Final Project Report(Aditya Ahuja)

8/8/2019 Final Project Report(Aditya Ahuja)

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Jaypee Business School

A constituent of Jaypee Institute of Information Technology UniversityA-10, Sector 62, Noida (UP) India 201 307www.jbs.ac.in

Hedging Strategy Through Futures And Options

Internship Report submitted as a partial requirement for the award of the two yearMaster of Business Administration Programme

MBA 2009-11

Name: Aditya AhujaTelephone: 9540322377

E-mail: [email protected]

Corporate Internship SupervisorName: Mr. Jitendra Rai Singhania

Designation: Regional Business Head (Karvy Fortune)Contact details: 9212386311

Mailing Address:[email protected]

JBS-Faculty Supervisor: Dr. Hima Gupta

Start Date for Internship: 19th AprilEnd Date for Internship: 16th June
http://www.jbs.ac.in/mailto:[email protected]:[email protected]://www.jbs.ac.in/mailto:[email protected]:[email protected]


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Report Date: 5th of July

Self Certification by the Intern

I hereby certify that I, Mr.Aditya Ahuja have successfully completed my internship withKarvy Stock Broking Limited in the month of June-2010 from (19th of April to 16th ofJune). This is also to certify that this report is an original product and no unfair meanslike copying etc have been used for its completion.

Name: Aditya Ahuja

Signature:

Date: 23rd June 2010

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Certificate from the Corporate Internship Providing Organization

This is to certify that Mr Aditya Ahuja has successfully completed his internship with us

in the month of June-2010 from (19th of April to 16th of June). We wish him all the best

for all his future endeavors.

Name of the Supervisor: Mr.Jitendra RaiSinghania

Signature:

Date: 23rd June 2010

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Acknowledgement

Sometimes words fall short to show gratitude, the same happened with me during this

project. The immense help and support received from Karvy stock broking limited

overwhelmed me during the project.

My sincere gratitude to Mr. Jitendra Rai Singhania (Regional Business Head-Karvy

Fortune) for providing me with an opportunity to work with Karvy stock broking limited.

I am highly indebted to Mr. Jitendra Rai Singhania, Regional Business Head-Karvy

Fortune and company project guide, who has provided me with the necessary information

and his valuable suggestion and comments on bringing out this report in the best possible

way.

I am grateful to Mr. Jitendra Rai Singhania and all of the Associate members of New

Delhi branch, who have helped me in the successful completion of this project,

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TABLE OF CONTENTS

Self certification By the Intern 2

Certificate from the Organization 3

Acknowledgement................... 4

Table of Contents................ 5

Executive Summary......... 6

Objective of the Study (Research Methodology). 7-8

College Profile.. 9-12

Companys Profile..13-28

About Stock Market28-

29

Stock Index.29-34

Indian Brokerage Industry..34-40

Introduction on Derivative..41-

45

Futures and Trading In Futures Segment.......................................................................45-52

What are Options...52-54

Option Strategies.55-

56

Hedging..57-58

What is Hedge Fund...58-59

Analysis and Interpretation60-67

Findings.... .....68-69

Suggestions and Conclusion..69-70

References70-71

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Executive Summary

This project has been a great learning experience for me; at the same time it gave me

enough scope to implement my analytical ability. This project as a whole can be divided

into two parts:

The project gives an insight about derivatives and its various aspects. It is purely

based on whatever I learned at karvy. One can have brief knowledge about

derivatives and its hedging strategies using Futures and Options and all its basics

through the project.

All the topics have been covered in a very systematic way. The language

has been kept simple so that even a layman could understand.

Hedging is nothing but to control or eliminate the risk to a certain extent. Derivatives are

an important tool to hedge the risk or position by dint 0f Future & option market.

My entire project report revolves around Derivatives as a tool of Hedging. This project

has been conducted at Karvy, Delhi to the best of my effort and determination.

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RESEARCH METHODOLOGY

Objective

Primary:

1) To understand about derivative market

2) To study how does a derivative has the risk or position

3) To know why the derivatives is considered safer then the cash market

Secondary:

1. To understand scope of derivatives in capital market

Research Approach:

Data collection:

1) Primary Data: - Formal and Informal Discussion with the company

guide and clients of the company.

2) Secondary Data: - Internet, Books, Newspapers, TV channels, News

Channels.

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Research Problem:

There are very few ways for hedging price risk or price volatility in equity markets and

derivatives is one of them. My study is to see how derivatives are used for hedging pricerisk in equity market.

Limitation:

1) As research required detail information of portfolios of clients, which is very

confidential for the company, a huge difficulty was faced in getting the data.

2) As the company guide was very busy in his exhausting work schedule very

less guidance was available.

Scope of study:

1) As derivatives are very vast subject the scope of research is limited to the

financial derivatives viz. future & options.

2) Forwards has been kept out of the scope of this research.

3) Since options are widely used for hedging, only the options cases have been taken

into the consideration in my research.

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About Jaypee Business school

Jaypee Business School is the latest manifestation of the vision of our Revered Founder,

Honble Shri Jaiprakash Gaur ji. The Jaypee Business School (JBS), a constituent of

Jaypee Institute of Information Technology (Deemed University) was started in the year

2007. It has made good progress in a short span of less than 3 years. The mission of JBS

is to prepare and produce competent, passionate and market centric professionals who

can manage human resources, business operations and ensure world class quality

practices.

