PROJECT REPORT ON
SUBMITTED TO PUNJAB TECHNICAL UNIVERSITY, JALANDHAR
IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF
SUBMITTED TO:-
SUBMITTED BY :VINAY KUMAR M.B.A 4th year ROLL NO - 80608317058
STUDENT DECLARATION I Vinay kumar hereby hereby declare declare that that In Final Final Project Project Report Report on “ Trends And Future And Future Of Derivatives In India: A Detailed Detailed Study” Study” which is submitted
in partial fulfillment of the requirements of degree of Masters Of Business Administration to Punjab Technical University, Jalandhar is my original work work and and no nott subm submit itte ted d for for the the awar award d of any any othe otherr degr degree ee,, dipl diplom oma, a, fellowship or other similar titles.
Vinay Kumar
ACKNOWLEDGEMENT This This formal formal piece piece of acknow acknowled ledgem gement ent may be suffic sufficien ientt to expres expresss the feelings of gratitude people who have helped me in successfully completing my Final Project Report. I am grateful to Lect. Ruchi for giving me a chance to “Trends And And Future Future Of Of Derivative Derivativess In do my Final Project Report on “Trends India: A Detailed Study” which required extensive study of various Brokers
and Investors that are engaged in Derivatives investment. I feel,I shall always remain indebted to Mrs. Sarabjeet kau kau r(He r(Head ad Of Of Department, Management) with withou outt whom whom it is bein being g
impossible
to
complete
my
project
report.He
gave
his
kind
supervision,guidance,timely support and all other kind of help required in each and every moment of need. I am deeply indebted to my dear parents,friends whose blessings and inspirations have brought me up to this stage of my carreer.
(VINAY KUMAR)
CONTENTS OF THE TABLE
1. PROJE PROJECT CT ASSIGN ASSIGNED ED..
Introduction of the project.
Objectives of the project.
2. CONCEP CONCEPT T OF STOCK STOCK MARK MARKET. ET.
Introduction to stock market – a global approach.
History of stock market.
Features and characterstics of stock market.
Future Plans for developing stock market.
Various Functions performed in stock market.
Performance of stock market in Indian market.
3.FINANCIAL DERIVATIVES MARKET.
Introduction.
Historical aspect.
Products, participants and functions.
Derivative terminology.
Reasons behind its evolution.
Requirements for Future and Options.
Strength of Indian capital market.
Importance of derivative investment.
Instruments involved in derivative.
Performance in India.
Regulatory framework.
4.ANALYSIS OF THE PROJECT.
Research Methodology.
Graphical analysis.
5.RESULTS AND FINDINGS.
Reasons behind less development of F &O at AMRITSAR stock exchange.
6.SUGGESTIONS. 7.LIMITATIONS OF STUDY. 8.CONCLUSIONS. 9.BIBLOGRAPHY. 10.SAMPLE OF QUESTIONNAIRE.
INTRODUCTION OF THE PROJECT Derivatives have vital role to play in enhancing shareholder value by ensuring access to the cheapest source of funds. Active use of derivatives instruments allows the overall business risk profile to be modified, thereby providing the potential to improve earning quality by offsetting undesired risk. Under my project report, I have studied various trends that comes in the way of Derivatives market. Because impression is usually given that losses arose from from deri deriva vati tive vess are are extr extrem emel ely y comp comple lex x and and diff diffic icul ultt to un unde ders rsta tand nd fina financ ncia iall strategies. So after interviewing with different different brokers ,investors ,investors and dealers, I have have tried to give a solution to these complexities. i also find out that what would be the future of derivative market in india on the basis of interviews and observations of brokers, dealers and investors. regarding future, I have find out that derivatives can indeed be used safely and successfully provided a sensible control and management strategy is established and executed. inspite of that more awareness should be done and technical expertise knowledge should be more expanded.
OBJECTIVES OF THE PROJECT The main objectives of my final project report are as follows:
To study the various trends that comes comes in the way of Derivatives Derivatives market
To find out that what would be the future and market potential of derivative
market in india.
To kno know w the awaren awareness ess & famili familiari arity ty invest investors ors,, dealer dealerss and broke brokers rs hold hold
regarding derivatives market.
To know the experience of dealers, investors and brokers with derivatives till
date.
To get knowledge about shortcomings in indian derivative market.
INTRODUCTION TO THE STOCK EXCHANGE A stock exchange is the place where securities, shares, debentures and bonds of joint stock companies, central & state govt., semi govt. organizations, local bodies and foreign govt. are bought and sold. A stock exchange is the nerve center of capital market. Changes in the capital market are brought about by a complex set of factors, all operating on the market simu simult ltan aneo eous usly ly.. Such Such chan change gess are are subj subjec ectt to secu secula larr tren trends ds set set by the the economic progress of the nation, and governed by the factors like general economic situation, financial and monetary policies, tax changes, political environment, international economic and financial development etc. A stock exchange provides necessary mobility to capital and directs the flow of capital into profitable and successful enterprises.
The Securities Contract (Regulation) Act 1956 defines stock exchange as:
“A body of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling, & dealing in securities.”
A stock exchange is a platform for the trade of already issued securities through primary market. It is the essential pillar of the private
sector and corporate economy. It is the open auction market where buyers and sellers meet and involve a competitive price for the securities.
It reflects hopes aspiration and fears of people regarding the performance of the economy. It exerts exerts a powerful powerful and significan significantt influence influence as a depressan depressantt or stimul stimulant ant of busine business ss activi activity. ty. So, stock stock exchan exchange ge mobili mobilizes zes saving savings, s, canalizes them as securities into those enterprises which are favored by the investors on the basis of such criteria as – - Future growth prospects. - Good returns. - Appreciation of capital.
The stock exchange serves the role of barometer, not only of the state of health of individual companies, but also of the nation’s economy as a whole (it measures of all the pull and pressure of securities in the market). The trade in market is through the authorized members who have duly registered with concerned stock exchange and SEBI.
HISTORY OF STOCK EXCHANGE The trading of securities in India was started in early 1973. The only stock exchange operating in the 19 th century were those of Bombay set up in 1875 and in Ahemdabad set up in 1894. These were organized as voluntary non profit making associations of brokers to regulate and protect their interests. Before the control on securities trading became a central subject under the constitution in 1950. It was a state subject and Bombay securities contract (control) act of 1925 used to regulate trading in securities. Under this act, Bombay stock exchange was recognized in 1927 and Ahemdabad stock exchange were organized at Bombay, Ahemdabad and other centers but they were not recognized soon after it became a central subject, central legislation was proposed and a committee headed by sh. A.D.GORWALA went into bill for security regulation. On the basis securities contract act became law in 1956. At present there were 23 recognized stock exchanges in India. From these BSE & NSE are the two major stock exchanges and rest 21 are the regional stock exchanges. Daily turnover of all the stock
exchange is app. 20,000cr. BSE is 129 years old. NSE is 11 years old and it brought the screen based trading system in India
FEATURES OF THE STOCK EXCHANGE
It is a place where listed securities are bought and sold.
It is an association of persons known as members.
Trading in securities is allowed under rules and regulations of stock exchange.
Membership is must for transacting business.
Investors and speculators, who want to buy and sell securities, can do so through members of stock exchange i.e. brokers.
There are mainly three participants in stock exchange i.e. •
Issuer of security (company).
•
Investor of security (Individual, HUF).
•
Interm Intermedi ediari aries es and produc products ts (brok (broker, er, mercha merchant nt banker bankerss and shares, bonds, warrants, derivatives products etc.).
It is the market as well as source for the capital. Corporate and govt. raise resource from the market.
FUTURE PLANS OF STOCK EXCHANGE The current market scenario in the capital market is not very encouraging, howe ho weve ver, r, in the the futu future re;; the the bu busi sine ness ss mode modell of ISE ISE woul would d be the the most most preferred method of accessing multiple markets with low cost and high credibility of an Exchange. ISE is considering several value added services or new products which may help ISE and ISS in fulfilling the demands of low cost users. We are considering derivative segment through NSE and DP services initially for the participants and later for clients through CDSL and NSDL. This futuristic concept of consolidation being pursued by ISE is now bei bein ng also lso exp xplo lorred by the the Dev Develo eloped ped Coun Countr trie ies. s. We thin think k suc such consolidation enables optimal utilization of existing resources, enhanced due to economies of scale and permit product innovation, a sign o any dynamic market. On account of this philosophy we are proposing to implement most of the new products centrally on ISE, like, Internet trading, IPO segment, Distribution of mutual funds units, Information dissemination, etc. We are also planning to provide trading support to the commodities Exchanges and also consider providing hem entry into the securities industries. The creation of a national market has provided the brokers of the RSEs and individual investors in the regions and opportunity approach the liquid national level mark market et.. Th This is mark market et is expe expect cted ed to prov provid idee liqu liquid idit ity y in smal smalll capi capita tall
companies as the other National Level markets have a higher entry norm and may not cater to this market.
FUNCTIONS OF STOCK EXCHANGE Stock Exchange Performs The Following Functions:
Thee stoc Th stock k exch exchan ange ge prov provid ides es appr approp opri riat atee cond condit itio ions ns wher wheree by purchase and sale of securities takes place at reasonable and fair prices.
People having surplus funds invest in the securities and these funds used for industrialization and economic development of country that leads to capital formation.
The stock exchange provides a ready market for the conversion of existing securities into cash and vice-versa.
Thee stoc Th stock k exch exchan ange ge acts acts as the the cent center er of pr prov ovid idin ing g bu busi sine ness ss information relating to enterprise whose securities are traded as the
listed companies are to present their financial and other statements to it.
Stock exchange protects the interest of the investors through strict enfo enforc rcem emen entt of rule ruless and and regu regula lati tion onss with with resp respec ectt to deal dealin ings gs.. Puni Punish shme ment ntss (inc (inclu ludi ding ng fine fine,, susp suspen ensi sion on or even even expu expuls lsio ion n of membership) may be there if broker make any malpractice in dealing with investors like charging high commissions etc.
Stock exchange acts as the barometer of the country as it measures all the pulls and pressures of the securities in the market.
The stock exchange provides the linkage between the savings in the household sector and the investment in corporate economy.
STOCK EXCHANGES OF INDIA Name of Stock Exchange
Year of
Type of Organization
Establishme nt 1875
Voluntary Non profit
1897
org. Voluntary Non profit
3. Calcutta Stock Exchange 1908 4. Madhya Pradesh Stock 1930
org. Public ltd. Company Voluntary No N on pr p rofit
Exchange 5. Madras Stock Exchange Ltd.
1937
org. Company
ltd.
By
6. Hyderabad Stock Exchange Ltd. 1943
guarantee Company
ltd.
By
7. Delhi
guarantee Public ltd. Company
1. The Stock Exchange Mumbai 2. Ahmedabad Stock Exchange
Stock
Exchange 1947
Association Ltd. 8. Bangalore Stock Exchange 9. Cochin Stock Exchange 10. U.P. Stock Exchange Ltd. 11. Pune Stock Exchange Ltd. 12. Ludhiana Stock Exchange
1957
Pvt.
Converted
into
1978 1982 1982
public ltd. company Public ltd. Company Public ltd. Company Company ltd. By
1983
guarantee Public ltd. Company
13. Guwahati Stock Exchange 1984 14.Maga 14.Magadh dh Stock Stock Exchan Exchange ge Ass. Ass. 1986
Public ltd. Company Company ltd. By
(Patna) 15. Jaipur Stock Exchange Ltd. 16. Bhubaneshwar Stock Exchange
guarantee Public ltd. Company Company ltd. By
1983 1989
Stock 1989
guarantee Company
Exchange Ltd. 18. Vadodara Stock Exchange Ltd. 1990 19.Nat 19.Nation ional al Stock Stock Exchan Exchange ge of 1994
guarantee N.D N.D
India Ltd. 20.Co 20 .Coim imba bato tore re
N.D
17. SaurashtraKutch
Stoc Stock k
Exch Ex chan ange ge 1996
Ltd. 21. OTC Stock Exchange of India 22. Mangalore Stock Exchange Ltd. 23.Interconnected Stock Exchange
ltd.
N.D N.D N.D
(ICSE)
WHO BENEFITS FROM STOCK EXCHANGE
1.
Investors: - It provides them liquidity, marketability, safety etc.
of investments. 2.
Company: - It provides them access to market funds, higher
rating and public interest. 3.
Brokers: - They receive commission in lieu of services to
investors. 4.
Economy and Country: - There is large flow of saving, better
growth more industries and higher income.
