A PROJECT REPORT ON
“AWARENESS ABOUT THE DERIVATIVE AND ITS COMPARISON WITH EQUITY” UNDERTAKEN AT:
NIRMAL BANG SECURITIES PVT. LTD. ITC,Ring Road, Surat.
Submitted By: SAURAV.P.GOHIL
Guided By: MRS.VARSHA PATEL
BBA PROGRAMME (Year 2009-010) VIVEKANAND COLLEGE FOR B.B.A
1
DECLARATION I, SAUR SAURAV AV.P .P.G .GO OHIL HIL
here here by decla eclare re that that the the
proj projec ectt
repo report rt entit ntitle led d
“AWARE “AWARENES NESS S ABOUT ABOUT THE DERIV DERIVATI ATIVE VE AND ITS ITS COMPAR COMPARIS ISON ON WITH WITH EQUITY” is base based d on my own own work work and and my inde indebt bted edne ness ss to othe otherr work work// publications, if any have been duly acknowledged at the relevant place.
PLACE: Surat DATE: SAURAV.P.GO HIL
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ACKNOWLEDGEMENT To acknowledge is very great way to show your gratitude towards the persons who have contributed in your success in one or other way. I find words inadequate to express my gratitude to Mr. DHARMESH PATEL for providing me an opportunity to carry out my winter project as such a well reputed and leading stock broking company Nirmal Bang Securities Private Limited .
At the very outset of the training I deem it is my pious duty to express my sincere thanks also to company’s Gujarat Head Mr. Dharmesh Patel for his continuous guidance and supervision and support during the project.
I would like to thank MRS.VARSHA PATEL, PATEL, who has guided me for my project work and provided encouragement through out my training period. This study could not have been successful without the valuable input of the customer of Nirmal Bang.
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PREFACE I know that Project is for the development and enhancement enhancement of the knowledge knowledge in this this part partic icul ular ar fiel field. d. It can can neve neverr be poss possib ible le to make make a mark mark in toda today’ y’s s competitive era only with theoretical knowledge when industries are developing at globa globall level level,, practi practica call know knowle ledge dge of admin administ istra ratio tion n and and manag managem ement ent of busines business s is very important. important. Hence, practical practical study is of great great importa importance nce to B.B.A. student.
With a view to expand the boundaries of thinking, I have undergone 6
th
SEM
Winter Winter Project Project at Nirm Nirmal al Ban Bang g Sec Securit urities ies pri private vate Limi Limited. ted. I have made a deliberate to collect the required information and fulfill project objective.
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TABLE OF CONTENTS Sr.No. SUBJECT
Page No. 6-17
1
Industry profile
2
Company profile
3
(p) LTD. Financial derivatives:
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Nirmal Bang securit securities ies
18-39
40-70
1. Intr Introduc oduction tion abo about ut deri derivati vatives ves 2
Risk Ri sk As Asso soci ciat ated ed Wi With th Der Deriv ivat ativ ives es
3
Func Fu ncti tion ons s of of der deriv ivat ativ ive e mar marke kett
4
Part Pa rtic icip ipan ants ts of of deri deriva vati tive ve ma mark rket et
5
Type pes s of deri riv vati tiv ves
6
Emerg Em ergen ence ce of de deriv rivati ative ve tra tradi ding ng in Ind India ia
7
Intr In trod oduc ucti tion on of fo forw rwar ard d
8
Intr In trod oduc ucti tion on to fu futu ture res s
9
Intr In trod oduc ucti tion on to op opti tion ons s
10 Ty Type pes s of of opt optio ions ns 11 Pr Prici icing ng with with rega regard rd to opti option on 12 Diff Differen erence ce betwee between n derivativ derivative e and equity equity 4
RESEARCH METHODOLOGY
71-73
5
DATA ANALYSIS
73-88
6
FINDINGS
89
7
CONCLUSION
90
8
RECOMENDATION
91
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BIBLIOGRAPHY & APPENDIX
92100
INDUSTR INDU STRY Y PROF P ROFILE ILE:
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HISTORY OF THE STOCK BROKING INDUSTRY Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago.
In 1887, 1887, they formally formally establishe established d in Bombay, Bombay, the "Native "Native Share and Stock Stock Brokers' Association" (which is alternatively known as "The Stock Exchange"). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated. Thus in the same way, gradually with the passage of time number of exchanges were increased and at currently it reached to the figure of 24 stock exchanges.
This was followed by the formation of associations /exchanges in Ahmadabad (1894), Calcutta (1908), and Madras (1937). In order to check such aberrations and promote a more orderly development of the stock stock market, market, the central central governm government ent introduc introduced ed a legislat legislation ion called called the Secu Securi riti ties es Cont Contra ract cts s (Reg (Regul ulat atio ion) n) Act, Act, 1956 1956.. Unde Underr this this legi legisl slat atio ion, n, it is mandatory on the part of stock exchanges to seek government recognition. As of Janu Januar ary y 2002 2002 ther there e were were 23 stoc stock k exch exchan ange ges s reco recogn gniz ized ed by the the cent centra rall Governm rnment.
They
are
loca ocated ted
at
Ahmad hmada abad,
Bangalor lore,
Baroda, oda,
Bhub Bhubane anesw swar, ar, Calcu Calcutta tta,, Chen Chennai nai,( ,(the the Madras Madras stock stock Excha Exchang nges es ), Coch Cochin, in, Coimbato Coimbatore, re, Delhi, Delhi, Guwahat Guwahati, i, Hyderab Hyderabad, ad, Indore, Indore, Jaipur, Jaipur, Kanpur, Kanpur, Ludhian Ludhiana, a, Mangalore, Mumbai(the National Stock Exchange or NSE), Mumbai (The Stock Exchan hange),
popula ularly
called lled
the
Bomb ombay
Stoc tock
Exch xchange,
Mum Mumbai
(OTCEx (OTCExchan change ge of India), India), Mumbai Mumbai (The Inter-co Inter-connec nnected ted Stock Stock Exchan Exchange ge of India), Patna, Pune, and Rajkot. Of course, the principle bourses are the National Stock Exchange and The Bombay Stock Exchange, accounting for the bulk of the business done on the Indian stock market.
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BSE (BOMBAY STOCK EXCHANGE) The The Stoc Stock k Exch Exchan ange ge,, Mum Mumbai, bai, popu popula larl rly y know known n as
"BSE" was
established established in 1875 as "The Native Share and Stock Brokers Association". Association". It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is the first Stock Exchange in the Country to have obtained permane permanent nt recogni recognition tion in 1956 from the Govt. of India India under under the Securities Securities Contracts (Regulation) Act, 1956.
A Governing Board having 20 directors is the apex body, which decides the policies and regulates the affairs of the Exchange. The Governing Board consists of 9 elected directors, who are from the broking comm Unity (one third of them retire ever year by rotation), three SEBI nominees, six public representatives representatives and an Executive Executive Director & Chief Executive Officer and a Chief Operating Officer.
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NSE (NATIONAL STOCK EXCHANGE) NSE NSE was was inco incorp rpor orat ated ed in 1992 1992 and and was was give given n reco recogn gnit itio ion n as a stoc stock k exchange in April 1993. It started operations in June 1994, with trading on the Wholesale Debt Market Segment. Subsequently it launched the Capital Market Segment in November 1994 as a trading platform for equities and the Futures and Options Segment in June 2000 for various derivative instruments.
MCX (MULTI COMMODITY EXCHANGE)
‘MULTI COMMODITY EXCHANGE’ of India limited is a new order exchange with a mandate for setting up a nationwide, online multi-commodity market place, offering unlimited growth opportunities to commodities market participants. As a true true neut neutral ral mark market, et, MCX MCX has has take taken n sever several al initia initiativ tives es for for users users in a new new generation commodities futures market in the process, become the country’s premier exchange.
MCX, an independent and a de-mutualized exchange since inception, is all set up to introduce a state of the art, online digital exchange for commodities futures futures trading in the country country and has accordi accordingly ngly initiated initiated several several steps to translate this vision into reality.
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NCDEX (NATIONAL COMMODITIES AND DERIVATIVES EXCHANGE)
NCDEX started working on 15 th December, 2003. This exchange provides facilities to their trading and clearing member at different 130 centers for contract. In comm commod odity ity marke markett the the main main parti particip cipan ants ts are specu speculat lators ors,, hedge hedgers rs and and arbitrageurs.
Facilities Provided By NCDEX
NCDE NCDEX X has develo develope ped d facil facility ity for checki checking ng of comm commodi odity ty and and also also provides a wear house facility
By colla collabo borat rating ing with with indust industria riall partn partners ers,, indust industria riall comp compan anies ies,, news news agenc agencies ies,, banks banks and and deve develop lopers ers of kiosk kiosk netwo network rk NCDE NCDEX X is able able to provide current rates and contracts rate.
To prepare guidelines related to special products of securitization NCDEX works with bank.
To avail farmers from risk of fluctuation fluctuation in prices NCDEX provides special services for agricultural.
NCDEX is working with tax officer to make clear different types of sales and service taxes.
NCDEX is providing attractive products like “weather derivatives”
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STOCK MARKET BASIC What are corporations? Companies are started by individuals or may be a small circle of people. They pool their money or obtain loans, raising funds to launch the business. A choice is made to organize the business as a sole proprietorship where one Person or a married couple owns everything, or as a partnership with others who may wish to invest money. Later they may choose to "incorporate". As a Corporation, the owners are not personally responsible or liable for any debts of the company if the company doesn't succeed. Corporations issue official-looking official-looking sheets of paper that represent ownership of the company. These are called stock certificates, and each certificate represents a set number of shares. The total number of shares will vary from one company to another, as each makes its own choice about how many pieces of ownership to divide the corporation into. One corporation corporation may have only 2,500 shares, while another, such as IBM or the Ford Motor Company, may issue over a billion Shares. Companies sell stock (pieces of ownership) to raise money and provide funding for the expansion and growth of the business. The business founders give up part of their ownership in exchange for this needed cash. The expectation is that even though the owners have surrendered a portion of the company to the Public, their remaining share of stock will become increasingly valuable as the business grows. Corporations are not allowed to sell shares of stock on the open
Stock market without the approval of the Securities and Exchange Commission (SEC). This transition from a privately held corporation to a publicly traded one is Called going public, and this first sale of stock to the public is called an initial public offering, or IPO.
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Why do people invest in the stock market?
When you buy stock in a corporation, you own part of that company. This gives you a vote at annual shareholder meetings, and a right to a share of future profits. When a company pays out profits to the shareholder, the money received is called a "Dividend". The corporation's board of directors choose when to declare a dividend and how much to pay. Most older and larger companies pay a regular dividend, most newer and smaller companies do not.
The average investor buys stock hoping that the stock's price will rise, so the shares can be sold at a profit. This will happen if more investors want to buy stock in a company than wish to sell. The potential of a small dividend check is of little concern. What is usually responsible for increased interest in a company's stock is the prospect of the company's sales and profits going up. A company who is a leader in a hot industry will usually see its share price rise dramatically. Investors take the risk of the price falling because they hope to make more money in the market than they can with safe investments such as bank CD's or government bonds.
