8/9/2019 Altered Project
1/96
A Project Report
On
Study On
Capital market & Derivatives
At
Angle broking
By
Srinivas kandula
Under the guidance of
Dr Subodh joshi
Submitted to
University of Pune
In partial fulfillment of the requirement for the award of the degree ofMaster of Business Administration (MBA)
Through
Institute of Business Management (I.BM.R) Chinchwad Pune- 411019
8/9/2019 Altered Project
2/96
DECLARATION
I, Mr.__Srinivas Kandula______ here by declare that this project report is the record ofauthentic work carried out by me during the period from __1/6/09____ to _31/7/09 andhas not been submitted to any other University or Institute for the ward of anydegree/diploma etc.
Signature :
Name of the Student : Srinivas Kandula
8/9/2019 Altered Project
3/96
ACKNOWLEDGEMENT
It is very important for me to put forward my sincere gratitude to Mr. SameerAmrute. I am thankful to him for not only giving me this excellent project but also forpatiently answering to all my queries during the period, even after having very busyschedules.
I would like to put forth my earnest thanks to my internal project guide Prof DrSubodh Joshi for providing me vital inputs to co-related the present project work withtheoretical and practical concepts and hence provide a sound base to the report structure.
Lastly, I would like to thank my entire friend for all the co-operation and God forgiving me the strength to move on when the times were difficult.
This project was not just a professional training for me, but an academic learning
on the exposure in area of Capital and Derivatives Market, which has become an area ofinterest for me.
It was a pleasure to be associated with Angel Group. The experience that I havegarnered has had a profound impact on my career choices.
Srinivas kandula
8/9/2019 Altered Project
4/96
EXECUTIVE SUMMARY
Capital Market is a source of long Term Capital generation for a company. And it is acheap source of capital generation for the Company. Over a Period, all the companiesthose want to expand their business globally have issued shares to the public , High NetWorth Individual , Qualified Institutions Buyer , Private Equity Fund in the form of
Initially Public offering (IPO) Or follow on Public offer (FPO).
Derivatives are financial contracts whose value is derived from some underlying asset.These assets can include equities, bonds, exchange rates, commodities, and interest rate.The more common forms of these contracts include forward, futures, options and aconsiderable portion of financial innovation over the last 30 years has come from theemergence of derivative markets. Generally, the benefits of derivatives fall into the areasof (I) hedging and risk management, (II) price discovery, and (III) enhancement ofliquidity.
Capital Market and Derivatives Market is a sign as how overall Economy is performing.
If the worlds economy is performing well along with other countries economy thenCapital Market & Derivative Market will perform Better and will give Investor a goodprofit .If the World economy is in recession and other countries economy is also inrecession it will replicate on Capital Market.
Investor who invest in Capital Market are of two types (I) short term (2) Long TermShort Term investors are investors who invest in shares for minimum for 1 day andmaximum 1 year. Long term investors are those who invest for more than 1 year.Investor who want to invest for short term should take the help of technical charts andinvestor who want to invest for long term like for 5 year or more should look at thefundamental of the company eg net profit , debt equity ratio. Revenue, price earning
ratio, dividend Yield ratio etc.
8/9/2019 Altered Project
5/96
LIST OF FIGURES
8/9/2019 Altered Project
6/96
LIST OF FIGURES
1) Pie chart of Major terminals located in Major cities (figure 1)
2) Bar diagram of Branches in each region (figure 2)
3) Bar diagram of sub-brokers present in reach region (figure 3)
4) Pie diagram of companies trading in each market (figure 4)
5) Bar diagram of companies trading in NSE & BSE (figure 5)
6) Bar diagram of companies trading in commodities (figure 6)
7) Bar diagram of products offered by Industry (figure 7)
8) Pay off diagram for the buyer of a futures contract (figure 8)
9) Pay off diagram for the seller of a futures contract (figure 9)
10) Pay off profile for the buyer of a call options (figure 10)
11) Pay off diagram for the writer of call option (figure 11)
12) Pay off profile for buyer of put options (figure 12)
13) Pay off profile for writer of put option (figure 13)
8/9/2019 Altered Project
7/96
LIST OF TABLES
8/9/2019 Altered Project
8/96
LIST OF TABLES
1) Understanding the Index Number (fig 1.1)
2) Price weighted method (fig 2.1)3) Equally weighted Method (fig 2.2)
4) Market Capitalization Weighted Index (fig 2.3)
5) The Prominent indices provided be IISL include (fig 3)
6) Distinction between futures and forwards (fig 4)
7) Distinction between futures and options (fig 5)
8/9/2019 Altered Project
9/96
CONTENT
8/9/2019 Altered Project
10/96
8/9/2019 Altered Project
11/96
INTRODUCTION
8/9/2019 Altered Project
12/96
INTRODUCTION
Selection of the Topic:
My field of specialization is Finance I got an opportunity to undertake my project in
Angel Broking Ltd; is one of the renowned name in Broking Firm.. The topic of my
study was To study Capital and Derivatives Market . Because I want to go in Wealth
Management and Capital and Derivative Market is a important part of wealth
management. I was also interested to work on the given topic, as it was challenging task,
Because world economy was in recession and at the same time it was very interesting to
learn how the bull market and bear market comes for a short term .
As the topic suggests Firstly I studied Primary and Secondary market and I have
calculated the return given by some companies that are included in Nifty and along with
it I have studied the Derivatives which is not easy to understand but I have tried to
understand derivative market and various strategies that are applied while trading but the
time was limited I tried to learn as much as possible with in the limited time of span that
was provided to me by University of Pune.
8/9/2019 Altered Project
13/96
COMPANY PROFILE
8/9/2019 Altered Project
14/96
History of the Organization
Angel broking, Ltd provides a personal financial service in India .The Company wasfounded in 1987, and was incorporated in December 1997 and is based in Mumbai, India.
G-1Akruti trade CenterRoad N0-7, MIDCAndheri EastMumbai, 400093India
Mr. Dinesh Thakkar established Angel Broking in 1987, and today it is one of the leadingIndian stock broking houses, with a focus on retail business and a commitment to provide
real value for money to its clients.
The Angel Group is a member of the Bombay Stock Exchange, the National StockExchange, and the countrys two leading commodity exchanges, the NCDEX and MCX.Angel is also registered as a Depository Participant with CDSL.
8/9/2019 Altered Project
15/96
Angel Broking limited
Company Name Private Limited
Broad Categories Financial Services
Main Product Range Stock Exchange
Key Executives
Mr. Dinesh Thakkar
Chairman and Managing Director (Founder)
Mr. Adil Kasad
Chief Financial Officer
Mr. Rajiv Phadke
Executive Director
Mr. Hitungshu Debnath
Head of Distribution & wealth Management Services
8/9/2019 Altered Project
16/96
Products Offered
1) Electronic Broking
Broking in the form of Dematerialization .Customer can do trading at Home onHis own Personal Computer
2) Wealth Management
Managing Wealth of High Net worth Individuals (HNI). By Investing in Variousfinancial Instrument eg- Bonds, shares, Debentures etc.
3) Portfolio Management
Managing customer Portfolio by Allocating and Diversifying Investment indifferent stocks.
