derivativeAnjana Bansal MBA Report

8/7/2019 derivativeAnjana Bansal MBA Report

http://slidepdf.com/reader/full/derivativeanjana-bansal-mba-report 1/75

INVESTORS AWARENES

ABOUT THE DERIVATIVE

IN CAPITAL MARKET

SUBMITTED TO

VINAYAKA MISSION

RESEARCH FOUNDATION,

DEEMED UNIVERSITY (TAMILNADU)

In Partial Fulfi l lment of the

Requirement for the Degree Of

Master of Business Administration

ENROLLEMENT NO. R022AP319A019

SUBMITTED BY

ANJANA BANSALMBA-FINANCE

Under The Guidance Of

Mr. AJAY SHARMA

BELLS EDUCATION &RESEARCH SOCIETY



ACKNOWLEDGEMENT

It gives me immense pleasure to express my sincere and whole

hearted sense of grat i tude to Mr.AJAY SHARMA Prof. , for his

able guidance, invaluable help, ever encouraging at t i tude and

supervision throughout this project . To drive benefi t of his

enormous experience i t i s a mat ter of great privi lege to me.

Without his help, cooperat ion and invaluable suggest ion this

work could not have seen the l ight of the day.

I would sincerely l ike to express my thanks to all the faculty

members for their kind support and help. It has been a great

pleasure to interact wi th them. I t gave a boost to my self

confidence.

Acknowledgements are a lso due to my family and fr iends for

their constant encouragement and support .

Anjana Bansal

Enrolment No. R022AP319A019

MBA 4t h

Semester



CONTENTS

1. Object ives of The Study

2. Research Methodology

3. Limitations of The Study

4. DERIVATIVE

Derivat ive

Indian Scenario

About Future What is Index

Option

Call Opt ion

Put Option

Summery

Use Of Derivatives

Hedging

Speculat ion

y Arbi t rage Trading Strategies

Bull Market Strategy

Bear Mar ket Strategy

Stable Market Strateg y

Price of Option

Volati l i ty



5. Scheme for Introduct ion of Exchange Trade Interest

Rate Derivat ives Contract

6. Scheme of FII Trade In All Exchange Traded

Derivat ive Contracts

7. SEBI Advisory Commit tee On Derivat ive

8. Limitat ion & Advantages of the Method of the

Derivatives

9. Annexure

Quest ionnaire for Investors

10. Bibl iography





OBJECTIVES OF THE STUDY

To study the market of DERIVATIVES in

India

To study the working and funct ioning of

DERIVATIVES

To study the investors awareness about the

DERIVATIVES

To study the reason for invest in the

DERIVATIVES

To study the investors view about the

DERIVATIVES





LIMITATIONS OF THE STUDY

1. The inherent l imitat ions of data are therein in

this project .

2 . Formal interviews have been conducted withthe investors and dealers of the Stock

Exchanges.

3 . Due to t ime and Space constraints so me

related aspects have been given in br ief .



DERIVATIVES

A derivat ive as a term conjures up visions of

complex numeric calculations, speculative dealings

and comes across as an instrument, which is theprerogat ive of a few µs mart f inance professionals¶ . In

reali ty i t is not so. In fact , a derivative transaction

helps cover r isk, which would arise on the t rading of

securi t ies on which the derivat ive is based and a

small investor, can benefit immensely.

A derivat ive securi ty can be defined as a securi ty

whose value depends on the values of other

underlying variables . Very often, the variablesunderlying the derivat ive securi t ies are the prices of

traded securi t ies .

Let us take an example of a simple derivative

contract :

y Ram buys a futures contract .

y He will make a profi t of Rs 100 0 if the price of

y Infosys

y r ises by Rs1000.

y If the price is unchanged Ram will receive nothing.

y If the stock price of Infosys falls by Rs 800 he will

lose Rs 800.

As we can see, the above contract depends upon theprice of the Infosys scrip, which is the underlying

securi ty. Similarly, futures t rading have al ready

started in Sensex futures and Nifty futures. The

underlying security in this case is the BSE Sensex

and NSE Nifty.



But now the question is why have derivatives?

Der iva t ives have made the in t e rna t iona l and

f inanc ia l head l ines i n t he pas t fo r mos t ly wi th

the i r a s soc ia t ion wi th spec t acu la r l osses o r

ins t i t u t iona l co l l apses . But marke t p l aye rs have

t raded de r iva t ives success fu l ly fo r cen tur i e s and

the da i ly i n t e rna t iona l t u rnove r i n de r iva t ives

t rad ing runs in to b i l l i ons o f do l l a r s .

Are de r iva t ive ins t rument s t ha t can on ly be t raded

by expe r i enced , spec i a l i s t t r ade rs? Al though i t i s

t rue tha t compl i ca t ed ma themat i ca l mode l s a reused for p r i c ing some de r iva t ives , t he bas i c

concept s and pr inc ip l e s unde rp inn ing de r iva t ives

and the i r t r ad ing a re qu i t e easy to g ra sp and

unders t and . Indeed , marke t p l aye rs rang ing f rom

government s , corpora t e t r easure rs , dea l e r s and

broke rs and ind iv idua l i nves tors use de r iva t ives

inc reas ing ly .



INDIAN SCENARIO

While forward contracts and exchange t raded in

futures has grown by leaps and bound, Indian stock

markets have been largely s low to these global

changes. However, in the last few years, there has

been substant ia l improvement in the funct ioning of

the securi t ies market . Requirements of adequate

capital ization for market intermediaries, margining

and establ ishment of c learing corporat ions have

reduced market and credit risks. However, there were

inadequate advanced risk management tools. And

after the ICE (Informat ion, Communicat ion,

Enterta inment) mel tdown the market regulator fe l tthat in order to deepen and st rengthen the cash

market trading of derivatives l ike futures and options

was imperative.

A derivat ive is a product whose value is derived

from the value of an underlying asset , index or

reference ra te . The underlying asset can be equi ty,

forex, commodity or any o ther asset . For example, i f

the sett lement price of a derivative is based on thestock price of a s tock for e .g. Infosys, which

frequent ly changes on a dai ly basis , then the

derivative risks are also changing on a daily basis.

This means that derivative risks and posit ions must

be monitored constantly.

The purpose of this Learning Centre is to int roduce

the basic concepts and principles of derivat ives.

We wil l t ry and understand

y What are derivat ives?

y Why have derivat ives a t a l l?

y How are derivat ives t raded and used?



Futures

Derivat ives and futures are basical ly of 3 types:

y Forwards and Futures

y Options

y Swaps

Forward contract

A forward contract is the s implest mode of a

derivat ive t ransact ion. I t i s an agreement to buy or

sel l an asset (of a specif ied quant i ty) a t a certa in

future t ime for a certa in price . No cash is exchanged

when the contract is entered into.

Illustration 1:

Shyam wants to buy a TV, which costs Rs 10,000 but

he has no cash to buy i t outright. He can only buy i t

3 months hence. He, however, fears that prices of

televisions will rise 3 months from now. So in order

to protect himself from the r ise in prices Shyam

enters into a contract wi th the TV dealer that 3months from now he wil l buy the TV for Rs 10,000.

What Shyam is doing is that he is locking the current

price of a TV for a forward contract . The forward

contract is sett led at maturity. The dealer will

deliver the asset to Shyam at the end of three months

and Shyam in turn will pay cash equivalent to the TV

price on del ivery.

Illustration 2:

Ram is an importer who has to make a payment for

his consignment in six months t ime. In order to meet

his payment obl igat ion he has to buy dol lars s ix

months from today. However, he is not sure what the

Re/$ rate will be then. In order to be sure of his



expenditure he will enter into a contract with a bank

to buy dollars six months from now at a decided rate.

As he is entering into a contract on a future date i t is

a forward contract and the underlying securi ty is the

foreign currency.

The difference between a share and derivat ive is that

shares/securit ies is an asset while derivative

instrument is a cont

What is an Index?