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What is a stock market index? In the stock market world, you need a way to compare the movement of the market, up and down, from day to day, and from year to year. An index is just a benchmark or yardstick expressed as a number that makes it possible to do this comparison. For e.g. S&P CNX Nifty is the index of NSE and SENSEX is the index of BSE.
The price per share, like the market cap, has nothing to do with how big a company is.
The Securities Securities Market Market consists consists of two segments, segments, viz. Primary Primary market market and Secondary market. Primary market is the place where issuers create and issue equity, debt or hybrid instruments for subscription by the public; the Secondary market enables the holders of securities to trade them. Second Secondary ary market market essent essentiall ially y compris comprises es of stock stock exchan exchanges ges,, which which provid provide e plat platfo form rm for for purchase purchase and sale of securities by investors. In India, apart from the Regional Stock
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Exchan Exchanges ges establ establish ished ed in differ different ent center centers, s, there there are exchan exchanges ges like like the National Stock Exchange (NSE) and the Over the Counter Exchange of India (OTCEI), (OTCEI), who provide provide nation nation wide wide trading trading facilities facilities with terminal terminals s all over over the country. country. The trading trading platform platform of stock stock exchange exchanges s is accessibl accessible e only through brokers and trading of securities is confined only to stock exchanges.
Corpora Corp orate te Securi Sec uritie ties s:
The no of stock exchanges increased from 11 in 1990 to 23 now. All the exch exchan ange ges s are are full fully y comp comput uter eriz ized ed and and offe offerr 100% 100% on-l on-lin ine e trad tradin ing. g. 9644 9644 companies were available for trading on stock exchanges at the end of March 2002 2002.. The The tradin trading g platf platform orm of the stock stock excha exchange nges s was acce accessi ssibl ble e to 9687 9687 members from over 400 cities on the same date.
Derivati Deri vatives ves Market :
Derivatives trading commenced in India in June 2000. The total exchange traded derivatives witnessed a volume of Rs. 442,343 crore during 2002-03 as against Rs. 4018 crore during the preceding year. While NSE accounted accounted for about 99.5% of total turnover, BSE accounted for about 0.5% in 2002-03. 2002-03. The market witnessed witnessed higher volumes from June 2001 with introduction of index options, and still higher volum volumes es with with intro introduc ductio tion n of stock stock option options s in July July 2001. 2001. There There was was a spurt spurt in volumes in November 2001 when stock futures were introduced. It is believed that India is the largest market in the world for stock futures.
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Supply and Demand
A stock's price movement up and down until the end of the trading day is strictly a result of supply and demand. The SUPPLY is the number of shares offered for for sale sale at anyo anyone ne one one mome moment nt.. The The DEMA DEMAND ND is the the numb number er of shar shares es investors wish to buy at exactly that same time. What a share of a company is worth on anyone day or at any one minute, is determined by all investors voting with their money. If investors want a stock and are willing to pay more, the price will go up. If investors are selling a stock and there aren't enough buyers, the price will go down Period.
Secondary Market Market Intermediar Intermediaries ies
Stock Stock brokers, brokers, sub-brok sub-brokers, ers, portfolio portfolio managers, managers, custodian custodians, s, share share transfer transfer agents constitute the important intermediaries in the Secondary Market. No stockbrokers or sub-brokers shall buy, sell or deal in securities unless he holds a certificate of registration granted by SEBI under the Regulations made by SEBI ion relation to them. The Central Government has notified SEBI (Stock Brokers & Sub-Brokers) Rules, 1992 in exercise of the powers conferred by section 29 of SEBI Act, 1992. These rules came into effect on 20 th August, 1992.
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Trading Through Brokers / Traditional Method of Share Trading:-
Trading in the stock exchange can be conducted only through member member broker in secur securiti ities es that that are listed listed on the the respec respectiv tive e excha exchange nge.. Inves Investor tor inten intendin ding g to buy/sell securities in the exchange has to do so only through a SEBI registered broker/sub-broker. broker/sub-broker. This is very popular concept in India for Share Trading before the facilities like on line trading introduce.
Both the exchange have switched over from the open outcry trading system to fully automated computerized mode of trading knows as Bolt and Neat. In this system, the broker trade with each other through the computer network. Buyers and sellers place their orders specifying the limits for quality and price. Those that are not matched remain on the screen and is opened for future matching
during the day / settlement. After the advent of computerized trading the speed of trading has increased increased multi-fold and a fuller view of the market is available to the investors. To start dealing with broker you have to fill a form with the broker. After fill all the formalities the firm gives you a User Id no like a bank a/c no. through which you can enter in the transaction with broker. Broker will gives all the which one investor needed.
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What is stock Broker? “A stock stock broke brokerr is one one who who inve invests sts other other people people’s ’s mone money y until until it’s it’s all gone.” -Woody Allen, American Film Maker
A stock broker is a person or a firm that trades on its clients behalf, you tell them what you want to invest in and they will issue the buy or sell order. Some stock brokers also give out financial advice that you a charged for.
It wasn’t too long ago and investing was very expensive because you had to go through a full service broker which would give you advice on what to do and would charge you a hefty fee for it. There are three different types of stock brokers.
Fulll Serv Service ice Brok Broker er - A full-s full-serv ervice ice brok broker er can can provid provide e a bunch bunch of 1. Ful services such as investment investment research advice, tax planning and retirement planning.
2. Discount Broker – Broker – A discount broker let’s you buy and sell stocks at a low rate but doesn’t provide any investment advice.
3. Direct-Acc Direct-Access ess Broker - A direct access broker lets you trade directly with the electron electronic ic commun communicat ication ion networks networks (ECN’s) (ECN’s) so you can trade trade faster. faster. Active traders such as day traders tend to use Direct Access Brokers
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No. of stock broker in India 9368:- Total no of share broker in the country 12687:- The no. of sub-broker. 46%:- The share of trades accounted for by NSE broker 90%: The share of On line trades clocked by segment’s top five companies
Generally there are two types of trading have been done in India which is given below:
On line Trading / E – Broking / Modern Method
Trading through Brokers / Traditional method of Share trading.
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ABOUT NIRMAL BANG INTRODUCTION:Nirmal Bang Group is one of the largest retail broking house in India, providing providing the investors state of art services in capital markets in the country. The Group has memberships of Bombay Exchange Limited, National Stock of India Limited, Multi Commodity Exchange of India Limited, National Commodity and Derivatives Exchange Limited and is also a depository participant of NSDL and CDS (I) L, the depositories of the country. They started in 1986 under Late Shri Nirmal Bang as sub brokers but have grown grown stead steadily ily and and progr progress essive ively ly since since then then.. Their Their clien clients ts had had contr contribu ibute ted d tremendously to their growth they recognize and applaud that, they value their relati relation onsh ship ip with with the the custo custome mers rs and and for their their conv conveni enien ence ce had all all inves investin ting g avenues under one roof.
NIRMAL BANG consultant As the flagship company of the NIRMAL BANG Group, NIRMAL BANG Private Limited has always remained at the helm of organizational affairs, pioneering business policies, work ethic and channels of progress. NIRMAL BANG believe that they were best positioned to venture into that activity as a Depository Participant. They were one of the early entrants registered as Depository Participant with NSDL (National Securities Depository Limited), the first Depository in the country and then with CDSL (Central Depository Services Limited). Today, It service over 1Lac customer accounts in this business spread across across over over 350 350 cities cities/to /town wns s in India India and and are are ranke ranked d amon amongst gst the large largest st Depo Deposit sitory ory Parti Partici cipan pants ts in the count country. ry. With With a growin growing g seco seconda ndary ry mark market et presence.
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It has transfer transferred red this business business to NIRMAL NIRMAL BANG BANG SECURI SECURITIE TIES S PRIVAT PRIVATE E LIMITED (NBSPL), their associate and a member of NSE, BSE, MCX & NCDEX.
NIRMAL BANG --- Early Days The birth of NIRMAL BANG was on a modest scale in 1986. It began with the vision and enterprise of a small group of practicing Chartered Accountants who founded founded the flagship flagship company company.. NIRMAL NIRMAL BANG BANG Securiti Securities es Private Private Limited Limited.. It started with consulting and financial financial accounting accounting automation, and carved inroads. Since then, They have utilized their experience and superlative expertise to go from from stren strength gth to stren strength gth…to …to better better their their servi service ces, s, to provi provide de new new ones, ones, to innovate, diversify and in the process, evolved NIRMAL BANG as one of India’s premier integrated financial service enterprise. Thus over the last 20 years NIRMAL BANG has traveled the success route, towards building a reputation as an integrated financial services provider, offering a wide spectrum of services. And they have made this journey by taking the route of quality service, path breaking innovations in service, versatility in service and finally totality in service. Their highly qualified manpower, cutting-edge technology, comprehensive infrastructure and total customer-focus has secured for them the position of an emerging financial services giant enjoying the confidence and support of an enviable clientele across diverse fields in the financial world. Their values and vision of attaining total competence in their servicing has served as the building block for creating a great financial enterprise, which stands solid on their fortresses of financial strength - their various companies.
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With the experience of years of holistic financial servicing behind them and years of complete expertise in the industry to look forward to, They have now emerged as a premier integrated financial services provider. And today, they can look with pride at the fruits of their mastery and experience – comprehensive financial services that are competently segregated to service and manage a diverse range of customer requirements.
Business Focus:The The focus focus of the the busine business ss is the Customer Customer – Customer Customer service, service, Custome Customer r educatio education, n, Custom Customer er support, support, Custom Customer er relatio relations ns and last but not the least least Custome Customerr acquisi acquisition tion.. Trade Trade executi execution on transpa transparen rency, cy, timely timely settlem settlements ents,, risk monitoring and superior service shall have topmost priority, in the best interests of all concerned.
VISION STATEMENT TO CREATE VALUABLE RELATIONSHIP AND PROVIDE THE “ TO BEST FINANCIAL SERVICES MOST PROFESSIONALLY ”
MISSION STATEMENT “
TO WORK TOGETHER WITH INTEGRITY & MAKE OUR CUSTOMER FEEL VALUED”
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CORE VALUE “RESPECT OUR COLLEAGUE AND THE BUSINESS ITSELF”
Board of Directors Of NIRMAL BANG GROUP NAME
POSITION
Mr. Dilip M. Bang
Director
Mr. Kishor M. Bang
Director
Mr.Rakesh Bhandari
Chartered Accountant
Mr. Deepak Agarval
Chartered Accountant
Mr.Suvinay Sharma
Chartered Accountant
Mr.Naresh Samdani
Chartered Accountant
Mr. Deepak Patel
Chartered Accountant
Mr. Sunil Jain
Chartered Accountant
Mr.Anup Agarval
Chartered Accountant
Mr.Brijmohan Bohra
Chartered Accountant
Miss. Monika Bafna
Chartered Accountant
Mr.Brijmohan Bohra
Company Secretarial
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Principal Activities Of Principal ‘NIRMAL BANG GROUP’
•
NIRMAL BANG Securities Private Limited
–
Member : National Stock Exchange of India Limited
–
Member : Bombay Stock Exchange Limited
–
Participant : National Securities Depository Limited
–
Participant : Central Depository Service (India) Limited
NIRMAL BANG Commodities Private Limited
•
Member - Multi Commodity Exc Exchange hange of India Limited
Member - National Commodities and Derivatives Exchange Ltd.
