Derivtives Nifty

8/2/2019 Derivtives Nifty

1/83

A PROJECT REPORT ON

COMPARATIVE STUDY ON EQUITIES W.R.TO

AUTO & OIL SECTORS

SUBMITTED BY

PIDUGU SANTOSH

HT No: 160710672043

Project Submitted in partial fulfillment for the award of the

Degree of

MASTER OF BUSINESS ADMINISTRATION

By

Osmania University, Hyderabad-500007

METHODIST COLLEGE OF ENGINEERING &TECHNOLOGY

KING KOTI, ABIDS, HYDERABAD-500001

1


2/83

DEPARTMENT OF BUSINESS

MANAGEMENT

METHODIST COLLEGE OF ENGINEERING AND

TECHNOLOGY

ACKNOWLEDGEMENT

Accomplishment of any work involves many people and this

project is no exception. I take this opportunity to express my

heartfelt thanks to all those who have directly or indirectly

contributed to make this Project a success.

I am indebted to the Management of Motilal Oswal securities Ltd.,for providing me the opportunity to carry out the Project work intheir esteemed organization.

I take this opportunity to express my heartfelt thanks to Mr.LAXMAN and the entire Equities team at Motilal Oswal for their cooperation and support during the project.

I am highly indebted to the Management of my college and H.O.D.

Department of Business Management for his valuable suggestions

and advice.

It was great experience to work under the inspiring guidance of

Mrs. Ranirajan Associate Professor, Department of Business

Management. I take this opportunity to express my gratitude to his

valuable advice and suggestions for completing this project.

2


3/83

At last, I would like to thank my family and friends of my collegefor the help and cooperation extended in this endeavor of mine.

DECLARATION

I hereby declare that project report entitled EquityAnalysis With Respect To Auto & Oil has been carriedout for Motilal Oswal Securities Ltd is an original and

bonafide work undertaken by me in partial fulfillment of the requirement for Master of Business Administration(MBA), Osmania University.

This project report has not been submitted to any other university for the award of degree or diploma.

(P.SANTOSH)

3


4/83

TABLE OF CONTENTPage

No.

1) INTRODUCTION

2) COMPANY PROFILE

3) MARKET PROFILE

4) OBJECTIVES OF THE STUDY

5) RESEARCH METHODOLOGY

6) ANALYSIS & INTERPRETATION

7) CONCLUSION AND SUGGESTIONS

8) BIBILIOGRAPHY

LIST OF TABLES

4


5/83

TABLES PAGE

No.

1. Pay off from Call Buying/Long

2. Pay off from Put Buying/Long3. Effect of increase in relevant parameter option prices

4. 29-April-2010 Future INDEX NIFTY-50

5. NIFTY 5400 Call Option Table for 29-April-2010

6. NIFTY 5400 Put Option Table for 29-April-2010

7. May 2010 Contract

8. 5000 Call Option for May 2010

9. 5000 Put Option for May 201010.5100 put option for May 2010

11.June 2010 Contract

12.5100 Call Option for June 2010

13.5100 Put Option for June 2010

LIST OF FIGURES

FIGURES PAGE

No

1. Payoff for a buyer of futures

2. Payoff for a seller of futures

3. Payoff from Cal Buying/Long

4. Payoff from Put Buying/Long

5. Services of the Networth Stock Broking Company

6. 107 NSBC Branches locations throughout India

ABSTRACT

5


6/83

` The Study is based on Financial Derivatives with special

reference to Futures and Options at NETWORTH STOCK BROKING

LIMITED. Derivative market has excited from centuries as need for

both users and producers of natural resources to hedge against price

fluctuations in underlying commodities, bonds, currencies, stocks and

stock indices.

In the derivatives market Future contract was designed to solve

limitations that existed in Forward contract options are also play major

role in derivative. In Bullish market the Call option Writer incurs more

profit, where as the in Bearish market the Call option holder will incur

more losses and the put option writer will get more profit so he is

suggested to hold as Put option.

Derivatives market is an innovation to Cash market,

approximately its daily turnover reaches to the equal stage of cashmarket. In Cash market the investor has to pay the total money, but in

derivatives investors has to pay premiums or margins, which are some

percentage of total money. Derivatives are mostly used for hedging

purposes. The derivative market is newly started in India and it is not

known by every investor, so SEBI has to take steps to create

awareness among the investors as about the Derivatives segment.

6


7/83

CHAPTER -1INTRODUCTION

INTRODUCTION

7


8/83

A derivative is a security whose value depends on the

value of more basic underlying variable. These are also known as

contingent claims. Derivative securities have been very successful

innovation in capital market.

The emergence of the market for derivative products, most

notably forwards, futures and options, can be traced back to the

willingness of risk averse economic agents to guard themselves

against uncertainties arising out of fluctuations in asset prices. By their

very nature, financial markets are marked by a very high degree of

volatility. Through the use of derivative products, is possible to partially

or fully transfer price risks by a locking - in asset prices. As

instruments of risk management, these generally do not influence the

fluctuation in the underlying asset prices.

However, by locking-in asset prices, derivative products

minimize the impact of fluctuations in asset prices on the profitability

and cash flow situation of risk-averse investor.

Derivatives are risk management instruments, which drive their

value form underlying asset. Underlying asset can be bullion, index,

share, bonds, currency, interest etc.

MAIN TOPICS OF STUDY

8


9/83

1. INTRODUCTION TO DERIVATIVE

The origin of derivatives can be traced back to the need of farmers to

protect themselves against fluctuations in the price of their crop. From

the time it was sown to the time it was ready for harvest, farmers wouldface price uncertainty. Through the use of simple derivative products, it

was possible for the farmer to partially or fully transfer price risks by

locking-in asset prices. These were simple contracts developed to

meet the needs of farmers and were basically a means of reducing

risk.

A farmer who sowed his crop in June faced uncertainty over theprice he would receive for his harvest in September. In years of

scarcity, he would probably obtain attractive prices. However, during

times of oversupply, he would have to dispose off his harvest at a very

low price. Clearly this meant that the farmer and his family were

exposed to a high risk of price uncertainty.

On the other hand, a merchant with an ongoing requirement of grains too would face a price risk that of having to pay exorbitant prices

during dearth, although favorable prices could be obtained during

periods of oversupply. Under such circumstances, it clearly made

sense for the farmer and the merchant to come together and enter into

contract whereby the price of the grain to be delivered in September

could be decided earlier. What they would then negotiate happened to

be futures-type contract, which would enable both parties to eliminate

the price risk.

In 1848, the Chicago Board Of Trade, or CBOT, was established

to bring farmers and merchants together. A group of traders got

together and created the to-arrive contract that permitted farmers to

lock into price upfront and deliver the grain later. These to-arrive

contracts proved useful as a device for hedging and speculation on

9


10/83

price charges. These were eventually standardized, and in 1925 the

first futures clearing house came into existence.

Today derivatives contracts exist on variety of commodities such

as corn, pepper, cotton, wheat, silver etc. Besides commodities,

derivatives contracts also exist on a lot of financial underlying like

stocks, interest rate, exchange rate, etc.

2. DERIVATIVE DEFINED

A derivative is a product whose value is derived from the value of one

or more underlying variables or assets in a contractual manner. Theunderlying asset can be equity, forex, commodity or any other asset. In

our earlier discussion, we saw that wheat farmers may wish to sell their

harvest at a future date to eliminate the risk of change in price by that

date. Such a transaction is an example of a derivative. The price of this

derivative is driven by the spot price of wheat which is the underlying

in this case.

The Forwards Contracts (Regulation) Act, 1952, regulates the

forward/futures contracts in commodities all over India. As per this the

Forward Markets Commission (FMC) continues to have jurisdiction

over commodity futures contracts. However when derivatives trading in

securities was introduced in 2001, the term security in the Securities

Contracts (Regulation) Act, 1956 (SCRA), was amended to include

derivative contracts in securities. Consequently, regulation of

derivatives came under the purview of Securities Exchange Board of

India (SEBI). We thus have separate regulatory authorities for

securities and commodity derivative markets.

Derivatives are securities under the SCRA and hence the trading of

derivatives is governed by the regulatory framework under the SCRA.

The Securities Contracts (Regulation) Act, 1956 defines derivative to

include-

10


11/83

A security derived from a debt instrument, share, loan whether secured

or unsecured, risk instrument or contract differences or any other form

of security.

A contract which derives its value from the prices, or index of prices, of

underlying securities.

3. TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives Over The Counter Derivatives

National Stock Bombay Stock National

Commodity &

Exchange Exchange Derivative

Exchange

Index Future Index option Stock optionStock future

Figure.1 Types of Derivatives Market

4. TYPES OF DERIVATIVES

11


12/83

Figure.2 Types of Derivatives

(i) FORWARD CONTRACTS

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 to buy 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 for the same price. Other contract details like

delivery date, price and quantity are negotiated bilaterally by the

parties to the contract. The forward contracts are n o r m a l l y

traded outside the exchanges.

