Chapter-1

Indian Capital Market

Financial markets
Financial market is a market where financial instruments are exchanged or traded and helps in determining the prices of the assets Financial markets may be classified on the basis of Types of claims debt and equity markets Maturity money market and capital market Trade spot market and delivery market Deals in financial claims primary market and secondary market

Indian Financial Market consists of the following markets:

Capital Market/ Securities Market o Primary capital market o Secondary capital market Money Market Debt Market Primary capital market- A market where new securities are bought and sold for the first time Types of issues in Primary market Initial public offer (IPO) (in case of an unlisted company), Follow-on public offer (FPO), Rights offer such that securities are offered to existing shareholders, Preferential issue/ bonus issue/ QIB placement Composite issue, that is, mixture of a rights and public offer, or offer for sale (offer of securities by existing shareholders to the public for subscription). Bombay Stock Exchange Limited o Oldest in Asia o Presence in 417 cities and towns in India o Trading in equity, debt instrument and derivatives
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 National Stock Exchange New York Stock Exchange NYSE) NASDAQ London Stock Exchange Functions of Stock Exchanges Liquidity and marketability of securities Fair price determination Source of long-term funds Helps in capital formation Reflects general state of economy Basics of Stock Market Indices: A stock market index is the reflection of the market as a whole. It is a representative of the entire stock market. Movements in the index represent the average returns obtained by the investors. Stock market index is sensitive to the news of: Company specific Country specific Thus the movement in the stock index is also the reflection of the expectation of the future performance of the companies listed on the exchange Settlement cycles: Settlement is the process whereby the trader who has made purchases of scrip makes payment and the seller selling the scrip delivers the securities. This settlement process is carried out by Clearing Houses for the stock exchanges. The Clearing House acts like an intermediary in every transaction and acts as a seller to all buyers and buyer to all sellers.

Capital market and money market:

Financial markets can broadly be divided into money and capital market. Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.
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Capital Market: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market includes financial instruments with more than one year maturity

Significance of Capital Markets

A well functioning stock market may help the development process in an economy through the following channels: 1. Growth of savings, 2. Efficient allocation of investment resources, 3. Better utilization of the existing resources. In market economy like India, financial market institutions provide the avenue by which long-term savings are mobilized and channeled into investments. Confidence of the investors in the market is imperative for the growth and development of the market. For any stock market, the market Indices is the barometer of its performance and reflects the prevailing sentiments of the entire economy. Stock index is created to provide investors with the information regarding the average share price in the stock market. The ups and downs in the index represent the movement of the equity market. These indices need to represent the return obtained by typical portfolios in the country. Generally, the stock price of any company is vulnerable to three types of news: Company specific Industry specific Economy specific An all share index includes stocks from all the sectors of the economy and thus cancels out the stock and sector specific news and events that affect stock prices, (law of portfolio diversification) and reflect the overall performance of the company/equity market and the news affecting it. The most important use of an equity market index is as a benchmark for a portfolio of stocks. All diversified portfolios, belonging either to retail investors or mutual funds, use the common stock index as a yardstick for their returns. Indices are useful in modern financial application of derivatives.
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Capital Market Instruments some of the capital market instruments are:

Equity Preference shares Debenture/ Bonds Derivatives

Corporate securities Shares

The total capital of a company may be divided into small units called shares. For example, if the required capital of a company is US $5,00,000 and is divided into 50,000 units of US $10 each, each unit is called a share of face value US $10. A share may be of any face value depending upon the capital required and the number of shares into which it is divided. The holders of the shares are called share holders. The shares can be purchased or sold only in integral multiples. Equity shares signify ownership in a corporation and represent claim over the financial assets and earnings of the corporation. Shareholders enjoy voting rights and the right to receive dividends; however in case of liquidation they will receive residuals, after all the creditors of the company are settled in full. A company may invite investors to subscribe for the shares by the way of: Public issue through prospectus Tender/ book building process Offer for sale Placement method Rights issue

Debt Instruments
A contractual arrangement in which the issuer agrees to pay interest and repay the borrowed amount after a specified period of time is a debt instrument. Certain features common to all debt instruments are:

 Maturity the number of years over which the issuer agrees to meet the contractual obligations is the term to maturity. Debt instruments are classified on the basis of the time remaining to maturity Par value the face value or principal value of the debt instrument is called the par value. Coupon rate agreed rate of interest that is paid periodically to the investor and is calculated as a percentage of the face value. Some of the debt instruments may not have an explicit coupon rate, for instance zero coupon bonds. These bonds are issued on discount and redeemed at par. Thus the difference between the investors investment and return is the interest earned. Coupon rates may be fixed for the term or may be variable. Call option option available to the issuer, specified in the trust indenture, to call in the bonds and repay them at pre determined price before maturity. Call feature acts like a ceiling f or payments. The issuer may call the bonds before the stated maturity as it may recognize that the interest rates may fall below the coupon rate and redeeming the bonds and replacing them with securities of lower coupon rates will be economically beneficial. It is the same as the prepayment option, where the borrower prepays before scheduled payments or slated maturity o Some bonds are issued with call protection feature, i.e they would not be called for a specified period of time o Similar to the call option of the issuer there is a put option for the investor, to sell the securities back to the issuer at a predetermined price and date. The investor may do so anticipating rise in the interest rates wherein the investor would liquidate the funds and alternatively invest in place of higher interest Refunding provisions in case where the issuer may not have cash to redeem the debt instruments the issuer may issue new debt instrument and use the proceeds to repay the securities or to exercise the call option. Debt instruments may be of various kinds depending on the repayment: Bullet payment instruments where the issuer agrees to repay the entire amount at the maturity date, i.e lumpsum payment is called bullet payment Sinking fund payment instruments where the issuer agrees to retire a specified portion of the debt each year is called sinking fund requirement Amortization instruments where there are scheduled principal repayments before maturity date are called amortizing instruments
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Debentures/ Bonds
The term Debenture is derived from the Latin word debere which means to owe a debt. A debenture is an acknowledgment of debt, taken either from the public or a particular source. A debenture may be viewed as a loan, represented as marketable security. The word bond may be used interchangeably with debentures. Debt instruments with maturity more than 5 years are called bonds

DERIVATIVES The origin of derivatives can be traced back to the need of farmers to protect themselves against fluctuations in the price of their crop. From the time it was sown to the time it was ready for harvest, farmers would face price uncertainty. Through the use of simple derivative products, it was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These were simple contracts developed to meet the needs of farmers and were basically a means of reducing risk. A farmer who sowed his crop in June faced uncertainty over the price he would receive for his harvest in September. In years of scarcity, he would probably obtain attractive prices. However, during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly this meant that the farmer and his family were exposed to a high risk of price uncertainty. On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices during dearth, although
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favorable prices could be obtained during periods of oversupply. Under such circumstances, it clearly made sense for the farmer and the merchant to come together and enter into contract whereby the price of the grain to be delivered in September could be decided earlier. What they would then negotiate happened to be futures-type contract, which would enable both parties to eliminate the price risk. In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and merchants together. A group of traders got together and created the to-arrive contract that permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts proved useful as a device for hedging and speculation on price charges. These were eventually standardized, and in 1925 the first futures clearing house came into existence. Today derivatives contracts exist on variety of commodities such as corn, pepper, cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying like stocks, interest rate, exchange rate, etc.

