Risk Management Through Derivative in Indian Stock Market

7/31/2019 Risk Management Through Derivative in Indian Stock Market

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A

Project Report

on

RISK MANAGEMENT THROUGH

DERIVATIVE IN INDIAN STOCK MARKET

Never put all eggs in a single basket

23-Aug-12 [email protected]

Submitted by: Mr. Himanshu Rastogi

GM 11058


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INDIA INFOLINE GROUP


The IIFL (India Infoline) group, comprising the holdingcompany, India Infoline Ltd (NSE: INDIAINFO, BSE:532636) and its subsidiaries, is one of Indias premierproviders of financial services.

IIFL offers advice and execution platform for the entirerange of financial services covering products rangingfrom Equities and derivatives, Commodities, Wealthmanagement, Asset management, Insurance, Fixeddeposits, Loans, Investment Banking, GoI bonds andother small savings instruments.


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India Infoline Diversification

Equities

Private Wealth Management

Investment BankingCredit & Finance

IIFL Mutual Fund

Life Insurance, Pension and other FinancialProducts

23-Aug-12 [email protected] 3


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Vision Statement :

Our vision is to be the most respected

company in the financial

services space.



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CORPORATE STRUCTURE

India Infoline Investment Services

India Infoline Marketing&Services

India Infoline Commodities

India Infoline Media& Research Services

IIFL (Asia) Pte

IIFL Wealth Management

IIFL Realty

IIFL Capital

IIFL Ventures

Moneyline Credit

India Infoline Housing

Finance

India Infoline

Distribution Co.

India Infoline Insurance

Services

India Infoline InsuranceBrokers23-Aug-12 [email protected]


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IIFL Business Model

Equities

Insurance

Credit & Finance

Wealth Management

Asset Management

Investment Banking


Huge

money


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Management Team

Chairman & Managing Nirmal Jain

DirectorH. Nemkumar

Investment BankingAjit Menon, Donald DSouza

Consumer Finance Apul Nayyar

Retail BrokingNandip Vaidya

Wealth ManagementKaran Bhagat

International Operation Bharat Parajia

Offshore Asset Management Deepesh Pandey, Manish

Srivastava

Insurance Distribution Deepesh Pandey, ManishSrivastava


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BUSINESS NETWORK

Domestic Presence

A network of over 2,500 business locations

spread over more than 500 cities and towns

across India facilitates the smooth acquisition

and servicing of a large customer base.

Our Global Presence:

Also prevailed in USA, Dubai, Singapore etc.



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SWOT ANALYSIS

STRENGTHS

Large retail customer base

Value-for-money proposition for customers

Strong research which picks winners

Bouquet of asset & liability products Wide branch network across India

OPPORTUNITIES

Booming financial services sector

Institutional broking Wealth management

Leverage network for more products



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THREATS

Large players foraying into the space Replicable product offering

Market dependence

Manpower retention

WEAKNESS

Does not have a bank in the group

Rural area have not facility of internet

connection



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FINANCIAL RESULTESULTS

FINANCE DEPARTMENT

Mar'06 Mar '07 Mar '08 Mar '09 Mar '10

12mths 12 mths 12 mths 12 mths 12 mths

Sources Of Funds

Total Share Capital 45.10 50.17 57.10 56.68 57.04

Equity Share Capital 45.10 50.17 57.10 56.68 57.04

Share Application Money 4.42 4.42 59.77 11.37 0.40

Preference Share Capital 0.00 0.00 0.00 0.00 0.00

Reserves 123.83 235.18 932.75 980.13 1,050.67

Revaluation Reserves 0.00 0.00 0.00 0.00 0.00

Networth 173.35 289.77 1,049.62 1,048.18 1,108.11

Secured Loans 1.50 44.68 0.00 1.70 1.17

Unsecured Loans 80.89 36.27 130.57 0.10 496.58

Total Debt 82.39 80.95 130.57 1.80 497.75

Total Liabilities 255.74 370.72 1,180.19 1,049.98 1,605.8623-Aug-12 [email protected]

M 06 M '07 M '08 M '09 M '10


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Mar 06 Mar '07 Mar '08 Mar '09 Mar '10

12mths 12 mths 12 mths 12 mths 12 mths

Application Of Funds

Gross Block 8.75 73.10 98.32 143.68 108.83

Less: Accum. Depreciation 5.23 24.38 35.08 44.94 60.63

Net Block 3.52 48.72 63.24 98.74 48.20

Capital Work in Progress 0.00 0.00 0.49 4.51 1.75

Investments 100.25 171.45 915.68 869.31 1,104.22

Inventories 0.00 0.00 1.31 0.56 53.76

Sundry Debtors 5.49 130.72 342.81 103.53 577.50

Cash and Bank Balance 0.15 27.12 61.62 264.10 309.86

Total Current Assets 5.64 157.84 405.74 368.19 941.12Loans and Advances 172.36 220.32 313.89 244.41 516.71

