A Project Report

On

Study On

Capital market & Derivatives

At

Angle broking

By

Srinivas kandula

Under the guidance of

“Dr Subodh joshi”

Submitted to

“University of Pune”

In partial fulfillment of the requirement for the award of the degree of

Master of Business Administration (MBA)

Through

Institute of Business Management (I.BM.R) Chinchwad Pune- 411019

 DECLARATION

I, Mr.__Srinivas Kandula______ here by declare that this project report is the record of
authentic work carried out by me during the period from __1/6/09____ to _31/7/09 and
has not been submitted to any other University or Institute for the ward of any
degree/diploma etc.

Signature :

Name of the Student : Srinivas Kandula

 ACKNOWLEDGEMENT

It is very important for me to put forward my sincere gratitude to Mr. Sameer

Amrute. I am thankful to him for not only giving me this excellent project but also for
patiently answering to all my queries during the period, even after having very busy
schedules.

I would like to put forth my earnest thanks to my internal project guide Prof Dr
Subodh Joshi for providing me vital inputs to co-related the present project work with
theoretical and practical concepts and hence provide a sound base to the report structure.

Lastly, I would like to thank my entire friend for all the co-operation and God for
giving me the strength to move on when the times were difficult.

This project was not just a professional training for me, but an academic learning
on the exposure in area of Capital and Derivatives Market, which has become an area of
interest for me.

It was a pleasure to be associated with Angel Group. The experience that I have
garnered has had a profound impact on my career choices.

Srinivas kandula
 EXECUTIVE SUMMARY

Capital Market is a source of long Term Capital generation for a company. And it is a
cheap source of capital generation for the Company. Over a Period, all the companies
those want to expand their business globally have issued shares to the public , High Net
Worth Individual , Qualified Institutions Buyer , Private Equity Fund in the form of
Initially Public offering (IPO) Or follow on Public offer (FPO).

Derivatives are financial contracts whose value is derived from some underlying asset.
These assets can include equities, bonds, exchange rates, commodities, and interest rate.
The more common forms of these contracts include forward, futures, options and a
considerable portion of financial innovation over the last 30 years has come from the
emergence of derivative markets. Generally, the benefits of derivatives fall into the areas
of (I) hedging and risk management, (II) price discovery, and (III) enhancement of
liquidity.

Capital Market and Derivatives Market is a sign as how overall Economy is performing.
If the worlds economy is performing well along with other countries economy then
Capital Market & Derivative Market will perform Better and will give Investor a good
profit .If the World economy is in recession and other countries economy is also in
recession it will replicate on Capital Market.

Investor who invest in Capital Market are of two types (I) short term (2) Long Term
Short Term investors are investors who invest in shares for minimum for 1 day and
maximum 1 year. Long term investors are those who invest for more than 1 year.
Investor who want to invest for short term should take the help of technical charts and
investor who want to invest for long term like for 5 year or more should look at the
fundamental of the company eg – net profit , debt equity ratio. Revenue, price earning
ratio, dividend Yield ratio etc.
LIST OF FIGURES
 LIST OF FIGURES

1) Pie chart of Major terminals located in Major cities (figure 1)

2) Bar diagram of Branches in each region (figure 2)

3) Bar diagram of sub-brokers present in reach region (figure 3)

4) Pie diagram of companies trading in each market (figure 4)

5) Bar diagram of companies trading in NSE & BSE (figure 5)

6) Bar diagram of companies trading in commodities (figure 6)

7) Bar diagram of products offered by Industry (figure 7)

8) Pay off diagram for the buyer of a futures contract (figure 8)

9) Pay off diagram for the seller of a futures contract (figure 9)

10) Pay off profile for the buyer of a call options (figure 10)

11) Pay off diagram for the writer of call option (figure 11)

12) Pay off profile for buyer of put options (figure 12)

13) Pay off profile for writer of put option (figure 13)
LIST OF TABLES
 LIST OF TABLES

1) Understanding the Index Number (fig 1.1)

2) Price weighted method (fig 2.1)

3) Equally weighted Method (fig 2.2)

4) Market Capitalization Weighted Index (fig 2.3)

5) The Prominent indices provided be IISL include (fig 3)

6) Distinction between futures and forwards (fig 4)

7) Distinction between futures and options (fig 5)

CONTENT
 CONTENTS

SR. NO. TOPICS

1 Introduction

2 Company Profile

3 Industry Profile

4 Scope of work

5 Objectives

6 Research Methodology

7 Data Collection

8 Data analysis

9 Limitations

10 Suggestion

11 Conclusion

12 Bibliography
INTRODUCTION
 INTRODUCTION

Selection of the Topic:

My field of specialization is “Finance” I got an opportunity to undertake my project in

Angel Broking Ltd; is one of the renowned name in “Broking Firm.”. The topic of my

study was “To study Capital and Derivatives Market “. Because I want to go in Wealth

Management and Capital and Derivative Market is a important part of wealth

management. I was also interested to work on the given topic, as it was challenging task,

Because world economy was in recession and at the same time it was very interesting to

learn how the bull market and bear market comes for a short term .

As the topic suggests Firstly I studied Primary and Secondary market and I have

calculated the return given by some companies that are included in Nifty and along with

it I have studied the Derivatives which is not easy to understand but I have tried to

understand derivative market and various strategies that are applied while trading but the

time was limited I tried to learn as much as possible with in the limited time of span that

was provided to me by University of Pune.

COMPANY PROFILE
 History of the Organization

Angel broking, Ltd provides a personal financial service in India .The Company was
founded in 1987, and was incorporated in December 1997 and is based in Mumbai, India.

G-1Akruti trade Center

Road N0-7, MIDC
Andheri East
Mumbai, 400093
India

Mr. Dinesh Thakkar established Angel Broking in 1987, and today it is one of the leading
Indian stock broking houses, with a focus on retail business and a commitment to provide
“real value for money” to its clients.

The Angel Group is a member of the Bombay Stock Exchange, the National Stock
Exchange, and the country’s two leading commodity exchanges, the NCDEX and MCX.
Angel is also registered as a Depository Participant with CDSL.
 Angel Broking limited

Company Name Private Limited

Broad Categories Financial Services
Main Product Range Stock Exchange

Key Executives

• Mr. Dinesh Thakkar

Chairman and Managing Director (Founder)

• Mr. Adil Kasad

Chief Financial Officer

• Mr. Rajiv Phadke

Executive Director

• Mr. Hitungshu Debnath

Head of Distribution & wealth Management Services

 Products Offered

1) Electronic Broking

Broking in the form of Dematerialization .Customer can do trading at Home on

His own Personal Computer

2) Wealth Management

Managing Wealth of High Net worth Individuals (HNI). By Investing in Various

financial Instrument eg- Bonds, shares, Debentures etc.