To understand the use and functioning of the indexderivat ives markets , i t i s necessary to understand the

underlying index. A stock index represents the

change in value of a set of stocks, which consti tute

the index. A market index is very important for the

market players as i t acts as a barometer for market

behavior and as an underlying in derivat ive

instruments such as index futures.

The Sensex and Nifty

In India the most popular indices have been the BSE

Sensex and S&P CNX Nifty. The BSE Sensex has 30

stocks comprising the index , which are selected

based on market capi ta l izat ion, industry

representat ion, t rading frequency etc . I t represents

30 large well-established and financially sound

companies. The Sensex represents a broad spectrum

of companies in a varie ty of industr ies . I t represents14 major industry groups. Then there is a BSE

national index and BSE 200. However, trading in

index futures has only commenced on the BSE

Sensex.

While the BSE Sensex was the f i rs t s tock market

index in the country, the National Stock Exchange



launched Nifty in Apri l 1996 taking the base of

November 3, 1995. The Nifty index consists of

shares of 50 companies with each having a market

capital ization of more than Rs 500 crore.

Futures and stock indices

For understanding of s tock index futures a thorough

knowledge of the composi t ion of indexes is essent ia l .

Choosing the right index is important in choosing the

right contract for speculat ion or hedging. Since for

speculation, the volati l i ty of the index is important

whereas for hedging the choice of index dependsupon the re la t ionship between the s tocks being

hedged and the characteris t ics of the index.

Choosing and understanding the r ight index is

important as the movement of s tock index futures is

qui te s imilar to that of the underlying stock index.

Volati l i ty of the futures indexes is generally greater

than spot s tock indexes.

Every t ime an investor takes a long or short posi t ion

on a stock, he also has an hidden exposure to the

Nifty or Sensex. As most often stock values fall in

tune with the entire market sentiment and rise when

the market as a whole is rising.

Retai l investors wil l f ind the index derivat ives useful

due to the high correlation of the index with their

portfol io/s tock and low cost associated with using

index futures for hedging.

Understanding index futures

A futures contract is an agreement between two

part ies to buy or sel l an a sset a t a certa in t ime in the



future at a certain price. Index futures are al l futures

contracts where the underlying is the stock index

(Nifty or Sensex) and helps a trader to take a view

on the market as a whole.

Index futures permits speculat ion and i f a t rader anticipates a major ral ly in the market he can simply

buy a futures contract and hope for a price r ise on

the futures contract when the ra l ly occurs . We shal l

learn in subsequent lessons how one can leverage

ones posit ion by taking posit ion in the futures

market.

In India we have index futures contracts based on

S&P CNX Nifty and the BSE Sensex and near 3months duration contracts are available at al l t imes.

Each contract expires on the last Thursday of the

expiry month and simultaneously a new contract is

int roduced for t rading after expiry of a contract .

Example:

Futures contracts in Nifty in July 2001

Contract

month

Expiry/sett lemen

t

July 2001 July 26

August

2001

August 30

Septembe

r 2001

September 27

On July 27

Contract

month

Expiry/sett lemen

t

August

2001

August 30



Septembe

r 2001

September 27

October

2001

October 25

The permitted lot size is 200 or multiples thereof for

the Nifty. That is you buy one Nifty contract the

total deal value wil l be 200*1100 (Nifty value)= Rs

2,20,000.

In the case of BSE Sensex the market lot is 50. That

is you buy one Sensex futures the tota l value wil l be

50*4000 (Sensex value)= Rs 2,00,000.

The index futures symbols are represented asfol lows:

BSE NSE

BSXJUN2001

(June

contract)

FUTDXNIFTY28

-JUN2001

BSXJUL2001

(July

contract)

FUTDXNIFTY28

-JUL2001

BSXAUG200

1 (Aug

contract)

FUTDXNIFTY28

-AUG2001

Options

Stock markets by their very nature are fickle. While

fortunes can be made in a j iffy more often than not

the scenario is the reverse. Investing in stocks has

two sides to i t ±a) Unl imited profi t potent ia l from

any upside (remember Infosys, HFCL etc) or b) a

downside which could make you a pauper.



Derivat ive products are s t ructured precisely for this

reason -- to curtail the risk exposure of an investor.

Index futures and stock opt ions are inst ruments that

enable you to hedge your portfolio or open posit ions

in the market. Option contracts al low you to run your

profi ts whi le rest r ic t ing your downside r isk.

Apart from risk containment , opt ions can be used for

speculat ion and investors can create a wide range of

potent ia l profi t scenarios.

We have seen in the Derivatives School how index

futures can be used to protect oneself from volati l i ty

or market r isk. Here we wil l t ry and understand so me

basic concepts of opt ions.

What are options?

Some people remain puzzled by options. The truth is

that most people have been using opt ions for some

time, because opt ions are bui l t into everything from

mortgages to insurance.

An option is a contract , which gives the buyer the

right , but not the obl igat ion to buy or sel l shares of

the underlying security at a specific price on or

before a specific date.

µOpt ion¶, as the word suggests , i s a choice given to

the investor to e i ther honour the contract ; or i f he

chooses not to walk away from the contract .

To begin, there are two kinds of opt ions: Cal l

Opt ions and Put Opt ions.

A Cal l Opt ion is an opt ion to buy a s tock at a

specif ic price on or before a certa in date . In this

way, Cal l opt ions are l ike securi ty deposi ts . If , for

example, you wanted to rent a certa in property, and



left a security deposit for i t , the money would be

used to insure that you could, in fact , rent that

property a t the price agreed upon when you returned.

If you never returned, you would give up your

security deposit , but you would have no other

liabil i ty. Call options usually increase in value as the

value of the underlying inst rument r ises .

When you buy a C al l opt ion, the price you pay for i t ,

cal led the opt ion premium, secures your r ight to buy

that certain stock at a specified price called the

strike price. If you decide not to use the option to

buy the s tock, and you are not obl igated to, your

only cost is the option premium.Put Opt ions are opt ions to sel l a s tock at a specif ic

price on or before a certa in date . In this way, Put

options are l ike insurance policies

If you buy a new car, a nd then buy auto insurance on

the car , you pay a premium and are , hence, protected

if the asset is damaged in an accident. If this

happens, you can use your policy to regain the

insured value of the car . In this way, the put opt ion

gains in value as the value of the underlying

instrument decreases. If a l l goes wel l and the

insurance is not needed, the insurance company

keeps your premium in return for taking on the risk.

With a Put Opt ion, you can "insure" a s tock by f ixing

a sel l ing price . If something happens which causes

the s tock price to fa l l , and thus, "damages" your

asset , you can exercise your option and sell i t at i ts

" insured" price level . If the price of your s tock goes

up, and there is no "damage," then you do not need

to use the insurance, and, once again, your only cost

is the premium. This is the primary function of l isted

opt ions, to a l low investors ways to manage r isk.



Technically, an option is a contract between two

parties. The buyer receives a privilege for which he

pays a premium. The sel ler accepts an obl igat ion for

which he receives a fee.

We will dwelve further into the mechanics of call /putopt ions in subsequent lessons.

Call option

An option is a contract between two parties giving

the taker (buyer) the right, but not the obligation, to

buy or sel l a parcel of shares a t a predetermined

price possibly on, or before a predetermined date . To

acquire this r ight the taker pays a premium to the

writer (seller) of the contract .

There are two types of opt ions:

y Call Options

y 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.

Buying a cal l option gives you the right (but not the

obl igat ion) to purchase 100 shares of a company's

stock at a certa in price (cal led the s t r ike price) from

the date of purchase unti l the third Friday of a

specific month (called the expiration date).

People buy cal ls because they hope the s tock wil l go

up, and they will make a profi t , ei ther by sell ing thecalls at a higher price, or by exercising their option

(i .e. , buy the shares at the strike price at a point

when the market price is higher).

Il lustration 1:

Raj purchases 1 Satyam Computer (SATCOM) AUG

150 Cal l --Premium 8

This contract a l lows Raj to buy 100 shares of

SATCOM at Rs 150 per share a t any t ime between

the current date and the end of next August . For this

privilege, Raj pays a fee of Rs 800 (Rs eight a share

for 100 shares) .

