Deravit

PREFACE
Derivatives occupy a significant place in finance and are deriving the global market. Derivatives have changed the market completely by providing hedging mechanism and they are of value to the retail, institutional and portfolio managers. Derivatives are used for a variety of purposes in this study it has been used with respect to the stock market. The most important use of derivatives is for the purpose of hedging. Hedging involves transfer of market risk, the possibility of sustaining losses due to unforeseen, unfavourable price fluctuations. With the world embracing this in a large scale India cannot remain back. It was seen in India in form of Teji, Mandi, Nazarna, Fatak etc. The Indian futures and options markets have overcome the cash market in derivatives and hence it is important to study the awareness among investors as to how well they know such hedging tools. The objective of the study is to conduct an Awareness Survey to know the exposure to such tools and satisfaction level of traders and methods to improve them. This study has been conducted with the help from different broking houses and the general public.
R. V. Institute of Management
EXECUTIVE SUMMARY
By the introduction of exchange traded derivations in June 2000, the futures and options market has moved a long way. And about 5000 accounts opening every month. Futures and options have overtaken the cash market. Since the inception of derivatives the market has improved exceptionally with 190% rise in stock futures and 423% in index futures. Globally the derivatives volumes are 4 to 5 times the cash market volumes. In India 99% of the market share has been taken by the NSE. The institutional contribution is about 16% of the total derivative segment. Therefore it is essential to understand the retail awareness of the instrument as a tool of hedging and this study is confined to futures only. This project is aimed to assess the awareness levels of traders about futures. This study also emphasize on the inevitable criteria in the present scenario with reference to various venues of investment and the mode of which the unknown traders can be made aware of futures and options. This study was descriptive in nature and it tries to understand from initial feed back of investors about this awareness and satisfaction levels by investing into such hedging tools. This study was conducted between April and June 2006 and the data collected, analysed and presented according to that period. The data collected during this period about awareness of futures and options as a tool of hedging and investing in the present scenario reveal that the investors are not completely aware of futures and options and they give prime importance to safety which can be gained from investing in banks. And they want to know more about this by media and interaction with market experts.
INTRODUCTION
HISTORY OF DERIVATIVES The concept of derivatives is not a new one. A kind of derivatives instruments were used in Ancient Greece in 330 B.C. The Olive growers in order to reduce the risk of a low price for their crop which were to be harvest months later, entered into forward agreements where a price was agreed for delivery at a specific time in future. In 1636 in Amsterdam, the producers and purchasers of tulips made also forward agreements to limit their risk in case that the harvest of tulips was poor. In United States the establishment of the New York Stock Exchange in 1790, created the need for investors for a formal and organized derivatives market. The securities companies of Wall Street published projects on derivatives transactions for the public investors. At the beginning of 1900 the transactions on derivatives were made over the counter (OTC). In 1929 after the Crash, the American Congress established the Securities Exchange Commission (SEC) with the task to monitoring the smooth operation of the market. What gave the boost for the significant growth of the derivatives market were the establishment of the Chicago Board Options Exchange and the creation of Options Clearing Corporation in 1973. Ten years later in 1983, derivatives on indices made their appearance. The first one was Standard and Poor's 100. This innovation was followed by derivatives on bonds and interest rates. The world financial markets have undergone qualitative changes in the last three decades due to phenomenal growth of derivatives. An increasingly large number of organizations now consider derivatives to play a significant role in implementing the financial policies. Derivatives are used for a variety of purposes but perhaps the most important is hedging. Hedging involves transfer of market risk - the possibility of sustaining losses due to unforeseen unfavorable price changes. A derivative transaction allows a firm to alter its market risk for a price.
Risk is a characteristic feature of all commodity and capital markets. Prices of all commodities whether agricultural like wheat, cotton, rice, coffee or tea of non-agricultural like silver, gold, etc are subject to fluctuation over time in keeping with the prevailing demand and supply conditions. To hedge against this, came the use of derivatives.
What are Derivatives?