3) Portfolio Management

Managing customer Portfolio by Allocating and Diversifying Investment in

different stocks.

4) Mutual Fund

Providing Suggestion to Clients About Different Mutual Fund available in the

Market and investment in which fund will give higher Return on Investment

5) Commodities Broking
Information about types of commodity available for trading and providing
investment options for short term and long terms investment.
6) Investment Advisory

Investment for retirement, financial goals, education for children. Financial

Expert with good Knowledge about financial planning are always ready to help
Customer.

7) IPO (Initial Public Offer)

Rating and Recommendation given to Customer About investment in IPO and

FPO (Follow on Public Offer)

8) Depository Services

Member of CSDL (Central Security Depository Limited) and NSDL (National

Security Depository Limited) Provides Depository services in the form of
Dematerialization.

9) Private client Group

Provide Investment advice to Private client and Management of wealth of private

clients.
 Competitors

1) Motilal Oswal Financial Services

2) Unicon

3) Religare Enterprises

4) Geojit financial services

5) Share khan Pvt Ltd

6) SMC Investment

7) Centrum Broking

8) Choksey shares & security

 Achievements

Angel Group provides its value-added services to over 5 lakh individual retail investors
through its nationwide network of 139 branches, including 20 regional hubs, 5,200+ sub-
brokers/business associates and 5,800+ direct and 15, 000 indirect employees.

Angel Broking has one of the largest trading terminal bases (11,390 terminals) in
the country, and the largest sub-broker network on the NSE. It records daily business
volumes of Rs 3,500 crores in equities, Rs 650 crores in commodities, and Rs 550 crores
through online broking. With over 1,500 outlets connected through its state-of-the-art IT
network, Angel offers personalized and world-class services.

The company has top-quality, retail-focused research, as well as expert dealing

facilities. Modern, centralized helpdesks answers investor queries and address any
concerns 24x7. Angel’s Web-enabled, value-added back office is staffed by a brilliant
team of experts for Quality Assurance.

Mission

Angel positions itself as a complete wealth management house – a one-stop shop for
fulfilling all the financial dreams of an individual .Angel is presently in the middle of an
aggressive & ambitious expansion plan, which aims at penetrating and dominating the
investment advisory market, the firm will be launching 9 new branches in the South
Region namely 4 in Coimbatore, 2 in Vishakhapatnam, 2 in Bangalore, 1 in Hyderabad.
INDSUTRY PROFILE
 History of Broking Industry in India

The Indian broking industry is one of the oldest trading industries that has been
around even before the establishment of the BSE in 1875. Despite passing through a
number of changes in the post liberalization period, the industry has found its way
towards sustainable growth. With the purpose of gaining a deeper understanding about
the role of the Indian stock broking industry in the country’s economy, I am presenting in
this section some of the industry insights gleaned from analysis of data received through
primary research.
All the data for the study was collected through responses received directly
from the Angel broking firm and from the www.nseindia.com. The insights have been
arrived at, through an analysis on various parameters, pertinent to the equity broking
industry, such as region, terminal, market, branches, sub brokers, products and growth
areas.

Some key characteristics of the sample 394 firms are:

• On the basis of geographical concentration, the West region has the maximum
representation of 52%. Around 24% firms are located in the North, 13% in the
South and 10% in the East
• 3% firms started broking operations before 1950, 65% between 1950-1995 and
32% post 1995

• On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% in

Ahmedabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities
• From this study, I find that almost 36% firm’s trade in cash and derivatives and
27% are into cash markets alone. Around 20% trade in cash, derivatives and
commodities
• In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at
both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and
45% at both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43%
at both exchanges

• Majority of branches are located in the North, i.e. around 40%. West has 31%,
24% are located in South and 5% in East

• In terms of sub-brokers, around 55% are located in the South, 29% in West, 11%
in North and 4% in East

• Trading, IPOs and Mutual Funds are the top three products offered with 90%
firms offering trading, 67% IPOs and 53% firms offering mutual fund transactions

• In terms of various areas of growth, 84% firms have expressed interest in

expanding their institutional clients, 66% firms intend to increase FII clients and
43% are interested in setting up JV in India and abroad

• In terms of IT penetration, 62% firms have provided their website and around
94% firms have email facility
 Terminals

Almost 52% of the terminals in the sample are based in the Western region of India,
followed by 25% in the North, 13% in the South and 10% in the East. Mumbai has got
the maximum representation from the West, Chennai from the South, New Delhi from
the North and Kolkata from the East.
Mumbai also has got the maximum representation in having the highest number of
terminals. 40% terminals are located in Mumbai while 12% are from Delhi, 8% from
Ahmedabad, 7% from Kolkata, 4% from Chennai and 29% are from other cities in India.

The major terminals located in major cities is shown in Figure 1

Figure 1
 Branches & Sub-Brokers

The maximum concentration of branches is in the North, with as many as 40% of all
branches located there, followed by the Western region, with 31% branches. Around 24%
branches are located in the South and East constitutes for 5% of the total branches of the
total sample.
In case of sub-brokers, almost 55% of them are based in the South. West and North
follow, with 30% and 11% sub-brokers respectively, whereas East has around 4% of total
sub-brokers.
The concentration of Branches in each region is shown figuer2

Figure 2
The concentration of sub-brokers present in each region is shown figure 3

Figure 3
 Financial Markets

The financial markets have been classified as cash market, derivatives market, debt
market and commodities market. Cash market, also known as spot market, is the most
sought after amongst investors. Majority of the sample broking firms are dealing in the
cash market, followed by derivative and commodities. 27% firms are dealing only in the
cash market, whereas 35% are into cash and derivatives. Almost 20% firms trade in cash,
derivatives and commodities market. Firms that are into cash, derivatives and debt are
7%. On the other hand, firms into cash and commodities are 3%, cash & debt market and
commodities alone are 2 %. 4% firms trade in all the markets.