JBS has state of the art infrastructure and highly competent and dedicated faculty for theMBA programme. The programme aims to develop a competent cadre of business

executives to meet the countrys growing requirements for trained personnels in the field

of management.

MBA Programme At JBS

The JBS MBA programme, a six trimester general management programme, aims at

providing a comprehensive coverage incorporating all the important areas and disciplines

in management and inculcates a professional approach to business amongst the potential

managers. The syllabi for MBA compare favorably with the syllabi of some of the

worlds best Business Schools. The ability to put in sustained and disciplined hard work

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over a sufficient length of time is one of the key factors to success in professional life. A

typical trimester is designed to be intensive with an emphasis on regular and continuous

work. The Evaluation System is accordingly designed to encourage this concept.

Future Prospects of JBS

Future Programme includes the following:

Three-year Part Time MBA Programme.

Short Term Training Programmes, Consulting and Research etc.

MBA Programme At JBS

The JBS MBA programme, a six trimester general management programme, aims at

providing a comprehensive coverage incorporating all the important areas and disciplines

in management and inculcates a professional approach to business amongst the potential

managers. The syllabi for MBA compare favorably with the syllabi of some of the

worlds best Business Schools. The ability to put in sustained and disciplined hard work

over a sufficient length of time is one of the key factors to success in professional life. A

typical trimester is designed to be intensive with an emphasis on regular and continuous

work. The Evaluation System is accordingly designed to encourage this concept.

Corporate Profile of Jaypee Group

The Jaypee Group, with an annual turnover of over 6500 Crores (US$ 1.5b), is an

infrastructure conglomerate with a strong belief in the countrys huge potential. The

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Groups business interests are in Engineering & Construction, Power, Cement,

Expressways, Real Estate, Hospitality and Education (not for profit). The group

companies have been well entrenched in infrastructure projects for over four decades.

Groups indomitable spirit and uncompromising execution capability has made it

complete some of the largest projects in India as on date. Empowered with self belief &

determination to excel and make the organization contribute in Nation building through

entrepreneurial daring, it focuses on all round growth.

The groups commitment is to grow with a human face.

Engineering and Construction

The Engineering & Construction wing of the group is an acknowledged leader in the

construction of multi-purpose river valley and hydropower projects and has the unique

distinction of completing various projects in different capacities in the 10th five year plan

to provide 7880 MW of hydropower to the nation.

Power

The Group, being an integrated power player in the country, after having established a

strong presence in the Hydro-Power Sector, has initiated its entry into Thermal Power

Generation, Power Transmission and also forayed into Wind Power. With 700 MW of

hydropower generating capacity, it is the largest private sector hydropower producer and

poised to be 13470 MW power entities by 2018.

Cement

Jaypee Cement, the third largest cement player in the country with an aggregate capacity

of 14.70 MTPA is poised to be a 30 MTPA cement producer by 2011 with Captive

Thermal Power plants totaling 342 MW, through expansion in the Northern, Southern,Central, Eastern, and Western regions of the country.

Expressways

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The Group is poised to complete by December 2010, 165 Km long 6/8 lane super

expressway between Greater Noida and Agra (Yamuna Expressway Project) to usher

growth and development across rural India. Ribbon development shall take place along

Yamuna Expressway at 5 locations with integrated townships to be constructed on 2500

hectares (6250 acres) of land

Real Estate

A premium 452 lifestyle real estate destinations, Jaypee Greens, Greater Noida offers

luxury villas and apartments with an 18-hole Greg Norman Signature golf course,

landscaped parks and lakes along with an integrated sports club.

Jaypee Greens has launched Wish Town in Noida, a historic residential township stated

to be Indias largest township development on over 1162 acres. The Group will also

construct state-of-the-art Formula-I racing tracks in Greater Noida.

Hospitality

The hospitality division owns and operates four 5-star hotels, two in the national capital,

New Delhi and one each in Agra and Mussoorie. The Group is also constructing a

boutique spa cum resort at Greater Noida. The hotels have a total capacity of 644 rooms.

Education

It is the belief of the Founder Chairman that imparting quality education is the best

service that an organization can provide to the society. The group supports various

educational initiatives at all levels of the learning curve through Jaiprakash Sewa

Sansthan (JSS) - a not-for-profit trust.

Today with 17 schools, 3 ITIs, 2 Polytechnics, and 3 Universities (JIIT, JUIT and JIET),

THE Jaypee Education System is touching the lives of over 25,000 students. The System

plans to take the vision of service to society through quality education to another plane

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by expanding its infrastructure to provide education to approximately 100,000 students

over the next 5-year period.

Organization overview

Introduction:

Success is a journey, not a destination. If we look for example to prove this

quote then we can find many but there is none like that of Karvy. Back in the year

1981, five people created history by establishing the Karvy and co. which is today

known as Karvy, the largest financial service provider of India.

Success sutras of Karvy:

The success sutra of karvy is driven by 8 success sutras adopted by it namely trust,

integrity, dedication, commitment, enterprise, hard work and tem play, learning and

innovation, empathy and humility. These are the values that bind success with karvy.

Vision of Karvy:

To achieve and sustain market market leadership, karvy shall aim for complete

customer satisfaction, by combining its human and technological resources, to

provide world class quality services. In the process karvy shall strive to meet

And exceed customers satisfaction and set industry standards.