BASIC FEATURES OF FORWARD CONTRACT

They are bilateral contracts and hence exposed to counter-partyrisk.

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 theasset.

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.

However forward contracts in certain markets have

become very standardized, as in the case of foreign

exchange, thereby reducing transaction costs and increasingtransactions volume. This process of standardization reaches its

12


13/83

limit in the organized futures market. Forward contracts are often

confused with futures contracts. The confusion is primarily because

both serve essentially the same economic fun cti ons of

allocating risk in the presence of future price uncertainty. However

futures are a significant improvement over the forward contracts

as they eliminate counterparty risk and offer more liquidity.

(ii) FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a

futures exchange, to buy or sell a certain underlying instrument at a

certain date in the future, at a pre-set price. The future date is called

the delivery date or final settlement date. The pre-set price is called the

futures price. The price of the underlying asset on the delivery date is

called the settlement price. The settlement price, normally, converges

towards the futures price on the delivery date.

A futures contract gives the holder the right and the obligation to buy or

sell, which differs from an options contract, which gives the buyer theright, but not the obligation, and the option writer (seller) the obligation,

but not the right. To exit the commitment, the holder of a futures

position has to sell his long position or buy back his short position,

effectively closing out the futures position and its contract obligations.

Futures contracts are exchange traded derivatives. The exchange acts

as counterparty on all contracts, sets margin requirements, etc.

BASIC FEATURES OF FUTURE CONTRACT

1 . S t a n d a r d i z a t i o n :

Futures contracts ensure their liquidity by being highly standardized,

usually by specifying:

The underlying . This can be anything from a barrel of sweet

crude oil to a short term interest rate.

13


14/83

The type of settlement, either cash settlement or physical

settlement. The amount and units of the underlying asset per contract. This

can be the notional amount of bonds, a fixed number of barrelsof oil, units of foreign currency, the notional amount of the

deposit over which the short term interest rate is traded, etc. The currency in which the futures contract is quoted. The grade of the deliverable. In case of bonds, this specifies

which bonds can be delivered. In case of physical commodities,

this specifies not only the quality of the underlying goods but

also the manner and location of delivery. The delivery month. The last trading date. Other details such as the tick, the minimum permissible price

fluctuation.

2 . M a r g i n : Although the value of a contract at time of trading should be zero, its

price constantly fluctuates. This renders the owner liable to adverse

changes in value, and creates a credit risk to the exchange, who

always acts as counterparty. To minimize this risk, the exchange

demands that contract owners post a form of collateral, commonly

known as Margin requirements are waived or reduced in some cases

for hedgers who have physical ownership of the covered commodity or

spread traders who have offsetting contracts balancing the position.

Initial Margin: is paid by both buyer and seller. It represents the loss

on that contract, as determined by historical price changes, which is

not likely to be exceeded on a usual day's trading. It may be 5% or

10% of total contract price.

Mark to market Margin: Because a series of adverse price changes

may exhaust the initial margin, a further margin, usually called variation

or maintenance margin, is required by the exchange. This is calculated

by the futures contract, i.e. agreeing on a price at the end of each day,

called the "settlement" or mark-to-market price of the contract.

14


15/83


16/83

forward price represents the expected future value of the underlying

discounted at the risk free rate. Thus, for a simple, non-dividend paying

asset, the value of the future/forward, , will be found by

discounting the present value at time to maturity by the rate of

risk-free return .

This relationship may be modified for storage costs, dividends,

dividend yields, and convenience yields. Any deviation from this

equality allows for arbitrage as follows.

In the case where the forward price is higher:

1. The arbitrageur sells the futures contract and buys theunderlying today (on the spot market) with borrowed money.

2. On the delivery date, the arbitrageur hands over the underlying,and receives the agreed forward price.

3. He then repays the lender the borrowed amount plus interest.4. The difference between the two amounts is the arbitrage profit.

In the case where the forward price is lower:

1. The arbitrageur buys the futures contract and sells theunderlying today (on the spot market); he invests the proceeds.

2. On the delivery date, he cashes in the matured investment,which has appreciated at the risk free rate.

3. He then receives the underlying and pays the agreed forwardprice using the matured investment. [If he was short theunderlying, he returns it now.]

4. The difference between the two amounts is the arbitrage profit.

16


17/83

FUNCTIONS OF DERIVATIVES MARKETS:

The following are various functions that are performed by the

derivatives markets. They are

1) Prices in an organized derivatives market reflect the perception of

market participants about the future and lead the prices of

underlying to the perceived future level.

2) Derivatives market helps to transfer risks from those who have

them but may not like them to those who have appetite for them.

3) Derivatives, due to their inherent nature, are linked to the underlying

cash markets. With the introduction of derivatives, the underlying

market witnesses higher trading volumes because of participation

by more players who would not otherwise participate for lack of an

arrangement to transfer risk.

4) Speculative trades shift to a more controlled environment of

derivatives market.

5) Derivatives trading acts as a catalyst for new entrepreneurial

activity.

6) They often energize others to create new businesses, new products

and new employment opportunities.

7) Derivatives markets help increase savings and investment in the

long run. Transfer of risk enables market participants to expand

their volume of activity. Derivatives thus promote economic

development.

17


18/83

METHODOLOGY

The following steps are involved in the study

Selection of scrip: Selection of scrip is done on a random basis and

the scrip selected is NIFTY 50. The lot is of 50 size, profitability

position of futures, buyers and sellers & also the option holders and

option writers is studied.

Data Collection: The data of the NIFTY 50 has been collected from

the news paper & internet.

The data consist of one month contract & period of data collection is

from 27 th Feb. 2009 to 28 th may 2009.

Analysis: The analysis consist of the tabulation of the data assessing

the profitability position of the fure buyers & sellers and also the option

holder & the option writer representing the data with graphs and

making interpretation using data.

SCOPE OF THE STUDY

The study is limited to Derivatives with special references to futures

and options in the Indian context & the NIFTY 50 has been taken as a

representative sample for the study. The study cant be said as totally

perfect. Any alteration may occur. The study has only made humble

attempt at evaluating derivatives only in India markets. The study is not

based on the international perspective of derivatives which exists in

DOW JONES and NASDAQ.

18


19/83

OBJECTIVES OF STUDY

1. To study various trends in derivative market.

2. Comparison of the profits/losses in cash market and derivativemarket.

3. To find out profit/losses position of the option writer and optionholder.

4. To study in detail the role of the forwards, future and options.

5. To study the role of derivatives in Indian financial market.

6. To find out the risk and returns with live trading values.7. To know how to minimize risk by using STRATEGIES.

8. To give some live examples on options.

LIMITATIONS

The following are the limitations of the study

The Scrip chosen for analysis is Nifty50 and the contract taken

in February 2009 is a one month contract ending in March.

The data collected is completely restricted to the NIFTY 50

hence this analysis cannot be taken universally.

19


20/83

CHAPTER-2REVIEW OF LITERATURE

DEFINITION

20


21/83

Derivatives is a product whose value is derived from the one or

more basic Variables, called base (underlying asset, index, or value of

reference rate), in a Contractual manner. The underlying asset can be

equity, forex, commodity or any other asset.

In the Indian context the securities contrasts (regulation) act, 1956

(SCR Act)

Defines derivative as

1) A security derived from an instrument, share, loan whether secured

or unsecured, risk instrument or contract for differences or any other

form of security.

2) A contract, which derives its value from the prices, or index of prices,

or Underlying securities.

Futures contracts, forward contracts, options and swaps are the

most common types of derivatives. Because derivatives are just

contracts, just about based on weather data, such as the amount of

rain or the number of anything can be used as an underlying asset.

There are even derivatives sunny days in a particular region.

Derivatives are generally used to hedge risk, but can also be used

for speculative purposes

EVALUTION OF DERIVATIVES:

Derivatives can be found throughout the history of mankind. In

the Middle Ages, engaging in contracts at predetermined prices for

future delivery of farming products. The new era for the derivative

markets was ushered with the introduction of financial derivatives, and

it continues to last to this day. Although commodity derivatives are stillquite active, particularly oil and precious metals, financial derivatives

dominate trading in the current derivative markets.

Although the derivatives markets slowed down considerably by

the end of the 20th century, that did not mean that there were not a

steady offering of existing, as well as new derivative products.

Derivatives exchanges also went through a period of change; some

consolidated, some merged, some became for-profit institutions.

21


22/83

Regardless, they all had something in commonthe need for less

regulation.

Aside from structural changes, some derivative exchanges also

changed the way they conducted trading. Old systems of face-to-face

trading on trading floors have been replaced with electronic trading,

and telephone and computer networks. With the advent of Internet,

electronic trading evolved into e-trading. And although trading floors

still dominate derivative markets in the U.S., it is obvious that to stay

competitive, the U.S. will have to eventually embrace electronic trading.