The buyer of a cal l has purchased the r ight to buyand for that he pays a premium.

Now let us see how one can profit from buying an

opt ion.

Sam purchases a December call option at Rs 40 for a

premium of Rs 15. That is he has purchased the right



to buy that share for Rs 40 in December. If the s tock

rises above Rs 55 (40+15) he will break even and he

wil l s tar t making a profi t . Suppose the s tock d oes not

rise and instead falls he will choose not to exercise

the option and forego the premium of Rs 15 and thus

limiting his loss to Rs 15.

Call Options-Long & Short Positions

When you expect prices to r ise , then you take a long

posi t ion by buying cal ls . You are bull ish.

When you expect prices to fall , then you take a short

posi t ion by sel l ing cal ls . You are bearish.

Put Options

A Put Option gives the holder of the right to sell a

specific number of shares of an agreed security at a

fixed price for a period of t ime.

Buying a put option gives you the right (but not the

obl igat ion) to sel l 100 shares of a company's s tock ata certa in price (cal led the s t r ike price) from the date

of purchase unt i l the thi rd Friday of a s pecif ic month

(cal led the expirat ion date) .

People buy puts, because they hope the stock will go

down, and they wil l make a profi t , e i ther by sel l ing

the puts a t a higher price , or by exercising their



opt ion ( i .e . , forcing the sel ler of the put to buy the

stock at the strike price at a t ime when the market

price is lower).

eg: Sam purchases 1 INFTEC (Infosys Technologies)

AUG 3500 Put --Premium 200

This contract al lows Sam to sell 100 shares INFTEC

at Rs 3500 per share a t an y t ime between the current

date and the end of August. To have this privilege,

Sam pays a premium of Rs 20,000 (Rs 200 a share

for 100 shares) .

The buyer of a put has purchased a r ight to sel l . The

owner of a put option has the right to sell .

Il lustration 2: Raj is of the view that the a stock is

overpriced and wil l fa l l in future , but he does not

want to take the r isk in the event of price r is ing so

purchases a put opt ion at Rs 70 on µX¶. By

purchasing the put option Raj has the right to sell the

stock at Rs 70 but he has to pay a fee of Rs 15

(premium).

So he wil l breakeven only after the s tock fal ls below

Rs 55 (70-15) and will start making profit if the

stock falls below Rs 55.

Put Options-Long & Short Posit ions

When you expect prices to fall , then you take a long

posi t ion by buying Puts . You are bearish.



When you expect prices to r ise , then you take a short

posit ion by sell ing Puts. You are bull ish.

SUMMARY:

CALL

OPTION

BUYER

CALL

OPTION

WRITER

(Seller)

Pays premium

Right to

exercise and buy the

shares

Prof i ts f rom

ris ing pr ices

Limited

losses , Potent ial ly

unl imi ted gain

Receives

premium

Obligat ion

to sel l shares if

exercised

Profi ts

from fall ing

pr ices or

remaining

neutral

Potent ial ly

unlimited losses,

l imi ted gain

PUT OPTION

BUYER

PUT

OPTION

WRITER

(Seller)



Pays premium

Right toexercise and sel l

shares

Prof i ts f rom

fal l ing pr ices

Limited

losses , Potent ial ly

unl imi ted gain

Receives

premium

Obligat ion

to buy shares if

exercised

Profi ts

from rising

pr ices or

remaining

neutral

Potent ial ly

unlimited losses,

l imi ted gain

USE OF DERIVATIVES

Hedging

We have seen how one can take a view on the market

with the help of index futures. The other benefi t of trading in index futures is to hedge your port fol io

against the r isk of t rading. In order to understand

how one can protect his port fol io from value erosion

let us take an example.

Hedging involves protect ing an exist ing asset

posi t ion from future adverse price movements . In

order to hedge a posit ion, a market player needs to

take an equal and opposi te posi t ion in the futures

market to the one held in the cash market . Every

portfol io has a hidden exposure to the index, which

is denoted by the beta. Assuming you have a

portfolio of Rs 1 mill ion, which has a beta of 1.2,



you can factor a co mplete hedge by sel l ing Rs 1.2 mn

of S&P CNX Nifty futures.

Steps:

1. Determine the beta of the port fol io. If the betaof any stock is not known, i t is safe to assume that i t

is 1.

2. Short sell the index in such a quantum that the

gain on a uni t decrease in the index would offset the

losses on the rest of his portfolio. This is achieved

by multiplying the relative volati l i ty of the portfolio

by the market value of his holdings.

Therefore in the above scenario we have to shortsell

1.2 * 1 mill ion = 1.2 mill ion worth of Nifty.

Now let us s tudy the impact on the overal l gain/ loss

that accrues:

Index

up 10%

Index

down

10%

Gain/(Loss) in

Portfol io

Rs

120,000

(Rs

120,000

)

Gain/(Loss) in

Futures

(Rs

120,000

)

Rs

120,000

Net Effect Nil Nil



Speculation

Speculators are those who do not have any posi t ion

on which they enter in futures and options market.

They only have a part icular view on the market ,

s tock, commodity e tc . In short , speculators put their money at r isk in the hope of profi t ing from an

ant ic ipated price change. They consider various

factors such as demand supply, market posi t ions,

open interests , economic fundamentals and other data

to take their posit ions.

Il lustration:

Ram is a trader but has no t ime to track and analyze

stocks. However, he fancies his chances in predicting

the market t rend. So instead of buying different

stocks he buys Sensex Futures.

On May 1, 2001, he buys 100 Sensex futures @ 3600

on expectat ions that the index wil l r ise in future . O n

June 1, 2001, the Sensex r ises to 4000 and at that

t ime he sel ls an equal number of contracts to c lose

out his posit ion.

Sell ing Price : 4000*100 = Rs 4,00,000

Less: Purchase Cost : 3600*100 = Rs 3,60,000

Net gain Rs 40,000

Ram has made a profi t of Rs 40,000 by taking a cal l

on the future value of the Sensex. However, if theSensex had fallen he would have made a loss.

Similarly, i f would have been bearish he could have

sold Sensex futures and made a profi t from a fall ing

profi t . In index futures players can have a long-term

view of the market up to atleast 3 months.



Arbitrage

An arbi t rageur is basical ly r isk averse . He enters into

those contracts were he can earn r iskless profi ts .

When markets are imperfect , buying in one marketand simultaneously sel l ing in other market gives

riskless profi t . Arbi t rageurs are a lways in the look

out for such imperfect ions.

In the futures market one can take advantages of

arbi t rage opportuni t ies by buying from lower priced

market and sel l ing at the higher priced market . In

index futures arbi t rage is possible between the spot

market and the futures market (NSE has provided aspecial software for buying al l 50 N ifty s tocks in the

spot market.

Take the case of the NSE Nifty.

y Assume that Nifty is a t 1200 and 3 month¶s

Nifty

0f Futures is at 1300.

y The futures price of Nifty futures can be worked

out by taking the interest cost of 3 months into

account

.

I f there is a d i fference then arbi t rage opportuni ty

exists.

Let us take the example of s ingle s tock to understand

the concept bet ter . If Wipro is quoted at Rs 1000 pe r

share and the 3 months futures of Wipro is Rs 1070

then one can purchase ITC at Rs 1000 in spot by

borrowing @ 12% annum for 3 months and sel l

Wipro futures for 3 months at Rs 1070.



Sale = 1070

Cost= 1000+30 = 1030

Arbi t rage profi t = 40

These kind of imperfections continue to exist in the

markets but one has to be a lert to the opportuni t ies

as they tend to get exhausted very fast .

Trading strategies

Bull Market Strategies

Calls in a Bull ish

Strategy

Puts in a

Bullish

Strategy

Bull ish Cal l Spread

Strategies

Bullish Put

Spread

Strategies

Calls in a Bull ish Strategy

An investor with a bul l ish market out look should buy

call options. If you expect the market price of the

underlying asset to r ise , then you would ra ther have

the r ight to purchase a t a specif ied price and sel l

la ter a t a higher price than have the obl igat ion to

deliver later at a higher price.