By
INTRODUCTION TO DERIVATIVES Primary market is used for raising money and secondary market is used for trading in the securities, which have been used in primary market. But derivative market is quite different from other markets as the market is used for minimizing risk arising from underlying assets. The work "derivative" originates from mathematics. It refers to a variable, which has been derived from another variable. i.e. X = f (Y) WHERE X (dependent variable) = DERIVATIVE PRODUCT Y (independent variable) = UNDERLYING ASSET A financial derivative is a product that derives value from the market of another product. Hence derivative market has no independent existence without an underlying asset. The price of the derivative instrument is contingent on the value of underlying assets. As a tool of risk management we can define it as, "a financial con contrac tractt whos whosee val value is deriv rived from rom the valu valuee of an un unde derl rlyi yin ng asset/derivative security". All derivatives are based on some cash product. The underlying assets can be: a.
Any Any type type of agri agricu cult ltur uree pro produ duct ct of grai grain n (no (nott pre preva vail ilin ing g in Indi India) a)
b.
Price of of pr precious an and metals go gold
c.
Foreign exchange rates
d.
Shor Shortt ter term m as as well well as lon longg-te term rm bo bond nd of secu securi riti ties es of of dif diffe fere rent nt type type issued by govt. and companies etc.
e.
O.T. O.T.C. C. mone money y ins instr trum umen ents ts for for exa examp mple le loan loan & dep depos osit its. s.
Example: Wheat farmers may wish to sell their harvest at a future date to elim elimin inat atee the the risk risk of chan change ge in pric pricee by that that date date.. Th Thee pric pricee of thes thesee derivatives is driven from spot price of wheat.
DEFINITION OF DERIVATIVE
In the Indian context the Securities contracts (Regulation), Act 1956 defines "Derivative" to include: (1) (1) A secu securi rity ty deri derive ved d from from a debt debt inst instru rume ment nt,, Shar Share, e, Lo Loan an whet whethe her r secured or unsecured, Risk instrument or contract for difference or any other form of security. A contract, which derives its value from the prices of underlying securities.
HISTORICAL ASPECT OF DERIVATIVES: Thee need Th need for for deri deriva vati tive vess as hedg hedgin ing g tool tool was was firs firstt felt felt in the the commodities market. Agricultural F&O helped farmers and PROCESSORS hedge against commodity price risk. After the fallout of BRITAIN WOOD AGREEMENT, the financial markets in the world started undergoing radical changes, which give rise to the risk factor. This situation led to development of derivatives as effective "Risk Management tools". Derivative trading in financial market started in 1972 when "Chicago Mercantile Exchange opened its International Monetary Market Division (IIM). The IMM provided an outlet for currency speculators and for those looking to reduce their currency risks. Trading took place on currency. Futures, which were contracts for specified quantities of given currencies, the exchange rate was fixed at time of contract later on commodity future contracts was introduced then followed by interest rate futures. Lookin Looking g at the liquid liquidit ity y market market,, deriva derivativ tives es allow allow corpo corporat ratee and institutional investors to effectively manage their portfolios of assets and liabil liabiliti ities es throu through gh instru instrumen ments ts like like stock stock index index future futuress and option options. s. An equity fund e.g. can reduce its exposure to the stock market and at a relatively low cost without selling of part of its equity assets by using stock index index futur futures es or index index option options. s. Theref Therefore ore the stock stock index index future futuress first first emerged in U.S.A. in 1982.
PRODUCTS, PARTICIPANTS AND FUNCTIONS Deriva Derivativ tivee contra contracts cts have have severa severall varian variants. ts. The most most common common are FORWADS, FUTURES, OPTIONS AND SWAPS. The following three categories of Participants-Hedgers, Speculators, and Arbitrageurs.
(1)
HEDGER : Hedgers face risk associated with the price of an asset.
They use futures or options markets to reduce the risk. Thus, they are operation who want to eliminate the risk composing of their portfolio. (2)
SPECU SPECULAT LATORS ORS : They wish to be on future movements in the price of
an asset. A speculator may buy securities in anticipation of rise in price. If this expectation comes true he sells the securities at a higher price and makes a profit. Usually the speculator does not take delivery of securities sold sold by him. him. He on only ly rece receiv ives es and and pays pays the the diff differ eren ence ce betw betwee een n the the purchase and sale prices. (3)
ARBIT ARB ITRAG RAGEU EURS RS: They are in business to take advantage of discrepancy
between price in two different markets. If for example, they see the future price of an asset getting out of line with the cash price, they will take off setting positions in two markets to lock in profit.
TYPES OF DERIVATIVES Thee most Th most comm common only ly used used deri deriva vati tive ve cont contra ract ct is forw forwar ards ds,, futu future ress and and options: (1)
FORWARDS : a forward contract is a customized contract
between two entities, where settlement takes place on a specific date in the futures at today's pre-agreed price. (2)
FUTU FU TURE RES S: a future contract is an agreement between two
parties to buy or sell an asset at a certain time the future at the certain price. Futures contracts are the special types of forward contracts in the sense that are standardized exchange traded contracts. (3)
OPTIONS: it is of two types: call and put options.
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.
(4) (4) LE LEAP APS: S: 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 pop popul ular arly ly kn know own n as Leap Leapss or Lo Long ng term term Eq Equi uity ty Anti Antici cipa pati tion on Securities. (5)
BASKETS:
Baskets options are option on portfolio of underl und erlyin ying g asset. asset. Equity Equity Index Index Option Optionss are most most pop popula ularr form form of baskets.
(6) (6) SW SWAP APS: S: these are private agreements between two parties to exchange cash flows in the future according to a prearrange formula. They can be regarded as portfolios of forward's contracts. The two commonly used swaps are: a)
INTEREST RATE SWAPS: these entail swapping both
Principal and interest between the parties, with the cash flow in one direction being in a different currency than those in the opposite direction. b)
CURRENCY SWAPS: these entail swapping both Principal
and interest between the parties, with the cash flow in one direction being in a different currency than those in the opposite direction.
Cash Vs Derivative Market The basis differences between these two may be noted as follows. a) In cash market market tangible tangible asset asset are traded traded whereas whereas in derivati derivatives ves market market contract based on tangible assets or intangible like index or rates are traded. b) The value value of derivative derivative contrac contractt is always based based on and linked linked to the underlying asset. Though, this linkage may not be on point-to point basis. c) Cash market market contracts contracts are are settled by delivery delivery and and payment payment or through through an offsetting contract. the derivative contracts on tangible may be settle settled d throug through h paymen paymentt and delive delivery, ry, offset offsettin ting g contra contract ct or cash cash settlement, whereas derivative contracts on intangibles are necessarily settled in cash or through offsetting contracts. d) Th Thee cash cash mark market etss alwa always ys has has a net net long long po posi siti tion on,, wher wherea eass the the net net position in derivative market is always zero. e) Cash asset asset may be meant for consump consumption tion or investme investment. nt. Derivativ Derivatives es are used for hedging, arbitration or speculation. f) Derivativ Derivativee markets markets are highly highly leverage leveraged d and therefor thereforee could be be much more riskier.
THE DERIVATIVE MARKETS PERFORM A NUMBER OF ECONOMIC FUNCTIONS: (1) (1) Pric Prices es in orga organi nize zed d deri deriva vati tive ve mark market etss refl reflec ectt the the perc percep epti tion on of market participants about the future and lead the prices of underlying to perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in discovery of future as well current prices. (2) The derivativ derivativee market helps helps to transfer transfer the risks from from those who have have them but may like them those who have an appetite for them. (3) Derivativ Derivatives es due to their inherent inherent nature nature are linked to the underlyin underlying g cash markets. With the introduction of derivative, the underlying market, witness higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. (4) Derivativ Derivatives es have a history of attractin attracting g many bright, bright, creative, creative, welleducated people with an entrepreneurial entrepreneurial attitude. They often energize others to create new business, new products and new employment opportunities, the benefits of which are immense. (5) Deriva Derivativ tives es marke markett helps helps increa increase se saving savingss and investm investment entss in the long run Transfer of risk enables market participants to expand their volume of activities.
PARTICIPANTS IN DERIVATIVE MARKET •
Exchange, trading members, clearing members.
•
Hedgers, arbitrageurs, speculators.
•
Clearing, clearing bank.
•
Financial institutions.
•
Stock lenders and borrowers.
OBJECTIVES OF DERIVATE TRADING (1) HEDGING: you own a stock and you are confident about the prospects of the company. However at the same time you feel that overall market may not perform as good and therefore price of your stock may also fall in line with overall marked trend. You expect that some adverse economic or political event event might might affect affect the market market sentim sentiment ents, s, though though funda fundamen mental talss of the company will remain good, therefore, it is good to retain the stock. In both these these situations situations you would like to insure your portfolio portfolio against against any such market fall. Such insurance is known as hedging. Hedging is a tool to reduce the inherent risk in an investment. Various strategies designed to reduce investment risk using call option, put options, short selling, and futures are used for hedging. The basic purpose of a hedge is to reduce the risk of loss.
(2) ARBITRAGE: The future price of an underlying asset is function of spot price and cost of carry adjusted for any return on investment. However, duee to un du unce cert rtai aint nty y abou aboutt inte intere rest st rate rates, s, dist distor orti tion onss in spot spot pric prices es,, or uncertainty about future income stream, prices in futures market may not truly reflect reflect the expected expected spot price in future. future. This imbalance imbalance in future future and spot price gives rise to arbitrage opportunities. Transaction made to take advantage of temporary distortions in the market are known as arbitrage transactions.
(3) SPECULATION:
you may have very strong opinion about the future mark market et pric pricee of a part partic icul ular ar asse assett base based d on past past tren trends ds,, curr curren entt inform informati ation on and future future expect expectati ation. on. Likewi Likewise se you may also also have have an opin op inio ion n abou aboutt the the ov over eral alll mark market et tren trend. d. To take take adva advant ntag agee of such such opinion, individual asset or the entire market (index) could be sold or purchased. Position taken either in cash market of derivative market on the basis of personal opinion is known as speculation.
DERIVATIVE TERMINOLOGY ASSIGNMENT: It means allocation of an option contract, which is exercised, to a short position in the same opinion contract, at the same strike price, for fulfillment of the obligation, in accordance with the procedure specified in by the relevant authority from time to time.
BADLA: It is an indigenous mechanism of postponing the settlement of trade. This product is peculiar to India markets. This involves Badla financiers, stock lenders and stock traders. The long buyers and short sellers may postpone settlement of their trade by making payments and giving delivery by using the services of Badla financiers and stock lenders who who assu assume me thei theirr po posi siti tion onss for for Badl Badlaa char charge ges. s. Coun Counte terp rpar arty ty risk risk,, unpr un pred edic icta tabl blee char charge gess and and high high risk risk du duee to inad inadeq equa uate te marg margin inin ing g are are inherent limitations of Badla.
BASIS: It is difference between spot price and future price of the same asset. In normal markets this basis is always negative, i.e. spot price is always less than future price. A positive basis provides for arbitrage opportunity.
BETA: It is a measure of the sensitivity of returns on scrip to return on the market index. It shows how the price of scrip would move with every percentage point change in the market index.
CONTRACT VALUE It is the value arrived at by multiplying the strike price of the option contract with the regular/market lot size.
EXERCISE: It is defined as the number of future or option contracts required be buying or selling per unit of the spot underlying position to completely hedge against the market risk of the underlying.
MARGIN: It is the money collected from parties to trade to insure against the default risk. Some amount of margins is collected upfront and some are collected shortly after the trade. Failure to pay margins may result in mandatory closure of position.
OFFSETTING CONTRACT: new matching contract, which offsets an existing contract, is known as offsetting contract.
OPTION PREMIUM: It is consideration paid by the option buyer to option writer. The premium has two components intrinsic value and time valu value. e. Intr Intrin insi sicc valu valuee is the the diff differ eren ence ce betw betwee een n the the spot spot pric pricee of the the underlying and exercise price of the contract. Time value represents the cost of carrying the underlying for the option period, adjusted for any dividend and option premium.
