad and
Secunderabd from the date. In view of substantial growth in trading activities, and for
the yeoman services rendered by the Exchange, the Exchange was bestowed with
permanent recognition with effect from 29th September 1983.
The exchange has a significant share in achievements of erstwhile State of Andhra
pradesh to its present state in the matter of Industrial development.
OBJECTIVES:
The Exchange was established on 18th October, 1943 with the main objective to
create, protect and develop a healthy Capital Market in the State of Andhra Pradesh to
effectively serve the public and Investor’s interests.
The property, capital and income of the Exchange, as per the Memorandum and
Articles of Association of the Exchange, shall have to be applied solely towards the
promotion of the objects of the Exchange. Even in case of dissolution, the surplus funds
shall have to be devoted to any activity having the same objects, as Exchange or be
distributed in Charity, as may be determined by the Exchange or the High Court of
judicature. Thus, in short, it is a Charitable Institution.
The Hyderabad Stock Exchange Limited is now on its stride of completing its 62nd
year in the history of Capital “Markets” serving the cause of saving and investments. The
Exchange has made its beginning in 1943 and today occupies a prominent place among
the Regional Stock Exchanges in India. The Hyderabad Stock Exchange has been
promoting the mobilization of funds into the Industrial Sector for development of
industrilization in the State of Andhra Pradesh.

GROWTH:
The Hyderabad Stock Exchange Ltd., established in 1943 as a Non profit making
orgnization, catering to the needs of investing population. Started its operations in a
small way in rented building in Koti area. It had shifted in Aiyangar Plaza, bank Street in
1987. In September 1989, the then Vice-President of India, Hon’ble Dr. Shankar Dayal
Sharma had inaugurated the own building of the Stock Exchange at Himayatnagar,
Hyderabad. Later in order to bring all the trading members under one roof, the exchange
acquired still a larger premised situated 6-3-654/A, Somajiguda, Hyderabad-82, with a
six storied building and a constructed area of about 4,86,842 sft (including cellar of 70,
857 sft). Considerably, there has been a tremendous perceptible growth which could be
observed from the statistics.
The number of members of the Exchange was 55 in 1943, 117 in 1993 and
increased to 300 with 869 listed companies having paid up capital of Rs. 19128.95 crores
as on 31/03/2000. The business turnover has also substantially increased to Rs. 1636.51
crores in 2003-2004. The Exchange has got a very smooth settlement system.

GOVERNING BOARD:
At present the Governing Board consists of the following:

MEMBERS OF THE EXCHANGE

Sri Hari Narayan Rathi
Sri Rajendra V. Naniwadekar
Sri K. Shiva Kumar
Sri R.D. Lahoti
Sri Ram Swaroop Agrawal
Sri Dattatray

SEBI NOMINEE DIRECTORS

Sri R.P. Singh, IAS - Joint Secretary(DF)
Dept. of Defence Prodn. & Supplies, Ministry of Defence
Sri N.S. Ponnunambi - Regristrar of Companies
(Govt. of India)

PUBLIC NOMINEE DIRECTORS

Dr. N.R. Sivaswamy (Chairman, HSE) –Former CBDT, Chariman Justice V. Bhaskara
Rao- Retd. Judge High Court
Sri P. Muralimohan Rao -Mogili & Co. Chartered Accountants
Dr. B. Brahmaiah - Professor

EXECUTIVE DIRECTOR

Sri. S. SARVESHWAR REDDY

COMPUTERIZATION:
The Stock Exchange business operations are equipped with modern
communication systems. Online computerization for simultaneously carrying out the
trading transactions, monitoring functions have been introduced at this Exchange since
1988 and the Settlement and Delivery System has become simple and easy to the
Exchange members.
The HSE On- line Securities Trading System was built around the most
sophisticated state of the art computers, communication systems, and the proven
VECTOR Software from CMC and was one of the most powerful SBT Systems in the
country, operating in a WAN environment, connected through 9.6 KBPS 2 Wire Leased
Lines from the offices of the members to the office of the Stock Exchange at Somajiguda,
where the Central System CHALLENGE L DESK SIDE SERVER made of Silicon
Graphics (SGI Model No. D-95602-S2) was located and connected all the members who
were provided with COMPAQ DESKPRO 2000/DESKTOP 5120 Computers connected
through MOTOROLA 3265 v. 34 MANAGEABLE STAND ALONE MODEMS (28.8
kbps) for carrying out business from computer terminals located in the offices of the
members.
HSE is the only Exchange in the country which has provided infrastructure to its
members for trading through WAN and leased lines from the day one.
The HOST System enabled the Exchange not only to expand its operations later
to other prime trading centers outside the twin cities of Hyderabad and Secunderabad but
also to link itself into the Inter-connected Market System (ICMS) proposed by the
Federation of Indian Stock Exchanges (FISE) to inter-connect various Regional Stock
Exchanges in various states.
In the age of electronic trading, On- line information on rates from other major
markets was an essential input for efficiency. HSE provided on-line rates from BSE and
NSE which not only enhanced the ability of HOST terminals to attract the investors but
also enabled the members to avail opportunities between Exchanges.
CORPORATE DATABASE
HSE has subscribed to the CMIE Corporate Database for accessing data and
profiles of companies. This data can be accessed by the members, which will further
enhance the information power of the members.
IMPROVEMENT IN THE VOLUMES
It is heartening that after implementing HOST, HSE’s daily turnover has fairly
stabilized at a level of Rs. 20.00 crores this should enable in improving our ranking
among Indian Stock Exchange for 14th position on 6th position. We shall continuously
strive to improve upon this to ensure a premier position for.

CURRENT PLANS OF H.S.E.

EXPANSION OF TRADING OPERATIONS:

The Exchange has plans to expand the trading operations to other prime centers in
Andhra Pradesh where the trading terminals of HOST can be installed. The HOST
system will facilitate this expansion with minimum incremental investment on additional
communication facilities.

DEPOSITORY PARTICIPANT:
The Exchange has become a Depository participant (DP) with National Securities
Depository Limited (NSDL) and Central Depository Services Limited (CDSL). The
requisite infrastructure for NSDL is in place. Once it is fully operational, the Exchange
could undertake the depository functions by operating account at Hyderabad of Investors
& members of the Exchange.

FACILITY TO TRADE AT NSE, DERIVATIVES TRADING

NET TRADING
The Exchange has incorporated a subsidiary “H.S.E. Securities Limited” with a
paid up capital of Rs. 2.00 Crores initially takes NSE membership, so that the members
of the Exchange will have access to the NSE’s Trading Screen as sub-broker, Derivatives
trading and Net Trading etc., as and when commenced by NSE. The member of this
Exchange will also have equal opportunity of participating in such trading like any other
NSE member.

COMMODITIES EXCHANGE:
The Exchange by seeking the support of the State Government is planning to set
up Online Commodities Exchange to trade in certain commodities since out state is in
one of the major Agri Economies. In view of the networking facilities available with the
exchange for online trading through WAN, The commencement of Commodities Market
will ensure the optional utilization of the existing infrastructure with efficient clearing,
settlement and guarantee system, delivery system, real time price and trade information
dissemination system, transparency in operations and trading experience and expertise in
similar business. The online commodity trading with WAN connectivity will minimize
the middlemen operation and provide price support to the producers.

RULES & BY-LAWS OF EXCHANGE

A Stock Exchange is recognized only after the govt. is satisfied that its rules and
By-Laws confirm to the conditions prescribed for ensuring for dealing and protection to
investors.
The rules of exchange are related in general to
 The constitution of the exchange
 The powers of the management of its governing body and Its constitution
 The admission for membership
 The qualification for membership
 The expulsion
Suspension and readmission of members

TRADING IN DERIVATIVES

Indian securities market has indeed waited for too long for derivatives trading to emerge.
Mutual fund, FIIs and other inventors who are deprived of hedging opportunities will
now have a derivatives market to bank on. First to emerge are the globally popular
variety – index futures.
While derivatives markets flourished in the developed world Indian markets remain
deprived of financial derivatives to the beginning of this millennium. While the rest of
the world progressed by leaps and bounds on the derivatives front, Indian market lagged
behind. Having emerging in the market of the developed nations in the 1970s, derivatives
markets grew from strength to strength. The trading volumes nearly doubled in every
Three years marking it a trillion-dollar business. They became so ubiquitous that, now,
one cannot think of the existence of financial markets without derivatives. Two broad
approaches of SEBI is integrate the securities market at the national level, And also to
diversify the trading products, so that more number of traders including Banks, financial
institutions, insurance companies, mutual fund, primary dealers etc. Choose to transact
through the ex change. In this context the introduction of derivatives trading through
Indian stock exchange permitted by SEBI IN 2000 AD is a real landmark.

SEBI first appointed the L.C Gupta Committee in 1998 to recommend the regulatory
Frame work for derivatives trading and to recommend suggestive bye-laws for regulation
And control of trading and settlement of derivatives contracts. The broad of SEBI in its
Meeting held on May 11,1998 accepted the recommendations of the Dr L.C Gupta
Committee and approved the phased introduction of derivatives trading in India
beginning with Stock Index Futures. The Board also approved the “Suggestive Bye-laws”
recommended by the committee for regulation and control of trading and settlement of
Derivatives Contracts.

SEBI subsequently appointed the J. R. Verma Committee to recommend Risk

containment Measures in the Indian stock index Futures Market. The report was
submitted in the same year (1998) in the month of November by the said committee.

However the Securities Contracts (REGULATION) Act, 1956 (SCRA0 need amendment
to include ” derivatives” in the definition of securities to enable SEBI to introduce
trading in derivatives. The government in the year 1999 carried out the necessary
amendment. The securities laws (amendment) bill 1999 was introduced to bring about
the much-needed changes. In December 1999 the new framework has been approved.
Derivatives have been accorded the statues of ‘securities’. The ban imposed on trading
in derivatives way back in 1969 under a notification issued by the central government
has been revoked. Therefore SEBI formulated the necessary regulation/bye-laws and
intimated the stock exchange in year 2000, while derivative trading started in India at
NSE in the same Year and BSE started trading in the year 2001. In this module we are
covering the different types of derivative products and their features, which are traded in
the stock exchanges in India.