DERIVATIVES A derivative is a product whose value is derived from the value of one or more underlying variables or assets in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. In our earlier discussion, we saw that wheat farmers may wish to sell their harvest at a future date to eliminate the risk of change in price by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the underlying in this case. The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts in commodities all over India. As per this the Forward Markets Commission (FMC) continues to have jurisdiction over commodity futures contracts. However when derivatives trading in securities was introduced in 2001, the term security in the Securities Contracts (Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities. Consequently, regulation of derivatives came under the purview of
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Securities Exchange Board of India (SEBI). We thus have separate regulatory authorities for securities and commodity derivative markets. Derivatives are securities under the SCRA and hence the trading of derivatives is governed by the regulatory framework under the SCRA. The Securities Contracts (Regulation) Act, 1956 defines derivative to includeA security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities

Derivatives 3.2 TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives

Over The Counter Derivatives

National Stock Exchange Bombay Stock Exchange National Commodity & Derivative exchange

Index Future Index option Stock option Stock future Interest rate Futures

TYPES OF DERIVATIVES

DERIVATIVES

Future

Options

9 Forwards

SWAPS

FORWARD CONTRACTS A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy the underlying asset on a certain specified future date for a certain specified price. The other party assumes a short position and agrees to sell the asset on the same date for the same price. Other contract details like delivery date, price and quantity are negotiated bilaterally by the parties to the contract. The forward contracts are n o rma l l y traded outside the exchanges. The salient features of forward contracts are: They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality. The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the same counter-party, which often results in high prices being charged. However forward contracts in certain markets have become very standardized, as in the case of foreign exchange, thereby reducing transaction costs and increasing transactions volume. This process of standardization reaches its limit in the organized futures market. Forward contracts are often confused with futures contracts. The confusion is primarily because both serve essentially the same economic functions of allocating risk in the presence of future price uncertainty. However futures are a significant improvement over the forward contracts as they eliminate counterparty risk and offer more liquidity. FUTURE CONTRACT A futures contract is a standardized contract, traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future date is called the delivery date or final settlement date. The pre-set price is called the futures price.
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The price of the underlying asset on the delivery date is called the settlement price. The settlement price, normally, converges towards the futures price on the delivery date. A futures contract gives the holder the right and the obligation to buy or sell, which differs from an options contract, which gives the buyer the right, but not the obligation, and the option writer (seller) the obligation, but not the right. To exit the commitment, the holder of a futures position has to sell his long position or buy back his short position, effectively closing out the futures position and its contract obligations. Futures contracts are exchange traded derivatives. The exchange acts as counterparty on all contracts, sets margin requirements, etc. BA SIC FEATURES OF FUTURE CONTRACT 1. Standardization: Futures contracts ensure their liquidity by being highly standardized, usually by specifying: The underlying. This can be anything from a barrel of sweet crude oil to a short term interest rate. The type of settlement, either cash settlement or physical settlement. The amount and units of the underlying asset per contract. This can be the notional amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional amount of the deposit over which the short term interest rate is traded, etc. The currency in which the futures contract is quoted. The grade of the deliverable. In case of bonds, this specifies which bonds can be delivered. In case of physical commodities, this specifies not only the quality of the underlying goods but also the manner and location of delivery. The delivery month. The last trading date. Other details such as the tick, the minimum permissible price fluctuation. 2. Margin: Although the value of a contract at time of trading should be zero, its price constantly fluctuates. This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange, who always acts as counterparty. To minimize this risk, the exchange demands that contract owners post a form of collateral, commonly known as Margin requirements are
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waived or reduced in some cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position. Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as determined by historical price changes, which is not likely to be exceeded on a usual day's trading. It may be 5% or 10% of total contract price. Mark to market Margin: Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the "settlement" or mark-to-market price of the contract. At the end of every trading day, the contract is marked to its present market value. If the trader is on the winning side of a deal, his contract has increased in value that day, and the exchange pays this profit into his account. On the other hand, if he is on the losing side, the exchange will debit his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid. 3. Settlement Settlement is the act of consummating the contract, and can be done in one of two ways, as specified per type of futures contract: Physical delivery - the amount specified of the underlying asset of the contract is delivered by the seller of the contract to the exchange, and by the exchange to the buyers of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled out by purchasing a covering position - buying a contract to cancel out an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a long). Cash settlement - a cash payment is made based on the underlying reference rate, such as a short term interest rate index such as Euribor, or the closing value of a stock market index. A futures contract might also opt to settle against an index based on trade in a related spot market. Expiry is the time when the final prices of the future are determined. For many equity index and interest rate futures contracts, this happens on the Last Thursday of certain trading month. On this day the t+2 futures contract becomes the t forward contract. Pricing of future contract In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price) must be the same as the cost (including interest) of buying and storing the asset. In other
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words, the rational forward price represents the expected future value of the underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the future/forward, , will be found by discounting the present value at time to maturity by the rate of risk-free return . This relationship may be modified for storage costs, dividends, dividend yields, and convenience yields. Any deviation from this equality allows for arbitrage as follows. In the case where the forward price is higher: 1. The arbitrageur sells the futures contract and buys the underlying today (on the spot market) with borrowed money. 2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed forward price. 3. He then repays the lender the borrowed amount plus interest. 4. The difference between the two amounts is the arbitrage profit. In the case where the forward price is lower: 1. The arbitrageur buys the futures contract and sells the underlying today (on the spot market); he invests the proceeds. 2. On the delivery date, he cashes in the matured investment, which has appreciated at the risk free rate. 3. He then receives the underlying and pays the agreed forward price using the matured investment. [If he was short the underlying, he returns it now.] 4. The difference between the two amounts is the arbitrage profit. OPTIONS A derivative transaction that gives the option holder the right but not the obligation to buy or sell the underlying asset at a price, called the strike price, during a period or on a specific date in exchange for payment of a premium is known as option. Underlying asset refers to any asset that is traded. The price at which the underlying is traded is called the strike price. There are two types of options i.e., CALL OPTION AND PUT OPTION. The status of rights and obligations between the buyer and seller of an option can be depicted as shown below
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Right