Puts in a Bull ish Strategy

An investor with a bul l ish market out look can also

go short on a Put opt ion. Basical ly, an investor

anticipating a bull market could write Put options. If

the market price increases and puts become out-of-



the-money, investors with long put posit ions will let

their opt ions expire worthless .

By wri t ing Puts , profi t potent ia l i s l imited. A Put

wri ter profi ts when the price of the underlying asset

increases and the opt ion expires worthless . Themaximum profit is l imited to the premium received.

However, the potential loss is unlimited. Because a

short put posit ion holder has an obligation to

purchase i f exercised. He wil l be exposed to

potential ly large losses if the market moves against

his posit ion and declines.

The break-even point occurs when the market priceequals the exercise price: minus the premium. At any

price less than the exercise price minus the premium,

the investor loses money on the transaction. At

higher prices, his option is profi table.

An increase in volati l i ty will increase the value of

your put and decrease your re turn. As an opt ion

writer, the higher price you will be forced to pay in

order to buy back the option at a later date , lower isthe re turn.

Bullish Call Spread Strategies

A vert ical cal l spread is the s imultaneous purchase

and sale of ident ical cal l opt ions but with different

exercise prices.

To "buy a call spread" is to purchase a call with a

lower exercise price and to wri te a cal l wi th a higher exercise price. The trader pays a net premium for the

posi t ion.

To "sel l a cal l spread" is the opposi te , here the t rader

buys a call with a higher exercise price and writes a



call with a lower exercise price, receiving a net

premium for the posi t ion.

An investor with a bul l ish market out look should buy

a call spread. The "Bull Call Spread" allows the

investor to part icipate to a l imited extent in a bullmarket, while at the same t ime l imiting risk

exposure.

To put on a bul l spread, the t rader needs to buy the

lower s t r ike cal l and sel l the higher s t r ike cal l . The

combination of these two options will result in a

bought spread. The cost of Put t ing on this posi t ion

will be the difference between the premium paid for

the low st r ike cal l and the premium received for thehigh strike call .

The investor ' s profi t potent ia l i s l imited. When both

calls are in-the-money, both will be exercised and

the maximum profit will be realised. The investor

delivers on his short call and receives a higher price

than he is paid for receiving delivery on his long

call .

The investors 's potential loss is l imited. At the most,

the investor can lose is the net premium. He pays a

higher premium for the lower exercise price cal l than

he receives for writ ing the higher exercise price call .

The investor breaks even when the market price

equals the lower exercise price plus the net premium.

At the most , an investor can lose is the net premium

paid. To recover the premium, the market price must

be as great as the lower exercise price plus the net

premium.



Bull ish Put Spread Strategies

A vert ical Put spread is the s imultaneous purchase

and sale of identical Put options but with different

exercise prices.

To "buy a put spread" is to purchase a Put with a

higher exercise price and to wri te a Put with a lower

exercise price. The trader pays a net premium for the

posi t ion.

To "sell a put spread" is the opposite: the trader buys

a Put with a lower exercise price and writes a put

with a higher exercise price , receiving a net premium

for the posi t ion.

An investor with a bul l ish market out look should sel l

a Put spread. The "vert ical bul l put spread" al lows

the investor to part icipate to a l imited extent in a

bull market, while at the same t ime l imiting risk

exposure.

To put on a bul l spread, a t rader sel ls the higher

strike put and buys the lower strike put.

Buying the lower s t r ike can create the bul l spread

and sel l ing the higher s t r ike of e i ther cal ls or put .

The difference between the premiums paid and

received makes up one leg of the spread.

The investor ' s profi t potent ia l i s l imited. When the

market price reaches or exceeds the higher exercise

price , both opt ions wil l be out-of- the-money and wil l

expire worthless. The trader will realize his

maximum profit , the net premium

The investor 's potential loss is also l imited. If the

market fal ls, the options will be in-the-money. The

puts wil l offset one another, but a t di fferent exercise

prices.



Bear Market Strategies

Puts in a Bearish

Strategy

Calls in a

Bearish Strategy

Bearish Put Spread

Strategies

Bearish Call

Spread

Strategies

Puts in a Bearish Strategy

When you purchase a put you are long and want the

market to fa l l . A put opt ion is a bearish posi t ion. I t

will increase in value if the market fal ls. An investor

with a bearish market out look shal l buy put opt ions.

By purchasing put options, the trader has the right to

choose whether to sel l the underlying asset a t the

exercise price. In a fal l ing market, this choice is

preferable to being obl igated to buy the underlying at

a price higher.

An investor 's profi t potential is practically

unlimited. The higher the fall in price of the

underlying asset , higher the profi ts .

The investor 's potential loss is l imited. If the price

of the underlying asset r ises instead of fa l l ing as th e

investor has anticipated, he may let the option expire

worthless. At the most, he may lose the premium for the opt ion.

The t rader ' s breakeven point is the exercise price

minus the premium. To profi t , the market price must

be below the exercise price. Since the trader has paid

a premium he must recover the premium he paid for

the opt ion.




your put and increase your re turn. An increase in

volati l i ty will make i t more l ikely that the price of

the underlying instrument will move. This increases

the value of the option.

Calls in a Bearish Strategy

Another opt ion for a bearish investor is to go short

on a call with the intent to purchase i t back in the

future. By sell ing a call , you have a net short

posi t ion and needs to be bought back before

expirat ion and cancel out your posi t ion.

For this an investor needs to write a call option. If the market price falls, long call holders will let their

out-of-the-money opt ions expire worthless , because

they could purchase the underlying asset a t the lower

market price.

The investor ' s profi t potent ia l i s l imited because the

trader's maximum profit is l imited to the premium

received for writ ing the option.

Here the loss potential is unlimited because a short

cal l posi t ion holder has an obl igat ion to sel l i f

exercised, he will be exposed to potential ly large

losses if the market rises against his posit ion.


equals the exercise price: plus the premium. At any

price greater than the exercise price plus the

premium, the trader is losing money. When the

market price equals the exercise price plus the

premium, the trader breaks even.


your cal l and decrease your re turn.

When the opt ion wri ter has to buy back the opt ion in

order to cancel out his posi t ion, he wil l be forced to



pay a higher price due to the increased value of the

calls.

Bearish Put Spread Strategies

A vertical put spread is the simultaneous purchaseand sale of ident ical put opt ions but with different

exercise prices.

To "buy a put spread" is to purchase a put with a

higher exercise price and to write a put with a lower


posi t ion.

To "sel l a put spread" is the opposi te . The t rader

buys a put with a lower exercise price and wri tes a

put with a higher exercise price , receiving a net


To put on a bear put spread you buy the higher s t r ike

put and sell the lower strike put.

You sel l the lower s t r ike and buy the higher s t r ike of

either calls or puts to set up a bear spread.

An investor with a bearish market out look should:buy a put spread. The "Bear Put Spread" allows the

investor to part icipate to a l imited extent in a bear

market, while at the same t ime l imiting risk

exposure.


market price fa l ls to or below the lower exercise

price , both opt ions wil l be in-the-money and the

trader will realize his maximum profit when herecovers the net premium paid for the opt ions.

The investor 's potential loss is l imited. The trader

has offset t ing posi t ions a t di fferent exercise prices.

If the market rises rather than falls, the options will



be out-of- the-money and expire worthless . Since the

trader has paid a net premium


equals the higher exercise price less the net

premium. For the s t ra tegy to be profi table , themarket price must fal l . When the market price falls

to the high exercise price less the net premium, the

trader breaks even. When the market fal ls beyond

this point , the trader profi ts.

Bearish Call Spread Strategies

A vert ical cal l spread i s the s imultaneous purchase

and sale of ident ical cal l opt ions but with different

exercise prices.

To "buy a call spread" is to purchase a call with alower exercise price and to wri te a cal l wi th a higher


posi t ion.