The companies trading in each Market is shown figure 4

Figure 4
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at both
exchanges. In the equity derivative market, 48% of the sampled broking houses are
members of NSE and 7% trade at BSE, while 45% of the sample operates in both stock
exchanges. Around 43% of the broking houses operating in the debt market, trade at both
exchanges with 31% and 26% firms uniquely at NSE and BSE respectively.

The companies trading in NSE & BSE is shown in figure 5

Figure 5
Of the brokers operating in the commodities market, 57% firms operate at NCDEX and
MCX. Around 20% and 21% firms are solely in NCDEX and MCX respectively, whereas
2% firms trade in NCDEX, MCX and NMCE

The companies trading in commodities market is shown figure 6

figure 6
 Products

The survey also revealed that in the past couple of years, apart from trading, the firms
have started offering various investment related value added services. The sustained
growth of the economy in the past couple of years has resulted in broking firms offering
many diversified services related to IPOs, mutual funds, company research etc. However,
the core trading activity is still the predominant form of business, forming 90% of the
firms in the sample. 67% firms are engaged in offering IPO related services. The broking
industry seems to have capitalized on the growth of the mutual fund industry, which was
pegged at 40% in 2006. More than 50% of the sample broking houses deal in mutual fund
investment services. The average growth in assets under management in the last two
years is almost 48%. Company research is another lucrative area where the broking firms
offer their services; more than 33% of the firms are engaged in providing company
research services. Additionally, a host of other value added services such as fundamental
and technical analysis, investment banking, arbitrage etc are offered by the firms at
Different levels
The products offered by Industry is shown figure 7

Figure 7
SCOPE
 SCOPE OF THE PROJECT

1) To know what is Primary & Secondary Market

2) To understand the Functioning of Call and Put

3) To Know how capital and Derivative Market Functions on National Stock

Exchange

4) To calculate the Rate of Return on Share of good performing Company in

Short Period.

5) Difference between futures and Options

6) Difference between futures and forwards

7) To Understand various Ways of Index Construction

OBJECTIVES
 OBJECTIVES

The aim of project was to accomplish the following objectives:-

1) To Understand Capital and Derivative Market

2) To Understand Market Index

3) To Understand Methodology of Index Construction

4) To know how Stocks are selected in Nifty

5) To Know Number of Index on Which Trading Can be done

6) To Know What Strategies are used in Derivatives Trading

RESEARCH METHODOLOGY
 Primary and Secondary Method

1) Primary Data

Primary data are obtained by a study specifically designed to fulfill the data needs of
the problems at hand. Such data are original in character and are generated in large
number of surveys conducted mostly by Government and also by some individuals,
institutions and research bodies. For example, data obtained in a population census by
the office of the Registrar General and Census Commissioner, Ministry of Home
Affairs, are primary data.

Method used for collecting Primary data

a) Oral Interview

I asked few question about regarding Derivative how it is trading on screen what
are the margin payment required .What king of customer are trading in derivative
market. What is the relation between capital and derivative market? What are the
strategies used in derivative market.
2) Secondary Data

Data which are not originally collected but rather obtained from published or
unpublished sources are known as secondary data. For example, for the office of
Registrar General and Census Commissioner, the census data are primary whereas for
all others, who use such data, they are secondary. The secondary data constitute the
chief material on the basis of which statistical work is carried out in many
investigations.

Method used for secondary data

a) Published sources

Published sources of data is published and circulated all over. I have used
National stock Exchange certification in Financial Market (Derivative Module)
book and website like www.nseindia.com. www.derivavtivesindia.com .
www.sebi.gov.in etc.
DATA COLLECTION

Of

Capital Market
 Primary Market & Secondary Market

The Capital market has two interdependent and inseparable segments’, the new issues
(primary market) and the stock (secondary) Market.

Primary Market

The primary market provides the channel for sale of new securities. Primary market
provides opportunity to issuers of securities; government as well as corporates, to raise
resources to meet their requirements of investment and/or discharge some obligation.

They issue the securities at face value, or at a discount/premium and these securities may
take a variety of forms such as equity, debt etc. They may issue the securities in domestic
market and/ or international market.

The primary market issuance is done either through public issues or private placement. A
public issue does not limit any entity in investing while in private placement, the issuance
is done to select people .In terms of the Companies Act, 1956, an issue becomes public if
it results in allotment to more than 50 persons. This means an issue resulting in allotment
to less than 50 persons is private placement.

There are two major types of issuers who issue securities. The corporate entities issue
mainly debt and equity instruments (shares, debentures, etc), while the government
(Central and state governments) issue debt securities (dated securities, treasury bills).
Secondary Market

Secondary market refers to a market where securities are traded after being initially
offered to the public in the primary market and/or listed on the stock Exchange. Majority
of the trading is done in the secondary market.

The secondary market enables participants who hold securities to adjust their holdings in
response to changes in their assessment or risk and return.

Market Index

Traditionally, indices have been used as benchmarks to monitor markets and judge
performance. Modern indices were first proposed by two 19th century mathematicians:
Etienne Laspeyres and Hermann Paasche. The grandfather of all the equity indices is
Dow Jones Industrial Average which was first published in 1896.

Stock Market Index

The stock (equity) Index which uses a set of stocks that are representative of the whole
market, or a specified sector, to measure the change in overall behaviour of the market or
sector over a period of time.

Importance of Stock (Equity) Index

1) As the lead indicator of the performance of the overall economy or a sector of the
Economy: A good index tells us how much richer or poorer investor have become.

2) As a barometer for market behaviour: It is used to monitor and measure market

Movements, whether in real time, daily or over decades, helping us to understand
Economic conditions and prospects.

3) As a benchmark for portfolio performance: A managed fund can communicate its

Objective and target universe by stating which index or indices serve as the standard
Against which its performance should be judged.

4) As an underlying for derivatives like index futures and option: It also underpins
 Products such as, exchange-traded funds, index funds etc. These index-related
Products form a several trillion dollar business and are used widely in investment,
Hedging and risk management.

5) As it supports research (for example, as benchmarks for evaluating trading rules,

Technical analysis systems and analysts’ forecasts); risk measurement and
Management; and asset allocation

Understanding S&P Nifty Index

S&P CNX Nifty (Nifty), the most popular and widely used indicator of the stock market
in the country, is a 50-stock index comprising the largest and the most liquid stocks from
about 25 sectors in India. These stocks have a Market Capitalization of over 50 % of the
total Market Capitalization of the Indian stock market.