Fixed Deposits 1.95 67.96 152.75 166.15 251.98

Total CA, Loans & Advances 179.95 446.12 872.38 778.75 1,709.81

Deferred Credit 0.00 0.00 0.00 0.00 0.00

Current Liabilities 7.67 244.54 514.85 552.68 1,025.81

Provisions 20.30 51.03 156.74 148.64 232.31

Total CL & Provisions 27.97 295.57 671.59 701.32 1,258.12

Net Current Assets 151.98 150.55 200.79 77.43 451.69

Miscellaneous Expenses 0.00 0.00 0.00 0.00 0.00

Total Assets 255.75 370.72 1,180.20 1,049.99 1,605.86

Contingent Liabilities 73.00 8.00 8.00 20.85 24.17

Book Value (Rs) 37.46 56.88 173.35 36.58 38.84



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Brokerage for Delivery Brokerage for Intraday trading MMC*

SBICAP Securities 0.50% 0.05% NIL

Sharekhan 0.03% - 0.50% 0.03% - 0.10% NIL

Motilal Oswal 0.30% - 0.50% 0.03% - 0.15%

5 paisa 0.25% - 0.85% 0.07%

Angel Broking 0.50% 0.02% - 0.03%

ICICI direct 0.75% 0.15%

Indiabulls 0.25% - 0.50% 0.05% - 0.10%

HDFC Securities 0.50% 0.15%

UTI Securities 0.80% 0.15%

Religare 0.20% - 0.30% 0.02% - 0.03%

Reliance Money 0.01% 0.01% card system

Geogit 0.30% 0.03%

Indiainfoline 0.50% 0.05% -*MMC=Minimum monthly commitment.

Comparison of India Infoline Ltd. with other depositories

MARKETING DEPARTMENT



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COMPARISON

5PAISA.COM

IIFL

ICICI DIRECT RELIGARE KOTAK HDFC

Account

opening

charge

Rs.555 Rs.975 Rs.500 Rs.750

(Rs.250 credit

in account)

Rs.799

Annual

Maintenance

Charges

Nil 1st Year free

Rs.500

2nd year

onwards

Rs.250 Rs.400 1st year free

Rs.500

2nd year

onwards

BrokerageCharges

5paisa(Intraday)

50 paisa

(delivery)

Rs.15 or0.05%(Intraday)

Rs.25 or0.55%

(Delivery)

Higher of two

25 paisa(Delivery)

3paisa

(Intraday)

6paisa(intraday)

59 paisa

(Delivery)

Rs.25 or0.1%(Intraday)

Rs.25 or0.50%

(Delivery)

Higher of two



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Intraday Brokerage Charge

BROKERAGE CHARGES

Intraday Brokerage Charges

0.1

0.05

0.1

0.25

0.05

0.1 0.1

0

0.05

0.1

0.15

0.2

0.25

0.3

Indiabulls Kotak

Securities

India-infoline ICICI direct Karvy Motilal

oswal

Sharekhan

Financial Brokerage Firms

Charges

Indiabulls Kotak Securities India-infoline ICICI direct Karvy Motilal oswal Sharekhan



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Delievery Brokerage Charges

0.5

0.45

0.5

0.75

0.5 0.5 0.5

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

Indiabulls Kotak

Securities

India-

infoline

ICICI Direct Karvy Motilal oswal Sharekhan

Financial Brokerage Firms

Charges

Indiabulls Kotak Securities India-infoline ICICI Direct Karvy Motilal oswal Sharekhan

Delivery Brokerage Charges



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RATIO ANALYSISYear

Ratio

MAR10 MAR09 MAR08

GROSS PROFIT 32.28 24.57 32.97

OPERATING PROFIT 37.06 29.29 36.12

NET PROFIT 22.02 18.51 23.45

DEBT-EQUITY RATIO 0.2 0.1 0.2

CURRENT RATIO 1.0 1.1 1.2

ASSETS TURNOVERRATIO 5.5 4.1 7.9

DEBTORS TURNOVER

RATIO

2.1 2.2 2.8

EPS 4.82 3.26 21.52



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FIRST OF ALL I HAVE TAKEN TRAINING IN THE

FOLLOWING AREAS

INFORMATION OF EQUITY

CAMPAIGNING

F & O SEGMENT

RESEARCH PART

HOW TO USE HEDGING TOOLS & MODELS

TRADING ON LINE & OFF LINE

CHART TREND ANALYSIS

FACE TO FACE INTERACTION WITH CUSTOMER

HOW THE BROKERAGE & TAX IS CALCULATED

WORK I HAVE DONE INDIA

INFOLINE


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Achievements during SIP

The business I achieved in SIP is:

Total business of Rs.40,000.

I have 7 IIFL customer with me.

Total conversion 6. Got future job opportunity.

Knowledge about corporate culture

Professionalism

Interpersonal skills

Meeting with People convincing them to trade.


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RISK MANAGEMENT THROUGH DERIVATIVE

IN INDIAN STOCK MARKET


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To construct portfolio and analyses the risk return relationship.

To hedge the most profitable portfolio.

To construct a diversified portfolio and risk reduction by usingindex futures.

To find out extant to which loss can be reduced by applying

hedging strategies.