4) Mutual Fund
Providing Suggestion to Clients About Different Mutual Fund available in theMarket and investment in which fund will give higher Return on Investment
5) Commodities BrokingInformation about types of commodity available for trading and providinginvestment options for short term and long terms investment.
8/9/2019 Altered Project
17/96
6) Investment Advisory
Investment for retirement, financial goals, education for children. FinancialExpert with good Knowledge about financial planning are always ready to helpCustomer.
7) IPO (Initial Public Offer)
Rating and Recommendation given to Customer About investment in IPO and
FPO (Follow on Public Offer)
8) Depository Services
Member of CSDL (Central Security Depository Limited) and NSDL (NationalSecurity Depository Limited) Provides Depository services in the form ofDematerialization.
9) Private client Group
Provide Investment advice to Private client and Management of wealth of privateclients.
8/9/2019 Altered Project
18/96
Competitors
1) Motilal Oswal Financial Services
2) Unicon
3) Religare Enterprises
4) Geojit financial services
5) Share khan Pvt Ltd
6) SMC Investment
7) Centrum Broking
8) Choksey shares & security
8/9/2019 Altered Project
19/96
Achievements
Angel Group provides its value-added services to over 5 lakh individual retail investorsthrough its nationwide network of 139 branches, including 20 regional hubs, 5,200+ sub-brokers/business associates and 5,800+ direct and 15, 000 indirect employees.
Angel Broking has one of the largest trading terminal bases (11,390 terminals) inthe country, and the largest sub-broker network on the NSE. It records daily business
volumes of Rs 3,500 crores in equities, Rs 650 crores in commodities, and Rs 550 croresthrough online broking. With over 1,500 outlets connected through its state-of-the-art ITnetwork, Angel offers personalized and world-class services.
The company has top-quality, retail-focused research, as well as expert dealingfacilities. Modern, centralized helpdesks answers investor queries and address anyconcerns 24x7. Angels Web-enabled, value-added back office is staffed by a brilliantteam of experts for Quality Assurance.
Mission
Angel positions itself as a complete wealth management house a one-stop shop forfulfilling all the financial dreams of an individual .Angel is presently in the middle of anaggressive & ambitious expansion plan, which aims at penetrating and dominating theinvestment advisory market, the firm will be launching 9 new branches in the SouthRegion namely 4 in Coimbatore, 2 in Vishakhapatnam, 2 in Bangalore, 1 in Hyderabad.
8/9/2019 Altered Project
20/96
INDSUTRY PROFILE
8/9/2019 Altered Project
21/96
History of Broking Industry in India
The Indian broking industry is one of the oldest trading industries that has beenaround even before the establishment of the BSE in 1875. Despite passing through anumber of changes in the post liberalization period, the industry has found its waytowards sustainable growth. With the purpose of gaining a deeper understanding aboutthe role of the Indian stock broking industry in the countrys economy, I am presenting inthis section some of the industry insights gleaned from analysis of data received throughprimary research.
All the data for the study was collected through responses received directlyfrom the Angel broking firm and from the www.nseindia.com. The insights have beenarrived at, through an analysis on various parameters, pertinent to the equity brokingindustry, such as region, terminal, market, branches, sub brokers, products and growthareas.
Some key characteristics of the sample 394 firms are:
On the basis of geographical concentration, the West region has the maximumrepresentation of 52%. Around 24% firms are located in the North, 13% in theSouth and 10% in the East
3% firms started broking operations before 1950, 65% between 1950-1995 and32% post 1995
On the basis of terminals, 40% are located at Mumbai, 12% in Delhi, 8% inAhmedabad, 7% in Kolkata, 4% in Chennai and 29% are from other cities
From this study, I find that almost 36% firms trade in cash and derivatives and27% are into cash markets alone. Around 20% trade in cash, derivatives andcommodities
8/9/2019 Altered Project
22/96
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at
both exchanges. In the derivative segment, 48% trade at NSE, 7% at BSE and45% at both, whereas in the debt market, 31% trade at NSE, 26% at BSE and 43%at both exchanges
Majority of branches are located in the North, i.e. around 40%. West has 31%,24% are located in South and 5% in East
In terms of sub-brokers, around 55% are located in the South, 29% in West, 11%in North and 4% in East
Trading, IPOs and Mutual Funds are the top three products offered with 90%firms offering trading, 67% IPOs and 53% firms offering mutual fund transactions
In terms of various areas of growth, 84% firms have expressed interest inexpanding their institutional clients, 66% firms intend to increase FII clients and43% are interested in setting up JV in India and abroad
In terms of IT penetration, 62% firms have provided their website and around
94% firms have email facility
8/9/2019 Altered Project
23/96
Terminals
Almost 52% of the terminals in the sample are based in the Western region of India,followed by 25% in the North, 13% in the South and 10% in the East. Mumbai has gotthe maximum representation from the West, Chennai from the South, New Delhi fromthe North and Kolkata from the East.
Mumbai also has got the maximum representation in having the highest number ofterminals. 40% terminals are located in Mumbai while 12% are from Delhi, 8% fromAhmedabad, 7% from Kolkata, 4% from Chennai and 29% are from other cities in India.
The major terminals located in major cities is shown in Figure 1
Figure 1
8/9/2019 Altered Project
24/96
Branches & Sub-Brokers
The maximum concentration of branches is in the North, with as many as 40% of allbranches located there, followed by the Western region, with 31% branches. Around 24%branches are located in the South and East constitutes for 5% of the total branches of thetotal sample.
In case of sub-brokers, almost 55% of them are based in the South. West and Northfollow, with 30% and 11% sub-brokers respectively, whereas East has around 4% of totalsub-brokers.
The concentration of Branches in each region is shown figuer2
Figure 2
8/9/2019 Altered Project
25/96
The concentration of sub-brokers present in each region is shown figure 3
Figure 3
8/9/2019 Altered Project
26/96
Financial Markets
The financial markets have been classified as cash market, derivatives market, debtmarket and commodities market. Cash market, also known as spot market, is the mostsought after amongst investors. Majority of the sample broking firms are dealing in thecash market, followed by derivative and commodities. 27% firms are dealing only in thecash market, whereas 35% are into cash and derivatives. Almost 20% firms trade in cash,derivatives and commodities market. Firms that are into cash, derivatives and debt are7%. On the other hand, firms into cash and commodities are 3%, cash & debt market andcommodities alone are 2 %. 4% firms trade in all the markets.
The companies trading in each Market is shown figure 4
Figure 4
8/9/2019 Altered Project
27/96
In the cash market, around 34% firms trade at NSE, 14% at BSE and 52% trade at bothexchanges. In the equity derivative market, 48% of the sampled broking houses are
members of NSE and 7% trade at BSE, while 45% of the sample operates in both stockexchanges. Around 43% of the broking houses operating in the debt market, trade at bothexchanges with 31% and 26% firms uniquely at NSE and BSE respectively.