obligatio n

Options Buyer Seller

CALL OPTION: A contract that gives its owner the right but not the obligation to buy an underlying asset stock or any financial asset, at a specified price on or before a specified date is known as a Call option. The owner makes a profit provided he sells at a higher current price and buys at a lower future price. b. PUT OPTION: A contract that gives its owner the right but not the obligation to sell an underlying asset stock or any financial asset, at a specified price on or before a specified date is known as a Put option. The owner makes a profit provided he buys at a lower current price and sells at a higher future price. Hence, no option will be exercised if the future price does not increase. Put and calls are almost always written on equities, although occasionally preference shares, bonds and warrants become the subject of options. 4. SWAPS Swaps are transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. They can be regarded as portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a SWAP. In case of swap, only the payment flows are exchanged and not the principle amount. The two commonly used swaps are: INTEREST RATE SWAPS:
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Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed rate interest payments to a party in exchange for his variable rate interest payments. The fixed rate payer takes a short position in the forward contract whereas the floating rate payer takes a long position in the forward contract. CURRENCY SWAPS: Currency swaps is an arrangement in which both the principle amount and the interest on loan in one currency are swapped for the principle and the interest payments on loan in another currency. The parties to the swap contract of currency generally hail from two different countries. This arrangement allows the counter parties to borrow easily and cheaply in their home currencies. Under a currency swap, cash flows to be exchanged are determined at the spot rate at a time when swap is done. Such cash flows are supposed to remain unaffected by subsequent changes in the exchange rates.

FINANCIAL SWAP: Financial swaps constitute a funding technique which permit a borrower to access one market and then exchange the liability for another type of liability. It also allows the investors to exchange one type of asset for another type of asset with a preferred income stream. The other kind of derivatives, which are not, much popular are as follows: 5. BASKETS Baskets options are option on portfolio of underlying asset. Equity Index Options are most popular form of baskets. 6. LEAPS Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities. 7. WARRANTS Options generally have lives of up to one year, the majority of options traded on options
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exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. 8. SWAP OPTIONS Swap options are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swap option is an option on a forward swap. Rather than have calls and puts, the swap options market has receiver swap options and payer swap options. A receiver swap option is an option to receive fixed and pay floating. A payer swap option is an option to pay fixed and receive floating. The relations ship between spot price and strike price Status At -the- money In- the- Money Out-of-the-Money call options S=X S>X S<X Put option S=X S<X S>X

HISTORY OF DERIVATIVES: The history of derivatives is quite colourful and surprisingly a lot longer than most people think. Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place on a specified date, existed in ancient Greece and Rome. Roman emperors entered forward contracts to provide the masses with their supply of Egyptian grain. These contracts were also undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices of grains. Thus, forward contracts have existed for centuries for hedging price risk. The first organized commodity exchange came into existence in the early 1700s in Japan. The first formal commodities exchange, the Chicago Board of Trade (CBOT), was formed in 1848 in the US to deal with the problem of credit risk and to provide centralized location to negotiate forward contracts. From forward trading in commodities emerged the commodity futures. The first type of futures contract was called to arrive at. Trading in futures began on
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the CBOT in the 1860s. In 1865, CBOT listed the first exchange traded derivatives contract, known as the futures contracts. Futures trading grew out of the need for hedging the price risk involved in many commercial operations. The Chicago Mercantile Exchange (CME), a spin-off of CBOT, was formed in 1919, though it did exist before in 1874 under the names of Chicago Produce Exchange (CPE) and Chicago Egg and Butter Board (CEBB). The first financial futures to emerge were the currency in 1972 in the US. The first foreign currency futures were traded on May 16, 1972, on International Monetary Market (IMM), a division of CME. The currency futures traded on the IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc, the German Mark, the Australian Dollar, and the Euro dollar. Currency futures were followed soon by interest rate futures. Interest rate futures contracts were traded for the first time on the CBOT on October 20, 1975. Stock index futures and options emerged in 1982. The first stock index futures contracts were traded on Kansas City Board of Trade on February 24, 1982.The first of the several networks, which offered a trading link between two exchanges, was formed between the Singapore International Monetary Exchange (SIMEX) and the CME on September 7, 1984. Options are as old as futures. Their history also dates back to ancient Greece and Rome. Options are very popular with speculators in the tulip craze of seventeenth century Holland. Tulips, the brightly coloured flowers, were a symbol of affluence; owing to a high demand, tulip bulb prices shot up. Dutch growers and dealers traded in tulip bulb options. There was so much speculation that people even mortgaged their homes and businesses. These speculators were wiped out when the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the option terms. The first call and put options were invented by an American financier, Russell Sage, in 1872. These options were traded over the counter. Agricultural commodities options were traded in the nineteenth century in England and the US. Options on shares were available in the US on the over the counter (OTC) market only until 1973 without much knowledge of valuation. A group of firms known as Put and Call brokers and Dealers Association was set up in early 1900s to provide a mechanism for bringing buyers and sellers together. On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up at CBOT for the purpose of trading stock options. It was in 1973 again that black,

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Merton, and Scholes invented the famous Black-Scholes Option Formula. This model helped in assessing the fair price of an option which led to an increased interest in trading of options. With the options markets becoming increasingly popular, the American Stock Exchange (AMEX) and the Philadelphia Stock Exchange (PHLX) began trading in options in 1975. The market for futures and options grew at a rapid pace in the eighties and nineties. The collapse of the Bretton Woods regime of fixed parties and the introduction of floating rates for currencies in the international financial markets paved the way for development of a number of financial derivatives which served as effective risk management tools to cope with market uncertainties. The CBOT and the CME are two largest financial exchanges in the world on which futures contracts are traded. The CBOT now offers 48 futures and option contracts (with the annual volume at more than 211 million in 2001).The CBOE is the largest exchange for trading stock options. The CBOE trades options on the S&P 100 and the S&P 500 stock indices. The Philadelphia Stock Exchange is the premier exchange for trading foreign options. The most traded stock indices include S&P 500, the Dow Jones Industrial Average, the Nasdaq 100, and the Nikkei 225. The US indices and the Nikkei 225 trade almost round the clock. The N225 is also traded on the Chicago Mercantile Exchange. INDIAN DERIVATIVES MARKET Starting from a controlled economy, India has moved towards a world where prices fluctuate every day. The introduction of risk management instruments in India gained momentum in the last few years due to liberalisation process and Reserve Bank of Indias (RBI) efforts in creating currency forward market. Derivatives are an integral part of liberalization process to manage risk. NSE gauging the market requirements initiated the process of setting up derivative markets in India. In July 1999, derivatives trading commenced in India Need for derivatives in India today In less than three decades of their coming into vogue, derivatives markets have become the most important markets in the world. Today, derivatives have become part and parcel of the day-to-day life for ordinary people in major part of the world. Until the advent of NSE, the Indian capital market had no access to the latest trading methods and was using traditional out18