Derivatives are contracts for the future delivery of assets at prices agreed at the time of the contract. The quantity and quality of the asset is specified in the contract. The buyer of the asset will make the cash payment at the time of delivery. Derivative products initially emerged, as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years.
Derivatives Defined
Derivative is a security whose value is derived from the value of the underlying asset in a contractual manner. In the Indian context, the Securities Contracts (regulation) Act, 1956 (SCRA) defines "derivative" to include: 1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. 2. A contract, which derives its value from the prices, or index of prices, of underlying securities. The derivatives are securities under the SCRA and the trading of derivatives is governed by the regulatory framework under the SCRA. All derivatives are based on some "cash" products. The underlying assets of derivative instruments may be any produce of the following types. Commodities include grain, coffee, beans, orange juice, etc. Precious metals like gold and silver Foreign Exchange rate
Bonds of different types, including medium to long-term negotiable debt securities issued by governments, companies, etc. Short-term debt securities such as trade bills. OTC (Over the Counter) money market products such as loans or Deposits. Derivatives are specialized contracts which are employed for variety of purpose including reduction of funding cost by borrowers, enhancing the yield on asset, modifying the payment structure of assets to correspond to investors market view, etc. However the most important use of derivatives is in transferring market risk, called hedging. Of late derivatives have assumed a very significant place in the field of finance and they seem to be the driving global financial markets. There are many kinds of derivatives including futures, options, interest rate swaps and mortgage derivatives.
Forward Contracts
A deal for the purchase or sale of a commodity, security or other assets can be in the spot or forward markets. A spot or cash market is most commonly used for trading. In addition to cash purchases another way to acquire or sell assets is by entering into a Forward Contract. In forward contract the buyer agrees to pay cash at a later date when the seller delivers the goods. EG: If a car is booked with a dealer and the delivery 'matures' the car is delivered after its price has been paid. Usually no money changes hands when forward contract are entered into, but sometimes one or both the parties to a contract may like to ask for some initial, good faith, deposit to ensure that the contract is honored by the other party.
Typically in a forward contract the price at which the underlying commodity are asset will be traded is decided at the time of entering the contract. The essential idea of entering into a forward contract is to peg the price and thereby avoid the price risk.
Forward contracts have been in existence since quiet some time. The organized commodities exchange, on which forward contracts are traded, probably started in Japan in the early eighteenth century, while establishment of the Chicago Board Of Trade (CBOT) in 1848 led to the start of a formal commodities exchange in the USA.
Futures Contract
The problem associated with forward contracts led to the emergence of Futures Contract. A futures contract is a standardized contract between two parties where one of the parties commits to sell and the other to buy, a stipulated quantity (and quality where applicable) of a commodity, currency, security, index or some other specified item at an agreed price on or before a given date in the future. Futures contract is an improvement over the forward contract in terms of standardization, performance guarantee and liquidity. Thus, whereas forward contracts are not standardized, the futures are standardized ones, so that 1. The quantity of the commodity or the asset which would be transferred or would form the basis of gain/loss on maturity of a contract. 2. 3. 4. The quality of the commodityif a certain commodity is involved and the place where delivery of the commodity would be made, The date and month of delivery The units of price quotation
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The minimum amount by which the price would change and the price limits for the days' operations, and other relevant details are all specified in the futures contract. Thus in a way, it becomes a standard asset, like any other asset to be traded. People can buy or sell futures like other commodities. When an
investor buys a future contract (is that he takes a long position) on an organized futures exchange, he is, in fact assuming the right and obligation of taking delivery of the specified underlying item (say 10 Quintals of wheat of a specified grade) on a specified date. Similarly, when an investor sells a contract, to take a short position one assumes that the right and obligation to make delivery of the underlying asset. While there is a risk of non-performance if the forward contract, it is not so in case of futures contract. This is because of the existence of a clearing house or clearing corporation associated with futures exchange, which plays a pivotal role in the trade so that it become the buyer to seller and the seller to the buyer. When a party takes a long position in contract it is obligated to sell the underlying commodity in question at the stipulated price to the clearinghouse on the maturity of the contract. Similarly an investor, who takes a short position on the contract, can seek its execution through the clearinghouse only. Unlike forward contract, it is not necessary to hold on to a futures contract until maturity- one can easily close out a position in a futures contract. Either of the parties may reverse their position by initiating a reverse trade so that the original seller of a contract can sell an identical contract at a later date, canceling, in effect the original contract. Thus the exchange facilitates subsequent selling (buying) of a contract so that a party can offset its position and eliminate the obligations.
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 as well as BSE have one-month, two-months and three-months expiry cycles, which expire on the last Thursday of the month. Thus a July expiration contract would expire on the last Thursday of July. On the Friday following the last Thursday, a new contract having a three-month expiry would be introduced for trading. More generally we can say, on the first trading day after the day of the expiry of that month's futures contract.
Expiry date: It is the date specified in the futures contract. This is the last day on which the contract will be traded. It will cease to exist by the end of that day. Contract size: The amount of asset that has to be delivered under one contract. The contract size of the stock index futures on NSE Nifty is 200 and the contract size, of the stock index futures on BSE Sensex is 50.
Basis: Basis is usually defined as the spot price minus the futures price. There will be a different basis for each delivery month for the same asset at any point in time. On 19th June 2001 Nifty closed at 1096.65. August 2001 Nifty futures closed at 1098.90. R. V. Institute of Management 8
Therefore the basis for the August Nifty futures is -2.25 index points. In a normal market, basis will be negative. This reflects the fact that the underlying asset is to be carried at a cost for delivery in the future. 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. In the case of stocks, dividend will be the income earned on the asset. The storage cost will be negligible. Initial Margin: The amount that must be deposited in the margin account kept with the broker at the time a futures contract is first entered into is known as initial margin. Margins are to be strictly collected in the futures and options markets by brokers as per the exchange regulations. Otherwise the exchange cannot guarantee the trades to all participants in the market. 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 or settlement price. This is called marking-to-market. Maintenance margin: If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day
Beta: Beta is a concept to be used in using futures and options for hedging. Beta measures the sensitivity of a share or a portfolio to that of the index. Beta of a share is found out by relating the daily price changes of a share to the daily changes in a stock price index. If a graph is drawn with daily changes of the share price on y-axis and daily changes in the index on x-axis the slope of the straight line fitted will be the value of beta. Mathematically it is found by regression method. If the beta of Tisco is found to be 1.23, it implies if the index increases by 10% in a period, price of Tisco will increase by 12.3%. Beta of the portfolios is found by weighted average of the betas of the shares in the portfolio. For example, an investor's portfolio has equal value in Tisco and Infosys. Tisco has a beta of 1.23 and Infosys has a beta of 1.37. The portfolio beta is the average of 1.23 and 1.37, which is 1.3. NSE website is providing values of beta for a large number of shares. Options: An option ids the right, but not the obligation, to buy or sell a specified amount (and quality) of a commodity, index, or financial; instrument or to buy or sell a specified number of underlying futures contracts at a specified price on or before a given date in the future. Thus options, like futures, also provide a mechanism by which one can acquire a certain commodity or other asset, or to take a position in order to make profit or cover risk for a price. The buyer who takes a long position and the seller (the writer), who takes a short position. An option contract gives its owner right to buy/sell a particular commodity to asset at a predetermined price by a specific date. Options are of two types Call option and Put options. A call option gives an owner the right to buy a specific quantity of underlying asset at a predetermined price-the exercise price on a specified datethe date on maturity.
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For example, suppose it is January now and an investor buys a March call option contract on (Reliance India Limited) RIL shares with an exercise price of Rs 300. With this the investor obtains the right to buy 100 shares of RIL at her rate of Rs 300 per share on a particular day in the month of March. The investor is not obliged to buy the shares. Obviously, if on the expiry of the option the price of the share in the market is being quoted at higher than Rs 300, the investor would like to exercise the call. By buying shares at Rs 300 and selling them at the prevailing higher price, the investor can make a profit. If on the other hand, the price of the share is quoted at Rs 300 of lower, the investor would not benefit by buying the share. In any case, the writer of the call option is obliged to sell the shares at Rs 300 per share if called upon. In case of Put option the option holder has the right to sell a specific amount of the underlying asset at the agreed price on the date of maturity. Thus id an investor buys a March put option on RIL shares with an exercise price of Rs 300 per share the investor gets the right to sell 100 shares of RIL at the rate of Rs 210 per share on a specific day in the month of March. The investor would naturally be inclined to exercise the option if the share price in the month of march happen to be lower than Rs300. by buying shares in the market at a lower then Rs300 per share, and selling than at Rs 300 per share, the investor would gain stand again. In this kind of an option, the writer undertakes to buy the shares at the exercise price, in case the holder of the option opts for that.
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Option Terminology
Index option: An option having the index as the underlying asset. Like index futures contracts, index options contracts are also cash settled. Stock options: Stock options are options on individual stocks. A contract gives the holder the right to buy or sell shares at the specified price. American option: American options are options that can be exercised any time up to the expiration date. This name is only a classification and does not imply that they are available only in America. European options: European options are options that can be exercised only on the expiration date. European options are easier to analyze than American options, and properties of American options are frequently deducted from those of its European counter part. Call option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price. Put option: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price. Buyer of an option: The buyer of the option, either call or put, pays the premium and buys the right but not the obligation to exercise his option on the seller/writer.
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Writer of an option: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. Option writer is the seller of the option contract. Strike price: The price specified in the option contract at which buying or selling will take place is known as the strike price or the exercise price. Option price: Option price is the premium, which the option buyer pays to the option seller or writer. Black and Scholes formula is widely used for determining the fair value of options. Expiration date: It is the date on which the European option is exercised. It is also called as exercise date, strike date or maturity date. Intrinsic value of an option: The option premium can be broken down into two componentsintrinsic value and time value. The intrinsic value of an option is the amount, which the holder will get by exercising his option and immediately selling or buying the acquired shares in the spot market. For example, if the strike price of a call option on Reliance shares is Rs.325 and current market price is Rs.350. The holder of the option can buy the Reliance shares at Rs.325 by exercising the option and can make a profit of Rs.25 by immediately selling them in the market. In this case the intrinsic value of the call option is Rs.25. Time value of the option: The time value of an option is the difference between its premium and its intrinsic value.
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At-the-money: An option is called at-the-money option when the strike price equals, or nearly equals, the spot price of the share. For example, if the strike price of stock index option on Nifty is 1080 and the Nifty index is also at 1080, the option is called at-the-money option. In the money: A call option is in the money when the underlying asset price is greater than the strike price. For example, if the strike price in the case of Nifty stock index option is 1050 and Nifty is at 1080, the option is in-the-money option. Out-of-the-money: A call option is out-of-the-money if the strike price is greater than the underlying asset price. For example, if the strike price in the case of Nifty stock index option is 1100 and Nifty is at 1080, the option is out-of-the-money option, The following table defines the relationship between the spot price and strike price for calls and puts for categorizing them as at-the money, in the money and out-of-the-money. Strategy In the-money At-the money Out-of-the money Call option Spot >Strike Spot= Strike Spot<Strike Put Option Spot<Strike Spot = Strike Spot>Strike
Participants in Derivatives Markets The participants in derivatives markets are broadly classified into three groups: Hedgers Speculators Arbitrageurs.
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Hedgers As already observed, hedging (covering against losses) is the prime reason, which has led to the emergence of derivatives. The availability of derivatives allows the undertaking of many activities at a substantially lower risk. Hedgers therefore are an important constituent of the traders in derivatives market. Hedgers are the traders who wish to eliminate the risk (of price change) to which they are already exposed. They may take a long position on, or short sell, a commodity and would, therefore stand to lose should the price move in adverse directions. Example. Suppose a leading trader buys a large quantity of wheat that would take two weeks to reach him. Now he fears that the wheat prices may fall in the coming two weeks and so wheat may have to be sold at lower prices. The trader can sell futures (or forward) contract with a matching price to hedge. Thus if the wheat prices do fall, the trader would lose money on the inventory of the wheat but will profit from the futures contract, which would balance the loss. Speculators Speculators are those who are willing to take risk. These are the people who take positions in the market and assume risk to profit from fluctuations in prices. In fact, the speculators consume information, make forecasts about the prices and put their money in these forecasts. In this process, they feed information into prices and thus contribute to market efficiency by taking positions they are betting that a price would go up or they bet that it would go down. Depending on their perceptions, they make long or short positions on futures /or options, or may hold (spread) positions (simultaneously long and short positions on the same derivatives). Example supposes that a share is currently quoted at Rs 32 and a speculator is strong on this share. Assume that a call option, with exercise price of Rs 35 and due in one month, on this share is available in the market at 50 paise (per share). Buying this option would require Rs 50(a call is for 100 shares) only.
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Now the price of the share is less than or equal to Rs 35, the call shall not be exercised and the loss would be Rs 50 or 100% of the investment. If on the other hand the price rules at Rs 40, then a gain of 100* (Rs 40-Rs35))= Rs 500 would be made, which works out to be 900% of the investment.
With no option or other derivative available, the investor would be required to invest Rs 3200(for 100 share) and would make a profit of Rs 800 i.e., only 24% of the amount invested. Not only that, many losses would be incurred if the share price were to settle at less than Rs 32. Obviously, therefore, the derivatives adequately address the needs of the speculators without threatening the market integrity in the process. Arbitrageurs They are People who trade in two or more different markets. Thus arbitrageur involves making risk-less profit by simultaneously entering into transactions in two or more markets. If a certain share is quoted at a lower rate on the (DSE) Delhi stock exchange and at a higher rate in BSE an arbitrageur would make profit by buying the share at DSE and simultaneously selling at BSE.
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FLOW CHART OF DERIVATIVE TRADING
Buyer
Seller
Member Firm
Buying Broker
Selling
Broker
Member Firm
Buying broker Confirms purchase
Trading ring Orders were executed by out cry but now it is through the BOLT or online trading
Reports Purchases
Selling broker Confirms purchase
Member Firm
Reports Sale
Member Firm
Confirms Purchase Clearinghouse 1 Obligation Long 1 Obligation Short
Confirms Sale
Buyer now long 1 Contract
Seller now short 1 Contract
1 Contract
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Pricing of Futures There are various models for valuating the futures Cost of carry model According to the cost of carry model the price of a futures contract is spot price plus the cost of carry of the asset till the date of delivery specified in the futures contract. F=S+C The cost of carry C will have three components, storage cost, cost of financing and any income earned by holding the asset (which is treated as a negative cost and deducted). For shares cost of storage will be zero. In the case of commodities like wheat, coffee, the storage cost needs to be incurred to carry stocks. Example Find out the fair price of a two-month futures contract on Nifty given the following information. 1. Current value of Nifty is 1078. 2. Reliance declared a dividend of Rs.5 per share, which will be received by the shareholders after 15 days of purchasing the contract. The market price of Reliance is Rs.350 and its weight in Nifty is 15%. 3. The cost of financing is 10 percent per annum. 4. The cost of storage will be nil. Solution: 1. Since Nifty is traded in multiples of 200, spot value of the contract is 200*1078 = Rs.2,15,600. 2. Reliance has a weight of 15% in Nifty, its value in the contract is Rs.32,340 (215600*0.15) 3. If the market price is Rs.350, then a traded unit of Nifty involves 92.4 shares of Reliance. The dividend received is therefore going to be Rs.462. 4. Thus, fair futures price F = Rs. 1078+17.72-2.34 = Rs.1093.38
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5. Note: interest cost (1078*0.1 *(60/365) =Rs. 17.72) and interest on dividend received ([462/200] +462*0.1 *(45/365)/200 = Rs.2.34) are calculated at simple interest) 6. Note that a dividend receipt has an effect on fair futures pricing. Hence it is important to know the dividend already declared or likely to be declared to determine the fair futures price. Participants interested in selling futures at fine prices have to know these details. Carry Price Model P = SP + CC-CR Where P is future price, SP Spot price, CC Carry Cost, CR Carry Return. Here Spot price id the current market price of one unit of the share in the market. Carry cost refers to the holding cost, including the interest charges on borrowings the cash to buy the asset. In case of physical commodities, storage, etc. Carry return refers to the income such as dividends on shares, which may accrue to the investor. Valuation of options The option premium or the price is determined competitively on the floor of the option exchange by the influx of buy and sell orders. It is influenced by a number of factors some of them, which are listed as, follows: 1. Price of the underlying asset 2. 4. 5. 6. Volatility Interest rates Tax rules with regard to gains and losses arising from the option trading Margin requirements in case of uncovered option writers 7. Transaction cost 3. Length of the period
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Essentials for a good derivatives market Large market capitalization Liquidity Clearinghouse that guarantees trades Physical Infrastructure Risk taking capability and analytical skills Role of derivatives in India Derivatives will make hedging possible Derivatives will enable separation between speculators who wish to bear risk Vs Hedgers Derivatives will lead to an improvement in cash market Develop Indian financial Industry Risk management Price Discovery Market effectiveness Ease of speculation
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WORLD DERIVATIVES MARKETS:

The past three decades have witnessed a singular rise in the development and growth of derivatives markets in the world over. Futures and options trading has registered a phenomenal rise and new products have been evolved. Futures and options exchanges and OTC derivative markets are integral parts of virtually all the economies which have reached an advanced state of economic development such markets are likely to become important parts of developing economies as well, when they move into advanced stages of development with the passage of time. Apart from USA, U.K. and several European counties, Japan and Singapore, amongst others, which have well-developed futures and options markets, a large number of other countries have also developed, or are in the process of developing such markets. The countries and markets include Argentina, Brazil, Bulgaria, Chile, China, Columbia, Costa Rica, Greece, Guatemala, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Philippines, Poland, Portugal, Russia, Slovak Republic, Slovenia, South Africa, Thailand and Turkey. Introduction of Futures and options in India: India is one of the many emerging markets of the world where derivatives have been introduced in the recent past. For long exchanges like the stock exchange, Mumbai and Vadodara Stock Exchange showed their willingness in introducing trading in futures and options. However, a concerted effort in this direction was made by the National Stock Exchange(NSE) in July, 1995 when it considered the modalities of introducing derivatives trading, mainly futures and options. Within a few months, NSE developed a system of options and futures trading aiming at modifying the carry forward system to include options and futures in its scope.
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By January 1996, the NSE started work on the scheme of such trading. In March 1996, it made a presentation to SEBI on its plans to commence trading in futures and options. The exchange proposed to start with index based futures and index based options, which are seen as comparatively safer forms of derivatives.
Functions performed by derivatives Markets The derivatives markets perform a number of useful economic functions: 1. Price discovery: The futures and options markets serve an all important function of price discovery. The individuals with better information and judgment are inclined to participated in these markets to take advantage of such information. When some new information arrives, perhaps some good news about the economy for instance, the actions of speculators swiftly feed their information into the derivatives markets causing changes in the prices of the derivatives. As these markets are usually the first ones to react because the transaction cost is much lower in these markets than in the spot markets. Therefore, these markets indicate what is likely to happen and thus assist in better price discovery.
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2.
Risk Transfer: By their very nature, the derivative instruments do not themselves
involve risk. Rather, they merely redistribute the risk between the market participants. In this senses, the whole derivatives market may be compared to a gigantic insurance company providing means to hedge against adversities of unfavourable market movements in return for a premium, and providing means and opportunities to those who are prepared to take risks and make money in the process. 3. Market Completion: The existence of derivative instruments adds to the degree of completeness of the market. A complete market implies that the number of independent securities or instruments is equal to the number of all possible alternative future states of the economy. A market would be said to be complete if instruments may be created which can, solely or jointly, provide a cover against all the possible adverse outcomes, it is held that a complete market can be achieved only when, firstly there is a consensus among all investors in the economy as to the number of adds, or states, that the economy can land up with, and, secondly, there should exist an efficient fund on which simple options can be traded. Here an efficient fund implies a portfolio of basic securities that exist in the market with the property of having a unique return for every possible outcome, while a simple option is one whose pay off depends only on one underlying return. The presence of future and options markets does, however lead to a greater degree of market completeness.
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RISK
Definition Of Risk: It is the possibility of loss or the degree or probability of such a loss. A technical definition on risk. Risk and uncertainty are an integral part of investment decision. Technically "Risk" can be defined as a situation where the possible consequences of the decision that is to be taken are known." Uncertainty" is generally defined to apply to situations where the probabilities cannot be estimated. However risk and uncertainty are used interchangeably. Risk can be classified as follows: RISK
Systematic Economic Sociological Political Legal Risk
Unsystematic Industry Risk
Risk of Securities Market Economy
Unique Risks Labour Strikes Weak Managerial policies Consumer preferences External Environmental risks 1. Market Risk 2. Interest rate risk Internal Risk power Risk 3. Purchasing Business Risk Financial Risk
External Environmental risks Market Risk Interest rate risk Purchasing power Risk
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Types of Risk: a) Systematic b) Unsystematic Systematic Risk: External risks are uncontrollable and broadly effect the investments. These external risks are called Systematic risk. They include Economic, sociological, political, legal risks. Unsystematic Risk: Risk due to internal environment of a firm or those affecting a particular industry are referred as unsystematic risk. This risk is depending on the firm or industry. With respect to this project we are confined to market risk, which arises from systematic risk. Market risk, is referred to stock variability due to changes in investor's attitudes and expectations. The investor's reaction to the news etc. Market risk triggers off through real events comprising political, social, economic reasons. The initial decline or 'rise' in the market price will create an emotional instability of investors and cause a fear of loss or create an undue confidence, relating possibility of profit. The reaction to loss will culminate in excessive selling and pushing price down and reaction to gain will bring in the active buying of securities. How ever investors are more reactive towards decline in prices rather than increase in prices.
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Hedging strategies using index futures There are eight basic modes of trading on the index futures market: Hedging: 1. 2. 3. 4. Long security, short Nifty futures Short security, long Nifty futures Have portfolio, short Nifty futures Have funds, long Nifty futures
Speculation: 1. 2. Arbitrage: 1. Have funds, lend them to the market Hedging: TIP: Hedging does not always making money. If the index has gone up instead of going down futures position will show a loss and the investor has to fund it if required by reducing his portfolio. The best that can be achieved using hedging is the removal of unwanted exposure. The hedged position will make less profit than the un-hedged position, half the time. The investor should adopt this strategy for the short periods of time where the market volatility that he anticipates makes him uncomfortable, or when he plans to sell his holdings in the near future. Bullish index, long Nifty futures Bearish index, short Nifty futures
Long Security, Short Nifty Futures