EQUITY DERIVATIVES EXCHANGES IN INDIA

• . In the equity markets both the national stock exchange of India Ltd. (NSE)
and The stock exchange, Mumbai (BSE) was quick to apply to SEBI for setting
 Up There derivatives segment.
• NSE as stated earlier commends derivatives trading in the same year i.e. 2000
AD, while BSE followed after a few months in 2001.
• Both the exchange have set-up an in-house segment instead of setting up a
Separate exchange for derivates.
• NSE’s Futures & Options Segment was launched with Nifty futures as the first
Production.
• BSE’s Derivatives Segment, started with sensex futures as its first product.
• Stock options and stock futures were introduced in both the Exchange in the year
2001.

Thus started trading in Derivatives in India Stock Exchanges (both BSE & NSE)
Covering index options, Index Futures, and Stock Options & Futures in the wake of the
new millennium in a short span of three years the volume traded in the derivatives
Market has outstripped the turnover of the cash market.

Derivatives Trading in Financial Markets

Derivatives were not traded in the financial markets of the world up to the period about
there decades backs, through Stock Exchange trading in securities in the cash market
came to be in vogue more than a century ago. In Indian the first Stock Exchange, BSE
was established in1875. But BSE commenced trading in derivatives only from 2001.Even
in the international finance/securities market the advent of derivatives as trading products
was a concurrent-effect with the process of globalization and integration the national
economies of the development countries beginning from the Seventies of the last
Century. As volumes traded increased and as competition on turned, trade & business
became more complex in the new environment. The new opportunities were matched by
fresh challenges and unpredictable volatility of the trading environment. Corporate for
the first time sensed the formidable risks inherent in business transactions and the
unpredictability of the markets to which they are exposed. Facing multiple risks the
business organization, were induced to search for new remedies, i.e. risk containment
devices/instrument. Derivatives came to be the natural remedy in this context. To quote
an international professional authority.

“As capital markets become increasingly integrated, shocks transmit easily from one
market to another. The proliferation of new instruments with has become darling of
corporate, banks, institutions alike is ‘Derivatives’. To have a touch of the tree top’s
view, Derivatives transaction is defined as a bilateral contract whose value is derived,
from the value of an underlying asset, or reference rate, or index. Derivative transaction
have evolved in the past twenty years to cover a broad range of products which include
instruments like ‘forward’, ‘future’, ‘options’, ‘swaps’ covering a broad spectrum of
underlying assets including exchange rates, interest rate, commodities, and equities.”

Through recent in origin derivates instrument issued over the years have grown by leaps
and bounds and the total amount issued globally is estimated to approach $80 trillion by
the advent of the new millennium. Derivatives position has growth at compounding rate
20% since 1990. In Indian through derivatives were introduced very recently in2001, the
trading turnover has already surpassed that of the equity segment. In NSE alone as per a
report on ors website the total turnover of the derivates segment for the month of May
2003 stood at R s. 53424 crores. During the month of May 2003, the percentage of
derivatives segment as a percentage of the cash segment was 97.68%. However in the
earlier two month the turnover of Derivatives was higher than that of the cash segment.

Developments Leading to Trading of Financial Derivatives in the USA

“The pace of innovation in derivatives markets increased remarkably in the 1970s.

 The first major innovation occurred in February 1972, when the Chicago
 mercantile Exchange CME began trading futures on currencies in its International
Money Market (IMM) division. This marked the first time a futures contract was
written on anything other than a physical commodity.
 The second was in April 1973, when the CBT formed Chicago Board Options
Exchange (CBOE) to trade options on common stocks. This marked the first time
an option was traded on an exchange.
 The third major innovation occurred in October 1975, when the CBT introduced
the first futures contract on an interest rare instrument – Government National
Mortgage Association futures.
 In January 1976, the CME launched Treasury bill futures and, in August 1977, the
CBT launched Treasury bond futures.
 The 1980s brought yet another round of important innovations. The first was the
use of cash settlement. In December 1981, the IMM launched the first cash
settlement contracts, the 3-months Eurodollar futures. At expiration, the
Eurodollar future is settled in cash based on the interest rate prevailing for a three-
month Eurodollar time deposit.
 Cash settlement made feasible the introduction of derivatives on stock index
futures, the second major innovation of the 1980s. in February 1982, the Kansas
City Board of Trade (KCBT) listed futures on the Value Line Composite stock
index, and, in April 1982, the CME listed futures on the S&P 500.these contract
introductions marked the first time future that contracts were written on stock
indexes.
 The third major innovation of the 1980s was the introduction of exchange-traded
option contracts written on ‘UNDERLYING’ other than individual common
stocks. The CBOE and AMEX listed interest rate options in October 1982 and the
Philadelphia Stock Exchange (PHILX) listed currency options in December 1982
as also options and gold futures.
 In January 1983, the CME and year New York Futures Exchanges (NYFE) began
to list options directly on stock index futures, and, March 1983, the CBOE began
to list options on stock indexes.

These two decades if innovation has transformed the nature of derivatives trading
activates on exchanges. While derivatives exchange were originally developed to help
market participants manage the price risk of physical commodities, today’s trading
activates is focused on hedging the financial risks associated with unanticipated price
movement in stock, bonds, and currencies.

BASIC OF DERIVATIVES

What are Derivatives?

The term “Derivatives” independent value, i.e. its value is entirely “derived” from the
underlying asset. The underlying asset can be securities, commodities bullion, currency,
live stock or anything else. In other words, derivative means a forward, future, option or
any other hybrid contract of per determined fixed duration, linked for the purpose of
contract fulfillment to the value of a specified real or financial asset or to an index of
securities.

The securities contracts (Regulation) Act 1956 define derivatives as under:

“derivative” includes-

A. a securities derivatives from a debt instrument, share, lone writher secured or

Unsecured, risk instrument or contract for different or any other from of security;

B. a contract which derives its value from the prices, or index of price of underlying
Securities;The above definition conveys

1.That derivative are financial products and derives its value from the underlying
assets.
1.Derivatives is derived from another financial instrument/contract called the
underlying. In the case of Nifty futures, Nifty index is the underlying.

Why Derivative

Derivatives are used –

1. By Hedgers for protecting (risk-covering) against adverse movement. Hedging is

a mechanism to reduce price risk inherent in open positions. Derivatives are
widely used for hedging. A Hedge can help lock in existing profits. Its purpose is
to reduce the volatility of a portfolio by reducing the risk.

2. Speculators to make quick fortune by anticipating/forecasting future market

movement. Hedgers with to eliminate or reduce the price risk to which they are
already exposed. Speculators, on the other hand are those classes of investors who
willingly take price risks to profit from price change in the underlying. While the
need to provide hedging avenues by means of derivative instruments is laudable,
it call for the existence of speculative traders to play the role of counter-party to
the hedgers. It is for this reason that the role of speculators gains prominence in a
derivatives market.

3. Arbitrageurs to earn risk-free profits by exploiting market importance.

Arbitrageurs profits from price differential existing in two markets by
simultaneously operating in the two different markets.

Type of Derivatives
Derivatives products initially emerged devices against fluctuations in commodity price,
and commodity-linked derivatives remained the sole form of such predicts for almost
three hundred years. Financial derivatives came into spotlight in the post-1970 period due
to growing instability in the financial markets. However, since their emergence, these
products have become very popular and by 1990s, they accounted for about two –thirds
of total transactions in derivative products. In recent years, the market for financial
derivatives has grown tremendously in term of variety of instruments available their
complexity and also turnover. In the class of equity derivatives the world over, future and
options on stock indices have gained more popularity than on individual stocks,
especially among institutional investors, who are major uses of index-linked derivatives.
Even small investors find these useful due to high correlation of the popular index with
various portfolios and ease of use. The lower costs associated with index derivatives vis-
à-vis derivative products based on individual securities is another reason for their
growing use. The most commonly used derivatives contracts are forward, futures and
options with we shall discuss in detail later. Here we take a brief look at various
derivatives contracts that have come to be used.

Forwards: A forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the future at today’s pre-agreed price.

Futures: A futures contract is an agreement between two parties to buy or sell an asset
at a certain time in the future at a certain price. Futures contracts are special type of
forward contract in the sense that the former are standardized exchange-trade contracts.

Options: options are of two types- calls and put calls give the buyer right but not the
obligation to buy a give quantity of the underlying asset, at a given price on or before a
given future date. Puts gives the buyer the right, but not the obligation to sell a given
quantity of the underlying asset at a given price on or before given date.

Warrants: Options generally have lives of up to one year, the majority of option traded
On options exchanges having a maximum maturity of one months. Longer-dated options
are called warrants and are generally traded over-counter.

Leaps: The acronym LEAPS means long-term equity anticipation securities. These are
options having a maturity of up to three years.

Baskets: Basket options are options on portfolios of underlying assets. The underlying
asset is usually a moving average of a basket of assets. Equity index options are a form of
basket options.

Swaps: swaps are private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. They can be regarded as portfolios of forward
contracts.

The two commonly used swaps are:

_Interest rate swaps: these entail swapping only the interest related cash flow between
the parties in the same currency.

Currency swaps: These entail swapping both principal and interest between the parties,
with the case flows in one direction being in a different currency than those in the
opposition direction.

Swaptions: Swaptions are options to buy or sell a swap that will became operative at the
expiry of the options. Thus a swaption is an option on a forward swap. Rather than have
called and puts, the swaption market has receiver swaption and payer swaptions. A
receiver swaptions in an option to receiver fixed and pay floating. A player swaption is an
option to pay fixed and receive floating.