The index was introduced in 1995 by the National Stock Exchange (NSE) keeping
in mind it would be used for modern application such ass index funds and index
derivatives besides reflecting the stock market behaviour.

NSE maintained it till July 1998, after which the ownership and management rights
were transferred to India Index Services & Products Ltd. (IISL), the only professional
company in India which provides Index services.
 Understanding the Index Number

A Stock Index represents the change in value of a set of stocks which constitute the
market.

An Index is a summary measure that indicates changes in value(s) of a variable

or a set of variables over a time or space. It us usually computed by finding the ratio of
current values(s) to a reference (base) value(s) and multiplying the resulting number by
100 or 1000.

E.g. - fig 1.1

Valve of Portfolio Index Value

Day 1 Rs. 20,000 1000
(base day)
Day2 Rs. 30,000 1500

Assume that Day 1 is the base day and the value assigned to the base day index is 1000.
On day 2 the value of the portfolio has changed from Rs 20,000 to Rs 30,000, a 50%
increase. The value of the index on Day 2 should reflect a corresponding 50% increase in
market value.

Index on Day 2 = Portfolio Value Of Day 2 * Index Value of Base Day

Portfolio Value of Base day
 = Rs 30,000 *1000
Rs 20,000

Day 2’s index is 1500 as compared to the 1000 of day 1

Attributes of an Index

A good stock market index should have the following attributes

1) Capturing behaviors of portfolios

a) It should reflect the behavior of the overall market as well as of different

Portfolio
b) It should be well- diversified index in such a manner that a portfolio is not
Vulnerable to any individual stock or industry risk
c). A good index should include the stocks which best represent the universe.

2) Including Liquid stocks

a) Liquid stocks are those stock who has the ability to transact at a price, which is
Very close to the current market price.

E.g.- The market price of a stock is at Rs. 230, it will be considered liquid if
One can buy some shares at around Rs 230.05 and sell at around
Rs 219.95

3) Maintaining professionally.
 a) An index is not a constant. It reflects he market dynamics and hence
Changes are essential to maintain its representative character.

b) A good index methodology must therefore incorporate a steady pace

Of change in the index. It is crucial that such changes are made at a steady
Space. Therefore the index set should be reviewed on a regular basis.

Methodology for Index construction

Three are two methods to calculate Index

1) Sampling Method

2) Weighting Method

1) Sampling Method

Under Sampling Method, an index is based on a fraction or a certain percentage

of select stocks which is highly representative of total stocks listed in a market.

E.g.- American Stock Market index & Hong Kong Exchange

2) Weighting Method

Under Weighting Index Method, the weight of each constituent stock is

proportional to its market share in terms of market capitalization.
The amount of money invested in each constituent stock is proportional to its
percentage of the total value of all constituent stocks.

E.g.- S&P CNX Nifty

 There are three commonly used methods for Constructing indices

Under Weighting Method

a) Price weighted method

b) Equally weighted method
c) Market capitalization method

A) Price weighted method

Price weighted index is computed by summing up the price, of the various

securities included in the index, at time 1, and dividing it by the sum of prices
of the securities at time 0 multiplied by base index value. Each stock is
assigned a weight proportional to its price.

Example: Assuming base index =1000, price weighted index consisting of 5

stocks tabulated below would be:

Fig 2.1

Share Share
Company Price at Price at
Time- 0 Time- 1
Reliance 351.75 340.50
Wipro 329.10 350.30
Infosys 274.60 280.40
Hindustan Unilever 1335.25 1428.75
Tata Tea 539.25 570.25
Total 2829.95 2970.20
 Index = 2970.20 *1000
2829.95

= 1049.5

B) Equally weighted method

An equally weighted index assigns equal weight to each stock. This is

Achieved by adding up the proportionate change in the price of each stock,
Dividing it by number of stocks and multiplying by base index value

Example: Assuming base index = 1000, equally weighted index consisting of 5 stocks
tabulated below would be:

Fig 2.2

Share Share
Company Price at Price at
Time- 0 Time- 1
Reliance 351.75 340.50
Wipro 329.10 350.30
Infosys 274.60 280.40
Hindustan unilever 1335.25 1428.75
Tata Tea 539.25 570.25
Total 2829.95 2970.20

340.50 + 350.30 + 280.40 + 1428.75 + 570.25

Index = 351.75 329.10 274.60 1335.25 539.25
 = 5.1810682 * 1000 = 1036.21
5

C) Market Capitalization weighted index

The most commonly used weight is market Capitalization (MC), that is, the
number of outstanding shares multiplied by the share price at some specified time.

Index = Current Market Capitalization * Base Value

Base Market Capitalization

Current MC = Sum of (number of outstanding shares * Current Market Price) all

Stock in the index

Base MC = Sum of (number of outstanding shares * Market Price) all stocks in

Index as on base date

Base value = 100 or 1000

Example: Assuming base index = 1000, equally weighted index consisting of 5

Stocks tabulated below would be:

Fig 2.3

Current Base
Company Market Market
Capitalization Capitalization
(Rs. Lakh) (Rs. Lakh)
Reliance 1668791.10 1654247.50
Wipro 872686.30 860018.25
Infosys 1452587.65 1465218.80
Hindustan unilever 2675613.30 2669339.55
Tata Tea 660887.25 662559.30
Total 7330566.10 7311383.40

I Index = 7330566.10 * 1000

7311383.40

Difficulties in Index construction:

The major difficulties encountered in constructing an appropriate index are :

1) Deciding the number of stocks to be included in the index,

2) Selecting stocks to be included in the index,

3) Selecting appropriate weights, and

4) Selecting the base period and base value.

 Selection of stocks in S&P CNX Nifty

From early 1996 onwards, the eligibility criteria for inclusion of stocks in S&P CNX
Nifty are based on the criteria of

1) Market Capitalization (MC)

Stocks eligible for inclusion in Nifty must have a six monthly average market
Capitalization of Rs 500 core or more during the last six months.

2) Liquidity

Liquid stocks are those stocks who has the ability to transact at a price, which is
Very close to the current market price

E.g. - The market price of a stock is at Rs. 230, it will be considered liquid if
One can buy some shares at around Rs 230.05 and sell at around Rs 219.95

3) Floating Stocks

Company’s eligible for inclusion is S&P CNX should have at least 12% floating
stocks. For this purpose, floating stock shall mean stock which are not held by the
promoters and associated entities (where identifiable) of such companies
 India Index Services & Products Ltd. (IISL)

IISL is jointly promoted by NSE, the leading stock exchange and The Credit
Rating and information services of India Ltd. (CRISIL) the leading credit rating
agency in India.