To "sell a call spread" is the opposite: the trader

buys a call with a higher exercise price and writes a

call with a lower exercise price, receiving a net


To put on a b ear cal l spread you sel l the lower s t r ike

cal l and buy the higher s t r ike cal l . An investor sel ls

the lower strike and buys the higher strike of ei ther

calls or puts to put on a bear spread.

An investor with a bearish market out look should:

sell a call spread. The "Bear Call Spread" allows the



investor to part icipate to a l imited extent in a bear

market, while at the same t ime l imiting risk

exposure.


market price falls to the lower exercise price, bothout-of-the-money opt ions wil l expire worthless . The

maximum profi t that the t rader can real ize is the net

premium: The premium he receives for the call at the

higher exercise price.

Here the investor 's potential loss is l imited. If the

market r ises , the opt ions wil l offset one another. At

any price greater than the high exercise price, the

maximum loss wil l equal high exercise price minuslow exercise price minus net premium.


equals the lower exercise price plus the net premium.

The strategy becomes profitable as the market price

declines. Since the trader is receiving a net premium,

the market price does not have to fall as low as the

lower exercise price to breakeve

Stable Market Strategies

Straddles in a Stable Market Outlook

Volat i le market t rading st ra tegies are appropria te

when the trader believes the market will move but

does not have an opinion on the direct ion of

movement of the market. As long as there iss ignif icant movement upwards or downwards, these

strategies offer profi t opportunit ies. A trader need

not be bul l ish or bearish. He must s imply be of the

opinion that the market is volati le. This market

outlook is also referred to as "neutral volati l i ty."



A straddle is the s imultaneous purchase (or

sale) of two identical options, one a call and the

other a put.

To "buy a straddle" is to purchase a call and a

put with the same exercise price and e xpirat ion date .

To "sell a straddle" is the opposite: the trader

sel ls a cal l and a put with the same exercise price

and expiration date.

A trader, viewing a market as stable, should: write

option straddles. A "straddle sale" al lows the trader

to profit from writ ing calls and puts in a stable

market environment .

The investor ' s profi t potent ia l i s l imited. If the

market remains s table , t raders long out-of- the-money

calls or puts will let their options expire worthless.

Writers of these options will not have be called to

deliver and will profi t from the sum of the premiums

received.

The investor ' s potent ia l loss is unl imited. Should the

price of the underlying rise or fal l , the writer of a

cal l or put would have to del iver , exposing himself

to unlimited loss if he has to deliver on the call and

practically unlimited loss if on the put.

The breakeven points occur when the market price a t

expiration equals the exercise price

plus the premium and minus the premium. The trader

is short two posi t ions and thus, two breakeven

points; One for the call (common exercise price plus

the premiums paid) , and one for the put (common

exercise price minus the premiums paid).



Strangles in a Stable Market Outlook

A strangle is similar to a straddle, except that the

cal l and the put have different exercise prices.

Usually, both the call and the put are out-of-the-

money.

To "buy a s t rangle" is to purchase a cal l and a put

with the same expiration date, but different exercise

prices. Usually the call strike price is higher than the

put strike price.

To "sell a strangle" is to write a call and a put with

the same expiration date, but different exercise

prices.

A trader, viewing a market as stable, should: write

strangles.

A "strangle sale" al lows the trader to profi t from a

stable market.

The investor ' s profi t potent ia l i s : unl imited.

If the market remains stable, investors having out-of-

the-money long put or long call posit ions will lettheir opt ions expire worthless .

The investor ' s potent ia l loss is : unl imited.

If the price of the underlying interest rises or fal ls

instead of remaining stable as the trader anticipated,

he will have to deliver on the call or the put.

The breakeven points occur when market price a t

expiration equals. . . the high exercise price plus thepremium and the low exercise price minus the

premium.

The t rader is short two posi t ions and thus, two

breakeven points. One for the call (high exercise





The investor 's potential loss is: l imited.

The maximum loss is l imited to the net premium paid

and is realized when the market price of the

underlying asset is higher than the high exercise

price or lower than the low exercise price.

The breakeven points occur when the market price a t

expiration equals . . . the high exercise price minus

the premium and the low exercise price plus the

premium. The strategy is profi table when the market

price is between the low exercise price plus the net

premium and the high exercise price minus the net

premium.



QUESTIONNAIRE

ARE YOU

(a) Salaried (c)Pro

(b) Self Employed (d)

YOU BELONG TO AGE GROUP

(a 18-2 5 years (

(b) 25-35 years (d)

DO YOU INVEST

(a) YES

WHICH TYPE OF INVESMENT YOU PREFFER

(a) Banking

(b) Capital market (d



IF CAPITAL MARKET, THEN

(a) Equity

IF IN DERIVATIVES

(a) Futur e

HOW YOU BECOME AWARE ABOUT CAPITAL

MARKET

(a) Newspaper

(b) So cial Circle

WHY DO YOU INVEST IN DERIVATIVES

MARKET

(a) Hedging

(b) Speculat ion

ARE YOU SATISFIED WITH YOUR INVESTMENT

(a) Yes

PEOPLE WHO SURVAYED



35% Surveyed people re la ted to the age group of 18-

25


35


50

10% Surveyed people re la ted to the age group of

above 50

SALARIED 20

SELF EMPLOYED 30

PROFESSIONAL 20

OTHERS 30



Percentage of investors

YES 90

NO 10

90% of surveyed people invested in different investment

10% of surveyed people don¶t invest in any kind of

investment



INVESTMET DONE BY

THE PEOPLE

35% Of

investment

done by the

people in

banking

20% Of Investment done by the people in Mutule

Fund

20% Of Investment done by the people in Capital

Market

25%Of Investment done by the people in the others

(post off ice securi t ies , land etc)

BANKING 35

MUTUAL FUNDS 20

CAPITAL MARKET 20

OTHERS 25



PERCENTAGE OF

INVESTORS IN

CAPITAL MARKET

60% Of capital investors invest in the Equity

market

40% Of capital market investors invest in the

Derivatives

WAY FROM THEY AWARE

ABOUT CAPITAL MARKET

EQUITY 60

DERAVITIVES 40

NEWSPAPER 15

TELEVISION 30

SOCIAL CIRCLE 40

OTHERS 5



17%Of investors aware about capi ta l market through

News Paper

33%Of investors aware about capi ta l market through

Television

44% Of investors aware about capi ta l market through

Social Circle

6% Of investors aware about capi ta l market through

Others .

REASON FOR INVEST IN

THE DERIVARIVES

10% Of investors invest in the derivatives for Hedging

20% Of Investors invest in the Derivat ives for Arbi t rage

40% Of Investors invest in the Derivat ives for Speculat ion30%

Investors

invest in the Derivatives for All Above

HEDGING 10

ARBRITAGE 20

SPECULATION 40ALL ABOVE 30



SETISFACTION FROM THE

INVESTMENT

90% Of people are satisfied with

there investment

10% Of people are unsatisfied with

there investment

YES 90

NO 10



FOR INTRODUCTION OF EXCHANGE

TRADED INTEREST RATE DERIVATIVE

CONTRACTS

This c i rcular is being issued in exercise of powers

conferred by sect ion 11 (1) of the Securi t ies and

Exchange Board of India Act , 1992, read with

sect ion 10 of the Securi t ies Contracts(regulat ion)

Act 1956, to protect the interests of investors in

securi t ies and to promote the development of , and

to regulate the securit ies market.

SEBI, in consul ta t ion with the Government and theReserve Bank of India (RBI) has decided to

introduce Exchange Traded I nterest Rate Derivat ive

Contracts in the Indian Securit ies Market. It has

also been decided that to begin with futures

contracts shal l be int roduced on a Not ional

Government Securi ty with a 10 year maturi ty and a

Notional Treasury Bill with a maturity of 91 days or

three months.

