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A PROJECT REPORTOF
STUDY ON DERIVATIVES
(FUTURES & OPTIONS)AT
SHAREKHAN STOCKBROKING CO. LTD.
Project report submitted in Partial fulfillment for the award of
MASTER OF BUSINESS ADMINISTRATION
Submitted by:K.HARIKA
Bearing Roll No=214309672008
OLIVE PG COLLEGE CHINTAPALLYGUDA-IBRAHIMPATNAM (Affiliated to Osmania University)
HYDERABAD (2009-2011)
1
DECLARATION
I hereby declare that the project titled
“DERIVATIVES (FUTURES & OPTIONS)” done at sharekhan stock
broking company Limited submitted by me as part of partial fulfillment
for the award of the Masters of Business Administration, at OLIVE PG
COLLEGE, Osmania University, Hyderabad. It is a record of bonafide
work done by me.
I also declare that this report has to my knowledge is my own
and is neither submitted to any other university nor published any time
before.
Name and address of student:
Signature of the student
Date:
Place:
2
ACKNOWLEDGEMENT
I take this opportunity to acknowledge, all the people who rendered their
valuable advice in completing my project.
I take privilege to thank Mr.S.Lakshminarasimham, Principal, olive pg
college for management for guiding and supporting me to carry out the project
work very smoothly.
I also thank Mr.S.Nagireddy,professor for his valuable suggestions and
kind cooperation in completing my project work.
I extend my sincere thanks and gratitude to the person who has been kind
in giving me an Opportunity to do a project work in sharekhan ltd.,
Mr.M.venugopal,Territory manager.
Last but not least, I am thankful to my parents and to all my friends for
their wholehearted support and suggestions, which helped me in completing this
project.
K.HARIKA
3
ABSTRACT
Derivatives are risk management instruments, which derive their
value from an underlying asset. The underlying asset can be bullion,
index, share, bonds, currency, interest etc.
SEBI set up a 24-member committee under Chairmanship of
Dr.L.C. Gupta to develop the appropriate regulatory framework for
derivatives trading in India. The committee submitted its report in March
1998. On May 11, 1998 SEBI accepted the recommendations of the
committee and approved the phased introduction of derivatives trading
in India beginning with stock index futures. SEBI also approved the
“suggestive bye-laws” recommended by the committee for regulation
and control of trading and settlement of derivatives contracts.
My study is to know about the investors’ familiarity and
awareness of the derivative market and their profit/loss positions in
trading in types of derivatives.
4
CONTENTS
S.NO. CHAPTER NAME PAGE NO.
1 1.1 1.2
1.3
1.4
1.5
INTRODUCTION
OBJECTIVES
NEED OF THE STUDY
SCOPE OF THE STUDY
METHODOLOGY
II
2.1
2.2
LITERATURE REVIEW
INDUSTRY PROFILE
THEORETICAL FRAMEWORK
III COMPANY PROFILE
IV DATA ANALYSIS & INTERPRETATION
VI FINDINGS,SUGGESTIONS & CONCLUSIONS
BIBLIOGRAPHY
5
CHAPTER 1
INTRODUCTION
6
1.1 A STUDY ON DERIVATIVES:
Derivatives have vital role to play in enhancing shareholder value by ensuring access to
the cheapest source of funds. Active use of derivatives instruments allows the overall business
risk profile to be modified, thereby providing the potential to improve earning quality by
offsetting undesired risk.
Under my project report, I have studied various trends that come in the way of
Derivatives market. Because impression is usually given that losses arose from derivatives are
extremely complex and difficult to understand financial strategies. So after interviewing with
different brokers,investors and dealers, I have tried to give a solution to these complexities.
I have also found out that what would be the future of derivative market in India on
the basis of interviews and observations of brokers, dealers and investors regarding future, I have
found out that derivatives can indeed be used safely and successfully provided a sensible control
and management strategy is established and executed. Inspite of that more awareness should be
done and technical expertise knowledge should be more expanded.
A derivative is a security whose value depends on the value of an underlying asset.
Underlying asset can be bullion, index, share, bonds, currency, interest etc. Derivative securities
have been very successful innovation in capital market.
The emergence of the market for derivative products, most notably forwards, futures and
options, can be traced back to the willingness of risk adverse economic agents to guard themselves
against uncertainties arising out of fluctuations in asset prices. By their very nature, financial
markets are marked by a very high degree of volatility. Through the use of derivative products, is
possible to partially or fully transfer price risks by a locking - in asset prices. As instruments of
risk management, these generally do not influence the fluctuation in the underlying asset prices.
However, by locking-in asset prices, derivative products minimize the impact of
fluctuations in asset prices on the profitability and cash flow situation of risk-averse investor.
7
.
1.2 OBJECTIVES OF THE STUDY:
The main objectives of my final project report are as follows:-
To study various trends in derivative market.
Comparison of the profits/losses in cash market and derivative market.
To find out profit/losses position of the option writer and option holder.
To study in detail the role of the future and options.
To study the role of derivatives in Indian financial market.
To find out that what would be the future and market potential of derivative market in
India.
To know the awareness & familiarity of investors, dealers and brokers hold regarding
derivatives market.
To know the experience of dealers, investors and brokers with derivatives till date.
To get knowledge about shortcomings in Indian derivative market.
8
1.3 NEED OF THE STUDY:
Different investment avenues are available for the investors. Stock market also offers
good investment opportunities to the investor alike all investments, they also carry certain
risks. The investor should compare the risk and expected yields after adjustment of tax on
various instruments. While taking an investment decision the investor may seek advice
from an expert and consultancy including stock brokers and analysts. The objective here
is to make the investor aware of the functioning of the derivatives.
Derivatives act as a risk hedging tool for the investors. The objective is to help the
investor in selecting the appropriate derivatives instrument to attain the maximum return
and to construct the portfolio in such a manner to meet the investor needs and to decide
how best to reach the goals from the securities available.
To identify the investor objective constraints and performance, which help formulate the
investment policy?
To develop and improve the strategies in the investment policy formulated.
Stockbrokers will help in the selection of asset classes and securities in each class
depending upon their risk and return attributes.
9
1.4 SCOPE OF THE STUDY:
The study is limited to “Derivatives” with special references to futures and options in
the Indian context .The study has only made humble attempt at evaluating derivatives only in
Indian markets.
The study is limited to the analysis made for types of instruments of derivatives .Each
strategy is analyzed according to its risk and return characteristics and derivatives performance
against the profit and policies of the company. The study is not based on the international
perspective of derivatives which exists in DOW JONES and NASDAQ.
10
1.5 RESEARCH METHODOLOGY:
The following steps are involved in the study :
SELECTION OF SCRIP: The sample of the stocks for the purpose of collecting
secondary data has been selected on the basis of Random Sampling.
The stocks are chosen in an unbiased manner and each stock is chosen independent
of the other stocks chosen. And the scrip selected is NIFTY ’50. The lot is of any
size, profitability position of futures, buyers and sellers & also the option holders
and option writers is studied.
DATA COLLECTION: Data is collected in two forms; They are primary data and
secondary data.
PRIMARY DATA: Data from brokers.
SECONDARY DATA:
Data from various books.
Data from internet.
Data from news papers & magazines.
11
CHAPTER 2
LITERATURE REVIEW
12
2.1 INDUSTRY PROFILE:
A capital market is a market for securities (debt or equity), where business
enterprises (companies) and governments can raise long-term funds. It is defined as
a market in which money is provided for periods longer than a year, as the raising of
short-term funds takes place on other markets (e.g., the money market ). The capital
market includes the stock market (equity securities) and the bond market (debt). U.S.
Securities and Exchange Commission. Capital markets may be classified as primary
markets and secondary markets.
PRIMARY MARKET:
In primary markets, new stock or bond issues are sold to investors. It is also
known as new issues market.
SECONDARY MARKET:
In the secondary markets, existing securities are sold and bought
among investors or traders, usually on a securities exchange, over-the-counter, or
elsewhere.It is also known as old issues market.
13
DEFINITION OF STOCK EXCHANGE:
"Stock exchange means the body of individuals whether incorporated or not, constituted for
the purpose of assisting, regulating or controlling the business of buying, selling or dealing in
securities."
It is an association of member brokers for the purpose of self-regulation and protecting
the interests of its members. It can operate only if it is recognized by the Government under the
securities contracts (regulation) Act, 1956. The recognition is granted under section 3 of the Act
by the central government, Ministry of Finance.
‘Recognised Stock Exchange’ means a stock exchange, which is for the time being
recognised by the Central Government under Section 4 of the SC(R)A.
As per Section 2(h), the term “securities” include-
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a
like nature in or of any incorporated company or other body corporate,
(ii) Derivative,
(iii) Units or any other instrument issued by any collective investment scheme to the investors in
such schemes,
(iv) Security receipts as defined in clause (zg) of section 2 of the Securisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI)
(v) Units or any other such instrument issued to the investors under any mutual fund scheme,
(vi) any certificate or instrument issued to an investor by any issuer being a special purpose
distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such
entity, and acknowledging beneficial interest of such investor in such debt or receivable,
including mortgage debt, as the case maybe.
(vii) Government securities,
(viii) Such other instruments as may be declared by the Central Government to be securities, and
(ix) Rights or interests in securities.
14
BYLAWS:
Besides the above act, the securities contracts (regulation) rules were also made in 1957 to
regulate certain matters of trading on the stock exchanges. There are also bylaws of the
exchanges, which are concerned with the following subjects.
Opening/closing of the stock exchanges, timing of trading, regulation of bank transfers,
regulation of badla or carryover business, control of the settlement and other activities of the
stock exchange, fixation of margins, fixation of market prices or making up prices, regulation of
taravani business (jobbing), etc., regulation of brokers trading, brokerage charges, trading rules
on the exchange, arbitration and settlement of disputes, settlement and clearing of the trading etc.
2.2 REGULATION OF STOCK EXCHANGES:
The securities contracts (regulation) act is the basis for operations of the stock exchanges in
India. No exchange can operate legally without the government permission or recognition. Stock
exchanges are given monopoly in certain areas under section 19 of the above Act to ensure that
the control and regulation are facilitated. Recognition can be granted to a stock exchange
provided certain conditions are satisfied and the necessary information is supplied to the
government. Recognition can also be withdrawn, if necessary. Where there are no stock
exchanges, the government can license some of the brokers to perform the functions of a stock
exchange in its absence.