The companies trading in NSE & BSE is shown in figure 5
Figure 5
8/9/2019 Altered Project
28/96
Of the brokers operating in the commodities market, 57% firms operate at NCDEX andMCX. Around 20% and 21% firms are solely in NCDEX and MCX respectively, whereas2% firms trade in NCDEX, MCX and NMCE
The companies trading in commodities market is shown figure 6
figure 6
8/9/2019 Altered Project
29/96
Products
The survey also revealed that in the past couple of years, apart from trading, the firmshave started offering various investment related value added services. The sustainedgrowth of the economy in the past couple of years has resulted in broking firms offeringmany diversified services related to IPOs, mutual funds, company research etc. However,the core trading activity is still the predominant form of business, forming 90% of thefirms in the sample. 67% firms are engaged in offering IPO related services. The brokingindustry seems to have capitalized on the growth of the mutual fund industry, which waspegged at 40% in 2006. More than 50% of the sample broking houses deal in mutual fundinvestment services. The average growth in assets under management in the last twoyears is almost 48%. Company research is another lucrative area where the broking firmsoffer their services; more than 33% of the firms are engaged in providing companyresearch services. Additionally, a host of other value added services such as fundamentaland technical analysis, investment banking, arbitrage etc are offered by the firms atDifferent levels
The products offered by Industry is shown figure 7
Figure 7
8/9/2019 Altered Project
30/96
SCOPE
8/9/2019 Altered Project
31/96
SCOPE OF THE PROJECT
1) To know what is Primary & Secondary Market
2) To understand the Functioning of Call and Put
3) To Know how capital and Derivative Market Functions on National StockExchange
4) To calculate the Rate of Return on Share of good performing Company inShort Period.
5) Difference between futures and Options
6) Difference between futures and forwards
7) To Understand various Ways of Index Construction
8/9/2019 Altered Project
32/96
OBJECTIVES
8/9/2019 Altered Project
33/96
8/9/2019 Altered Project
34/96
RESEARCH METHODOLOGY
8/9/2019 Altered Project
35/96
Primary and Secondary Method
1) Primary Data
Primary data are obtained by a study specifically designed to fulfill the data needs ofthe problems at hand. Such data are original in character and are generated in largenumber of surveys conducted mostly by Government and also by some individuals,institutions and research bodies. For example, data obtained in a population census by
the office of the Registrar General and Census Commissioner, Ministry of HomeAffairs, are primary data.
Method used for collecting Primary data
a) Oral Interview
I asked few question about regarding Derivative how it is trading on screen what
are the margin payment required .What king of customer are trading in derivativemarket. What is the relation between capital and derivative market? What are thestrategies used in derivative market.
8/9/2019 Altered Project
36/96
2) Secondary Data
Data which are not originally collected but rather obtained from published orunpublished sources are known as secondary data. For example, for the office ofRegistrar General and Census Commissioner, the census data are primary whereas forall others, who use such data, they are secondary. The secondary data constitute thechief material on the basis of which statistical work is carried out in manyinvestigations.
Method used for secondary data
a) Published sources
Published sources of data is published and circulated all over. I have usedNational stock Exchange certification in Financial Market (Derivative Module)book and website like www.nseindia.com. www.derivavtivesindia.com .www.sebi.gov.in etc.
http://www.nseindia.com/http://www.derivavtivesindia.com/http://www.sebi.gov.in/http://www.nseindia.com/http://www.derivavtivesindia.com/http://www.sebi.gov.in/8/9/2019 Altered Project
37/96
DATA COLLECTIONOf
Capital Market
8/9/2019 Altered Project
38/96
Primary Market & Secondary Market
The Capital market has two interdependent and inseparable segments, the new issues(primary market) and the stock (secondary) Market.
Primary Market
The primary market provides the channel for sale of new securities. Primary market
provides opportunity to issuers of securities; government as well as corporates, to raiseresources to meet their requirements of investment and/or discharge some obligation.
They issue the securities at face value, or at a discount/premium and these securities maytake a variety of forms such as equity, debt etc. They may issue the securities in domesticmarket and/ or international market.
The primary market issuance is done either through public issues or private placement. Apublic issue does not limit any entity in investing while in private placement, the issuanceis done to select people .In terms of the Companies Act, 1956, an issue becomes public ifit results in allotment to more than 50 persons. This means an issue resulting in allotment
to less than 50 persons is private placement.
There are two major types of issuers who issue securities. The corporate entities issuemainly debt and equity instruments (shares, debentures, etc), while the government(Central and state governments) issue debt securities (dated securities, treasury bills).
8/9/2019 Altered Project
39/96
Secondary Market
Secondary market refers to a market where securities are traded after being initiallyoffered to the public in the primary market and/or listed on the stock Exchange. Majorityof the trading is done in the secondary market.
The secondary market enables participants who hold securities to adjust their holdings inresponse to changes in their assessment or risk and return.
Market Index
Traditionally, indices have been used as benchmarks to monitor markets and judgeperformance. Modern indices were first proposed by two 19 th century mathematicians:Etienne Laspeyres and Hermann Paasche. The grandfather of all the equity indices isDow Jones Industrial Average which was first published in 1896.
Stock Market Index
The stock (equity) Index which uses a set of stocks that are representative of the wholemarket, or a specified sector, to measure the change in overall behaviour of the market or
sector over a period of time.
Importance of Stock (Equity) Index
1) As the lead indicator of the performance of the overall economy or a sector of theEconomy: A good index tells us how much richer or poorer investor have become.
2) As a barometer for market behaviour: It is used to monitor and measure market
Movements, whether in real time, daily or over decades, helping us to understandEconomic conditions and prospects.
3) As a benchmark for portfolio performance: A managed fund can communicate itsObjective and target universe by stating which index or indices serve as the standardAgainst which its performance should be judged.
4) As an underlying for derivatives like index futures and option: It also underpins
8/9/2019 Altered Project
40/96
Products such as, exchange-traded funds, index funds etc. These index-relatedProducts form a several trillion dollar business and are used widely in investment,Hedging and risk management.
5) As it supports research (for example, as benchmarks for evaluating trading rules,
Technical analysis systems and analysts forecasts); risk measurement andManagement; and asset allocation
Understanding S&P Nifty Index
S&P CNX Nifty (Nifty), the most popular and widely used indicator of the stock marketin the country, is a 50-stock index comprising the largest and the most liquid stocks fromabout 25 sectors in India. These stocks have a Market Capitalization of over 50 % of thetotal Market Capitalization of the Indian stock market.
The index was introduced in 1995 by the National Stock Exchange (NSE) keeping
in mind it would be used for modern application such ass index funds and indexderivatives besides reflecting the stock market behaviour.
NSE maintained it till July 1998, after which the ownership and management rightswere transferred to India Index Services & Products Ltd. (IISL), the only professionalcompany in India which provides Index services.
8/9/2019 Altered Project
41/96
Understanding the Index Number
A Stock Index represents the change in value of a set of stocks which constitute themarket.
An Index is a summary measure that indicates changes in value(s) of a variableor a set of variables over a time or space. It us usually computed by finding the ratio ofcurrent values(s) to a reference (base) value(s) and multiplying the resulting number by100 or 1000.