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Mission Statement:

Our mission is to be a leading and preferred service provider to our customers, and

we aim to achieve this leadership position by building an innovative, enterprising,

and technology driven organization which will set the highest standards of service

and business ethics.

Company overview:

Karvy was established as Karvy and company by five Chartered Accountants during the

year 1979-80, and then its work was confined to audit and taxation only. Later on it

diversified into financial and accounting services during the year 1981-82 with a capital

of Rs.150000. it achieved its first milestone after its first investment in technology.

Karvy became a known name during the year 1985-86 when it forayed into capital

market as registrar.

Evolution of KARVY:

It is well said that success is a journey not a destination and we can see it being proved

by Karvy. Under this section we will see that how this Karvy And Company of 1980

became Karvy of 2010. Karvy blossomed with the setting up of its first branch at

Mumbai during the year 1987-88. The turning point came in the year 1989 when it

decided to enter into one of the not only emerging rather potential field too i.e.; stock

broking. It added the feather of stock broking into its cap. At the same time it became the

member of Hyderabad Stock Exchange through associate firm Karvy Securities Ltd and

then Karvy never looked back. It went on adding services one after another; it entered

into retail stock broking in the year 1990. Karvy investor service centers were set up in

the year 1992. Karvy which already enjoyed a wide network through its investor service

centers, entered into financial product distribution services in the year 1993. One year

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more and Karvy was now dealing into mutual fund services too in the year 1994 but it

didnt stopped there, it stepped into corporate finance and investment banking in the year

1995.

Karvys strategy has always been being the first entrant in the market. Karvy again hit

the limelight by becoming the first registrar in the country to be awarded ISO 9002 in the

year 1997. Then it stepped into the other most happening sector i.e.; IT enabled services

by establishing its own BPO units and at a gap of just 1 year it took the path of E-

Business through its website www.karvy.com . Then it entered into insurance services in

the year 2001 with the launch of its retail arm karvy- the finapolis: your personal

finance advisor. Then in the year 2002 it launched its PCG (Private Client Group)

which looks after its High Net worth Individuals .and maintain their portfolio and

provides them with other financial services. In the year 2003, it commenced secondary

debt and WDM trading.

It was a decade which saw many Indian companies going global..so why the largest

financial service provider of India should lag behind? Hence, Karvy launched Karvy

Global Services Limited after entering into a joint venture with Computer share,

Australia in the year 2004.the year 2004 also saw Karvy entering into commodities

marketing through Karvy Comtrade.

Year 2005 saw Karvy establishing a separate branch for its insurance services under the

head Karvy Insurance Broking Ltd and in the same year, after being impressed with

the rapid growth ofKarvy Stock Broking Limited, PCG group of Hong Kong acquired

25% stake at KSBL. In the year 2006, karvy entered into one of the hottest sector of

present time i.e. real estate through Karvy realty& services (India) ltd. hence, we can

see now karvy being established as the largest financial service provider of the country.

Now Karvy group consists of 8 highly renowned entities which are as follow:

1. : The first securities registry to receive ISO 9002 certification in

India. Registered with SEBI as Category I Registrar, is Number 1 Registrar in the

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Country. The award of being Most Admired Registrar is one among many of the

acknowledgements we received for our customer friendly and competent services.

2. : Karvy Stock Broking Ltd. consists of five units namely stock

broking servics, depository participant, advisory services, distribution of financial

products, advisory services and private client goups.

3. : It is registered with SEBI as a category 1 merchant banker. Its

clientele includesinclude leading corporate, State Governments, foreign institutional

investors, public and private sector companies and banks, in Indian and global markets.

4. : Karvy insurance broking ltd is also a part of karvy stock broking

ltd. At Karvy Insurance Broking Limited both life and non-life insurance products are

provided to retail individuals, high net-worth clients and corporates.

5. : The company provides investment, advisory and brokerage

services in Indian Commodities Markets. And most importantly, it offer a wide reachthrough our branch network of over 225 branches located across 180 cities.

6. : Karvy Global is a leading business and knowledge process

outsourcing Services Company offering creative business solutions to clients globally. It

operates in banking and financial services, inurance, healthcare and pharmaceuticals,

media , telecom and technology. It has its sales and business development office in New

York, USA and the offshore global delivery center in Hyderabad, India

7. : Karvy Realty (India) Limited is engaged in the business of real

estate and property services offering:

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Buying/ selling/ renting of properties

Identifying valuable investments opportunities in the real estate sector

Facilitating financial support for real estate and investments in properties

Real estate portfolio advisory services

8. : It is a joint venture between Computershare, Australia and Karvy

Consultants Limited, India in the registry management services industry.

Organization structure of Karvy:

Talking about the organization structure of karvy, we have the board of directors as the

supreme governing body , the chairman being Mr. C. Parthasarthy, Mr. M. Yugandhar as

the managing director, Mr M.S. Ramakrishna and Mr. Prasad V. Potluri as directors.

The board of directors head the karvy group, karvy computershares limited, karvy

investors services ltd., karvy comtrade, karvy stock broking ltd., and karvy global

services ltd.

Karvy group being the flagship company looks after the functional departments such as

corporate affairs, group human resources, finance & accounting, training & development,

technology services and corporate quality.

Karvy computershare private limited facilitates mutual fund services, share registry and

issue registry whereas merchant banking is looked after by karvy investor services ltd.