Why do we need a regulatory body for investor protection in India?
India is an ‘informationally’ weak market.
Boosting capital market demands restoring the confidence of lay investors who have been
beaten down by repeated scams.
Progressively softening interest rates and an under performing economy have eroded
investment options, and require enhanced investing skills.
15
SECURITIES CONTRACTS (REGULATION) ACT, 1956
The Securities Contracts (Regulation) Act, 1956 [SC(R)A] was enacted to prevent
undesirable transactions in securities by regulating the business of dealing therein and by
providing for certain other matters connected therewith. This is the principal Act, which governs
the trading of securities in India.
Listing of Securities
Where securities are listed on the application of any person in any recognised stock
exchange, such person shall comply with the conditions of the listing agreement with that stock
exchange (Section 21). Where a recognised stock exchange acting in pursuance of any power
given to it by its bye-laws, refuses to list the securities of any company, the company shall be
entitled to be furnished with reasons for such refusal and the company may appeal to Securities
Appellate Tribunal (SAT) against such refusal.
Delisting of Securities
A recognised stock exchange may delist the securities of any listed companies on such
grounds as are prescribed under the Act. Before delisting any company from its exchange, the
recognised stock exchange has to give the concerned company a reasonable opportunity of being
heard and has to record the reasons for delisting that concerned company. The concerned
company or any aggrieved investor may appeal to SAT against such delisting.(Section 21A).
SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI):
SEBI was set up as an autonomous regulatory authority by the Government of India in 1988
" to protect the interests of investors in securities and to promote the development of, and to
regulate the securities market and for matters connected therewith or incidental thereto." It is
empowered by two acts namely the SEBI Act, 1992 and the securities contract (regulation) Act,
1956 to perform the function of protecting investor's rights and regulating the capital markets.
16
Objectives of SEBI:
As an important entity in the market it works with following objectives:
1. It tries to develop the securities market.
2. Promotes Investors Interest.
3. Makes rules and regulations for the securities market.
Functions of SEBI:
1. Regulates Capital Market
2. Checks Trading of securities.
3. Checks the malpractices in securities market.
4. It enhances investor's knowledge on market by providing education.
5. It regulates the stockbrokers and sub-brokers.
6. To promote research and investigation.
7. Investor education and training of the Intermediaries.
8. Inspection and enquiries.
BOMBAY STOCK EXCHANGE
This stock exchange, Mumbai, popularly known as "BSE" was established in 1875 as “The
Native share and stock brokers association", as a voluntary non-profit making association. It has
evolved over the years into its present status as the premiere stock exchange in the country. It
may be noted that the stock exchanges the oldest one in Asia, even older than the Tokyo Stock
exchange which was founded in 1878.
The exchange, while providing an efficient and transparent market for trading in securities,
upholds the interests of the investors and ensures redressed of their grievances, whether against
the companies or its own member brokers. It also strives to educate and enlighten the investors
by making available necessary informative inputs and conducting investor education
programmes.
17
A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public
representatives and an executive director is the apex body, which decides the policies and
regulates the affairs of the exchange.
BSE INDICES:
In order to enable the market participants, analysts etc., to track the various ups and
downs in the Indian stock market, the Exchange has introduced in 1986 an equity stock index
called BSE-SENSEX that subsequently became the barometer of the moments of the share prices
in the Indian stock market. It is a "Market capitalization-weighted" index of 30 component
stocks representing a sample of large, well-established and leading companies. The base year of
Sensex is 1978-79. The Sensex is widely reported in both domestic and international markets
through print as well as electronic media.
Sensex is calculated using a market capitalization weighted method. As per this
methodology, the level of the index reflects the total market value of all 30-component stocks
from different industries related to particular base period. The total market value of a company
is determined by multiplying the price of its stock by the number of shares outstanding.
Statisticians call an index of a set of combined variables (such as price and number of shares) a
composite Index. An Indexed number is used to represent the results of this calculation in order
to make the value easier to work with and track over a time. It is much easier to graph a chart
based on Indexed values than one based on actual values world over majority of the well-known
Indices are constructed using “Market capitalization weighted method ".
In practice, the daily calculation of SENSEX is done by dividing the aggregate market
value of the 30 companies in the Index by a number called the Index Divisor. The Divisor is the
only link to the original base period value of the SENSEX. The Divisor keeps the Index
comparable over a period of time and if the reference point for the entire Index maintenance
adjustments. SENSEX is widely used to describe the mood in the Indian Stock markets. Base
year average is changed as per the formula.
18
NATIONAL STOCK EXCHANGE
The NSE was incorporated in Nov 1992 with an equity capital of Rs. 25 crs. The
International securities consultancy (ISC) of Hong Kong has helped in setting up NSE. ISC has
prepared the detailed business plans and installation of hardware and software systems. The
promotions for NSE were financial institutions, insurances companies, banks and SEBI capital
market ltd, Infrastructure leasing and financial services ltd and stock holding corporation ltd.
It has been set up to strengthen the move towards professionalization of the capital market
as well as provide nationwide securities trading facilities to investors.
NSE is a national market for shares PSU bonds, debentures and government securities since
infrastructure and trading facilities are provided.
NSE - NIFTY:
The NSE on April 22, 1996 launched a new equity Index. The NSE-50. The new Index
which replaces the existing NSE-100 Index is expected to serve as an appropriate Index for the
new segment of futures and options.“Nifty “means National Index for Fifty Stocks.
The NSE-50 comprises 50 companies that represent 20 broad Industry groups with an
aggregate market capitalization of around Rs. 1, 70,000 crs. All companies included in the Index
have a market capitalization in excess of Rs 500 crs each and should have traded for 85% of
trading days at an impact cost of less than 1.5%.
The base period for the index is the close of prices on Nov 3, 1995, which makes one year of
completion of operation of NSE’s capital market segment. The base value of the Index has been
set at 1000.
NSE - MIDCAP INDEX:
The NSE midcap Index or the Junior Nifty comprises 50 stocks that represents 21 board
Industry groups and will provide proper representation of the midcap segment of the Indian
capital Market.
19
The base period for the index is Nov 4, 1996, which signifies two years for completion of
operations of the capital market segment of the operations. The base value of the Index has been
set at 1000.
At present, there are 24 stock exchanges recognized under the securities contract
(regulation) Act, 1956. They are
List of Stock Exchanges recognized under the securities contract (regulation) Act, 1956
NAME OF THE STOCK EXCHANGE YEAR
Bombay stock exchange,
Ahmadabad share and stock brokers association
Calcutta stock exchange association Ltd,
Delhi stock exchange association Ltd,
Madras stock exchange association Ltd,
Indoor stock brokers association,
Bangalore stock exchange,
Hyderabad stock exchange,
Cochin stock exchange,
Pune stock exchange Ltd,
U.P stock exchange association Ltd,
Ludhiana stock exchange association Ltd,
1875
1957
1957
1957
1957
1958
1963
1943
1978
1982
1982
1983
20
Jaipur stock exchange Ltd,
Gauhathi stock exchange Ltd,
Mangalore stock exchange Ltd,
Maghad stock exchange Ltd, Patna,
Bhubaneswar stock exchange association Ltd,
Over the counter exchange of India, Bombay,
Saurasthra Kutch stock exchange Ltd,
Vadodara stock exchange Ltd,
Coimbatore stock exchange Ltd,
The Meerut stock exchange Ltd,
1National stock exchange Ltd,
Integrated stock exchange,
1983-84
1984
1985
1986
1989
1989
1990
1991
1991
1991
1991,1999
21
2.2 THEORETICAL FRAMEWORK:
DERIVATIVES:
The emergence of the market for derivatives products, most notably forwards, futures and
options, can be tracked 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 influence the fluctuations in the underlying asset prices. However,
by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on
the profitability and cash flow situation of risk-averse investors.
Derivatives are risk management instruments, which derive their value from an
underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc..
Banks, Securities firms, companies and investors to hedge risks, to gain access to cheaper money and
to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.
DEFINITION:
Derivative is a product whose value is derived from the value of an underlying asset in a
contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
1. Securities Contracts (Regulation) Act, 1956 (SCR Act) defines “derivative” to be secured or
unsecured, risk instrument or contract for differences or any other form of security.
2. A contract which derives its value from the prices, or index of prices, of an underlying
securities.
22
Emergence of Financial derivative products:
Derivative products initially emerged as hedging devices against fluctuations in commodity prices,
and commodity-linked derivatives remained the sole form of such products for almost three hundred years.
Financial derivatives came into spotlight in the Post-1970 period due to growing instability in the financial
markets. However since their emergence, these products have become very popular and by 1990s, they
accounted for about two-thirds of total transactions in derivative products. In recent years, the market for
financial derivatives has grown tremendously in terms of variety of instrument available, their complexity
and also turnover.
In the class of equity derivatives the worlds 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 small investors find these useful due to high correlation of the
popular indexes with various portfolios and ease o use. The lower costs associated with index
derivatives vis-à-vis derivative products based on individual securities is another reason for their
growing use.
PARTICIPANTS:
The following three broad categories of participants in the derivatives market.
HEDGERS
Hedgers face risk associated with the price of an asset. They use futures or options markets to
reduce or eliminate this risk.
SPECULATORS
23
Speculators wish to bet on future movements in the price of an asset. Futures and options
contracts can give them an extra leverage; that is, they can increase both the potential gains and
potential losses in a speculative venture.
ARBITRAGEURS
Arbitrageurs are in business to take of a discrepancy between prices in two different markets,
if, for, example, they see the futures price of an asset getting out of line with the cash price,
they will take offsetting position in the two markets to lock in a profit.
FUNCTIONS OF DERIVATIVES MARKETS:
The following are the various functions that are performed by the derivatives markets. They are:
Prices in an organized derivatives market reflect the perception of market
participants about the future and lead the price of underlying to the perceived future level.
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 trading acts as a catalyst for new entrepreneurial activity.
Derivatives markets help increase saving and investment in long run.
3.5.2 TYPES OF DERIVATIVES:
The following are the various types of derivatives. They are:
FORWARDS:
A forward contract is a customized contract between two entities, where settlement takes place
on a specific date in the future at today’s pre-agreed price.
FUTURES:
24
A futures contract is an agreement between two parties to buy or sell an asset at a certain time i
at a certain price.