The following factors have contributed to the growth of financial

derivatives

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 agents a wider choice of risk management

strategies

5) Innovations in the derivatives markets, which optimally combine

the risks and returns over a large number of financial assets

leading to higher returns, reduced risk as well as transactions

costs as compared to individual financial assets.

6) Technology facilitates the ability to track the payoffs and riskexposures associated with a portfolio of derivative positions.

7) An important factor in the growth of derivatives market has been

a variety of intellectual advances. The development of economic

models for valuing derivative instruments and assessing their

riskiness and the increasing sophistication of such models have

played a crucial role in the growth of the market.

22


23/83

PARTICIPANTS:

The following three categories of participants in the derivatives market:1) HEDGERS

2) SPECULATORS

3) ARBITRAGEURS

HEDGERS: Hedgers face risk associated with the price of an asset.

They use futures or options market to reduce or eliminate this risk.

Hedgers are those who protect themselves from the risk associated

with the price of an asset by using derivatives. He keeps a closewatch upon the prices discovered in trading and when the comfortable

price is reflected according to his wants, he sells futures contracts.

Hedgers use futures for protection against adverse future price

movements in the underlying cash commodity. Hedgers are often

businesses, or individuals, who at one point or another deal in the

underlying cash commodity.

SPECULATORS: Speculators are somewhat like a middle man. They

are never interested in actual owing the commodity. They will just buy

from one end and sell it to the other in anticipation of future price

movements. They actually bet on the future movement in the price of

an asset. They are the second major group of futures players. These

participants include independent floor traders and investors. They

handle trades for their personal clients or brokerage firms. Buying a

futures contract in anticipation of price increases is known as going

long. Selling a futures contract in anticipation of a price decrease is

known as going short.

ARBITRAGEIRS: Arbitrators are the person who takes the advantage

of a discrepancy between prices in two different markets. If he finds

future prices of a commodity edging out with the cash price, he will take

offsetting positions in both the markets to lock in a profit. Risk less

23


24/83

Profit Making is the prime goal of Arbitrageurs. Buying in one market

and selling in another, buying two products in the same market are

common. They could be making money even without putting there own

money in and such opportunities often come up in the market but last

for very short timeframes. This is because as soon as the situation

arises arbitrageurs take advantage and demand-supply forces drive the

markets back to normal.

TYPES OF DERIVATIVES:

The most commonly used derivatives contracts are forwards, futures

and options. Here are various derivatives contacts that have come to

be used given briefly: FORWARDS FUTURES OPTIONS WARRANTS LEAPS

SWAPS SWAPTIONS

FORWARDS: forward contract is a customized contract between two

entities, where settlement takes place on a specific date in the future at

today's pre-agreed price.

Futures: A futures contract is an agreement between two parties tobuy or sell an asset at a certain time in the future at a certain price.

Futures contracts are special types of forward contracts in the sense

that the former are standardized exchange-traded contracts.

Options: Options are of two types - calls and puts

24


25/83

Calls option gives the buyer the right but not the obligation to buy

a given quantity of the underlying asset, at a given price on or before a

given future date.

Put option give the buyer the right, but not the obligation to sell a

given quantity of the underlying asset at a given price on or before a

given date.

Warrants: Options generally have lives of up to one year, the majority

of options traded on options exchanges having a maximum maturity of

nine months. Longer-dated options are called warrants and are

generally traded over-the-counter.

Swaps: Swaps are private agreements between two parties to

exchange cash flows in the future according to a prearranged formula.

They can be regarded as portfolios of forward contracts. The two

commonly used swaps are

Interest rate swaps : These entail swapping only the interest

related cash flows between the parties in the same currency.

Currency swaps : These entail swapping both principal and

interest between the parties, with the cash flows in one direction being

in a different currency than those in the opposite direction

LEAPS: The acronym LEAPS means Long-Term Equity Anticipation

Securities. These are options having a maturity of up to three years.

Swaptions: Swaptions are options to buy or sell a swap that will

become operative at the expiry of the options. Thus a swaption is an

option on a forward swap. Rather than have calls and puts, the

swaptions market has receiver swaptions and payer swaptions. A

receiver swaption is an option to receive fixed and pay floating. A payer

swaption is an option to pay fixed and receive floating.

25


26/83

FUTURES

DEFINITION:

A future is a contract between two parties whereby the one party

(the buyer) agrees to buy an underlying asset from the other party tothe contract on a specific future date, and at a price determined at the

close of the contract. A future is a derivative that is used to transfer the

price risk of the underlying instrument from one party to another.

The underlying asset can be a financial asset such as a bond, a

currency such as US dollars, a commodity, etc.

A future is normally classified according to the underlying

instrument. Where, for instance, two parties agree to buy and sell a

specific quantity of rice (of a certain quality) at a certain price on a

future date, the contract will be a commodity futures contract .

Where two parties agree to buy and sell bonds, this will be known as a

financial futures contract , and where two parties agree to buy and

sell a certain amount of foreign currency, this is a currency futures

contract.

FEATURES OF FUTURES:

Futures are highly standardized. The contracting parties need not pay any down payments. Hedging of price risks. They have secondary markets to.

A futures contract is thus

an agreement between two parties to buy and sell a standardized type and quantity of a specified underlying asset with a certain quality at a price determined at the closing of the contract

on a specified date

26


27/83

Through a central exchange.

TYPES OF FUTURES:

On the basis of the underlying asset they derive, the futures are

divided in to two types:1) Stock futures:

The stock futures are the futures that have the underlying asset as the

individual securities. The settlement of the stock futures is of cash

settlement and the settlement price of the future is the closing price of

the underlying security.

2) Index futures:Index futures are the futures, which have the underlying

asset as an index. The index futures are also cash settled. The

settlement price of the index futures shall be the closing value of the

underlying index on the expiry date of the contract.

PARTIES IN FUTURES CONTRACT:

There are two parties in a future contract, the buyer and seller. The

buyer of the futures contract is one who LONG on the futures contract

and the seller of the futures contract is who is SHORT on the futures

contract.

In a futures contract, both parties have an obligation, one to buy the underlying instrument The other to sell the underlying instrument.

Both the buyer and the seller can make a profit or suffer a loss, due to

the fact that the contract price (at which the underlying instrument is

bought and sold) is determined at closing of the contract. If the market

price at the delivery date is lower than the futures contract price, the

buyer suffers a loss because he could have bought the instrument in

the market at a lower price. He is now obliged, according to the

contract, to buy the underlying instrument at the higher price specified

in the contract. The opposite applies when the market value of the

underlying instrument is above the futures contract price. The buyer

27


28/83

can now buy the underlying instrument at the lower contract price, and

sell the instrument immediately at the higher market price, thus making

an immediate profit.

The pay off for the buyer and the seller of the futures of the contracts

are as follows:

PAY-OFF FOR A BUYER OF FUTURES

F- FUTURES PRICEE1, E2 SETTLEMENT PRICE

CASE 1:- The buyer bought the futures contract at (F); if the futuresprice goes to E1 then the buyer gets the profit of (FP).

CASE 2:- The buyer gets loss when the future price goes less then (F),if the future price goes to E2 then the buyer gets the loss of

(FL).

28

F

LOSS

PROFIT

E2P

LE1


29/83

PAY- OFF FOR A SELLER OF FUTURES

F- FUTURES PRICE

E1, E2 SETTLEMENT PRICECASE 1:- The seller sold the future contract at (f); if the future goes to

E1 then the seller gets the profit of (FP).

CASE 2: - The seller gets loss when the future price goes greater than

(F), if the future price goes to E2 then the seller gets the loss of (FL).

FUTURES TERMINOLOGY

Spot price:It is the price at which an asset is traded in the current market.

29

E2

PROFIT

LOSS

E1

P

L


30/83

Futures price:It is the price at which the futures contract trades in the futures

market.

Contract cycle:It is the period over which the contract trades. The index futures

contracts on the NSE have one-month; two-month and three monthexpiry cycle which expire on the last Thursday of the month. Thus aJanuary expiration contract expires on the last Thursday of Januaryand February expiration contract ceases trading on the last Thursdayof February. On the Friday following the last Thursday, a new contracthaving a three- month expiry is introduced for trading.

Expiry date:

It is the date specifies in the futures contract. This is the lastday on which the contract will be traded, at the end of which it will

cease to exist.

Contract size:

The amount of asset that has to be delivered under one

contract. For instance, the contract size on NSEs futures market is 50

nifties.

Basis:In the context of financial futures, basis can be defined as the

futures price minus the spot price. There will be a different basis for

each delivery month for contract. In a normal market, basis will be

positive. This reflects that futures prices normally exceed spot prices.