dated methods of trading. There was a huge gap between the investors aspirations of the markets and the available means of trading. The opening of Indian economy has precipitated the process of integration of Indias financial markets with the international financial markets. Introduction of risk management instruments in India has gained momentum in last few years thanks to Reserve Bank of Indias efforts in allowing forward contracts, cross currency options etc. which have developed into a very large market. Myths and realities about derivatives In less than three decades of their coming into vogue, derivatives markets have become the most important markets in the world. Financial derivatives came into the spotlight along with the rise in uncertainty of post-1970, when US announced an end to the Bretton Woods System of fixed exchange rates leading to introduction of currency derivatives followed by other innovations including stock index futures. Today, derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world. While this is true for many countries, there are still apprehensions about the introduction of derivatives. There are many myths about derivatives but the realities that are different especially for Exchange traded derivatives, which are well regulated with all the safety mechanisms in place. Myths behind derivatives Derivatives increase speculation and do not serve any economic purpose Indian Market is not ready for derivative trading Disasters prove that derivatives are very risky and highly leveraged instruments Derivatives are complex and exotic instruments that Indian investors will find difficulty in understanding Is the existing capital market safer than Derivatives? Derivatives increase speculation and do not serve any economic purpose Numerous studies of derivatives activity have led to a broad consensus, both in the private and public sectors that derivatives provide numerous and substantial benefits to the users. Derivatives are a low-cost, effective method for users to hedge and manage their exposures to interest rates, commodity Prices or exchange rates. The need for derivatives as hedging tool was felt first in the commodities market. Agricultural futures and options helped farmers and processors hedge against commodity price risk. After the fallout of Bretton wood
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agreement, the financial markets in the world started undergoing radical changes. This period is marked by remarkable innovations in the financial markets such as introduction of floating rates for the currencies, increased trading in variety of derivatives instruments, on-line trading in the capital markets, etc. As the complexity of instruments increased many folds, the accompanying risk factors grew in gigantic proportions. This situation led to development derivatives as effective risk management tools for the market participants. Looking at the equity market, derivatives allow corporations and institutional investors to effectively manage their portfolios of assets and liabilities through instruments like stock index futures and options. An equity fund, for example, can reduce its exposure to the stock market quickly and at a relatively low cost without selling off part of its equity assets by using stock index futures or index options. By providing investors and issuers with a wider array of tools for managing risks and raising capital, derivatives improve the allocation of credit and the sharing of risk in the global economy, lowering the cost of capital formation and stimulating economic growth. Now that world markets for trade and finance have become more integrated, derivatives have strengthened these important linkages between global markets increasing market liquidity and efficiency and facilitating the flow of trade and finance. Indian Scenario of derivative trading Often the argument put forth against derivatives trading is that the Indian capital market is not ready for derivatives trading. Here, we look into the pre-requisites, which are needed for the introduction of derivatives, and how Indian market fares: PRE-REQUISITES
Large market Capitalisation

INDIAN SCENARIO
India is one of the largest market-capitalised countries in Asia with a market capitalisation of more than Rs.765000 crores. The daily average traded volume in Indian capital market today is around 7500 crores. Which means on an average every month 14% of the countrys Market capitalisation gets traded. These are clear indicators of high liquidity in the underlying. The first clearing corporation guaranteeing trades has become fully functional from July 1996 in the form of National Securities Clearing Corporation (NSCCL). 20

High Liquidity in the Underlying

Trade guarantee

NSCCL is responsible for guaranteeing all open positions on the National Stock Exchange (NSE) for which it does the clearing. A Strong Depository National Securities Depositories Limited (NSDL) which started functioning in the year 1997 has revolutionalised the security settlement in our country. In the Institution of SEBI (Securities and Exchange Board of India) today the Indian capital market enjoys a strong, independent, and innovative legal guardian who is helping the market to evolve to a healthier place for trade practices.

A Good legal guardian

Players in Derivatives market Derivatives will find use for the following set of people: Speculators: People who buy or sell in the market to make profits. For example, if you will the stock price of Reliance is expected to go upto Rs.400 in 1 month, one can buy a 1 month future of Reliance at Rs 350 and make profits Hedgers: People who buy or sell to minimize their losses. For example, an importer has to pay US $ to buy goods and rupee is expected to fall to Rs 50 /$ from Rs 48/$, then the importer can minimize his losses by buying a currency future at Rs 49/$ Arbitrageurs: People who buy or sell to make money on price differentials in different markets. For example, a futures price is simply the current price plus the interest cost. If there is any change in the interest, it presents an arbitrage opportunity. We will examine this in detail when we look at futures in a separate chapter. Basically, every investor assumes one or more of the above roles and derivatives are a very good option for him.
Exchange-traded vs. OTC derivatives markets The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalization of financial activities. The recent developments in information technology have contributed to a great extent to 21

these developments. While both exchange-traded and OTC derivative contracts offer many benefits, the former have rigid structures compared to the latter. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in financial markets in 1998. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets.

The OTC derivatives markets have the following features compared to exchange-traded derivatives: 1. The management of counter-party (credit) risk is decentralized and located within individual institutions, 2. There are no formal centralized limits on individual positions, leverage, or margining, 3. There are no formal rules for risk and burden-sharing, 4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, and 5. The OTC contracts are generally not regulated by a regulatory authority and the exchanges self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance. BENEFITS OF DERIVATIVES Derivative markets help investors in many different ways: 1.] RISK MANAGEMENT Futures and options contract can be used for altering the risk of investing in spot market. For instance, consider an investor who owns an asset. He will always be worried that the price may fall before he can sell the asset. He can protect himself by selling a futures contract, or by buying a Put option. If the spot price falls, the short hedgers will gain in the futures market, as you will see later. This will help offset their losses in the spot market. Similarly, if the spot price falls below the exercise price, the put option can always be exercised. 2.] PRICE DISCOVERY Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices are believed to contain information about future spot prices and help in disseminating such
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information. As we have seen, futures markets provide a low cost trading mechanism. Thus information pertaining to supply and demand easily percolates into such markets. Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. Options markets provide information about the volatility or risk of the underlying asset. 3.] OPERATIONAL ADVANTAGES As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they offer greater liquidity. Large spot transactions can often lead to significant price changes. However, futures markets tend to be more liquid than spot markets, because herein you can take large positions by depositing relatively small margins. Consequently, a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to a transaction of the same magnitude in the spot market. Finally, it is easier to take a short position in derivatives markets than it is to sell short in spot markets. 4.] MARKET EFFICIENCY The availability of derivatives makes markets more efficient; spot, futures and options markets are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is possible to exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help to ensure that prices reflect true values. 5.] EASE OF SPECULATION Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions. Also, the amount of capital required to take a comparable position is less in this case. This is important because facilitation of speculation is critical for ensuring free and fair markets. Speculators always take calculated risks. A speculator will accept a level of risk only if he is convinced that the associated expected return is commensurate with the risk that he is taking. The derivative market performs a number of economic functions. The prices of derivatives converge with the prices of the underlying at the expiration of derivative contract. Thus derivatives help in discovery of future as well as current prices.
23