Karvy stock broking ltd heads its another branch too ie. Karvy insurance broking ltd. The

services offered by KSBL are: stock broking, depository, research, distribution, personal

client group and institutional desk. And finally the BPO services are managed by karvyglobal services ltd. Summarizing it in a diagram, it can be presented as:

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Spectrum of services offered by Karvy:

Karvy being the top registrar and transfer agent, functions as registrar in most of the

issues in the country. Talking about the mutual fund services offered by karvy, we can

get the products of 33 AMCs over here. it deals in both closed ended funds as well as

open ended too. Now one must be thinking why to get the mutual funds from karvy

instead of getting it directly from AMCs???we have great reasons for it: the first one

being ; if we avail the services ofkarvy then we can get the information about all the

AMCs and their products at a single place along with expert recommendations whereas at

an AMC we can get information about the products of that specific AMC only. And the

second being wide network ofkarvy.nowadays we can find karvy offices at remote

areas too.

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Along with these, karvy is very well handling the role of depository participant. Being

registered with both the depositories i.e.; NSDL (national securities depository ltd) and

CDSL (central depository services ltd), karvy can have access to both. Its wide network

also facilitates it in distribution of retail financial products.

Karvy believes in being updated always. So it is always ready to use latest technologies

so that its clients always be in touch with the latest happenings along with karvy. It offers

e-business through internet through its website: karvy.com. Other than it, it also provides

its various services through SMSes.

Karvys services are not limited to its investors only rather its offerings are for its

corporate clients and distributors too. it is very well aware of the fact that in this era of

neck to neck competition, we cant ignore any of the aspects of our business.so theres

a offering for everybodyeveryones welcome at Karvy.

Why should investors choose for Karvy?

Excellence is next to nothing .and here at karvy everybody tries their best to offer

excellent services to its clientele through its offerings maintaining the karvy culture

which includes:

1. Controlled and low cost service culture: Karvy is there to serve its client at the

minimum possible cost. It controls cost by its various cost- cutting techniques and

minimization of avoidable costs.

2. Large volume processing capability: Being the largest financial service provider in

the country, it has the unique distinction of operating its activities on a large scale which

benefits all the parties cordially.

3. Adherence to strict time schedule: Karvy knows that time is money and tries it best

to finish the task within the stipulated time schedule.

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4. Expertise in coordinating multi-location responses:Karvy has got a wide network

and hence one can find its branches at most of the places in India. Thus it enjoys its

presence everywhere and coordinates among itself in solving the queries and in

responding to any situation.

5.Expertise in managing independent entities such as banks, post-office etc.: The

work culture of karvy and the ethics followed inside karvy makes its workforce

compatible with everybody, so the karvy people establishes good coordination with

independent entities too.

6. Pooling of group resources: Karvy group consists of eight subsidiaries, so it can

easily pool up its resources for accomplishment of its goals, whenever needed. The

groups can help each other whenever there are peaks and lows, and even in the case when

they have huge targets just as we saw few years back, Tata group pooling its resources to

acquire Corus.

How karvy achieved it?

The core competency of karvy lies in the following points due to which it enjoys a

competitive edge over its competitors. The following culture adopted by karvy makes it

all time favorite among its clientele:

1. Professionally managed by qualified and trained manpower.

2. Uniquely structured in-house software and hardware department

3. Query handling within 48 hrs.

4. Strong secretarial, accounting and audit systems.

5. Unique work culture of working 7 days a week in 3 shifts.

6. Unmatched network spreading all over India.

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How Achievements sounds synonymous to Karvy:

The landmarks achieved by Karvy very well define its success story. In the previous

pages, we learnt how a company started by five chartered accountants, named as Karvy

and company turned into todays Karvy Group, the largest financial intermediary of

India. But success didnt came to Karvy at a flow, the hard work and dedication of its

workforce made it what it is todaygradually it achieved the following landmarks and

now it has became what we call the Karvy group, now it is:

1. Largest independent distributor for financial products.

2. Amongst the top 5 stock broker.

3. Among the top 3 depository participants.

4. Largest network of branches & business associates.

5. ISO 9002 certified operations by DNV.

6. Amongst top 10 investment bankers.

7. Adjudged as one of the top 50 IT users in India by MIS

south Asia.

8. Full- fledged IT driven operation.

9. Indias no.1 registrar & securities transfer agent.

Clientele of Karvy:

Karvys culture has helped karvy in achieving such a distinct position in the market

where it can boast of its huge client base. Be it a retail investor investing Rs. 500 in a SIP

in Reliance mutual fund or be it the largest corporate house of the country: Reliance

industries- everybody is heading towards karvy for their wealth maximization, lets have

a look at the clientele ofkarvy:

According to the data published in year 2007, karvy stock broking ltd. Operates

through more than 12000 terminals, more than 290000 accounts are maintained and

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commands over 3.14% market share of NSE. The distribution services have access to

more than Rs.40 billion Assets under Management. Karvy being a depository participant

with both NSDL and CDSL manages more than 700000 accounts from more than 380

locations. Talking about the registry services, it manages over 750 public/ right issues at

the same time; it is managing over 16 million portfolios as registrar.

If we took a look at some of the top corporate houses availing the services of karvy then

we have: Reliance, IOC, IDBI,LIC, Hindustan Unilever, Principal Mutual Fund,

Duetsche Mutual Fund, Yogokawa, Marico Industries, Patni Computers, Morgan

Stanley, Glenmark, CRISIL, 3M, Kotak Mahindra Bank, Bharti Televenture, Infosys

Technologies, Wipro, Infotech, IPCL,TATA consultancy services, UTI mutual fund etc.