RISK TRANSFER : It refers to hedging against the price risk through futures. The holder of an asset, which he intender to sell in near future, may transfer the inherent risk by selling futures today. The counterparty assumes the risk in anticipation of making gain
REASON FOR STARTING DERIVATIVES
1.Counter party risk on the part of broker, in case it ask money from us but before giving delivery of shares goes bankrupt. 2.Liquidity risk in the form that the particular scrip might not be traded on exchange. 3.Unsystematic risk in the form that the price of scrip may go up or down due to “Company Specific Reasons”. 4.Mutual funds may find it difficult to invest the funds raised by them properly properly as the scrip in which they want to invert might not be available available at the right price. 6.Systematic risk in the form form that the price price of scrip may go up or to reason affecting the sentiment of whole market.
down due due
THE REQUIREMENTS FOR SETTING UP FUTURE AND OPTION TRADING ARE OUTLINED BELOW:
1. Crea Creati tion on of an Opti Option onss Clea Cleari ring ng Corp Corpor orat atio ion n (OCC (OCC)) as the the sing single le guarantor of every traded option. In case of default by a party to a contract, the clearing house has to bear the cost necessary to carry out the contract. 2. Creation Creation of a strong strong cash market market (seconda (secondary ry market). market). This This is because because after the exercise of an option contract, the investors move to the secondary market to book profits. 3. Creation Creation of paper-le paper-less ss trading trading and a book-entry book-entry transf transfer er system. system. 4. Care Carefu full sele select ctio ion n of the the secu securi riti ties es may may be list listed ed on a Nati Nation onal al securities exchange, have a wider capital base, be actively traded, and so on. 5. Uniformi Uniformity ty of rules rules and regulation regulation in all all the stock exchang exchanges. es. 6. Standa Standardi rdizat zation ion of the terms terms gov govern erning ing the option optionss contra contracts cts.. This This would decrease the transaction costs, For a given underlying security, all contracts on the options exchange should have an expiry date, a stri strike ke pric price, e, and and a cont contra ract ct pric price, e, on only ly the the prem premiu ium m shou should ld be negotiated on the floor of the exchange. 7. Larg Large, e, fina financ ncia iall lly y soun sound d inst instit itut utio ions ns,, memb member erss and and a nu numb mber er of market makers, who can write the options contracts. Strict capital adequacy norms to be laid out and followed.
STRENGTH OF INDIAN CAPITAL MARKET FOR INTRODUCTION OF DERIVATIVES
1.
LARGE MARKET CAPITALIZATION: India is one of the largest market capitalized country
in Asia with a market capitalization of more than 7,65,000 corers. 2.
HIGH LIQUIDITY: In the underlying securities the daily average traded
volume in Indian capital market today is around 7,500 crores. Which mean eans on an aver averaage ever every y mon onth th 14 14% % of the the coun countr try y mark arket capitalization gets traded, shows high liquidity. 3.
TRADER GUARANTEE: The first "clearing corporation" (CCL) guaranteeing
trad trades es has has beco become me full fully y func functi tion onal al from from July July 19 1996 96 in the the form form of National Securities Clearing Corporation (NSCCL) for which it does the clearing. 4.
STRONG DEPOSITORY: A strong depository National Securities Depositories
Ltd.(NSDL), which started functioning in the year 1997, has strengthen the securities settlement in our country. 5.
A GOOD LEGAL GUARDIAN: SEBI is acting as a good legal guardian for Indian
Capital market.
IMPORTANCE OF DERIVATIVE TRADING 1. Reduct Reduction ion of of borrow borrowing ing cost cost.. 2. Enhanc Enhancing ing the the yiel yield d on asse assets. ts. 3. Mod Modify ifying ing the payment payment structur structuree of assets assets to corresp correspond ond to invest investor or market view. 4. No physical physical delivery delivery of of share certifica certificate te so reduction reduction in cost cost by stamp duty. 5. Increase Increase in hedge hedger, r, speculat speculator or and arbitr arbitrageur ageurs. s. 6. It does not not totally totally eliminate eliminate specula speculation, tion, which which is basic basic need of Indian Indian investors.
INSTRUMENTS OF DERIVATIVE TRADING FORWARD
Derivative
FUTURE
OPTION
SWAPS
FORWARD CONTRACT "It is an agreement to buy/sell an asset on a certain future date at an agreed price". The two parties are: •
Who takes a long position – agreeing to buy
•
Who takes a short position—agreeing to sell The mutually agreed price is known as "delivery price" or
"forward price". The delivery price is chosen in such a way that the value of contract contract for both parties parties is zero at the time of entering entering the contract, contract, but the cont contra ract ct take takess a po posi siti tive ve or nega negati tive ve valu valuee for for part partie iess as the the pric pricee of underlying asset moves. It removes the future price risk. If a speculator has information or analysis, which forecast an upturn in price, and then be can go long on the forward market instead of cash market. The speculator would go long on the forward, wait for the price to rise, and then take a reversing transaction to book profits. Speculator may well be required to deposit a margin upfront. However, this is generally a relatively small proportion of the value of assets underlying the forward contract.
EFFECT OF CHANGE IN PRICE:
As mentioned above the value of such a contract in zero for both the parties. But later as the price & the underlying asset changes, it gives positive or negative value for contract.
PRICE
& HOLDER
&
LONG HOLDER LDER & SHORT ORT
UNDERLYING
POSITION
POSITION
ASSETS INCREASE
POSITIVE
DECREASE
NEGATIVE VALUE
VALUE NEG NEGAT ATIV IVE E
VALU VALUE E
POSITIVE VALUE
E.g. A agrees to deliver 100 equity shares of Reliance to B on Sept. 30, 2002 at a Rate of Rs. 120 per share. Now if the price of share on that date is Rs. 140 per share, than a who has short position would stand to loss of Rs. (20*200) = 4000, long position would gain the same amount or vise versa if price quoted is less than delivery price. Profit/Loss = ST-E ST = spot price on maturity date E = delivery price
LIMITATIONS OF FORWARD CONTRACT 1. No stan standa dard rdiz izat atio ion. n. 2. One part party y can brea breach ch its its obliga obligatio tion. n. 3. Lack Lack of centr centrali alizat zation ion of of tradin trading. g. 4. Lack Lack of liqu liquid idit ity. y. To ov over erco come me this this othe otherr type type of deri deriva vati tion on inst instru rume ment nt kn know own n as "Future Contracts" were introduced.
VALUATION OF FORWARD CONTRACT The forward contract can be put under three categories for the purpose & valuation:
VALU VA LUAT ATIO ION N OF THOS THOSE E SE SECU CURI RITI TIES ES PROV PROVID IDIN ING G NO INCOME Shares, which neither expects to do not pay any, dividend in future nor having arbitrage opportunities. e.g. Here Price (F) = S 0e rt Where F = Future Future Price Price S0 = spot price of asset R = risk free rate of interest p.a. with continuous compounding T = time of maturity. If F>S0ert In this case the investor will buy asset and take a short position in the forward contract.
"Short position is not position of investor is of seller means contract sold is greater then contract bought". Investor may buy the assets, borrowing an amount equal to * * for "t" period at risk free rate. At the time of maturity, the assets will be delivered for price F and repayment will be equal to S 0ert and there is net profit equal to F- S 0ert
If F< S 0ert He will long his position in forward contract. When contract matures: the assets would be purchased for "F" Here profit is S 0ert –F
E.g. Consider a forward contract were non-dividend shares available at Rs, Rs, 70 matur aturees in 3 mont month hs, Risk isk free free rat rate 8% p.a p.a. comp compou oun nded ded continuously. S0ert = 70 x [e]
0.25x0.08
= 70 x 0202 = Rs. 71.41 If F = 73 Then an arbitrageur will short a contract, borrow an amount of Rs. 70 & buy share at Rs, Repay the loan of Rs. 70. At maturity sell it as Rs. 73 (forward contract price) and 71.40, thus profit is (73- 71.40) 1.60 Thus he shorts his forward contract position.
SECURITIES PROVIDING A CERTAIN CASH INCOME If there is certain cash income to be generated on securities in future to the inve invest stor or,, we will will dete determ rmin inee pres presen entt valu valuee of inco income me e.g. e.g. in case case of preference share. Present Value of Dividend = Rate & Interest (continuously compounded) ~If there is no arbitrage Then F = (So – I) e rt
~If F> (So –I)e rt Arbitrageur can short a forward contract, borrow money and buy the asset at present and at maturity asset is sold and earns profit. Profit = F –(So – I) e rt If
F <(So-I) ert Arbitrageur can long a forward contract, short the asset a present and invest the proceeding Profit (at maturity)
(So-I) e rt –F
E.g. Let us consider a 6-month forward contract on 100 shares at Rs. 38 each risk free of interest (compounding continuously) earn is 10% p.a. dividend is expected to a yield of Rs. 1.50 in 4 months.
Solution: divide divided d receiv receivabl ablee after after 4 months months resent Value & dividend
=
100x1. 100 x1.50= 50=Rs. Rs.1.5 1.50 0
= 150xe (4/12)(0.10)50
= Rs 50x0.9672=RS 145.88 = (3800-145.8) e (0.5)(0.10) = 3654.92x1.05127 F
= 3842.31
VALU VA LUAT ATIO ION N & FORW FORWAR ARD D CONT CONTRA RACT CT PROV PROVID IDIN ING G A KNOWN YIELD In case of share included in portfolio companies the index, as underlying assets, are expected to give dividend in course of time, whic which h may be perc perceenta ntage 0 their heir price rices. s. It is assu assum med to be paid aid continuously at a rate of "Y" p.a. F = Soert
E.g. Stock underlying an under provide a, dividend yield of 4.1% p.a., current value of index index is 520 and risk free rate of interest interest is 10% p.a. r=0.10, y = 0.04, * * = 520 T =3/12 =0.25 F = 520xe(0.10-0.40) 520xe(0.10-0.40) (0.25) = 520x01512 = Rs. 527.85
FUTURE CONTRACT 'It is an agreement between buyer and seller for the purchase and sale of a particular assets at a specific future date; specific size, date of delivery, place and alternative asset. It takes obligation on both parties to fulfill the contract.
FEATURES OF FUTURE CONTRACT: 1. Standardi Standardized zed contracts contracts e.g. contract contract size. 2. Between Between two parties parties who who do not necessar necessarily ily know know each other. other. 3. Guar Guaran ante teee for for perf perfor orma manc ncee by a clea cleari ring ng corp corpor orat atio ion n or clea cleari ring ng hous ho use. e. Clea Cleari ring ngho hous usee is asso associ ciat ated ed with with matc matchi hing ng,, proc proces essi sing ng,, regist registeri ering, ng, confir confirmin ming g settin setting, g, reconc reconcili iling ng and guaran guarantee teeing ing the trades on the future exchanges. Clearinghouse tries to eliminate risk of default by either party. 4. It has has some some featur features es of Badla Badla also also..
FUTURE 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 the contract trades. The index futures contracts on the NSE have one month, and three-month expiry
cycles, which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of the January. On the Friday Friday follo followin wing g the last last Thursd Thursday, ay, a new contra contract ct having having three three-mo -month nth expiry is introduced of trading.
EXPIRY DATE: it is 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 less than one contract. For instance, the contract size on NSE's futures market is Nifties.
BASIS: in the contract of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. in a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices.
COST OF CARRY: the relation between futures price and spot price can be summarized in terms of what is known as cost of carry. This measures the storage cost plus the interest that is paid to finance the assets less the incomes earned on the asset.
INITI INITIAL AL MARG MARGIN IN: the amount that must be deposited in the margin account at a time a future contract is first entered into is known as initial margin.
MARKING-TO-MARKET: in the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor's margin gain or loss depending upon the future's closing price.
MAINTENANCE MARGIN: this is somewhat lower than initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance amount 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.
INSTRUMENTS OF FUTURE CONTRACTS
COMMODITY FUTURES 1. Trade Traderr in Americ American an Exchang Exchanges es like CBOT, CBOT, New York: York: Commodi Commodity ty Exch Ex chan ange ge,, Chic Chicag ago o Merc Mercan anti tile le Ex Exch chan ange ge (CME (CME), ), New New York York Mercantile Exchange Includes: Wheat, Natural Gas, Platinum, Gold, and Cattle etc. 2. Contra Contract ct Life: Life: Most Mostly ly for for 90 days days or less less.. 3. Maturity Maturity date is mostly mostly non-stand non-standardiz ardized. ed. 4. Qual Qualit ity y spec specif ifie ied d
FINANCIAL FUTURES 1. Intr Introd oduc uced ed by IMM IMM (a divis divisio ion n of CME) CME) It Inclu Include des: s: 10 or 5 year year treasury notes (in 1976 by I:M:M), S & P 5000, Nikkie 225, Euro Dollar Dollars, s, Britis British h Pound, Pound, Canadi Canadian an Dollar Dollars, s, Mini Mini Value Value line line Stock Stock Index, Russell 2000, Russell 3000, etc. 2. Mostly Mostly Longer Longer time e.g. e.g. US Treasur Treasury y Bond Futures Futures are are of even more more than 2 years 3. Maturi Maturity ty date date is is standa standardi rdized zed.. 4. There There connot connot be any any quality quality variati variations ons into into these these assets. assets.