Cost carry:

The relationship between futures prices and spot prices can be

summarized in terms of what is known as the cost of carry. Thismeasures the storage cost plus the interest that is paid to finance the

asset less income earned on the asset.

Open Interest:

Total outstanding long or short position in the market at any

specific time. As total long positions in the market would be equal to

short position, for calculation of open interest, only one side of the

contract is counter.

30


31/83

OPTIONS

DEFINITION:Option is a type of contract between two persons where one

grants the other the right to buy a specific asset at a specific price

within a specific time period. Alternatively the contract may grant the

other person the right to sell a specific asset at a specific price within a

specific time period. In order to have this right, the option buyer has to

pay the seller or the option premium.

The assets on which option can be derived are stocks,commodities, indexes etc. If the underlying asset is the financial asset,

then the option are financial option like stock options, currency options,

index options etc, and if options like commodity option.

Options contracts are instruments that give the holder of the

instrument the right to buy or sell the underlying asset at a

predetermined price.

PROPERTIES OF OPTIONS:

Options have several unique properties that set them apart from other

securities. The following are the properties of options: Limited Loss High Leverage Potential Limited Life

PARTIES IN AN OPTION CONTRACT:

1. Buyer of the Option:

The buyer of an option is one who by paying option premium buys the

right but not the obligation to exercise his option on seller/writer.

2. Writer/Seller of the Option:

The writer of a call/put options is the one who receives the option

premium and is there by obligated to sell/buy the asset if the buyer

exercises the option on him.

31


32/83

TYPES OF OPTIONS:

The options are classified into various types on the basis of various

variables. The following are the various types of options:

I). On the basis of the Underlying asset:On the basis of the underlying asset the options are divided into two

types:

INDEX OPTIONS: The Index options have the underlying asset

as the index.

STOCK OPTIONS: A stock option gives the buyer of the option

the right to buy/sell stock at a specified price. Stock options are

options on the individual stocks, there are currently more than

50 stocks are trading in this segment.

II). On the basis of the market movement:

On the basis of the market movement the options are divided into two

types.

CALL OPTION:

A call options is bought by an investor when he seems that the stock

price moves upwards. A call option gives the holder of the option the

right but not the obligation to buy an asset by a certain date for a

certain price.

PUT OPTION:

A put option is bought by an investor when he seems that the

stock price moves downwards. A put option gives the holder of the

option right but not the obligation to sell an asset by a certain date for a

certain price.

III). On the basis of exercise of option:

32


33/83

On the basis of the exercising of the option, the options are classified

into two categories.

AMERICAN OPTION:American options are options that can be exercised at any

time up to the expiration date; most exchange-traded options are

American. EUROPEAN OPTION:

European options are options that can be exercised only

on the expiration date itself. European options are easier to analyze

than American option.

Call option

The following example would clarify the basics on Call Options.

Illustration 1:

An investor buys one European Call option on one share of Reliance

Petroleum at a premium of Rs. 2 per share on 31 July. The strike price

is Rs.60 and the contract matures on 30 September. The payoffs for

the investor on the basis of fluctuating spot prices at any time are

shown by the payoff table (Table 1). It may be clear form the graph that

even in the worst case scenario, the investor would only lose a

maximum of Rs.2 per share which he/she had paid for the premium.

The upside to it has an unlimited profits opportunity.

On the other hand the seller of the call option has a payoff chart

completely reverse of the call options buyer. The maximum loss that he

can have is unlimited though a profit of Rs.2 per share would be made

on the premium payment by the buyer.

33


34/83

A European call option gives the following payoff to the investor:

Max (S - Xt, 0).

The seller gets a payoff of: -max (S - Xt, 0) or min (Xt - S, 0).

Notes:

S - Stock Price

Xt - Exercise Price at time 't 1

C - European Call Option PremiumPayoff - Max (S - Xt, O)

34


35/83

Net Profit - Payoff minus 'c'

Exercising the Call Option and what are its implications for the

Buyer and the Seller?

The Call option gives the buyer a right to buy the requisite shares on a

specific date at a specific price. This puts the seller under the obligation

to sell the shares on that specific date and specific price. The CallBuyer exercises his option only when he/ she feel it is profitable. This

Process is called "Exercising the Option". This leads us to the fact that

if the spot price is lower than the strike price then it might be profitable

for the investor to buy the share in the open market and forgo the

premium paid. The implications for a buyer are that it is his/her decision

whether to exercise the option or not. In case the investor expects

prices to rise far above the strike price in the future then he/she would

surely be interested in buying call options. On the other hand, if the

seller feels that his shares are not giving the desired returns and they

are not going to perform any better in the future, a premium can be

charged and returns from selling the call option can be used to make

up for the desired returns. At the end of the options contract there is an

exchange of the underlying asset. In the real world, most of the deals

are closed with another counter or reverse deal. There is no

35


36/83

requirement to exchange the underlying assets then as the investor

gets out of the contract just before its expiry.

Put Options :

The European Put Option is the reverse of the call option deal. Here,

there is a contract to sell a particular number of underlying assets on a

particular date at a specific price. An example would help understand

the situation a little better:

Illustration 2:

An investor buys one European Put Option on one share of Reliance

Petroleum at a premium of Rs. 2 per share on 31 July. The strike price

is Rs.60 and the contract matures on 30 September. The payoff table

shows the fluctuations of net profit with a change in the spot price.

The payoff for the put buyer is: max (Xt - S, 0)The payoff for a put writer is: -max (Xt - S, 0) or min(S - Xt, 0)

36


37/83

These are the two basic options that form the whole gamut of

transactions in the options trading. These in combination with other

derivatives create a whole world of instruments to choose form

depending on the kind of requirement and the kind of marketexpectations.

Exotic Options are often mistaken to be another kind of option. They

are nothing but non-standard derivatives and are not a third type of

option.

Options Classifications: Options are often classified as

In the money - These result in a positive cash flow towards the

investor

At the money - These result in a zero-cash flow to the investor

Out of money - These result in a negative cash flow for the

investor

Example:

Calls

Reliance 350 Stock Series

Naked Options: These are options which are not combined with an

offsetting contract to cover the existing positions.

37


38/83

Covered Options: These are option contracts in which the shares are

already owned by an investor (in case of covered call options) and in

case the option is exercised then the offsetting of the deal can be done

by selling these shares held.

OPTIONS PRICING

Prices of options are commonly depending upon six factors.

Option's prices are far more complex. These are the two basic options

that form the whole gamut of transactions in the options trading. These

in combination with other derivatives create a whole world of

instruments to choose form depending on the kind of requirement andthe kind of market expectations. Exotic Options are often mistaken to

be another kind of option. They are nothing but non-standard

derivatives and are not a third type of option.

Options undertakings:

Stocks

Foreign Currencies

Stock Indices

Commodities

Others - Futures Options, are options on the futures contracts or

Underlying assets are futures contracts. The futures contract generally

matures shortly after the options expiration.

OPTIONS PRICING

Prices of options are commonly depending upon six factors. Option's

prices are far more complex. The table below helps understand the

affect of each of these factors and gives a broad picture of option

pricing keeping all other factors constant. The table presents the case

of European as well as American Options.

38


39/83

EFFECT OF INCREASE IN THE RELEVANT PARAMETRE ON

OPTION PRICES

SPOT PRICES: In case of a call option the payoff for the buyer ismax(S -Xt, 0) therefore, more the Spot Price more is the payoff and it is

favorable for the buyer. It is the other ways round for the seller, more

the Spot Price higher are the chances of his going into a loss.

In case of a put Option, the payoff for the buyer is max (Xt - S, 0)

therefore, more the Spot Price more are the chances of going into a

loss. It is the reverse for Put Writing.

STRIKE PRICE: In case of a call option the payoff for the buyer is

shown above. As per this relationship a higher strike price would

reduce the profits for the holder of the call option.

TIME TO EXPIRATION: More the time to Expiration more favorable is

the option. This can only exist in case of American option as in case of

European Options the Options Contract matures only on the Date of

Maturity.

39


40/83

VOLATILITY: More the volatility, higher is the probability of the option

generating higher returns to the buyer. The downside in both the cases

of Call and put is fixed but the gains can be unlimited. If the price falls

heavily in case of a call buyer then the maximum that he loses is the

premium paid and nothing more than that. More so he/ she can buy the

same shares form the spot market at a lower price.

Similar is the case of the put option buyer. The table shows all effects

on the buyer side of the contract.

RISK FREE RATE OF INTEREST: In reality the r and the stock market

is inversely related. But theoretically speaking, when all other variables

are fixed and interest rate increases this leads to a double effect:

Increase in expected growth rate of stock prices discounting factor

increases making the price fall.

In case of the put option both these factors increase and lead to a

decline in the put value. A higher expected growth leads to a higher

price taking the buyer to the position of loss in the payoff chart. The

discounting factor increases and the future value become lesser.