SEBI Group on Secondary Market Risk

Management (RMG) considered the specif icat ion of

the init ial set of interest rate derivative contracts to

be introduced and the r isk containment measures to

be adopted for such derivat ive contracts . The

recommendat ions of the RMG were a part of a

µConsul ta t ive Document¶ prepared by the RMG and

placed on the SEBI web si te for public comments.The recommendat ions of the RMG as regard the

derivat ive contract and the r isk containment

measures were also placed before the SEBI Board.

The r isk containment measures and the scheme for

introduct ion of futures contracts on a Not ional

Government Securi ty with 10 year maturi ty



(hereinafter referred to as a Long Bond Future) and

a Notional Treasury Bill (hereinafter referred to as

a Notional T-Bill Futures) are as follows-

I) PRODUCT SPECIFICATION

1) The Interest Rate Derivat ive Contracts to be

traded on the derivat ive exchange/segment and

set t led through the Clearing house/corporat ion of

the Exchange (herein after col lect ively referred to

as Exchange) shal l have prior approval of SEBI.

The Contract should comply with the disclosure and

other requirements , i f any, specif ied by SEBI fromtime to t ime.

2) The minimum contract size of the Interest Rate

Derivat ive Contract shal l not be less than Rs. 2,

00,000/- at the t ime of i ts launch.

3) The Exchange shal l ini t ia l ly int roduce Long

Bond Futures and Notional T-Bil l Futures. The

not ional underlying could be a coupon bond or/and

a zero coupon bond. The Exchange shall specify the

coupon rate and disclose the same to the market

prior to introduction of the contracts. The features

of the notional bonds, including the coupon rate

shall , however, be disclosed to the market in

advance and form a part of the contract

specification.

4) The bonds may be quoted on the basis of prices,

yields or 100-yield, init ial ly up to 2 decimal points

and within two months of the int roduct ion of the

contract , up to 4 decimal places.

5) Long Bond Futures and Notional T- Bill Futures

shall init ial ly be cash sett led.



6) The Exchange shall introduce futures contract

on the notional bonds up to a maturity of one year.

The Exchange shal l decide whether to have

quarterly contracts beyond the f i rs t three months,

and whether the quarters should be f ixed months of

the year or roll ing quarterly horizon from the

contract introduction date.

7) The final se tt lement pr ice of the Lo ng Bon d

Future and the Not ional T-Bil l Future shal l be

determined using a µzero coupon yield curve¶. The

µzero coupon yield curve¶ shal l be computed from

the prices of Government Securi t ies t raded on the

Exchange/s or reported on the Negot ia ted Deal ingSystem of RBI, or both.

The µzero coupon yield curve¶ may be computed by the

Exchange or by any other yield curve provider designated

by the Exchange. As regard the computat ion of the zero

coupon yield curve, the Exchange shal l ensure the

fol lowing:

i) The yield curve should be compute d by an

objective process without any element of human judgment

so that any market part icipant could arrive at the same

yield curve by applying the publ ished computat ion

algori thm to publ ic ly avai lable data .

i i ) The computat ion algori thm, including the source

code should be ful ly disclosed to the publ ic and made

avai lable on the websi te of the Exchange, under a GNU

General Public License or under any other l icense that is

not more restrict ive than the General Public License. This

requirement shal l a lso extend to source codes and

algori thm in any pre and post processing that may be

carried out before or after the actual est imation i tself.



i i i ) The Exchange shal l make avai lable on the web si te

a set of at least 25 trading days (i .e. one month) of data

sui tes for the input data . Each day¶s data sui te shal l

include traded prices and other transaction data that is

input into the est imat ion / pre-processing/post-procession

algorithm.

iv) The full t ime-series of yield curve parameters shall

be made available on the web si te of the xchange/yield

curve provider, for a period extending back at least to

Apri l 1, 1999.

v) Major changes in the est imat ion process shal l be

implemented after giving due not ice to the market and

providing the appropria te back tests .

vi) For the Long Bond Future, the estimation shall

target , within a period of six months from the date of

launch of futures contract , a mean pricing error for l iquid

bonds of not more that 2 basis points of yield for al l

l iquid bonds. The mean pric ing error would be calculated

as the s imple ari thmetic mean over a one month period of

the dai ly mean pric ing errors , which in turn shal l be

calculated as the simple ari thmetic mean of the absolute

pricing errors (in basis points of yield) of the bonds that

were l iquid on that day. Liquid bonds may be defined as

those with at least 10 trades of at least one market lot

(Rs. 5 crores) on a given day.

II) RISK C ONTAINMENT MEASURES

The present port fol io based margining approach

applicable to equity derivative contracts shall also

be extended to Interest Rate Derivat ive Contracts .

The margins would be computed taking an

integrated view on the r isk on a port fol io of an

individual cl ient comprising posit ions in al l

Derivat ive Contracts including Interest Rate



Derivat ives Contracts . The parameters for r isk

containment model shal l include the fol lowing-

A) INITIAL MARGIN OR WORSTSCENARIO LOSS

The Ini t ia l Margin requirements shal l be based on

the worst scenario loss of a portfolio of an

individual c l ient to cover 99% VaR over one day

horizon across various scenarios of price changes,

based on the volati l i ty estimates, and volati l i ty

changes. The volat i l i ty est imate or s tandard

deviat ion shal l be calculated as per theexponent ia l ly weighted moving average

methodology specif ied in the Prof. J . R Varma

Commit tee Report on the Risk Containment

Measures for Index Futures.

B) CALENDAR SPREAD CHARGE

The Calendar Spread Margin is charged in addi t ionto the Worst Scenario Loss of the portfolio. For

interest ra te futures contracts a calendar spread

margin shall be at a flat rate of 0.125% per month

of spread on the far month contract subject to a

minimum margin of 0.25% and a maximum margin

of 0.75% on the far s ide of the spread with legs

upto 1 year apart .

C) EXPOSURE LIM ITS

The not ional value of gross open posi t ions a t any

point in t ime in Futures Contracts on the Not ional

10 year Bond shal l not exceed 100 t imes the

available l iquid networth of a member. Therefore,





compute the zero coupon yield curve on a real t ime

basis or at least several t imes during the course of

the day. Margins computed on the basis of the la test

available yield curve shall be applied to

member/cl ient port fol ios on a real t ime basis .

Exchanges may also choose to compute the end of

day margins on the basis of a provisional yield

curve (for example based only on t+0 t rades)

because the final end of day yield curve becomes

available only late in the evening. If so, exchanges

shal l specify and disclose the condi t ions under

which a margin call shall be made next morning to

deal wi th large deviat ions between the provisional

and final yield curves. It is expected that such intraday margin cal ls shal l be necessary only on a smal l

number of days each year.

E) MARGIN CONDENSEMENT AND

ENFORCEMENT

As prescribed in the case of index futures contract ,the mark to market set t lement margin for Interest

Rate Futures Contracts shall be collected before

start of the next day¶s trading, in cash. If mark to

market margins is not collected before start of the

next day¶s t rading, the c learing corporat ion/house

shall collect correspondingly higher init ial margin

to cover the potential for losses over the t ime

elapsed in the collection of margins. The higher

init ial margin shall be calculated in the same

manner as specified in the

The dai ly c losing price of Interest Rate Futures

Contract for Mark to Market set t lement would be

calculated on the basis of the last half an hour

weighted average price of the contract . In the



absence of t rading in the last half an hour the

theoretical price would be taken. The exchange

shal l define and disclose the methodology of

calculating the µtheoretical price¶ and include i t as a

part of the contract specif icat ion. In addi t ion, the

exchange shal l a lso specify the detai led

methodology, with examples, for arr iving at the

closing price at the t ime of expiry.

The ini t ia l margin (or the worst scenario loss) p lus

the calendar spread charge shal l be adjusted against

the available Liquid Networth of the member. The

members in turn shall collect the init ial margin

from their cl ients.

F) POSITION LIMITS

In the case of Interest Rate Futures Contracts,

posit ions l imits shall be specified at the client level

and for near month contracts. The client level

posi t ion l imits shal l be Rs. 100 Cr or 15% of Open

Interest whichever is higher.