TYPE OF FUTURE CONTRACTS:
INDEX FUTURES & STOCK FUTURES
INDEX FUTURES: Of the financial futures, Index future contracts are key contracts, introduced in U.S. A, in 1982 by the "Commodity Futures Trading Commis Commissio sion" n" (CFTC (CFTC)) by approv approving ing the Kansas Kansas Board Board propos proposal. al. Index Index Futures began trading in India in June 2000 of Trade (KSBT)'s Futures derive its value from the underlying index-e.g. NSE's futures. Contracts are based on "S & P CNX NIFTY" At present it has become the most liquid contract in the country, the arbitrage between the futures equity market is further expected to reduce impact cost. 80-90% of retail participation is expected in India because. 1. Broker Brokerage age cost cost is lower. lower. 2. Saving Savingss in cost is possib possible le thorough thorough reduced reduced bid-ask bid-ask spreads spreads where where stocks are trade in package forms. 3. Impact Impact cost will will be much much lower lower than dealing dealing in indiv individual idual scrip. scrip. 4. Institutio Institutional nal and large equity equity holders holders need portfoli portfolios os hedging hedging facility. facility. Index derivatives are more suited to them and more cost effective than in individual stocks. Pension funds in the US are known-to use stock index futures for risk hedging purpose.
5. Stock Stock Index is difficul difficultt to manipulate manipulate as compared compared to individ individual ual stock stock prices, more so in India, and the possibility of cornering is reduced. 6. Stock Stock index, index, being being an averag averagee is much less volatil volatilee than than indivi individua duall stoc stock k pric prices es.. Th This is impl implie iess lowe lowerr capi capita tall adeq adequa uacy cy and and marg margin in requirements. 7. Inde Index x deri deriva vati tive vess are are cash cash sett settle led, d, and and henc hencee do don' n'tt suff suffer er from from settle settlemen mentt delays delays and proble problems ms relate related d to bad delive delivery ry & forge forged d certificates.
INDIVIDUAL STOCK FUTURES The high level committee on capital market on 2001 decided to permit FII's to participate in "Individual Stock Futures" trading e.g. in Reliance SEB! Frame guidelines for its trading stock futures can be effectively used for hedging: speculation and arbitrage At present there are 31 scrips in which stock derivatives are trading. E.g. the Reliance stock traders at Rs. 1000 and the two month futures trades at 1006. Assume that the minimum contract value is Rs. 1,00,000. He buys 100 Individual stock futures for which he buys a margin of Rs. 20,000. 2 months later the stock closes at Rs. 010. OR expiration date, he makes a profit of Rs. 400 on an investment of Rs. 20,000 works out annual return of 12%.
VALUATION OF FUTURES CONTRACTS It can be made possible on following basis: 1. Valuat Valuation ion of finan financia ciall futures futures 2. Valuat Valuation ion of commo commodit dityy futures futures I.
Carry type commodities
II.
Non-C -Ca arry ty type co commodities
VALUATION OF FINANCIAL FUTURES:
Valuation of financial futures is based on following assumptions 1. The market marketss are are perfec perfect. t. 2. There There is no no trans transact action ion cost. cost. 3. All the the assets assets are are infinit infinitely ely divisi divisible. ble. 4. Bid-asks Bid-asks spreads spreads do not not exit so so that it is assum assumed ed that only only one price price prevails.There is no restriction on short selling. Also short selling gets to use the full proceeds of the sales valuations. This includes stock index futures. The value of futures contract on a stock index may be obtained by using the "cost of carry model". In this this case case
Price Price of the the cont contrac ractt is = spot spot price+ price+ Carr Carry y cost-c cost-carr arry y
returns i.e. (s + C – R)
Here: SPOT PRICE : Current Price of One Unit of Deliverable asset in the Market.
CARRY COST : Holding cost i.e. interest Charges etc. + opportunity cost of using funds.
CARRY RETURNS RETURNS : Dividends etc. Valuation of Stock Index futures is F = S 0e(r-y) t
COMMODITY FUTURE'S VALUATION
CARRY TYPE OR INVESTME INVE STMENT NT PURPOSE PURP OSE
1)
COMMODITIES VALUATION These types of commodities are held by significant number. Of investor for futures safety as investment alone. ~If storage cost is zero then F = Soert ~If any storage cost or opportunity cost then it is regarded as negative income. If S is the present value. of all the storage costs that may be incurred during the life of a future contract then F = (So + s)e rt ~If the storage cost were proportional to price of commodity then would be the same as in case of Provid Providing ing a negati negative ve yield. yield. If S repres represent entss the storag storagee costs costs p.a. p.a. proportion of spot prices, we have F = Soe(r+s) t E.g. Let us consider a 6 months gold futures contract of 100 gm.
Assume that the spot price is Rs. 480 per gram and that it cost Rs. 3 per gram for the 6 monthly period to store gold and that the cost is incurred at the end of the period. If the risk free rate of Interest is 12% p.a. compounded continuously then R=0.12, s=480 x 100= 48000, e = 6/12 = 0.5 S=3 x 100 e -(0.12 x 0.5) = Rs. 282.53 Then F (48000 282.53)e-0.12 = Rs. 54,438.40
2)
NON CARRY TYPE COMMODITITES COMMODITITES: Consumable goods like agricultural
product's futures price will not exceed the sum of spot price + Caring CostCaring Returns, in these arbitrage arguments doesn't work investor stores thes thesee on beca becaus usee of its its cons consum umpt ptio ion n valu valuee on only ly no nott for for inve invest stme ment nt.. Valuation Valuation of non-carry non-carry commodity commodity futures futures requires requires another another concept. concept. i.e. "Convenience return" or "Convenience yield", which is the returns (in terms of money) that the investor realizes for carrying commodity over his short term term need needs. s. Th Thee fina financ ncia iall asse assets ts have have no conv conven enie ienc ncee retu return rn.. Th This is is different or different investor. F= (So +s) e
(r-c) t
S= P.V. C=convenience cost So=Spot price
PAY OF FOR FUTURES: (a) Payoff for buyers of futures contract-long futures Its payoff is same as payoff of a person who holds assets. Result of holding an asset may be unlimited upside or unlimited downside. Profit
1220
Nifty (underlying) Assets
Loss
INTERPRETATION The figure shows P/L for a long futures position. The investor bought futures when THE INDEX WAS AT 1220.
If Index
His futures position shows profits
If Index
His futures position shows losses
(b) Payoff for seller of futures contract-short futures It can be explained by taking an example: A speculator who sells a 2 months Nifty Index futures contracts when the nifty stands at 1220 (Nifty an underlying assets)
Profit …Nifty (underlying assets)
Loss INTERPRETATION:
When Index moves
Seller start making Profits.
When When ind index move moverrs.
Sell eller start tartss mak makiing Lo Loss ss..
FORWARD VS. FUTURES Features
Forward
Future
-Operational
Traded between
Trade on
Mechanism
two parties
Exchange
-Contract
Differ from
Standardised
Specifications
traded to trade
contracts
-Counter party
Exists such
No such
Risks
risk
risk
-Liquidity
Low
High
-Price
Not
Highly
Discovery
Efficient
Efficient
-Example
Currency Market
Future Market
-Settlement
At end of period
Daily
COBOT WHEAT FUTURES CONTRACT SPECIFICATIONS
Trading Unit
5000 Bushels
Deliverable Grades
No. 1 Northern Spring wheat at par and No. 2 Soft. Red, No. 2 Hard Red Winter, No. 2 Dark Northern Spring and
substitution
at
different
established by the exchange. Price Quotation
Cent ents
and and
quar uarterter-ccent ents
busshel bu hel
($12.50 per contract.) Tick Size
One-quarter cent per bushel ($12.50 per contract)
Daily Price Limit
20 cent per bushel ($1000 per contract)
above
pr previ eviou ouss
day' day'ss
or
below
settl ettleement ment
the pric pricee
(expandable to 30 cent per bushel) No limit in the spot month (limit are lift lifted ed two two bu busi sine ness ss day day befo before re the the spot month begins.) Contract Months
Marc March, h, May, May, July July,, Sept Septem embe berr and and December.
Contract Year
Starts in July and ends in May
Last Trading day
Seventh business day preceding the last last bu busi sine ness ss day day of the the deli delive very ry month.
Last Delivery Day
Last Last bu busi sine ness ss day day of the the deli delive very ry month
Trading Hours
9.30 9.30 to 1.15 1.15 p.m p.m (Chi (Chica cago go time time!, !, Mond Mo nday ay thro throug ugh h Frid Friday ay,, Only Only the the last trading day of an expiring contract, trading that contract closes in noon.
Ticker Symbol
W
OPTIONS Options are fundamentally different from forward and futures. An option gives the holder/buyers of the option the right to do something. The holder does not have committed himself to doing something. In contrast, in a forward or futures contract, the two parties have committed them self to doing something. Whereas it nothing (expect margin requirement) to enter in to a futures he purchases of an option require an up front payment.
HISTORICAL BACKGROUND OF OPTION: Although options have exercised for a long time, they were traded OTD, without much knowledge of valuation. Today exchange-traded options are active actively ly traded traded on stocks stocks,, stock stock indice indices, s, forei foreign gn curren currencie ciess and futur futures es contracts.
The first trading is options began in Europe and U.S. as early as the century. It was only in early, 1900s that a group of firm firmss set set up what what is kn know own n as the the "put "put and and call call brok broker erss and and deal dealer erss association" with the aim of providing a mechanism for bringing buyers and sellers together. It someone wanted to buy an option, he or she would contract one of the member firms. The firm would then attempt to find a seller or writer of option either from its own client of those of other member firms. If no seller could be found, the firm would undertake to write the option itself in return of price. The two deficiencies in above markets were 1.
No secondary market
2.
No mech mechan anis ism m to to gua guara rant ntee ee the the wri write terr of of opt optio ion n wou would ld ho hono norr it it In 1973, Black, Marton, Scholes invented the
Black-Scholes formula. In April 1973, CBOE was set up specially for the purpose of trading options. The market for options develop so rapidly that by early 80's number of share underlying the options contract sold each day exceed the daily volume of share traded on the NYSE. Since then, there has been no looking back.
What is option? An options is the right, but not the obligation to buy or sell a specified amou amount nt (and (and qu qual alit ity) y) of a comm commod odit ity, y, curr curren ency cy,, inde index x or fina financ ncia iall inst instru rume ment ntss a to bu buy y or sell sell a spec specif ifie ied d nu numb mber er of un unde derl rlyi ying ng futu future ress contracts, at a specified price on a before a give date in the future. Thus, option like futures, also provide a mechanism by which one can acquire a certain commodity on other assets, or take position in order to make profits or cover risk for a price. In this type of contract as well, there are two parties:
(a) The buyer (or the the holder, or owner owner of options) (b) The seller (or writer writer of options) While the buyer take "long position" the seller take "short position" So every option contract can either be "call option" or "put option" options are created by selling and buying and for every option that is buyer and seller.
OPTION
BUYER
SELLER
RIGHT
TO BUY (CALL)
OBLIGATION
TO SELL (PUT)
TO SELL
TO BUY
(CALL)
(PUT)
OPTION TERMINOLOGY TERMINOLOGY
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 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 exercise on him.
Option price: option price is the price, which the option buyer pays to the option seller. It is also referred as option premium.
Expiration date: the date specified in the options contract is known as expiration date, the exercise date, the strike date or the maturity.
Strike price: the price specified in the options contract is knows as strike price or the exercise price.
American options: these are the options that can be exercised at any time time upto upto the expira expiratio tion n date. date. Most Most exchan exchangege-tra traded ded option optionss are Americans.
European options: these are the options that can be exercised only on the expiration date itself. These are easier or analyze than American option, and properties of American options are frequently deducted from those of its European counterpart.
In the money option: an in the money option is an option that would lead lead to a po posi sittive ive cash ash flow low to the the ho hollder der if it will will exe exerci rcise immediately. A call option in the index is set 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 set to deep ITM. In the case of a put, the put is ITM if the index is below the strike price.
At-money option: (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.
Out-of-the money option:(OTM) option is an option that would lead to a negative cash flow it was exercised immediately. A call option on the index is OTM when the current index stands at a level, which is less than the strike price (spot price
Intrinsic value of an option: the option premium can be broken into two components-intrinsic values and time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero.