E.g. - fig 1.1
Valve of Portfolio Index Value
Day 1(base day)
Rs. 20,000 1000
Day2 Rs. 30,000 1500
Assume that Day 1 is the base day and the value assigned to the base day index is 1000.On day 2 the value of the portfolio has changed from Rs 20,000 to Rs 30,000, a 50%increase. The value of the index on Day 2 should reflect a corresponding 50% increase inmarket value.
Index on Day 2 = Portfolio Value Of Day 2 * Index Value of Base DayPortfolio Value of Base day
8/9/2019 Altered Project
42/96
= Rs 30,000 *1000Rs 20,000
Day 2s index is 1500 as compared to the 1000 of day 1
Attributes of an Index
A good stock market index should have the following attributes
1) Capturing behaviors of portfolios
a) It should reflect the behavior of the overall market as well as of different
Portfoliob) It should be well- diversified index in such a manner that a portfolio is notVulnerable to any individual stock or industry risk
c). A good index should include the stocks which best represent the universe.
2) Including Liquid stocks
a) Liquid stocks are those stock who has the ability to transact at a price, which isVery close to the current market price.
E.g.- The market price of a stock is at Rs. 230, it will be considered liquid ifOne can buy some shares at around Rs 230.05 and sell at aroundRs 219.95
3) Maintaining professionally.
8/9/2019 Altered Project
43/96
a) An index is not a constant. It reflects he market dynamics and henceChanges are essential to maintain its representative character.
b) A good index methodology must therefore incorporate a steady pace
Of change in the index. It is crucial that such changes are made at a steadySpace. Therefore the index set should be reviewed on a regular basis.
Methodology for Index construction
Three are two methods to calculate Index
1) Sampling Method
2) Weighting Method
1) Sampling Method
Under Sampling Method, an index is based on a fraction or a certain percentageof select stocks which is highly representative of total stocks listed in a market.
E.g.- American Stock Market index & Hong Kong Exchange
2) Weighting Method
Under Weighting Index Method, the weight of each constituent stock isproportional to its market share in terms of market capitalization.The amount of money invested in each constituent stock is proportional to itspercentage of the total value of all constituent stocks.
E.g.- S&P CNX Nifty
8/9/2019 Altered Project
44/96
There are three commonly used methods for Constructing indices
Under Weighting Method
a) Price weighted methodb) Equally weighted methodc) Market capitalization method
A) Price weighted method
Price weighted index is computed by summing up the price, of the varioussecurities included in the index, at time 1, and dividing it by the sum of pricesof the securities at time 0 multiplied by base index value. Each stock isassigned a weight proportional to its price.
Example: Assuming base index =1000, price weighted index consisting of 5stocks tabulated below would be:
Fig 2.1
CompanySharePrice atTime- 0
SharePrice atTime- 1
Reliance 351.75 340.50
Wipro 329.10 350.30
Infosys 274.60 280.40
Hindustan Unilever 1335.25 1428.75
Tata Tea 539.25 570.25Total 2829.95 2970.20
8/9/2019 Altered Project
45/96
Index = 2970.20 *10002829.95
= 1049.5
B) Equally weighted method
An equally weighted index assigns equal weight to each stock. This isAchieved by adding up the proportionate change in the price of each stock,Dividing it by number of stocks and multiplying by base index value
Example: Assuming base index = 1000, equally weighted index consisting of 5 stockstabulated below would be:
Fig 2.2
CompanySharePrice atTime- 0
SharePrice atTime- 1
Reliance 351.75 340.50
Wipro 329.10 350.30
Infosys 274.60 280.40
Hindustan unilever 1335.25 1428.75
Tata Tea 539.25 570.25
Total 2829.95 2970.20
340.50 + 350.30 + 280.40 + 1428.75 + 570.25Index = 351.75 329.10 274.60 1335.25 539.25
8/9/2019 Altered Project
46/96
= 5.1810682 * 1000 = 1036.215
C) Market Capitalization weighted index
The most commonly used weight is market Capitalization (MC), that is, thenumber of outstanding shares multiplied by the share price at some specified time.
Index = Current Market Capitalization * Base ValueBase Market Capitalization
Current MC = Sum of (number of outstanding shares * Current Market Price) allStock in the index
Base MC = Sum of (number of outstanding shares * Market Price) all stocks in
Index as on base date
Base value = 100 or 1000
Example: Assuming base index = 1000, equally weighted index consisting of 5Stocks tabulated below would be:
Fig 2.3
CompanyCurrentMarketCapitalization(Rs. Lakh)
BaseMarket
Capitalization(Rs. Lakh)
Reliance 1668791.10 1654247.50
8/9/2019 Altered Project
47/96
Wipro 872686.30 860018.25
Infosys 1452587.65 1465218.80
Hindustan unilever 2675613.30 2669339.55
Tata Tea 660887.25 662559.30
Total 7330566.10 7311383.40
I Index = 7330566.10 * 10007311383.40
Difficulties in Index construction:
The major difficulties encountered in constructing an appropriate index are :
1) Deciding the number of stocks to be included in the index,
2) Selecting stocks to be included in the index,
3) Selecting appropriate weights, and
4) Selecting the base period and base value.
8/9/2019 Altered Project
48/96
Selection of stocks in S&P CNX Nifty
From early 1996 onwards, the eligibility criteria for inclusion of stocks in S&P CNXNifty are based on the criteria of
1) Market Capitalization (MC)
Stocks eligible for inclusion in Nifty must have a six monthly average marketCapitalization of Rs 500 core or more during the last six months.
2) Liquidity
Liquid stocks are those stocks who has the ability to transact at a price, which isVery close to the current market price
E.g. - The market price of a stock is at Rs. 230, it will be considered liquid ifOne can buy some shares at around Rs 230.05 and sell at around Rs 219.95
3) Floating Stocks
Companys eligible for inclusion is S&P CNX should have at least 12% floatingstocks. For this purpose, floating stock shall mean stock which are not held by thepromoters and associated entities (where identifiable) of such companies
8/9/2019 Altered Project
49/96
India Index Services & Products Ltd. (IISL)
IISL is jointly promoted by NSE, the leading stock exchange and The CreditRating and information services of India Ltd. (CRISIL) the leading credit ratingagency in India.
IISL has a consulting and license agreement with Standard & Poors (S&P), theleading index services provider in the world.
IISL maintains over 80 indices comprising broad based benchmark indices,sectoral indices and customized indices.
The Prominent indices provided by IISL include:
Name of the Index Description
Fig 3
Name of the Index Description
S&P CNX Nifty 50-stock large M Cap Index
S&P CNX 500 A broad based 500 stock Index
S&P CNX Defty US $ denominated Index of S&P CNX Nifty
S&P CNX Industry indices The S7P CNX 500 is Classified in 72
8/9/2019 Altered Project
50/96
industry sectors. Each such sector forms anindex by itself.