IISL has a consulting and license agreement with Standard & Poor’s (S&P), the
leading index services provider in the world.

IISL maintains over 80 indices comprising broad based benchmark indices,

sectoral indices and customized indices.

The Prominent indices provided by IISL include:

Name of the Index Description

Fig 3

Name of the Index Description

S&P CNX Nifty 50-stock large M Cap Index

S&P CNX 500 A broad based 500 stock Index
S&P CNX Defty US $ denominated Index of
S&P CNX Nifty
S&P CNX Industry indices The S7P CNX 500 is Classified in 72
 industry sectors. Each such sector forms an
index by itself.
CNX Nifty Junior 50- stocks Index which comprise the next
rung of large and liquid stocks after S&P
CNX Nifty
CNX PSE Index Public Sector Enterprises Index
CNX MNC Index Multinational Companies Index
CNX IT Index Information Technology Index
CNX FMCG Index Fast Moving Consumer Goods Index
CNX Madcap Midcap Index

DATA ANALYSIS
 Rate of Return

I have studied 8 sectors in that I have selected 2 companies each and have calculated Rate
of Return from 1st Jan 09 to 31 July 09

Calculation of Rate of Return on Stocks from 1st Jan 09 to 31 July 09

Return On an Investment/ asset for given period, say a year, consist of annual income
(dividend) receivable plus change in market price.

But

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

Where,
 Pt = Security price at time period ‘t’ which is closing/ending price

Pt-1 = Security price at time period ‘t-1’ which is opening/beginning price.

1.1 Communication Sector

a) Bharti Airtel

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (783.6-719.6)* 100
719.6

= 8.89%

b) Reliance Communication

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (296-245)* 100
245

= 20.81%
Reason for under performance of communication sector

Bharti Airtel merger with MTN ( South Africa based telecom company) which is
facing problem from both the country and from shareholders also on merger

The dispute between RNRL with Reliance Industry on Pricing of Gas has
affected return on shares of both the company.

1.2 Banking Sector

a) ICICI Bank ( Industrial Credit & Investment Corporation of India Limited)

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (678-464)* 100
464

= 46%

b) SBI (State Bank of India)

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (1655-1315)* 100
1315

= 25.85%

Reason for out performance of Banking sector

ICICI BANK aggressive strategy in lending with high rates has increased there net profit
and NPA (Non performing assets) has Increased from 1 Jan to 31 July.

SBI lending below the benchmark has a affected the balance sheet . Currently they are
providing housing loan at 8.5% . While other Private and Cooperative Banks are
charging homes loans in the range of 10% o 15 %

1.3 IT Sector (Information Technology)

a) Infosys Technology

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (1760-1147)* 100
1147

= 53.44%

b) Wipro

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (371-248)* 100
248

= 49.59%

Reason for out performance of IT sector

Both Infosys and Wipro started receiving order from USA and Europe and also from
domestic Market also.

1.4 Power Sector

a) TATA Power

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (1101-783)* 100
783

= 40.61%

b) NTPC ( National Thermal Power Corporation)

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (194-182)* 100
182

= 6.59%
Reason for under performance of power sector

Demand for more electricity increasing day by day and TATA Power being a private
company has taken initiative to increase the production compare to NTPC (government
owned company)

1.5 FMCG Sector ( Fast Moving Consumer Goods )

a) Hindustan Unilever

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= ( 275-250)* 100
250

= 10%

b) ITC

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (197-171)* 100
171

= 15.20%
Reason for under performance of FMCG sector

Increase in Price of raw material has affected both the company due to Inadequate
monsoon and recession in developed country.

1.6 Metal Sector

a) Hindalco

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (78-54)* 100
54

= 44.44%

b) Sterlite Industry

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (588-275)* 100
275
 = 113.81%

Reason for out performance of Metal sector

Increase in Construction activities and revival in automobiles demand is a good sign for
metal sector because it is a important items in production of automobiles and construction
activity

1.7 Passenger Cars

a) Maruti Suzuki

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (1035-549)* 100
549

= 88.52%

b) Hero Honda Motors

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (1358-879)* 100
879

= 54.49%
Reason for out performance of Commercial Vehicle sector

Both the company has concentrated on affordable cars and bikes as compared to other
company so the sales and revenue has increased inspite of recession.

1.8 Capital Goods & Engineering

a) BHEL (Bharath Heavy Electrical Limited)

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (2102.5-1401.2)* 100
1401.2

= 50.04 %

b) L&T ( Larsen & Toubro )

Rate of Return (R) = (Pt-Pt-1)*100

P t -1

= (1464-821)* 100
821

= 78.31%
Reason for out performance of Infrastructure sector

Government expenditure in infrastructure has increased in recession to boast growth and

employment and the effect of expenditure was seen on the shares .

DATA COLLECTION

Of

Derivatives Market
 Derivative

Derivative is a product whose value is derived from the value of one or more basic
variables, called bases (underlying asset, index, or reference rate), in a contractual
manner. The underlying asset can be equity, forex, commodity or any other asset.

For example, wheat farmers may wish to sell their harvest at a future date to
eliminate the risk of a change in prices 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”.

Factor Driving the Growth of Derivatives

Over the last three decades, the derivatives market has seen a phenomenal growth. A
large variety of derivative contracts have been launched at exchanges across the world.

Some of the factors driving the growth of financial derivatives are:

1. Increased volatility in asset prices in financial markets,

2. Increased integration of national financial markets with the international markets,

3. Marked improvement in communication facilities and sharp decline in their costs,

4. Development of more sophisticated risk management tools, providing economic agents

a wider choice of risk management strategies, and

5. Innovations in the derivatives markets, which optimally combine the risks and returns
 Over a large number of financial assets leading to higher returns, reduced risk as well
As transactions costs as compared to individual financial assets.

DERIVATIVE PRODUCTS

Derivative contracts have several variants. The most common variants are forwards,
futures, options and swaps. A Brief look at various derivatives contracts that have come
to be used.

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

Settlement takes place on a specific date in the future at today's pre-agreed
Price.