Time value of an option: it is a difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually the maximum time value exists when the options is ATM. The longer the time to expiration, the greater is an option's time value, all else equal. At expiration, an option should have no time value.
TYPES OF OPTIONS Thus Th us the the op opti tion onss are are of two two type types: s: CALL CALL OPTI OPTION ON AND AND PUT PUT OPTION.
CALL OPTION: It gives an owner the write to buy a specified quantity of the underling assets at a predetermined price i.e. the exercise price, or the specific date i.e. is the date of maturity.
EXAMPLE Suppose it is January now and the investor buys a March option contract on Reliance Industries (RIL) Share with an exercise pri price ce/s /str trik ikee pric pricee Rs. Rs. 21 210. 0. With With this this he get get a righ rightt to bu buy y shar sharee on a particular date in March, of course he is under no obligation. Obviously, if at the expiry date the price in market (spot price on expiry date) is above the exercise price he'll exercise his option and reverse is also true.
PUT OPTION: It gives the holder the right to sell a specific quantity of underlying assets at an agreed price on date of maturity he gets the right to sell.
EXAMPLE If an investor buys a March Put Option on RIL shares with an exercise price of Rs. 210 per share the investor get the right to sell 100 share @ 210 per share. The investor would naturally exercise his right if on maturity date price were below 210 and stand to gain and viceversa. Buying out options is buying insurance. To buy a put option on Nifty is to buy insurance: which reimburses the full extent to which-Nifty drops below the strike price of the put option. This is attractive to many people.
AMERICAN Vs EUROPEAN OPTION Its owner can exercise an American option at any time on or before the expiration date. A European style option gives the owner the right to use the option only on expiration date and not before.
OPTION PREMIUM A glance at the rights and obligation of buyer and seller reveals that option contracts are skewed. One way naturally wonder as to why the seller (writer) of an option would always be obliged to sell/buy an asset whereas the other party gets the right? The answer is that writer of an option receives, a consideration for Undertaking the obligation. This is known as the price or premium to the seller for the option. The buyer pays the premium for the option to the seller whether he exercise the option is not exercised, it becomes worthless and the premium becomes the profit of the seller. Premium/Price of an option = Intrinsic Value + Time Value Do Nothing
Option Option to option option holder holder matc matchi hing ng
Close Close out the positi position on by write write a, call call op opti tion on or it in case case of
writer. Exercise the option.
IN-THE-MONEY AND OUT-THE-MONEY OPTIONS
Condition So>E So
Call In the money Out of the money At the money E = exercise price
Put Out of the money In the money At the money
Consider Consideration ation for selling selling the option/O option/Optio ption n Pricing/O Pricing/Optio ption n Premium Premium Assumption
Not transaction cost likes brokerage or commission on buying or selling.
FACTORS AFFECTING PRICING 1. Supply Supply and and demand demand in second secondary ary market market 2. Ex Exer erci cise se pri price ce 3. Risk Risk free free inte interes restt rate, rate, 4. Volati Volatilit lity y of und underl erlyin ying g 5. Time Time to expi expira rati tion on 6. Divide Dividend nd on und underl erlyin ying g
Option-to-option holder in case of—he opt for expiry date. i.e How Option Work
CALL OPTIONS
Da y1
Spot Nifty: 1100 Strike Price: 1150 Duration :3 months No. of option bought=200 Premium per option:10 Total premium paid=2000
Da y 90
Spot Nifty:1200 Buyer exercise the option Profit: No. of option x price Differential-Premium paid=Rs. (200x(1200-1150)(200x(1200-1150)-
Spot Nifty: 1000 Buyer foregoes the option Loss premium paid Rs. 2000
CALL OPTION WORK
Da y1
Spot Nifty: 1100 Strike Price: 1150 Duration :3 months No. of option bought=200 Premium per option:10 Total premium paid=2000
Da y 90
Spot Nifty:1200 Buyer exercise the option Profit: No. of option x price Differential-Premium paid=Rs. (200x(1200-1150)(200x(1200-1150)-
Spot Nifty: 1000 Buyer foregoes the option Loss premium paid Rs. 2000
PRICING OF OPTION
AT EXPIRATION
BEFORE EXPIRATION
Call option
Put option
Put option
Call option
At expiration
Before expiration
At expiration
Before
expiration
1 AT EXPIRATION (a) Call option pricing at expiration : If the price of the underlying asset were lower than the exercise price on the expiration date, the call would expire unexercised. This is because no one would like to buy an asset, which is available in the market at a lower price. If an out of money call did actually sell for a certain price, the investor can make an arbitrage profit by selling it and earning premium. The buyer is unlikely to exercise option, the allowing seller to retain premium. In even of (irrational) exercise of such a call, writer can purchase asset as S1 and give it at making a profit of (E+S 1)+ premium. On the other hand, if the call happens to be in the money, it'll, be worth its intrinsic value, equal to excess of asset price over the exercise price. If call price
VALUE OF CALL OPTION
Value
E
Price of share
Put option at expiration : When at the expiration date the price of the underl und erlyin ying g asset asset is greate greaterr than than exerci exercised sed price price,, the put option option will will go unexercised. This is because there is no use of using option to sell at E when If the option were exercised, it would have resulted in a profit to seller of option of about (E-S 1) + premium. When
S1
Value of put option
Value
Price of share
2. BEFORE EXPIRATION: Before expiration, the options call and put are usually sold for at least intrinsic valued (difference of E & S 1).
(a ) Call Option Pricing: A call option will usually sell for at least its intrinsic value, Minimum value of call is always is equal to its intrinsic value. Intrinsic value = S>E To this would be added the time value, if any longer the time expiry, greater were time value. P=f (E,S,T) Y
Price of Call option
Intrinsic Value
450
E
Stock Price
X
In figure intrinsic value is shown, by, a 45 0 line starting at E, equal to the excess of stock price over the exercise price.
At Stock price S2, Call Option pence is out- of-the money i.e. zero intrinsic value then option price=S2B= only time value
(c)Put Option Pricing It would sell for a price that is at least equal to intrinsic value, which is excess of exercise price over stock price, when option is in –the money. For in the money Put Option i.e. S
For out-the-money/at the money Put Option i.e. S>E, E,S = 0 P=Time Value b'coz intrinsic value = 0 B
Time value
Price of put option
Value Intrinsic
B1 Time Value
Stock prices S1
E
S2
DERIVATIVES TRADING 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 24 members committee under the Chai Chairm rman ansh ship ip of Dr. Dr. L.C. L.C. Gupt Guptaa on 18 18th th Nove Novemb mber er,, 96 to deve develo lop p approp appropria riate te regula regulator tory y frame framewor work k for deriva derivativ tives es tradin trading g in India India.. The committee submitted its report on 17th March, 98 prescribing necessary preconditions for introduction of derivatives trading in India. the committee recomm recommend ended ed that that deriva derivativ tives es should should be declar declared ed as 'secur 'securiti ities' es' so that 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 Chai Chairm rman ansh ship ip of Prof Prof.. J.R. J.R. Varm Varma, a, to reco recomm mmen end d
meas measur ures es for for risk risk
containment in derivatives market in India. The report, which was submitted in October, 1998, worked out the operational details of margining system, meth method odol olog ogy y for for char chargi ging ng init initia iall marg margin ins, s, brok broker er net net wort worth, h, depo deposi sitt requirement and real time monitoring requirements. The SCRA was amended in Dec. 1999 to include derivatives within the ambit of 'securities' and the regulatory framework was developed for governing derivatives trading. The act also made it clear that derivative shall be legal and valid only it such contract are traded on a recognized stock exchange, thus preluding OTC derivative. Thee go Th gove vern rnme ment nt also also resc rescin inde ded d in Marc March h 20 2002 02,, the the thre threee deca decade de old 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 2000. SEBI permitted the derivative segments of two stock exch exchan ange ges. s. NSE NSE and and BSE, BSE, and and thei theirr clea cleari ring ng ho hous use/ e/co corp rpor orat atio ion n to commen commence ce tradin trading g and settle settlemen mentt in approv approved ed deriva derivativ tives es contra contracts cts.. To begin with, SEBI approved trading in index futures contracts based on S & P CNX Nifty and BSE-30 (Sensex) index. This was followed by approval, for trading in options based on these two indexes and options on individual securities. The trading in index options commenced in June 2001. Futures contracts on individual stocks were launched in November 2001. Trading and Settlement in derivatives contracts is done in accordance with the rules, bye-laws, and regulations of the respective exchanges and their clearing hous ho use/ e/co corp rpor orat atio ion n du duly ly appr approv oved ed by SEBI SEBI and and no noti tifi fied ed in the the offi offici cial al gazette. Thus, the following five types of Derivatives are now being traded in the India Stock Market. * Stock Index Futures * Stock Index Options * Futures on Individual Stocks * Options on Individual Stocks * Interest Rate Derivatives
INDEX FUTURES: Index futures are financial contracts for which the underlying is the cash market index like the Sensex, which is the brand index of India. index futures contract is an agreement to buy or sell a specified quantity of underlying index for a future date at a price agreed
upon up on betw betwee een n the the bu buye yerr and and sell seller er.. Th Thee cont contra ract ctss have have stan standa dard rdiz ized ed specifications like market lot, expiry day, tick size and method of settlement.
INDEX OPTIONS: Index Options are financial contracts whereby the right is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying index at a specific price (strike price) on or before a specific date (expiry date).
STOCK FUTURES: Stock Futures are financial contracts where the unde un derl rlyi ying ng asse assett is an indi indivi vidu dual al stoc stock. k. Stoc Stock k futu future ress cont contra ract ct is an agreement to buy or sell a specified quantity of underlying equity share for a
future date at a price agreed upon between the buyer and seller. Just like Index derivatives, the specifications are pre-specified.
STOCK OPTIONS: Stock Options are instruments whereby the right of purchase and sale is given by the option seller in consideration of a premium to the option buyer to buy or sell the underlying stock at a specific price (strike price) on or before a specific date (expiry date).
INTEREST RATE DERIVATIVES: The derivatives are taken on various rates of interests.
OPERATIONAL MECHANISM FOR DERIVATIVES TRADIN
1.
REGISTRAT REGI STRATION ION WITH WI TH BROKER BRO KER: The first step towards trading in the derivatives
market is selection of a proper broker with whom the investor would trade. Investors should complete all the registration formalities with the broker before commencement of trading in the derivatives market. The inve invest stor or shou should ld also also ensu ensure re to deal deal with with a brok broker er (mem (membe berr of the the exch exchan ange ge)) who who is a SEBI SEBI regi regist ster ered ed brok broker er and and po poss ssess esses es a SEBI SEBI registration certificate. 2. CLIENT AGREEMENT: The investor should sign the Client Agreement with the broker before the broker can place any order on his behalf. The client agreement includes provisions specified by SEBI and the derivatives segment.
3. UNIQUE CLIENT IDENTIFICATION NUMBER : After signing the client agreement, the investor gets a unique identification number (ID). The broker would key this identification number in the system at the time of placing the order on behalf of the investor. This ID is broker specific i.e. if the investor chooses to deal with different brokers, he needs to sign the client agreement with each one of them and resultantly, he would have different Ids.
4. RISK DISCLOSURE DOCUMENT: As stipulated in the Bye-Laws provide his par parti ticu cula lars rs to the the inve invest stor or.. Th Thee part partic icul ular arss woul would d incl includ udee his his SEBI SEBI registration number, the name of the employees who would be primarily responsible for the client's affairs, the precise nature of his liability towards
the client in respect of the business done on behalf of the investor. The broker must also apprise the investor about the risk associated with the business in derivative trading and the extent of his liability. This information forms forms part of the Risk Disclosure Disclosure document, document, which the broker broker issues issues to the client. client. The investor should carefully carefully read the risk disclosure disclosure document document and understand the risks involved in the derivatives trading before committing any position in the market. The risk disclosure document has to be signed by the client and a copy of the same is retained by the broker for his records.
5. FREE COPY OF RELEVANT REGULATION REGULATION: The client is also entitled to a free copy of the extrac extracts ts of releva relevant nt provis provision ionss gov govern erning ing the rights rights and obliga obligatio tions ns of client clients, s, releva relevant nt manual manuals, s, notifi notificat cation ions, s, circul circulars ars and any additi additions ons or amendments etc. of the derivatives segment or of any regulatory authority to the extent it governs the relationship between the broker and the client.