 An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity. 4.1 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA The first step towards introduction of derivatives trading in India was the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in securities. The market for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24member committee under the Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 prescribing necessary preconditions for introduction of derivatives trading in India. The committee recommended that derivatives should be declared as securities so that regulatory framework applicable to trading of securities could also govern trading of securities. SEBI also set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measures for risk containment in derivatives market in India. The report, which was submitted in October 1998, worked out the operational details of margining system, methodology for charging initial margins, broker net worth, deposit requirement and realtime monitoring requirements. The Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives within the ambit of securities and the regulatory framework were developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The government also rescinded in March 2000, the three decade old notification, which prohibited forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and settlement in approved derivatives contracts. To begin with, SEBI approved trading in index futures

24

contracts based on S&P CNX Nifty and BSE30 (Sense) index. This was followed by approval for trading in options based on these two indexes and options on individual securities. The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on individual securities commenced in July 2001. Futures contracts on individual stocks were launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and trading in options on individual securities commenced on July 2, 2001. Single stock futures were launched on November 9, 2001. The index futures and options contract on NSE are based on S&P CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to trade in all Exchange traded derivative products. The following are some observations based on the trading statistics provided in the NSE report on the futures and options (F&O): Single-stock futures continue to account for a sizable proportion of the F&O segment. It constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this phenomenon is that traders are comfortable with single-stock futures than equity options, as the former closely resembles the erstwhile badla system. On relative terms, volumes in the index options segment continue to remain poor. This may be due to the low volatility of the spot index. Typically, options are considered more valuable when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do not earn high commissions by recommending index options to their clients, because low volatility leads to higher waiting time for round-trips. Put volumes in the index options and equity options segment have increased since January 2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32

25

in June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming pessimistic on the market. Farther month futures contracts are still not actively traded. Trading in equity options on most stocks for even the next month was non-existent. Daily option price variations suggest that traders use the F&O segment as a less risky alternative (read substitute) to generate profits from the stock price movements. The fact that the option premiums tail intra-day stock prices is evidence to this. If calls and puts are not looked as just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one impact on the option premiums. The spot foreign exchange market remains the most important segment but the derivative segment has also grown. In the derivative market foreign exchange swaps account for the largest share of the total turnover of derivatives in India followed by forwards and options. Significant milestones in the development of derivatives market have been (i) permission to banks to undertake cross currency derivative transactions subject to certain conditions (1996) (ii) allowing corporates to undertake long term foreign currency swaps that contributed to the development of the term currency swap market (1997) (iii) allowing dollar rupee options (2003) and (iv) introduction of currency futures (2008). I would like to emphasise that currency swaps allowed companies with ECBs to swap their foreign currency liabilities into rupees. However, since banks could not carry open positions the risk was allowed to be transferred to any other resident corporate. Normally such risks should be taken by corporates who have natural hedge or have potential foreign exchange earnings. But often corporate assume these risks due to interest rate differentials and views on currencies. This period has also witnessed several relaxations in regulations relating to forex markets and also greater liberalisation in capital account regulations leading to greater integration with the global economy. Cash settled exchange traded currency futures have made foreign currency a separate asset class that can be traded without any underlying need or exposure a n d on a leveraged basis on the recognized stock exchanges with credit risks being assumed by the central counterparty Since the commencement of trading of currency futures in all the three exchanges, the value of the trades has gone up steadily from Rs 17, 429 crores in October 2008 to Rs 45, 803 crores in

26

December 2008. The average daily turnover in all the exchanges has also increased from Rs871 crores to Rs 2,181 crores during the same period. The turnover in the currency futures market is in line with the international scenario, where I understand the share of futures market ranges between 2 3 per cent. Forex Market Activity April'0 April'1 9 0 Mar'1 Mar'1 Mar06 Mar07 Mar08 Mar09 0 1 10,52 11,02 4,404 6,571 12,304 9,621 1 1 2.6:1 50.5 19 30.5 2.7:1 51.9 17.9 30.1 2.37: 1 2.66:1 49.7 19.3 31.1 54.9 21.5 32.7 2.7:1 55.1 22.3 32.5 2.76:1 55.9 22.7 33.6 April0 5April0 6April0 7April0 8-

Total turnover (USD billion) Inter-bank to Merchant ratio Spot/Total Turnover (%) Forward/Total Turnover (%) Swap/Total Turnover (%) Source: RBI 5. National Exchanges

In enhancing the institutional capabilities for futures trading the idea of setting up of National Commodity Exchange(s) has been pursued since 1999. Three such Exchanges, viz, National Multi-Commodity Exchange of India Ltd., (NMCE), Ahmedabad, National Commodity & Derivatives Exchange (NCDEX), Mumbai, and Multi Commodity Exchange (MCX), Mumbai have become operational. National Status implies that these exchanges would be automatically permitted to conduct futures trading in all commodities subject to clearance of byelaws and contract specifications by the FMC. While the NMCE, Ahmedabad commenced futures trading in November 2002, MCX and NCDEX, Mumbai commenced operations in October/ December 2003 respectively. MCX MCX (Multi Commodity Exchange of India Ltd.) an independent and demutulised multi commodity exchange has permanent recognition from Government of India for facilitating online trading, clearing and settlement operations for commodity futures markets across the country. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of
27

India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank of India, Bank of Baroda, Canera Bank, Corporation Bank Headquartered in Mumbai,

MCX, having a permanent recognition from the Government of India, is an independent and demutualised multi commodity Exchange. MCX, a state-of-the-art nationwide, digital Exchange, facilitates online trading, clearing and settlement operations for a commodities futures trading. NMCE National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by Central Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and Neptune Overseas Limited (NOL). While various integral aspects of commodity economy, viz., warehousing, cooperatives, private and public sector marketing of agricultural commodities, research and training were adequately addressed in structuring the Exchange, finance was still a vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that linkage. Even today, NMCE is the only Exchange in India to have such investment and technical support from the commodity relevant institutions. NCDEX National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven commodity exchange. It is a public limited company registered under the Companies Act, 1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23,2003. It has an independent Board of Directors and professionals not having any vested interest in commodity markets. It has been launched to provide a world-class commodity exchange platform for market participants to trade in a wide spectrum of commodity derivatives driven by best global practices, professionalism and transparency.

28

Forward Markets Commission regulates NCDEX in respect of futures trading in commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations, which impinge on its working. It is located in Mumbai and offers facilities to its members in more than 390 centres throughout India. The reach will gradually be expanded to more centres.