Classification of Derivatives

The derivatives can be classified as

• Forwards (Currencies, Stocks, Swaps etc)

Forward contract is different from a spot truncation, where payment of price and
delivery of commodity concurrently take place immediately the transaction is
settled. In a forward contract the sale/purchase truncation of an asset is settled
including the price payable, not for delivery/settlement at spot, but at a specified
future date. India has a strong dollar-rupee forward market with contract being
traded for one, two, and six-month expiration. Daily trading volume on this
forward

Market is around $500 million a day. Indian users of hedging services are
also allowed to buy derivatives involving other currencies on foreign markets.

• Futures(Currencies, Stocks, Indexes, Commodities etc

A futures contract has been defined as “a standardized, exchange-traded

agreement specifying a quantity and price of a particular type of commodity
 (soybeans, gold, oil, etc) to be purchased or sold at a pre-determined date in the
future. On contract date, delivery and physical possession take place unless the
contract has been closed out futures fate also available ob various financial
products and indexes today.

A futures contract is thus a forward, contract, which trades on national stock

exchange. this provides them transparency, liquidity, anonymity of trades, and
also eliminates the counter party risks due to the guarantee provided by
nationalsecurities clearing corporation limited.

• Options (currencies, stocks, indexes etc).

Options are the standardized financial that allows the buyer (holder) if the
options, i.e. the right at the cost of options premium, not the obligation, to but
(call options) or sell (put options) a specified asset at a set price on or before a
specified date through exchange under stringent financial security against default.

FORDWARDS CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One of the parties to the contract assumes a long position and agrees to
buy the underlying asset on a certain specified future date for a certain specified price.
The other party assumes a short position and agrees to sell the asset on the same date for
the same price. Other contract details like delivery date, the parties to the contracts
negotiate price and quality bilaterally. The forward contracts are normally traded outside
the exchanges.

The silent futures of forward contract are:

_the are bilateral contracts and hence exposed to counter-party risk.

_each contract is custom designed, and hence is unique in terms of contract size,
Expiration date and the asset type and quality.

_the contract price is generally not available in public domain.

_on the expiration date, the contract has to be settled by delivery of the asset.

_if the party wishes to reverse the contract, it has to compulsorily go the same counter
Party, which often results in high prices being changed.

However forward contracts in certain markets have become very standardization, as in

the case of foreign exchange, thereby reducing transaction cost and increasing
transactions volume. This process of standardization reaches its limit in the organized
futures market .Forward contracts is very useful in hedging and speculation. The classic
hedging application word is that of an exporter who expects to receive payment in dollars
three Months later he is exposed to the risk of exchange rate fluctuations. By using the
currency forward markets to sell dollars forward, he can lock on to a rate today and
reduce his uncertainty. Similarly an importer who is required to make a payment in
dollars forward if a speculator has information or analysis, which forecasts an upturn in a
price, than he can go long on the forward market instead of the cash market. The
speculator would go long on the forward, wait for the price to rise, and than take a
reversing transaction to book profits. Speculators may well be required to deposit a
margin upfront. However, this is generally a relatively small proportion of the value of
the assets underlying the forward contract. The use of forward markets here supplies
leverage to the speculator.

Limitations

Forward markets world-wide are afflicted by several problems:

Lack of centralization of trading, Liquidity, and Counter party risk in the first two of
these, the basic problem is that of too much flexibility and generality. The forward
market is like a real estate market in that any two consenting adults can form contracts
against each other. This often makes them design terms of the deal, which are very
convenient in that specific situation, but makes the contracts non-tradable. Counter party
risk arises from the possibility of default by any one party to the transaction. When one of
the two sides to the transaction declares bankruptcy, the other suffers. Even when
forward markets trade standardized contracts, and hence avoid the problem of liquidity,
still the counter party risk remains a very serious issue.

FUTURES

Futures markets were designed to solve the problems that exist in forward markets.
Futures Contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. But unlike forward contracts, the futures contracts are
standardized and exchange traded. To facilitate liquidity in the future contracts, the
exchange specifies certain standard quantity and quality of the underlying instrument that
can be delivered, (or which can be used for reference purposes in settlement) and a
standard timing of such settlement. A futures contract may be offset prior to maturity by
entering into an equal and opposite transaction. More than 99% of futures transactions are
offset this way.

The standardized items in a futures contract are:

Quantity of the underlying

Quality of the underlying

The date and month of delivery

The units of price quotations and minimum price changes

Location of settlement.

DISTINCTION BETWEEN FUTURES AND FROWARDS

Forward contracts are often confused with futures contracts. The confusion is primarily
Became both serve essentially the same economics of allocations risk in the presence of
Future price uncertainly. However futures are a significant improvement over the forward
Contracts as they eliminate counter party risk and offer more liquidity.

FUTURES TERMINOLOGY

Spot price: The price at which an asset trades in the spot market.

Futures price: The price at which the futures contract trades in the futures market.

Contract cycle:

The period over which a contract trades. The index futures contracts on the NSE have
one-month, two-month and three-month expiry cycle, which expire on the last Thursday
of the month. Thus January expiration contract expires on the last Thursday of February.
On the Friday following the last Thursday, a new contract having a three-month expiry is
introduced for trading.

Expiry date:

It is the date specified in the futures contract. This is the last day on which the contract
will be traded, at the end of which it will case to exist.

Contract size:
The amount of the asset that has to be delivered less than one contract. For instance, the
contract size on NSE’s futures market is 200 Nifties.

Basis:
In the context of financial futures, basis can be defined as the futures price minus the
spot price. There will be a different basis for each delivery month for each contract.

In a normal market, basis will be positive. This reflects that futures prices normally
Exceed spot prices.

_cost of carry: the relationship between futures prices and spot prices can be summarized
 In terms of what is known as the cost of carry. This measures the storage Cost plus the
interest that is paid to finance the asset less the income earned on the asset.

_initial margin: the amount that must be deposited in the margin account at the time a
future contract is first entered into is known as initial margin.

_marking-to-market: in the futures market, at the end of each trading day, the margin
Account is adjusted to reflect the investor’s gain or loss depending upon the futures
Closing price. This is called marking-to-market.

_maintenance margin: this is somewhat lower than the initial margin. This is set to ensure
That the balance in the margin account never becomes negative. If the balance
in the margin account falls bellow the maintenance margin, the investor receives a
margin call and is expected to top up the margin account to the initial margin level
before trading commences on the next day.

OPTIONS

We look at the next derivative product to be traded on the NSE, namely option. Options
are fundamentally different from forward and futures contracts. An option gives the
holder of the option the right to do something. The holder does not have to exercise this
right .in contrast, in a forward or futures contract, the two parties have committed
themselves to doing something. whereas it costs nothing (except margin requirements)to
enter into a futures contract, the purchase of an option requires an up-front payments.

OPTIONS TERMINAOLOGY

_index option:

There option has theidex as the underlying. Some options are

European while others are American. Like index, futures, contract, index options
Contracts are also cash settled.

_stock options:

stock options are options on individual stocks. option currently trade On over 500
stocks in the United States. A contract gives the holder the right to buy or sell shares at
the specified prices.
_buyer of options:

the buyer of an options is the one who by paying the options

Premium buys the right but not the obligation to exercise his option on the
seller/writer.

_writer of an option:
the writer of a call/put options is the one who receives the option
premium and is thereby obliged to sell/buy the asset if the buyer exercises on him.

There are two basic types of options, all options and put options.

_call option:

a call option gives the holder the right but not the obligation to buy anAsset by a certain
date for a certain price.

_put option:

a put option gives the holder the right but not the obligation to sell an asset
By a certain date for a certain price.

_option price:

option prices are the price, which the option buyer pays to option seller.
It is also referred to as option premium.

_expiration date:

the date specified in the options contract is known as the expiration

Date, the exercise date, the strike date or the maturity.

_strike price:

the price specified in the options contract is known as the strike price or
the exercise price.

_American options:

American options are options that can be exercised at any time

up to The expiration date. Most exchange-traded options are American.
_European options:

European options are options that can be exercised only on the

Expiration date itself. European options are easier to analyze than American options, and
Properties of American options are frequently deduced from those of its European
Counterpart.

_In-the-money option:

an in-the money (ITM) option that would lead to a Positive cash flow to the holder if it
were exercised immediately. A call option on the Index is said to be in money when the
current index is stands at a level higher than the strike price, (i.e. spot price strike price).
If the index is much higher than the strike price, The call is said to be deep ITM. In the
case of a put is ITM if the index is bellow the strike price.

_At-the-money option:

an at-the money(ATM) option is an option that would lead to

Zero cash flow if it were exercised immediately. An option on the index is at-the –money
when the current index equals the strike price (i.e. spot price = strike price.

_Out-of the money option:

an out-of –money (OTM) option is an option that would lead

to a negative cash flow it was exercised immediately. A call option on the index is
out-of-the-money when the current index stands at a level, which is less than the strike
Price(i.e. spot price strike price). If the index is much lower than the strike price, the call
is said to be deep OTM .in the case of a put, the put is OTM if the index is above the
Strike price.

Trading Strategies using Futures and Option

There are a lot of practical uses of derivatives. As we have seen, derivatives can be used
for profits and hedging. We can use derivatives as a leverage tool too.

Use of derivatives as leverage.

You can use the derivatives market to raise fund using your stocks. Conversely, you can
also lend funds against stocks.

Different between badla and derivatives.

The derivatives product that comes closest to Badla is futures. Futures is not badla,
through a lot of people confuse it with badla. The fundamental difference is balda
consisted of contango and backwardation (undha badla and vyaj badla ) in the same
market. Futures is a different market segment altogether. Hence derivatives is not the
same as badla, through it is similar.

Raising funds from the derivatives market.

This is fairly simple. Say, you have Infosys, which is trading at R s 3000. You have
shares lying with you and are in urgent need of liquidity. Instead of pledging your shares
and borrowing from banks at a margin, you can sell the stock at R s 3000. Suppose you
need this liquidity only for a month and also do not want to party with Infosys. You can
buy a 1 month future at R s 3050

After a month you get back you infosys at the cost of additional rs 50. This R s 50 is the
financing cost for the liquidity.The other beauty about this is you have already locked in
your purchase cost at R s 3050. This fixes your liquidity cost also and protected against
further price losses.