6. PLACING ORDER WITH THE BROKER : The investor should place orders only after understanding the monetary implications in the event of execution of the trade. After the trade is executed, the investor can request for a copy of the trade confirmation slip generated on the systems on execution of the trade. The investor should also obtain from the broker, a contract note for the trade executed within 24 hours. The contract note should be time (order receipt and order execution) and price stamped. Execution prices, brokerage and other charges, if any, should be separately mentioned in the contract note. If desired, the investor may change an order anytime before the same is executed on the exchange.
7. MARGINING SYSTEM IN DERIVATIVES : The aim of margin money is to minimize the risk of default by either counter-party. The payment of margin ensures that that the the risk risk is limi limite ted d to the the prev previo ious us day' day'ss pric pricee move moveme ment nt on each each outstanding position. The different types of margins are:
A) INITIAL MARGIN: The basic aim of initial margin is to cover the the largest largest potential potential loss in one day. Both buyer buyer and seller have have to deposited deposited before the opening of the position in the futures transaction. This margin is calculated by SPAN by considering the worst case scenario. B) MARK TO MARKET MARGIN: All daily losses must be met by depositing of further collateral-known as variation margin, which is required by the close of business, the following day. Any profits on the contract are credited to the client's variation margin account.
7.
INVESTOR PROTECTION FUND:
The derivatives segment has established an "Investor Protection Fund" which is independent of the cash segment to protect the interest of the investors in the derivatives market.
8.
ARBITR ARB ITRATI ATION ON :
In case of any dispute between the members and the clients arising out of the trading or in relation to trading/settlement, the party thereto shall resolve such complaint, dispute by arbitrations procedure as defined in the rules and regulations and ByeLaws of the respective exchanges.
REGULATORY FRAMEWORK The trading of derivatives is governed by the provisions contained in the SC (R) A, the SEBI Act, the rules and regulations framed there under and the rules and bye-laws of stock exchanges.
Securities contracts (Regulation) Act, 1956
SC(R) A aims at preventing undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India. The term "securities" has been defined in the SC(R)A. As per Section 2(h), the 'Securities' include:
1. Shares Shares,, scrips scrips,, stock, stock, bonds, bonds, debent debenture ures, s, stock stock or other other marke marketab table le securities of a like nature in or of any incorporated company or other body corporate. 2. Deri erivat vative ive
3. Unit Unitss or any any othe otherr inst instru rume ment nt issu issued ed by any any coll collec ecti tive ve inve invest stme ment nt scheme to the investors in such schemes. 4. Govern Governmen mentt securi securitie ties. s. 5. Such other other instrume instruments nts as may be declared declared by the the Central Govern Government ment to be securities 6. Rights Rights or inte interes rests ts in securi securitie tiess "Derivative" is defined to includes: •
A security derived from a debt instrument, share, loan whether
secured or unsecured, risk instrument or contract for differences or any other form of security. •
A contract which derives its value from the prices, or index of
price, of underlying securities. Section 18A provides that notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are: Traded on a recognized stock exchange. Sett Settle led d on the the clea cleari ring ngho hous usee of the the reco recogn gniz ized ed stoc stock k exch exchan ange ge,, in accordance with the rules and bye-laws of such stock exchanges.
REGULATIONS FOR DERIVATIVES TRADING SEBI set up a 24-member committee under the Chairmanship of Dr. L.C. Gupta Gupta to develo develop p the approp appropria riate te regula regulator tory y framew framework ork for for deriva derivativ tives es trading in India. The committee submitted its report in March 1998. On May 11,, 19 11 1998 98 SEBI SEBI acce accept pted ed the the reco recomm mmen enda dati tion onss of the the comm commit itte teee and and approved the phased introduction of derivatives trading in India beginning with stock index futures. SEBI also approved the "suggestive bye-laws" recommended by the committee for regulations and control of trading and settlement of derivatives contracts. The provisions in the SC(R)A and the regulatory fram framew ewor ork k deve develo lope ped d ther theree un unde derr go gove vern rn trad tradin ing g in secu securi riti ties es.. Th Thee amen amendm dmen entt of the the SC(R SC(R)A )A to incl includ udee deri deriva vati tive vess with within in the the ambi ambitt of 'securities' in the SC(R)A made trading in derivatives possible with in the framework of that Act. 1. Any Exchange Exchange fulfilli fulfilling ng the eligibili eligibility ty criteria criteria as prescribe prescribed d in the LC Gupta committee report may apply to SEBI for grant of recognition under Section 4 of the SC(R)A, 1956 to start trading derivatives. The deriva derivativ tives es exchan exchange/ ge/seg segmen mentt should should have have a separa separate te gov govern erning ing counci councill and repres represent entati ation on of tradin trading/c g/clea learin ring g member memberss shall shall be limited to maximum of 40% of the total members of the governing coun counci cil. l. Th Thee exch exchan ange ge shal shalll regu regula late te the the sale saless prac practi tice cess of its its memb member erss and and will will ob obta tain in prio priorr appr approv oval al of SEBI SEBI befo before re star startt of trading in any derivative contract. 2. The Exchang Exchangee shall shall have have minimum minimum 50 50 members members..
3. Th Thee membe emberrs of an exis existi tin ng seg segment ment of the the exc exchan hange will ill no nott atomically become the members of derivative segment. The members of the derivatives segment need to fulfill the eligibility conditions as laid down by the LC Gupta committee. 4. The cleari clearing ng and settleme settlement nt of deriva derivativ tives es traders traders shall be through through a SEBI
approved
clearing
corporation/house.
Clearing
corporation/house complying with the eligibility conditions as laid down by the committee have to apply to SEBI for grant of approval. 5. Derivativ Derivativee brokers/dea brokers/dealers lers and clearing clearing members members are required required to seek seek registration from SEBI. This is in addition to their registration as broke brokers rs of existi existing ng stock stock exchan exchanges ges.. The minimu minimum m netwo networth rth for for clearing members of the derivatives clearing corporation/house shall be Rs. 300 Lakh. The networth of the member shall be computed as follows:
a. b.
•
Capital + Fee reserves
•
Less non-allowable assets viz. Fixed assets Pledged securities
c.
Member's card
d.
Non-allowable securities (unlisted securities)
e.
Bad deliveries
f.
Doubtful debts and advances
g.
Prepaid expenses
h.
Intangible assets
i.
30% marketable securities
6. Th Thee mini minimu mum m cont contra ract ct valu valuee shal shalll no nott be less less than than Rs. Rs. 2 Lakh Lakh.. Exchan Exchange ge should should also also submit submit detail detailss of the future futuress contra contract ct they they propose to introduce. 7. Th Thee init initia iall marg margin in requ requir irem emen ent, t, expo exposu sure re limi limits ts link linked ed to capi capita tall adequacy and margin demands related to the risk of loss on the position shall be prescribed by SEBI/Exchanges from time to time. 8. Th Thee L.C. L.C. Gupt Guptaa comm commit itte teee repo report rt requ requir ires es stri strict ct enfo enforc rcem emen entt of "Know your customer" rule and requires that every client shall be registered with the derivatives broker. The members of the derivatives segment are also required to make their clients aware of the risks invo involv lved ed in deri deriva vati tive vess trad tradin ing g by issu issuin ing g to the the clie client nt the the Risk Risk Disclosure Document and obtain a copy of the same duly signed by the client. 9. The trading trading members members are requir required ed to have qualifi qualified ed approved approved user and and sales person who have passed a certification programme approved by SEBI.
DR. L.C.GUPTA COMMITTEE Thee Secu Th Securi riti ties es and and exch exchan ange ge bo boar ard d of Indi Indiaa (SEB (SEBI) I) appo appoin inte ted d a committee with Dr. L.C. Gupta as its chairman in November, 1996 to develop regulatory framework for derivatives trading in India. The committee recommended introduction of derivatives market in a phased manner with the introduction of index futures and SEBI appointed a group with Prof. J.R. Varma as its Chairman to recommend measures for risk containment in the derivative market in India. The recommendations of L.C. Gupta Committee at a glance:
a) Stock Stock index futures futures to be the startin starting g point of equity equity derivat derivatives. ives. b) SEBI SEBI to approve approve rules, rules, bye-la bye-laws ws and regulat regulation ion of the derivat derivative ivess exchange and the derivatives contracts. c) SEBI need need not be involved involved in framing framing exchange exchange level level regulatio regulations. ns. d) SEBI SEBI should should create create a specia speciall Deriva Derivativ tives es Cell Cell as it involv involves es specia speciall knowledge, and a Derivatives advisory council may be created to tap outside experts for independent. e) Legal Legal restri restricti ctions ons on instit instituti utions ons,, includ including ing mutual mutual funds, funds, on use of derivatives should be removed. f) Ex Exis isti ting ng stoc stock k exch exchan ange gess with with cash cash trad tradin ing g to be allo allowe wed d to trad tradee derivatives if they meet prescribed eligibility condition—importantly, a separate Governing Council and at least 50 members. g) Two Two cate catego gori ries es of memb member er-c -cle lear arin ing g memb member erss and and no nonn-cl clea eari ring ng members, with the latter depending on the former for settlement of trades. This is no bring in more traders.
h) Broker Broker members, members, dealers dealers and sales persons persons in the derivatives derivatives market market must have passed a certificate programme to be registered with SEBI. i) Co-o Co-ord rdin inat atio ion n betw betwee een n SEBI SEBI and and the the RBI RBI of fina financ ncia iall deri deriva vati tive vess market must have passed a certificate programme to be registered with SEBI. j) Clearing Clearing corpor corporation ation to to be the center center piece piece of the the derivativ derivatives es market, market, bot both h for for impl implem emen enti ting ng the the marg margin in syst system em and and prov provid idin ing g trad tradee guarantee. In the near term, existing clearing corporation be allowed to participate in derivatives. For the long-term, a centralized clearing corporation has been recommended. k) Mini Minimu mum m netw networ orth th requ requir irem emen entt of Rs. Rs. 3 cror crores es for for part partic icip ipan ants ts,, maximum exposure limits for each broker/dealer on gross basis and capital adequacy requirements to be prescribed. l) Mark-to-m Mark-to-marke arkett to be collect collected ed before before next next day's day's trading trading starts. starts. m) As a conservat conservative ive measure, measure, margins for derivatives derivatives purposes purposes not to take into account positions in cash and futures market and across all stock exchanges. n) Margin Marginss to be system systemati atical cally ly collecte collected d and not left to discre discretio tion n of brokers/dealers. o) Much stricter regulation for derivatives derivatives as compared compared to cash trading. p) Strengthe Strengthen n cash market market with uniform uniform settlement settlement cycles cycles among all all SEs and regulatory oversight. Proper supervision of sales practices with registration of every client with the dealer/broker and risk disclosure as the corner-stone.
J.R. VARMA COMMITTEE After the submission of L.C. Gupta committee report and approval of the introduction of index futures trading by SEBI the board mandated the setting up of a group to recommend measures for risk containment in the derivative market in India. Prof. J.R. Varma was the chairman of the group.
ASSUMPTIONS
-Volatility in India markets are high. -Volatility is not constant & varying. -There is no data on the volatility on Index futures. -Even at 99% "Value At Risk" model there could be possibility of default once in six months. -Not efficient organized arbitragers players. RECOMMENDATIONS
- Only traders with high net worth be allowed to traded in Derivatives. - Imposition of VAR margin system. - Submission of periodic reports by CC and SE to SEBI. - Continuously refining of Margin system. - Daily changes in the Margins be calculated and imposed. - Proper liquid net worth. -Online position monitoring at customer, TM, CM and Market level.