Futures : A futures contract is an agreement between two parties to buy or sell an

Asset at a certain time in the future at a certain price. Futures contracts are
Special types of forward contracts in the sense that the former are
Standardized exchange-traded contracts.

Options : Options are of two types - calls and puts. Calls give the buyer the right but
Not the obligation to buy a given quantity of the underlying asset, at a given
Price on or before a given future date. Puts give the buyer the right, but not
The obligation to sell a given quantity of the underlying asset at a given
Price on or before a given date

Warrants: Options generally have lives of upto one year, the majority of options traded
On options exchanges having a maximum maturity of nine months. Longer-
Dated options are called warrants and are generally traded over-the-counter.
LEAPS : The acronym LEAPS means Long-Term Equity Anticipation Securities.
These are options having a maturity of upto three years.

Baskets : Basket options are options on portfolios of underlying assets. The

Underlying asset is usually a moving average of a basket of assets. Equity
Index options are a form of basket options.

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

The two commonly used swaps are:

· Interest rate swaps : These entail swapping only the interest related cash flows between
the parties in the same currency.

· Currency swaps : These entail swapping both principal and interest between the
With the cash flows in one direction being in a different
Currency than those in the opposite direction.

Swaptions : Swaptions are options to buy or sell a swap that will becomes
Operative at the expiry of the options. Thus, swaptions is an
Option on a forward swap. Rather than have calls and puts, the
Swaptions market has receiver swaptions and payer swaptions
A receiver swaption is an option to receive fixed and pay floating.
A payer swaption is an option to pay fixed and receive floating.
 COMMENCEMENT OF DERIVATIVE MARKET ON NATIONAL
STOCK EXHCHANGE (NSE)

1) The derivatives trading on the NSE commenced with S&P CNX Nifty Index futures on
June 12, 2000.

2) The trading in index options commenced on June 4, 2001 and trading in options on
Individual securities commenced on July 2, 2001.

3) Single stock futures were launched on November 9, 2001.

Today, both in terms of volume and turnover, NSE is the largest derivatives
Exchange in India.

Participants in the Derivatives Market

The following three broad categories of participants

1) Hedgers

Hedgers face risk associated with the price of an asset. They use futures or
Options markets to reduce or eliminate this risk.

2) Speculators

Speculators wish to bet on future movements in the price of an asset. Futures

And options contracts can give them an extra leverage; that is, they can
Increase both the potential gains and potential losses in a speculative venture

3) Arbitrageurs

Arbitrageurs are in business to take advantage of a discrepancy between

 prices in two different markets.

Example – Arbitrageurs see the future price of an asset getting out of line
With the cash price, they will take offsetting in two markets to lock in profit.

INTRODUCTION TO FORWARD CONTRACT

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.

Forward contracts are very useful in hedging and speculation.The classic hedging
application would be that of an exporter who expects to receive payment in dollars three
moths later. He is exposed to the risk of exchange rate fluctuations.By using the currency
forward market to sell dollars forward, he can lock on to a rate today and reduce his
uncertainty. Similarly an importer who is required to make a payment in dollars two
months hence can reduce his exposure to exchange rate fluctuations by buying dollars
forward.

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.

LIMITATIONS OF FORWARD MARKETS

Forward markets world-wide are afflicted by several problems:

• Lack of centralization of trading,

• Illiquidity, and

• Counterparty risk
 Introduction to Futures

Futures markets were designed to solve the problems that exist in forward markets. A
futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. But unlike forward contracts, the futures contracts are
standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the contract.

The standardized items in a futures contract are :

· Quantity of the underlying

· Quality of the underlying

· The date and the month of delivery

· The units of price quotation and minimum price change

· Location of settlement
 Futures Terminology

· Spot price

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

· Futures price

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

· Contract cycle

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

· Expiry date

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

· Contract size
 The amount of asset that has to be delivered under one contract. Also called as lot size.

· Basis

In the context of financial futures, basis can be defined as the Futures price minus the
Spot price. There will be a different basis for each delivery month for each contract. In
a normal market, basis will be positive. This reflects that futures prices normally exceed
Spot price.

· Cost of carry

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

· Initial margin

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

· Marking-to-market

In the futures market, at the end of each trading day, the margin account is adjusted to
Reflect the investor's gain or loss depending upon the futures closing price. This is
Called marking-to-market.

· Maintenance margin

This is somewhat lower than the initial margin. This is set to ensure that the balance in
The margin account never becomes negative. If the balance in the margin account falls
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.
 APPLICATIONS OF FUTURES

A payoff is the likely profit/loss that would accrue to a market participant with change in
the price of the underlying asset. This is generally depicted in the form of payoff
diagrams which show the price of the underlying asset on the X-axis and the
profits/losses on the Y-axis.

Pay off for buyer of futures: Long futures

The payoff for a person who buys a futures contract is similar to the payoff for a person
who holds an asset. He has a potentially unlimited upside as well as a potentially
unlimited downside. Take the case of a speculator who buys a two month
Nifty index futures contract when the Nifty stands at 2220.

The underlying asset in this case is the Nifty portfolio. When the index moves up, the
Long futures position starts making profits, and when the index moves down it starts
making losses.
Figure 8 shows the payoff diagram for the buyer of a futures contract.

The figure shows the profits/losses for a long futures position. The investor bought future
When the index was at 2220. If the index goes up, his futures position starts making
profit. If the index falls, his futures position starts showing losses.

Figure 8
Note – For the buyer of future contract the profit is unlimited & loss suffered
By him is also unlimited.

Payoff for seller of futures: Short futures

The payoff for a person who sells a futures contract is similar to the payoff for a person
who shorts an asset. He has a potentially unlimited upside as well as a potentially
unlimited downside.

Take the case of a speculator who sells a two-month Nifty Index

contract when the Nifty stands at 2220. The underlying asset in this case is the Nifty
portfolio. When the index moves down, the short futures position starts making profits,
and when the index moves up, it starts making losses.

Figure 9 shows the payoff diagram for the seller of a futures contract.

The figure shows the profits/losses for a short futures position. The investor sold futures
when the index was at 2220. If the index goes down, his futures position starts making
profit. If the index rises, his futures position starts showing losses.
 Figure 9

Note – For the seller of future contract the profit earned by him is unlimited and
Loss suffered by him is unlimited

Introduction to Options

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

Option Terminology
· Index options

These options have the index as the underlying some options are European while others
are American. Like index futures contracts, index options contracts are also cash settled.