A person may buy Larsen & Toubro at Rs 300 thinking that it would announce good results and the security price would rise. A few days later, Nifty drops, so he makes losses, even if his understanding of Larsen & Toubro was correct.
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Every buy position on a security is simultaneously a buy position on Nifty. This is because a LONG LARSEN & TOUBRO position generally gains if Nifty rises and generally loses if Nifty drops. The stock picker may be thinking he wants to be LONG LARSEN & TOUBRO, but a long position on Larsen & Toubro effectively forces him to be LONG LARSEN & TOUBRO + LONG NIFTY Those who are bullish about index should just buy Nifty futures; they need not trade individual securities. Those who are bullish about LARSEN & TOUBRO do wrong by carrying along a long position on Nifty as well. Every time we adopt a long position on a security, we should sell some amount of Nifty futures. This offsets the hidden Nifty exposure that is inside every long security position.
Short Security, Long Nifty:

A person may sell MUL at Rs 230 thinking that it would announce poor results as decline in car sales and the security price would fall. A few days later, Nifty rises, so he makes losses, even if his understanding of MUL was correct. Every sell position on a security is simultaneously a sell position on Nifty. This is because a SHORT MUL position generally gains if Nifty falls and generally loses if Nifty rises. The stock picker may be thinking he wants to be SHORT MUL, but a long position on MUL effectively forces him to be Short Mul + Short Nifty. Those who are bearish about index should just sell Nifty futures; they need not trade individual securities. Those who are bearish about MUL do wrong by carrying along a short position on Nifty as well.
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Every time we adopt a short position on a security, we should buy some amount of Nifty futures. This offsets the hidden Nifty exposure that is inside every short security position. Hedging: Have portfolio, short Nifty futures: Every portfolio contains a hidden exposure. This statement is true for all portfolios. In the case of portfolios, most of the portfolio risk is accounted for by index fluctuations (unlike individual securities, where only 30-60% of the securities risk is accounted for by the index fluctuations). Hence a position LONG PORTFOLIO + SHORT NIFTY can often become one-tenth as risky as the LONG PORTFOLIO position. Suppose Mr. X has a portfolio of l Lakh and has a risk of 1.25. Then a completely hedge is obtained by selling Rs 1.25 Lakh of Nifty futures. Case l On August 28 2005 where Mr. X had a portfolio composed of five securities HLL (200 shares, value Rsl90.50), Dr Reddy(100 shares, value Rs 1123.20), Oriental Bank(100 shares, value Rs 184.85),Reliance (100 shares, value Rs 393.80), Tisco (200 shares, value Rs 253.70). Scrip or Qty Price Value 38100 112320 18485 39380 50740 259025 Weight Beta of of portfolio 0.14 0.25 0.06 0.17 0.22 0.84
HLL 200 190.50 DRCRed 100 1123.20 OBOC 100 184.85 RIL m 100 393.80 TISCO p 200 253.70 Total Investment
scrip () 0.14 1 0.43 0.60 0.07 0.94 0.15 1.19 0.19 1.17 Portfolio
for a complete hedge Mr. X will need to sell futures worth 0.84*259025 i.e. Rs 217581.
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On August 28th, Nifty was at 1340.30. So he decides to sell 200 Nifties. Hence Mr. X supplements his portfolio with a short position on the Nifty futures with expiry on 25th September worth Rs 268060. Hedging: Have funds, buy Nifty futures: There could be a situation where you have funds, which needed to get invested in equity, or expecting to get funds in future which will get invested into equity. Some common occurrences include: A close-ended fund, which just finished its IPO, has cash, which is not yet invested. Suppose a person plans to sell land and buy shares. The land deal is slow and takes weeks to complete so that is become sure that the funds will come from the date that the funds actually are in hand. An open-ended fund has just sold fresh units and has received funds. Getting invested in equity ought to be easy but there are three problems: A person may need time to research securities, and carefully pick them that are expected to do well. This process takes time. For that time, the investor is partly invested in cash and partly invested in securities. During this time, he is exposed to the risk of missing out if the overall market index goes up. A person may have made up his mind on what portfolio he seeks to buy, but going to the market and placing market orders would generate large "impact cost". The execution would be improved substantially, if he could instead place limited orders and gradually accumulate the portfolio at favorable prices. This takes time, and during this time he is exposed to the risk of missing out if the Nifty goes up. In some cases, such as land sale above, the person may simply not have cash to immediately buy shares, hence he is forced to wait even if he feels that Nifty is unusually cheap. He is exposed to the risk of missing out if Nifty rises.
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In such a situation to hedge he can adopt the following strategy. The investor would obtain the desired equity exposure by buying index futures, immediately. A person who expects to obtain Rs 5 million by selling land would immediately enter into a position LONG NIFTY worth Rs 5 million. Similarly a close-ended fund, which has just finished its IPO and has cash, which is not yet invested, can immediately enter into a LONG NIFTY to the extent it wants to be invested into equity. The index futures market is likely to be more liquid than individual securities so it is possible to take extremely large position at a low impact cost. Later, the investor can gradually acquire securities (based on detail research or based on limited orders). As and when shares are, obtained, one would scale down the LONG NIFTY position correspondingly. No matter how slowly securities are purchased, this strategy would fully capture a rise in Nifty. So there is no risk of missing out on broad rise in the securities market while this process is taking lace hence the strategy allows the investor to take more care and spend time in choosing securities and placing aggressive limit orders. Speculation; Bullish index, long Nifty futures When any person thinks of that the index will go up, he thinks of making most of the situation thus by adopting a position on the index or buy selected securities which move with the index and sell them at a later date. Taking a position on the index is effortless using the index futures market. Using index futures an investor can "buy" or "sell" the entire index by trading on one single security. Once a person is LONG NIFTY using the futures market, he gains if the index raises and loses if the index falls.
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Case 2: On 28th August 2005 Mr. X believes that the index would rise so he buys 200 Nifties with expiration date on 25th September 2005. At this time Nifty August contract costs Rs 1370.30 so his position is worth Rs 274060. On 5th September Nifty was at 1398. The Nifty September contract has risen to Rs 1410. To book profit Mr. X sells of his position at Rs 1410, his profit from this position is Rs 7940. Speculation; Bearish index, short Nifty Futures: When a person thinks of that the index will come down. He thinks adopting a position on the index or sell selected securities, which move with the index and buy them at a later date. Taking a position on the index is effortless using the index futures market. Using index futures an investor can "buy" or "sell" the entire index by trading on one single security. Once a person is SHORT NIFTY using the futures market, he loses if the index raises and gains if the index falls. Case 3: On 28th August 2005 -Mr. X believes that the index would fall so he sells 200 Nifties with expiration date on 25th September 2005. At this time Nifty August contract costs Rs 1060 so his position is worth Rs 212000. On 5th September Nifty was at 1050. The Nifty September contract has fallen to Rs 1030. Mr. X squares of his position. His profit from this position comes to Rs 6000.
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Arbitrage: Have funds, lend them to the market: Some investors would like to lend funds into the security market, without suffering the risk. Traditional methods of loaning money into the security market suffer from Price risk of shares Credit risk of default of the counter party. What is new about the index futures market is that it supplies a technology of lending money into the market without suffering any exposure to Nifty, and without bearing any credit risk. The basic idea is simple. The lender buys all 50 securities of Nifty on the cash market, and simultaneously sells them at a future date on the futures market. There is no price risk since the position is perfectly hedged. There is no credit risk since the counter party on both legs is the NSCCL, which supplies clearing services on NSE. It is an ideal lending vehicle for entities, which are shy of price risk and credit risk, such as traditional banks and the most conservative corporate treasuries. How to do this 1. Calculate the portfolio, which buys all the 50 securities in Nifty in correct proportion 2. Round off the number of shares in each security 3. Using the NEAT software, a single keystroke can fire off these 50 orders in rapid succession into the NSE trading system. This gives you the buy position 4. A moment later sell Nifty futures of equal value. Now you are completely hedged, so fluctuations in Nifty do not affect you 5. A few days later, you will have to take delivery of the 50 securities and pay for them. This id the point at which you are "loaning the money to the market". R. V. Institute of Management 32
6. Someday later (and time you want), you will unwind the entire transaction. 7. At this point use NEAT to send 50 sell orders in rapid succession to sell off all the 50 securities. 8. A moment later reverses the futures position. Now your position is down to 0. 9. A few days later, you will have to make delivery of the 50 securities and receive money for them. This point at which "your money is repaid to you." The Return: A specific case, where you will unwind the transaction on the expiration date of the futures. In this case, the difference between the futures rise and the cash Nifty is the return to the moneylender, with two complications. The moneylender additionally earns any dividends that the 50 shares pay while he held them, and the moneylender suffers transaction cost (impact cost, brokerage) in doing these trades. On 1 July 2000 if the Nifty spot is 942.25 and the Nifty July 200 futures are at 956.5 then the difference (1.5% for 30 days) is the return the moneylender obtains. Case 4: On August 1 Nifty is at 1200. Futures contract is trading with 27th august expiration for 1230. Mr. X wants to earn this return (30/1200 fir 17days). 1. 2. He buys Rs 3 million of Nifty on the spot market. In doing this he places 50 market orders and ends up paying slightly more. He sells Rs3 million of the futures at 1230. The futures market is extremely liquid so the market order for Rs 3 million does through at near - zero impact cost. 3. He takes delivery of the shares and waits
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4. 5.
While waiting, for a few dividends come into his hands. The dividend works out to Rs 7000. On 27th August at 3.15, Mr. X puts in market orders to sell off his Nifty portfolio , putting 50 market orders to sell off all the shares. Nifty happens to have close at 1210 and his sell orders goes at 1207
6.
The futures position spontaneously expires on 27th august at 1210(the value of the futures on the last day is always equal to the Nifty spot).
7.
Mr. X has gained Rs 3 (0.25%) on the spot Nifty and Rs 20(1.63%) on the futures for a return of near 1.88%. in addition, he has gained Rs 7000 or 0.23% owing to the dividends for a total return of 2.11% for 27 days, risk free.
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Statement Of The Problem:

Futures and options were started in India in November 1997 and is one of the integral part of the stock market for hedging though India is overcoming the US market with respect to the volumes it is to be seen how well this has been exposed to the retail segment.
Objective Of The Study:

The prime objective of this research study is to know the awareness among the retail investors about futures and options. The other Objectives: To find out the satisfaction level of investors by investing through such derivatives How well investors utilized derivatives in minimizing their investment risk. Criteria for investment in the present scenario How the unknown segment of futures and options want to know more about this tool. To identify the potential of futures and options in the future.
Scope Of The Study:

This study is not only based on theoretical data but also the awareness of the investing public about futures and options to minimize risk and loss. This study gives a fair view about the potential of the futures and options market.
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RESEARCH METHODOLOGY
Type of project study: It is a Freelance type study. Along with the study about the investors of different security dealers it has a field study with general investor analysis. Tool for collection of data: Structured questionnaire The secondary information is collected from various text books, news papers and web sites. Respondents Size: This study is confined to 100 respondents, which includes clients of various broking houses and investing public. Sample Design: Random sampling (investors) Method of Analysis Tabulation, graphical representation and logical analysis Limitations: 1. This study is mainly conducted with only a few clients of Kotak Securities, Integrated Services, IL & FS investments and few other security dealers. Also with general public at few areas of Bangalore and does not take the whole of the derivative investors in India. 2. This study is restricted to 100 respondents. As the numbers of respondents are only 100, this may not give the clear picture about all the investors attitude towards the futures and options. 3. This study is conducted between April and June 2006, the respondents preference might be different due to the changing conditions for different investment avenues.
36
Chapter Scheme
Chapter One deals with Introduction & History of Derivatives and Statement of problem, Objective and Scope of the study. Chapter Two deals with the Research Methodology. Chapter Three portrays the Analysis and Interpretation of Data. Chapter Four conveys the Findings, Conclusion and Suggestions.
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ANALYSIS AND INTERPRETATION OF COLLECTED DATA
The data is collected from 100 respondents in order to study the awareness of investing public about futures and options. The questionnaire is drafted in such a way as to collect information on income, age, occupation, venues of investing, criteria for investing, risk seeking of investors and so on. At the same time a provision is made in order to collect data on the awareness about futures and options. The data has been tabulated and the percentage has been calculated for the analysis and evaluation of the collected data.
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AGE BREAK UP OF RESPONDENTS Table No. 4.1 AGE GROUP LESS THAN 25 25 40 MORE THAN 40 RESPONDENTS 12 5 83 PERCENTAGE 12 5 83
AGE GROUP OF RESPONDENTS Graph No. 4.1