RISK MANAGEMENT NSCCL has developed a comprehensive risk containment mechanism for the F & O segment. The salient features of risk containment mechanism on the F & O segment are: 1. The financia financiall soundness soundness of the member memberss is the key to risk manage management. ment. Therefore, the requirements for membership in terms of capital adequacy (net worth, security deposits) are quite stringent. 2. NSCCL NSCCL charges charges an upfront upfront initial initial margin margin for all the the open position positionss of a CM. It specifies the initial margin requirements for each futures/options contr contract act on a daily daily basis. basis. It also also follow followss valuevalue-atat-ris risk k (VaR) (VaR) based based margining through SPAN. The CM in turn collects the initial margin from the TMs and their respective clients. 3. Th Thee op open en positi position onss of the memb member erss are are mark marked ed to mark market et based based on contract settlement price for each contract. The difference is settled in cash on a T + 1 basis. 4. NSCC NSCCL' L'ss on on-l -lin inee po posi siti tion on moni monito tori ring ng syst system em moni monito tors rs a CM's CM's op open en positions on a real-time basis. Limits are set for each CM based on his capital deposits. The on-line position monitoring system generates alerts whenever a CM reaches a position limit set up by NSCCL. NSCCL monitors the CMs for MTM value violation, while TMs are monitored for contract-wise position limit violation. 5. CMs are provide provided d a trading trading termina terminall for the purpos purposee of monitor monitoring ing the open position of all the TMs clearing and settling through him. A CM may set exposure limits for a TM clearing and settling through him. NSCCL assists the CM to monitor the intra-day exposure limits set up by
a CM and whenever a TM exceed the limits, it stops that particular TM from further trading. 6. A member member is alerted alerted of his positio position n to enable enable him to adjust adjust his exposure exposure or bring in additional capital. Position violations result in withdrawal of trading facility for all TMs a CM is case of a violation by the CM. 7. A separate separate settlemen settlementt guarantee guarantee fund for for this segment segment has been created created out of the capital of members. The fund had a balance of Rs. 648 crore at the end of March 2002. The most critical component of risk containment mechanism for F & O segment is the margining system and on-line position monitoring. The actual position monitoring and margining is carried out online line throug through h Paral Parallel lel Risk Risk Manage Managemen mentt System System (PRIS (PRISM). M). PRISM PRISM uses uses SPAN (r) (Standard Portfolio Analysis of Risk) system for the purpose of computation of on-line margins, based on the parameters defined by SEBI.
MINIMUM BASE CAPITAL A Clearing Member (CM) is required to meet with the Base Minimum Capital (BMC) requirements prescribed by NSCCL before activation. The CM has also to ensure that BMC is maintained in accordance with the requirements of NSCCL at all points of time, after activation. Every CM is required to maintain BMC of Rs.50 lakhs with NSCCL in the following following manner:
(1)
Rs.25
lakhs
in
the
form
of
cash.
(2) Rs.25 lakhs in any one form or combination of the below forms: Cash
FIXED DEPOSIT RECEIPTS (FDRs) issued by approved banks and deposited with approved Custodians or NSCCL
BANK GUARANTEE in favour of NSCCL from approved banks in the specified format.
APPROVED APPROVED SECURITIE SECURITIES S
in dema dematt form form depo deposi site ted d with with
approved Custodians. Any failure on the part of a CM to meet with the BMC requirements at any point of time, will be treated as a violation of the Rules, Bye-Laws and Regulations of NSCCL and would attract disciplinary action inter-alia including, withdrawal of trading facility and/ore clearing facility, closing out of outstanding positions etc.
ADDITIONAL BASE CAPITAL Clearing members may provide additional margin/collateral deposit (additional base capital) to NSCCL and/or may wish to retain deposits and/or such amounts which are receivable from NSCCL NSCCL,, over over and above above their their minimu minimum m deposi depositt requir requireme ements nts,, toward towardss initial margin and/ or other obligations.
EFFECTIVE DEPOSITS / LIQUID NETWORTH Effective deposits
All collateral deposits made by CMs are segregated into cash
component and
non-cash
component.
For Additional Base Capital, cash component means cash, bank guarantee, fixed deposit receipts, T-bills and dated government securities. Non-cash component shall mean all other forms of collateral deposits like deposit of approved
demat
securities.
At least 50% of the Effective Deposits should be in the form of cash.
Liquid Liqu id
Networth Netw orth
Liquid Networth is computed by reducing the initial margin payable at any point
in
time
from the
effective
deposits. The Liquid Networth maintained by CMs at any point in time should not be less than Rs.50 lakhs (referred to as Minimum Liquid Net Worth).
MARGINS NSCCL has developed a comprehensive risk containment mechanism for the Futu Future ress & Opti Option onss segm segmen ent. t. Th Thee most most crit critic ical al comp compon onen entt of a risk risk containment mechanism for NSCCL is the online position monitoring and
margining system. The actual margining and position monitoring is done online, line, on an intraintra-day day basis. basis. NSCCL NSCCL uses uses the SPAN SPAN (Stand (Standard ard Portfo Portfolio lio Analysis of Risk) system for the purpose of margining, which is a portfolio
based bas ed
Initia Ini tiall
Margin Mar gin
NSCCL collects initial margin up-front for all the open positions of a CM based based on the margins margins computed computed by NSCCLNSCCL-SP SPAN AN .A CM is in turn turn required to collect the initial margin from the TMs and his respective clients. Sim Simila ilarly, ly, a TM sho should uld coll ollect ect up upffront ront marg margiins fro from his clien lients ts..
Initial margin requirements are based on 99% value at risk over a one day time horizon. However, in the case of futures contracts (on index or individual securities), where it may not be possible to collec collectt mark mark to market market settle settlemen mentt value, value, before before the commen commencem cement ent of trading on the next day, the initial margin may be computed over a two-day time horizon, applying the appropriate statistical formula. The methodology for computation of Value at Risk percentage is as per the recommendations of SEBI from time to
time.
INITIAL MARGIN REQUIREMENT FOR A MEMBER: For client positions - shall be netted at the level of individual client
and grosse grossed d across across all client clients, s, at the Tradin Trading/ g/ Cleari Clearing ng Member Member level, level, without any setoffs between clients.
For proprieto proprietory ry position positionss - shal shalll be nett netted ed at Trad Tradin ing/ g/ Clea Cleari ring ng
Member level without any setoffs between client and proprietory positions. For the purpose of SPAN Margin, various parameters are specified from time to time. In case a trading member wishes to take additional tradin trading g positi positions ons his CM is requi required red to provid providee Additi Additiona onall Base Base Capita Capitall (ABC) (ABC) to NSCCL. NSCCL. ABC can be provi provided ded by the the member memberss in the form form of Cash , Bank Guarantee , Fixed Deposit Receipts and approved securities .
Premiu Pre mium m
Margin Mar gin
In addi additi tion on to Init Initia iall Marg Margin in,, Prem Premiu ium m Marg Margin in woul would d be char charge ged d to members. The premium margin is the client wise margin amount payable for the day and will be required to be paid by the buyer till the premium settlement is
complete.
Assignmen Assig nmentt
Margin Marg in
Assignment Margin is levied on a CM in addition to SPAN margin and Premium Margin. It is required to be paid on assigned positions of CMs towa toward rdss Inte Interi rim m and and Fina Finall Ex Exer erci cise se Sett Settle leme ment nt ob obli liga gati tion onss for for op opti tion on contracts on individual securities, till such obligations are fulfilled.
The margin is charged on the Net Exercise Settlement Value payable by a Cleari Clearing ng Member Member toward towardss Inter Interim im and Final Final Exerci Exercise se Settle Settlemen mentt and is deduct deductibl iblee from from the effect effective ive deposi deposits ts of the Cleari Clearing ng Member Member availa available ble towards
margins. Assignment margin is released to the CMs for exercise
settlement pay-in.
PAYMENT OF MARGINS The initial margin is payable upfront by Clearing Members. Initial margins can can be paid paid by memb member erss in the the form form of Cash Cash , Bank Bank Guar Guaran ante tee, e, Fixe Fixed d Depos De posit it
Receip Rec eipts ts
and an d approv app roved ed
secur se curiti ities es
.
Non-fulfillment Non-fulfillment of either the whole or part of the margin obli ob liga gati tion onss will will be trea treate ted d as a viol violat atio ion n of the the Rule Rules, s, ByeBye-La Laws ws and and Regulations of NSCCL and will attract penal charges @ 0.09% per day of the amount not paid throughout the period of non-payment. In addition NSCCL may at its discretion and without any further notice to the clearing member, initiate other disciplinary action, inter-alia including, withdrawal of trad tradin ing g faci facili liti ties es and/ and/ or clea cleari ring ng faci facili lity ty clos closin ing g ou outt of ou outs tsta tand ndin ing g positions, imposing penalties, collecting appropriate deposits, invoking bank guarantees/ fixed deposit receipts, etc.
POSITION LIMITS, VIOLATIONS & PRICE SCAN RANGE
Position
Limits
Clearing Members are subject to the following exposure / position limits in addition to initial margins requirements •
Exposure Limits
•
Trading Memberwise Position Limit
•
Client Level Position Limits
•
Market Wide Position Limits (for Derivative Contracts on Underlying Stocks) Collateral limit for Trading Members
VIOLATIONS
PRIS PRISM M (Par (Paral alle lell Risk Risk Mana Manage geme ment nt Syst System em)) is the the real real-t -tim imee po posi siti tion on monitoring and risk management system for the Futures and Options market segm segmen entt at NSCC NSCCL. L. Th Thee risk risk of each each trad tradin ing g and and clea cleari ring ng memb member er is moni monito tore red d on a real real-t -tim imee basi basiss and and aler alerts ts/d /dis isab able leme ment nt mess messag ages es are are generated if the member crosses the set limits. •
Initial Margin Violation
•
Exposure Limit Violation
•
Trading Memberwise Position Limit Violation
•
Client Level Position Limit Violation
•
Market Wide Position Limit Violation
•
Violation arising out of misutilisation of trading member/ constituent collaterals and/or deposits
•
Violation of Exercised Positions Clearing members who have violated any
requirement and/ or limits, may submit a written request to NSCCL to either reduce their open position or, bring bring in additional collateral deposits by way of cash or bank guarantee or FDR or securities. NSCCL renders a service to members, whereby the members can give standing instructions to debit their account
towards
additional
base
capital.
A penalty of Rs. 5000/- is levied for each violation and is debited to the clearing account of clearing member on the next business day. In respect of violation on more than one occasion on the same day, each instance is treated as a separate violation for the purpose of calcul calculati ation on of penalt penalty. y. The penalt penalty y is charge charged d to the cleari clearing ng membe member r irresp irrespect ective ive of whethe whetherr the cleari clearing ng member member brings brings in margi margin n deposi deposits ts subsequently. Clearing Members (CMs) and Trading Members (TMs) are required to collect upfront initial margins from all their Trading Members/
Constituents.
CMs are required to compulsorily report, on a daily basis, details in respect of such margin amount due and collected, from the TMs/ Constituents clearing and settling through them, with respect to the trades executed/ open positions of the TMs/ Constituents, which the CMs
have paid to NSCCL, for the
purpose
of
meeting
margin
requirements.
Similarly, TMs are required to report on a daily basis details in respect of such margin amount due and collected from the constituents clearing and settling through them, with respect to the trades executed/ open positions of the constituents, which the trading members have paid to the CMs, and on which the CMs have allowed initial margin limit to the TMs.
RESEARCH METHODOLOGY & ANALYSIS
RESEARCH METHODOLOGY METHODOLOGY
Research is a procedure of logical and systematic appl applic icat atio ion n of the the fund fundam amen enta tals ls of scie scienc ncee to the the gene genera rall and and ov over eral alll questions of a study and scientific technique by which provide precise tolls, specif specific ic proced procedure uress and techni technical cal,, rather rather than than philos philosoph ophica icall means means for getting and ordering the data prior to their logical analysis and manipulation. Different type of research designs is available depending upon the nature of research project, availability of able manpower and circumstances. The study about " Trends and future of derivatives in india " is descriptive in nature. So survey method is used for the study.
Sampling Procedure
The small representative selected out of large population is selected at random is called sample. Well-selected sample may reflect fairly, accurately the characteristic of population. The chief aim of samp sampli ling ng is to make make an infe infere renc ncee abou aboutt un unkn know own n para parame mete ters rs from from a measurable sample statistics. The statistical hypothesis relating t population. The sample size was 60 which includes brokers,dealers brokers,dealers and investors.
Sources of Data:
The sources of data includes primary and secondary data sources. Primary Sources:
Prima Primary ry data data is collec collected ted by struct structure ured d questi questionn onnair airee administered by sitting with guide and discussing problems. Secondary Sources:
The secondary data is data, which is collected and compiled for the different purpose, which are used in research for this study. The secondary data include material collected from:
Newspaper
Magazine
Internet
Data collection instruments instruments
The various method of data gathering involves the use of appropriate recording forms. These are called 'tools' or 'instruments of data collection. Collection Instruments: 1. Obse Observ rvat atio ion n 2. Inte Interv rvie iew w gu guid idee 3. Inte Interv rvie iew w sched schedul ulee
Each tool is used for specific method of data gathering. The tool tool for for data data collec collectio tion n transl translate atess the resear research ch object objective ivess in to specif specific ic term/questions to the response, which will provide research objective. The instrument data collection in our study interview schedule mainly. Every respondent was conducted personally with an interview
schedule containing questions. Interview method was used because it can be explained more easily and clearly and takes less time to answer. Methodology Assumptions:
The research was based on the following assumption: 1. The methodo methodolog logy y used used for this purpose purpose are survey survey and questio questionab nable le method. It is assumed that this method is more suitable for collection of data. 2. It is assumed assumed that the respond respondent ent have sufficie sufficient nt knowledge knowledge to ensure ensure questionable. 3. It is assume assumed d that that the respond respondent ent have filled filled right right and correct correct option option according to their view.