In case of a call option these effects work in the opposite direction/The

first effect is positive as at a higher value in the future the call option

would be exercised and would give a profit. The second affect is

negative as is that of discounting. The first effect is far more dominant

than the second one, and he overall effect is favorable on the call

option.

DIVIDENDS: When dividends are announced then the stock prices on

ex-dividend are reduced. This is favorable for the put option and

unfavorable for the call option.

40


41/83

CALL OPTION:

C = SN (dl)-Xe" rtN(d2)

PUT OPTION:

p = xe^NC-oa-SNC-oa)

Where

C - VALUE OF CALL OPTION

S - SPOT PRICE OF STOCK

X - STRIKE PRICE

r - ANNUAL RISK FREE RETURN

t - CONTRACT CYCLE

41


42/83

CHAPTER-3COMPANY PROFILE

42


43/83

Incorporated in 1993, Net worth Stock Broking Limited (NSBL) has

been a listed company at Bombay Stock Exchange (BSE), Mumbai since 1995.

A Member, at the National Stock Exchange of India (NSE) and Bombay Stock

Exchange, Mumbai (BSE) on the Capital Market and Derivatives (Futures &

Options) segment, NSBL has been traditionally servicing Institutional clients

and in the recent past has forayed into retail broking, establishing branches

across the country. Presence is being marked in the Middle East, Europe and the

United States too, as part of our attempts to cater to global markets. We are a

Depository participant at Central Depository Services India (CDSL) with plans

to become one at National Securities Depository (NSDL) by the end of this

quarter. We have our customers participating in the booming commodities

markets with our membership at the Multi Commodity Exchange of India

(MCX) and National Commodity & Derivatives Exchange (NCDEX), through

Networth Stock.Com Ltd. With its strong support and business units of

research, distribution & advisory, NSBL aims to become a one-stop solution to

the broking and investment needs of its clients, globally.

Strong team of professionals experienced and qualified pool of human

resources drawn from top financial service & broking houses form the backbone

of our sizeable infrastructure. Highly technology oriented, the companys

scalability of operations and the highest level of service standards has ensured

rapid growth in the number of locations & the clients serviced in a very short

span of time. Networthians, as each one of our 400 plus and ever growing

team members are addressed, is a dedicated team motivated to continuously

progress by imbibing the best of global practices, Indian sing

such practices, and to constantly evolve a comprehensive suite of products &

services trying to meet every financial / investment need of the clients.

NSE CM and Derivatives Segment SEBI Regn. 1NB230638639 &

1NF230638639

BSE CM and Derivatives Segment SEBI Regn. 1NB010638634 &

PMS SEBI Regn. 1NP000001371 CDSL DP SEBI Regn. IN-DP-CDSL 251-

2004

Commodities Trading : MCX -10585 and NCDEX - 00011 (through Networth

Stock.ComHyderabad (Somajiguda)

43


44/83

401, Dega Towers, 4th Floor, Raj Bhavan Road, Somajiguda Hyderabad - 500

082

Andhra Pradesh. Phone Nos.: 040-55560708, 55562256, and 30994985

Mumbai (MF Division)

49, Au Chambers, 4th Floor, Tamarind Lane, Fort Mumbai - 400 001

Maharashtra.

Phone Nos.: 022- 22650253

Mumbai (Registered Office)

5, Church gate House, 2nd Floor, 32/ 34 Veer Nariman Road, Fort

Mumbai - 400 001

Products and services portfolio

With greater choices comes greater value. Networth offers you more choices by

providing a wide array of products and personalized services, so you can take

charge of your financial future with confidence. So whether you are a new

investor or a seasoned one, we have the resources and advice you would need to

make smart, well-researched investments and help you grow your Networth.

1 Retail and institutional broking

2 Research for institutional and retail clients

3 Distribution of financial products

* Mutual funds

* Insurance

* NBFC Loans

4 PMS

5 Corporate finance

6 Net trading7 Depository services

8 Commodities Broking

44


45/83

Infrastructure1 A corporate office and 3 divisional offices in CBD of Mumbai which

houses state-of-the-art dealing room, research wing & management and

back offices.

2 All of 107 branches and franchisees are fully wired and connected to

hub at corporate office at Mumbai. Add on branches also will be wired

and connected to central hub

3 Web enabled connectivity and software in place for net trading.

4 60 operative IDs for dealing room

5 In house technology back up team to ensure un-interrupted connectivity.

1993: Networth Started with 300 Sq.ft. of office space & 10 employees

2006: Spread over 42 cities (around 70,000 Sq.ft of office space) with over 107

branches & employee strength over 400

Market & research

Focusing on your needs

45


46/83

Every investor has different needs, different preferences, and different

viewpoints. Whether investor prefer to make own investment decisions or desire

more in-depth assistance, company committed to providing the advice and

research to help you succeed.

Networth providing following services to their customers,

Daily Morning Notes Market Musing Company

Reports

Theme Based Reports Weekly Notes IPOs

Sector Reports Stock Stance Pre-guarter/Updates

Bullion Tracker F&O Tracker.

Key Personnel:Mr. S P Jain CMD Networth Stock Broking Ltd.

Mr. Deepak Mehta Head PMS

Mr. Viral Doshi Equity Strategist

1 Mr. Vinesh Jain Asst. Fund Manager

OUR GROUP COMPANIES

Networth Stock Broking Ltd. [NSBL]

NSBL is a member of the National Stock Exchange of India Ltd (NSE) and the

Bombay Stock Exchange Ltd (BSE) in the Capital Market and Derivatives

(Futures & Options) segment. NSBL has also acquired membership of the

currency derivatives segment with NSE, BSE & MCX-SX. It is Depository

participants with Central Depository Services India (CDSL) and National

Securities Depository (India) Limited (NSDL). With a client base of over 1L

loyal customers, NSBL is spread across the country though its over 300+

branches. NSBL is listed on the BSE since 1994.

Net worth Wealth Solutions Ltd. [NWSL]

Net worth Commodities & Investments Limited [NCIL]

Net worth Soft Tech Ltd. [NSL]

Ravisha Financial Services Pvt. Ltd. [RFSL]

46


47/83

Principles & Values

At Net worth Stock Broking Ltd. success is built on teamwork, partnership and

the diversity of the people.

At the heart of our values lie diversity and inclusion. They are a fundamental part of our culture, and constitute a long-term priority in our aim to become the

world's best international bank.

Values

Responsive

Trustworthy

Creative Courageous

Approach

Participation:- Focusing on attractive, growing markets where we can

leverage our relationships and expertise

Competitive positioning:- Combining global capability, deep local

knowledge and creativity to outperform our competitors Management Discipline:- Continuously improving the way we work,

balancing the pursuit of growth with firm control of costs and risks

Commitment to stakeholders

Customers:- Passionate about our customers' success, delighting them

with the quality of our service

Our People:- Helping our people to grow, enabling individuals to make

a difference and teams to win

Communities:- Trusted and caring, dedicated to making a difference

Investors:- A distinctive investment delivering outstanding performance

and superior returns

Regulators: - Exemplary governance and ethics wherever we are.

MARKET PROFILE

47


48/83

NATIONAL STOCK EXCHANGE

The National Stock Exchange of India (NSE) situated in Mumbai

- is the largest and most advanced exchange with 1016 companies

listed and 726 trading members. Capital market reforms in India and

the launch of the Securities and Exchange Board of India (SEBI)

accelerated the incorporation of the second Indian stock exchange

called the National Stock Exchange (NSE) in 1992. After a few years of

operations, the NSE has become the largest stock exchange in India.

Three segments of the NSE trading platform were established one after

another. The Wholesale Debt Market (WDM) commenced operations in

June 1994 and the Capital Market (CM) segment was opened at the

end of 1994. Finally, the Futures and Options segment began

operating in 2000. Today the NSE takes the 14th position in the top 40

futures exchanges in the world.

In 1996, the National Stock Exchange of India launched S&P CNXNifty and CNX Junior Indices that make up 100 most liquid stocks in

India. CNX Nifty is a diversified index of 50 stocks from 25 different

economy sectors. The Indices are owned and managed by India Index

Services and Products Ltd (IISL) that has a consulting and licensing

agreement with Standard & Poor's.

In 1998, the National Stock Exchange of India launched its web-site

and was the first exchange in India that started trading stock on theInternet in 2000. The NSE has also proved its leadership in the Indian

financial market by gaining many awards such as 'Best IT Usage

Award' by Computer Society in India (in 1996 and 1997) and CHIP

Web Award by CHIP magazine (1999).

The NSE is owned by the group of leading financial institutions such as

Indian Bank or Life Insurance Corporation of India. However, in the

totally de-mutualized Exchange, the ownership as well as the

48


49/83

management does not have a right to trade on the Exchange. Only

qualified traders can be involved in the securities trading.