OPTIONS:
Options are of two types-calls and puts. Calls give the buyer the right but not the obligation
to buy a given quantity of the underlying asset, at a given price on or before a give future date. Puts
give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a
given price on or before a given date.
WARRANTS:
Options generally have lives of up to one year; the majority of options traded on options exchanges
having a maximum maturity of nine months. Longer-dated options are called warrants and are
generally traded over-the counter.
LEAPS:
The acronym LEAPS means long-term Equity Anticipation securities. These are options
having a maturity of up to three years.
BASKETS:
Basket options are options on portfolios of underlying assets. The underlying asset is usually a
moving average of a basket of assets. Equity index options are a form of basket options.
SWAPS:
25
Swaps are private agreements between two parties to exchange cash flows in the future
according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two
commonly used Swaps are:
Interest rate Swaps:
These entail swapping only the related cash flows between the parties in the same currency.
Currency Swaps:
These entail swapping both principal and interest between the parties, with the cash flows in on
direction being in a different currency
.
SWAPTION:
Swaptions are options to buy or sell a swap that will become operative at the expiry of the
options. Thus a swaption is an option on a forward swap.
RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES:
Holding portfolios of securities is associated with the risk of the possibility that the investor
may realize his returns, which would be much lesser than what he expected to get. There are various
factors, which affect the returns:
Price or dividend (interest)
Some are internal to the firm like-
Industrial policy
Management capabilities
Consumer’s preference
Labour strike, etc.
26
These forces are to a large extent controllable and are termed as non systematic risks. An investor
can easily manage such non-systematic by having a well-diversified portfolio spread across the
companies, industries and groups so that a loss in one may easily be compensated with a gain in other.
There are yet other of influence which are external to the firm, cannot be controlled and affect
large number of securities. They are termed as systematic risk. They are:
1. Economic
2. Political
3. Sociological changes are sources of systematic risk.
For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all-individual
stocks to move together in the same manner. We therefore quite often find stock prices falling
from time to time in spite of company’s earning rising and vice versa. Rationale behind the
development of derivatives market is to manage this systematic risk, liquidity in the sense of
being able to buy and sell relatively large amounts quickly without substantial price concession.
In debt market, a large position of the total risk of securities is systematic. Debt
instruments are also finite life securities with limited marketability due to their small size relative
to many common stocks. Those factors favour for the purpose of both portfolio hedging and
speculation, the introduction of derivatives securities that is on some broader market rather than
an individual security.
FUTURES:
DEFINITION
Futures contract is an agreement two parties to buy or sell an asset a certain time in the future
at a certain price. To facilitate liquidity in the futures contract, the exchange specifies certain standard
features of the contract. The standardized items on a futures contract are:
Quantity of the underlying.
27
The date and the month of delivery.
The units of price quotations and minimum price change.
Location of settlement.
FEATURES OF FUTURES:
Futures are highly standardized.
The contracting parties need not pay any down payments.
Hedging of price risks.
They have secondary markets too.
TYPES OF FUTURES :
On the basis of the underlying asset they derive, the futures are divided into two types:
Stock futures:
The stock future is the futures that have the underlying asset as the individual securities.
Index futures:
Index futures are the futures,which have the underlying asset as an index.
MARGINS:
Margins are the deposits which reduce counter party risk, arise in a futures contract. These
margins are collect in order to eliminate the counter party risk. There are three types of margins:
Initial Margins
28
Whenever a futures contract is signed, both buyer and seller are required to post initial margins.
Both buyer and seller are required to make security deposits that are intended to guarantee that they
will infact be able to fulfill their obligation. This deposits are initial margins and they are often
referred as purchase price of futures contract.
Marking to market margins
The process of adjusting the equity in an investor’s account in order to reflect the change in the
settlement price of futures contract is known as MTM margin.
Maintenance margi n
The investor must keep the futures account equity equal to or greater than certain percentage of
the amount deposited as initial margin. If the equity goes less than the percentage of the initial margin,
then the investor receives a call for an additional deposit of cash known as maintenance margin to bring
the equity upto the initial margin.
Pricing the Futures:
The Fair value of the futures contract is derived from a model known as the cost of carry
model. This model gives the fair value of the contract.
Cost of Carry model:
The relationship between futures prices and spot prices can be summarized in terms of what is
known as the cost of carry. This measures the storage cost plus the interest that is paid to finance the
asset less the income earned on the asset.
F=S (1+r-q) t
where
29
F- Futures price
S- Spot price of the underlying
r- Cost of financing
q- Expected Dividend yield
t - Holding Period.
Futures terminology:
Spot price:
The price at which an asset trades in the spot market.
Futures price:
The price at which the futures contract trades in the futures market.
Contract cycle:
The period over which contract trades. The index futures contracts on the NSE have one-
month, two –month and three-month expiry cycle which expire on the last Thursday of the month. Thus
a January expiration contract expires on the last Thursday of January and a February expiration contract
ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new
contract having a three-month expiry is introduced for trading.
Expiry date:
It is the date specifies in the futures contract. This is the last day on which the contract will
be traded, at the end of which it will cease to exist.
Contract size:
The amount of asset that has to be delivered under one contract. For instance, the contract
size on NSE’s futures market is 50 nifties.
Basis:
30
In the context of financial futures, basis can be defined as the futures price minus the spot
price. There will be a different basis for each delivery month for each contract, In a normal market,
basis will be positive. This reflects that futures prices normally exceed spot prices.
Basis=futures price-spot price
Open Interest:
Total outstanding long or short position in the market at any specific time. As total long
positions in the market would be equal to short positions, for calculation of open interest, only one
side of the contract is counted.
Multiplier:
It is a pre-determined value used to arrive at the contract size. It is the price per index point.
Tick size:
It is the minimum price difference between two quotes of similar nature.
OPTION:
Option is a type of contract between two persons where one grants the other the right to
buy a specific asset at a specific price within a specific time period. Alternatively the contract
may grant the other person the right to sell a specific asset at a specific price within a specific
time period. In order to have this right. The option buyer has to pay the seller the option
premium.
The assets on which option can be derived are stocks, commodities, indexes etc. If the
underlying asset is the financial asset, then the option are financial option like stock options, currency
options, index options etc, and if options like commodity option.
PROPERTIES OF OPTION:
31
Options have several unique properties that set them apart from other securities. The following are
the properties of option:
Limited Loss
High leverages potential
Limited Life
PARTIES IN AN OPTION CONTRACT:
Buyer of the option:
The buyer of an option is one who by paying option premium buys the right but not the
obligation to exercise his option on seller/writer.
Writer/seller of the option:
The writer of the call /put options is the one who receives the option premium and is their by
obligated to sell/buy the asset if the buyer exercises the option on him.
3.7.3 TYPES OF OPTIONS:
The options are classified into various types on the basis of various variables. The following are
the various types of options.
1.On the basis of the underlying asset:
On the basis of the underlying asset the option are divided into two types:
INDEX OPTIONS
The index options have the underlying asset as the index.
32
STOCK OPTIONS:
A stock option gives the buyer of the option the right to buy/sell stock at a specified price.
Stock option are options on the individual stocks,mthere are currently more than 50 stocks are
trading in the segment.
2.On the basis of the market movements:
On the basis of the market movements the option are divided into two types. They are:
CALL OPTION
A call option is bought by an investor when he seems that the stock price moves upwards. A
call option gives the holder of the option the right but not the obligation to buy an asset by a certain date
for a certain price.
PUT OPTION
A put option is bought by an investor when he seems that the stock price moves downwards.
A put options gives the holder of the option right but not the obligation to sell an asset by a certain date
for a certain price.
3.On the basis of exercise of option :
On the basis of the exercising of the option, the options are classified into two categories.
AMERICAN OPTION
American options are options that can be exercised at any time up to the expiration date, most
exchange-traded option are American.
.EUROPEAN OPTION
33
European options are options that can be exercised only on the expiration date itself. European
options are easier to analyze than American options.
PAY OFF PROFILE FOR BUYER OF CALL OPTION:
S - Strike price OTM - Out of the money
SP - Premium/ Loss ATM - At the money
E1 - Spot price 1 ITM - In the money
E2 - Spot price 2
SR - Profit at spot price E1
CASE 1: (Spot price > Strike price)
As the spot price (E1) of the underlying asset is more than strike price (S). the buyer gets profit of
(SR), if price increases more than E1 then profit also increase more than SR.
CASE 2: (Spot price < Strike price)
As a spot price (E2) of the underlying asset is less than strike price (s).The buyer gets loss of
(SP), if price goes down less than E2 then also his loss is limited premium (SP)
PAY-OFF PROFILE FOR SELLER OF A CALL OPTION:
The pay-off of seller of the call option depends on the spot price of the underlying asset.
S - Strike price ITM - In the money
SP - Premium /profit ATM - At the money
E1 - Spot price 1 OTM - Out of the money
E2 - Spot price 2
34
SR - Profit at spot price E1
CASE 1: (Spot price < Strike price)
As the spot price (E1) of the underlying is less than strike price (S). the seller gets the profit of
(SP), if the price decreases less than E1 then also profit of the seller does not exceed (SP).
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset is more than strike price (S) the seller gets loss of
(SR), if price goes more than E2 then the loss of the seller also increase more than (SR).
PAY-OFF PROFILE FOR BUYER OF A PUT OPTION
The pay-off of the buyer of the option depends on the spot price of the underlying asset.
S - Strike price ITM - In the money
SP - Premium /profit OTM - Out of the money
E1 - Spot price ATM - At the money
E2 - Spot price 2
SR - Profit at spot price E1
CASE 1: (Spot price < Strike price)
As the spot price (E1) of the underlying asset is less than strike price (S). the buyer gets the profit
(SR), if price decreases less than E1 then profit also increases more than (SR).
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset is more than strike price (s), the buyer gets loss of (SP),
if price goes more than E2 than the loss of the buyer is limited to his premium (SP).
PAY-OFF PROFILE FOR SELLER OF A PUT OPTION
The pay-off of a seller of the option depends on the spot price of the underlying asset.
S - Strike price ITM - In the money
SP - Premium/ profit ATM - At the money
35
E1 - Spot price 1 OTM - Out of the money
E2 - Spot price 2
SR - Profit at spot price E1
CASE 1: (Spot price < Strike price)
As the spot price (E1) of the underlying asset is less than strike price (S), the seller gets the loss of
(SR), if price decreases less than E1 than the loss also increases more than (SR).