•
BANG Equity Broking Private Limited
•
Member - Bombay Stock Exchange Ltd
Nadi Finance & Investment Private Limited
RBI registered Non Banking Finance Company
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Publications of NIRMAL BANG
NIRMAL BANG- Beyond Market
NIRMAL BANG Profile REGISTERED OFFICE "
NIRMAL BANG HOUSE" 38, Khatau Building, 2 nd Floor, Alkesh Dinesh Modi Marg, Fort, Mumbai - 400 001, Maharashtra, India. Tel : +91-2264-1234 Fax : +91-3027-2006
SURAT Branch
Shop no. G4, ITC Building, Majura Gate, Surat. Ph. 9376126075 Email:
[email protected]
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Organization Chart:Nirmal Bang
Branch
Web Dealer
Franchise
Sales Executive
Sales Coordinator
Account Head
Customer Care Receptionist
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NIRMAL BANG’s CORE SERVICES:NIRMAL BANG is one of India’s leading broking houses providing a complete life-cycle of investment solution.
Research Based Investment Advice
Training and Seminars
Investment and Trading Services
EQUITIES DERIVATIVES COMMODITIES
Technology Based Investment Tools
Integrated Demat Facility
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SWOT Analysis
27
Strength:
23 years of research and broking experience
Understandings of the markets
All financial needs under one roof
Scalable and robust infrastructure
Full Full fledg fledge e resear research ch unit unit comp compris rising ing of both both fund fundam ament ental al & techni technica call research
Dedicated, Qualified and Loyal staff
Flexible Brokerage charges
Weakness:
Low Brand Image in the market.
Low Professionalism
Low Advertisements
Opportunity:
Large potential market for delivery and intra-day transactions.
Open interest of the people to enter in to stock market for investing
Attract the customers who are dissatisfied with other brokers & DPs.
Up growing markets in commodity and forex trading
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Threats:
Decreasing rates of brokerage in the market. A Increasing competition against other brokers & DPs.
Poor Poor marke marketin ting g activi activitie ties s for makin making g the the compan company y known known amon among g the customers. A threat of loosing clients for any kind of weakness of the company. An Indirect threat from instable stock market, i.e., low/no profit of NIRMAL BANG's clients would lead them to go for other broker/DP.
“SERVICES of NIRMAL BANG”
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Nirmal Bang’s Services
Offline
Online
Other Services
OFFLINE
Offline A/c is the A/c for the investors who are not familiar with the use of computer. 30
The A/C opening charges applied(One time)
For 1st Year Demat A/C is Free, On 2 nd Year AMC charge is applicable.
Onlin Onl ine Acco A ccount unt
Requirement for online trading Linked Bank Account •
Broking Account
•
Linked Depository Account
Benefits of online trading
Freedom from paperwork •
Instant credit and transfer
•
Trade Anywhere
•
Timely Advice and access to research
•
Real-time portfolio tracking
•
After hour orders
•
Market Alerts
•
Instant quotes
Other Services:
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Dial-n-Trade
Mutual Fund
Commodity
Derivative
Depository Participants
Distribution of Financial Services
Research Based Advices
Portfolio Management System
DnT (Dia ( Diall- n –Tra – Trade de ) Dial n Trade is the name of the phone-trading facility offered by NIRMAL BANG.
A call center wholly dedicated to order placement / confirmation.
Easy 2-step process for order placement.
Step1. Enter your PHONE ID Step2. Enter your Client Code On successful dial, call gets transferred to call center executives.
NIRMA NIRMAL L BANG BANG Securi Securiti ties es Priva Private te Limite Limited, d, one one of the the corne cornerst rstone ones s of the NIRMA NIRMAL L BANG BANG edifi edifice ce,, flows flows freely freely towar towards ds attai attainin ning g divers diverse e goals goals of the the
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customer through varied services. Creating a plethora of opportunities for the customer by opening up investment vistas is backed by research-based advisory services. Here, growth knows no limits and success recognizes no boundaries. Helping the customer create waves in his portfolio and empowering the investor completely is the ultimate goal.
Stock Broking Services
We offer trading on a vast platform; National Stock Exchange, Bombay Stock Excha Exchang nge, e, MCX MCX & NCDE NCDEX. X. More More impor importan tantly tly,, we make make tradi trading ng safe safe to the the maximum possible extent, by accounting for several risk factors and planning accordingly. We are assisted in this task by our in-depth research, constant feedb feedback ack and and sound sound advis advisory ory facili facilitie ties. s. Our Our highly highly skill skilled ed resea research rch team, team, compris comprising ing of technic technical al analyst analysts s as well well as fundame fundamental ntal speciali specialists, sts, secure secure result result-or -orien iente ted d inform informati ation on on marke markett trend trends, s, marke markett analy analysis sis and and mark market et predictions. To empower the investor further we have made serious efforts to ensure that our research calls are disseminated systematically to all our stock broking clients through various delivery channels like email, chat, SMS, phone calls etc.
Introduction: MUTUAL FUNDS Ever Everyb ybod ody y talk talks s abou aboutt mutu mutual al fund funds, s, but but what what exactly are they? Are they like shares in a company, or are they like bonds and fixed deposits? Will I lose 33 all my money in funds or will I become an overnight millionaire? millionaire? Big questions that get answer in just five
Meaning: A mutu mutual al fund fund is a pool pool of money money that is invest invested ed accord according ing to a comm common on investment objective by an asset management company (AMC). The AMC offers to invest the money of hundreds of investors according to a certain objective - to keep money liquid or give a regular income or grow the money long term. Investors buy a scheme if it fits in with their investment goals, like getting a regula regularr incom income e now now or lettin letting g the mone money y accum accumul ulate ate over over the long long term. term. Investors pay a small fraction of their total funds to the AMC each year as investment management fees.
Commodity Organized futures market evolved in India by the setting up of "Bombay Cotton Trade
Association
discontent amongst
Ltd."
in
leading
1875. In cotton
1893, mill
following
widespread
owners
and
merchants over the functioning of the Bombay Cotton Trade Association,
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a separ separate ate asso associa ciati tion on by the the name name "Bom "Bomba bay y Cotton Cotton Excha Exchang nge e Ltd." Ltd." was was constituted. A future trading in oilseeds was organized in India for the first time with the setting up of Gujarati Vyapari Mandali in 1900, which carried on futures
trading trading in groundnu groundnut, t, castor castor seed seed and cotton. cotton. Before Before the Second Second World World War broke out in 1939 several futures markets in oilseeds were functioning in Gujarat and Punjab.
There were booming activities in this market and at one time as many as 110 exchanges exchanges were conducting conducting forward trade in various commodities in the country. The securities market was a poor cousin of this market as there were not many papers to be traded at that time. The era of widespread shortages in many essential commodities resulting in inflationary pressures and the tilt towards socialist policy, in which the role of market forces for resource allocation got diminished, saw the decline of this market since the mid-1960s.
This This coup couple led d with with the the regu regula lato tory ry cons constr trai aint nts s in 1960 1960s, s, resu result lted ed in virt virtua uall dismantling of the commodities future markets. It is only in the last decade that commod commodity ity future future exchange exchanges s have have been been actively actively encourag encouraged. ed. However However,, the markets have been thin with poor liquidity and have not grown to any significant level.
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Derivative The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management,
these generally do not influen influence ce the fluctuatio fluctuations ns in the underlyin underlying g asset asset prices. prices. Howeve However, r, by lockin locking-in g-in asset asset prices prices,, deriva derivativ tive e produc products ts minimiz minimize e the impact impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
Depository Participants
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The onset of the technology revolution in financial services Industry saw the emerge emergence nce of NIRMAL NIRMAL BANG BANG as an electron electronic ic custodi custodian an registe registered red with Natio Nationa nall Secu Securit rities ies Depos Deposit itory ory Ltd Ltd (NSDL) (NSDL) and and Centr Central al Secu Securit rities ies Deposito Depository ry Ltd (CSDL) (CSDL).. NIRMA NIRMAL L BANG BANG set stand standard ards s enabl enabling ing furth further er comfort to the investor by promoting paperless trading across the country and emerged as the top 3 Depository Participants in the country in terms of customer serviced. Offering a wide trading platform with a dual membership at both NSDL and CDSL, we are a powerful medium for trading and settlement of dematerialized Shares. We have established live DPMs, Internet access to accounts and an easier transaction process in order to offer more convenience to individual and
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Corporate investors. A team of professional and the latest technological expertise allocated exclusively to our demat division including technological enhancements like SPEED-e; make our response time quick and our delivery impeccable. A
wide national network makes our efficiencies accessible to all.
About NIRMAL BANG: •
Depository participant with both NSDL and CDSL
•
Over 25 thousands clients being serviced from over 135 cities.
•
Web enabled service to provide state of the art service delivery
Distribution of Financial Products
The The para paradig digm m shift shift from from pure pure sellin selling g to know knowle ledge dge base based d selli selling ng drive drives s the business today. With our wide portfolio offerings, we occupy all segments in the retail financial services industry. A 1600 team of highly qualified and dedicated dedicated professionals drawn from the best of academic and professional backgrounds are committed to maintaining high levels of client service delivery.
This has propelled us to a position among the top distributors for equity and debt issues with an estimated market share of 15% in terms of applications mobilized, besides being established as the leading procurer in all public issues.
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To further tap the immense growth potential in the capital markets we enhanced the scope of our retail brand, NIRMAL BANG – the Finapolis, Finapolis, thereby providing planning and advisory services to the mass affluent. Here we understand the customer needs and lifestyle in the context of present earnings and provide adequate advisory services that will necessarily help in creating wealth. Judicious
Planning that is customized to meet the future needs of the customer deliver a service that is exemplary. The market-savvy and the ignorant investors, both find this service very satisfactory. The edge that we have over competition is our portfolio of offerings and our professional expertise. The investment planning for each customer is done with an unbiased attitude so that the service is truly customized. Our monthly monthly magazine magazine,, Finapol Finapolis, is, provides provides up-date up-dated d market market informa information tion on market trends, investment options, opinions etc. Thus empowering the investor to base every financial move on rational thought and prudent analysis and embark on the path to wealth creation.
About NIRMAL BANG: •
Investments – Equity – Primary and Secondary – Fixed Income – Primary and Secondary – Fixed Deposits – Mutual Funds
•
Insurance Life – Life
: LIC, LIC, Amp Sanm Sanmar ar,, HDFC HDFC Stand Standar ard, d, ICIC ICICII Pruli Prulife fe,, Om Kotak, MetLife, Tata AIG, Birla Sun life
Genera rall – Gene
: New New Indi India, a, Tat Tata a AIG AIG,, Rel Relia ianc nce, e, Roya Royall Sun Sund daram aram
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Portfolio Management System
The company has initiated the process of obtaining permission from SEBI for rendering PMS Service to its clients. We are planning to start PMS Service to High Net Worth individual and NRIs after obtaining the necessary regulatory clearances.