BROKER'S PERCEPTION ABOUT DERIVATIVES (ANALYSIS)
TRADING PERIOD IN DERIVATIVES
Trading period in derivatives. 25
21
20 15
13
13
Series1
10
7
Series2 6
5 0 Less than 1 year
1 year
2 year
3 year
More than 3 year
From my sample sample of 60, 13 (22%) brokers brokers and investors investors investing in derivatives from last 1 year and less than this. 21(35%) are investing from last 2 years ,7 (11%) are investing from last 3 years and only 6 (10%) have experience of more than 3 years of investment in derivatives.
REASONS BEHIND ITS ADOPTION
Purpose for derivative derivative Trading 30
24
25 20
15
Series1
14
15
Series2
7
10 5 0
i n g d e H
o i o t a a e m l g a c u n e a M S p k s i s R
t d i d i q u q i L
Reasons behind adoption of derivatives are different by brokers,investors and
dealers
e.g.
liquidity,
risk
management
hedging,
investor
demand(speculation) demand(speculation) etc. Out of 60 brokers,investors dealing dealing in derivatives derivatives 14 (23%) adopt it due to characteristi characteristics cs of risk management management,, 15 (25%) due to hedgin hedging g , 24 (40%) (40%) for invest investor or (clien (client's t's)) demand demand (specu (speculat lation ion)) and remaining 7 (12%) due to liquidity.
EXPERIENCE WITH DERIVATIVE Out of my sample size 60, only 23 (38%) find derivatives as quite profitable investment. 14 (23%) find that derivatives can’t give big profits in future.17 (29%) feels that equities are better option for onvestment than derivativies.remaining 6 (10%) have other opin op inio ion n that thaton only ly thos thosee inve invest stor ors, s,br brok oker erss can can deri derive ve go good od retu return rn from from derivatives those have surplus funds and patience for long period..because derivative requires huge investment and risk also.
INVESTED AMOUNT IN DERIVATIVES Invested amount in derivati derivative ve trading. trading. 30 25 20
Series1
15
Series2
10
Series3
5 0 2 lacs
2lacs-5 lacs
5 lacs-10 lacs
Any other
Out of my sample size 60 ,27 (45%) investors and brokers have invested 2 lacs normally.9 (15%) invested between 2 lacs to 5 lacs.and 15 (25%) invested between 5 lacs to 10 lacs,and remaining have invested in other amounts. Reason behind this is that those are investing from many years are taking the risk of investing huge amount.
TRADED PERIOD IN DERIVATIVES
Tradedperiod for derivati derivative investment. 23
25
19
20 15
13
Series1
10
5
Series2
5 0 Weekly
Monthly
More than 1 montth h
More th than 2 montth hs
13 (22%) (22%) invest investors ors and broke brokers rs are inves investin ting g weekly weekly in deriv derivati atives ves,23 ,23 ( 38%) investing monthly,19 (32 %) investing after more than 1 month and only 5 ( 8%) investing too late after 2 months.
IMPACT ON CUSTOMER BASE
Impact on customer base. 50
42
40 30
Series1 15
20
Series2
3
10 0 Increase
Decrease
Remain same
Out of 60 brokers and investors, 3 ( 5%) of brokers said that it doesn't incr increa ease se thei theirr cust custom omer er base base beca becaus usee intr introd oduc ucin ing g smal smalll savi saving ngss as investment, but derivatives increases customer base of 42 (70%) wich is more than half.it is basically beneficial for those who are investing from last 2 or more years. In investmen investmentt sector need minimum minimum of Rs. 2,00,000 2,00,000 as investment so it is basically for corporate and investment sector only not for small investors.15 ( 25%) said their customer base remain same because they they have have starte started d just just now for for invest investing ing in deriva derivativ tives. es.in in future future it will will increase their customer base.
RELATIONSHIP WITH CASH MARKET
relation Between derivative and cash market. 30
28
27
20
Series1
10
Series2
5
0 Positive
Negative
Can't say
Out of 60 brokers,deale brokers,dealers rs 27 (45%) have the positive positive response response toward toward the relation relation betwe between en derivat derivative ive and and cash cash market market and remain remaining ing 5 (8%) (8%) has negative response. 28 (47%) are not able to say anything because they don’t have have proper proper kno knowle wledge dge about about stock stock market market.th .they ey are invest investing ing with with the guidance guidance of brokers brokers and with the support support of their close relatives relatives those are investing for last many years.
BROKER'S PERCEPTION TOWARDS INDIAN INVESTOR
i.e. is settled in Indian investor psyche? Relation Relation among derivative derivative and cash market. 37
40 30
23
20
Series1
10 0 Yes
No
out of total 37 (62%) of investors and dealers are saying it hasn't settled in Indian investor psyche and 23 (38%) are saying it has.
DERIVATIVES AND RISK Every broker says that there is a risk factor (up to some extent) in derivatives also.
SHORTCOMINGS IN INDAIN DERIVATIVE SYSTEM
27 (45%) brokers,i brokers,invest nvestors ors respond respond towards towards shortage of domestic domestic tech techni nica call expe expert rtis ise. e. 31 31(5 (52% 2%)) feel feel lack lack of awar awaren enes esss in inve invest stor or abou aboutt derivatives and remaining 2 (3%) market failure.
RESULTS / FINDINGS 1.
Brok rokers ers no nott deal dealin ing g in deriv rivativ atives es at pres presen entt are als also o not not goin oing to adopt it in near futures.
2.
Hedg Hedgin ing g & Ris Risk k Mgt. Mgt. Is Is the the most most imp impor orta tant nt fea featu ture re of deri deriva vati tive ves. s.
3.
It is not for small investors. investors.
4.
It has incr increa ease sed d bro broker kers turno rnovers vers as wel well as help helpfful in agg aggreg regate ate investment.
5.
Brok Broker erss have haven' n'tt ade adequ quat atee know knowle ledg dgee abou aboutt opt optio ions ns,, so most most by them them are dealing in futures only.
6.
7.
There is a risk factor in derivative also. Most of investors are not investing in derivatives.
8.People are not aware of derivatives, even people who have invested in it, hasn’t adequate knowledge about it. These people are interested to take it in their future portfolio also. They consider it as a tool of risk management. 9.They normally invest in future contracts. 10.They are investing in future contract, because futures have up to home extent similar quality as Badla.
REASON BEHIND LESS DEVELOPMENT OF F&O SEGMENT AT L.S.E.
At L.S.E. the is become possible by L.S.E.S.L, which is working as a broker at N.S.E. and the broker of L.S.E. (301 members) are working as a client of LSES Ltd. Itself (in reality). So they can't trade as a broker of their client and sub-broker concept does not exist in F&O segment. At National Level 1.
Securities an and co contract's re regulations ac act ha has re recognized "i "index" as as a security very later i.e. in Nov. 2001. It will take time to take position in derivative or capital market. 2.
Thee Limi Th Limite ted d mut mutua uall fait faith h in in the the part partie iess inv invol olve ved. d.
3.
It ha hasn't a legalized market.
4.
Commodity F & O market ha has no not ye yet be been co come to to In India. th this wi will make easy to understand and take simple investor under investor base of derivative trading. 5.
Market failures
6.
Scandals
7.
Inadequate in infrastructures
8.
Shortage to to do domestic te technical ex expertise, in in In India ev even mo most of of pe people are not aware of concept derivatives.
9.
Large lo lot si size, so so sm small in investors ar are not ab able to co come un under de derivative segment. 10.
There There are are less less scrip scripts ts und under er deriva derivativ tives es segmen segment. t.
11.. 11
High High marg margin in as comp compar aree to to Bad Badla la..
12.
In In India th there ca can't be be a long te term tr trading in in F & O, O, it it is is on only fo for 1 to 2 or maximum for 3 months.
SUGGESTIONS 1.
LOT SIZE: Lot size should be reduced so that the major segment of
an India society i.e. small saving class can come under F & O trading. There is strong need for revision of lot sizes as the lot sizes of some of the individual scrips that were worth of Rs. 200000 in starting, now same lot size amount to a much larger value. 2.
SUB BROKER : Sub-broker concept should be added and the actual
brokers should give all rights of brokers in F & O segment also. 3.
SCRIPS: More scrips of reputed companies etc. should be
introduced in "F & O segment". 4.
TRADING PERIOD: Trading period should be increased.
5.
TRAINING CLASSES OR SEMINARS :
There should be proper classes on derivatives for investors, traders, brokers, students and employees of stock exchanges. Because lack of knowledge is the main reason of its less development. The first step towards it should be seminars provide to brokers & LSE employees and secondly seminar to students.
LIMITATIONS OF THE STUDY No study is complete in itself, however good it may and every study has some limitations:
Time is the main constraint of my study.
Avai Availa labi bili lity ty of info inform rmat atio ion n was was no nott suff suffic icie ient nt beca becaus usee of less less awareness among investors/brokers
Study is based only on NSE because information and trading in BSE is not available here.
Sample size is not enough to have a clear opinion.
CONCLUSION On the the basi basiss of ov over eral alll stud study y on deri deriva vati tive vess it was was foun found d that that derivative products initially emerged as hedging devices against fluctuation and commodity prices and commodity linked derivatives remained the soul form of such products. The financial derivatives came in spotlight in 1972 due to growing in stability in financial market.
I was really surprised to see during my study that a layman or a simple investor does not even know how to hedge and how to reduce risk on his portfolios. All these activities are generally performed by big individual investors, institutional investors, mutual funds etc.
No doubt that derivative growth towards the progress of economy is positive. But the problems confronting the derivative market segment are giving it a low customer base. The main problems that it confronts are unawareness and bit lot sizes etc. these problems could be overcome easily
by by revi revisi sing ng lot lot size sizess and and also also ther theree shou should ld be semi semina narr and and gene genera rall discussions on derivatives at varied places.
BIBLIOGRAPHY 1. BO BOOK OKS S AND AND ARTI ARTICL CLES ES
NCFM on derivatives core module by NSEIL. The Indian Commodity-Derivatives Market in Operations.
2. MAGAZINES
The Dalal Street
LSE Bulletin
3. INTERNET SITES
www.nseindia.com
www.derivativeindia.com
www.bseindia.com
www.sebi.gov.in
SAMPLE OF QUESTIONNAIRE Dear Respondent,
I am a student of MBA 2 nd year. I am working on the project " TRENDS AND FUTURE OF DERIVATIVES IN INDIA : A DETAILED STUD STUDY Y”
You are requ reques estted to fill ill in the the qu ques esti tion onn nair aire to enabl enablee, to
undertake the study on the said project.
NAME:
OCCUPATION:
ADDRESS:
PHONE NO.:
1) For how how long you you have been been trading trading in derivat derivatives? ives? a) Less than 1 year
b) 1 Year
c) 2 Year
d) 3 Year
e) More than 3 years.
2) What is your your purpose purpose for for trading trading in derivati derivatives? ves? a) Hedging
b) Speculation
c) Risk Management
d) Liquidity
3) How will you describe your experience experience with derivative till date? a) I find these quite profitable b) I don't find derivatives can give big profits c) I feel that equities are better than derivatives d) Any other __________________________________ __________________________________
4)What is amount of money you are investing in normally? a) 2,00,000
b) Rs. 2,00,000 to Rs. 5,00,000
c) Rs. 5,00,000 to Rs. 10,00,000 d) Any other amount____________ amount____________
5)How often do you trade? a) Weekly
b) Monthly
c) More than 1 month
d) More than 2 month
6)What is your customer base with introduction of derivatives? a) Increase
b) Decrease
c) Remain same
7)What according to you is relationship between derivative market and cash market?
a) Positive
b) Negative
c) Can't say
8) According to you have derivatives settled in Indian investors psyche? a) Yes
b) No
9)What shortcomings do you feel in Indian derivative market? a) Lack of awareness among the investors about derivatives. b) Shortage of domestic technical expertise. c) If any other___________________________ other___________________________
10) Which of following Media would you prefer the most for investor education? a) TV
b) Newspaper
c) Magazines
11) What suggestions do you want to make with regard to investors education in derivatives market in India?
THANKS FOR YOUR COOPERATION