CASE 2: (Spot price > Strike price)
As the spot price (E2) of the underlying asset is more than strike price (S), the seller gets profit of
(SP), if price goes more than E2 than the profit of seller is limited to his premium (SP).
Factors affecting the price of an option
The following are the various factors that affect the price of an option they are:
Stock price : The pay –off from a call option is a amount by which the stock price exceeds the strike
price. Call options therefore become more valuable as the stock price increases and vice versa. The
pay-off from a put option is the amount; by which the strike price exceeds the stock price. Put options
therefore become more valuable as the stock price increases and vice versa.
Strike price : In case of a call, as a strike price increases, the stock price has to make a larger
upward move for the option to go in-the-money. Therefore, for a call, as the strike price increases
option becomes less valuable and as strike price decreases, option become more valuable.
Time to expiration : Both put and call American options become more valuable as a time to
expiration increases.
Volatility: The volatility of a stock price is measured of uncertain about future stock price
movements. As volatility increases, the chance that the stock will do very well or very poor increases.
The value of both calls and puts therefore increase as volatility increase.
Risk-free interest rate: The put option prices decline as the risk-free rate increases where as the
prices of call always increase as the risk-free interest rate increases.
36
Dividends : Dividends have the effect of reducing the stock price on the x- dividend rate. This has an
negative effect on the value of call options and a positive effect on the value of put options.
PRICING OPTIONS
The black- scholes formula for the price of European calls and puts on a non-dividend paying
stock are:
CALL OPTION
C = SN(D1)-Xe-r t N(D2)
PUT OPTION
P = Xe-r t N(-D2)-SN(-D1)
C = VALUE OF CALL OPTION
S = SPOT PRICE OF STOCK
N= NORMAL DISTRIBUTION
V= VOLATILITY
X = STRIKE PRICE
r = ANNUAL RISK FREE RETUR
t = CONTRACT CYCLE
d1 = in (S/X) + (r+ v 2 /2)t
v\/t
d2 = d1- v\/t
Options Terminology:
37
Strike price
The price specified in the options contract is known as strike price or Exercise price.
Options premium
Option premium is the price paid by the option buyer to the option seller.
Expiration Date
The date specified in the options contract is known as expiration date.
In-the-money option
An In the money option is an option that would lead to positive cash inflow to the holder if it exercised
immediately.
At-the-money option
An at the money option is an option that would lead to zero cash flow if it is exercised immediately
.
Out-of-the-money option
An out-of-the-money option is an option that would lead to negative cash flow if it is exercised
immediately.
Intrinsic value of money
The intrinsic value of an option is the expiration value or the fair value.
Time value of an option
The time value of an option is the difference between its premium and its intrinsic value.
38
CHAPTER 3
COMPANY PROFILE
39
INTRODUCTION TO THE COMPANY
SHAREKHAN is one of the India’s leading financial services. It provides a complete
life-cycle of investment solution in Equities, Derivatives, Commodities, IPO, Mutual Funds,
Depository Services, Portfolio Management Services and Insurance. It also offer personalized
wealth management services for High Networth individuals with a physical presence in over 300
cities of India through more than 800 "Share Shops", and an online presence through
Sharekhan.com, India's premier online destination, we reach out to more than 800,000 trading
customers.
Sharekhan Limited offers online security broking and portfolio services to institutions and
large corporate houses as well as individual investors. Sharekhan Limited was formerly known
as SSKI Investor Services Private Limited. The company is based in Mumbai, India.
Been in the business for over 80 years, Sharekhan can provide you with the assistance and the
advice like no one else could.
Sharekhan has its customers participating in the booming commodities markets with our
membership at the Multi Commodity Exchange of India (MCX) and National Commodity &
Derivatives Exchange (NCDEX), through.sharecon.Com Ltd. With its strong support and
business units of research, distribution & advisory, sharekhan aims to become a one-stop
solution to the broking and investment needs of its clients globally.
SHAREKHAN STOCK BROKING COMPANY
---your guide to the financial jungle
Sharekhan is one of the leading retail brokerage of Citi Venture which is running
successfully since 1922 in the country. Earlier it was the retail broking arm of the Mumbai based
SSKI (SRIPAL SRAVANTHI KANTHILAL ISWARLAL)Group, which has over eight decades
of experience in the stock broking business. Share khan offers its customers a wide range of
40
equity related services including trade execution on BSE, NSE, Derivatives, depository services,
online trading, investment advice etc.
Earlier with a legacy of more than 80 years in the stock markets, the SSKI group
ventured into institutional broking and corporate finance 18 years ago. SSKI is one of the leading
players in institutional broking and corporate finance activities. SSKI holds a sizeable portion of
the market in each of these segments. SSKI’s institutional broking arm accounts for 7% of the
market for Foreign Institutional portfolio investment and 5% of all Domestic Institutional
portfolio investment in the country.
It has 60 institutional clients spread over India, Far East, UK and US. Foreign
Institutional Investors generate about 65% of the organization’s revenue, with a daily turnover of
over US$ 2million.The objective has been to let customers make informed decisions and to
simplify the process of investing in stocks.
“Mission” of the Sharekhan is “To educate and empower the individual
investor to make better investment decisions through
QUALITY ADVICE
INNOVATIVE PRODUCTS and
SUPERIOR SERVICE.”
3.2 WORK STRUCUTRE OF SHAREKHAN:
Ceo & chairman:Tarun shah
No. of employees:20,000(approximately)
Sharekhan has always believed in investing in technology to build its business. The
company has used some of the best-known names in the IT industry, like Sun Microsystems,
Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette, Verisign Financial
Technologies India Ltd, Spider Software Pvt. Ltd. to build its trading engine and content. The
41
Citi Venture holds a majority stake in the company. HSBC, Intel & Carlyle are the other
investors.
On April 17, 2002 Sharekhan launched Speed Trade and Trade Tiger, are net-based
executable application that emulates the broker terminals along with host of other information
relevant to the Day Traders. This was for the first time that a net-based trading station of this
caliber was offered to the traders. In the last six months SpeedTrade has become a de facto
standard for the Day Trading community over the net. Sharekhan’s ground network includes
over 700+ Shareshops in 130+ cities in India.
The firm’s online trading and investment site www.sharekhan.com - was launched on Feb
8, 2000. The site gives access to superior content and transaction facility to retail customers
across the country.
PRODUCT AND SERVICES OFFERED BY SHAREKHAN:
1- Equity Trading Platform (Online/Offline).
2- Commodities Trading Platform (Online/Offline).
3- Portfolio Management Service.
4- Mutual Fund Advisory and Distribution.
5- Insurance Distribution
6-Forex.
42
43
REASONS TO CHOOSE SHAREKHAN LIMITED:
Experience
SSKI has more than eight decades of trust and credibility in the Indian stock market. In
the Asia Money broker's poll held recently, SSKI won the 'India's best broking house for 2004'
award. Ever since it launched Share khan as its retail broking division in February 2000, it has
been providing institutional-level research and broking services to individual investors.
Technology
With their online trading account one can buy and sell shares in an instant from any PC
with an internet connection. Customers get access to the powerful online trading tools that will
help them to take complete control over their investment in shares.
Knowledge
In a business where the right information at the right time can translate into direct profits,
investors get access to a wide range of information on the content-rich portal,
www.sharekhan.com.
Investors will also get a useful set of knowledge-based tools that will empower them
to take informed decisions.
Convenience
One can call Sharekhan’s Dial-N-Trade number to get investment advice and execute
his/her transactions. They have a dedicated call-center to provide this service via a Toll Free
Number 1800-22-7500 & 39707500 from anywhere in India.
44
Customer Service
Its customer service team assist their customer for any help that they need relating to
transactions, billing, demat and other queries. Their customer service can be contacted via a toll
free number, email or live chat on www.sharekhan.com.
Investment Advice
Sharekhan has dedicated research teams of more than 30 people for fundamental and
technical research. Their analysts constantly track the pulse of the market and provide timely
investment advice to customer in the form of daily research emails, online chat, printed reports
etc.
BENEFITS:
Free Depository A/c
Instant Cash Transfer
Multiple Bank Option.
Secure Order by Voice Tool Dial-n-Trade.
Automated Portfolio to keep track of the value of your actual purchases.
Personalized Price and Account Alerts delivered instantly to your Mobile Phone & Email
address.
Special Personal Inbox for order and trade confirmations.
On-line Customer Service via Web Chat.
Buy or sell even single share
Anytime Ordering.
Sharekhan Ltd.: BSE Cash-INB011073351; F&O-INF011073351; NSE – INB/INF231073330;
MAPIN – 100008375; DP: NSDL-IN-DP-NSDL-233-2003; CDSL-IN-DP-CDSL-271-2004;
PMS INP00000066; Mutual Fund: ARN 20.Sharekhan Commodities Pvt. Ltd.: MCX-10080;
NCDEX-00132; MAPIN – 100013912.
45
CHAPTER 4 & 5
DATA ANALYSIS
AND
INTERPRETATION
46
Tata Motors Limited
Tata Motors Ltd (NSE: TATAMOTORS, BSE: 500570, NYSE: TTM) is a
multinational corporation headquartered in Mumbai, India. Part of the Tata Group, it was
formerly known as TELCO (TATA Engineering and Locomotive Company).Tata Motors is
India’s largest automobile company, with consolidated revenues of USD 20 billion in 2009-10. It
is the leader in commercial vehicles and among the top three in passenger vehicles. Tata Motors
has products in the compact, midsize car and utility vehicle segments. The company is the
world's fourth largest truck manufacturer, the world's second largest bus manufacturer, and
employs 24,000 workers. Since first rolled out in 1954, Tata Motors has produced and sold over
4 million vehicles in India.Established in 1945, when the company began manufacturing
locomotives, the company manufactured its first commercial vehicle in 1954. Tata Motors is a
dual-listed company traded on both the Bombay Stock Exchange, as well as on the New York
Stock Exchange. Tata Motors in 2005, was ranked among the top 10 corporations in India with
an annual revenue exceeding INR 320 billion.