The NSE is one of the few exchanges in the world trading all types of

securities on a single platform, which is divided into three segments:

Wholesale Debt Market (WDM), Capital Market (CM), and Futures &

Options (F&O) Market.

Each segment has experienced a significant growth throughout a few

years of their launch. While the WDM segment has accumulated the

annual growth of over 36% since its opening in 1994, the CM segment

has increased by even 61% during the same period. The National

Stock Exchange of India has stringent requirements and criteria for the

companies listed on the Exchange. Minimum capital requirements,

project appraisal, and company's track record are just a few of the

criteria. In addition, listed companies pay variable listing fees based on

their corporate capital size.

The National Stock Exchange of India Ltd. provides its clients with a

single, fully electronic trading platform that is operated through a VSAT

network. Unlike most world exchanges, the NSE uses the satellite

communication system that connects traders from 345 Indian cities.

The advanced technologies enable up to 6 million trades to be

operated daily on the NSE trading platform.

NSE Nifty:

The S&P CNX Nifty (nicknamed Nifty 50 or simply Nifty), is the leading

index for large companies on the National Stock Exchange of India.

S&P CNX Nifty is a well diversified 50 stock index accounting for 22

sectors of the economy. It is used for a variety of purposes such asbenchmarking fund portfolios, index based derivatives and index funds.

Nifty was developed by the economists Ajay Shah and Susan Thomas,

then at IGIDR. Later on, it came to be owned and managed by India

Index Services and Products Ltd. (IISL), which is a joint venture

between NSE and CRISIL. IISL is India's first specialized company

focused upon the index as a core product. IISL have a consulting and

licensing agreement with Standard & Poor's (S&P), who are worldleaders in index services.

49


50/83

CNX stands for CRISIL NSE Indices. CNX ensures common branding

of indices, to reflect the identities of both the promoters, i.e. NSE and

CRISIL. Thus, 'C' stands for CRISIL, 'N' stands for NSE and X stands

for Exchange or Index. The S&P prefix belongs to the US-based

Standard & Poor's Financial Information Services.

NSE other indices:

S&P CNX Nifty

CNX Nifty Junior

CNX 100

S&P CNX 500

CNX MidcapS&P CNX Defty

CNX Midcap 200

50


51/83

BOMBAY STOCK EXCHANGE:

The Bombay Stock Exchange Limited (formerly, The Stock Exchange,

Mumbai; popularly called The Bombay Stock Exchange, or BSE) is the

oldest stock exchange in Asia . It is located at Dalal Street, Mumbai ,

India .

Bombay Stock Exchange was established in 1875 . There are around

5,600 Indian companies listed with the stock exchange, and has a

significant trading volume. As of October 2006 , the market capitalization

of the BSE was about Rs. 33.4 trillion (US $ 730 billion). The BSE

SENSEX (Sensitive index), also called the BSE 30, is a widely used

market index in India and Asia . As of 2005, it is among the 5 biggest

stock exchanges in the world in terms of transactions volume.

History:

An informal group of 22 stockbrokers began trading under a banyan

tree opposite the Town Hall of Bombay from the mid- 1850s, 1875 , was

formally organized as the Bombay Stock Exchange (BSE).In January

1899 , the stock exchange moved into the Brokers Hall after it was

inaugurated by James M MacLean. After the First World War , the BSE

was shifted to an old building near the Town Hall. In 1956 , the

Government of India recognized the Bombay Stock Exchange as the

first stock exchange in the country under the Securities Contracts

(Regulation) Act .1995, when it was replaced by an electronic

(e.trading ) system named BOLT, or the BSE Online Trading system. In

2005 , the status of the exchange changed from an Association of

Persons (AoP) to a fully fledged corporation under the BSE

(Corporatization and Demutualization) Scheme , 2005 (and its namewas changed to The Bombay Stock Exchange Limited).

BSE Sensex:

The BSE SENSEX (also known as the BSE 30) is a value-weighted

index composed of 30 scrips, with the base April 1979 = 100. The set

of companies which make up the index has been changed only a few

times in the last 20 years. These companies account for around one-

fifth of the market capitalization of the BSE.

51
http://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/1875http://en.wikipedia.org/wiki/2006http://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Indian_Rupeehttp://en.wikipedia.org/wiki/Trillionhttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Stockbrokerhttp://en.wikipedia.org/wiki/Banyanhttp://en.wikipedia.org/wiki/Town_Hall_(Bombay)http://en.wikipedia.org/wiki/1850http://en.wikipedia.org/wiki/1875http://en.wikipedia.org/wiki/1899http://en.wikipedia.org/w/index.php?title=James_M_Maclean&action=edithttp://en.wikipedia.org/wiki/First_World_Warhttp://en.wikipedia.org/wiki/1956http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/w/index.php?title=Securities_Contracts_(Regulation)_Act&action=edithttp://en.wikipedia.org/w/index.php?title=Securities_Contracts_(Regulation)_Act&action=edithttp://en.wikipedia.org/wiki/1995http://en.wikipedia.org/wiki/ETradinghttp://en.wikipedia.org/w/index.php?title=BOLT&action=edithttp://en.wikipedia.org/w/index.php?title=BSE_OnLine_Trading&action=edithttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/w/index.php?title=BSE_(Corporatization_and_Demutualization)_Scheme&action=edithttp://en.wikipedia.org/w/index.php?title=BSE_(Corporatization_and_Demutualization)_Scheme&action=edithttp://en.wikipedia.org/wiki/1979http://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Mumbaihttp://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/1875http://en.wikipedia.org/wiki/2006http://en.wikipedia.org/wiki/Market_capitalizationhttp://en.wikipedia.org/wiki/Indian_Rupeehttp://en.wikipedia.org/wiki/Trillionhttp://en.wikipedia.org/wiki/Asiahttp://en.wikipedia.org/wiki/Stockbrokerhttp://en.wikipedia.org/wiki/Banyanhttp://en.wikipedia.org/wiki/Town_Hall_(Bombay)http://en.wikipedia.org/wiki/1850http://en.wikipedia.org/wiki/1875http://en.wikipedia.org/wiki/1899http://en.wikipedia.org/w/index.php?title=James_M_Maclean&action=edithttp://en.wikipedia.org/wiki/First_World_Warhttp://en.wikipedia.org/wiki/1956http://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/w/index.php?title=Securities_Contracts_(Regulation)_Act&action=edithttp://en.wikipedia.org/w/index.php?title=Securities_Contracts_(Regulation)_Act&action=edithttp://en.wikipedia.org/wiki/1995http://en.wikipedia.org/wiki/ETradinghttp://en.wikipedia.org/w/index.php?title=BOLT&action=edithttp://en.wikipedia.org/w/index.php?title=BSE_OnLine_Trading&action=edithttp://en.wikipedia.org/wiki/2005http://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/w/index.php?title=BSE_(Corporatization_and_Demutualization)_Scheme&action=edithttp://en.wikipedia.org/w/index.php?title=BSE_(Corporatization_and_Demutualization)_Scheme&action=edithttp://en.wikipedia.org/wiki/1979


52/83

SENSEX , first compiled in 1986 was calculated on a "Market

Capitalization-Weighted" methodology of 30 component stocks

representing a sample of large, well-established and financially sound

companies. The base year of SENSEX is 1978-79. The index is widely

reported in both domestic and international markets through print as

well as electronic media. SENSEX is not only scientifically designed

but also based on globally accepted construction and review

methodology. From September 2003, the SENSEX is calculated on a

free-float market capitalization methodology. The "free-float Market

Capitalization-Weighted" methodology is a widely followed index

construction methodology on which majority of global equity

benchmarks are based.

The growth of equity markets in India has been phenomenal in the

decade gone by. Right from early nineties the stock market witnessed

heightened activity in terms of various bull and bear runs. More

recently, the bourses in India witnessed a similar frenzy in the 'TMT'

sectors. The SENSEX captured all these happenings in the most

judicial manner. One can identify the booms and bust of the Indian

equity market through SENSEX.

The values of all BSE indices are updated every 15 seconds during the

market hours and displayed through the BOLT system, BSE website

and news wire agencies.

SENSEX calculation: SENSEX is calculated using a "Market

Capitalization-Weighted" methodology. As per this methodology, the

level of index at any point of time reflects the total market value of 30component stocks relative to a base period. (The market capitalization

of a company is determined by multiplying the price of its stock by the

number of shares issued by the company). An index of a set of

combined variables (such as price and number of shares) is commonly

referred as a 'Composite Index' by statisticians. A single indexed

number is used to represent the results of this calculation in order to

make the value easier to work with and track over time. It is mucheasier to graph a chart based on indexed values than one based on

52


53/83

actual values.

The base period of SENSEX is 1978-79. The actual total

market value of the stocks in the Index during the base period has

been set equal to an indexed value of 100. This is often indicated by

the notation 1978-79=100. The formula used to calculate the Index is

fairly straightforward. However, the calculation of the adjustments to

the Index (commonly called Index maintenance) is more complex.