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THEORETICAL ASPECT
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INTRODUCTION:
According to dictionary, derivative means ‘something which is derived from from anot anothe herr source source’. ’. Ther Therefo efore re,, deriv derivati ative ve is not not prima primary, ry, and and hence hence not not independent. In financial terms, derivative is a product whose value is derived from the value of one or more basic variables. These basic variable are called base bases, s, which which may may be valu value e of unde underly rlyin ing g asset asset,, a refer referen ence ce rate rate etc. etc. the underlying asset can be equity, foreign exchange, commodity or any asset.
For example: - the value of any asset, say share of any company, at a futu future re date date depe depend nds s upo upon the the shar share’ e’s s curr curren entt pric price. e. Here Here,, the the shar share e is underlying underlying asset, the current price of the share is the bases and the future value of the share is the derivative. Similarly, the future rate of the foreign exchange depends upon its spot rate of exchange. In this case, the future exchange rate is the derivative and the spot exchange rate is the base.
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Derivatives Derivatives are contract for future delivery of assets at price agreed at the time of the contract. The quantity and quality of the asset is specified in the contract. The buyer of the asset will make the cash payment at the time of delivery.
Meaning: Derivatives Derivatives are the financial contracts whose value/price is dependent on the behavior of the price of one or more basic underlying assets (often simply known known as the underly underlying) ing).. These These contract contracts s are legally legally binding binding agreemen agreements, ts, made on the trading screen of stock exchanges, to buy or sell an asset in future. The asset can be a share, index, interest rate, bond, rupee dollar exchange rate, sugar, crude oil, soybean, cotton, coffee etc.
In the Indian Indian Conte Context xt the the Secu Securit rity y Contr Contract acts s (Regu (Regula latio tion) n) Act, Act, 1956 1956 (SC(R) A) defines “derivative” to include – A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or other form of security. A contract, which derives its value from the prices, or index of prices of underlying securities.
Contracts agreement
Cash
Derivatives
Others like Swaps, FRAs etc
Forward
Merchandisi ng, customized NTSD
TSD
Futures (Standardized
Options
)
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In financial terms derivatives is a broad term for any instrumental whose value is derived from the value of one more underlying assets such as commodities, forex, precious metal, bonds, loans, stocks, stock indices, etc. Derivatives were developed primarily to manage offset, or hedge against risk but some were developed primarily to provide potential for high returns. In the context of equity markets, derivatives permit corporations and institutional
Investors to effectively manage their portfolios of assets and liabilities through instrument like stock index futures.
For example: example : - The price of Reliance Triple Option Convertible Debentures (Reliance (Reliance TOCD) used to vary with the price of Reliance shares. shares. In addition, addition, the price price of Telco Telco warran warrants ts depends depends upon the price of Telco Telco shares. shares. American American Depo Deposit sitor ory y recei receipt pts s / Glob Global al Depo Deposit sitor ory y recei receipts pts draw draw their their price price from from the underlying shares traded in India. Nifty options and futures. Reliance futures and options, are the most common and popular form of derivatives.
Altho Although ugh tradi trading ng in agric agricult ultur ure e and and other other comm commod oditi ities es has has been been the deriving force behind the development of derivatives exchanges, the demand for products based on financial instruments such as bond, currencies, stocks and stock indices have now for outstripped that for the commodities contracts.
The history of the derivatives dates back to the time since the trading came into being. The merchants entered into contracts with one another for future delivery of specified amount of commodities at specified price. A primary
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intention for contracting for future date was to keep the transaction immune to unexpected fluctuations in price.
There Therefor fore, e, deriv derivati ative ve prod product ucts s initi initial ally ly emer emerge ged d as hedg hedging ing devic devices es agai against nst fluct fluctua uatio tions ns in comm commod odity ity prices prices.. Howe However ver,, the the conce concept pt appli applied ed to financial trade only in the post-1970 period due to growing instability in the finan financia ciall market markets. s. Howe Howeve ver, r, since since their their emerg emergen ence ce,, these these prod produc ucts ts have have become very popular and by 1990s, they accounted for about two-third of the total transaction in derivative products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and turnover.
In the class of equity derivatives the world over, futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives.
Even Even small small inves investo tors rs find find these these usefu usefull due due to high high correl correlati ation on of the the popular indexes with various portfolios and ease of use.
Early forward contracts in the US addressed merchants concerns about ensuring that there were buyers and sellers for commodities. However “credit risk” remained a serious problem.
1848 A group of Chicago businessmen formed the Chicago Board of Trade (CBOT). The primary intention of the CBOT was to provide a centralized location known in advance for buyers and sellers to negotiate forward contracts.
1865
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The CBOT went one-step further and listed the first “exchange traded” derivatives contract in the US; these contracts were called “future contracts”
1919 Chicago Chicago Butter and Egg & board, a spin-off of CBOT, was reorganized to allow futures trading. Its name was changed to Chicago Mercantile Exchange (CME). The The CBOT CBOT and and the CME CME rema remain in the two two large largest st organ organize ized d futur futures es exchanges, exchanges, indeed the two largest “financial” exchanges exchanges of any kind in the world today.
The first stock index futures contract was traded at Kansas City Board of Trade. Currently the most popular stock index futures contract in the world was based on S&P 500 index, traded on Chicago Mercantile Exchange. Duri During ng the the mid mid eigh eighti ties es,, fina financ ncia iall futu future res s beca became me the the most most acti active ve derivatives instruments generating volumes many times more than the
Commod Commodity ity futures. futures. Index Index futures, futures, futures futures on T-Bills T-Bills and Euro-Do Euro-Dollar llar futures are the three most popular future contracts traded today. Other popular international exchanges that trade derivatives are LIFFE in England, DTB in Germany, SGX in Singapore, TIFFE in Japan, and MATIF in France, Eurex, etc. India has been trading derivatives contract in silver, gold, spices, coffee, cotton, cotton, etc for decades decades in the gray market. market. Trading Trading derivative derivatives s contract contracts s in orga organiz nized ed marke markett was was lega legall befo before re Moora Moorage ge Desa Desai’s i’s gover governm nmen entt bann banned ed forward contracts.
Deriv Derivati ative ves s on stock stocks s were were trade traded d in the form of Teji Teji and and Mand Mandii in unorganized on exchanges. For example, now cotton and oil futures trade in
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Mumbai, soybean futures trade in Bhopal, pepper futures in Kochi, coffee in Bangalore, etc.
JUNE 2000 National National Stock Exchange Exchange and Bombay Bombay Stock Exchange started trading in futures on Sensex and Nifty. Options trading on Sensex and Nifty commenced in June 2001. Very soon thereafter trading began on options and and futu future res s in 31 prom promin inen entt stoc stocks ks in the the mont month h of July July and and Nove Novemb mber er respectively. Option and future are the most commonly traded derivatives, but as the unde underst rstand anding ing of finan financia ciall marke markets ts and and riske risked d manag managem emen entt contin continue ued d to improve newer derivatives were created. The family includes the host of other product such as forward contracts. Structured notes, inverse floaters, caps & Floors and Collar Swaps.
The largest derivatives market in the world, are on government bonds (to help help contro controll intere interest st rate rate risk) risk) the the stock stock index index (to (to help help contro controll risk risk that that is associated with the fluctuations in the stock market) and on exchange rates (to cope with currency risk).
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Risk Associated With Derivatives:
Whil While e deri deriva vati tive ves s can can be used used to help elp mana manage ge risk risks s invo involv lved ed in investments, they also have risks of their own. However, the risks involved in
derivatives trading are neither new nor unique – they are the same kind of risks associated with traditional bond or equity instruments.
Market Risk Derivatives exhibit price sensitivity to change in market condition, such as fluctuat fluctuation ion in interest interest rates or currency currency exchange exchange rates. rates. The market risk of lever leverag aged ed deriv derivati atives ves may may be consid consider erab able le,, depen dependi ding ng on the degre degree e of leverage and the nature of the security.
Liquidity Risk
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Most derivatives are customized instrument and could exhibit substantial liquid liquidity ity risk risk implyi implying ng they they may may not not be sold sold at a reaso reasona nable ble price price withi within n a reaso reasonab nable le perio period. d. Liquid Liquidity ity may may decre decrease ase or evap evapora orate te entir entirely ely durin during g unfavorable markets.
Credit Risk Derivatives not traded on exchange are traded in the over-the-counter (OTC) market. OTC instrument are subject to the risk of counter party defaults.
Hedging Risk Several types of derivatives, including futures, options and forward are used as hedges to reduce specific risks. If the anticipated risks do not develop, the hedge may limit the fund’s total return.
FUNCTION OF DERIVATIVES MARKET:The derivative market performs a number of economic functions:-
Prices in an organized organized derivatives market reflect the perception perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivative converge with the prices of the the unde underl rlyi ying ng at the the expi expira rati tio on of the the deri deriva vati tive ve cont contra ract ct.. Thus Thus,, derivatives help in discovery of future as well as current prices.
The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them.
Derivatives, due to their inherent nature, are linked to the underlying cash market. With the introduction of the derivatives, the underlying market ma rket witnesses higher trading volumes because of the participation by more 49
players who would not otherwise participate for lack of arrangement to transfer risk.
Speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivative market, speculators trade in the underlying cash market.
An important incidental benefit that flows from derivatives derivatives trading is that it acts as a catalyst for new entrepreneurial activity.
The derivatives have a history of attracting many bright, creative, welleducate educated d people people with an entrepr entrepreneu eneurial rial attitude attitude.. They They often often energiz energize e others to create new businesses, new products and new employment opportunities, the benefit of which are immense.
Derivatives markets help increase savings and investment in the end. Transfer of risk enables market participants to expand their volumes of activity.
PARTICIPANTS OF THE DERIVATIVE MARKET:Market participants in the future and option markets are many and they perform multiple roles, depending upon their respective positions. A trader acts as a hedger when he transacts in the market for price risk management. management. He is a speculator if he takes an open position in the price futures market or if he sells nake naked d opti option on cont contra ract cts. s. He acts acts as an arbi arbitr trag ageu eurr when when he ente enters rs in to
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simultaneous purchase and sale of a commodity, stock or other asset to take adva advant ntag age e of misp mispri rici cing ng.. He earn earns s risk risk less less prof profit it in this this acti activi vity ty.. Such Such oppo opportu rtunit nitie ies s do not not exist exist for for long long in an effic efficien ientt marke market. t. Broker Brokers s provid provide e services to others, while market makers create liquidity in the market.
Hedgers Hedgers are the traders who wish to eliminate the risk (of price change) to which they are already exposed. They may take a long position on, or short sell, a commodity and would, therefore, stand to lose should the prices move in the adverse direction.