47
Parent Tata group
Founder(s) JRD Tata
Headquarters Mumbai, Maharashtra, India [1]
Key people
Ratan Tata, ChairmanRavi Kant, Vice ChairmanCarl Peter Forster, CEOPrakash Telang, MD (India Operations)Ravi Pisharody, President (CVBU)
Revenue 94,481.34 crore (US$20.5 billion) (2009) [2]
Net income 2,571.06 crore (US$557.92 million) (2009)[2]
Total assets $15.430 billion (2009)
Total equity $763 million (2009)
Employees 25,000 [3]
FUTURES AND EQUITIES:
TIMESTAMP SPOT PRICE FUTURE PRICE EXPIRY_DTDECEMBER
15-Dec-10 1322.9 1304.6 30-Dec-1016-Dec-10 1347 1341.85 30-Dec-1020-Dec-10 1351 1341.6 30-Dec-1021-Dec-10 1350 1344.9 30-Dec-1022-Dec-10 1365.15 1367.55 30-Dec-1023-Dec-10 1352.75 1349.2 30-Dec-1024-Dec-10 1306.15 1312.15 30-Dec-1027-Dec-10 1301.1 1300 30-Dec-1028-Dec-10 1268.9 1271.15 30-Dec-1029-Dec-10 1273.85 1275.55 30-Dec-1030-Dec-10 1300.15 1300.65 30-Dec-10
JANUARY31-Dec-10 1308.35 1305.5 27-Jan-11
3-Jan-11 1308.45 1304 27-Jan-114-Jan-11 1298.4 1297.8 27-Jan-115-Jan-11 1282.8 1281.5 27-Jan-116-Jan-11 1261 1260.7 27-Jan-117-Jan-11 1190.2 1193.45 27-Jan-11
10-Jan-11 1176.7 1174.8 27-Jan-1111-Jan-11 1158.05 1158.1 27-Jan-1112-Jan-11 1218 1213.65 27-Jan-1113-Jan-11 1236.7 1223.75 27-Jan-1114-Jan-11 1182.4 1173.25 27-Jan-1117-Jan-11 1178.85 1170.1 27-Jan-1118-Jan-11 1199.55 1195.8 27-Jan-1119-Jan-11 1192.75 1180.3 27-Jan-1120-Jan-11 1194.7 1191.55 27-Jan-1121-Jan-11 1187.4 1187.7 27-Jan-1124-Jan-11 1188.3 1185.15 27-Jan-1125-Jan-11 1166 1159.85 27-Jan-1127-Jan-11 1195.85 1195.8 27-Jan-11
48
CALL OPTION:
TIMESTAMP EXPIRY_DT CLOSE
STRIKE PRICE
DECEMBER 1250 1300 135015-Dec-10 30-Dec-10 1322.9 72 41.4 21.2516-Dec-10 30-Dec-10 1347 103 63.75 32.9520-Dec-10 30-Dec-10 1351 103.2 58.65 28.5521-Dec-10 30-Dec-10 1350 101.4 57.85 26.9522-Dec-10 30-Dec-10 1365.15 119.15 75 36.0523-Dec-10 30-Dec-10 1352.75 103.25 57.6 22.4524-Dec-10 30-Dec-10 1306.15 66.9 26.8 7.6527-Dec-10 30-Dec-10 1301.1 55 16.5 3.728-Dec-10 30-Dec-10 1268.9 28.05 5.05 1.129-Dec-10 30-Dec-10 1273.85 28.05 3.35 0.530-Dec-10 30-Dec-10 1300.15 50.3 0.15 0.05
JANUARY 1150 1200 125031-Dec-10 27-Jan-11 1308.35 168 119 77.15
3-Jan-11 27-Jan-11 1308.45 166 113 76.14-Jan-11 27-Jan-11 1298.4 166 105 70.155-Jan-11 27-Jan-11 1282.8 166 94.55 60.556-Jan-11 27-Jan-11 1261 166 78.05 45.157-Jan-11 27-Jan-11 1190.2 65.25 36.6 19.65
10-Jan-11 27-Jan-11 1176.7 54.35 29.7 14.8511-Jan-11 27-Jan-11 1158.05 41.4 23.35 10.912-Jan-11 27-Jan-11 1218 78.5 45.3 23.213-Jan-11 27-Jan-11 1236.7 87.8 50.4 25.914-Jan-11 27-Jan-11 1182.4 46.95 22.85 10.217-Jan-11 27-Jan-11 1178.85 39.9 17 6.5518-Jan-11 27-Jan-11 1199.55 54.7 22.8 819-Jan-11 27-Jan-11 1192.75 41.8 14.55 4.1520-Jan-11 27-Jan-11 1194.7 49.3 17.3 4.7521-Jan-11 27-Jan-11 1187.4 43.4 13 2.924-Jan-11 27-Jan-11 1188.3 39.7 8.95 1.7525-Jan-11 27-Jan-11 1166 16.4 1.45 0.427-Jan-11 27-Jan-11 1195.85 43 0.05 0.05
49
PUT OPTION:
TIMESTAMP EXPIRY_DT SPOT PRICESTRIKE PRICE
DECEMBER 1250 1300 135015-Dec-10 30-Dec-10 1322.9 17.9 35.95 64.4516-Dec-10 30-Dec-10 1347 9.95 20.05 4020-Dec-10 30-Dec-10 1351 7.55 16.95 3621-Dec-10 30-Dec-10 1350 5.4 13.3 32.1522-Dec-10 30-Dec-10 1365.15 2.6 6.75 18.723-Dec-10 30-Dec-10 1352.75 2.75 7.75 23.824-Dec-10 30-Dec-10 1306.15 4.15 14.9 44.927-Dec-10 30-Dec-10 1301.1 4.2 17.05 53.3528-Dec-10 30-Dec-10 1268.9 6.55 32.8 81.4529-Dec-10 30-Dec-10 1273.85 3.15 27.45 75.4530-Dec-10 30-Dec-10 1300.15 0.05 0.1 48
JANUARY 1150 1200 125031-Dec-10 27-Jan-11 1308.35 5.7 11.2 21.9
3-Jan-11 27-Jan-11 1308.45 4.55 10.45 22.054-Jan-11 27-Jan-11 1298.4 5.15 11.05 23.55-Jan-11 27-Jan-11 1282.8 7.3 15.1 29.956-Jan-11 27-Jan-11 1261 7.95 17.65 35.47-Jan-11 27-Jan-11 1190.2 22.3 42.8 74.45
10-Jan-11 27-Jan-11 1176.7 31.4 54.65 88.111-Jan-11 27-Jan-11 1158.05 37.45 65.15 107.7512-Jan-11 27-Jan-11 1218 15.25 31.2 57.113-Jan-11 27-Jan-11 1236.7 12.25 26.4 53.4514-Jan-11 27-Jan-11 1182.4 24 49.05 87.717-Jan-11 27-Jan-11 1178.85 20.95 47.3 86.3518-Jan-11 27-Jan-11 1199.55 9.65 27.4 7019-Jan-11 27-Jan-11 1192.75 12.15 34.45 79.9520-Jan-11 27-Jan-11 1194.7 8.45 27.45 6521-Jan-11 27-Jan-11 1187.4 6.35 25.2 6624-Jan-11 27-Jan-11 1188.3 4.65 24.2 66.225-Jan-11 27-Jan-11 1166 8.05 41.55 92.927-Jan-11 27-Jan-11 1195.85 0 0 0
50
ANALYSIS:
The objective of this analysis is to evaluate the profit/loss position of futures and options. This
analysis is based on sample data taken of TATA MOTORS CO. LTD scrip. This analysis considered
the Dec & Jan contract of TATA MOTORS CO. LTD. The lot size of TATA MOTORS CO. LTD is
250, the time period in which this analysis done is from 15.12.10 – 31.01.11.
Future Market
BUYER
03/01/11(bought) 1304
14/01/01(sold) 1173.5
loss= 130.75
Net loss=loss on each share*lot size
=130.75*250
=32687.5 rs.
HEDGING
Short concept(FUTURES) EQUITY
03/01/11 (sold) 1304.6
12/01/11 (buy back) 1213.65
profit= 90.3
Net profit=pfofit on each share*lot size
=90.35*250
=22587.5 rs.
03/01/11 (bought) 1308.45
12/01/11 (sold) 1218
Loss= 90.45
Net loss=loss on each share*no. of shares
purchased
=90.45*250 =22612.5rs.
51
The loss occurred in equity market is covered by making hedging in futures market.By
hedging the total loss is 25rs(22612.5-22587.5) which is minimum and will be more if he would
have hedged any other day.
Entry on dec 15th and when to exit
Max. profit max. loss
15/12/12 (bought) 1304.6 15/12/12 (bought) 1304.6
22/12/12 (sold) 1367.55 28/12/12 (sold) 1271.15
Profit= 62.95 loss=33.45
Max profit=profit per share*lot size Max loss=loss per share*lot size
=62.95*250=15737.5rs =33.45*250=8362.5rs
On any other day client will not exceed the above loss or the above profit.
OPTION MARKET
CALL OPTION
On 15th dec bought 6 Lots of TATA MOTORS that is 1500(250*6)
IN THE MONEY AT THE MONEY OUT OF THE MONEY
Spot price
Less:-strike price
Amount
Less:-premium
Profit/loss
1312.55
1250
62.55
72
-9.45
1312.55
1300
12.55
41.40
-28.85
1312.55
1350
-37.45
21.25
-16.2
If client enters on this particular day he will get loss at any cost.
52
PUT OPTION
On 13th jan bought 6 Lots of TATA MOTORS that is 1500(250*6)
IN THE MONEY AT THE MONEY OUT OF THE MONEY
Strike price
Less:-spot price
1250
1223.75
1200
1223.75
1150
1223.75
Amount
Less:-
26.25
12.25
23.75
26.4
-73.75
53.45
Profit/loss 14 -2.65 -20.3
Client can get profit by entering on this date at IN THE MONEY.
Graph showing price movement of FUTURE & MARKET
RELIANCE COMMUNICATIONS
53
Looking back, looking forward
Reliance – Anil Dhirubhai Ambani Group, an offshoot of the Reliance Group founded by
Shri Dhirubhai H Ambani (1932-2002), ranks among India’s top three private sector business
houses in terms of net worth. The group has business interests that range from
telecommunications (Reliance Communications Limited) to financial services (Reliance Capital
Ltd) and the generation and distribution of power (Reliance Infrastructure Limited).
Reliance – ADA Group’s flagship company, Reliance Communications, is India's
largest private sector information and Communications Company, with over 100 million
subscribers. It has established a pan-India, high-capacity, integrated (wireless and wireline),
convergent (voice, data and video) digital network, to offer services spanning the entire
infocomm value chain. Other major group companies — Reliance Capital and Reliance
Infrastructure — are widely acknowledged as the market leaders in their respective areas of
operation.