CNX Nifty Junior 50- stocks Index which comprise the nextrung of large and liquid stocks after S&PCNX Nifty
CNX PSE Index Public Sector Enterprises IndexCNX MNC Index Multinational Companies Index
CNX IT Index Information Technology Index
CNX FMCG Index Fast Moving Consumer Goods Index
CNX Madcap Midcap Index
DATA ANALYSIS
8/9/2019 Altered Project
51/96
Rate of Return
I have studied 8 sectors in that I have selected 2 companies each and have calculated Rateof Return from 1st Jan 09 to 31 July 09
Calculation of Rate of Return on Stocks from 1st Jan 09 to 31 July 09
Return On an Investment/ asset for given period, say a year, consist of annual income(dividend) receivable plus change in market price.
But
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
Where,
8/9/2019 Altered Project
52/96
Pt = Security price at time period t which is closing/ending price
Pt-1 = Security price at time period t-1 which is opening/beginning price.
1.1 Communication Sector
a) Bharti Airtel
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (783.6-719.6)* 100719.6
= 8.89%
b) Reliance Communication
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (296-245)* 100245
= 20.81%
8/9/2019 Altered Project
53/96
Reason for under performance of communication sector
Bharti Airtel merger with MTN ( South Africa based telecom company) which isfacing problem from both the country and from shareholders also on merger
The dispute between RNRL with Reliance Industry on Pricing of Gas hasaffected return on shares of both the company.
1.2 Banking Sector
a) ICICI Bank ( Industrial Credit & Investment Corporation of India Limited)
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (678-464)* 100464
= 46%
b) SBI (State Bank of India)
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (1655-1315)* 1001315
= 25.85%
Reason for out performance of Banking sector
8/9/2019 Altered Project
54/96
ICICI BANK aggressive strategy in lending with high rates has increased there net profitand NPA (Non performing assets) has Increased from 1 Jan to 31 July.
SBI lending below the benchmark has a affected the balance sheet . Currently they are
providing housing loan at 8.5% . While other Private and Cooperative Banks arecharging homes loans in the range of 10% o 15 %
1.3 IT Sector (Information Technology)
a) Infosys Technology
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (1760-1147)* 1001147
= 53.44%
b) Wipro
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (371-248)* 100248
= 49.59%
Reason for out performance of IT sector
8/9/2019 Altered Project
55/96
Both Infosys and Wipro started receiving order from USA and Europe and also fromdomestic Market also.
1.4 Power Sector
a) TATA Power
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (1101-783)* 100783
= 40.61%
b) NTPC ( National Thermal Power Corporation)
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (194-182)* 100182
= 6.59%
8/9/2019 Altered Project
56/96
8/9/2019 Altered Project
57/96
Reason for under performance of FMCG sector
Increase in Price of raw material has affected both the company due to Inadequatemonsoon and recession in developed country.
1.6 Metal Sector
a) Hindalco
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (78-54)* 10054
= 44.44%
b) Sterlite Industry
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (588-275)* 100275
8/9/2019 Altered Project
58/96
= 113.81%
Reason for out performance of Metal sector
Increase in Construction activities and revival in automobiles demand is a good sign formetal sector because it is a important items in production of automobiles and constructionactivity
1.7 Passenger Cars
a) Maruti Suzuki
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (1035-549)* 100549
= 88.52%
b) Hero Honda Motors
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (1358-879)* 100879
= 54.49%
8/9/2019 Altered Project
59/96
Reason for out performance of Commercial Vehicle sector
Both the company has concentrated on affordable cars and bikes as compared to other
company so the sales and revenue has increased inspite of recession.
1.8 Capital Goods & Engineering
a) BHEL (Bharath Heavy Electrical Limited)
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (2102.5-1401.2)* 1001401.2
= 50.04 %
b) L&T ( Larsen & Toubro )
Rate of Return (R) = (Pt-Pt-1)*100Pt-1
= (1464-821)* 100821
= 78.31%
8/9/2019 Altered Project
60/96
8/9/2019 Altered Project
61/96
Derivative
Derivative is a product whose value is derived from the value of one or more basicvariables, called bases (underlying asset, index, or reference rate), in a contractual
manner. The underlying asset can be equity, forex, commodity or any other asset.
For example, wheat farmers may wish to sell their harvest at a future date toeliminate the risk of a change in prices by that date. Such a transaction is an example of aderivative. The price of this derivative is driven by the spot price of wheat which is theUnderlying.
Factor Driving the Growth of Derivatives
Over the last three decades, the derivatives market has seen a phenomenal growth. Alarge variety of derivative contracts have been launched at exchanges across the world.
Some of the factors driving the growth of financial derivatives are:
1. Increased volatility in asset prices in financial markets,
2. Increased integration of national financial markets with the international markets,
3. Marked improvement in communication facilities and sharp decline in their costs,
4. Development of more sophisticated risk management tools, providing economic agentsa wider choice of risk management strategies, and
5. Innovations in the derivatives markets, which optimally combine the risks and returns
8/9/2019 Altered Project
62/96
Over a large number of financial assets leading to higher returns, reduced risk as wellAs transactions costs as compared to individual financial assets.
DERIVATIVE PRODUCTS
Derivative contracts have several variants. The most common variants are forwards,futures, options and swaps. A Brief look at various derivatives contracts that have cometo be used.
Forwards : A forward contract is a customized contract between two entities, whereSettlement takes place on a specific date in the future at today's pre-agreedPrice.
Futures : A futures contract is an agreement between two parties to buy or sell anAsset at a certain time in the future at a certain price. Futures contracts areSpecial types of forward contracts in the sense that the former are
Standardized exchange-traded contracts.
Options : Options are of two types - calls and puts. Calls give the buyer the right butNot the obligation to buy a given quantity of the underlying asset, at a givenPrice on or before a given future date. Puts give the buyer the right, but notThe obligation to sell a given quantity of the underlying asset at a givenPrice on or before a given date
Warrants: Options generally have lives of upto one year, the majority of options tradedOn options exchanges having a maximum maturity of nine months. Longer-Dated options are called warrants and are generally traded over-the-counter.
8/9/2019 Altered Project
63/96
LEAPS : The acronym LEAPS means Long-Term Equity Anticipation Securities.These are options having a maturity of upto three years.
Baskets : Basket options are options on portfolios of underlying assets. TheUnderlying asset is usually a moving average of a basket of assets. EquityIndex options are a form of basket options.
Swaps : Swaps are private agreements between two parties to exchange cash flowsIn the future according to a prearranged formula. They can be regarded asPortfolios of forward contracts.
The two commonly used swaps are:
Interest rate swaps :These entail swapping only the interest related cash flows betweenthe parties in the same currency. Currency swaps : These entail swapping both principal and interest between the
With the cash flows in one direction being in a differentCurrency than those in the opposite direction.
Swaptions : Swaptions are options to buy or sell a swap that will becomesOperative at the expiry of the options. Thus, swaptions is anOption on a forward swap. Rather than have calls and puts, the
Swaptions market has receiver swaptions and payer swaptionsA receiver swaption is an option to receive fixed and pay floating.A payer swaption is an option to pay fixed and receive floating.
8/9/2019 Altered Project
64/96
COMMENCEMENT OF DERIVATIVE MARKET ON NATIONALSTOCK EXHCHANGE (NSE)
1) The derivatives trading on the NSE commenced with S&P CNX Nifty Index futures on
June 12, 2000.