Lending funds to the market.

The lending into the market is exactly the reverse of borrowing. You have money to lend.
You can a stock and sell its future. Say, you buy Infosys at R s 3000 and sell a 1 month
future at R s 3100. in effect what you have done is lent R s 3000 to the market for a
month and earned R s 100 on it

Using speculation to make profits.

When you speculate, you normally take a view on the market, either bullish or bearish.
When you take a bullish view on the market, you can always sell futures and buy in the
spot market. If you take a bearish view on the market, you can buy futures and sell in the
sport market. Similarly, in the option market, if you are bullish, you should buy call
options. If you are bearish, you should buy put option conversely, if you are bullish, you
should write put options. This is so because, in a bull market, there are lower changes of
the put option being exercised and you can profit from the premium if you are bearish,
you should write call option. This is so because, in a bear market, there are lower chances
of the call option being exercised and you can profit from the premium.

Using arbitrage to make money in derivatives market.

Arbitrage is making money on price differential in different markets. For example, future
is nothing but the future value of the spot price. This futures value is obtained by
factoring the interest rate. But if there are differences in the money market and the
interest rates change than the future price should correct itself to factor the change in
interest. But if there is no factoring of this change than it present an opportunity to make
money-an arbitrage opportunity.

Let us take an example.

Example:

A stock is quoting for rs 1000. The 1 month future of this stock is at rs 1005. the risk free
interest rate is 12%. What should be the trading strategy?

Solution:

The strategy for trading should be: Sell Spot and Buy Futures
Sell the stock for rs 1000. buy the future at rs 1005.
Invest the rs 1000 at 12%. The interest earned on this stock will be

1000(1+.02) (1/12) = 1009

So net gain the above strategy is rs 1009-rs 1005= rs 4

Thus one can make a risk less profit of rs 4 because of arbitrage
But an important point is that this opportunity was available due to mis-pricing and the
market not correcting itself. Normally, the time taken for the market to adjust to
corrections is very less. So the time available for arbitrage is also less. As every one to
cash in on the arbitrage, the market corrects itself.

USING FUTURE TO HEDGE POSITION.

One can hedge ones by taking an opposite position in the futures market. For example, if
you are sport price, the risk you carry is that of price in the future. You can lock this by
selling in the futures price. Even if the stock continues falling, your position is hedge as
you have firmed the price at witch you are selling. Similarly, you want to buy a stock at a
later date but face the risk of prices rising. You can hedge against this rise by buying
futures. You can use a combination of futures too to hedge yourself. There is always a
correlation between the index and individual stocks, this correlation may be negative or
positive, but there is a correlation. This is given by the beta of the stock. In simple terms,
terms, what beta indicates is the change in the price of a stock to the change in index.

For examples

If beta of a stock is 0.8, it means that if the index goes up by the stock
goes up by 8. t will also fall a similar level when the index falls.
A negative beta means that the price of the stock falls when the index rises. So, if you
have a position in a stock, you can hedge the same by buying the index at times the
value of the stock.

Example :

The beta of HPCL is 0.8. The Nifty is at 1000. If I have Rs 10000 worth of HPCL, I can
hedge my position by selling 800 of Nifty. That is I well sell 8 Nifities.

Scenario 1

If index rises by 10%, the value of the index becomes 8800 I e a loss of R s 800. The
value of my stock however goes up by 8% I e it becomes R s 10800 I e a gain of R s 800.
Thus my net position is zero and I am perfectly hedged.

Scenario 2:

If index falls by 10%, the value of the index becomes Rs 7200 a gain of Rs 800. But the
value of the stock also falls by 8%. The value of this stock becomes Rs 9200 a loss of Rs
800Thus my net position is zero and I am perfectly hedged.But against, beta is a
predicated value based on regression models. Regression is nothing but also analysis of
past data. So there is a chance that the above position may not be fully hedged if the beta
does not behave as per the predicated value.

Using options in trading strategy

Options are a great tool to use for trading. If you feel the market will go up. You should
are a call option at a level lower than what you expect the market to go up. If you think
that the market will fall, you should buy a put option at a level higher than the level to
which you expect the market fall. When we say market, we mean the index. The same
strategy can be used for individual stocks also. A combination of futures and options can
be used too, to make profits.

Strategy fro an option writher to cover himself.

An option writer can use a combination strategy of futures and options to protect his
position. The risk for an option writer arises only when the option is exercised this will be
very clear with an example.

Supposing I sell a call option on Satyam at a strike price of rs 300 for a premium of rs20.
The risk arises only when the option is exercised. The option will be exercised when the
price exceeds rs 300. I start making a loss only after the price exceeds rs 320(Strick price
plus premium).

More impotently, I have to deliver the stock to the opposite party. So to enable me to
deliver the stock to the other party and also make entire profit on premium, I buy a future
of Satyam at rs 300. This is just one leg of the risk. The earlier risk was of the called
being exercised the risk now is that of the call not being exercised. In case the call is not
exercised, what do I do?

I will have to take delivery as I have brought a future. So minimize the risk, I buy a put
option on Satyam at Rs 300. But I also need to pay a premium for buying the option. Ipay
Premium of Rs 10. Now I am fully covered and my net cash flow would be.Premium

earned from selling call option Rs 20.

Premium paid to buy put option (Rs 10)
Net cash flow Rs 10

But the above pay off will be possible only when the premium I am paying for the put
Option is lower than the premium that I get for writing the call.
Similarly, we can arrive at a covered position for waiting a put option two. Another
interesting observation is that the above strategy in itself presents an opportunity to make
money. This is so because of the premium differential in the put and the call option. So if
one tracks the derivatives make on a continuous basis, one can chance upon almost risk
less money making opportunities.

Other strategies using derivatives.

The other strategies are also various permutations of multiple puts, call and futures. They
are also called by exotic names, but if one were to observe them closely, they are
relatively simple instruments.Some of these instruments are:

Butterfly spread:

It is the strategy of simultaneous buying of put and call

Calendar spread:

An option strategy in which a short-term option is sold and a longer-term option is

bought both having the same striking price. Either puts or calls may be used.

Double option:

An option that gives the buyers the right to buy and/or sell a futures contract, at a
premium, at the strike price.

Straddle:

The simultaneous purchase and sale of option of the same speculation to different
periods.

Tandem Options:

A sequence of options of the same type, with variable strike price and period.

Bermuda Option:

Like the location of the Bermudas, this option is located somewhere between a European
style option with can be exercised only at maturity and an American style option which
can be exercised any time the option holder chooses. This option can be exercise only on
predetermined dates.

RISK MANAGEMENT IN DERIVATIVES

Derivatives are high-risk instrument and hence the exchanges have put up a lot of
measures to control this risk. The most critical aspect of risk management is the daily
monitoring of price and position and the margining of those positions.

NSE uses the SPAN (Standard Portfolio Analysis of Risk). SPAN is a system that has
origins at the Chicago Mercantile Exchange, one of the oldest derivative exchanges in the
world.

The objective of SPAN is to monitor the positions and determine the maximum loss that
a stock can incur in a single day. This loss is covered by the exchange by imposing mark
to market margins.

SPAN evaluates risk scenarios, which are nothing but market conditions. The specific set
of market conditions evaluated, are called the risk scenarios, and these are defined in
terms of:

a) How much the price of the underlying instrument is expected to change over one
trading day, and

b) How much the volatility of that underlying price is expected to change over one
trading day?

Based on the SPAN measurement, margins are imposed and risk covered. Apart from
this, the exchange will have a minimum base capital of Rs. 50 lacks and brokers need to
pay additional base capital if they need margins above the permissible limits.

SETELLEMENT OF FUTURES
Mark to market settlement

There is daily settlement for Mark to Market. The profits/losses are computed as the
difference between the trade price or the precious day’s settlement price as the case may
be and the current day’s settlement price. The parties who have suffered a loss are
required to pay the mark-to-market loss amount to exchange which is in turning passed
on to the party who has made a profit. This is known as daily mark-to market settlement.
Theoretical daily settlement price for unexpired futures contracts, which are not traded
during the last half on a day, is currently the price computed as per the formula detailed
below.

F = S * e rt

Were:

F = theoretical futures price

S = value of the underlying index/stock
r = rate of interest (MIBOR- Mumbai Inter Bank Offer Rate)
t = time to expiration

Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.
After daily settlement, all the open positions are reset to the daily settlement price. The
pay-in and payout of the mark-to-market settlement is on T+1 days (T = Trade day). The
mark to market losses or profits are directly debited or credited to the broker account
from where the broker passes to client account.

Final settlement

On the expiry of the futures contracts, exchange market all positions to the final
settlement price and the resulting profit/loss is settlement I cash. The final settlement of
the future contract is similar to the daily settlement process except for the method of
capon of final settlement price. The final settlement profit/loss is completed as the
difference between trade price or the previous day’s settlement price, as the case may be
and the final settlement price of the relevant futures contract.

Final settlement loss/profit amount is debited/credited to the relevant broker’s clearing

bank account on T + 1 day (T = expiry day). This is then passed on the client from the
broker. Open positions in futures contracts cease to exist after their expiration day.
SETTLEMENT OF OPTIONS

Daily premium settlement

Premium settlement is cash settled and settlement style is premium style. The premium
payable position and premium receivable position are netted across all option contract for
each broker at the client level to determine the net premium payable or receivable
amount, at the end of each day.

The brokers who have a premium payable position are required to pay the premium
amount to exchange which is in turn passed on to the members who have a premium
receivable position. This is known as daily premium settlement. The brokers in turn
would take from their clients.

The pay-in and pay-out of the premium settlement is on T + 1) days (T = Trade day). The
premium payable amount and premium receivable amount are directly debited or credited
to the broker, from where it is passed on to the client.