Graph showing price movement of FUTURE & MARKET
54
FUTURES AND EQUITIES:
55
TypePublic
(NSE: RCOM, BSE: 532712)
Industry Telecommunications
Founded 2004
Founder(s) Dhirubhai Ambani
Headquarters Navi Mumbai, Maharashtra, India
Area served India
Key people
Anil Ambani
(Chairman)
Satish Seth
(MD)
Products
Wireless
Telephone
Internet
Television
Data Cards
Recharge Vouchers
VC
TIMESTAMP MARKET FUTURE EXPIRY_DT
DECEMBER
15-Dec-10 129.35 129.95 30-Dec-10
16-Dec-10 128.95 129.45 30-Dec-10
20-Dec-10 126.85 126.85 30-Dec-10
21-Dec-10 127.45 128.05 30-Dec-10
22-Dec-10 128.2 128.75 30-Dec-10
23-Dec-10 128.6 129.05 30-Dec-10
24-Dec-10 141.95 142.55 30-Dec-10
27-Dec-10 137 137.2 30-Dec-10
28-Dec-10 139.4 139.7 30-Dec-10
29-Dec-10 138.7 138.85 30-Dec-10
30-Dec-10 138.45 138.5 30-Dec-10
JANUARY
31-Dec-10 145.35 146.3 27-Jan-11
3-Jan-11 148.25 148.7 27-Jan-11
4-Jan-11 144.3 145.1 27-Jan-11
5-Jan-11 140.05 140.8 27-Jan-11
6-Jan-11 139.75 140.75 27-Jan-11
7-Jan-11 139.35 139.3 27-Jan-11
10-Jan-11 135.25 135.35 27-Jan-11
11-Jan-11 137.65 138.25 27-Jan-11
12-Jan-11 138.65 138.8 27-Jan-11
13-Jan-11 138.5 138.8 27-Jan-11
14-Jan-11 138.5 138.7 27-Jan-11
17-Jan-11 131.65 131.95 27-Jan-11
18-Jan-11 132.1 132.6 27-Jan-11
19-Jan-11 130.8 130.95 27-Jan-11
20-Jan-11 133.4 133.75 27-Jan-11
21-Jan-11 136.4 136.5 27-Jan-11
24-Jan-11 134.8 134.9 27-Jan-11
25-Jan-11 132.9 132.95 27-Jan-11
27-Jan-11 127.7 127.7 27-Jan-11
CALL OPTION:
56
TIMESTAMP SPOT PRICE STRIKE PRICE
DECEMBER 120 130 140
15-Dec-10 129.35 11.95 5.25 2.15
16-Dec-10 128.95 11.35 4.55 1.65
20-Dec-10 126.85 8.55 3 0.85
21-Dec-10 127.45 1.3 4.95 13
22-Dec-10 128.2 0.95 4.15 11.85
23-Dec-10 128.6 9.9 2.55 0.55
24-Dec-10 141.95 0.25 0.75 3.45
27-Dec-10 137 17.1 7.65 2.2
28-Dec-10 139.4 22.5 9.6 2.35
29-Dec-10 138.7 0.05 0.1 2.35
30-Dec-10 138.45 19.2 8.4 0.05
JANUARY
130 140 150
31-Dec-10 145.35 18.25 10.5 5.9
3-Jan-11 148.25 1.25 3.3 7.7
4-Jan-11 144.3 16.45 9.3 4.7
5-Jan-11 140.05 12.85 6.55 3.05
6-Jan-11 139.75 13.1 6.55 3.1
7-Jan-11 139.35 10.85 5.65 2.6
10-Jan-11 135.25 8.65 3.75 1.6
11-Jan-11 137.65 10.95 4.65 1.9
12-Jan-11 138.65 10.8 4.55 1.75
13-Jan-11 138.5 10.1 4.5 1.6
14-Jan-11 138.5 10.35 4.15 1.35
17-Jan-11 131.65 5.25 1.45 0.5
18-Jan-11 132.1 5 1.1 0.35
19-Jan-11 130.8 2.55 9.55 18.8
20-Jan-11 133.4 5.05 0.9 0.3
21-Jan-11 136.4 0.65 4.7 15
24-Jan-11 134.8 5.3 0.55 0.15
25-Jan-11 132.9 3.5 0.15 0.05
27-Jan-11 127.7 0.1 0.05 0.05
PUT OPTION:
57
TIMESTAMP SPOT PRICE
STRIKE
PRICE
DECEMBER 120 130 140
15-Dec-10 129.35 2.1 5.4 12
16-Dec-10 128.95 1.75 5 13.75
20-Dec-10 126.85 1.85 5.7 13.75
21-Dec-10 127.45 1.3 4.95 13
22-Dec-10 128.2 0.95 4.15 11.85
23-Dec-10 128.6 0.75 3.5 11.5
24-Dec-10 141.95 0.25 0.75 3.45
27-Dec-10 137 0.2 0.85 5
28-Dec-10 139.4 0.1 0.25 2.7
29-Dec-10 138.7 0.05 0.1 2.35
30-Dec-10 138.45 0.05 0.05 1.4
JANUARY 130 140 150
31-Dec-10 145.35 1.75 4.25 9.5
3-Jan-11 148.25 1.25 3.3 7.7
4-Jan-11 144.3 1.6 4.35 9.75
5-Jan-11 140.05 2.1 5.8 12.45
6-Jan-11 139.75 2.05 5.65 12.1
7-Jan-11 139.35 2.2 6.3 13.4
10-Jan-11 135.25 3.1 8.15 15.5
11-Jan-11 137.65 2.35 6.25 12
12-Jan-11 138.65 1.9 5.6 12.45
13-Jan-11 138.5 1.85 5.5 11.9
14-Jan-11 138.5 1.7 5.25 12.1
17-Jan-11 131.65 3.5 9.75 16.05
18-Jan-11 132.1 2.55 8.2 18.8
19-Jan-11 130.8 2.55 9.55 18.8
20-Jan-11 133.4 1.35 6.9 20.4
21-Jan-11 136.4 0.65 4.7 15
24-Jan-11 134.8 0.6 5.5 16.15
25-Jan-11 132.9 0.5 7.05 14.5
27-Jan-11 127.7 2 11.45 20.8
ANALYSIS:
58
The objective of this analysis is to evaluate the profit/loss position of futures and options.
This analysis is based on sample data taken of RELIANCE COMMUNICATIONS scrip. This analysis
considered the Dec & Jan contract of RELIANCE COMMUNICATIONS. The lot size of RELIANCE
COMMUNICATIONS is 2000, the time period in which this analysis done is from 15.12.10 –
31.01.11.
Future Market
03/01/11(bought) 148.7
14/01/01(sold) 138.7
Loss= 10
Net loss=loss on each share*lot size
=10*2000
=20000 rs.
HEDGING
Short concept(FUTURES) EQUITY
03/01/11 (sold) 148.7
18/01/11 (buy back) 132.6
profit= 16.1
Net profit=profit on each share*lot
size
=16.1*2000
=32200 rs.
03/01/11 (bought) 148.25
18/01/11 (sold) 132.1
Loss= 16.15
Net loss=loss on each share*no. of shares
purchased
=16.15*2000 =32300rs.
59
The loss occurred in equity market is covered by making hedging in futures market. By
hedging the total loss is 100rs (32300-32200) which is minimum and will be more if he would
have hedged any other day.
Entry on dec 16th and when to exit
Max. Profit max. loss
16/12/12 (bought) 129.45 16/12/12 (bought) 129.45
24/12/12 (sold) 142.55 20/12/12 (sold) 126.85
Profit= 13.1 loss=2.6
Max profit=profit per share*lot size Max loss=loss per share*lot size
=13.1*2000=26200rs =2.6*2000=5200rs
On any other day client will not exceed the above loss or the above profit.
OPTION MARKET
CALL OPTION
On 30th dec client bought 3 Lots of RELIANCE COMMUNICATIONS that is (2000*3=6000)
IN THE MONEY AT THE MONEY OUT OF THE MONEY
Spot price
Less:-strike price
138.45
120
138.45
130
138.45
140
Amount
Less:-premium
18.45
19.2
8.45
8.4
-1.55
0.05
Profit/loss
*lot size
-0.75
6000
0.05
6000
-1.5
6000
60
Total profit/loss -4500 300 -9000
If client enters on this particular day he will get profit only at strike price 130 at AT
THE MONEY.
PUT OPTION
On 25th Jan bought 3 Lots of RELIANCE COMMUNICATIONS that is 6000(2000*3)
OUT OF THE MONEY AT THE MONEY IN THE MONEY
Strike price
Less:-spot price
130
132.9
140
132.9
150
132.9
Amount
Less:-premium
-2.9
0.5
7.1
7.05
17.1
14.5
Profit/loss
*lot size
-2.4
6000
0.05
6000
2.6
6000
Total profit/loss -14400 300 15600
Client can get profit by entering on this date at AT THE MONEY & IN THE MONEY.
HEDGING
As buyers think to purchase at less cost they will opt for 130 strike price and as sellers think to
sell at highest price they opt for 150 strike price. So making hedging at 130 call & 150 put.
IDBI
The Industrial Development Bank of India Limited (IDBI) (BSE: 500116) is one of
India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorised IDBI
as an "other public sector bank". It was established in 1964 by an Act of Parliament to provide
61
credit and other facilities for the development of the fledgling Indian industry. It is currently 10th
largest development bank in the world in terms of reach with 1300 ATMs, 758 branches and 513
centers. Some of the institutions built by IDBI are the National Stock Exchange of India (NSE),
the National Securities Depository Services Ltd (NSDL), the Stock Holding Corporation of India
(SHCIL), the Credit Analysis & Research Ltd, the Export-Import Bank of India(Exim Bank), the
Small Industries Development Bank of India(SIDBI), the Entrepreneurship Development
Institute of India, and IDBI BANK, which today is owned by the Indian Government, though for
a brief period it was a private scheduled bank.