2) The trading in index options commenced on June 4, 2001 and trading in options onIndividual securities commenced on July 2, 2001.
3) Single stock futures were launched on November 9, 2001.
Today, both in terms of volume and turnover, NSE is the largest derivativesExchange in India.
Participants in the Derivatives Market
The following three broad categories of participants
1) Hedgers
Hedgers face risk associated with the price of an asset. They use futures or
Options markets to reduce or eliminate this risk.
2) Speculators
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 canIncrease both the potential gains and potential losses in a speculative venture
3) Arbitrageurs
Arbitrageurs are in business to take advantage of a discrepancy between
8/9/2019 Altered Project
65/96
prices in two different markets.
Example Arbitrageurs see the future price of an asset getting out of lineWith the cash price, they will take offsetting in two markets to lock in profit.
INTRODUCTION TO FORWARD CONTRACT
A forward contract is an agreement to buy or sell an asset on a specified date for a
specified price. One of the parties to the contract assumes a long position and agrees tobuy the underlying asset on a certain specified future date for a certain specified price.The other party assumes a short position and agrees to sell the asset on the same date forthe same price. Other contract details like delivery date, price and quantity are negotiatedbilaterally by the parties to the contract.
Forward contracts are very useful in hedging and speculation.The classic hedgingapplication would be that of an exporter who expects to receive payment in dollars threemoths later. He is exposed to the risk of exchange rate fluctuations.By using the currencyforward market to sell dollars forward, he can lock on to a rate today and reduce hisuncertainty. Similarly an importer who is required to make a payment in dollars two
months hence can reduce his exposure to exchange rate fluctuations by buying dollarsforward.
The salient features of forward contracts are:
They are bilateral contracts and hence exposed to counter-party risk.
Each contract is custom designed, and hence is unique in terms of contract size,Expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
8/9/2019 Altered Project
66/96
If the party wishes to reverse the contract, it has to compulsorily go to the same counter-Party, which often results in high prices being charged.
LIMITATIONS OF FORWARD MARKETS
Forward markets world-wide are afflicted by several problems:
Lack of centralization of trading,
Illiquidity, and
Counterparty risk
8/9/2019 Altered Project
67/96
Introduction to Futures
Futures markets were designed to solve the problems that exist in forward markets. Afutures contract is an agreement between two parties to buy or sell an asset at a certaintime in the future at a certain price. But unlike forward contracts, the futures contracts arestandardized and exchange traded. To facilitate liquidity in the futures contracts, theexchange specifies certain standard features of the contract.
The standardized items in a futures contract are :
Quantity of the underlying
Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement
8/9/2019 Altered Project
68/96
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 a contract trades. The index futures contracts on the NSE haveOne- month, two-month and three months expiry cycle which expire on the lastThursday of the month. Thus a January expiration contract expires on the last ThursdayOf January and a February expiration contract ceases trading on the last Thursday ofFebruary. 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 specified in the futures contract. This is the last day on which the contractWill be traded, at the end of which it will cease to exist.
Contract size
8/9/2019 Altered Project
69/96
The amount of asset that has to be delivered under one contract. Also called as lot size.
Basis
In the context of financial futures, basis can be defined as the Futures price minus theSpot price. There will be a different basis for each delivery month for each contract. Ina normal market, basis will be positive. This reflects that futures prices normally exceedSpot price.
Cost of carry
The relationship between futures prices and spot prices can be summarized in terms ofWhat is known as the cost of carry. This measures the storage cost plus the interest thatis paid to finance the asset less the income earned on the asset.
Initial margin
The amount that must be deposited in the margin account at the time a futures contractis first entered into is known as initial margin.
Marking-to-market
In the futures market, at the end of each trading day, the margin account is adjusted toReflect the investor's gain or loss depending upon the futures closing price. This isCalled marking-to-market.
Maintenance margin
This is somewhat lower than the initial margin. This is set to ensure that the balance inThe margin account never becomes negative. If the balance in the margin account fallsBelow the maintenance margin, the investor receives a margin call and is expected to topUp the margin account to the initial margin level before trading commences on the nextDay.
8/9/2019 Altered Project
70/96
APPLICATIONS OF FUTURES
A payoff is the likely profit/loss that would accrue to a market participant with change inthe price of the underlying asset. This is generally depicted in the form of payoffdiagrams which show the price of the underlying asset on the X-axis and theprofits/losses on the Y-axis.
Pay off for buyer of futures: Long futures
The payoff for a person who buys a futures contract is similar to the payoff for a personwho holds an asset. He has a potentially unlimited upside as well as a potentiallyunlimited downside. Take the case of a speculator who buys a two monthNifty index futures contract when the Nifty stands at 2220.
The underlying asset in this case is the Nifty portfolio. When the index moves up, theLong futures position starts making profits, and when the index moves down it startsmaking losses.
8/9/2019 Altered Project
71/96
Figure 8 shows the payoff diagram for the buyer of a futures contract.
The figure shows the profits/losses for a long futures position. The investor bought futureWhen the index was at 2220. If the index goes up, his futures position starts makingprofit. If the index falls, his futures position starts showing losses.
Figure 8
8/9/2019 Altered Project
72/96
Note For the buyer of future contract the profit is unlimited & loss sufferedBy him is also unlimited.
Payoff for seller of futures: Short futures
The payoff for a person who sells a futures contract is similar to the payoff for a personwho shorts an asset. He has a potentially unlimited upside as well as a potentiallyunlimited downside.
Take the case of a speculator who sells a two-month Nifty Indexcontract when the Nifty stands at 2220. The underlying asset in this case is the Niftyportfolio. When the index moves down, the short futures position starts making profits,and when the index moves up, it starts making losses.
Figure 9 shows the payoff diagram for the seller of a futures contract.
The figure shows the profits/losses for a short futures position. The investor sold futureswhen the index was at 2220. If the index goes down, his futures position starts making
profit. If the index rises, his futures position starts showing losses.
8/9/2019 Altered Project
73/96
Figure 9
Note For the seller of future contract the profit earned by him is unlimited andLoss suffered by him is unlimited
Introduction to Options
In this section, we look at the next derivative product to be traded on the NSE, namelyoptions. Options are fundamentally different from forward and futures contracts. Anoption gives the holder of the option the right to do something. The holder does not haveto exercise this right. In contrast, in a forward or futures contract, the two parties havecommitted themselves to doing something. Whereas it costs nothing (except marginrequirements) to enter into a futures contract, the purchase of an option requires an up-front payment.
Option Terminology
8/9/2019 Altered Project
74/96
Index options
These options have the index as the underlying some options are European while othersare American. Like index futures contracts, index options contracts are also cash settled.
Stock options
Stock options are options on individual stocks. Options currently trade on over 500 stocksin the United States. A contract gives the holder the right to buy or sell shares at thespecified price.
Buyer of an option
The buyer of an option is the one who by paying the option premium buys the right butNot the obligation to exercise his option on the seller/writer.
Writer of an option
The writer of a call/put option is the one who receives the option premium and is therebyobliged to sell/buy the asset if the buyer exercises on him.
There are two basic types of options, call options and put options.
Call option:
A call option gives the holder the right but not the obligation to buy an asset by a certaindate for a certain price.