Thus in total karvy serves over 16 million investors and 300 corporates.

Since the project was carried on in Delhi, so there is a special reference to working

of Karvy at Northern Zone and stock market in particular.

KARVY at northern zone:

Karvy stock Broking Ltd at Arunachal Building, Barakhamba Road which is

established as the regional head office. Presently Mr. Jitendra Rai Singhania is heading

the northern zone. Talking about the zonal offices, Karvy has zonal offices at Lucknow,

Rajasthan, Chandigarh. Each zonal office has got its own zonal heads. Karvy is a

member of three stock exchanges of India: National Stock Exchange (NSE),

Bombay Stock Exchange (BSE) and Hyderabad Stock Exchange (HSE).

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Hierarchical Structure in diagram:

The above diagram shows the hierarchy ofKarvy stock broking ltd. It can be easily

depicted from the diagram that the regional head (presently Mr. Jitendra Rai

Singhania) is the supreme in the northern region, under whom the various zonal heads

operate and under these zonal heads, the branch heads operate. Between each level of the

hierarchy, there exists a coordinator, who acts as the facilitator between the different

heads.

Karvy at New Delhi:

Now if we look at karvys branch offices at Delhi, then there exist eleven branches of

karvy at New Delhi, which are as follow:

1. Arunachal Building, Barakhaba Road

2. Ansal Chamber, Bhikajikama Place

3. Bahadurshah Zafar Marg, ITO

4. Suneja Tower I, Distt. Centre, Janakpuri

5. Shivaji Marg, Moti Nagar

6. Vishal Bhavan, Nehru Place

7. D.D.Market, Paschim Vihar

8. Savitri Sadan, Preet Vihar

9. Vikrant Tower, Rajendra Place

10. Nanda Devi Tower, Rohini

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11. Sector-B, Vasant Kunj

Structure according to the Products offered by Karvy:

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REGIONALHEADS

PRODUC

THEADS

HEA

Mutualfunds

Insurance

broking

commodities

Stockbroking

Depository

participant

Merchant &

inv.banking

PMS

Realty

Debtdivision


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Mutual fund Services

Investment is the stepping stone to achieving one's financial dreams. Mutual funds offeran opportune way to long-term wealth creation. However, with more and more funds

flooding the market, the task of selecting the most suitable scheme gets even more

complicated. Mutual Fund Advisory Service at Karvy guides you through this maze and

ensures that your investments are backed by our quality research. We, at Karvy help you

to reach your goals by offering:

Products of 33 AMCs

Research reports (existing funds & NFOs; strategy reports etc.)

Customized mutual fund portfolios

Portfolio revision (depending on changing market outlook and evolving trends)

Depository Services

SERVICES

KARVY Stock Broking Limited provides depository services to investors as a

Depository Participant with the National Securities Depository Limited (NSDL) and

Central Depository Services (India) Limited (CDSL). The Depository system in India

links Issuers, National level Depositories, Depository Participants and Clearing Houses /

Clearing Corporation of Stock Exchanges. Our demat services are accessible through any

of our network of over 575 branches / investor service centers located in over 375 cities

and towns across the country.

Our demat services business has the distinction of having all its operations ISO 9001:

2000 certified with state-of-the-art technology and operations capabilities. Our demat

services has innovated over time and we provide online access to account statements and

transaction alerts through SMS to its clients.

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KARVY Demat services offer you a secure, convenient and paperless way to keep track

of your investments in shares and other security instruments over time, without the hassle

of handling paper based transcripts.

We provide the following services:

Dematerialization of Shares

Rematerialization of Shares

Transfer of Shares

Pledging of Shares

Electronic Custodial Services

Maintenance of Beneficial Holdings Electronic Credit Against Corporate Actions

Insurance Broking Services

At Karvy Insurance Broking (P) Ltd. we provide both life and non-life insurance

products to retail individuals, high net-worth clients and corporates. With the opening up

of the insurance sector and with a large number of private players in the business, we are

in a position to provide tailor made policies for different segments of customers. In ourjourney to emerge as a personal finance advisor, we will be better positioned to leverage

our relationships with the product providers and place the requirements of our customers

appropriately with the product providers. With Indian markets seeing a sea change, both

in terms of investment pattern and attitude of investors, insurance is no more seen as only

a tax saving product but also as an investment product. By setting up a separate entity,

we would be positioned to provide the best of the products available in this business to

our customers.

Our wide national network, spanning the length and breadth of India, further supports

these advantages. Further, personalized service is provided here by a dedicated team

committed in giving hassle-free service to the clients.

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Portfolio Management Service

In today's intricate and volatile market your investment requires constant monitoring and

attention. The demand made on your time and energy by other business may not leave

you with capacity to attend to your personal portfolio with the degree of care you deem

appropriate. We at KARVY understand your situation and offer PMS services taking the

same level of care and attention you would devote to monitoring your portfolio.

GreenWallet is an endeavour specially designed by Karvy to enhance the wealth of a

niche segment of investors. This service primarily meant for HNIs (High Networth

Individuals) offers customers a wide range of schemes. These unique schemes seek to

achieve higher returns through broad based participation in equity markets. This is

achieved by creating a diversified equity portfolio of small, medium and large capitalized

companies.

WHAT IS PMS?