Interim Exchange Settlement for Options on Individual Securities

Interim exchange settlement for Option contract on individual securities is effected for
valid exercised option at in-money strike price, at the close of the trading hours, on the
day of exercise. Valid exercise option contracts are assigned to short position in option
contracts with the same series, on a random basis. This interim exercise settlement value
is the difference between the strike price and the settlement price of the relevant option
contract. Exercise settlement value is debited/credited to the relevant option broker
account on T + 3 days(T = exercise date). From there it is passed on to clits.

Final Exercise Settlement

Final Exercise settlement is effected for option positions at in-the-money strike price
existing at the close of trading hours, on the expiration day of an option contract. Long
position at in-the money strike price are automatically assigned to short positions in
option contracts with the same series, on a random basis. For index option individual
securities, exercise style is American style. Final Exercise is Automatic on expiry of the
option contracts.

Exercise settlement is cash settled by debiting/crediting of the clearing account or the

relevant broker with the respective Clearing Bank, from where it is passed
debited/credited to the relevant broker clearing bank account on
T + 1 day (T = expiry day), from where it is passed Final settlement loss/profit amount
for option contracts on Individual Securities is debited/credited to the relevant broker
clearing bank account on T + 3 days (T = expiry day), from where it is passed Open
positions, in option contracts, cease to exist after their expiration day.
Options valuation using Black Scholes model.
The black and scholes Option Pricing model didn’t appear overnight, in fact, Fisher
Black started out working to create a valuation model for stock warrants. This work
involved calculating a derivative to measure how the discount rate of a warrant varies
with time and stock price. The result of this calculation held a striking resemblance to a
well-known heat transfer equation. Soon after this discovery, Myron Scholes joined
Black and the result of their work is a startlingly accurate option pricing model. Black
and Scholes can’t take all credit for their infect the model is actually an improved version
of a precious model developed by A. James Boness in his Ph.D. dissertation at the
University of Chicago. Black and scholes improvement on the Boness model come in the
from of a proof that the risk- free interest raise is the correct discount factor, and with the
absence of assumptions regarding investor’s risk preferences.

The model:
C = SN (d1) – Ke {-rt} N (d2)
C= Theoretical call premium
S= current stock price
t= time until option expiration
K= option striking price
r= risk-free interest rate
N = Cumulative standard normal distribution

D1 = in(S / K) + (r + s²/2)t

In order to under stand the model itself, we divide into two parts. The first part, SN (d1),
derives the expected benefit from acquiring a stock outright. This is found by multiplying
stock price [S] by the change in the call premium with respect to a change in the
underlying stock price [N (d1)]. The second part of the model, Ke(-rt)N(d2), gives the
present value of paying the exercise price on the expiration day. The fair market value of
the call option is then calculated by taking the difference between these two parts.

Assumptions of the Black and Scholes Model

1) The stock pays no dividends during the option’s life

Most companies pay dividends to their share holders, so this might see a serious
limitation to the model considering the observation that higher dividend yields
elicit lower call premiums. A common way of adjusting the model for this
situation is subtract the discounted value of a future dividend from the stock price.

2) European exercise terms are used

European exercise terms dictate that the option can only be exercised on the
expiration date. American exercise term allow the option to be exercised at any
time during the life of the option, making American option more valuable due to
their greater flexibility. This limitation is not a major concern because very few
calls are exercise before the last few days of their life. This is true because when
you exercise a call early, you forfeit the remaining time value on the call and
collect the intrinsic value. Towards the end of the life of a call, the remaining time
value is very small, but the iatric value is the same.

1. Markets are efficient

This assumption suggests that people cannot consistent predict the direction of the
market or an individual stock. The market operates continuously with share price
followed a continuous it process. To understand what a continues it processes,
you must first known that m Markov process is “one where the observation in
time period at depends only on the preceding observation”. An it process is
simply a Marko process you would do so without picking the pen up from the
piece of paper.

2. No commissions are charged

Usually market participants do have to pay a commission to buy or sell options.

Even floor traders pay some kind of free, but it is usually very small. The fees that
Individual investor’s pay is more substantial and can often distort the out put of
the model.

Interest rate remain constant and know

The Black and Scholes model uses the risk-free rate to represent this constant and
known rate. In reality there is no such thing as the risk-free rate, but the discount
rate on U.S. Government Treasury Bills with 30 days left until maturity is usually
used to represent it. During periods of rapidly change interest rates, these 30 day
rates are often subject to change, thereby violating one of the assumptions of the
model.

REGULARITY FRAME WORK

The trading of derivatives is governed by the provisions contained in the SC(R)A, the
SCBI act, the rules and regulation framed there under and the rules and bye-laws of stock
exchange.

Securities contracts (Regulation) Act, 1956

SC(R) A aims at preventing undesirable transactions in securities by regulating the

Business of dealing therein and by providing for certain other matters connected
therewith. This is the principal Act, which governs the trading of securities in
India. The term “securities” has been defined in the SC(R) A. as per section 2(h), the
‘securities’ include.

1. Shares, scraps, stocks, bonds, debenture stock or other marketable securities of a like
nature in or of any incorporated company or other body corporate.

2. Derivative

3. Units or any other instrument issued by any collective investors in such schemes
To the investors in such schemes

, risk Government securities. Such other instruments as may be declared by the central
government to be securities rights or interests in securities. “Derivative” is defined to
include: A security derived from a debt instrument, share, loan whether secured or
unsecured instrument or contract for differences or any other from of security.

_A contracts which derives its value from the prices, or index of prices, of underlying
Securities.

Section 18 a provides that notwithstanding anything contained in any other law for
the time being in force, contracts in derivative shall be legal and valid if such
contracts are :

-Traded on a recognized stock exchange –settled on the clearing hose of the

recognized stock exchange, in accordance with the rules and bye –loss of such stock
exchanges

Securities and Exchange Board of India Act, 1992

 SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India
(SEBI) with statutory powers for (A) protecting the interests of investors in securities
(B) promoting the development of the securities market and (C) regulating the
securities market. Its regulatory jurisdiction extends over corporate in the issuance of
capital and transfer of securities, in addition to all intermediaries and persons
associated with securities market. SEBI has been obligated to perform the aforesaid
functions by such measures as it thinks fit.

In particular, it has powers for:

_regulating the business in stock exchanges and any other securities markets

_registering and regulating the working of stock brokers, sub-brokers etc.

_promoting and regulating self – regulatory organizations

_prohibiting fraudulent and unfair trade practices.

_calling for information from, undertaking inspection, conducting inquires and audits of
the stock exchanges, mutual funds and other persons associated with the securities market
and intermediaries and self-regulatory organization in the securities market

_performing such functions and exercising according to Securities Contracts (Regulation)

Act, 1956, as may be delegated to it by the Central Government

SEBI (Stockbrokers and Sub-brokers) Regulations, 1992

In this section we shall have a look at the regulations that apply to brokers under the
SEBI Regulation.

BROKERS
A broker is an intermediary who arranges to buy and sell securities on behalf of clients
(the buyers and the seller). According to section2 (e) of the SEBI (Stock Brokers and sub
brokers) Rules, 1992, a stock broker mean of a recognized stock exchange. No stock
broker is allowed to buy, sell or deal in securities, unless he or she holds a certificate of
registration granted by SEBI. A stock broker applies for registration to SEBI through a
stock exchange or stock exchanges of which he or she is admitted as a member. SEBI
may grant a certificate to a stock-broker [as per SEBI (stock Brokers and Sub-Brokers)
Rules, 1992] subject to the conditions that:

1. He holds the membership of stock exchange:

2. He sell abide by the rules, regulations and buy-laws of the stock exchange or stock
exchange of which he is a member:

3. In case of any change in the status and constitution, he shall obtain prior
permission of SEBI to continue to buy, sell or deal in securities in any stock
exchange:

4. he shall pay the amount of fees for registration in the prescribed manner: and

5. he shall take adequate steps for redressed of grievances of the investors within
one month of the date of the receipt of the complaint and keep SEBI informed
about the number, nature and other particulars of the complaints .
as per SEBI(Stock Brokers) Regulations, 1992,SEBI shall take into account for
considering the grant of a certificate all matters relating to buying, selling, or
dealing in securities and in particular the following namely,

whether the stock broker

(a) is eligible to be admitted as a member of a stock exchange ,

(b) has the necessary infrastructure like adequate office space, equipment and man
power to effectively discharge his activities;

(c) has any past experience in the business of buying, selling or dealing in securities;

(d) is subjected to disciplinary proceeding under the rules, regulations and buy-laws of a
stock exchange with respect to his business as a stock-broker involving either himself or
any of his partners, directors or employees.

REGULATION FOR DERIVATIVES TRADING

 SEBI set up a 24-member committee under the Chairmanship of Dr.L.C.Gupta to
develop the appropriate regulatory framework for derivatives trading in India. The
committee submitted its report in March 1998. On May 11, 1998 SEBI accepted the
recommendations of the committee and approved the phased introduction of
derivatives trading in India beginning with stock index futures. SEBI also approved
the “suggestive bye-laws” recommended by the committee for regulation and control
of trading settlement of derivatives contracts.

The provision in the SC(R)A and the regulatory framework developed there under govern
trading in securities .

The amendment of the SC(R) A to included derivatives with in the ambit of ‘securities’
in the SC(R) A made trading in derivatives possible within the frame work of that Act.

1. Any Exchange fulfilling the eligibility criteria as prescribed in the L.C.Gupta

committee report may apply to SEBI for grant of recognition under section 4 of
the SC(R) A, 1956 to start trading derivatives. The derivatives exchange/segment
should have a separate governing council and representation of trading /clearing
members shall be limited to maximum of 30% pf the total members and will obtain
prior approval of SEBI before start of trading in any derivatives contract.