To determine whether the hedger enjoys better returns from theuse of hedgers.

To identify how much reduction in risk is possible.

To find out the extend of loss due to misjudgment on index

movements .

OBJECTIVE OF THE STUDY


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Size of Derivative Exchanges

0

100

200

300

400

500

600

700800

900

millioncontracts

Eurex Euronext CME CBOE CBOT AMEX

Top-8 Derivative Exchanges (volume)

KSE: 855m (2001) ; 1930m (2002)Value $1,800 bn (#5)

KSE BM&F

BM&F: 101m (2002)Value $3,200 bn (#4)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

CMES&P500

EurexDAX

CMENasdaq

EurexSTOXX

EuronextCAC40

EuronextFTSE

OsakaNikkei

Top-8 Equity Index Futures (value)

billionUS$

KSEKOSPI

KSE:market-cap $216 bn (#14 ; 10% Tokyo, 60% Sydney)

Cash trading $593 bn (#12 ; 40% Tokyo, 200% Sydney)

Futures trading $1680 bn (#3 ; 200% Nikkei)

0

20

40

60

80

100

120

140

160

180

millioncontracts

CMEEuro$

EuronextEuribor

EuronextSterling

SGXEuro$

KOFEXKTB

MexderInterest

Top-8 Interest Rate Futures (volume)

BM&FDI-future

BM&F: DI-futures 44m (2001) ; 71m (2002)

Value $1,180 bn (DI) + $680 bn (DDI)

+ $850 bn (US$ futures)

Brazil: government dom debt $180 bn

BM&FDDI-$

0

100

200

300

400

500

600

700

800

900

billionUS$

BM&FUS$

CMEEuro

CMEYen

CMECHF

CMECAD

CMEGBP

CMEMXP

Top-8 Currency Futures Exchanges (value)

Sources: FIBV (2001) ; KSE, KOFEX, BM&F (2002)

KOFEXUS$

KOFEX: $75 bn USD futures trading (#7)

KTB futures trading $1,120 bn (#6) + OTC

KTB cash trading $39 bn (Israel, Ireland)

Korea: government dom debt $100 bn



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Introduction of derivatives in the Indian capital marketis the beginning of a new era , which is truly exciting.Derivatives, worldwide are recognized riskmanagement products. These products have a long

history in India, in the unorganized sector , especiallyin currency and commodity markets. The availability ofthese products on organized exchanges provided themarket participants with broad based risk managementtools.

This study mainly covers the area of hedging andspeculation. The main aim of the study is to prove howrisks in investing in equity shares can be reduced andhow to make Maximum return to the other investment.

SCOPE OF THE STUDY


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IMPORTANCE OF THE STUDY

It helps the researcher to construct a

diversified portfolio.

Provide an insight on return and risk analysis.

It helps to make a general study on derivatives.

It helps to identify and reduce by using

hedging strategies and speculation.



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LIMITATION OF THE STUDY

While applying the strategies, transaction cost and

impact cost are not taken into consideration. so, it

will reflect in the profit calculation on each month of

the study. Data were collected only on the basis of NSE trading.

Hedging strategy is applied on historical data. so the

direction of each trend in the stock market is known

before hand for the period selected. As a result, some

bias could have been done for the application of

hedging strategy.



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The following findings are made on the basis of data analysis from the project:

1. The study reveals the effectiveness of risk reduction using hedging

strategies. It has found out that risk cannot be avoided. But can only be

minimized.

2. Through the study, it has found out that, the hedging provides a safe positionon an underlying security. The loss gets shifted to a counter party. Thus the

hedging covers the loss and risk. Sometimes, the market performs against

the expectation. This will trigger losses. So the hedger should be a strategic

and positive thinker.

3. The anticipation of the hedger regarding the trend of the movement in the

prices of the underlying security plays a key role in the result of the

strategy applied.

FINDINGS



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4. It has been found that, all the strategies applied onhistorical data of the period of the study were able to

reduce the loss that rose from price risk substantially.5. If the trader is not sure about the direction of the

movement of the profits of the current position, he cancounter position in the future contract and reduces thelevel of risks.

6. The trader can effectively use the strategy for returnenhancement provided he has the correct marketanticipation.

7. In general, the anticipation of the strategies purely for

return enhancement is a risky affair, because, if theanticipation about the performance of the marketand the underlying goes wrong, the position takerwould end up in higher losses.



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CONCLUSION

Derivatives could be complex, and they have quite often been criticizedfor having been the source of large losses by some corporations. But are theinstruments really at fault? Chance answers this with the aid of anotherquestion: is electricity at fault when someone with little knowledgemishandles it?

Derivatives are powerful instruments with a high degree of leverage, thuslarge gains or losses can result from small price changes. Thus an effectiveuse demands the following:

Having the requisite knowledge of its structure and applicability.

The reason for using it should be properly understood; there could be ahigh appeal to use it for speculation instead of for hedging, and this couldbe very dangerous.

The appropriate type of derivative should be selected for differentsituations.



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Thanks for being patience23-Aug-12 [email protected]

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Risk Management Through Derivative in Indian Stock Market

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