Type Public (BSE: 500116 )
Industry BankingFinancial services
Founded July 1964
Headquarters Mumbai, India
Key people Type
Products Finance and insurance
Revenue 17,563.59 crore (US$3.81 billion) (2010)
Net income1,031.13 crore (US$223.76 million) (2010)
Employees 8,989
GRAPH SHOWING MARKET AND FUTURES PRICE MOVEMENT:
62
63
FUTURES AND EQUITIES:
TIMESTAMP MARKET FUTURE EXPIRY_DT
DECEMBER
15-Dec-10 155.8 155.8 30-Dec-10
16-Dec-10 161.15 162.15 30-Dec-10
20-Dec-10 161.75 162.3 30-Dec-10
21-Dec-10 166.15 166.6 30-Dec-10
31-Dec-10 166.65 166.55 30-Dec-10
23-Dec-10 164.65 165.1 30-Dec-10
24-Dec-10 164.35 165 30-Dec-10
27-Dec-10 162.05 162.1 30-Dec-10
28-Dec-10 159.15 159.65 30-Dec-10
29-Dec-10 160.25 160.75 30-Dec-10
30-Dec-10 160.35 160.25 30-Dec-10
JANUARY
31-Dec-10 165.05 166.05 27-Jan-11
3-Jan-11 166.05 167.2 27-Jan-11
4-Jan-11 162.75 163.35 27-Jan-11
5-Jan-11 157.95 158.95 27-Jan-11
6-Jan-11 156.75 157.2 27-Jan-11
7-Jan-11 152.55 152.8 27-Jan-11
10-Jan-11 148.7 148.85 27-Jan-11
11-Jan-11 148 148.35 27-Jan-11
12-Jan-11 152.1 152.7 27-Jan-11
13-Jan-11 148.1 148.2 27-Jan-11
14-Jan-11 146.6 146.8 27-Jan-11
17-Jan-11 140.75 141.25 27-Jan-11
18-Jan-11 155.15 144.15 27-Jan-11
19-Jan-11 155.3 145.2 27-Jan-11
20-Jan-11 150.05 150.3 27-Jan-11
21-Jan-11 151.05 151.2 27-Jan-11
24-Jan-11 152.7 152.9 27-Jan-11
25-Jan-11 151.85 152 27-Jan-11
27-Jan-11 142.2 142.15 27-Jan-11
64
CALL OPTION:
TIMESTAMPSPOT PRICE
STRIKE PRICE
DECEMBER 150 160 17015-Dec-10 155.8 8.75 3.9 1.5516-Dec-10 161.15 13.15 6.1 2.1520-Dec-10 161.75 13 5.6 2.0521-Dec-10 166.15 17.65 8.15 2.7522-Dec-10 166.65 16.85 7.65 2.423-Dec-10 164.65 15.8 6.3 1.624-Dec-10 164.35 15.2 5.65 1.0527-Dec-10 162.05 12.1 3.15 0.428-Dec-10 159.15 9.85 1.4 0.1529-Dec-10 160.25 11.3 1.5 0.130-Dec-10 160.35 9.5 0.15 0.05
JANUARY 140 150 16031-Dec-10 165.05 26.9 17.5 9.75
3-Jan-11 166.05 26.9 18 10.454-Jan-11 162.75 26.9 14.95 85-Jan-11 157.95 26.9 11.4 5.756-Jan-11 156.75 26.9 10.05 4.757-Jan-11 152.55 15.15 6.9 3.1
10-Jan-11 148.7 11.65 4.95 211-Jan-11 148 9.3 4.5 1.612-Jan-11 152.1 14.1 6.4 2.4513-Jan-11 148.1 10.25 3.9 1.3514-Jan-11 146.6 9.4 3 0.8517-Jan-11 140.75 4.55 1.25 0.418-Jan-11 155.15 6.05 1.4 0.319-Jan-11 155.3 6.55 1.5 0.3520-Jan-11 150.05 10.85 3.2 0.621-Jan-11 151.05 11.65 3.4 0.5524-Jan-11 152.7 13.1 4.3 0.6525-Jan-11 151.85 12 3.05 0.2527-Jan-11 142.2 1.85 0.05 0.05
65
PUT OPTION:
66
TIMESTAMP MARKETSRIKE PRICE
DECEMBER 150 160 17015-Dec-10 155.8 8.75 3.9 1.5516-Dec-10 161.15 13.15 6.1 2.1520-Dec-10 161.75 13 5.6 2.0521-Dec-10 166.15 17.65 8.15 2.7522-Dec-10 166.65 16.85 7.65 2.423-Dec-10 164.65 15.8 6.3 1.624-Dec-10 164.35 15.2 5.65 1.0527-Dec-10 162.05 12.1 3.15 0.428-Dec-10 159.15 9.85 1.4 0.1529-Dec-10 160.25 11.3 1.5 0.130-Dec-10 160.35 9.5 0.15 0.05
JANUARY 140 150 16031-Dec-10 165.05 26.9 17.5 9.75
3-Jan-11 166.05 26.9 18 10.454-Jan-11 162.75 26.9 14.95 85-Jan-11 157.95 26.9 11.4 5.756-Jan-11 156.75 26.9 10.05 4.757-Jan-11 152.55 15.15 6.9 3.1
10-Jan-11 148.7 11.65 4.95 211-Jan-11 148 9.3 4.5 1.612-Jan-11 152.1 14.1 6.4 2.4513-Jan-11 148.1 10.25 3.9 1.3514-Jan-11 146.6 9.4 3 0.8517-Jan-11 140.75 4.55 1.25 0.418-Jan-11 155.15 6.05 1.4 0.319-Jan-11 155.3 6.55 1.5 0.3520-Jan-11 150.05 10.85 3.2 0.621-Jan-11 151.05 11.65 3.4 0.5524-Jan-11 152.7 13.1 4.3 0.6525-Jan-11 151.85 12 3.05 0.2527-Jan-11 142.2 1.85 0.05 0.05
ANALYSIS:
The objective of this analysis is to evaluate the profit/loss position of futures and options. This
analysis is based on sample data taken of IDBI scrip. This analysis considered the Dec & Jan contract
of IDBI. The lot size of IDBI is 2000, the time period in which this analysis done is from 15.12.10 –
31.01.11.
Future Market
BUYER
03/01/11(bought) 167.2
14/01/01(sold) 148.725
loss= 18.475
Net loss=loss on each share*lot size
=18.475*2000
=36950 rs.
Entry on dec 15th and when to exit
Max. Profit No loss
15/12/10 (bought) 155.8 15/12/10 (bought) 155.8
21/12/10 (sold) 166.6 on any date (sold) at any price
Profit= 10.8 no loss
Max profit=profit per share*lot size
=10.8*2000=21600rs
On any other day client will not exceed the above profit and he don’t have any chance
of getting loss.
67
OPTION MARKET
CALL OPTION
On 13th Jan client bought 4 Lots of IDBI that is (2000*4=8000)
IN THE MONEY AT THE MONEY OUT OF THE MONEY
Spot price
Less:-strike price
148.1
140
148.1
150
148.1
160
Amount
Less:-premium
8.1
10.25
-1.9
3.9
-11.9
1.35
Profit/loss
*lot size
-2.15
8000
2
8000
-10.55
8000
Total profit/loss -17200 16000 -84400
If client enters on this particular day he will get profit only at strike price 150 at AT
THE MONEY.
PUT OPTION
On 25th Jan bought 4 Lots of IDBI that is 8000(2000*4)
IN THE MONEY AT THE MONEY OUT OF THE MONEY
Strike price
Less:-spot price
160
151.85
150
151.85
140
151.85
Amount
Less:-premium
8.15
0.05
-1.85
1.1
-11.85
8.6
Profit/loss
*lot size
8.1
8000
-0.75
8000
-3.25
8000
Total profit/loss 64800 -6000 -26000
Client can get profit by entering on this date at IN THE MONEY.
68
HEDGING
As buyers think to purchase at less cost they will opt for 140 strike price and as sellers
think to sell at highest price they opt for 160 strike price. So making hedging at 140 calls & 160
put on 27th Jan 2011 eliminates the risk.
CALL OPTION AT 140 STRIKE PRICE PUT OPTION AT 160 STRIKE PRICE
Spot price 142.2
Less:-strike price 140
Amount 2.2
Less:-premium 1.85
Profit/loss 0.35
*lot size 2000
Total Profit/loss 700
Strike price 160
Less:-spot price 142.2
Amount 17.8
Less:-premium 17.8
Profit/loss 0
*lot size 2000
Total Profit/loss 0
By hedging the total profit is 700rs which is maximum and will be less if he would have
hedged any other day.
IOC
69
Indian Oil Corporation, or Indian Oil, (BSE: 530965 | NSE: IOC) is an Indian state-
owned oil and gas company. It is India’s largest commercial enterprise, ranking 125th on the
Fortune Global 500 list in 2010. Indian Oil and its subsidiaries account for a 47% share in the
petroleum products market, 34.8% share in refining capacity and 67% downstream sector
pipelines capacity in India. The Indian Oil Group of Companies owns and operates 10 of India's
19 refineries with a combined refining capacity of 65.7 million metric tons per year.
Indian Oil operates the largest and the widest network of fuel stations in the country,
numbering about 17606 (15557 regular ROs & 2049 Kisan Sewa Kendra). It has also started
Auto LPG Dispensing Stations (ALDS). It supplies Indane cooking gas to over 47.5 million
households through a network of 4,990 Indian distributors. In addition, Indian Oil's Research and
Development Center (R&D) at Faridabad supports, develops and provides the necessary
technology solutions to the operating divisions of the corporation and its customers within the
country and abroad. Subsequently, Indian Oil Technologies Limited - a wholly owned
subsidiary, was set up in 2003, with a vision to market the technologies developed at Indian Oil's
Research and Development Center. It has been modelled on the R&D marketing arms of Royal
Dutch Shell and British Petroleum.