2. The exchange shall have maximum 50 members.

3. The members of an existing segment of the exchange will not automatically become
the members of derivatives segment. The members of the derivatives segment need to
fulfill the eligibility conditions as laid down by the L.C.Gupta committee.

4. The clearing and settlement of derivatives trades shall be through a SEBI approved
clearing corporations/house. Clearing corporation/house complying with the eligibility
conditions as laid down by the committee have to apply to SEBI for grant of approval.

5. Derivatives brokers/dealers and clearing members are required to seek registration

from SEBI. This is in additional top their registration as brokers of existing stock
exchanges. The minimum net worth for clearing members of the derivatives clearing
corporation/house shall be Rs. 300 lakh. The net worth of the members shall be
computed as follows:

_Capital + Free reserves

_Less non-allowable assets viz,

 Fixed assets
  Pledged securities

 Member’s card

 Non-allowable securities (unlisted securities)

 Bad deliveries

 Doubtful debts and advances

 Prepaid expenses

 Intangible asset

 30% marketable securities

6. The minimum contract value shall not to be less than Rs. 2 Lakh. Exchanges should
also submit details of the futures contract they propose to introduce.

7. The initial margin requirement, exposure limits linked to capital adequacy and margin
demands related to the risk of loss on the position shall be prescribed by
SEBI/Exchange from time to time.
8.the L .C. Gupta committee report requires strict enforcement of “know your customer”
Rules and requires that every client shall be registered with the derivatives broker. the
Members of the derivatives segment are also required to make their clients aware of the
Risks involved in derivatives trading by issuing to the client the risk disclosure

Document and obtain a copy of the same duly signed by the client.
A trading members are required to have qualified approved user and sales person qho
have passed a certification programmed approved by SEBI.

NSE’S certification in financial markets.

A critical element of financial sector reforms is the development of a pool of human

resources having right skills and expertise to provide quality intermediation services in
Each segment of the market. In order to dispense quality intermediation, personnel
providing services need to possess requisite skills and knowledge. This is generally
achieved through a system of testing and certification. Such testing and certification has
assumed added significance in India as there is no formal education/training on financial
Markers, especially in the area of operations. Taking into account international

experience and needs of the Indian financial Market, NSE offers NCFM (NSE’ s
Certification in Financial Markets) to test practical knowledge and skills that are
required to operate in financial markets in a very secure and unbiased manner and to
certify personnel with a view to improve quality of intermediation. NCFM offers a
comprehensive range of Modules covering many different areas in finance including a
module in derivatives. The Module on derivatives has been recognized by SEBI. SEBI
requires that derivative Brokers/dealers and sales persons must mandatory pass this
module of the NCFM
.
Regulation for clearing and settlement
1. The L. C Gupta committee has recommended that the clearing corporation must
perform full notation i.e. the clearing corporation should interpose itself
betweenboth legs of every trade, becoming the legal counter party to both or
alternatively should provide an unconditional guarantee for settlement of all
trades.

2. the clearing corporation should ensure that none of the Board member has
tradinginterests.

3. the definition of net-worth as prescribed by SEBI need to be incorporated in the c

application/regulations of the clearing corporation.

4. the regulations relating to arbitration need to be incorporated in the

clearingcorporation.

5. specific provision/chapter relating to declaration of default must be incorporated

by the clearing corporation in its regulations.

6. the regulations relating to investor protection fund for the derivatives market
mustbe included in the clearing corporation application/regulations.

7. the clearing corporation should have the capabilities to segregate upfront/initial

margins deposited by clearing members for trades on their own account and on
account of his clients. The clearing corporation shall hold the clients’ margin
money in trust for the clients’ purposes only and should not allow its diversion for
ant other purposes. This condition must be incorporated in the clearing
corporation regulations.

8. the clearing member shall collect margins from his constituents (clients/trading
members). He shall clear and settle deals in derivative contracts on behalf of the
constituents only on the receipt of such minimum margin.

9. Exposure limits based on the value at risk concept will be used and the exposure limits
Will be continuously monitored. These shall be within the limits prescribed by
SEBI from time to time.

10. the clearing corporation must lay down a procedure for periodic review of the
net worth of its members.
 11. the clearing corporation must inform SEBI how it proposes to monitor the
exposure of its members in the underlying market.

12. any changes in the bye-laws, rules or regulations which are covered under the
“suggestive bye-laws for regulations and control of trading and settlement of
derivatives contracts” would require prior approval of SEBI.

Product Specifications BSE-30 Sensex Futures

• contract size – R s . 50 times the Index

• Tick size – 0.1 points or R s . 5

• Expiry day – last Thursday of the month

• Settlement basis – cash settled

• Contract cycle – 3 months

• Active contracts – 3 nearest months

Product Specifications S&P CNX Nifty Futures

 • Contract size – R s . 200 times the Index

• Tick size – 0.05 points or R s. 10

• Expiry day – last Thursday of the month

• Settlement basis – cash settled

• Contract cycle -3 months

• Active contracts -3 nearest months

Membership

• Membership for the new segment in both the exchanges is not automatic and has

To be separately applied fir.

• Membership is currently open on both the exchanges.

• All members will also have to be separately registered with SEBI before they can

be accepted.

Membership Criteria – National Stock Exchange (NSE)

Clearing Member (CM)

• Net worth – 300 lake

• Interest – free security Deposit – Rs.25 lake

• Collateral Security Deposit – Rs.25 lake

In addition for every TM be wishes to clear for the CM has to deposit R s . 10 lakh.

Trading Member (TM)

 • Net worth – R s . 100 lakh

• Interest – fee security Deposits – R s. 8 lakh

• Annul subscription fee – R s . 1 lakh

Membership Criteria – Mumbai Stock Exchange (BSE)

Clearing Member (CM)

• Net worth – 300 lake

• Interest – free Security Deposits – R s. 25 lakh

• Collateral Security Deposits – R s. 25 lakh

• Non-refundable Deposit – R s. 5 lakh

• Annual Subscription Fee – R s.50 thousand

In addition for every TM he wishes to clear for the CM has to deposit R s. 10 lake with

The following break-up.

I. Cash – R s. 2.5 lakh

II. Cash Equivalents – R s. 25 lakh

III. Collateral Security Deposit – R s. 5 lakh

Trading Member (TM)

• Net worth – R s. 50 lakh

• Non-refundable Deposit – R s.3 lakh

• Annual subscription Fees – R s.25 thousand

The non-refundable fees paid by the members is exclusive and will be a total of R s. 8

Lakh if the member has both clearing and trading rights.

Trading Systems

• NSE’s trading system for it’s futures and options segment is called NEAT F&O.

• It is based on the NEAT system for the cash segment.

• BSE’s trading system for its derivatives segment is called DTSS. It is built on a

Platform different from the BOLT system though most of the features are

common.

LOT SIZE PF DIFFERENT COMPANIES

 CODE LOT COMPANY NAME
SIZE
ACC 750 ASSOCIATES CEMENT COMPANIES LTD.
ANDHRA BANK 2300 ANDHRA BAKS.
ARIVENDMILLS 2150 ARIVENDMILLS LTD
BAJAJAUTO 200 BAJA AUTOMOBILES LTD.
BANK BARODA 1400 BANK OF BRODA.
BANK INDIA 1900 BANK OF INDIA.
BEL 550 BHARAT ELECTRICALS LTD.
BHEL 300 BHARAT HEAVY ELECTRICALS LTE.
BPCL 550 BHARAT PETROL CORPORATION LTD.
CANBK 1600 CANARABANK
CIPLA 1000 CIPLA LTD.
CNXIT 1200 IT INDEX
DABUR 1800 DABUR LTD.
DRREDDY 400 DR. REDDY’S LABORATORIES LTD.
GAIL 1500 GAS AUTHORITY OF INDIA.
GRASIM 175 GRASIM AMBUJA CEMENTS LTD.
GUJAMBCEMENT 4125 GUJRAT AMBUJA CEMENTS LTD.
HCLTECH 650 HINDISTAN CORPORATION LTD TECNO.
HDFC 300 HOUSING DEVELOPMENT FINACE CORP.
HDFE BANK 400 HDFE BANK
HERO HONDA 400 HEROHONDA MOTARS LTD.
HINDALCO 1500 HINDUSTAN ALUMINIUM COMPANY.
HINDLEVER 2000 HINDUSTAN LEVER LTD.
HINDPETROL 650 HINDUSTAN PETROLEUM CORPORATIONLTD.
I-FLEX 600 I-FLEX SOLUTIONS
ICICI BANK 700 ICICI BANKING CORPORATION LTD.
INFOSYSTECH 100 INFOSYS TECHNOLOGIES LTD.
IDBI 2400 INDUSTRIAL DEV BANK OF INDIA
IPCL 2200 INDIAN PETROALEUM CHEMICALS LTD.
ITC 2250 INDIAN TOBACCO COMPANY LTD.
MATRIX 1250 MATRIX LAB.
M&M 1250 MAHENDRA &MAHENDRA LTD.
MARUTI 800 MARUTI UDYOG LTD.
MPHASIS 800 MPHASIS BFL
MTNL 1600 MAHENDRA TELECOM NIGAML LTD.
NATIONAL ALUM 1150 NATIONAL ALUMINIUM COMP.
NDTV 1100 NATIONAL INDEX FOR FIFTY STOCK
NIIT 1500 NATIONAL INSTITUT OF FASHION TECH.
ONGC 300 OIL & NATURAL GAS CORPORATION.
ORIENT BANK 600 ORIENTAL BANK.
PNB 600 PANJAB NATIONAL BANK.
POLARIS 2800 POLARIS SOFTWARE COMPANY LTD.
RANBAXY 400 RANBAXY LABORATORIES LTD.
RELIANCE 600 RELIANCE INDUSTRIES LTD.
REL 550 RELIANCE COMPUTERS SERVICES LTD.
SATYAMCOMP 600 SATYAM COMPUTERS LTD.
SBIN 500 STATE BANK OF INDIA.
SCI 1600 SHIPPING CORPORATION OF INDIA.
SYNDIBANK 3800 SYNDICATE BANK
TATAMOTORS 825 TATA MOTORS
TATAPOWER 800 TATA POWER COMPANY LTD.
TATASTEEL 675 TATA STEEL COMPANY
TATATEA 550 TATA TEA LTD.
TSICO 2800 TATA IRON & STEEL COMPANY LTD.
UNION BANK 2100 UNION BANK OF INDIA.
OBJECTIVE

The objective of this analysis is to evaluate the profit/loss position of option

Holder/writer. This analysis is done based on the sample data. The sample is taken as
ICICI & NTPC scripts of FEBRUARY 2006. The lot size of the scrip is 175&1625. The
option contract starting period is 01/01/09 and its maturity date is on 29/01/09. As the
scripts of ICICI BANK & NTPC Companies are volatile, they are chosen as the sample
for analysis. The data is collected form various news papers, like Economic Times,
Business standard and Business Line off course from the Hyderabad stock exchange.