RESARCH METHODOLOGY Due to uncertainty in the share market movement's, Individual as well as institutional investors bear the risk of heavy loss. The share prices may fall or rise in the future especially in derivatives market and this volatility of the market presents a greater risk to the investor. Investors individually not participating derivatives market to invest in future and options due to uncertainty in derivative market. Investors in Indian market are exposed to various levels of risk. This is due to lack of information. To reduce this risk, Derivatives came into existence. In Indian Stock Market various types of investment avenues are trading but some of the investment avenues like derivatives are not performing well in the stock market. In addition, the investors perception changes attention towards derivatives when compared to equity stock in Indian Stock Market.

OBJECTIVES OF THE STUDY To study the nature of Indian derivative market To study investors awareness towards future forwards and options To study the investors and broker perception towards futures and options. To study the factors influencing for derivative investment.

Method of data collection:Collection of Primary Data and Analysis: After collecting the Secondary data the next phase will be collection of primary data using
29

Questionnaires. The questionnaire will be filled by around 100 people who will be mainly from Bangalore region. The sample will consist of 50 Brokers and 50 Investors dealing in derivative market to know their perception towards investment in derivative market. The data collected will be then entered into MS Excel for analysis of the data collected from the questionnaire. Secondary sources:It is the data which has already been collected by some one or an organization for some other purpose or research study .The data for study has been collected from various sources: Books Journals Magazines Internet sources RESEARCH DESIGN Non probability The non probability respondents have been researched by selecting the persons who do the trading in derivative market. Those persons who do not trade in derivative market have not been interviewed. Exploratory and descriptive research The research is primarily both exploratory and descriptive in nature. The sources of information are both primary and secondary. The secondary data has been taken by referring to various magazines, newspapers, internal sources and internet to get the figures required for the research purposes. The objective of the exploratory research is to gain insights and ideas. The objective of the descriptive research study is typically concerned with determining the frequency with which something occurs. A well structured questionnaire was prepared for the primary research and personal interviews were conducted to collect the responses of the target population. SAMPLING METHODOLOGY Sampling Technique Initially, a rough draft was prepared a pilot study was done to check the accuracy of the Questionnaire and certain changes were done to prepare the final questionnaire Sampling Unit
30

The respondents were investors and brokers of Bull raj investment Pvt ltd, Angel broking ltd, Way to wealth and HDFC securities within Bangalore Region as the sampling units. These respondents comprise of the persons dealing in derivative market. The people have been interviewed in the open market, in front of the companies, telephonic interviews and through other sources also Sample Size The sample size was restricted to 100 respondents. Sampling Area The area of the research was Bangalore Statistical Tools Used: Simple tools like bar graphs, tabulation, line diagrams have been used.

LIMITATION OF THE STUDY 1. Sampling survey is restricted to only Bangalore city 2. Sampling survey is restricted to only 100 respondents. 3. Due to time constraint, extensive study is not conducted on the topic. 4. Respondents bias

SCOPE OF THE STUDY The proposed study is to find out, where investors normally prefer to invest and the reasons for not investing in derivatives.. This study covers the awareness level among the brokers and investors. CHAPTER SCHEME Chapter-1 Introduction This chapter gives the general introduction of overall derivatives market. Chapter-2 Research Methodology
31

This chapter gives an overview of the project giving information of title of the study statement of the problem, objective of the study, scope of the study operational definition of concepts, methodology. Limitation of the study Chapter-3 introduction about company This chapter covers overall Derivative Products and Indian Derivatives. Chapter-4 Data Analysis and interpretation This chapter proves information regarding the technique used for analysis supported by a descriptive interpretation this simplifies the fig into clear words Chapter -5 Finding, Conclusions and Suggestions This chapter covers the summary of findings: recommendations and conclusion derives from the study

Company Profile ANGEL BROKING LTD Angel Broking's tryst with excellence in customer relations began in 1987. Today, Angel has emerged as one of the most respected Stock-Broking and Wealth Management Companies in India. With its unique retail-focused stock trading business model, Angel is committed to providing Real Value for Money to all its clients. The Angel Group is a member of the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and the two leading Commodity Exchanges in the country: NCDEX & MCX. Angel is also registered as a Depository Participant with CDSL.
32

Business

Equity Trading Commodities Portfolio Management Services Mutual Funds Life Insurance IPO Depository Services Investment Advisory

Angel Group

Angel Broking Ltd. Angel Commodities Broking Ltd. Angel Securities Ltd.

Vision To provide best value for money to investors through innovative products, trading/investments strategies, state of the art technology and personalized service.

Motto To have complete harmony between quality-in-process and continuous improvement to deliver

33

exceptional service that will delight our Customers and Clients.

Milestones October, 2011 Angel Broking bagged the Dun & Bradstreet Equity Broking Awards 2011 for 'Best Retail Broking House' and 'Fastest Growing Equity Broking House' (Large Firms) at Dun & Bradstreet Equity Broking Awards 2011. March, 2011 Angel Broking was awarded with 'Best in Contribution Investor Education & Category Enhancement of the year' and 'Best Commodity Research of the year'. November, 2010 Angel Broking bags the coveted Major Volume Driver Award by BSE for 2009-10 October, 2009 Angel Broking bags the coveted Major Volume Driver Award by BSE for 2008-09 May, 2009 Angel Broking wins two prestigious awards for 'Broking House with Largest Distribution Network' and 'Best Retail Broking House' at Dun & Bradstreet Equity Broking Awards August, 2008 Angel Broking crosses 5,00,000 mark in unique trading accounts November, 2008 Angel Broking wins the esteemed Major Volume Driver Award by BSE for 2007-2008 November, 2007 Angel Broking augments its business with introduction of Insurance Distribution in alliance with Birla Sun Life

34

Work Culture At Angel, we keep exploring new paths to provide the best value to all our internal and external customers. We consider people as our biggest asset and believe in creating long term relationships by nurturing talent from within. A fast-growing, forward-looking organization like ours, demands HR to be a key responsibility area of our core management team. Our HR team constantly explores ways to enhance and augment the knowledge base and productivity of all Angels by providing various learning and development Programs. Our three tier Leadership Development program helps all star performers to grow and develop their managerial skills to become effective mentors for their teams and thereby take on the next level of responsibility effectively. Ours is a winning team of highly determined, motivated, and adaptable people, all working diligently to take Angel's exciting success story forward.