70
TypeState-owned enterprise
Public (BSE: 530965 NSE: IOC)
Industry Oil and Gas
Founded 1964
Headquarters New Delhi, India
Key people S V Narasimhan, [[Chairman][acting]]
Products
Oil
Petroleum
Natural gas
Petrochemical
Fuel
Lubricant
Revenue272,689.95 crore (US$60.54 billion) (2009-
10)
Net income10,220.55 crore (US$2.27 billion) (2009-
10)
Total assets $29.672 billion (2009-10)
Total equity $11.686 billion (2009-10)
Employees 36,307 (2009)
71
FUTURES AND EQUITY:
TIMESTAMP MARKET FUTURE EXPIRY_DT
DECEMBER
15-Dec-10 380.5 382.4 30-Dec-10
16-Dec-10 379.35 380.9 30-Dec-10
20-Dec-10 367.65 369.45 30-Dec-10
21-Dec-10 363.95 366.2 30-Dec-10
22-Dec-10 366.45 368.6 30-Dec-10
23-Dec-10 362.55 363.85 30-Dec-10
24-Dec-10 354.8 356 30-Dec-10
27-Dec-10 354.3 354.5 30-Dec-10
28-Dec-10 347.65 348.4 30-Dec-10
29-Dec-10 348.45 348.3 30-Dec-10
30-Dec-10 337.3 337.2 30-Dec-10
JANUARY
31-Dec-10 342.4 344.95 27-Jan-11
3-Jan-11 353.6 355.1 27-Jan-11
4-Jan-11 348.8 351.55 27-Jan-11
5-Jan-11 349.5 350.95 27-Jan-11
6-Jan-11 341.55 343.75 27-Jan-11
7-Jan-11 343.75 344.3 27-Jan-11
10-Jan-11 335.2 335.3 27-Jan-11
11-Jan-11 328.3 330.15 27-Jan-11
12-Jan-11 319.55 321.4 27-Jan-11
13-Jan-11 310.35 310.95 27-Jan-11
14-Jan-11 309.8 311.05 27-Jan-11
17-Jan-11 314.25 314.25 27-Jan-11
18-Jan-11 314 314.6 27-Jan-11
19-Jan-11 313.65 314.5 27-Jan-11
20-Jan-11 312.95 313.1 27-Jan-11
21-Jan-11 327.8 328.2 27-Jan-11
24-Jan-11 329.85 330.05 27-Jan-11
72
25-Jan-11 336.8 337.3 27-Jan-11
27-Jan-11 328.7 328.8 27-Jan-11
CALL OPTION:
73
PUT OPTION:
74
TIMESTAMP SPOT PRICE STRIKE PRICE
DECEMBER 340 360 380
15-Dec-10 380.5 45 27.7 14.15
16-Dec-10 379.35 45 27.7 11
20-Dec-10 367.65 45 27.7 5.85
21-Dec-10 363.95 45 27.7 5.9
22-Dec-10 366.45 45 27.7 5
23-Dec-10 362.55 45 11.2 3.1
24-Dec-10 354.8 45 5.2 1.45
27-Dec-10 354.3 45 2.7 0.6
28-Dec-10 347.65 45 1.3 0.3
29-Dec-10 348.45 45 1.45 0.15
30-Dec-10 337.3 0.5 0.2 0.05
JANUARY 320 340 360
31-Dec-10 342.4 107.6 17.85 9.15
3-Jan-11 353.6 107.6 23 11.4
4-Jan-11 348.8 107.6 19 8.65
5-Jan-11 349.5 107.6 19.25 9.5
6-Jan-11 341.55 107.6 13.5 6.6
7-Jan-11 343.75 107.6 12 5.5
10-Jan-11 335.2 107.6 12 4.5
11-Jan-11 328.3 107.6 10.95 3.4
12-Jan-11 319.55 11.65 5.6 2.25
13-Jan-11 310.35 8.4 3.45 1.7
14-Jan-11 309.8 6.4 2.55 1.5
17-Jan-11 314.25 8.55 2.85 1.1
18-Jan-11 314 7.05 1.65 1.1
19-Jan-11 313.65 4 0.85 0.55
20-Jan-11 312.95 5 0.4 0.55
21-Jan-11 327.8 8.75 2.3 0.75
24-Jan-11 329.85 14 3.4 0.5
25-Jan-11 336.8 19 2.05 0.75
27-Jan-11 328.7 14.55 0.05 0.05
TIMESTAMP SPOT PRICE STRIKE PRICE
340 360 380
15-Dec-10 380.5 3 4.5 11.6
16-Dec-10 379.35 3 6 11.6
20-Dec-10 367.65 3 6 15
21-Dec-10 363.95 3 6 18
22-Dec-10 366.45 3 6 13.05
23-Dec-10 362.55 3 7 13.05
24-Dec-10 354.8 3 9 13.05
27-Dec-10 354.3 7.75 9 13.05
28-Dec-10 347.65 9.75 13 13.05
29-Dec-10 348.45 9.75 11.5 32
30-Dec-10 337.3 1.5 11.5 34.5
320 340 360
31-Dec-10 342.4 0.45 12 15
3-Jan-11 353.6 0.85 2.3 15
4-Jan-11 348.8 0.85 2.3 15
5-Jan-11 349.5 8.3 7.95 15
6-Jan-11 341.55 8.3 8.5 15
7-Jan-11 343.75 8.3 9.9 24.7
10-Jan-11 335.2 8.3 10 24.7
11-Jan-11 328.3 8.3 10 24.7
12-Jan-11 319.55 8.3 10 24.7
13-Jan-11 310.35 14.8 31 24.7
14-Jan-11 309.8 14.8 31 48
17-Jan-11 314.25 14.8 23 48
18-Jan-11 314 11.7 23 48
19-Jan-11 313.65 9 25 48
20-Jan-11 312.95 9 25 48
21-Jan-11 327.8 2.6 25 48
24-Jan-11 329.85 0.8 25 48
25-Jan-11 336.8 0.15 3.1 48
27-Jan-11 328.7 0.15 3.1 28.45
ANALYSIS:
75
The objective of this analysis is to evaluate the profit/loss position of futures and options. This
analysis is based on sample data taken of IOC scrip. This analysis considered the Dec & Jan contract
of IOC. The lot size of IOC is 500, the time period in which this analysis done is from 15.12.10 –
31.01.11.
Future Market
BUYER
04/01/11(bought) 351.55
14/01/01(sold) 311.05
Loss= 40.05
Net loss=loss on each share*lot size
=40.05*500
=20025 rs.
Entry on dec 16th and when to exit
No profit max. Loss
16/12/10 (bought) 380.9 16/12/10 (bought) 380.9
On any date (sold) at any price 30/12/10 (sold) 337.2
No profit 43.7
Max loss=loss per share*lot size
=43.7*500=21850rs
On any other day client will not exceed the above loss and he don’t have any chance of
getting profit.
76
OPTION MARKET
CALL OPTION
On 17th Jan client bought 6 Lots of IOC that is (500*6=3000)
IN THE MONEY AT THE MONEY OUT OF THE MONEY
Spot price
Less:-strike price
314.25
320
314.25
340
314.25
360
Amount
Less:-premium
-5.75
8.55
-25.75
2.85
-45.75
1.1
Profit/loss
*lot size
-14.3
3000
-28.6
3000
-46.85
3000
Total profit/loss -42900 -85800 -140550
If client enters on this particular day he will not get profit only at any strike price.
PUT OPTION
On 25th Jan bought 6 Lots of IOC that is 3000(500*6)
IN THE MONEY AT THE MONEY OUT OF THE MONEY
Strike price
Less:-spot price
360
336.8
340
336.8
320
336.8
Amount
Less:-premium
23.2
0.15
3.2
3.1
-16.8
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Profit/loss
*lot size
23.05
3000
0.1
3000
-64.8
3000
Total profit/loss 69150 300 -194400
Client can get profit by entering on this date at IN THE MONEY & AT THE MONEY.
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HEDGING
As buyers think to purchase at less cost they will opt for 320 strike price and as sellers
think to sell at highest price they opt for 360 strike price.So making hedging at 140 calls & 160
put on 12th jan 2011 eliminates the risk.
CALL OPTION AT 320 STRIKE PRICE PUT OPTION AT 360 STRIKE PRICE
Spot price 319.55
Less:-strike price 320
Amount -0.45
Less:-premium 11.65
Profit/loss -12.1
*lot size 3000
Total Profit/loss -36300
Strike price 360
Less:-spot price 319.55
Amount 40.45
Less:-premium 24.7
Profit/loss 15.75
*lot size 3000
Total Profit/loss 47250
By hedging the total profit is 10950rs (47250-36300) which is maximum and will be less
if he would have hedged any other day.
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CHAPTER 6
FINDINGS
AND
CONCLUSIONS
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FINDINGS:
The scrip value of reliance communications is declined due to 2G scam problem.
IDBI has well versed exchanged in providing good sound loans to industrial sector so the share
value of IDBI increased.
As per present condition it is good to invest in banking sector.
There are many reasons that the market is going down such as political issues,inflation etc:-
Derivative market is a good return market compared to equity market.
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CONCLUSION:-
Derivative products serve the vitally important economic functions
of price discovery and risk management. The transparency, which emerges from their
trading mechanism, ensures the price discovery in the underlying market. Further they
serve as a risk management tools by facilitating the trading of risks among the market
participants. These products enable market participants to take the desired risks.
From the above project it is proved that the underlying stock values
changes according to the news. Depending on underlying stock prices the derivative
values also changes. By doing above analysis we can know when to buy, at what time to
sell and how much risk we can take. Above project has done practical analysis on three
companies for one and a half month. Se Graphs and tables are used to analyze more.
FUTURE ENHANCEMENT:-
In future I like to introduce software based on this analysis. It automatically
calculates the problem and gives us result. By using this software we can get more accurate
values. It also tells that depending on the news how the share value will fluctuate, where to buy
the options and futures and where to sell it. This software also gives the fundamental analysis on
the individual company. By using this software we can analyze more and help to take profitable
decisions.
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LIMITATIONS OF THE STUDY:
The following are the limitations of the study:
The Scrip chosen for analysis is Nifty’50 and the contract taken in dec 2010 is a 45 days
contract ending in jan.
The data collected is completely restricted to the NIFTY ’50 hence this analysis cannot
be taken universally.
The data collected is basically confined to secondary sources, with very little amount of
primary data associated with the project.
There is a constraint with regard to time allocated for the research study.
The availability of information in the form of annual reports & price fluctuations of the
companies is a big constraint to the study.
The subject of derivatives is vast. It requires extensive study and research to understand
the depth of the various instruments operating in the market.
The derivative market is a dynamic one .premiums, contract rates, strike price fluctuates
on demand and supply basis. Therefore data related to last few trading months was only
considered and interpreted.
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BIBLIOGRAPHY
Prasanna Chandra : Investment analysis &portfolio mgmt
Websites:
www.derivatives.com
www.nseindia.com
www.moneycontrol.com
www.money.rediff.com
www.bseindia.com
www.sharekhan.com
www.sebi.gov.in
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