· Stock options

Stock options are options on individual stocks. Options currently trade on over 500 stocks
in the United States. A contract gives the holder the right to buy or sell shares at the
specified price.

· Buyer of an option

The buyer of an option is the one who by paying the option premium buys the right but
Not the obligation to exercise his option on the seller/writer.

·Writer of an option

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

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

· 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.

· Option price/premium:

Option price is the price which the option buyer pays to the option seller. It is also
referred to as the option premium.
· Expiration date:

The date specified in the options contract is known as the expiration date, the exercise
date, the strike date or the maturity.

· Strike price:

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

· American options:

American options are options that can be exercised at any time upto the expiration date.
Most exchange-traded options are American.

· European options:

European options are options that can be exercised only on the expiration date itself.
European options are easier to analyze than American options, and properties of an
American option are frequently deduced from those of its European counterpart.

· In-the-money option:

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

· At-the-money option:

An at-the-money (ATM) option is an option that would lead to zero cash flow if it were
exercised immediately. An option on the index is at-the-money when the current index
equals the strike price (i.e. spot price = strike price).

· Out-of-the-money option:
 An out-of-the-money (OTM) option is an option that would lead to a negative cash flow
if it were exercised immediately. A call option on the index is out-of-the-money when the
current index stands at a level which is less than the strike price (i.e. spot price < strike
price). If the index is much lower than the strike price, the call it is said to be deep
OTM. In the case of a put, the put is OTM if the index is above the strike price.

Fig 10 Pay off profile for buyer of call options: Long call

A call option gives the buyer the right to buy the underlying asset at the strike price
specified in the option. The profit/loss that the buyer makes on the option depends on the
spot price of the underlying. If upon expiration, the spot price exceeds the strike price, he
makes a profit. Higher the spot price, more is the profit he makes. If the spot price of the
underlying is less than the strike price, he lets his option expire un-exercised. His loss in
this case is the premium he paid for buying the option.

Figure 10 Payoff for investor who went Long Nifty at 2220

The figure shows the profits/losses from a long position on the index. The investor
bought the index at 2220. If the index goes up, he profits. If the index falls he looses.
 Figure 10

Payoff profile for writer of call options: Short call

A call option gives the buyer the right to buy the underlying asset at the strike price
specified in the option. For selling the option, the writer of the option charges a premium.
The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. Whatever is the buyer's profit is the seller's loss. If upon expiration, the spot
price exceeds the strike price, the buyer will exercise the option on the writer. Hence as
the spot price increases the writer of the option starts making losses. Higher the spot
price, more is the loss he makes. If upon expiration the spot price of the underlying is less
than the strike price, the buyer lets his option expire un-exercised and the writer gets to
keep the premium
. Figure 11 gives the payoff for the writer of a three month call option (often
referred to as short call) with a strike of 2250 sold at a premium of 86.60.

The figure shows the profits/losses for the seller of a three-month Nifty 2250 call option.
As the spot Nifty rises, the call option is in-the-money and the writer starts making
losses. If upon expiration, Nifty closes above the strike of 2250, the buyer would exercise
his option on the writer who would suffer a loss to the extent of the difference between
the Nifty -close and the strike price. The loss that can be incurred by the writer of the
option is potentially unlimited, whereas the maximum profit is limited to the
extent of the up-front option premium of Rs.86.60 charged by him.
 Figure 11

Payoff profile for buyer of put options: Long put

Figure 12 gives the payoff for the buyer of a three month put option (often
referred to as long put) with a strike of 2250 bought at a premium of 61.70.

The figure shows the profits/losses for the buyer of a three-month Nifty 2250 put option.
As can be seen,as the spot Nifty falls, the put option is in-the-money. If upon expiration,
Nifty closes below the strike of 2250, the buyer would exercise his option and profit to
the extent of the difference between the strike price and Nifty-close. The profits possible
on this option can be as high as the strike price. However if Nifty rises above the strike of
2250, he lets the option expire. His losses are limited to the extent of the premium he paid
for buying the option.
 Figure 12

Payoff profile for writer of put options: Short put

A put option gives the buyer the right to sell the underlying asset at the strike price
specified in the option. For selling the option, the writer of the option charges a premium.
The profit/loss that the buyer makes on the option depends on the spot price of the
underlying. Whatever is the buyer's profit is the seller's loss. If upon expiration, the spot
price happens to be below the strike price, the buyer will exercise the option on the
writer. If upon expiration the spot price of the underlying is more than the strike price, the
buyer lets his option unexercised and the writer gets to keep the premium. Figure 4.9
gives the payoff for the writer of a three month put option (often referred to as short put)
with a strike of 2250 sold at a premium of 61.70.

Figure 13 Payoff for writer of put option

The figure shows the profits/losses for the seller of a three-month Nifty 2250 put option.
As the spot Nifty falls, the put option is in-the-money and the writer starts making losses.
If upon expiration, Nifty closes below the strike of 2250, the buyer would exercise his
option on the writer who would suffer a loss to the extent of the difference between the
strike price and Nifty-close. The loss that can be incurred by the writer of the option is a
maximum extent of the strike price (Since the worst that can happen is that the asset price
can fall to zero) whereas the maximum profit is limited to the extent of
the up-front option premium of Rs.61.70 charged by him.

Figure 13

DATA ANALYSIS
 AND

STRATAGIES USED IN DERIVATIVE TRADING

Strategies used in derivative Trading

Futures & Options can be used as an effective Risk Management tools in the following
ways

1) Hedging : Long security , sell futures

If an Investor holds 200 shares of Infosys and the Purchase price is 1765. If the
investor feels that in future the price of his share is going to fall with the help of security
futures he can minimize his price risk.

All he needs to do is short futures position.

Current market prices is 1765

2 Month futures cost him 1825 with initial margin of Rs 49227 and the lost size is 200

Now if the price of the security falls any further he will suffer losses on security he holds.
However, the losses he suffers on the security, will be offset by the profit he makes on his
short futures position

Short future at 1825

After one month price of Infosys closes at Rs 1650

Loss on security = 115* 200 = 23000

Profit on short future = 175*200 = 35000

Profit of Rs = 35000-23000 = 8000

2) Speculation : Bullish security , Buy futures

If a speculator who has a view on the direction of the market . He would like
to trade based on this view. He believes that a particular security that trades at Rs
1000 is undervalued & expects its price to go up in next 2 to 3 monthes . He will buy
shares of that company.