Speculators If hedgers are the people who wish to avoid the price risk, speculators are those who are willing to take such risk. These people take position in the market and and assum assume e risk risk to profi profitt from from fluctu fluctuati ation ons s in price prices. s. In fact, fact, specul speculat ator ors s consume information, make forecasts about the prices and put their money in these these forecas forecasts. ts. In this process, process, they they feed informatio information n into prices and thus thus contribute to market efficiency. By taking position, they are betting that a price would go up or they are betting that it would go down.
The speculators in the derivative markets may be either day trader or position traders. The day traders speculate on the price movements during one trading day, open and close position many times a day and do not carry any position at the end of the day.
They monitor the prices continuously and generally attempt to make profit from just a few ticks per trade. On the other hand, the position traders also attempt to gain from price fluctuations but they keep their positions for longer durations may is for a few days, weeks or even months.
Arbitrageurs
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Arbitra Arbitrageur geurs s thrive thrive on market market imperfe imperfectio ctions. ns. An arbitra arbitrageu geurr profits profits by trading a given commodity, or other item, that sells for different prices in different markets. markets. The Institute of Chartered Accountant of India, the word “ARBITRAGE” “ARBITRAGE” has been defines as follows:-
“Simultaneous purchase of securities in one market where the price there of is low low and and sale sale ther thereo eoff in anot anothe herr mark market et,, wher where e the the pric price e ther thereo eoff is compar comparative atively ly higher. higher. These These are done done when when the same securities securities are being being quoted at different prices in the two markets, with a view to make profit and
carried on with conceived intention to derive advantage from difference in prices of securities prevailing in the two different markets”
Thus Thus,, arbit arbitrag rage e invol involves ves makin making g risk-l risk-les ess s profi profits ts by simult simultan aneo eous usly ly entering into transactions in two or more markets.
TYPES OF DERIVATIVES:The most commonly used derivatives contracts are Forward, Futures and Optio Options ns.. Here Here some some deriv derivati ative ves s contra contracts cts that that have have come come to be used used are are covered.
FORWARD:A forward forward contract contract is a customi customized zed contract contract between between two entities entities,, where settlement takes place on a specific date in the future at today’s preagreed price.
FUTURES :-
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A futures contact is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are are specia speciall types types of forw forward ard contra contracts cts in the the sense sense that that the the forme formerr are are standardized exchange-traded contracts.
For example :- A, on 1 Aug. agrees to sell 600 shares of Reliance Ind. Ltd. @ Rs. 450 to B on 1 st sep. A, on 1 st Aug. agrees to buy 600 shares of Reliance Ind. Ltd. @ Rs. 450 to B on 1st Sep.
OPTIONS:Options are a right available to the buyer of the same, to purchase or sell an asset, without any obligation. It means that the buyer of the option can exercise his option but is not bound to do so. Options are of 2 types: calls and puts.
1. CALLS ::Call gives the buyer the right, but not the obligation, to buy a given quantity of the underlying asset, at a given price, on or before a given future date. For example :- A, on 1 st Aug. buys an option to buy 600 shares of Reliance Ind. Ltd. @ 450 Rs 450 on or before 1 st Sep. In this this case, A has the right right to buy the the shares on or before the specified date, but he is not bound to buy the shares.
2. PUTS :Put gives the buyer the right, but not the obligation, to sell a given quantity of the underlying asset, at a given price, on or before a given date.
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For example example :- A, on on 1 st Aug. buys an option to sell 600 shares of Reliance Ind. Ltd. @ Rs 450 on or before 1 st Sep. In this case, A has the right to sell the shares on or before the specified date, but he is not bound to sell the shares.
In both both the the type types s of the the opti option ons, s, the the sell seller er of the the opti option on has has an obligation but not a right to buy or sell an asset. His buying or selling of an asset depends upon the action of buyer of the option. His position in both the type of option is exactly the reverse of that of a buyer.
WARRANTS :Options generally have lives of up to one year, the majority of options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.
LEAPS :The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of up to three years.
BASKET :Baske Baskett optio options ns are are optio options ns on port portfo folio lios s of unde underl rlyin ying g asset assets s are are usually a moving average of a basket of assets. Equity index options are a form of basket options.
SWAPS :-
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Swaps are private agreement between two parties to exchange cash flow flows s in the the futu future re acco accord rdin ing g to a pre pre arra arrang nged ed form formul ula. a. They They can can be regarded as portfolios of forward contract. The two commonly used swaps are as followas:
1.) INTEREST RATE SWAPS:These entail swapping only the interest related cash flows between the parties in the same currency. 2.) CURRENCY SWAPS:These entail swapping both principal and interest interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.
SWAPTIONS :Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus, a swaptions is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions swaptions and payer swaptions. swaptions. A receiver swaptions swaptions is an option to receive fixed and pay floating. A payer swaptions is an option to pay fixed and receive floating Out of the above-mentioned types of derivatives forward.
EMERGENCE OF THE DERIVATIVE TRADING IN INDIA
Approval For Derivatives Trading The first step towards introduction of derivatives trading in India was the promulga promulgation tion of the Securitie Securities s Laws Laws (Amendm (Amendment) ent) Ordinan Ordinance, ce, 1995, 1995, which which withd withdrew rew the proh prohibi ibitio tion n on optio options ns in secu securit rities ies.. The The mark market et for derivatives, however, did not take off, as there was no regulatory framework to govern trading of derivatives. SEBI set up a 24 – member committee under 55
the the chairm chairman anshi ship p of Dr. Dr. L.C. L.C.Gu Gupt pta a on Novem Novembe berr 18, 18, 1996 1996 to deve develop lop appropriate regulatory framework for derivatives trading in India.
The committee submitted its report on March 17, 1998 prescribing necessary pre-conditions for introduction of derivatives trading in India.
The committee recommended that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of securities. SEBI also set up a group in June 1998 under the chairmanship of Prof. J.R.Verma, to recommend measures for risk containment in derivative market in India.
The repot, which was submitted in October 1998, worked out the operati operational onal details details of margini margining ng system, system, method methodolo ology gy for chargin charging g initial initial margins, broker net worth, deposit requirement and real - time monitoring requirements.
The SCRA was amended in December 1999 to include derivatives within the ambit of ‘securities’ and the regulatory framework framework were developed for governing derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such contracts are traded on
a recognized stock exchange, thus precluding OTC derivatives. The gove govern rnme ment nt also lso resc rescin inde ded d in Marc March h 2000 2000,, the the thre three e – deca decade de old old notification, which prohibited forward trading in securities.
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Deri Derivat vative ives s trad trading ing comme commence nced d in India India in June June 2000 2000 after after SEBI SEBI granted the final approval to this effect in May 2000. SEBI permitted the derivative segment of two stock exchanges, NSE and BSE, and their clearing hous house/ e/co corp rpor orat atio ion n to comm commen ence ce trad tradin ing g and and sett settle leme ment nt in appr approv oved ed derivatives contract.
To begin with, SEBI approved trading in index future contracts based on S&P S&P CNX CNX Nifty Nifty and and BSEBSE-30 30 (Sen (Sensex sex)) index index.. This This was was follo followe wed d by approval for trading in options based on these two indices 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, byelaws, and regulations of the respective exchanges and their clearing house/corporation duly approved by SEBI and notified in the official gazette.
INTRODUCTION TO FORWARDS;Forward Contracts A forward contract is an agreement to buy or sell an asset on a specified date for a specified price. One of the parties to the contract assumes a long position and agrees to buy underlying asset on a certain spec specif ifie ied d futu future re date date for for a cert certai ain n spec specif ifie ied d pric price. e. The The othe otherr part party y assumes a short position and agrees to sell the asset on the same date for the same price. The parties to the contract negotiate other contracts details details like delivery delivery date, date, price, price, and quantity quantity bilaterally bilaterally.. The forward contracts are normally traded outside the exchanges.
Salient features of forward contracts are as follows:-
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They are bilateral contracts and hence exposed to counter party risk.
Each contract is custom designed, and hence is unique in terms of contract size, expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the same counter party, which often results in high prices being charged.
Limitation of forward market Forward market worldwide is affected by several problems:
Lack of centralization.
Illiquidity.
Counter party risk.
In the first two of these, the basic problem is that of too much flexibility and generality. The forward market is like a real estate market in that any two consenting adults can form contracts against each other. This often makes them design terms of the deal, which are very convenient in that specific situation, but makes the contract non-tradable.
Counter party risk arises from the possibility of default by any one part party y to the the transa transacti ction on.. When When one one of the two sides sides to the the transa transacti ction on declares bankruptcy, the other suffers. Even when forward markets trade standardized contracts, and hence avoid the problem illiquidity, the counter party risk remains a very serious.
INTRODUCTION TO FUTURES:Future Future contrac contractt is specie specie of forward forward contrac contract. t. Futures Futures are exchang exchange-tr e-trade aded d cont contra ract cts s to sell sell or buy buy stan standa dard rdiz ized ed fina financ ncia iall inst instru rume ment nts s or phys physic ical al commo commodit dities ies for deliv deliver ery y on a speci specifie fied d date date at an agre agreed ed price price.. Futu Futures res contra contracts cts are are used used gene genera rally lly for prote protecti cting ng again against st rich rich of adve adverse rse price price
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fluctuations (hedging). As the terms of contracts are standardized, these are generally not used for merchandizing purpose. The standardized items in a futures contract are:
Quantity of the underlying.
Quality of the underlying.
The date and month of delivery.
The units of price quotation and minimum price change.
Location of settlement.
Futures contract performs two important functions of price discovery and price risk management with reference to the given commodity. It is useful to all segment of economy. It is useful to the producer because investor can get an idea of the price likely to prevail at a future point of time and therefore therefore can decide between various competing commodities, commodities, the best that suits him. It enables the consumer get an idea of the price at which the commodity would be available at a future point of time. He can do proper costing and cover his purchases by making forward contracts. The future trading is very useful to the exporters as it provides an advance indication of the price likely to prevail and thereby help the exporter in quoti uoting ng a real realis isti tic c pric price e and and ther thereb eby y secu secure re expor xportt cont contra ract ct in a competitive market. Having entered into an export contract, it enables him to hedge his risk by operating in futures market .
Other benefits of futures trading are:
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Price stabilization in time of violent price fluctuations- this mechanism dampens the peaks and lifts up the valleys i.e. the amplitude of price variation is reduced.
Leads to integrated price structure throughout the country.
Facilitates lengthy and complex, production and manufacturing activities.
Helps balance in supply and demand position throughout the year.
Encourages competition and acts as a price barometer to farmers and other trade functionaries.
FEATURE Operational Mechanism Contract Specifications Counter-party risk
Liquidation Profile
Price discovery
FORWARD CONTRACT Traded directly between two part partie ies s (not (not trad traded ed on the the exchanges). Differ from trade to trade.
FUTURE CONTRACT Traded on the exchanges.