The calculation of SENSEX involves dividing the total market

capitalization of 30 companies in the Index by a number called the

Index Divisor. The Divisor is the only link to the original base period

value of the SENSEX. It keeps the Index comparable over time and is

the adjustment point for all Index maintenance adjustments. During

market hours, prices of the index scrips, at which latest trades are

executed, are used by the trading system to calculate SENSEX every

15 seconds and disseminated in real time. During market hours, prices

of the index scrips, at which trades are executed, are automatically

used by the trading computer to calculate the SENSEX every 15

seconds and continuously updated on all trading workstations

connected to the BSE trading computer in real time.

BSE - other Indices:

Apart from BSE SENSEX, which is the most popular stock index in

India, BSE uses other stock indices as well:

BSE 500

BSE PSU

BSE MIDCAP

BSE SMLCAP

BSE BANKEX

53


54/83

BSE SENSEX 2009 is calculated based on the 30scrips. Those thirty

scrips are as

Follows:

Code Name Sector

500410 ACC Ltd. Housing Related

500103 Bharat Heavy Electricals Ltd. Capital Goods

Code Name Sector

532454 Bharti Airtel Ltd. Telecom

532868 DLF Ltd. Housing Related

500300 Grasim Industries Ltd. Diversified

500010 HDFC Finance

500180 HDFC Bank Ltd. Finance

500440 Hindalco Industries Ltd. Metal,Metal Products &

Mining

500696 Hindustan Unilever Ltd. FMCG

532174 ICICI Bank Ltd. Finance

500209 Infosys Technologies Ltd. Information Technology

500875 ITC Ltd. FMCG

532532 Jaiprakash Associates Ltd. Housing Related

500510 Larsen & Toubro Limited Capital Goods

500520 Mahindra & Mahindra Ltd. Transport Equipments

532500 Maruti Suzuki India Ltd. Transport Equipments

532555 NTPC Ltd. Power

500312 ONGC Ltd. Oil & Gas

500359 Ranbaxy Laboratories Ltd. Healthcare

532712 Reliance Communications Limited Telecom

500325 Reliance Industries Ltd. Oil & Gas

500390 Reliance Infrastructure Ltd. Power

500376 Satyam Computer Services Ltd. Information Technology

500112 State Bank of India Finance

500900 Sterlite Industries (India) Ltd. Metal,Metal Products & Mining532540 Tata Consultancy Services Limited Information Technology

54


55/83

500570 Tata Motors Ltd. Transport Equipments

500400 Tata Power Company Ltd. Power

500470 Tata Steel Ltd. Metal,Metal Products &

Mining

507685 Wipro Ltd. Information Technology

55


56/83

CHAPTER -4

DATA ANALASYS

AND INTERPRETATION

ANALYSIS AND INTERPRETATION

July 2011 NIFTY FUURE CONTRACTSymbo Date Expiry Open High Low Close

56


57/83

lNIFTY 1-Jul-11 28-Jul-

115700.

25702 5616.

255638.

4NIFTY 4-Jul-11 28-Jul-

115659.

95690 5642.

35665.

85

NIFTY 5-Jul-11 28-Jul-11 5668 5670 5628. 25 5651.1NIFTY 6-Jul-11 28-Jul-

115642.

65667.

55617.

55636.


115649.

85751.

65641 5744.


115760 5760 5661 5672.

3NIFTY 11-Jul-

1128-Jul-

115652.

155659 5605.

15617.

05NIFTY 12-Jul-

1128-Jul-

115587.

35593.

455502.

155539.

95NIFTY 13-Jul-

1128-Jul-

115551 5609.

95550 5599.

75NIFTY 14-Jul-

1128-Jul-

115574.

45667.

055546.

15600.

25NIFTY 15-Jul-

1128-Jul-

115606 5640 5563.

55586.

95NIFTY 18-Jul-

1128-Jul-

115590 5609 5560.

055572.

75NIFTY 19-Jul-

1128-Jul-

115662.

15662.

15561.

655624.

3NIFTY 20-Jul-

1128-Jul-

115651.

25658.

95554.

055569.

55NIFTY 21-Jul-

1128-Jul-

115559.

85586 5532.

55544.

2NIFTY 22-Jul-

1128-Jul-

115590.

15652.

85573.

255645.

55NIFTY 25-Jul-

1128-Jul-

115630 5709.

85616.

15690.

65NIFTY 26-Jul-

1128-Jul-

115700 5708.

95555.

555574.

35NIFTY 27-Jul-

1128-Jul-

115588.

85588.

85518.

255547.

9

NIFTY 28-Jul-11 28-Jul-11 5500 5517.05 5473 5492. 7

57


58/83

5800 CALL OPTION FOR JULY 2011

Symbol

Date Expiry StrikePrice

Open High Low Close

NIFTY 1-Jul-11 28-Jul-11 580

0

60 60 34.3 39.25

NIFTY 4-Jul-11 28-Jul-11 5800

51.85 52.5 37.75 41

NIFTY 5-Jul-11 28-Jul-11 5800

41.6 42 31.05 35.9

NIFTY 6-Jul-11 28-Jul-11 5800

32.95 39.8 27 30.2

NIFTY 7-Jul-11 28-Jul-11 5800

31.05 69.95 30.15 66.45

NIFTY 8-Jul-11 28-Jul-11 5800

72 72.6 34.35 38.3

NIFTY 11-Jul-11 28-Jul-11 580 0 34.65 35.95 22 24.45NIFTY 12-Jul-

1128-Jul-11 580

016.1 18.7 11.1 14.65

NIFTY 13-Jul-11

28-Jul-11 5800

25 25 14.1 18.65

NIFTY 14-Jul-11

28-Jul-11 5800

16.5 27.3 12.15 16.75

NIFTY 15-Jul-11

28-Jul-11 5800

16.85 20.65 10.85 12.35

NIFTY 18-Jul-11

28-Jul-11 5800

10.95 13.35 7.2 7.65

NIFTY 19-Jul-11

28-Jul-11 5800

6.55 14.5 6.05 11.75

NIFTY 20-Jul-11

28-Jul-11 5800

13.25 14.2 4.6 5.3

NIFTY 21-Jul-11

28-Jul-11 5800

4.05 5.5 2.8 3.2

NIFTY 22-Jul-11

28-Jul-11 5800

4.2 8.5 3.6 7.1

NIFTY 25-Jul-11

28-Jul-11 5800

4.7 14.2 4.05 9.65

NIFTY 26-Jul-

11

28-Jul-11 580

0

11 11.5 1.2 1.4

NIFTY 27-Jul- 28-Jul-11 580 1 1.2 0.3 0.35

58


59/83

11 0NIFTY 28-Jul-

1128-Jul-11 580

00.15 0.15 0.05 0.05

5800 PUT OPTION FOR JULY 2011Symbol


Open High Low Close

NIFTY 1-Jul-11

28-Jul-11

5800 162.75

215.9 158 198.25

NIFTY 4-Jul-11

28-Jul-11

5800 166 192.35

159.7 173.2

NIFTY 5-Jul-11

28-Jul-11

5800 170 199.85

170 181.8

NIFTY 6-Jul-11

28-Jul-11

5800 189.4 205 171.1 190.25

NIFTY 7-Jul-11

28-Jul-11

5800 182 185.1 114.8 118.95

NIFTY 8-Jul-11

28-Jul-11

5800 111.75

170.35

111.7 162.8

NIFTY 11-Jul-11

28-Jul-11

5800 178.85

213.8 169.55

206.65

NIFTY 12-Jul-11

28-Jul-11

5800 256 305.8 222 268.5

NIFTY 13-Jul-11

28-Jul-11

5800 254.1 256.65

207.15

217.2

NIFTY 14-Jul-11

28-Jul-11

5800 239 262.65

156.65

217.45

NIFTY 15-Jul-11

28-Jul-11

5800 200.1 244 177.4 222.6

NIFTY 18-Jul-11

28-Jul-11

5800 225 243.5 201.45

230.9

NIFTY 19-Jul-11

28-Jul-11

5800 230 239.55

169.9 183.2

59


60/83

NIFTY 20-Jul-11

28-Jul-11

5800 165.3 246 156 231.85

NIFTY 21-Jul-11

28-Jul-11

5800 242 265.7 216.9 254.9

NIFTY 22-Jul-

11

28-Jul-

11

5800 215 229.9 151.5 158.3

NIFTY 25-Jul-11

28-Jul-11

5800 178.8 183.6 100.5 113.95

NIFTY 26-Jul-11

28-Jul-11

5800 105 241 99 224.85

NIFTY 27-Jul-11

28-Jul-11

5800 217 278.75

215.8 247.9

NIFTY 28-Jul-11

28-Jul-11

5800 289.65

322 282 306.1

INTERPRETATION: In the above graph I calculated BEP.BREAKEVEN POINT (BEP) = HIGH VALUE+LOW VALUE/2

=5760+5473/2= 11233/2= 5616.5

In the above table I observed fluctuations in the period of (01-07-

2011 to 28-07- 2011) in this graph I found as BEP was 5616.5 sharevalues.