Eg – Assume he buys a 100 shares which cost him 100000 /- Rs and after one month
it closes at Rs 1010.

He Makes a profit or Rs 10 * 100=10000

At the same time he can also buy future contracts.

 If security trades at Rs 1000 & two- month futures trades at 1006 and the
contract value is Rs 100000 /- . He buys 100 security futures for which he pays a
margin of Rs 20000.

Two months later the security closes at 1010. On expiration, the futures price
converges to the sport price and he makes a profit of Rs 4000 on Investment of
20000.This works out to an annual Return of 12%.

3) Speculation : Bear Security , Sell futures.

Stock futures can be used by a Speculator who believes that a Particular security is
over-Valued and is likely to see a fall in price.

Let us see how this works.

If the security price rises, so will the futures price. If security falls, so will the futures
price falls.

If trader who expects to see a fall in price of ABC Ltd. He sells one two- Month
contract of futures of ABC at Rs 240 (each contract for 100 underlying shares)

He pays 10000 as margin. Two month later, when the future contract expires, ABC
closes at 220. On the day of expiration, the sport & future Price converges He has
made a clean profit or Rs 2000 ( 20*100).
 4) Arbitrage: Over priced Futures, Buy sport/cash ,sell futures.

If you notice that futures on a security that you have been observing seem overpriced,
how can you cash in on the opportunity to earn risk less profits?.

Eg- If ABC Ltd trades at Rs 1000. One month ABC futures trades at Rs 1025 and seems
over priced. AS an arbitrageur, you can make risk less profit by entering in to the
following set of transaction.

a) On day one, buy the security on the cash/ spot market at 1000
b) Simultaneously, sell the futures on the security at 1025
c) Take delivery of the security purchased and hold the security for a month
d) On the future expiration date, the spot and the futures price converge now unwind
the position.
e) If the security closes at Rs 1015 sell the security
f) Futures position expires with profit of Rs 10
g) The Result is a risk less profit of Rs 15 on the spot position & Rs 10 on the
futures position.

5) Arbitrage: Under priced futures: buy futures, sell spot

Whenever the futures price deviates substantially from its fair value, arbitrage
Opportunities arise. It could be the case that you notice the futures on a Security you hold
seem under priced. How can you cash in on this opportunity to earn risk less profits?

Say for instance, ABC Ltd. trades at Rs.1000. One month ABC futures trade at Rs.
965 and seem under priced. As an arbitrageur, you can make risk less profit by entering
into the following set of transactions.

a) On day one, sell the security in the cash/spot market at 1000.

b) Make delivery of the security.
c) Simultaneously, buy the futures on the security at 965.
d) On the futures expiration date, the spot and the futures price
 Converge. Now unwind the position.
e) Say the security closes at Rs.975. Buy back the security.
f) The futures position expires with a profit of Rs.10.
7. The result is a risk less profit of Rs.25 on the spot position and Rs.10
On the futures position.

6) Hedging : Have Underlying Buy Puts.

Owners of Stocks or Equity Portfolios often experience discomfort about the overall
stock market movement. As an owner of stocks or equity Portfolio, Sometimes you may
have a view that stock prices will fall in the near future. At other times you may see that
the market is in for a few days or weeks of massive volatility, and you do not have an
appetite for this king of volatility.

Egg- union budget is a common & reliable source of such volatility. Mostly volatility is
always enhanced for one week before & two weeks after a budget.

TO protect the value of your portfolio from falling below a particular level, buy the right
number of put options with the right strike price,

Example
I have 200 shares of Infosys Price per share is 1800

Spot Price 1800

Strike price put 1760 Premium 80 Rs Lot size is 200

Total premium paid = 80*200 = 16000

On expire strike price converge in to spot price and closing price is 1700

Loss on share in cash market

200*(1800-1700) = 20000

Profit earned in Put option

200*(1760-1700) = 18000

Hedging helps u to minimize the loss if u buy the necessary put option at the required
strike price.

Distinction between futures and forwards

Futures Forwards
Trade on an organized exchange OTC in nature

Standardized contract terms Customized contract terms

Hence more liquid Less liquid

Requires margin payment No margin payment

Follows daily settlement Settlement happens at end of period

 Distinction between futures and options

Futures Options
Exchange traded, with novation Same as futures

Exchange defines the product Same as futures

Price is zero, strike price moves Strike price is fixed, price moves

Price is zero Price is always positive

Linear payoff Nonlinear payoff.

 LIMITATION

LIMITATION

1) 2 months duration of the project was inadequate as such all the strategies and
experience gained is inadequate.

2) Because of busy schedule of broker limited knowledge was provided to me.

3) Tools and techniques information was not provided to me.

4) Direct access to the system was not allowed however the practical knowledge is
gained through watching the screen.
SUGGESTIONS
 SUGGESTIONS

1) Investor who has a very high risk appetite should only invest in capital and
derivative

2) If a Layman want to invest in Capital and Derivative Market take the help of an
expert or Learn by himself.
3) Invest in only Good companies whose fundamentals are strong and has a good
track record in paying dividends.

4) Long term Investor should not get panic when a particular share of a company fall
on a particular day, he should fix his target and stop loss according to his risk
appetite.

5) Don’t take suggestion from unwanted person or tips from friends.

6) If an investor is less risk don’t invest in equity or derivatives .There are other
investment instrument, like bank fixed deposits , post office scheme, LIC scheme
SIP (Systematic Investment Plan).

CONCULSION
 Conclusion

1) Capital and Derivative Market is Risky form of investment

2) Investor should invest in Capital and Derivative market according to his risky
Appetite Eg – If investor age is 24 years he does not have any obligation to fulfill
then he can allocate 50% to equity and Derivative Market and remaining in safer
instrument.

3) If a persona is above 50 or near to his retirement he should allocate 10% of his

Investment in capital and derivative market and remaining in bonds, fixed deposit,
gold etc.

4) For Middle class capital and derivative market is not safer to invest. For High net
Worth individual who has large corpus lying with me can invest in capital and
derivative market.
 BIBLIOGRAPHY

BIBLOGRAPHY

Derivatives Market (Dealers) Module Work Book

(National Stock Exchange of India Limited)

WEBSITES
www.derivativesindia.com

www.derivatives-r-us.com

www.nseindia.com

www.sebi.gov.in

www.rediff/money/derivatives

www.mof.nic.in