Contracts are standardized contracts. Exists. Exists. However, assumed by the clea cleari ring ng corp corp., ., whic which h becom becomes es the coun counter ter party to all the trades or unconditionally guarantees their settlement. Low, Low, as contrac contracts ts are tailor High, High, as contrac contracts ts are made made contra contracts cts cater caterin ing g to standardized standardized exchange exchange the needs of the needs of the traded contracts. parties. Not efficient, as markets are Effi Effici cien ent, t, as mark market ets s scattered. are centralized and all buyers and sellers come to a common platform to discover the price.
Margins The
margining
system
is
based
on
the
J
R
Verma
committee
recommendations. The actual margining happens on a daily basis while online on line
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position monitoring is done on an intra day basis. Daily margining is of two types:
1.
Initial margins.
2.
Mark-to market profit/loss.
The computation of initial margin on the futures market is done using the concept of Value-at-risk (VaR). The initial margin amount is large enough to cover a one-day loss that can be encountered on 99% of the days.
VaR methodology seeks to measure the amount of value that a portfolio may may stan stand d to lose lose withi within n certai certain n horiz horizon on perio period d (one (one day day for the clear clearing ing corporation) due to potential changes in the underlying asset market price. Initial margin amount computed computed using VaR is collected up-front. The daily settlement settlement process called “mark-to-market” “mark-to-market” provides for collection of losses that have have alre alread ady y occu occurr rred ed (his (histo tori ric c loss losses es)) wher wherea eas s init initia iall marg margin in seek seeks s to safeguard against potential losses on outstanding positions. The mark-to-market settlement is done in cash.
Settlement of Future Contract:Futures contract has two types of settlement, the MTM settlement, which happens happens on a continuous basis at the end of each day, and the final settlement, which happens on the last trading day of the futures contract.
i.
MTM Se Settlement
61
All futures contact for each member is marked-to-market (MTM) to the daily settlement price of the relevant futures contract at the end of each day. The profits/losses are computes as a difference between: 1.
The trade price and the day’s settlement price for contracts executed during the day but not squared up.
2.
The previous day’s settlement price and the current day’s settlement price for brought forward contracts.
The buy price and the sell price for the contracts executed during during the day and squared up. The clearing members (CMs) who have a loss are required to pay the mark-to-market (MTM) loss amount in cash which is in, turn passed on to the CMs who have made a MTM profit. This is known as daily mark-to-market set settlem tlemen ent. t. CMs are are res respons ponsib ible le to coll collec ectt and and sett settle le the the dail daily y MTM MTM profits/losses incurred by the Trading members (TMs) and their clients clearing and
settling
through
them.
Similarly,
TMs
are
responsible
to
collect/pay/losses/profits from/to their clients by the next day. The pay-in and payout of the mark-to-market settlement are affected on the day following the trade trade day. day. After After compl completi etion on of daily daily settl settlem emen entt compu computat tatio ion, n, all the the open open positions are reset to the daily settlement price. Such position becomes the opening positions for the next day.
ii.. ii
FINA FI NAL L SET SETTL TLEM EMEN ENTS TS FO FOR R FU FUTUR URE ES On the expiry of the future contracts, after the close of trading hours,
NSCCL marks all positions of CM to the final settlement price and the resulting prof profit its/ s/lo loss sses es is sett settle led d in cash cash.. Fina Finall sett settle leme ment nt loss loss/p /pro rofi fits ts amou amount nt is debited/credit to the relevant CM’s clearing bank account on the day following expiry day of the contract
62
SETTLEMENT PRICES FOR FUTURES:Dail Daily y sett settle leme ment nt pric price e on a trad tradin ing g day day is the the clos closin ing g pric price e of the the respe respecti ctive ve futur future e contr contract acts s on such such day. day. The The closin closing g price price for for the futur future e contracts is currently calculated as the last half an hour weighted average price of a contract in the F&O segment of NSE. Final settlement price is the closing price of the relevant underlying index/security in the capital market segment of NSE, on the last trading day of the contract. The closing price of the underlying Index/security is currently its last half an hour weighted average value in the capital market segment of NSE.
INTRODUCTION TO OPTIONS:Options give the holder or buyer of the t he option the right to do something. something. If the option is a call option, the buyer or holder has the right to buy the number of shares mentioned in the contract at the agreed strike price. If the option is a put opti option on,, the the buye buyerr of the the opti option on has has a righ rightt to sell sell the the numb number er of shar shares es mentioned in the contract at the agreed strike price. The holder of the buyer does not have to exercise this right. Thus on the expiry of the day of the contract the option may or may not be exercised by the buyer. In contrast, in a futures contract, the two parties to the contract have committed themselves to doing something at a future date. To have this privilege of doing the transaction at a future only if it is a profitable, the buyer of the option has to pay a premium to the seller of options.
TYPES OF OPTIONS:-
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An option is a contract between two parties giving the taker/buyer) the right, but not obligation, to buy or sell a parcel of shares at a predetermined price possibly on, or before a predetermined rate. To acquire this right the taker pays a premium to the writer (seller) of the contract. There are two types of options: 1.
Call Options
2.
Put Options
Call Options: Call options give the taker the right, but not the obligation, to buy the underlying shares at a predetermined price, on or before a predetermined date. Call Options- Long & Short Positions When you expect prices to rise, then you take a long position by buying calls. You are bullish. When you expect prices to fall, then you take a short position by selling calls. You are bearish.
Put Options: A Put Option gives the holder of the right to sell a specific number of an agreed security at a fixed price for a period. Put Options- Long & Short Positions When you expect prices to rise, then you take a long position by buying Puts. You are bearish. When you expect prices to fall, then you take a short position by selling Puts. You are bullish. Particulars
Call Options
Put Options
If yo you u exp expect ect a fal falll in pr price ice [B [Bea earis rish] h]
Shor Sh ortt
Long Lo ng
If you expect a rise in price [B ullish]
Long
Short
64
TABLE SHOWING THE DEALING OF CALL & PUT OPTION Call Option Holder (Buyer) Pays Premium Right to exerc xercis ise e & buy buy the the Rig shares Profit from rising prices Limite ted d loss losse es, pote poten ntial tially ly Limi unlimited gains Put Option Holder (Buyer)
Call Option Writer (Seller) Receives premium ligati tio on to sell ell sha shares if Obliga exercised Profit its s fro from fall fallin ing g pric prices es or Prof remaining neutral Potent ntia iall lly y unli unlimi mite ted d loss losses es,, Pote limited gains Put Option Holder (Seller)
Pays Premium Right to exerc xercis ise e & buy buy the the Rig shares Profit from rising prices Limite ted d loss losse es, pote poten ntial tially ly Limi unlimited gains
Receives premium Obligation to buy shares if exercised rofits its fro from risi risin ng prices ices or Prof remaining neutral limited losses, Potentially unlimited gains
IMPORTANT CONCEPTS:In -the- money option: It is an option with intrinsic value. A call option is in the memory if the underlying price is above the strike price. A put option is in the memory if the underlying price is below the strike price.
Out- of- the- money: It is an option that has no intrinsic value, i.e. all of its value consists of time value. A call option is out of the money if the stock price is below its strike price. At- the- money:
65
A term that describes an option with a strike price that is equal to the current market price of the underlying stock. But of the money if the stock price is above its strike price.
Market Scenario
Call Option
Put Option
Market price > strike price Market price < strike price Market price = strike price Market price ~ strike price
In- the- money Out- of- the- money At- the- money Near- the- money
Out- of- the- money In- the- money At the- money Near- the- money
Intrinsic Value In a call option, if the value of the underlying asset is higher than the strike price, the option premium premium has an intrinsic value and is an “in- the- money” option. If the value of the underlying asset is lower than the strike price, the option has no intrinsic value and is an “out- of- the- money” option. If the value of the underlying asset is equivalent to the strike price, the call option is “at- themoney” and has no intrinsic value or zero intrinsic value. In a put option, if the value of the underlying asset is lower than the strike price, the option has an intrinsic value and is an “in- the- money” option. If the value of the underlying asset is higher than the strike price, the option has no intrinsic value and is “out- of- money” option. If the value of the underlying asset is equivalent to the strike price, the put option is at the- money”
Time Value Time value is the amount an investor is willing to pay for an option, in the hope that at some time prior to expiration its value will increase because of a favorable change in the price of the underlying asset. Time value reduces as the expiration draws near and on expiration day; the time value of the option is zero. Option Price
66
An option cost or price is called “premium”. The potential loss for the buyer of an option is limited to the amount of premium paid for the contract. The writer of the option, on the other hand, undertakes the risk of unlimited potential loss, for premium received. Thus, Option Price = Premium Price A premium is the net amount the buyer of an option pays to the seller of the option. It does not refer to an amount above the base price, as the term
“pre “prem mium ium” com commonly only used. sed. The The of an opti optio on has has two two impo import rtan antt constituents, intrinsic value and time value. Premium = Intrinsic value + Time
PRICING WITH REGARD TO OPTIONS:The Black and Scholes Model: The Black and Scholes Option Pricing Model didn't appear overnight, in fact, fact, Fishe Fisherr Black Black starte started d out out worki working ng to creat create e a valua valuatio tion n mode modell for stock stock warra warrants nts.. This This work work invo involve lved d calcu calcula latin ting g a deriva derivativ tive e to measu measure re how the the discount rate of a warrant varies with time and stock price. The result of this calculation held a striking resemblance to a well-known heat transfer equation. Soon after this discovery, Myron Scholes joined Black and the result of their work is a startlingly accurate option pricing model. Black and Scholes can't take all credit for their work; in fact their model is actually an improved version of a previous model developed by A. James Boness in his Ph.D. Ph.D. disse disserta rtatio tion n at the Unive Univers rsity ity of Chica Chicago go.. Black Black and and Scho Scholes les'' improvements improvements on the Boness model come in the form of a proof that the risk-free
67
interest rate is the correct discount factor, and with the absence of assumptions regarding investor's risk preferences.
Black and Scholes Model: In order to understand the model itself, we divide it into two parts. The first part, SN [d1), derives the expected benefit from acquiring a stock outright. This is found by multiplying stock price [S] by the change in the call premium with respect to a change in the underlying stock price [N (d1)]. The second part of the model, Ke [-rt) N (d2), gives the present value of paying the exercise price on the
expiration day. The fair market value of the call option is then calculated by taking the difference between these two parts.
Assumptions of the Black and Scholes Model:1) The stock pays no dividends during the option's life Most companies pay dividends to their share holders, so this might seem a serious limitation to the model considering the observation that higher dividend yields elicit lower call premiums. A common way of adjusting the model for this situation is to subtract the discounted value of a future dividend from the stock price. 2) European exercise terms are used European exercise terms dictate that the option can only be exercised on the expiration date. American exercise term allow the option to be exercised at any time during the life of the option, making American options more valuable due to their greater flexibility. This limitation is not a major concern because v ery few calls are ever exercised before the last few days of their life. This is true
68
because when you exercise a call early, you forfeit the remaining time value on the call and collect the intrinsic value. Towards the end of the life of a call, the remaining time value is very small, but the intrinsic value is the same.