LIMITATIONS:

 The sample size chosen as ICICIBANK & NTPC Companies scrip’s of the month
of February.

 The study is confined to January month only.

 The data gathered is completely restricted to the ICICIBANK & NTPC

Companies scripts of Jan 09. And hence cannot be taken universal.

 The opening premium is considered for calculation of profit/loss position.

The following table explained the amount transaction between the option writer and
option holder. The table has various columns, which explain various factors involved in
derivatives trading.

 Date - the day on which trading took place.

 Closing premium – premium for that day.

 Open interest – no of that did not get exercised.

 Trading quantity – no of options traded on bourses on that day.

 Value - total value of the options on that particular day.

CALL OPTIONS OF JANUARY ‘09
 Close pre Open int Trad Volume Close Open Trade Volume
qul pre int qul

01/01/09 23.7 2L 17K 104.67 12 64K 16K 101.86

02/01/09 12.10 2L 7.15
03/01/09 8.45 2L 73K 444.3 5.2 73K 18K 113.81
04/01/09 6.6 2L 61K 369.4 3.9 74K 11K 65.45
07/02/08 16.7 3L 3L 1781.5 8.9 91K 48K 303.35
9
08/02/06 28065 3L 3L 2177.8 15.85 1L 21L 982.03
9
09/02/06 21.55 2L 1L 699.24 10.5 2L 1L 801.27
11/02/06 17.05 2L 76K 465.9 8.85 2L 70K 439.61
14/02/06 18 2L 38K 233.95 8.2 2L 27K 167.9
15/02/06 12.25 2L 36K 223.85 6 2L 22K 140.34
16/02/06 11.85 2L 37K 227.24 4.75 2L 25K 157.49
17/02/06 10.2 2L 24K 145.64 3 2L 22K 135.33
18/02/06 4.8 2L 42K 254.74 1.85 2L 33K 204.79
21/02/06 5.25 2L 42K 253.58 1.8 2L 20K 126.14
22/02/06 3.9 2L 26K 156.58 1.25 2L 23K 143.57
23/02/06 2.75 2L 22K 134.92 13 2L 5K 30.42
24/02/06 0.1 2L 0.75

ICICI BANK
ICICI CALL OPTIONS:

The above call options details have revalues that, the premium/price of the

call has shown a decreasing nature as the time to expiate in decrease as but at some

places there is rise the price due to increase in the index .

 NTPC
CA NTPC (180) CA NTPC (190)

Date Close Open Trade Volume Close Open Trade Volume

pre int qul pre int qul

01/02/06 5.85 4L 2L 237.86 3.1 12L 10L 1102.36

02/02/06 6.25 3
03/02/06 2.65 14L 3L 405.96
04/02/06 7.9 3L 3L 364.01 3.9 14L 11L 1362.69
07/02/08 8.95 3L 2L 217.18 4.2 13L 7L 864.36
08/02/06 9.9 3L 59K 70.05 5.05 12L 5L 545.8
09/02/06 12.25 2L 1L 138.01 7.25 11L 11L 1349.72
11/02/06 11.15 2L 2L 283.51 6.3 6L 3L 391.29
14/02/06 6.2 4L 1L 153.03
15/02/06 4.8 4L 72K 85.83
16/02/06 9.5 3L 2L 299.75
17/02/06 9.45 3L 62K 76.89
18/02/06
21/02/06
22/02/06 14 49K 10K 12.1 9.6 3L 3K 4.05
23/02/06 19.2 46K 23K 28.84 14.4 3L 3L 348.87
24/02/06 22.5 26K 10K 4.9 18.5 1L 13K 17.56
 CA NTPC (200)

Date Close Open Trade Volume

pre int qul

01/02/06 1.3 7L 3L 374.86

02/02/06 5.50
03/02/06 1.15 9L 81K 98.45
04/02/06 1.65 13L 9L 1080.23
07/02/08 2.15 15L 9L 1160.9
08/02/06 2.45 17L 6L 732.2
09/02/06 3.2 18L 15L 1808.08
11/02/06 2.85 18L 6L 622.77
14/02/06 2.55 21L 6L 731.3
15/02/06 1.7 21L 3L 356.48
16/02/06 4.75 19L 21L 20565.3
1
17/02/06 5.15 18L 9L 1078.94
18/02/06 2.85 17L 5L 560.86
21/02/06 3.45 17L 5L 627.45
22/02/06 3.1 17L 3L 386.49
23/02/06 9.35 17L 19L 2405.69
24/02/06 11.3 4L 1L 179.25
NTPC CALL OPTIONS:

The above call options details have revalues that, the premium/price of the

call has shown a decreasing nature as the time to expiate in decrease as but at some

places there is rise the price due to increase in the index .

PUT OPTIONS OF JANUARY ‘09
 ICICI BANK

PA ICICI (300) PA ICICI (350)

Date Close Open Trade Volume Close Open Trade Volume

pre int qul pre int qul

01/02/06 10.85 51K 8K 51.36 _ _ _ _

02/02/06 18.30 34 _ _ _
03/02/06 24.6 33K 33K 204.5 _ _ _ _
04/02/06 37 27K 19K 120.12 _ _ _ _
07/02/08 15 61K 63K 387.68 - - _ _
08/02/06 11.8 29K 69K 419.57 19.5 18K 19K 120.85
09/02/06 14.2 94K 50K 309.53 _ _ _ _
11/02/06 12.9 90K 29K 176.15 _ - _ _
14/02/06 _ _ _ _ _ _ _
15/02/06 14.4 84K 21K 128.89 _ _ _ _
16/02/06 _ _ _ _ - _ _
17/02/06 _ _ _ _ _ _ _
18/02/06 19.2 68K 29K 176.86 _ _ _ _
21/02/06 11.05 53K 26K 160.71 _ _ _ _
22/02/06 23.75 1K 700 437 _ _ _ _
23/02/06 8.2 52K 6K 34.22 _ _ _ _
24/02/06 10.75 50K 4K 25.56 _ _ _ _
ICICI PUT OPTIONS:

The above put options details have revalues that, the premium/price of the

call has shown a decreasing nature as the time to expiate in decrease as but at some

places there is rise the price due to increase in the index .

 NTPC

PA NTPC (160) PA NTPC (175)

Date Close Open Trade Volume Close Open Trade Volume

pre int qul pre int qul

01/02/06 1.5 2L 1L 137.77 4.4 2L 2L 208.76

02/02/06 1.30 3.60
03/02/06
04/02/06 0.95 3L 55K 61.29 2.4 3L 2L 217.29
07/02/08 1.55 4L 2L 231.12
08/02/06 1.35 4L 72K 83.19
09/02/06 1.05 5L 1L 158.64
11/02/06 0.85 5L 1L 139.4
14/02/06 0.65 5L 2L 255.86
15/02/06
16/02/06 0.2 5L 1L 153.56
17/02/06
18/02/06
21/02/06
22/02/06 0.1 5L 3K 3.74
23/02/06 0.05 5L 3K 3.74
 PA NTPC (170)

Date Close pre Open int Trade qul Volume

01/02/06
02/02/06 6.90
03/02/06
04/02/06
07/02/08 4.8 1L 2L 202.14
08/02/06 4.6 2L 85L 105.01
09/02/06 2.5 3L 3L 311.15
11/02/06 2.6 4L 1L 139.44
14/02/06 2.05 4L 72K 87.43
15/02/06 2.9 3L 75K 91.68
16/02/06 0.6 7L 5L 656.32
17/02/06 0.5 8L 2L 293.76
18/02/06 0.65 9L 2L 266.3
21/02/06 0.65 9L 3L 340.95
22/02/06 0.2 10L 68K 82.04
23/02/06 0.1 8L 2L 230.34
24/02/06
NTPC PUT OPTIONS:

The above PUT options details have revalues that, the premium/price of the

call has shown a decreasing nature as the time to expiate in decrease as but at some

places there is rise the price due to increase in the index .

