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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
23-Aug-12 [email protected]
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
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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
23-Aug-12 [email protected]
Huge
money
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23-Aug-12 [email protected] 7
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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23-Aug-12 [email protected] 20
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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23-Aug-12 [email protected]
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]