3) Markets are efficient This assump assumption tion suggests suggests that people people cannot cannot consiste consistently ntly predict predict the direction of the market or an individual stock. The market operates continuously with share prices following a continuous into process. To understand what a continuous into process is, you must first know that a Markov process is "one where the observation in time period t depends only on the preceding
observation." An into process is simply a Markov process in continuous time. If you were to draw a continuous process you would do so without picking the pen up from the piece of paper.
4) No commissions are charged Usually market participants do have to pay a commission to buy or sell options. Even floor traders pay some kind of fee, but it is usually very small. The fees that Individual investor's pay is more substantial and can often distort the output of the model. 5) Interest rates remain constant and known The Black and Scholes model uses the risk-free rate to represent this constant and known rate. In reality there is no such thing as the risk-free rate, but the discou discount nt rate rate on U.S. U.S. Gover Governm nmen entt Treas Treasury ury Bills Bills with with 30 days days left left until until matur maturity ity is usuall usually y used used to repre represe sent nt it. Durin During g period periods s of rapid rapidly ly chang changing ing interest rates, these 30-day rates are often subject to change, thereby violating one of the assumptions of the model.
69
6) Returns are log normally distributed This assumption suggests, returns on the underlying stock are normally distributed, which is reasonable for most assets that offer options.
Advantages & Limitations:Advantage:
The The main main adva advanta ntage ge of the Black Black-S -Scho choles les mode modell is speed speed -- it lets lets you you calculate a very large number of option prices in a very short time. Limitation:
The Black-Sc Black-Schole holes s model model has one major limitati limitation: on: it cannot be used to accurately accurately price options with an American-style American-style exercise as it only calculates the option price at one point in time -- at expiration. It does not consider the steps along the way where there could be the possibility of early exercise of an American option.
As all exchange traded equity options have American-style exercise (i.e. they can be exercised at any time as opposed to European options which can only be exercised at expiration) this is a significant limitation.
The exception to this is an American call on a non-dividend paying asset. In this case the call is always worth the same as its European equivalent as there is never any advantage in exercising early.
Various Various adjustme adjustments nts are sometim sometimes es made made to the Black-S Black-Schol choles es price price to enable it to approximate American option prices but these only works well within certain limits and they don't really work well for puts.
70
Difference between derivative and equity DERIVATIVE Warehousing Quality underlying assets Contract life
No warehousing is required of Deri Deriva vati tive ves s cont contrract act don’t don’t have have attribu attribute te of quality
EQUITY No warehousing is required Equity contract don’t have attribute of quality
Maturity date
Comparatively having Hav Having ing lon long long contract life contract life Standardized Standardized
and
Return
High
Medium
Risk
Very High
Less
Liquidity
Less
Very high
Investment Amount
Very high
Low
Lot size
Fixed by SEBI
Not fixed by SEBI
short
71
Time of trading
9a.m to 3.30p.m
9a.m to 3.30p.m
72
RESEARCH METHODOLOGY:
Problem Statement: The topic, which is selected for the study, is “DERIVATIVE MARKET” in
the firm so the problem statement for this study will be, “AWARENESS ABOUT THE DERIVATIVE AND ITS COMPARISION WITH EQUITY.”
Objective of the Study:
1. To know the awareness of the Derivative Market in Surat City. 2. To know know which which one is benef beneficia iciall for the investo investor. r. 3. To find what what proportion proportion of the the population population are investing in such derivative derivatives s along with their investment pattern and product preferences.
Research Design:
The The rese resear arch ch desi design gn spec specif ifie ies s the the meth method ods s and and proc proced edur ures es for for conducting a particular study. The type of research design applied here are “DES “DESCR CRIPT IPTIV IVE” E” as the the obje objecti ctive ve is to check check the the posit position ion of the Deriv Derivat ative ive Market in Surat city. The objectives of the study have restricted the choice of research research design up to descriptive research design. design. This survey will help the firm to know how the investors invest in the derivative segment & which factors affect their investing behavior.
Scope of the Study:
73
The scope of the study will include the analysis of the survey, which is being conducted to know the awareness of the Derivative Market in the city & also doing comparison of derivatives with equity.
Research Source of Data:There are two types of sources of data which is being used for the studies:-
Primary Source of Data: Preparing a Questionnaire is collecting the primary source of data & it
was collected by interviewing the investors.
Secondary Source of Data: For having the detailed study about this topic, it is necessary to have
some of the secondary information, which is collected from the following:-Books. Magazines & Journals. Websites. Newspapers, etc.
Methods of Data Collection:The study to be conducted is about the awareness of the Derivative Market in the Surat City so the method of data collection used id “SURVEY METHOD”.
DATA ANALYSIS AND INTERPRETATION:
74
Q.1 Are you trading in derivative market?
Objective: To know whether
Yes No the Total
that
Frequencies 74 126 200
Percentage 37.0 63.0 100.0
investors are trading in derivative market or not.
Frequency
Graph:
75
Trading 140 y c n e u q e r f / t n e c r e p
126
120 100 80
74 63
60 40
Frequencies Percentage
37
20 0 Y es
No Trading
Inference: from the above graph out of 200 investors, only 37% investors means 74 respondent are trading in derivative derivative market and 63% means 126 respondents are not trading in derivative market.
Q.2 Reasons for not investing in derivative market. {Give the rank}
Objective: Objective : To know know the reason reason why why inves investor tors s are are not trading trading in tradi trading ng in derivative market Frequency
76
Reasons Lack of knowledge Lack of awareness High risky Huge amount of
Frequency 26 19 62 17
Percent 20.6 15.1 49.2 13.5
investment Other Total
2 126
1.6 100.0
Graph: Reason
y c n e u q e r f / t n e c r e p
70 60
62 49.2
50 40
Series1 26 20.6
30 20 10 0
Series2 19 15.1
1713.5
Series3 2 1.6
0 0 Reasons
Lack of Lack of knowledge awareness
High ris ky
Huge amount of investment
Other
reasons
Inference: From the above graphical representation you can see that 49.2% investors think that the derivatives are high risky whereas 1.6% investors don’t have specify their reasons for not trading in derivative market. Q.3 what is the objective of trading in derivative market? Objective: To know that why they are trading in derivative market.
Frequency Frequency
Percent
77
Don’t trade Not at all preferred Neutral Some how preferred Most preferred Total
126 2 2 5 65 200
63.0 1.0 1.0 2.5 32.5 100
Graph: High Return 140 y c n e u q e r f / t n e c r e p
126
120 100 80
Frequency
65
63
60
Percent 32.5
40 20
2
1
2
1
5
2.5
0 Don’t trade
Not at all preferred
Neutral
Some how preferred
Most preferred
preferred
Inference: From the above graph we can see that 32.5% investors are most preferred preferred the objective of high return and 1% investors are neutral while they are trading in derivative market.
Q .4what are the criteria do you taken in the consideration while investing in derivative market?
Objective: Objective : To know that which which criteria are consider consider by the investors investors while they they are investing in derivative market. Which criteria are most important for them whether derivatives are ease in transaction, less costly, or available of different contract or for the margin money. 78
Frequency
Don’t trade Not at all preferred Some how not preferred Neutral Some how preferred Most preferred Total
Freq equ uency 126 2
Percen entt 63.0 1.0
4
2.0
16 23 29 200
8.0 11.5 14.5 100.0
Graph:
Ease in transaction y c 140 n e 120 u q 100 e r 80 f / e g 60 a t n 40 e c 20 r e 0 p
126
Frequency
63
Don’t trade
2 1
4 2
Not at all preferred
Some how not preferred
16
8
N eutral
23 11.5
29 14.5
Percent
Som e Most how preferred preferred
preferred
79
Inference: from the above graph we can conclude that out of the 200 investors 14.5% investors are most preferred and 1% investors are not at all preferred the ease in transaction contract.
Q-5 Give your preference of trading in derivative instrument.
Objective: To know the preference of the investors while they are trading in derivative market.
Frequency
Don’t trade Not at all preferred Some how not preferred Neutral Some how preferred Most preferred Total
Frequency 126 1 1 15 14 43 200
Percent 63.0 .5 .5 7.5 7.0 21.5 100.0
Graph:
80
Index future y c n e u q e r f / t n e c r e p
126
140 120 100 80 60 40 20 0
Frequency
63 43
Don’ on’t tra trade de
1 0.5
1 0.5
Not at all all preferred
Some how not preferred
15 7.5
14 7
Neutr al al
Some ho how preferred
21.5
Percent
Most preferred
preferred
Inference:: From the above graph we can see that only 0.5% investors are not at Inference all preferred the index future, 0.5 % investors are some how not preferred ,7.5% investors are some how preferred 21.5% are most preferred as the preference of their trading in derivative market.
Q-6 Give your preference in term of trading in derivative market? Objective: Objective :
To know know the prefere preferenc nce e of the inves investor tors s in term term of trading trading in
derivative market.
Frequency
Don’t trade Not at all preferred Some how not preferred Neutral Some how preferred Most preferred Total
Frequency 126 4 1 5 10 54 200
Percent 63.0 2.0 .5 2.5 5.0 27.0 100.0
81
Graph:
Intraday e g a t n e c r e p / y c n e u q e r F
140 120 100 80 60 40 20 0
126 63 0 0 t ’ e n d o a r D t
4 2
10.5
5 2.5
l l d a e t r r a e t f o e r N p
t d e e o n r r m e o w f o e S h r p
l a r t u e N
10 5
54 27
frequency percentage
d d e t e e r r r s r w m o e o e f o h f e S r M e r p p
preferred
Inference: from the above graph we can see that 27% investors are most preferred the intraday and 2% investors are not at all preferred the intraday.
Q-7 How much percentage of your income you trade in derivative market? Objective: To know investors are how much percentage percentage of their income trade in derivative market.
Frequency
Don’t trade Less than 5% 5%-10% 11%-15% 16%-20% More than 20% Total
Frequency 126 8 25 25 13 3 200
Percent 63 4.0 12.5 12.5 6.5 1.5 100.0
82
Graph:
1.5 3
More than 20%
6.5 13
16%-20% 11%-15%
12.5 25
5%-10%
12.5 25
Percent Frequency
4 8
Less than 5%
63
Don’t trade 0
50
126 126 100
150
Inference: From the above graph we can see that 12.5% investors are invest 5% to 10% income income in the the deriva derivativ tive e mark market. et. While While only only 1.5% 1.5% inves investor tors s are are investing more than 20% of their income.
Q-8 what is the rate of return expected by you from derivative market? Objective: To know know the inves investor tors s expec expectat tation ion toward towards s their their inves investm tmen entt in derivative market.
Frequency
Do not trade 5%-9% 10%-13. % 14%-17. % 18%-23% Total
Frequency 126 21 22 23 8 200
Percent 63.0 10.5 11.0 11.5 4.0 100.0
Graph:
83
rate of return expected y c n e u q e r f / e g a t n e c e p
140 120 100 80 60 40 20 0
126
Frequency
63
Percent 21
Do not tr ade
10.5
5%- 9%
22
23
11
10%-13. %
11.5
14%-17. %
8
4
18%-23%
Rate Rate of r eturn
Inference:: From the above Inference above graph we we can see that 11.55 investors investors are expect expect the 14% to 17% of their investment .and 4% investors are expect the 18% to 23% rate of return.