90% 80% 70% 60% 50% 40% 30% 20% 12% 10% 0% LESS THAN 25 25 - 40 MORE THAN 40 5% AGE GROUP LESS THAN 25 25 - 40 MORE THAN 40 83%
Age is an indication of matured thoughts. We can see from the above data that 83% of the respondents are of the age group of more than 40. 5% are of the age between 25 to 40 and 12% are in the age of less than 25.
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From this we can see that the respondents are quiet experienced in spending and investing their earnings. This shows the maturity of the respondents.
40
DISTRIBUTION OF MALES AND FEMALES AMONG RESPONDENTS Table No. 4.2 SEX MALE FEMALE RESPONDENTS 69 31 PERCENTAGE 69 31
DISTRIBUTION OF MALES AND FEMALES AMONG RESPONDENTS Graph No. 4.2
31% GENDER MALE FEMALE
69%
The above data reveals that 69% of the respondents are males and 31% are females. It shows that although the men are having more control on their investments and decision making in the family, women are also interested in investments. From the above data it is clear that a trend is developing, in which women are also moving towards investing their savings.
41
OCCUPATION OF RESPONDENTS Table No. 4.3 OCCUPATION BUSINESS EMPLOYEE PROFESSIONAL RESPONDENTS 17 57 26 PERCENTAGE 17 57 26
OCCUPATION OF RESPONDENTS Graph No. 4.3
57% 60%
50% OCCUPATION 26% 30% 17% 20% BUSINESS EMPLOYEE PROFESSIONAL
40%
10%
0% BUSINESS EMPLOYEE PROFESSIONAL
It can be observed that 17% of the respondents are in business, 57% are employees and rest 26% are professionals. The majority of the investors come from the employee and aged segment of the society. The employee segment of the respondents is more interested in investing. The objective of their investment may be to live a secured and happy life after the retirement from their job.
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INCOME OF THE RESPONDENTS Table No. 4.4 INCOME LESS THAN 15,000 15,000 - 25,000 MORE THAN 25,000 RESPONDENTS 28 39 33 PERCENTAGE 28 39 33
INCOME OF THE RESPONDENTS Graph No. 4.4
40% 35% 30% INCOME 25% 20% 15% 10% 5% 0% LESS THAN 15,000 15,000 - 25,000 MORE THAN 25,000 28% 39% 33% LESS THAN 15,000 15,000 - 25,000 MORE THAN 25,000
From the above table we can find out that 28% of the respondents have income less than 15,000 about 39% are ranging between 15, 000 to 25,000 however, about 33% constitute income group of more than 25,000.
This indicates that middle income people are more interested in investing. They want to earn more from what they have invested in order to live a luxurious life.
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SAVING AND INVESTMENT PATTERN OF RESPONDENTS Table No. 4.5 SAVING & INVESTMENT YES NO RESPONDENTS 100 0 PERCENTAGE 100 0
SAVING AND INVESTMENT PATTERN OF RESPONDENTS Graph No. 4.5
100% SAVING AND INVESTMENT 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% YES NO 0% YES NO
All respondents have the nature of saving of what they have earned. They invest their savings in order to earn more. The availability of many investment avenues and raise in the education level of the people also contributed towards saving and investment of their earnings.
44
THE BROKING HOUSES THROUGH THE INVESTMENT IS MADE Table No. 4.6 BROKING HOUSE KOTAK SECURITIES IL & FS SECURITIES INTEGRATED SERVICES OTHERS RESPONDENTS 34 21 18 27 PERCENTAGE 34 21 18 27
THE BROKING HOUSES THROUGH THE INVESTMENT IS MADE Graph No. 4.6
27%
34%
BROKING HOUSE KOTAK SECURITIES IL & FS SECURITIES INTEGRATED SERVICES OTHERS
18% 21%
The above data reveals that in Bangalore Kotak Securities is having a major market share, compare to the other security dealers. As the Kotak Securities are no.1 security dealers in India, respondents choose Kotak Securities as their broking house. The reputation and market share of the company helped here to get more clients.
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INVESTMENT AREAS AWARE OF Table No. 4.7 INVESTMENT AREAS REAL ESTATE POST OFFICE STOCK MARKET PRECIOUS METALS BANKS MUTUAL FUNDS COMMODITIES INSURANCE RESPONDENTS 24 52 60 14 85 32 4 29 PERCENTAGE 8 17 20 5 28 11 1 10
INVESTMENT AREAS Graph No. 4.7

30% 28%
25% 20% 20% 17% INVESTMENT AREAS REAL ESTATE POST OFFICE STOCK MARKET PRECIOUS METALS BANKS MUTUAL FUNDS COMMODITIES INSURANCE
15% 11% 10% 8% 5% 5% 1% 0% 10%
Among the various investment areas available banks dominate since it is quiet safe compared to other investments and it occupies 28%, followed by stock market 20%, because of the recent boom. The safest among all investments is the post office 17%, real estate 8%, mutual funds 11%, insurance 10%, precious metals 5% and commodities 1%. INVESTMENT CRITERIA Table No. 4.8
46
CRITERIA LIQUIDITY PROFITABILITY SAFETY LEGALITY
RESPONDENTS 14 26 52 8
PERCENTAGE 14 26 52 8
INVESTMENT CRITERIA OF RESPONDENTS Graph No. 4.8
8%
14%
CRITERIA LIQUIDITY PROFITABILITY SAFETY LEGALITY
26%
52%
It can be seen that all the investors give preference for safety for their investment. Safety of investment can be seen in banks, safety occupies 52%, profitability 26%, liquidity 14% and legality 8%. This shows a direct relationship between safety and investment. As the banks are more safer, more people invest in banks.
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IN THE PRESENT SCENARIO I PREFER INVESTING IN Table No. 4.9 PREFERED AREAS REAL ESTATE POST OFFICE STOCK MARKET BANK INSURANCE MUTUAL FUNDS RESPONDENTS 12 6 41 21 8 12 PERCENTAGE 12 6 41 21 8 12
THE PRESENT SCENARIO I PREFER INVESTING IN Graph No. 4.9

12% 12%
8%
6% PREFERED AREAS REAL ESTATE POST OFFICE STOCK MARKET BANK INSURANCE MUTUAL FUNDS
21%
41%
Due to the stock market boom with FDI and FII inflows, respondents prefer stock market with 41% followed by banks 21%, real estate and mutual funds 12% each, post office 6% and insurance 8% respectively. It is clear that most of the respondents prefer stock market investment. This is because in the present scenario the stock market is booming and the SENSEX has already achieved a record high. So in order to get the benefit of the stock market boom, respondents are more interested in stock market investments.
AWARENESS ABOUT INVESTOR AWARENESS ADVERTISEMENTS R. V. Institute of Management 48
Table No. 4.10 AWARENESS ABOUT ADVERTISEMENTS YES NO RESPONDENTS 53 47 PERCENTAGE 53 47
AWARENESS ABOUT SEBI ADVERTISEMENTS Graph No. 4.10
47% 53%
AWARENESS ABOUT ADVERTISEMENTS YES NO
53% of the respondents watch the investor awareness advertisements given by SEBI. It is found that most of the respondents do not watch the investor awareness advertisements given by SEBI. Hence there is a need to educate the investors about their rights and obligations.
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RISK SEEKING OF INVESTORS Table No. 4.11 RISK SEEKER YES NO RESPONDENTS 29 71 PERCENTAGE 29 71
RISK SEEKING OF INVESTORS Graph No. 4.11
80% 70% 60% 50% 40% 30% 20% 10% 0% PERCENTAGE YES NO 29% RISK SEEKER YES NO 71%
From the above data we can conclude that most of the investors are risk averse. They do not want to take risk, they prefer low risk investments. As most of the respondents are from the middle income group they do not want to take risk with their investment.
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INVESTMENT PATTERN ON THE BASIS OF RISK Table No. 4.12 INVESTMENT PATTERN LOW RISK INVESTMENTS MODERATE RISK INVESTMENTS HIGH RISK INVESTMENTS RESPONDENTS 31 60 9 PERCENTAGE 31 60 9
INVESTMENT PATTERN ON THE BASIS OF RISK Graph No. 4.12

9% INVESTMENT PATTERN LOW RISK INVESTMENTS MODERATE RISK INVESTMENTS HIGH RISK INVESTMENTS
31%
60%
We can see that 31% of the respondents prefer low risk investments, 60% prefer moderate risk and only 9% go in for high risk investments. This shows that respondents prefer those investments, in which the risk involved is moderate or low.
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PREFERENCE GIVEN ACCORDING TO RISK AND RETURN Table No. 4.13 PREFERENCE ACCORDING TO RISK MINIMUM RISK MAXIMUM RETURN MINIMUM RISK MINIMUM RETURN MAXIMUM RISK MAXIMUM RETURN 55 35 10 55 35 10 RESPONDENTS PERCENTAGE
PREFERENCE GIVEN ACCORDING TO RISK AND RETURN Graph No. 4.13

60%
50%
PREFERENCE MINIMUM RISK MAXIMUM RETURN MINIMUM RISK MINIMUM RETURN MAXIMUM RISK MAXIMUM RETURN 35%
40%
30%
55%
20%
10% 10% 0% MINIMUM RISK MAXIMUM RETURN MINIMUM RISK MINIMUM RETURN MAXIMUM RISK MAXIMUM RETURN
It is found that most of the respondents prefer investments of minimum risk and maximum return. 35% of the respondents prefer minimum risk and minimum return. Only 10% go for maximum risk and maximum return in their investments. This suggests that most of the respondents do not want to take risk while investing.
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RESPONDENTS WHO THINK RISK CAN BE MINIMIZED Table No. 4.14 RISK CAN BE MINIMIZED YES NO RESPONDENTS 93 7 PERCENTAGE 93 7
RESPONDENTS WHO THINK RISK CAN BE MINIMIZED Graph No. 4.14