Put option:
A put option gives the holder the right but not the obligation to sell an asset by a certaindate for a certain price.
Option price/premium:
Option price is the price which the option buyer pays to the option seller. It is alsoreferred to as the option premium.
8/9/2019 Altered Project
75/96
Expiration date:
The date specified in the options contract is known as the expiration date, the exercisedate, the strike date or the maturity.
Strike price:
The price specified in the options contract is known as the strike price or the exerciseprice.
American options:
American options are options that can be exercised at any time upto the expiration date.Most exchange-traded options are American.
European options:
European options are options that can be exercised only on the expiration date itself.European options are easier to analyze than American options, and properties of anAmerican option are frequently deduced from those of its European counterpart.
In-the-money option:
An in-the-money (ITM) option is an option that would lead to a positive cash flow to theholder if it were exercised immediately. A call option on the index is said to be in-the-money when the current index stands at a level higher than the strike price (i.e. spot price> strike price). If the index is much higher than the strike price, the call is said to be deepITM. In the case of a put, the put is ITM if the index is below the strike price.
At-the-money option:
An at-the-money (ATM) option is an option that would lead to zero cash flow if it wereexercised immediately. An option on the index is at-the-money when the current indexequals the strike price (i.e. spot price = strike price).
Out-of-the-money option:
8/9/2019 Altered Project
76/96
An out-of-the-money (OTM) option is an option that would lead to a negative cash flowif it were exercised immediately. A call option on the index is out-of-the-money when thecurrent index stands at a level which is less than the strike price (i.e. spot price < strikeprice). If the index is much lower than the strike price, the call it is said to be deep
OTM. In the case of a put, the put is OTM if the index is above the strike price.
Fig 10 Pay off profile for buyer of call options: Long call
A call option gives the buyer the right to buy the underlying asset at the strike pricespecified in the option. The profit/loss that the buyer makes on the option depends on thespot price of the underlying. If upon expiration, the spot price exceeds the strike price, hemakes a profit. Higher the spot price, more is the profit he makes. If the spot price of theunderlying is less than the strike price, he lets his option expire un-exercised. His loss inthis case is the premium he paid for buying the option.
Figure 10 Payoff for investor who went Long Nifty at 2220
The figure shows the profits/losses from a long position on the index. The investorbought the index at 2220. If the index goes up, he profits. If the index falls he looses.
8/9/2019 Altered Project
77/96
Figure 10
Payoff profile for writer of call options: Short call
A call option gives the buyer the right to buy the underlying asset at the strike pricespecified in the option. For selling the option, the writer of the option charges a premium.The profit/loss that the buyer makes on the option depends on the spot price of theunderlying. Whatever is the buyer's profit is the seller's loss. If upon expiration, the spotprice exceeds the strike price, the buyer will exercise the option on the writer. Hence asthe spot price increases the writer of the option starts making losses. Higher the spot
price, more is the loss he makes. If upon expiration the spot price of the underlying is lessthan the strike price, the buyer lets his option expire un-exercised and the writer gets tokeep the premium
8/9/2019 Altered Project
78/96
. Figure 11 gives the payoff for the writer of a three month call option (oftenreferred to as short call) with a strike of 2250 sold at a premium of 86.60.
The figure shows the profits/losses for the seller of a three-month Nifty 2250 call option.As the spot Nifty rises, the call option is in-the-money and the writer starts makinglosses. If upon expiration, Nifty closes above the strike of 2250, the buyer would exercisehis option on the writer who would suffer a loss to the extent of the difference betweenthe Nifty -close and the strike price. The loss that can be incurred by the writer of theoption is potentially unlimited, whereas the maximum profit is limited to the
extent of the up-front option premium of Rs.86.60 charged by him.
8/9/2019 Altered Project
79/96
Figure 11
Payoff profile for buyer of put options: Long put
Figure 12 gives the payoff for the buyer of a three month put option (oftenreferred to as long put) with a strike of 2250 bought at a premium of 61.70.
The figure shows the profits/losses for the buyer of a three-month Nifty 2250 put option.As can be seen,as the spot Nifty falls, the put option is in-the-money. If upon expiration,Nifty closes below the strike of 2250, the buyer would exercise his option and profit tothe extent of the difference between the strike price and Nifty-close. The profits possible
on this option can be as high as the strike price. However if Nifty rises above the strike of2250, he lets the option expire. His losses are limited to the extent of the premium he paidfor buying the option.
8/9/2019 Altered Project
80/96
Figure 12
Payoff profile for writer of put options: Short put
A put option gives the buyer the right to sell the underlying asset at the strike pricespecified in the option. For selling the option, the writer of the option charges a premium.The profit/loss that the buyer makes on the option depends on the spot price of theunderlying. Whatever is the buyer's profit is the seller's loss. If upon expiration, the spotprice happens to be below the strike price, the buyer will exercise the option on thewriter. If upon expiration the spot price of the underlying is more than the strike price, thebuyer lets his option unexercised and the writer gets to keep the premium. Figure 4.9gives the payoff for the writer of a three month put option (often referred to as short put)with a strike of 2250 sold at a premium of 61.70.
Figure 13 Payoff for writer of put option
The figure shows the profits/losses for the seller of a three-month Nifty 2250 put option.As the spot Nifty falls, the put option is in-the-money and the writer starts making losses.
8/9/2019 Altered Project
81/96
If upon expiration, Nifty closes below the strike of 2250, the buyer would exercise hisoption on the writer who would suffer a loss to the extent of the difference between thestrike price and Nifty-close. The loss that can be incurred by the writer of the option is amaximum extent of the strike price (Since the worst that can happen is that the asset pricecan fall to zero) whereas the maximum profit is limited to the extent of
the up-front option premium of Rs.61.70 charged by him.
Figure 13
DATA ANALYSIS
8/9/2019 Altered Project
82/96
AND
STRATAGIES USED IN DERIVATIVE TRADING
Strategies used in derivative Trading
Futures & Options can be used as an effective Risk Management tools in the followingways
1) Hedging : Long security , sell futures
If an Investor holds 200 shares of Infosys and the Purchase price is 1765. If theinvestor feels that in future the price of his share is going to fall with the help of securityfutures he can minimize his price risk.
All he needs to do is short futures position.
8/9/2019 Altered Project
83/96
Current market prices is 1765
2 Month futures cost him 1825 with initial margin of Rs 49227 and the lost size is 200
Now if the price of the security falls any further he will suffer losses on security he holds.However, the losses he suffers on the security, will be offset by the profit he makes on hisshort futures position
Short future at 1825
After one month price of Infosys closes at Rs 1650
Loss on security = 115* 200 = 23000
Profit on short future = 175*200 = 35000
Profit of Rs = 35000-23000 = 8000
2) Speculation : Bullish security , Buy futures
If a speculator who has a view on the direction of the market . He would liketo trade based on this view. He believes that a particular security that trades at Rs1000 is undervalued & expects its price to go up in next 2 to 3 monthes . He will buyshares of that company.
Eg Assume he buys a 100 shares which cost him 100000 /- Rs and after one monthit closes at Rs 1010.