SEVICES

Equity Derivatives Commodities Life Insurance Mutual Funds Depository Services PMS Currency Trading NRI Services Investment Advisory IPO
35

ANALYSIS ANALYSIS OF INVESTORS SURVEY Table No1.1 Age wise distribution of respondents Age Group Below 25 25-35 35-45 45-55 55 and above Total Investors % 8 16 28 56 8 16 4 8 2 4 50 100

Graph 1.1 Graphical representation of age group of Respondents

36

Analysis 56% of investors fall under the age group of 26-35 and only 4% of investors fall under the age group of 60 and above. Inference : From the above Table we can find that the maximum number of invertors fall under the age group of 26-35 years. so the company should focus on the investors falling under this age group. Table No.1.2 Educational level of Respondents Participated in Derivatives market a) Illiterate b)Higher secondary c)Pre-university d)Graduation e)Post graduation Total Respondents % 4 2 8 4 5 10 25 50 14 28 10 50 0

Graph:1.2 Graphical representation of Educational level of Brokers and Investors

37

Analysis High percentage of investors graduates 50%. But in case post graduates are just 28% Surprisingly it is seen that even illiterate participated in derivatives market 4% Inference: It is noticed that most of the investors are adequately educated. This helps because Education is necessary to be aware about the market conditions.

Table no 1.3 Occupation of Respondents invested in futures and options of Derivatives Respondents % a)Government employee b)Private employees c)Proprietor Total 10 15 25 50 20 30 50 100

38

Graph: 1.3 Graphical representation of occupation of Respondents

Analysis: Nearly 50% of investors are propritors and only 10% of repondents are the government employees INTERPRETATION Most number of people who participated in derivative market are propriters, the next highest group of people are private employees and the least being government employees Table 1.4 Income distribution of Respondents participation in derivatives market 1)below 100000 2) 1 00001 to 500000 3) 500001 to 1000000 4) above 1000000 Respondents % 9 18 10 20 13 26 18 36 10 50 0

Graph:1.4 Graphical representation of Income distribution

39

Analysis Highest number of respondents have income of Rs. 10 lacs and above Second highest group of investors fall under the income group falling between 5 to 10 lakh Lowest number of investors come under income group falling Below 1 lakh Inference Investors who have more income will invest more because they have hedge over inflation and brokers would also like to participate in the derivative market to benefit themselves.

Table no 1.5 Percentage of income invested by Respondents Percentage a) Below 5% b) 5 10 % c) 10 20% d) Above 20% Respondents 10 18 13 9 50 % 20 36 26 18

Grph:1.5 Graphical representation of income invested by the Respondents

40

Analysis Respondents who invest 5% to 10% of their income forms the highest group. Only few respondents invested more than 20% of their income because of the risk involved in the investment. Inference : Since respondents do not have much knowledge about the derivative market, they invest very less in the Derivatives market. If the awareness about derivative market Increases more number of people will invest in the market.

Table no.1.6

Sources of Information on The Derivative Market Respondents % 24 48 18 36 5 10 3 6 50

Economic Dailies TV channels Business magazine Websites

Graphical representation of customers opinion on Sources of Information on The Derivative Market

41

Analysis: majority of respondents get information about Derivative market from economic dailies and only 8% get their information from the websites Interpretation The company should focus on advertising in economic dailies to attract more number of investors.

Table..1.7 investor's opinion on the factors that influence their investment in derivatives Respondents % 54 27 1)Hedge their fund 9 18 2)Risk control 1 2 3)returns 4) Direct investment 13 without 13 buying and holding asset Grph.1.7 graphical representation of factors influencing invest in derivatives

42

Analysis: Nearly 54% of investors invest to hedge their fund from the risk of uncertainty and only 2% of investors invest with the purpose of earning returns from derivatives. INTERPRETATION it is inferred that most of the respondents invest in order to hedge their fund against any external risk in the market. other reasons of investment includes direct investment without buying and holding the asset and to earn good returns

Table no 1.8 Investors preference in derivatives Respondents % 1)stock futures 2) forwards 3) index options 4) swaps 16 13 12 9 50 32 26 24 18

1.8 Graphical representation of preference in derivatives

43

Analysis 32% of people invested in derivatives futures and only 18% of respondents invested in swaps viz currency and interest rate swaps. INTERPRETATION In above analysis we can find that maximum number of investors preferred to invest in stock futures to get more returns and to hedge their fund against Future risks.

Table No 1.9 Respondents opinion on the period of investment in Derivatives Responde nts 11 19 12 8 50 % 22 38 24 16 10
44

1)one month 2) 3 month 3) 6month 4) 1 year Total

0 Graph No: 1.9 Grphical representation of Number of month Respondents is willing to invest

Analysis: 38% of investors invested for the Period of 3 months and only 8% of Respondents invested for the 1 year period. INTERPRETATION Highest number of investors invested for 3 months and the next highest includes the period of 6 months.

Table No: 1.10 Investors perception on the types of derivatives that yields good return Type Futures Options Total Investo % rs 23 46 27 54 50

45

Graph:1.10 Graphical representation of Investors perception on the types of derivatives that yields good return.

Analysis: 54% of respondents felt that derivative options will earn good returns and only 46% felt that derivative future will earn good return INTERPRETATION Among the 50 respondents 27 Respondents feel it is better to invest in futures And 23 investors feel that investing in options is better when compare to futures.

Table No 1.11 Respondents opinion on services provided by the company Responde % nts 21 42 23 46 5 10 1 2
46

1)Highly satisfied 2) satisfied 3) dissatisfied 4)highly dis satisfied

50

10 0

Graph:1.11 Graphical representation Respondents perception towards bullraj company service

Analysis 46% of investors feel that they are satisfied with the return on derivatives 2% of investors feel that they are highly dissatisfied with the derivatives return. Interpretation: maximum Number of Investors are satisfied with the services provided by the company

Table No 1.12 Respondents opinion on the investment avenues preferred Investo rs %

47

1) fixed deposits 2)shares 3)mutual funds 4)derivatives

2 14 16 18

4 28 32 36

1.12 Graphical representation of Respondents opinion on the investment avenues preferred

Analysis 36% of respondents feel that investing in derivatives is a good option and only 4% of respondents feel that fixed deposits is better avenue for investments. . Interpretation Maximum number of investors Preferred to invest in derivatives in order to hedge the risk and then invested in equities to earn high returns by taking more risk. Table no: 1.13 Table showing investors' Knowledge about Derivatives Investo % rs 90 45 5 10

1)yes 2) No

48

Analysis: 90% of the investors have a knowledge about derivatives and 10% do not have INTERPRETATION Among 50 respondents 45 of investors have full knowledge about derivatives but 5 of investors are not aware about derivatives market.

Table no:1.14 avenues

Table showing respondents invested regularly in various investment

Respondents 1) yes

% 10 50 0
49

2) No Total

0 50

Graph :1.14

Analysis: 100% Respondents invested in various avenues regularly. INTERPRETATION Among 50 respondents all of them have invested in different investment avenues regularly.