G) RISK CONTAINMENT MEASURES IN THE

EVENT OF STRESS

The extreme st ress events are diff icul t to predictthough the early warning signals could be noted by

the clearing corporat ion, in which case the c learing

corporat ion should respond on i ts own ei ther by

reducing posi t ions or by rais ing margins to

prohibit ive levels



III) The Derivat ive Exchange/Segment shal l submit their

proposal for approval of the Contracts to SEBI

which shal l include:

a) the detai ls of proposed derivat ive contract to be

traded on the exchange which would include:

i) Symbol

i i ) Underlying - The defini t ion of the underlying would

include the specif icat ion of the yield curve p rovider

and the broad methodology for yield curveestimation.

i i i) Multiplier

iv) Last Trading Day

v) Margins, including procedure for int ra-day or

beginning of day margin calls, i f any.

vi) Methodology for calculat ing closing price for

mark to market sett lement.

vi i ) Methodology for calculat ing closing price a t

t ime of expiry

b) Trading Hours the economic purpose i t i s

intended to serve

c) likely contribution to market development,

d) the safeguards and the r isk protect ion

mechanism adopted by the exchange to ensure

market integri ty, protect ion of investors and s mooth

and orderly t rading,



e) the infrast ructure of the exchange and the

survei l lance system to effect ively moni tor t rading

in Interest Rate Derivative Contracts,

f) details of sett lement procedures & systems with

regard to Interest Rate Derivative Contracts,

g) details of the methodology used for computing

the zero coupon yield curve, and

h) details of back test ing of the margin calculation

and the mean pric ing error for a period of one year

Scheme of FII Trading in al l Exchange TradedDerivative Contracts

RBI had vide circular EC.CO.FII/

/11.01.01(16)/2000-01 dated August 7, 2000

permit ted Foreign Inst i tut ional Investors (FIIs) to

t rade in exchange t raded index futures contracts on

the Derivative Segment of BSE and the F & O

Segment of NSE provided the overal l open interest

of the FII would not exceed 100% of market valueof the concerned FII 's total investment.

The SEBI Board vide meeting dated December 28,

2001 has permitted FIIs to trade in all exchange

traded derivat ive contracts and la id down the

posit ion l imits for the trading of FIIs and their sub-

accounts . RBI vide ci rcular

ECO.CO.FII/515/11.01.01/(16) 2000-01 dated

February 4, 2002 permit ted FIIs to t rade in a l l the

exchange t raded derivat ive contracts subject to the

posi t ion l imits prescribed hereunder. The FIIs shal l

be under obl igat ion to adhere to the posi t ion l imits

prescribed for them and their sub-accounts . The FIIs

shal l a lso comply with the procedure for t rading,

set t lement and report ing as prescribed by the



derivat ive exchange / Clearing House / Clearing

Corporation from time to t ime. The posit ion l imits

for FII and their sub-accounts shal l be as under:

I POSITION LIMITS

At the level of the FII

In the case of index rela ted derivat ive products

there shal l be a posi t ion l imit a t the level of FII a t

15% of the open interest of al l derivative contracts

on a part icular underlying index or Rs. 100 crores

whichever is higher, per exchange.

The FII posit ion l imit in derivative contracts on a

part icular underlying stock would be at 7.5% of the

open interest of al l derivative contracts on a

particular

underlying stock or Rs. 50 crores whichever is higher,

a t an exchange.

At the level of the sub-account

Each Sub-account of a FII would have the

fol lowing posi t ion l imits :

A disclosure requirement for any person or

persons act ing in concert who together own 15% or

more of the open interest of al l derivative contracts

on a part icular underlying index.

The gross open posi t ion across a l l derivat ive

contracts on a part icular underlying stock of a sub-

account of a FII should not exceed the higher of:

o 1% of the free float market capital isat ion (in

terms of number of s hares) .

or



o 5% of the open interest in the derivative

contracts on a part icular underlying stock (in terms

of number of contracts) .

This posi t ion l imits would be appl icable on the

combined posi t ion in a l l derivat ive contracts on anunderlying stock at an exchange.

The Derivat ive Segment of the Exchanges and their

Clearing House / Clearing Corporat ion

would monitor the FII posit ion l imits at the end of

each trading day. For this purpose, the Derivative

Segment of the Exchanges and their Clearing House

/ Clearing Corporat ion would implement the

fol lowing procedure for the moni toring of the FII

and the sub-account ' s posi t ion l imits :

1. The FII would be required to notify the names of

the Clearing Member/s and Custodian through whom

it would clear i ts derivative trades to exchanges and

their Clearing House / Clearing Corporat ion.

2. A unique code would be assigned by the exchanges

and / or the Clearing House / Clearing Corporat ion

to each registered FII intending to trade in

derivative contracts.

3. The FII would be required to co nfirm all i ts

posi t ions and the posi t ions of a l l i t s sub-accounts to

the designated Clearing Members onl ine but beforethe end of each trading day.

4. The designated Clearing Member/s w ould at the

end of each t rading day would submit the detai ls of

all the confi rmed FII t rades to the derivat ive

Segment of the exchange and their Clearing House /

Clearing Corporat ion.



5. The exchanges and their Clearing House / Clearing

Corporat ion would then compute the tota l FII

t rading exposure and would monitor the posi t ion

l imits a t the end of each t rading day. The

cumulat ive FII posi t ion may be disclosed to the

market on a T + 1 basis, before the commencement

of t rading on the next day.

6. In the event of an FII breaching the pos i t ion l imits

on any derivative contract on an underlying, the FII

would not be permitted by the exchanges and their

Clearing House / Clearing Corporat ion / Clearing

Member/s to take any fresh posi t ions in any

derivat ive contracts in that underlying. However,they would be permit ted to execute off-set t ing

transact ions so as to reduce their open posi t ion.

7. The FIIs whi le t rading for each sub-account would

also assign a unique cl ient code with a prefix or

suffix of the code assigned by the exchange and

their Clearing House / Clearing Corporation to the

FII. The FII would be required to enter the unique

sub-account code before execut ing a t rade on behalf of the sub-account .

8. The sub-account posi t ion l imits would be

monitored by the FII i t se l f , on the same l ines as the

trading member monitors the posit ion l imits of i ts

c l ient / customer. The FIIs would report any breach

on posi t ion l imits by the sub-account , to the

derivat ive segment of the exchange and their

Clearing House / Clearing Corporation and the FII /Custodian / Clearing Member/s would ensure that

the sub-account does not take any fresh posit ions in

any derivative contracts in that underlying.

However the sub-account would be permit ted to

execute off-set t ing t ransact ions so as to reduce i ts

open posi t ion



9. The exchanges may assign unique sub-account

codes on the l ines of unique cl ient codes to each

sub-account of a FII , which would enable the

derivat ive segment of the exchange and their

Clearing House / Clearing Corporat ion to moni tor

the posi t ion l imits specif ied for sub-accounts .

II COMPUTATION OF THE POSITION LIMITS

The posi t ion l imits would be computed on a gross

basis at the level of a FII and on a net basis at the

level of sub-accounts and proprie tary posi t ions.

The open posi t ion for a l l derivat ive contracts would

be valued as the open interest multiplied with the

closing price of the respect ive underlying in thecash market



SEBI Advisory Committee on Derivatives

Report on

Development and Regulat ion of Derivat ive Markets

in India

Submit ted to

Securi t ies and Exchange Board of India

September 2002.



SEBI Advisory Committee Derivatives

Report on

Development and Regulation of

Derivative Markets in India

1 Background

The SEBI Board in i ts meeting on June 24, 2002

considered some important issues

Relating to the derivative markets including:

· Physical set t lement of s tock opt ions and stock

futures contracts .

· Review of the e l igibi l i ty cri ter ia of s tocks onwhich derivat ive products a repermit ted.

· Use of sub-brokers in the derivative markets.