PMS gives investors access to an institutional process of money management it provides

a customized solution by matching the unique circumstances and objectives of each

investor.

Wealth creation based on disciplined investment process is the crux of PMS

Effective diversification helps reduce portfolio volatility and enhances risk-adjusted

returns over long term

PMS gives investor direct ownership of the individual securities in the portfolio

Research

With a full fledged research team comprising of qualified professionals, technical

analysts and fundamental specialists, Karvy offers qualitative insights into the market

scenario on various industry segments. With a proven track record of providing the best

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value for money, Karvys research aims at giving investors that extra edge to make

smarter investments.

Research Capability:

Karvy research was rated in Asiamoney for its IT and Mid cap coverage

Karvy has research experience of more than nine years

The research department comprises of 20 research analysts

The analysts experience ranges from 3 to 18 years

ALL ABOUT STOCK MARKET

The stock market system is an avenue of how to trade stock for listed corporations. As a

corporation is formed, its initial shareholders are able to acquire shares of stockfrom the

point of subscription when a company is created. When a company starts to be traded to

the public, the primary market comes in where those who subscribe to the initial public

offering (IPO) takes on the shares of stock sold from point of IPO. When those who

bought into a company at IPO point of view decides to sell their shares of stock to other

people, they can do so by going to the stock market.

The stock market is a secondary market for securities trading wherein original or

secondary holders of a companys shares of stock can sell their stocks to other

individuals within the frame work of the stock market system.

The stock market has buyers of stocks or those who wants to own a part of the company

but wasnt able to do so during the initial public offerings made by the company to the

public when it has decided to list itself as a publicly listed company. The secondary

market or the stock market allows other individuals to sell shares of the company when

the initial shareholders may have realized that they want to sell their shares after gaining

either significant profit or realized significant loss from point of acquiring a company

from its IPO price

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PRIMARY & SECONDARY MARKET

There are two ways for investors to get shares from the primary and secondary

markets. In primary markets, securities are bought by way of public issue directly

from the company. In Secondary market share are traded between two investors.

Primary Market: Market for new issues of securities, as distinguished from the

Secondary Market, where previously issued securities are bought and sold.

Secondary Market: The market where securities are traded after they are initially

offered in the primary market. Most trading is done in the secondary market.

Stock Market Index

Its ironical that something as huge as a stock market which should be stable as it

represents the economy of a nation, is actually extremely volatile since it is driven more

by the sentiments of the people Stock Market is a place where the stocks of a listed

company are traded. A single figure that sums up the overall performance of the market

on a daily basis is the Stock Index. A good Stock Index captures the movement of the

well diversified and highly liquid stocks. For a lay man it is the pulse rate of the

economy. Index movements reflect the changing expectations of the stock market about

future dividends of the corporate sector. The index is calculated by finding the weighted

average of the prices of the most actively traded companies in the market, where the

weights are generally in proportion to the market capitalization of the company.

But when and where did it all start?

In India, the Stock Exchange, Mumbai, was established in 1875 as "The Native Share

and Stockbrokers Association" (a voluntary non-profit making association) and is now

popularly known as the Bombay Stock Exchange (BSE). The other major exchange is the

National Stock Exchange of India Limited (NSE) and was incorporated in November

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1992. Combined the two trading zones are responsible for 99.9% of the trading done in

India.

Types of Indexes available:-

Broad-Market Index: This consists of all the large, liquid stocks of the

country and becomes the benchmark for the entire capital market of the country.

An example for this is the S&P CNX 500.

Specialized Index:We can either have Industry or Sector specific Index for

any particular sector of the economy which then serves as the benchmark for that

particular industry or we can have an index for the highly liquid stocks. Taking

an example for an industry specific index we have the S&P Banking Index which

is a capitalization-weighted index of 26 domestic equities traded on the New

York Stock Exchange and NASDAQ, The stocks in the Index are high-

capitalization stocks representing a sector of the S&P 500. Similarly, The S&P

CNX Nifty is a relevant example for an index composed of highly liquid stocks

Determinants of a Stock Index

Following parameters should be taken into picture before one constructs a stock index:

Liquidity Liquidity of stocks as measured by the impact cost criterion which

determines the cost faced when actually trading the index. For example if the current

market price of a stock is Rs 200 and a trader purchases it at Rs 202 (due to involved

transaction costs) then the market impact cost is 1% and the stock is considered

highly liquid for lower impact cost.

Diversification Diversification, by putting stocks of various sectors that reflect

the economy, is used to cancel out stock noise which is essentially the individual

stock fluctuations and to reduce investors risks. An index must thus have a balanced

representation of all sectors.

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Optimum size - More stocks lead to greater diversification but the limiting factor

is the size of the index. Increasing number of stocks in an index from 10 to say 30

gives a sharp reduction in risks but increasing the number beyond a point does very

little in risk reduction. Further it might lead to addition of illiquid stocks. For

example, the optimal size for BSE Sensex is 30.

Market Capitalization: The index should include primarily the stocks of

companies that have significant market capitalization with respect to the index such

that any major change in the price of the stock is reflected in the index. For example

in BSE 30 Index, the scrip must have a minimum of 0.5% of the market capitalization

of the Index.