Table no:1.15 Risk in futures and options Risk in Futures in market Uncertainty of returns Slump in stock market % Investors 38 19 44 22
50

Fear of windup of company Others Total

12 6 3 50 6 100

Graph:1.15

Analysis: out of 50 respondents 20 members slump in stock market INTERPRETATION Among 50 respondents 38% of investors feel that uncertainty of returns associated with derivatives and 44% of investors feel that there is slump in stock market

ANALYSIS OF BROKERS SURVEY Tab:2.1 Number of Brokers invested their personal money No of Responde nts

Particulars

%
51

1)yes 2)no Total

48 2 50

96 4 100

Analysis:96% of Respondents invested money in derivative market 4% of Respondents not invested money in derivative market Interpretation: It is inferred that Out of 50 Respondents 48 members do the business with their personal money and also others, only 2 members not invested personal money and doing business with others money

Table no:2.2 Investment prefer in various financial avenue Avenue 1) shares 2)debenture Broke rs % 22 44 5 10
52

3)mutual funds 4)derivatives 5)Deposits Total

10 11 2 50

20 22 4 100

Analysis : It is found that 44% repondents invest in shares,22% of repondents invest in derivatives, 20% repondents in mutual funds 10% of repondents in debentures and 4% of them invest in deposits Interpretation: it is infered that the most of the brokers are intrest in investingin shares then any other investment avenues.

Table no:2.3 Number of brokers occurred loss by brokers Broke rs % 45 90

53

Particulars 1)yes

2) no Total

5 50

10 100

Analysis: From the above information 45 members occured normal loss out of 50 respondents but only 5 members not occured loss due to they are new to the derivative market Interpretation: It is found that majority (90%) of the Respondents incurred normal losses while dealing in derivatives occurs loss

Tab:2.4 Number of years experince of brokers Year 1)0 to 1 2) 2 to 5 Respondents % 3 30 6 60

54

3)6 to 10 4) Above 10 Total

15 2 50

30 4 100

Analysis 2 to 5 year experince Respondents have 60% only 4% in the abve 10 years Interpretation : It is found that only 30% of the brokers have high experience in derivative market where 60% of the brokers are less experince

Table no: 2.5 representation of Respondents prefrence in types of Derivatives Derivatives 1)future 2)option 3)forward 4)swap Respondents % 20 18 7 5 40 36 14 10

55

2.5 Grphical representation of Respondents prefrence in types of Derivatives

Analysis: Out of the 50 respondents, 40% prefered futures,14% prefered forwards,36% prefered options and 10% preference swaps Interpretation:It is found that majority of the brokers hedge through Futures and Options hedging .

Table no 2.6: Risk consideration of derivatives Particular 1)yes 2) no Respondents % 47 94 3 6

56

Total

50

100

Analysis: From the table, it can be analysed that 94% of the respondents find investment in futures and options risky and the rest 6% do not Interpretation: 47 respomdents are of the opinion that futures and options are risky. Only 3 respondents agreed that futures and options are risky but they can be hedged through derivatives.

Tab:2.7 Respondents knowing about SEBI Regulation Particular 1)yes 2) no Total Broke rs % 28 56 22 44 50 100

57

Analysis: out of the 50 respondents 28 respondents had a knowledge about SEBI regulatios whereas 22 respondents did not have any knowledge about SEBI regulations Interpretation: Brokers are not aware of SEBI regulations as they are supposed to be , so they should educate themselves insuch a waythat they can attract more and more investors.

Table: 2.8 perception expectation on growth by brokers Particular a) Grow very fast b) Grow Moderately c) Grow slowly d) Cant say anything Total Broke rs % 28 56 18 36 2 4 2 4 50 100
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Analysis: 56% of the respondents expect a very fast growth in futures and options, 36 %expect a moderate growth and 4% of the respondents expected a slow growth 4% of the respondents had no opinion on this. Interpretation: \ It is found that 56% of the brokers are growing very fast, 36% of the brokers are growing moderately.

Table No:2.9 Risk in futures in Market Risk in Futures in market Uncertainty of returns Slump in stock market Fear of windup of company Others Total Respondents % 19 25 4 2 50

38 50 8 4 100
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Analysis 50% of the brokers find uncertainity of returns as the major risk. 38% said that a slump in stock market is a risk for them 8% feared a wound up of the company can be a risk fa ctors 4% said that apart from above reasons, there are many other risk factors in future market. Interpretation : Risk and returns are a part and parcel of any investment 50% of the investors agreed that a fall in stock market is a risk factor if a company winding up it willl lead to a risky situation in the future market. Findings

It is found that most of investors prefer Derivative and Equity shares within short It is found that the present situation is is good for investing in the derivatives market it

period of time to earn more income are showing a possible sign in the growth is increasing it is recommended that investors use this opprtunity form making investments

Many of brokers and investors feel that hedging risk through derivatives has helped in

reducing risk and sometimes even substantial risk can be reduced, It is recommended that example of such kind should be used to induce investors to use these investments.
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Derivative market is dominated by individual players or retail participants, the financial A knowledge need to be spread concerning the risk and return of the derivative market. More variation in stock index future need to be made looking a demand side of investors. There must be more derivative instruments aimed at individual investors. SEBI should conduct seminars regarding the use of derivatives to educate individual investors. paper as the business daily so it is recommended that the new investment activities and transactions should come only in the economic news papers

institutions are not coming forward due to lack of depth and longevity of the contract

It is found that majority of brokers and investors prefer to read News

It is found that futures and options are the best alternative for the share market because of risk liabilty being less in futuresa nd options market than share market it is recommanded that the brokers should take intiative in giving proper insights to the investors in the shares to invest in futures and options market

SUGGESTIONS FOR FURTHER RESEARCH

Simplyfing the the trading methods in futures and options of the derivatives market. Counducting research on fundamental analysis and technical analysis to help investors and brokers decision.

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Educating investors espicially in derivatives market by supplying NSE BSE Materials leading mutual fund analysis . Require to attract rual people to particpat in derivatives market. The awareness about investing is have to start from school level. Derivatives are better hedging tool againist risk in the world of uncertainity derivatives

are proved as a better investment avenue to miimise the risk with maximising the return of the investors. Detailed information about the functioning of futures and options should be provided because some investors not fully aware about functioning. which is most important for every investors to invest their funds in futures and options.

RBI should play a greater role in supporting derivatives

Conclusion:

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The world business focuses on derivative trading in market in NSE it is found that there is more transaction on derivative trading than cash market. It is found that most of the investors are aware of equity investment than futures and options in derivative markets. The project is focused on where investors prefer to invest and whether they know derivatives or not and why most of the investors are not investinging in it.they are not willin to invest in it because of difficulty to understand the concept, lot size highma rgin money and complex settlement procedure, but the investors those who are investing are invest at earing a high returned Investors not have much knowledge about the derivative market for them need to give more education and awarness and it was also found that Bullraj investment Pvt ltd company deals most of its transactions through brokers justifying better satisfaction level to its customer or ultimate investors

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