Q-9. You are satisfied with the current performance of the derivative market
Objective: To know that investors are satisfied with the performance of the derivative market or not. Frequency
Do not trade Strongly disagree Disagree Neutral Agree strongly agree Total
Frequency 126 8 14 18 25 9 200
Percent 63.0 4.0 7.0 9.0 12.5 4.5 100.0
Graph:
84
Satisfaction y c n e u q e r f / e g a t n e c r e p
140 120 100 80 60 40 20 0
126
Frequency
63 8 4 Do not trade
14 7
Strongly Di s ag ree disagree
18
9
Neutral
25 12.5
Ag ree
Percent 9 4.5 s trong ly agree
prferred
Inference:
From From the the abov above e Grap Graph h we can can see see that that 12.5 12.5% % are are agre agree e for for
satisfaction and4% are strongly disagree.
Gender: Frequency
Male Female Total
Frequency 157 43 200
Percent 78.5 21.5 100.0
Graph:
85
gender 180 160 140 y c 120 n e 100 u q 80 e r 60 f 40 20 0
157
Frequency
78.5
Percent 43 21.5
male
female gender
Inference: From the above graph we can see that there are 157 male investors when 43 are the female investors.
AGE: Frequency
Below 20 years 20-25 years 26-30 years 31-35 years above 35 years Total
Frequency 3 61 51 43 42 200
Percent 1.5 30.5 25.5 21.5 21.0 100.0
Graph:
86
age 35
30.5
30 t n e c r e p
25.5 21.5
25
21
20 15
Percent
10 1.5
5 0
below below 20 years
20-25 years
26-30 years
31-35 years
above 35 years
years
Inference: From the above graph we can see that out of 200 investors 1.5% investors are below 20 years,30.5% investors are 20 to 25 years,21.5% investors are between between 31 to35 years years , and 21% investors investors are above 35 35 years trading trading in derivative market.
Occupation: Frequency Student Employed Business Professional House wife Others Total
Frequency 35 82 32 22 13 16 200
Percent 17.5 41.0 16.0 11.0 6.5 8.0 100.0
Graph:
87
Occupation 45 40 e 35 g a 30 t n 25 e 20 c r 15 e 10 p 5 0
41
17.5
t e n d t u s
16
11
Percent 8
6.5
l f e a e d i s s n y e w o o i n l i e p s s s u s f e b u e m o o h p r
s e r h t o
occupation
Inference:
From
the
above
graph
we
can
see
that
17.5% investors are students, 41% are the employed, 16% are the business, 11% investors are the professionals, 6.5% investors are the housewife, and 8% are others, which include the retired, farmers and unemployed.
ANNUAL INCOME Frequency
Frequenc Vali d
0 less than 1 lac 1-5 lacs 6-10 lacs 11-15 lacs 15 lacs above Total
&
Valid
Cumulative
y 47
Percent Percent 23.5 23.5
Percent 23.5
62
31.0
31.0
54.5
73 15 1
36.5 7.5 .5
36.5 7.5 .5
91.0 98.5 99.0
2
1.0
1.0
100.0
200
100.0
100.0
Graph:
88
annual income 40 35 e 30 g a 25 t n 20 e c r 15 e p 10 5 0
36.5 31 23.5 Percent 7.5
0
l es s tha n 1 lac
1-5 1-5 lacs lacs
6-10 6-10 lacs lacs
0.5
1
11-1 11-15 5 lacs
15 lacs & above
income in Rs.
Inference: From the above graph we can see that 23.5% investors don’t have the the inco income me,, 31% 31% inve invest stor ors s have have less less than than 1 lack lack annu annual al inco income me,, 36.5 36.5 % investors have the 1to 5 lacks annual income, 7.5 % investors have the 6 to 10 lacks income, 0.5% investors have the 11 to 15 lacks annual income, and 1% investors have the 15 lacks and above annual income.
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FINDINGS 1. Here we found that out of 200 investors investors 74 means 37% investors
are
trading in derivative market whereas 126 means 63% are not trading in derivative market. 2. Reasons for not investing in derivative market Is derivative is because lack of awareness and knowledge, high risky, need huge amount of investment. 3. The main objective I of trading in derivative market of the investors is getting high return. 4. Criteria for trading is considered by investors are derivatives in derivative they get margin money and derivatives are more liquid. 5. Their attractive preference is index future and index options 6. Most of the investors are trading intraday.
90
7. Out of 200 investors 12.5% investors are investing 11% to 15% of their income trading in derivative market. 8.12.5% are satisfied with derivative market 9.157male investors and 43 female investors out of 200 investors. 10.-most of the businessman and employed are trading in derivative market.
CONCLUSION
1. The
awareness
regarding
Derivative among investor is 78 percent.
2. In term terms s of inve invest stme ment nt in Deri Deriva vati tive ve and and Equi Equity ty inve invest stor ors s have have capability of taking risk.
91
3. Inve Invest stor ors s also also pref prefer er Safe Safety ty and and Time Time Fact Factor or as the the impo import rtan antt parameter for investing.
4. The importa important nt factor factor that affecting affecting the investo investorr decision decision is based on In Consult With Their Broke
RECOMMENDATION 1. Only 74 investors are trading whereas 126 are not trading .so attract them for trading.
2.19 are lack of awareness so make them aware with the derivative .so increase the customer.
92
3. Out Out of 126, 126, 26 don’t don’t have have knowl knowledg edge e for derivati derivative ve so provid provide e them them knowledge for trading in derivative market.
4. Those who are not satisfied with the derivative by knowing their behavior of invest investme ment nt make make them them satis satisfie fied. d. Becaus Because e negat negative ive word word mouth mouth of the the custo custome mers rs fall fall down down the busin business ess.. And And good good word word of mouth mouth build builds s the the business.
BIBLIOGRAPHY
93
1. Donal Donald d R Coop Cooper er & Pame Pamela la S Schin Schindle dler, r, “ Business Business
Research Research Methods Methods” ” ,
Eighth Edition, Tata McGraw-Hill, New York, 2003. 2. N D Vohra and B R Bagri, “Future and options ”
nd
2
Edition, seventh reprint
2006 Tata McGraw-Hill Publishing Company Ltd, 2006. WEBSITES
www.5paisa.com
www.derivativeindia.com
www.nirmalbang.com
www.bseindia.com
www.nseindia.com
www.mcx.com
www.ncdex.com
APPENDIX Questionnaire
Myself Saurav.P.Gohil Saurav.P.Gohil student of B.B.A studying at Vivekanand Vivekanand College for B.B.A, Surat. I had prepared this questionnaire for project work meant for educa educatio tiona nall purp purpose ose only. only.
On “Aware “Awarene ness ss abou aboutt Deriva Derivativ tives es and and Its
Comparison with Equity.”
No personal information will be disclosed in any form at anywhere.
94
1. ARE YOU INVESTING IN DERIVATIVE MARKET?
YES
NO
2. REASO REASON N FOR FOR NOT INVES INVESTI TING NG IN DERIV DERIVATI ATIVE VE MARKET MARKET.. {GIVE {GIVE THE RANK}
LACK OF KNOWLEDGE
LACK OF AWARENESS
HIGH RISKY
HUGE AMOUNT OF INVESTMENT
OTHER
3. WHAT WHAT ARE THE OBJECT OBJECTIV IVES ES OF THE INVES INVESTI TING NG IN DERIV DERIVATI ATIVE VES S MARKET?
95
5
4
SCALE INS INSTRUMEN MENT MOS MOST
3
2
1
SOMEWHAT NUTR UTRAL SOMEW MEWHAT NOT
PREFERED PREFERED
AT
NOT
ALL
PREFERED
PREFERED
HIGH RETURN HEDG HEDGE E THE THE RISK MORE RELIABLE SAFE TO INVEST
IN
DERIVATIVE MARKET MORE LIQUID
4. WHAT ARE THE CRITERIA DO YOU TAKEN IN THE CONSIDERATION WHILE INVESTING IN DERIVATIVE MARKET?
SCALE 5 INSTRUME MOST
4 SOMEWH
3 NUTRAL
2 SOMEWH
1 NOT
NT
PREFERE
AT
AT
D
PREFERE
PREFERE
PREFERE
D
D
D
AT
NOT ALL
FLEXIBILIT Y
96
EASE
IN
TRANSAC TION LESS COSTLY AVALABILI TY
OF
DIFFEREN T CONTRAC T MARGIN MONEY
5. GIVE GIVE YOUR YOUR PRE PREFERE FERENC NCE E OF INVE INVEST STME MENT NT IN DERI DERIVA VATI TIVE VE INSTRUMENT.
SCALE 5 INSTRUME MOST
4 SOME
3 NEUTRAL
2 SOMEWH
1 NOT
NT
PREFERE
HOW
AT
D
PREFERE
PREFERE
PREFERE
D
D
D
AT
NOT ALL
INDEX FUTURE STOCK
97
FUTURE INDEX OPTION STOCK OPTION
6. GIVE GIVE YOUR YOUR PREF PREFERE ERENCE NCE IN TERMS TERMS OF INVES INVESTME TMENT NT DERIVA DERIVATI TIVE VE MARKET.
SCALE TERMS
5 MOST
4 SOMEWHA
PREFER
T PREFER
3 NEATRUL
2 SOMEWHA T
1 NOT
AT
NOT ALL
PREFER
PREFER
SHORT TERM MEDIUM TERM LONG TERM
98
7. HOW HOW MUCH MUCH PERC PERCER ERNT NTAG AGE E OF YOUR YOUR INCO INCOME ME YOU YOU INVE INVEST ST IN DERIVATIVE MARKET?
LESS THAN 5%
11% TO 15%
5% TO 10%
16% TO 20%
MORE THAN 20%
8. WHAT IS THE RATE OF RETURN EXPECTED BY YOU FROM DERIVATIVE MARKET?
5 % TO 9.5%
10% TO 13.5%
14 % TO 17%
18% TO 23%
ABOVE 23%
9. YOU ARE SATISFIED WITH THE CURRENT PERFORMANCE OF THE DERIVATIVE IN TERMS OF EXPECTED RETURN.
STRONGLY AGREE
NUTRAL
AAGREE
DISAGREE
99
STRONGLY DISAGREE.
DEMOGRAPHIC PROFILE
NAME: …………………………………………………………
CONTACT NO: …………………………… ……………………………………………… …………………
EMAIL ID: ………………………… ……………………………………………………. ………………………….
AGE:
BELOW 20YRS
31 TO 40 YRS
20 TO 30 YRS
41 TO 50 YRS
100
ABOVE 50
GENDER:
MALE
FEMALE
FROM WHICH CATEGORY DO YOU FEET MORE?
STUDENT
EMPLOYEED
BUSINESS OWNER
OTHER
INCOME {YEARLY}:
LESS THAN 100000RS.
101
100000 TO 200000RS.
200001 TO 300000RS.
300001 TO 400000 RS
ABOVE 400000RS.
THANK YOU
102