· Norms for use of derivatives by mutual funds

The recommendat ions of the Advisory Commit tee on

Derivatives on some of these issues

were also placed before the SEBI Board. The Board

desired that these issues be reconsidered by the

Advisory Commit tee on Derivat ives (ACD) andrequested a detai led report on the aforesaid issues

for the consideration of the Board. n the meantime,

several other important issues l ike the issue of

minimum contract size,

the segregat ion of the cash and derivat ive segments

of the exchange and the survei l lance

issues in the derivatives market were also placed

before the ACD for i ts consideration.

The Advisory Commit tee therefore decided to takethis opportuni ty to present a comprehensive report

on the development and regulat ion of derivat ive

markets including a review of the recommendat ions

of the L. C. Gupta Committee (LCGC). Four years

have elapsed since the LCGC Report of March 199 8.

During this period there



have been several s ignif icant changes in the

structure of the Indian Capital Markets which

include, demateria l izat ion of shares, rol l ing

sett lement on a T+3 basis, cl ient level and Value at

Risk (VaR) based margining in both the derivative

and cash markets and Proposed demutual izat ion of

Exchanges. Equity derivative markets have now

been in Existence for two years and the markets

have grown in s ize and diversi ty of products .

This therefore appears to be an appropriate t ime for

a comprehensive review of the Development and

regulation of derivative markets.

2 Regulatory Objectives

The LCGC out l ined the goals of regulat ion

admirably well in Paragraph 3.1 of i ts report . We

endorse these regulatory principles completely and

base our recommendat ions a lso on these same

principles . We therefore reproduce this paragraph of

the LCGC Report : .2 ³The Commit tee bel ieves thatregulat ion should be designed to achieve specif ic ,

wel l -defined goals . I t i s incl ined towards posi t ive

regulat ion designed to encourage heal thy act ivi ty

and behaviour. I t has been guided by the fol lowing

object ives:

(a) Investor Protection: Attent ion needs to be

given to the fol lowing four aspects:

(i) Fairness and Transparency:

(ii) Safeguard for c l ients¶ moneys:

(i i i) Competent and honest service:

(iv) Market integrity:









Limitation

Dividends are ignored in the basic Black-Scholes

formula, but there are a number of widely used

adaptat ions to the original formula, which I use in

my models, which enable i t to handle both discrete

and cont inuous dividends accurately.

However, despi te these adaptat ions the Black-

Scholes model has one major l imitation: i t cannot

be used to accurately price opt ions with an

American-style exercise as i t only calculates the

opt ion price a t one point in t ime -- a t expirat ion. I t

does not consider the s teps a long the way where

there could be the possibi l i ty of early exercise of a n

American opt ion.

As al l exchange t raded equi ty opt ions have

American-style exercise (ie they can be exercised at

any t ime as opposed to European opt ions which can

only be exercised at expirat ion) this is a s ignif icant

l imitation.

The exception to this is an American call on a non-

dividend paying asset . In this case the cal l i s a lways

worth the same as i ts European equivalent as there

is never any advantage in exercising early. As

ment ioned before the main disadvantage of the

binomial model is i ts relatively slow speed. It 's

great for half a dozen calculations at a t ime but

even with today's fastest PCs i t 's not a practicalsolution for the calculation of thousands of prices

in a few seconds which is what 's required for the

product ion of the animated charts in my st ra tegy

evaluation model



VINAYAKA MISSION RESEARCH FOUNDATION,

DEEMED UNIVERSITY,

SALEM (TAMILNADU)

ENROLLMENT NO. R022AP319A019

NAME

TITLE OF THE PROJECT INVESTORS AWARENESS

ABOUTDERIVATIVE

IN CAPITAL MARKET

SUBJECT AREA

RESEARCH SUPERVISOR MR. AJ

DESIGNATION

INSTITUTION

SECTOR-32C

Chandigarh

SIGNATURE OF STUDENT



BIBLIOGRAPHY

1. Economic Times

2. www.nseindia.com

3. www.google.com

4. www.bseindia.com

5. Business Standard



RESUME

NAME AJAY SHARMA

DESIGNATION LECTURER IN COMMERCE COLLEGE G.G.D.S.D. College, Sector 32-C, Chandigarh ADDRESS 226, Sector 46-A, Chandigarh. SEX Male AGE 26

MARITAL STATUS Married PHONE NUMBER 98720-81199(Mobile), 0172-600090(College)

PUBLICATION1. Business Tax Law (2001) by Kalyani Publication.2. Central Sales Tax, (1956) by Kalyani Publication.3. Indirect Taxes (2002) by Kalyani Publication.

4. Indirect Taxes (2002)- Andra by Kalyani Publication.5. A few Punjabi Stories published in Preetlari6. Himachal Sales Tax (2002) by Kalyani Publication.7. Fourteen editions of Indirect Taxes for Graduate students of

different universities

8. Including PU, Chandigarh.9. A book on Investment Management is under Print.

RESEARCH PAPERS/ SEMINARS

1. Presented research paper at national level seminar on Indian Corporate

restructuring, K.U. in Kurukshetra in Feb. 19992. Attended Industry-Academic meet at K.U. Kurukshetra in dec.2000.3. Presented two research papers at regional level seminar at G.G.D.S.D

College, Chd. On higher eduction reforms.4. Attended Contemporary issues in Finance, Insurance and Business

organized by ICFAI Hydrabad.5. Participated in Curriculum development of commerce organized by

Board of Study, U.B.S.,PU. Chandigarh.



6. Resource Person at workshop on practical training to commercestudents at D.A.V. College Jalandhar.

7. Resources Person of topic of ³Scientific technology and attitude´ atseminar organized by Dev Samaj College, Sector 45-C, Chandigarh

8.

Participated in seminar at GGS Khalsa College and deliberate on the

topic ³Punjab Economy-Retrospect and Prospect.´9. Participated in seminar on Logistic Management Organized by

University Business School, Punjab University, Chandigarh.10. Attended orientation programme at Academic Staff College, Himachal

University, Shimla

ADMINISTRATIVE EXPERIENCE

1. Coordinating UGC NET Orientation Classes in College for last 2 years.2. Warden, G.G.D.S.D. Hostel, Chd for last 5 years.3. Member of NAAC committee, Academic committee, Committee for

College with Potential for Excellence, Works Committee, CollegesContract Committee, Prize Distribution Committee, Audio-VisualSociety, Personality Development programme and career counselingcell and placement cell.

4. Has served as President, Finance Secretary, General Secretary of Commerce Forum, D.A.V. College, Jalandhar, as multi-purpose subjectsociety.

RESEARCH SUPERVISION

Has guided more than 100 Post-Graduate Research Projects.

VISITING ASSIGNMENTS1. Visiting lecturer at Zed CA(K.U. KURUKSHETRA) for Msc (IT),

MCA and PGDCA.2. Visiting lecturer at Education Solution (Punjabi University, Patiala) for

M.Sc(IT), MCA3. And PGDCA.4. Visiting lecturer for Himachal University, Shimla for M.Com, B.Com

(Correspondence Classes).5. Visiting lecturer for MHRM of Pondichary University.6. Guest Lecturer at Punjab Co-operative Training Institute, Sec-7C, Chd.

For Indirect Texation Academic counselor for G.J. University, Hisar.



EDUCATIONAL QUALIFICATION

M.C.B.A. 84.6% D.A.V. College,Jalandhar

G.N.D.U. WithDistinction

B.Com 72% D.A.V. College,

Jalandhar

G.N.D.U. With

Distinction

NET (UGC) QUALIFIED



CERTIFICATE / DECLARATION

Certified that the report enti t led Investors Awarness About

The Derivative In Capital Market submit ted by Anjana

Bansal in the part ial fulfi l lment for the award of

MBA

Ajay Sharma Lecturer of S D col lege is a record of s tudents

own work carr ied out her under my guidance and supervision. I

solemnly declare that the work done by is original and no copy

of i t has been submit ted to any other Universi ty for award of

any other degree, diploma, and fellowship on similar t i t le.

Signature of candidate

Date post:	08-Apr-2018
Category:	Documents
Upload:	rock-on
View:	214 times
Download:	0 times

derivativeAnjana Bansal MBA Report

Documents