Averaging - Every stock primarily moves for two reasons: The news about the

company and the news about the country. An ideal index is affected only by the

latter, that is the news of the economy and the effect of the former is knocked out by

proper averaging. The various methods of averaging employed are:

1. Price Weighted : The weights assigned are proportional to the stock

prices.2. Market Capitalization Weighted : The equity price is weighted by the

market capitalization of the company. Hence each constituent stock in the

index affects the index value in proportion to the market value of all

outstanding shares.

(Current market capitalization)

Index = ---------------------------------------- x Base Value

(Base Market Capitalization)

Where:

CMS = Sum of (current market price * outstanding shares) of all securities in the index

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BMS = Sum of (market price * issue size) of all securities as on base date.

1. Equal Weighted : The weights are equal and assigned irrespective of both

markets Capitalization or price Index revision is done periodically taking into

consideration the factors mentioned above. The relevant index body makes clear,

researched and publicly documented rules for this purpose. These rules are applied

regularly, to obtain changes to the index set. However, it is ensured that the value of

the index does not change significantly after the revision of the index set.

2. Sensex (BSE 30): The index includes 30 companies which figure in top 100 in

terms of market capitalization and are also among the leaders in their industry groups.

Presently the following are the constituent companies: ACC, Infosys, ICICI Bank,Dr. Reddys Lab, SBI, CIPLA, Zee Telefilms, Nestle India, RPL, RIL, HCL Tech.,

Bajaj Auto, BHEL, Castrol, BSES, Colgate Palmolive, Hindalco, Grasim, Glaxo,

Hero Honda, Gujrat Ambuja Cements, HLL, HPCL, ITC, L&T, MTNL, Ranbaxy,

TISCO, TELCO and Satyam.

Standard and Poors CRISIL NSE Exchange NIFTY

S&P CNX NIFTY is an S&P endorsed Stock Index owned by the India Index ServicesLtd. (IISL). It is a highly diversified index, accurately reflecting the overall market

conditions and is composed of 50 liquid stocks. It is backed by solid economic research

and three extremely respected organizations (NSE, CRISIL and S&P).

Signals from the Stock Index

The Index finds uses in various fields starting from economic research to helping

investors choose appropriate portfolio for investment. For example the index funds are

funds that passively invest in the market i.e. the portfolio returns of the index funds is

same as that of the Index. Since the Index is an indicator of the overall mood of the

investors in the secondary market, it helps a company answer questions like is it the right

time to take out an IPO, how to price the issue, etc.

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It acts as a signal to the government of the feel good factor prevailing in the economy.

As much as the finance ministry may want to ignore it, the performance of the stock

market right after the introduction of the budget gives an immediate feedback to the

Finance Minister about the acceptability of the budget.

However, the market index is a double edged sword. Because the index is influenced by

expectations of the future performance of the stocks, it leads to a self fulfilling prophecy.

Suppose an investor thinks that the stock of the company is going to go down and this

feeling prevails across the market then everyone would want to get out of the companys

stock. This will automatically lead to the stock prices crashing.

The Stock Index can often also act as a trigger to herd mentality. Any downturn in the

market would be reinforced by the collective action of the investors to hedge against any

losses and get out of the market. This would further depress the market. This herd

mentality is often used to the advantage of speculators. The speculator buys long thus

creating waves in the market that the stock he is investing in is hot. Thus everyone

would follow suit giving the speculator a good short term profit margin.

The stock index is often more a representation of investors perceptions (noise element)

rather than real news. The dot com bubble of 2000 is a case in point. There was a rush ofinvestment in anything even remotely connected with information-technology driving up

the stock prices way above what they should have been according to their P/E ratios.

Thus it can be seen that though the index is a popular investors guide, it is riddled with

imperfections which can often confuse rather than help. The index popularly used in

India is the NSE CNX Nifty. There are processes afoot to reduce the pure noise element

and speculative margin of the index. The basic problem arises due to imperfect

information reflected by the inclusion of illiquid stocks in the calculation of the index.

Illiquid stock is one which is not actively traded in the market or has been lying dormant

for a long time. Inclusion of such stocks leads to problems of stale prices, bid-ask bounce

and ease in manipulation.

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Bid-ask bounce: Illiquid stocks have a wide bid-ask spread. Thus even when no

news is breaking, when a stock price is not changing, the `bid-ask bounce' is about

prices bouncing up and down between bid and ask. Such changes are spurious in

nature.

Stale prices: A stock index is supposed to represent the state of the stock market at

the closing time (3:30 pm in NSE) on a particular day. However the last traded price

of an illiquid stock (if included in the index)may be even a week old thus distorting

the index.

Hence to make an index useful, there has to be continuous evaluation of the stocks listed

and any stock which remains inactive for a period of time should be de-listed or removed

from the index. A prudent investor is one who exercises caution while interpreting themarket index, taking into account all its inconsistencies.

Indian Equity Brokerage Industry Profile

While regulation and reforms have made major improvements in the quality of the equity

markets in India, its rapid growth and development are largely due to strong and efficient

market intermediation. The robustness of the Indian markets today is attributable to a

healthy blend of the quality of market structure and efficient intermediation. Even as

several countries are instituting procedures to commence equity derivative markets, India

ranks amongst the top five countries globally in this segment, in less than five years of its

introduction. This is an example of the proactive and progressive nature of the Indian

brokerage industry. In the last decade, the Indian brokerage industry has undergone a

dramatic transformation. From being made of close groups, the broking industry today is

one of the most transparent and compliance oriented businesses. Long settlement cycles

and large scale bad deliveries are a thing of the past with the advent of T+2 settlementcycle and dematerialization. Large and fixed commissions have been replaced by wafer

thin margins, with competition driving down the brokerage fee, in some cases, to a few

basis points. There have also been major changes in the way business is conducted.