7%
RISK CAN BE MINIMIZED YES NO
93%
As the saying goes higher the risk higher the return, 7% of the respondents are of the opinion that risk can not be minimized and the remaining 93% says that risk can be minimized. Risk is involved in every investment, in some investments it may be less and in some investments it may be high. The respondents are of the opinion that the risk involved in investments can be minimized.
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RISK MINIMIZING INSTRUMENTS Table No. 4.15 INSTRUMENTS INSURANCE POST OFFICE GOVERNMENT BONDS FUTURES & OPTIONS OTHERS RESPONDENTS 56 10 6 26 2 PERCENTAGE 56 10 6 26 2
RISK MINIMIZING INSTRUMENTS Graph No. 4.15
60%
56%
50% INSTRUMENTS 40% INSURANCE POST OFFICE GOVERNMENT BONDS FUTURES & OPTIONS OTHERS
30%
26%
20% 10% 6% 2% 0%
INSURANCE POST OFFICE GOVERNMENT BONDS FUTURES & OPTIONS OTHERS
10%
As an instrument of minimizing risk the respondents are aware of insurance than derivatives. Insurance constitute 56%, followed by futures and options 26%, post office 10%, government bonds 6% and others 2%. As compared to futures and options, insurance is very easy to understand and to deal with. So the respondents opt for insurance as a risk minimizing instrument rather than complicated futures and options.
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AWARENESS TO FUTURES AND OPTIONS Table No. 4.16 AWRENESS OF DERIVATIVES YES NO RESPONDENTS 42 58 PERCENTAGE 42 58
AWARENESS TO FUTURES AND OPTIONS Graph No. 4.16
42% AWRENESS YES NO 58%
Only 42% of the respondents are aware of futures and options or partially know about them. The remaining 58% do not know about futures and options. This indicates that still futures and options are not known to a large segment of investors. This shows that media and market experts have not been so effective in educating the investors about futures and options.
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RESPONDENTS WHO LIKE TO KNOW MORE ABOUT THEM Table No. 4.17 LIKE TO KNOW MORE YES NO RESPONDENTS 85 15 PERCENTAGE 85 15
LIKE TO KNOW MORE ABOUT DERIVATIVES Graph No. 4.17
85% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% YES NO
LIKE TO KNOW MORE YES NO
15%
It shows that about 85% of the respondents want to know more about futures and options, this also include people with partial knowledge and the remaining 15% say no, this can be either they know about them or do not want to know about it. Majority of the respondents wants to know more about futures and options. As the futures and options are little complex to understand, respondents would like to know more about them.
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MEDIAS TO UNDERSTAND THE CONCEPTS OF DERIVATIVES Table No. 4.18 LEARNING MEDIA SEMINARS PRINT MEDIA TELEVISION INTERACTION WITH EXPERTS RESPONDENTS 23 19 32 26 PERCENTAGE 23 19 32 26
LEARNING MEDIA Graph No. 4.18
26%
23%
LEARNING MEDIA SEMINARS PRINT MEDIA TELEVISION INTERACTION WITH EXPERTS 19%
32%
Most of the respondents want to understand the concept of futures and options through Television which constitutes 32%, seminars 23%, interaction with market experts 26% and print media 19%. Some of the respondents have little knowledge about futures and options yet, they are interested to learn about this aspect through various media.
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TRADING PATTERN OF INVESTORS IN DERIVATIVES Table No. 4.19 TRADE DO NOT TRADE DAILY WEEKLY FORTNIGHTLY MONTHLY RESPONDENTS 67 7 6 4 16 PERCENTAGE 67 7 6 4 16
TRADING PATTERN OF INVESTORS IN DERIVATIVES Graph No. 4.19
70% 60% 50% 40% 30% 20% 10% 0%
67%
TRADE DO NOT TRADE DAILY WEEKLY FORTNIGHTLY MONTHLY 16% 7% 6%
4%
Since most of the respondents are not derivative traders, they trade less. 67% of the respondents do not trade, 7% trade daily, 6% weekly, 4% fortnightly and 16% trade monthly through derivatives. This indicates that investors trade less frequently in futures and options.
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I USE THIS INSTRUMENT TO TRADE IN Table No. 4.20 TRADE IN GOLD SHARES CURRENCY COMMODITY RESPONDENTS 0 30 6 6 PERCENTAGE 0 72 14 14
RESPONDENTS USED OF DERIVATIVES TO TRADE IN Graph No. 4.20
14%
0%
14%
TRADE IN GOLD SHARES CURRENCY COMMODITY 72%
Futures and options mainly used by respondents to trade in shares, it constitute about 30%. The 6% of the respondents use it to trade in currency and commodities. It can be concluded that most of the respondents use futures and options only to trade in shares. They are not aware or do not trade in Gold and other precious metals through derivatives. The use of futures and options to trade in currency and commodities is also comparatively low.
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I THINK THROUGH DERIVATIVES Table No. 4.21 THROUGH DERIVATIVES RISK CAN BE MINIMIZED LOSS CAN BE MINIMIZED RESPONDENTS 32 10 PERCENTAGE 76 24
RESPONDENTS WHO THINK THROUGH DERIVATIVES Graph No. 4.21
24% THROUGH DERIVATIVES RISK CAN BE MINIMIZED LOSS CAN BE MINIMIZED 76%
76% of the respondents think that through derivatives risk can be minimized. In contrast 24% of the respondents feel that derivatives can be used to minimize the loss. This indicates that futures and options are mainly used to minimize the risk involved in the investment.
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EXPERIENCE WITH DERIVATIVES WAS Table No. 4.22 EXPERIENCE VERY SATISFACTORY SATISFACTORY NOT SATISFACTORY NONE RESPONDENTS PERCENTAGE 8 19 18 10 6 43 24 14
RESPONDENTS EXPERIENCE WITH DERIVATIVES Graph No. 4.22
14%
19%
EXPERIENCE 24% VERY SATISFACTORY SATISFACTORY NOT SATISFACTORY NONE
43%
43% of the respondents are satisfied with the trading in derivatives. 24% are not satisfied with the performance of derivatives. 19% says they are very satisfied with the performance of derivatives. 14% says none.
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FINDINGS
1. The study shows that most of the respondents are aged more than 40 years. 2. Major parts of the respondents are employees and regular investors to stock markets. 3. The respondents consider safety and liquidity to be the prime importance and therefore want to invest their savings in banks rather than in the stock market and other investment avenues. 4. Major portions of investors consider insurance, as the best hedging tool and the exposure to futures and options is also quite well. 5. Respondents believe that futures and options are very technical and difficult to understand. 6. They prefer television and seminars to understand about futures and options. 7. Among the players in the derivative market most of the respondents trade on monthly positions, and are quite satisfied with their performance.
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CONCLUSION
Though the derivatives market has overtaken the cash market in daily turnover and volumes we can see that the awareness among the investing public about futures and options as a tool of hedging is not much and respondents think that this topic is highly technical and complicated to understand. And a few respondents know about derivatives and are reluctant in keeping heavy sums and margins with brokers. As the study shows that most of the respondents do not want to take risk in their investment, the futures and options can be an ideal tool for minimizing their investment risk. But the problem is, they are not aware of futures and options fully. There is a necessity on the part of the media and market experts to make futures and options more familiar among the investing public. It is also found that futures and options mainly used to trade in shares only. So there is a need to make them familiar in the trading of commodities, currencies and precious metals. The complexity involved in the trading of futures and options should be reduced and it should be made simple to understand, even for a common man. This will definitely help in developing Indian futures and options market in the coming years.
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SUGGESTIONS
1. Although the derivatives market is growing considerably in India, respondents lack knowledge about futures and options, therefore awareness has to be developed about derivatives. 2. As the majority of the respondents fall in the middle income group, they do not opt for futures and options due to high margins. So steps should be taken to lower the initial margins, in order to make derivatives popular among small and medium level investors. 3. There is a necessity from the brokers point of view to provide adequate and timely information to the clients. 4. The television media with assistance from market experts can help the investors or traders to give more knowledge about futures and options.
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Permitted Lot Sizes of Contracts
65
Underlying S&P CNX Nifty CNX IT BANK Nifty ABB Ltd. Associated Cement Co. Ltd. Allahabad Bank Alok Industries Ltd. Andhra Bank Arvind Mills Ltd. Ashok Leyland Ltd Aurobindo Pharma Ltd. Bajaj Auto Ltd. Bank of Baroda Bank of India Bharat Electronics Ltd. Bharat Forge Co Ltd Bharti Tele-Ventures Ltd Bharat Heavy Electricals Ltd. Ballarpur Industries Ltd. Bongaigaon Refinery Ltd. Bharat Petroleum Corporation Ltd. Canara Bank Century Textiles Ltd CESC Ltd. Chambal Fertilizers Ltd. Chennai Petroleum Corp Ltd. Cipla Ltd. Kochi Refineries Ltd Colgate Palmolive (I) Ltd. Corporation Bank Cummins India Ltd Dabur India Ltd. Divi's Laboratories Ltd. Dr. Reddy's Laboratories Ltd. R. V. Institute of Management
Symbol NIFTY CNXIT BANKNIFTY
Market Lot 100 100 100 200 750 2450 3350 2300 2150 9550 700 200 1400 1900 550 1000 1000 300 1900 2250 550 1600 850 1100 6900 950 1000 1300 1050 600 1900 1800 250 400 66
Derivatives on Individual Securities ABB ACC ALBK ALOKTEXT ANDHRABANK ARVINDMILL ASHOKLEY AUROPHARMA BAJAJAUTO BANKBARODA BANKINDIA BEL BHARATFORG BHARTI BHEL BILT BONGAIREFN BPCL CANBK CENTURYTEX CESC CHAMBLFERT CHENNPETRO CIPLA COCHINREFN COLGATE CORPBANK CUMMINSIND DABUR DIVISLAB DRREDDY
QUESTIONNAIRE
1. Name:....................................... 2. Address:.................................... 3. Age Group: Less than 25 4. Sex : Male 25-40 More than 40
Female
5. Occupation: Business Employee Professional Others (Please Specify)................... 6. Monthly Income : Less than 15,000 15,000-25,000 More than 25,000 7. Do you invest your savings? Yes No
8. The name of the company through which you invest Kotak Securities IL & FS Securities Integrated Services Other (Please specific).. 9. Areas of investment that you are aware of: Real Estate Precious metals Banks Post Office Stock Market Mutual funds
Other (Please specific).. 10. While investing you give the highest preference to (Any one) Liquidity Legality Profitability
Safety
Others (please specify).
67
11. Which investment according to you is most preferable? Real estate Post office Stock Market Mutual funds Precious metals Banks
Other (Please specific) 12. Do you watch the investor awareness advertisements given by SEBI? Yes No
13. Are you a risk seeker? Yes No
14. You invest in :
High risk investments