Here I observed as a value share is high rate so Nifty-50 value was

(5616.5 - 5760.00=143.5) so here share value is decreased so in this

period of so here investors gets more losses, when goes for more

longs .if investor enter for longs on 7 th of May, with in short span of time

investor get good profits. So this is good signal of the investors. So

here I again observed nifty-50 losses of the period so here Nifty-50share value is (5616.5-5473=143.5) so share value is increased so

here investor gets more profits, when attempts for more shorts. So this

is unexpected changes in market and politics and lack of experts of

investors.

When an investor goes for shorts in 3 levels, when compare to BEP

Explaining the actual position of investor (1)Margin of Safety (M.o.S) =opening share value BEP

60


61/83

. =5700-5616.5

=-83.5

So here margin of safety is less than to the BEP share value. So here

investor gets some profits in shorts.

(2) Margin of Safety (M.o.S) =high share value BEP

=5760.00-5616.5

= 143.5

So here margin of safety is more than to the BEP share value. So here

investor gets more profits and shorts at high price.

(3) Margin of Safety (M.o.S) =low share value BEP

= 5473 5616.5

= 143.5

So, in the above situation , after low recorded price 5473, on expiry

date nifty maximum reached only 20 points more, so the max loss in

the current contract is only 20 points here margin of safety is less than

to the BEP so here investor gets more losses when investor goes for

more shorts.

What is called as Margin?

Margin amount is security to the Broking firms in derivatives markettrading happens on basis of margin amount, here Margin amount isinvestment of customers, sometimes margin may becomes zero,sometimes it may go negative values.

Ex: if a Nifty contract worth is 2 lakhs, broking companies will not taketotal amount, normally they used to collect 15% on actual worth it

means they collect only 30k. if nifty looses 600 points , margin amountbecomes zero, if nifty looses more than 600 points, it comes innegative

Is hedging gives the security to Margin Amount? A: Absolutely Yes

When coming to may contract, there is lot of positive fluctuations(Never happen in stock market). Because of Old Govt. formation on16 th May 2009.

Here , in a situation, a investor expects correction on may 13 th

and he had short sell nifty future on same day @ 3700 ( keep in mind

61


62/83

elections results on 16 th) and Paid margin amount of 30k. and heknows that if Nifty crosses 4250 his margin becomes Zero.

In above situation, to give the security to his margin amount, Iam suggesting 3900 call option .on 15 th may 2009 for the investment of 3500

Calculations as on 19 th May 2009

Nifty future hits 4600 it means he was in loss of 900 points900*50 = 45000

Margin amount = 30000It means on 19 th may his margin amount gone into negative of 15000

Nifty option hits 680 it means is he was in gain of 600 points600*50 = 30000

It means after deducting the margin amount he has still 15000 positivebalance with the company.Here Rs 3500 worth call option given the 30k worth security

On 19 th may if he sold the call option he gains 610 points and hehold the position short sell of 3700.

On 22 nd may he covers the nifty (3700 short) @4200, here theloss was 500 points.

On 2 positions he got 110 points gain. It means here hedging

given security and returns also.

25-AUGUST-2011 FUTURES INDEX NIFTY-50

Symbol Date Expiry Open High Low Close

NIFTY 29-Jul-11 25-Aug-11

5479.9

5531.45

5456.1

5488.05

NIFTY 1-Aug-11 25-Aug-11

5544.45

5557.1

5488 5532.95


5498.7

5498.7

5433.15

5466.5


5418 5436.6

5386.5

5424.4


5424.5

5440 5325.25

5337.2


5191 5233.7

5114.7

5211.35

62


63/83


5120.2

5208 5057.3

5126.2


4964 5172 4951 5083.4

NIFTY 10-Aug-

11

25-Aug-

11

5223 5223 5118.

1

5158.

65NIFTY 11-Aug-11

25-Aug-11

5130 5186.8

5122 5137.25

NIFTY 12-Aug-11

25-Aug-11

5175 5181 5052 5079.85

NIFTY 16-Aug-11

25-Aug-11

5125 5139.85

5006.4

5027.7

NIFTY 17-Aug-11

25-Aug-11

5039.6

5125.7

5014 5066.75

NIFTY 18-Aug-11

25-Aug-11

5055.65

5075.65

4926.4

4938.05

NIFTY 19-Aug-11

25-Aug-11

4870 4903.3

4801.1

4850.85

NIFTY 22-Aug-11

25-Aug-11

4850 4921.75

4816.1

4910.45

NIFTY 23-Aug-11

25-Aug-11

4927 4973.2

4865.1

4947.4

NIFTY 24-Aug-11

25-Aug-11

4930 4961.95

4867.3

4883.85

NIFTY 25-Aug-11

25-Aug-11

4901.05

4912 4831.1

4841.75

NIFTY5600 CALL OPTION TABLE FOR 25-AUGUST-

2011

63


64/83

Symbol


Open High Low Close

NIFTY 29-Jul-11 25-Aug-

11

560

0

56 72.05 49 62.15


5600

76 82.15 55.65 67


5600

55 57 36.7 44.4


5600

5 38 5 33.6


5600

32.8 35.35 16.55 18.4


5600

10 13 7.1 12.1


5600

6 10.65 5.7 7.45


5600

3 10.4 2.5 9.5

NIFTY 10-Aug-11

25-Aug-11

5600

13 13.6 6.4 7.25

NIFTY 11-Aug-11

25-Aug-11

5600

6.6 7.15 4.95 5.3

NIFTY 12-Aug-11

25-Aug-11

5600

5.75 6.5 2.85 3.15

NIFTY 16-Aug-11

25-Aug-11

5600

3.85 3.9 1.5 1.6

NIFTY 17-Aug-11 25-Aug-11 5600 1.8 1.85 1.2 1.45

NIFTY 18-Aug-11

25-Aug-11

5600

1.7 1.7 1.05 1.15

NIFTY 19-Aug-11

25-Aug-11

5600

1 1.2 0.8 1.1

NIFTY 22-Aug-11

25-Aug-11

5600

0.7 1 0.65 0.75

NIFTY 23-Aug-11

25-Aug-11

5600

0.55 0.7 0.45 0.55

NIFTY 24-Aug-11

25-Aug-11

5600

0.25 0.4 0.25 0.3

NIFTY 25-Aug-11

25-Aug-11

5600

0.1 0.1 0.05 0.05

64


65/83

NIFTY 5600 PUT OPTION TABLE FOR 25-AUGUST-2011

Symbol

Date Expiry StrikePric

e

Open High Low Close


5600

176.3 192 141.45

172.3


5600

150 162 111.45

133.05


5600

140.5 202.45

140.5 176.45


5600

206.6 235.55

197.4 205.3


5600

210.6 288.95

193 279.3

NIFTY 5-Aug-11 25-Aug- 11 5600 399.95 492.25 380 398.3NIFTY 8-Aug-11 25-Aug-

11560

0499.9 544 400 479.5

5NIFTY 9-Aug-11 25-Aug-

11560

0642.6 702 437 521.7

NIFTY 10-Aug-11

25-Aug-11

5600

440 482.7 416.1 445.55

NIFTY 11-Aug-11

25-Aug-11

5600

463.1 476.75

418.85

461.75

NIFTY 12-Aug-11

25-Aug-11

5600

440.5 545.45

440.5 520.1

NIFTY 16-Aug-11

25-Aug-11

5600

480 589.3 472.45

560.3

NIFTY 17-Aug-11

25-Aug-11

5600

549.15

581.9 475 532.35

NIFTY 18-Aug-11

25-Aug-11

5600

534.3 669.95

534.3 659.85

NIFTY 19-Aug-11

25-Aug-11

5600

722.05

794 700 745.85

NIFTY 22-Aug-11

25-Aug-11

5600

760.7 782 677.3 685.95

NIFTY 23-Aug-

11

25-Aug-

11

560

0

683.4

5

731.1 628 649

NIFTY 24-Aug- 25-Aug- 560 680.8 728.1 638 715.5

65


66/83

11 11 0 5 5NIFTY 25-Aug-

1125-Aug-

11560

0713.6

5770.7

5688.0

5762.2

5

NIFTY 5400 PUT OPTION TABLE FOR 25-AUGUST-2011

Symbol


Open High Low Close


5400

109 109 58 75.7


5400

63.8 66.25 47.25 49.95


5400

58.6 85.9 58.6 71.2


5400

94 105.75

81.65 86.85


5400

89 140.3 78.5 132.7


5400

200 313 200 230.3


5400

Documents

Derivtives Nifty