 FURUTES OF JANUARY ‘09

ICICI BANK

FURURES FOR THE MONTH OF JAN-09 (ICICI)

DATE OPEN CLOSE OPEN INT TRD QTY NO OF CON

01/01/09 613.95 612.85 55L 17L 2369

02/02/06 614 594.30
03/02/06 603 582.75 54L 29L 4139
04/02/06 576.01 570.35 60L 24L 3475
07/02/06 604.05 600.5 66L 61L 8771
08/02/06 62107 615.15 66L 68L 9678
09/02/06 616.6 604.95 68L 46L 6630
11/02/06 609.4 603.35 69L 24L 3478
14/02/06 608.4 604.8 68L 13L 1553
15/02/06 608 595.55 62L 23L 3218
16/02/06 602 597 56L 17L 2475
17/02/06 601 597.05 55L 9L 1325
18/02/06 603 586.9 56L 20L 2894
21/02/06 593.8 592.25 43L 22L 3189
22/02/06 599 593.65 35L 20L 2809
23/02/06 596 595.33 31L 20L 2903

NTPC

FURURES FOR THE MONTHOF JAN-09 (NTPC)

DATE OPEN CLOSE OPEN INT TRD QTY NO OF CON

01/01/09 115.65 113.85 104L 102L 3141

02/02/06 116.40 114.45
03/02/06 115.55 113.95 95L 24L 733
04/02/06 117.25 116.4 93L 88L 2005
07/02/06 118.27 117.4 98L 68L 2098
08/02/06 118.75 118.45 96L 44L 1345
09/02/06 121 120.7 90L 94L 2903
11/02/06 121.5 120.35 94L 44L 1365
14/02/06 120.9 120.55 91L 35L 1065
15/02/06 121 118.9 86L 23L 719
16/02/06 124.0 124.35 81L 54L 4749
17/02/06 125.85 124.5 72L 88L 2696
18/02/06 125.65 122.25 69L 62L 1922
21/02/06 123.5 123.1 59L 43L 1313
22/02/06 124.65 123.05 50L 29L 895
23/02/06 130 129.15 42L 30L 4003
24/02/06 134.6 132.55 33K 20K 6
 SPOT PRICE OF ICICI

DATE SPOT PRICE

01/01/09 609.15
02/02/06 594.30
03/02/06
04/02/06 570.60
07/02/06 607.15

08/02/06 627.95
09/02/06 617.95
11/02/06 603.45
14/02/06 609.05
15/02/06 596.40
16/02/06 598.40
17/02/06 598
18/02/06 586.50
21/02/06 593.10
22/02/06 592.95
23/02/06 594.40
 Effect of an increase in each variable on the
value of the option, holding other factors
Variable constant
 Call premium Put premium

• Sport price (S) Increase Decrease

• Strike price (K) Decrease Increase

• Volatility (σ) Increase Increase

• Time to

expiration (t) Increase Increase

• Interest rates (r) Increase Decrease

Decrease Increase
• Dividend (D)

In the nutshell, we can formulate the basic rules for options pricing as follows:

For calls:

 Lower the strike (exercise) price, the more valuable the call.

 Different in call prices cannot exceed difference in the exercise price.

 A call must be worth at least the stock price less the present value of the exercise

price.

 More the time till expiration, greater the call price.

 More the volatility, higher the call option premium.

 Higher the interest rates, more the call value.

For puts:
  Higher the exercise price, more valuable the put.

 The price difference between two puts cannot exceed the different in exercise
prices.

 Before expiration, a put must be worth at least the difference between the exercise

price and the stock price.

 Longer the time to expiration, the more voluble the put.

 More the volatility, higher the put premium.

 Higher the interest rate, lower the put value.

POSITION OFCALL OPTION BUYERS/WRITERS

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT – 5

PRI CE PRICE PREMIUM PRICE
+PREMIUM
15/01/09 600 596.40 12.25 612.25 -15.85

15/01/09 620 596.40 6.00 626.00 -29.6

All OPTIONS IS OUT-OF-THE-MONEY.

If the OPTION is purchased on 1st Feb and as on expiry date (29/01/09)

POSITION OF CALL OPTION BUYER/WRITER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT – 5

PRI CE PRICE PREMIUM PRICE
+PREMIUM
23/02/06 600 594.40 23.7 623.7 -29.3

23/02/06 620 594.40 12.00 632.00 -39.6

All OPTIONS IS OUT-OF-THE-MONEY.

POSITION OF PUT OPTION BUYER/WRITERS

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT – 5

PRI CE PRICE PREMIUM PRICE
-PREMIUM
15/01/09 600 596.40 14.4 585.6 10.8
15/01/09 620 596.40 _ 620 23.6

All OPTION IS OUT-OF-THE- MONEY

If the OPTION is purchased on 1st Jan and as on expiry date (29/01/09)

POSITION OF PUT OPTION BUYER/WRITER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT – 5

PRI CE PRICE PREMIUM PRICE
-PREMIUM
29/01/09 600 594.40 10.85 589.15 5.25

29/01/09 620 594.40 _ 620.00 -26.6

THE OPTION 600 IS OUT-OF-THE-MONEY

THE OPTION 620 IS IN-THE-MONEY.

SPOT PRICE OF NTPC

 DATE SPOT PRICE

01/02/06 114.55

02/02/06 114.45

03/02/06

04/02/06 117.80

07/02/06 118.25

08/02/06 119.60

09/02/06 122.20

11/02/06 121.10

14/02/06 119.95

15/02/06 118.55

16/02/06 123.95

17/02/06 124.25

18/02/06 121.60

21/02/06 122.75

22/02/06 122.85

23/02/06 129.45

POSITION OF CALL OPTION BUYER/WRITER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT – 5

PRI CE PRICE PREMIUM PRICE
+PREMIUM
11/02/06 110 121.10 11.15 121.15 -0.05
11/02/06 115 121.10 6.3 121.3 -0.2

11/02/06 120 121.10 2.85 122.85 -1.75

All OPTIONS AREOUT-OF-THE-MONEY

If the OPTION is purchased on 1st Feb and as on expiry date (23/02/06)

POSITION FO CALL OPTION BUYER/WRITER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT – 5

PRI CE PRICE PREMIUM PRICE
+PREMIUM
23/02/06 110 129.45 5.85 115.85 13.6

23/02/06 115 129.45 3.1 118.1 11.35

23/02/06 120 129.45 1.3 121.3 8.15

All OPTIONS ARE IN-THE-MONEY

POSITION OF PUT OPTION BUYER/LOWER

1. DATE 2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT – 5

PRI CE PRICE PREMIUM PRICE
-PREMIUM
11/02/06 110 121.10 _ 110 11.1

11/02/06 115 121.10 0.85 114.15 6.95

11/02/06 120 121.10 2.6 117.4 3.5

All OPTIONS ARE OUT-OF-THE-MONEY

If the OPTION is purchased on 1st Feb and as on expiry date (23/02/2006)

POSITION OF PUT OPTION BUYER/WRITER

2. STRIKE 3. SPOT 4. 5. STRICK 6. SPOT – 5

1. DATE PRI CE PRICE PREMIUM PRICE
-PREMIUM
23/02/06 110 129.45 1.5 108.5 20.95

23/02/06 115 129.45 4.4 110.6 18.85

23/02/06 120 129.45 _ 120.00 9.45

ALL OPTIONS ARE OUT-OF-THE-MONEY

SUMMARY:
Derivatives market is on innovation to cash market, approximately its daily turn over
reaches to equal stage of cash market. The average daily turn over of the NSE derivative
segment is.

Presently the available scrip sin futures and options segment are in cash
market. The profit/ loss of the investor depends on the market price of the under lying
asset. the investor may incur huge profit or he may incur huge loss.

But in derivative segment the investor enjoys huge profit with limited
down side.

In cash market the investor as to pay the total money. But in derivatives the
investor as to pay premium or margins which are some percentage of total money.

.
Derivatives are mostly used for hedging purpose.

In derivatives segment the profit/loss of the option holder/option writer is purely

depended on the fluctuations of the under lying assets

SUMMARY:
Derivatives market is on innovation to cash market, approximately its daily turn over
reaches to equal stage of cash market. The average daily turn over of the NSE derivative
segment is.

Presently the available scrip sin futures and options segment are in cash
market. The profit/ loss of the investor depends on the market price of the under lying
asset. The investor may incur huge profit or he may incur huge loss.

But in derivative segment the investor enjoys huge profit with limited
down side.

In cash market the investor as to pay the total money. But in derivatives the
investor as to pay premium or margins which are some percentage of total money.

.
Derivatives are mostly used for hedging purpose.

In derivatives segment the profit/loss of the option holder/option writer is purely

depended on the fluctuations of the under lying assets

CONCLUSIONS

 at present scenario the derivatives market is increased to a grate position.

 Approximately its daily turnover reaches to the equal stage of cash market, the

avgas daily turnover of the NSE in derivatives market is 4,00,000(vol).

 Presently the available scraps in the futures and options segment are 55.

 The derivative market is newly stated in India and its is not know by every one so

SEBI should take necessary actions to create awareness among investors.

 In cash market the profit/loss of the investor may be unlimited, but in the

derivative market.

 The investor can enjoy unlimited profits and minimize the losses incurred.

 In derivatives market the investors enjoys the privilege of paying less amount in

case of options.

 Derivatives are mostly used for hedging purpose.

 In derivatives market the profit/loss of the investors depends upon the market

fluctuations, especially with the prices of the securities.

 In bearish market the investor is suggested to option for put options in order to

minimized his losses.

 In bullish market the investor is suggested to option for call options in order to

maximize the profits.

BIBLOGRAPHY
 BIBILOGRAPHY:

BOOKS:

Futures and options Vohra & bogri

Future and options Mahajan.

DERIVATIVES CORE MODULE WORK BOOK

NCFM(NSE’S CERTIFICATION IN FINANCIAL MARKETS)

NEWS PEPERS:

THE ECONOMIC TIMES

BUSINESS STANDARDS

BUSINESS LINE

And varies newspapers.

Websites:

www.NSEindia.com

www.BSEindia.com

www.dervativesindia.com

www.peninsular.com

www.5paisa.com

www.sify.com
INDEX:
S.NO TITLE PAGE.NO
1 OBJECTIVES
2 METHODOLOGY
3 INTRODUCTION
4 INDUSTRY PROFILE
5 COMPANY PROFILE
6 BASIC OF DERVATIVES
7 TRADING SRATEGES
8 RISK MANAGEMENT IN DERVATIVES
9 SETLLEMENT OF FUTURES
10 SETLLEMENT OF OPTIONS
11 REGULARITY FRAME WORK
12 REGULATION FOR DERVATIVES TRADING

13 LOT SIZES OF DIFFERENT COMPANIES

14 ANALYSIS
15 TABLES
16 OBSERVATION OF FINDINGS
17 SUMMARY
18 CONCLUSIONS
19 BIBILOGRAPHY