He Makes a profit or Rs 10 * 100=10000
At the same time he can also buy future contracts.
8/9/2019 Altered Project
84/96
If security trades at Rs 1000 & two- month futures trades at 1006 and thecontract value is Rs 100000 /- . He buys 100 security futures for which he pays amargin of Rs 20000.
Two months later the security closes at 1010. On expiration, the futures price
converges to the sport price and he makes a profit of Rs 4000 on Investment of20000.This works out to an annual Return of 12%.
3) Speculation : Bear Security , Sell futures.
Stock futures can be used by a Speculator who believes that a Particular security isover-Valued and is likely to see a fall in price.
Let us see how this works.
If the security price rises, so will the futures price. If security falls, so will the futures
price falls.
If trader who expects to see a fall in price of ABC Ltd. He sells one two- Monthcontract of futures of ABC at Rs 240 (each contract for 100 underlying shares)
He pays 10000 as margin. Two month later, when the future contract expires, ABCcloses at 220. On the day of expiration, the sport & future Price converges He hasmade a clean profit or Rs 2000 ( 20*100).
8/9/2019 Altered Project
85/96
4) Arbitrage: Over priced Futures, Buy sport/cash ,sell futures.
If you notice that futures on a security that you have been observing seem overpriced,how can you cash in on the opportunity to earn risk less profits?.
Eg- If ABC Ltd trades at Rs 1000. One month ABC futures trades at Rs 1025 and seemsover priced. AS an arbitrageur, you can make risk less profit by entering in to thefollowing set of transaction.
a) On day one, buy the security on the cash/ spot market at 1000b) Simultaneously, sell the futures on the security at 1025c) Take delivery of the security purchased and hold the security for a monthd) On the future expiration date, the spot and the futures price converge now unwind
the position.e) If the security closes at Rs 1015 sell the securityf) Futures position expires with profit of Rs 10g) The Result is a risk less profit of Rs 15 on the spot position & Rs 10 on the
futures position.
5) Arbitrage: Under priced futures: buy futures, sell spot
Whenever the futures price deviates substantially from its fair value, arbitrageOpportunities arise. It could be the case that you notice the futures on a Security you holdseem under priced. How can you cash in on this opportunity to earn risk less profits?
Say for instance, ABC Ltd. trades at Rs.1000. One month ABC futures trade at Rs.965 and seem under priced. As an arbitrageur, you can make risk less profit by enteringinto the following set of transactions.
a) On day one, sell the security in the cash/spot market at 1000.b) Make delivery of the security.c) Simultaneously, buy the futures on the security at 965.d) On the futures expiration date, the spot and the futures price
8/9/2019 Altered Project
86/96
Converge. Now unwind the position.e) Say the security closes at Rs.975. Buy back the security.f) The futures position expires with a profit of Rs.10.7. The result is a risk less profit of Rs.25 on the spot position and Rs.10
On the futures position.
6) Hedging : Have Underlying Buy Puts.
Owners of Stocks or Equity Portfolios often experience discomfort about the overallstock market movement. As an owner of stocks or equity Portfolio, Sometimes you mayhave a view that stock prices will fall in the near future. At other times you may see thatthe market is in for a few days or weeks of massive volatility, and you do not have anappetite for this king of volatility.
Egg- union budget is a common & reliable source of such volatility. Mostly volatility isalways enhanced for one week before & two weeks after a budget.
TO protect the value of your portfolio from falling below a particular level, buy the rightnumber of put options with the right strike price,
Example
8/9/2019 Altered Project
87/96
I have 200 shares of Infosys Price per share is 1800
Spot Price 1800
Strike price put 1760 Premium 80 Rs Lot size is 200
Total premium paid = 80*200 = 16000
On expire strike price converge in to spot price and closing price is 1700
Loss on share in cash market
200*(1800-1700) = 20000
Profit earned in Put option
200*(1760-1700) = 18000
Hedging helps u to minimize the loss if u buy the necessary put option at the requiredstrike price.
Distinction between futures and forwards
Futures ForwardsTrade on an organized exchange OTC in nature
Standardized contract terms Customized contract terms
Hence more liquid Less liquid
Requires margin payment No margin payment
Follows daily settlement Settlement happens at end of period
8/9/2019 Altered Project
88/96
Distinction between futures and options
Futures OptionsExchange traded, with novation Same as futures
Exchange defines the product Same as futures
Price is zero, strike price moves Strike price is fixed, price moves
Price is zero Price is always positive
Linear payoff Nonlinear payoff.
8/9/2019 Altered Project
89/96
LIMITATION
LIMITATION
1) 2 months duration of the project was inadequate as such all the strategies andexperience gained is inadequate.
2) Because of busy schedule of broker limited knowledge was provided to me.
3) Tools and techniques information was not provided to me.
4) Direct access to the system was not allowed however the practical knowledge isgained through watching the screen.
8/9/2019 Altered Project
90/96
SUGGESTIONS
8/9/2019 Altered Project
91/96
SUGGESTIONS
1) Investor who has a very high risk appetite should only invest in capital andderivative
2) If a Layman want to invest in Capital and Derivative Market take the help of anexpert or Learn by himself.
8/9/2019 Altered Project
92/96
3) Invest in only Good companies whose fundamentals are strong and has a goodtrack record in paying dividends.
4) Long term Investor should not get panic when a particular share of a company fallon a particular day, he should fix his target and stop loss according to his risk
appetite.
5) Dont take suggestion from unwanted person or tips from friends.
6) If an investor is less risk dont invest in equity or derivatives .There are otherinvestment instrument, like bank fixed deposits , post office scheme, LIC schemeSIP (Systematic Investment Plan).
CONCULSION
8/9/2019 Altered Project
93/96
Conclusion
1) Capital and Derivative Market is Risky form of investment
2) Investor should invest in Capital and Derivative market according to his riskyAppetite Eg If investor age is 24 years he does not have any obligation to fulfillthen he can allocate 50% to equity and Derivative Market and remaining in saferinstrument.
3) If a persona is above 50 or near to his retirement he should allocate 10% of his
Investment in capital and derivative market and remaining in bonds, fixed deposit,gold etc.
4) For Middle class capital and derivative market is not safer to invest. For High netWorth individual who has large corpus lying with me can invest in capital andderivative market.
8/9/2019 Altered Project
94/96
8/9/2019 Altered Project
95/96
BIBLIOGRAPHY
BIBLOGRAPHY
Derivatives Market (Dealers) Module Work Book
(National Stock Exchange of India Limited)
WEBSITES
8/9/2019 Altered Project
96/96
www.derivativesindia.com
www.derivatives-r-us.com
www.nseindia.com
www.sebi.gov.in
www.rediff/money/derivatives
www.mof.nic.in
http://www.derivativesindia.com/http://www.derivatives-r-us.com/http://www.nseindia.com/http://www.sebi.gov.in/http://www.rediff/money/derivativeshttp://www.mof.nic.in/http://www.derivativesindia.com/http://www.derivatives-r-us.com/http://www.nseindia.com/http://www.sebi.gov.in/http://www.rediff/money/derivativeshttp://www.mof.nic.in/