Low risk Investments
Moderate risk investments
15. In your investments you give preference for : Minimum risk, Maximum return
Maximums risk, Maximum return

Minimum risk, Minimum return 16. Do you think that risk can be minimized? (If No go to Q. No 18 ) Yes
No
17. If YES what are the instruments that can be used to minimize your investment risk. Insurance Futures and options Post office Government Bonds Others (Please Specify)..
18. Are you aware of futures and options? Yes No
68
19. Do you like to know more about futures and options? Yes No
20. Through which medium would you like to understand about futures and options? Seminars Print Media Television Interaction with market experts 21. How often do you trade through futures and options? Do not trade Fortnightly Daily Monthly Weekly
22. I use derivatives to trade in : Gold Shares
Currency Commodities
Others (Please Specify). 23. Which one do you think is correct? Through Derivatives: Risk can be minimized Loss can be minimized 24. Your experience with futures and options as an. instrument to minimize risk or loss has been : Very satisfactory Not satisfactory 25. Please give Satisfactory None if any, to your company (broker)
suggestions
THANK YOU
69
BIBLIOGRAPHY
1. N.D. Vohra and B.R. Bagri, Futures and options, Tata Mc Graw Hill Publications, 2001, Pp2-10. 2. Hull C. John Options, futures and other derivatives, Pearson Education, 4th Edition 2001, Pp28. 3. Edwards. R. Franklin and Cindy, Futures and Options, Mc Graw Hill Publications, 1992, Pp92. 4. Parameshwara K. Sunil, Futures Market theory and practice, Tata Mc Graw Hill Publications, 2003, Pp2-48. 5. D.C.Patwari and A. Bhargava, Options and futures An Indian perspective, Jaico Publishing house, 2005, Pp1-30.
INTERNET: http://www.angelfire.com/a_brief_history_of_derivatives.htm http://www.business_standard.com http://www.bseindia.com http://www.nscindia.com
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PREFACE

What are Derivatives?

FLOW CHART OF DERIVATIVE TRADING

Buying broker Confirms purchase

Selling broker Confirms purchase

Confirms Purchase Clearinghouse 1 Obligation Long 1 Obligation Short

Buyer now long 1 Contract

Seller now short 1 Contract

WORLD DERIVATIVES MARKETS:

Systematic Economic Sociological Political Legal Risk

Unsystematic Industry Risk

Risk of Securities Market Economy

Long Security, Short Nifty Futures

Short Security, Long Nifty:

Statement Of The Problem:

Objective Of The Study:

Scope Of The Study:

ANALYSIS AND INTERPRETATION OF COLLECTED DATA

AGE GROUP OF RESPONDENTS Graph No. 4.1

DISTRIBUTION OF MALES AND FEMALES AMONG RESPONDENTS Graph No. 4.2

31% GENDER MALE FEMALE

OCCUPATION OF RESPONDENTS Graph No. 4.3

50% OCCUPATION 26% 30% 17% 20% BUSINESS EMPLOYEE PROFESSIONAL

0% BUSINESS EMPLOYEE PROFESSIONAL

INCOME OF THE RESPONDENTS Graph No. 4.4

SAVING AND INVESTMENT PATTERN OF RESPONDENTS Graph No. 4.5

BROKING HOUSE KOTAK SECURITIES IL & FS SECURITIES INTEGRATED SERVICES OTHERS

INVESTMENT AREAS Graph No. 4.7

15% 11% 10% 8% 5% 5% 1% 0% 10%

CRITERIA LIQUIDITY PROFITABILITY SAFETY LEGALITY

INVESTMENT CRITERIA OF RESPONDENTS Graph No. 4.8

CRITERIA LIQUIDITY PROFITABILITY SAFETY LEGALITY

THE PRESENT SCENARIO I PREFER INVESTING IN Graph No. 4.9

AWARENESS ABOUT INVESTOR AWARENESS ADVERTISEMENTS R. V. Institute of Management 48

Table No. 4.10 AWARENESS ABOUT ADVERTISEMENTS YES NO RESPONDENTS 53 47 PERCENTAGE 53 47

AWARENESS ABOUT SEBI ADVERTISEMENTS Graph No. 4.10

AWARENESS ABOUT ADVERTISEMENTS YES NO

RISK SEEKING OF INVESTORS Graph No. 4.11

INVESTMENT PATTERN ON THE BASIS OF RISK Graph No. 4.12

PREFERENCE GIVEN ACCORDING TO RISK AND RETURN Graph No. 4.13

RESPONDENTS WHO THINK RISK CAN BE MINIMIZED Graph No. 4.14

RISK CAN BE MINIMIZED YES NO

RISK MINIMIZING INSTRUMENTS Graph No. 4.15

AWARENESS TO FUTURES AND OPTIONS Graph No. 4.16

42% AWRENESS YES NO 58%

LIKE TO KNOW MORE ABOUT DERIVATIVES Graph No. 4.17

LIKE TO KNOW MORE YES NO

LEARNING MEDIA Graph No. 4.18

TRADING PATTERN OF INVESTORS IN DERIVATIVES Graph No. 4.19

70% 60% 50% 40% 30% 20% 10% 0%

TRADE DO NOT TRADE DAILY WEEKLY FORTNIGHTLY MONTHLY 16% 7% 6%

RESPONDENTS USED OF DERIVATIVES TO TRADE IN Graph No. 4.20

TRADE IN GOLD SHARES CURRENCY COMMODITY 72%

RESPONDENTS WHO THINK THROUGH DERIVATIVES Graph No. 4.21

RESPONDENTS EXPERIENCE WITH DERIVATIVES Graph No. 4.22

EXPERIENCE 24% VERY SATISFACTORY SATISFACTORY NOT SATISFACTORY NONE

Permitted Lot Sizes of Contracts

Symbol NIFTY CNXIT BANKNIFTY

Others (please specify).

13. Are you a risk seeker? Yes No

14. You invest in :

High risk investments

Moderate risk investments