Technology has emerged as the key driver of business and investment advice has become

research based. At the same time, adherence to regulation and compliance has vastly

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increased. The scope of services have enhanced from being equity products to a wide

range of financial services. Investor protection has assumed significance, and so has

providing them with education and awareness. Greater need for capitalization has

induced several firms to access the capital market; foreign firms are showing increasing

interest in taking equity stakes in domestic broking firms.

Major developments in equity brokerage industry in India:

1. Corporate memberships: There is a growing surge of corporate

memberships (92% in NSE and 75% in BSE), and the scope of functioning of the

brokerage firms has transformed from that of being a family run business to that of

professional organized function that lays greater emphasis on observance of market

principles and best practices. With proliferation of new markets and products,

corporate nature of the memberships is enabling broking firms to expand the realm of

their operations into other exchanges as also other product offerings. Memberships

range from cash market to derivatives to commodities and a few broking firms are

making forays into obtaining memberships in exchanges outside the country subject

to their availability and eligibility.

2. Wider product offerings: The product offerings of brokerage firms today go

much beyond the traditional trading of equities. A typical brokerage firm today offers

trading in equities and derivatives, most probably commodities futures, exchange

traded funds, distributes mutual funds and insurance and also offers personal loans

for housing, consumptions and other related loans, offers portfolio management

services, and some even go to the extent of creating niche services such as a brokerage firm offering art advisory services. In the background of growing

opportunities for investors to invest in India as also abroad, the range of products and

services will widen further. In the offing will be interesting opportunities that might

arise in the exchange enabled corporate bond trading, soon after its commencement

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and futures trading that might be introduced in the near future in the areas of interest

rates and Indian currency.

3. Greater reliance on research: Client advising in India has graduated from

personal insights, market tips to becoming extensively research oriented and

governed by fundamentals and technical factors. Vast progress has been made in

developing company research and refining methods in technical and fundamental

analysis. The research and advice are made online giving ready and real time access

to market research for investors and clients, thus making research important brand

equity for the brokerage firms.

4. Accessing equity capital markets: Access to reliable financial resourceshas been one of the major constraints faced by the equity brokerage industry in India

since long. Since the banking system is not fully integrated with the securities

markets, brokerage firms face limitations in raising financial resources for business

and expansion. With buoyancy of the stock markets and the rising prospects of

several well organized broking firms, important opportunity to access capital markets

for resource mobilization has become available. The recent past witnessed several

leading brokerage firms accessing capital markets for financial resources with

success.

5. Foreign collaborations and joint ventures: The way the brokerage

industry is run and the manner in which several of them pursued growth and

development attracted foreign financial institutions and investment banks to buy

stakes in domestic brokerage firms, paving the way for stronger brokerage entities

and possible scope for consolidation in the future. Foreign firms picked up stake in

some of the leading brokerage firms, which might lead to creating of greater interest

in investing in brokerage firms by entities in India and abroad.

6. Specialized services/niche broking: While supermarkets approach are adopted in

general by broking firms, there are some which are creating niche services that attract

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a particular client group such as day traders, arbitrage trading, investing in small cap

stocks etc, and providing complete range of research and other support to back up this

function.

7. Online broking: Several brokers are extending benefits of online trading through

creation of separate windows. Some others have dedicated online broking portals.

Emergence of online broking enabled reduction in transaction costs and costs of

trading. Keen competition has emerged in online broking services, with some of these

offering trading services at the cost of a few basis points or costs which are fixed in

nature irrespective of the volume of trading conducted. A wide range of incentives

are being created and offered by online brokerage firms to attract larger number of

clients.

8. Compliance oriented: With stringent regulatory norms in operation, broking

industry is giving greater emphasis on regulatory compliance and observance of

market principles and codes of conduct. Many brokerage firms are investing time,

money and resources to create efficient and effective compliance and reporting

systems that will help them in avoiding costly mistakes and possible market abuses.

Brokerage firms now have a compliance officer who is responsible for all compliancerelated aspects and for interacting with clients and other stake holders on aspects of

regulation and compliance.

9. Focus on training and skill sets: Brokerage firms are giving importance and

significance to aspects such as training on skill sets that could prove to be beneficial

in the long run. With the nature of markets and products becoming more complex, it

becomes imperative for the broking firms to keep their staff continuously updated

with latest development in practices and procedures. Moreover, it is mandated for

certain types of dealers/brokers to seek specific certification and examinations that

will make them eligible to carry business or trade. Greater emphasis on aspects such

as research and analysis is giving scope for in-depth training and skills sets on topics

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such as trading programs, valuations, economic and financial forecasting and

company research.

10. From owners to traders: A fundamental change that has taken place in the

equity brokerage industry, which is a global trend as well, is the transformation of

broking from owners of the stock exchange to traders of the stock market.

Demutualization and corporatization of stock exchanges bifurcated the ownership and

trading rights with brokers vested only with the later and ownership being widely

distributed. Demutualization is providing balanced welfare gains to both the stock

exchanges and the members with the former being able to run as corporations and the

latter being able to avoid conflict of interests that sometimes came as a major

deterrent for the long term growth of the industry.

11. Emerging challenges and outlook for the brokerage industry: Brokerage firms in

India made much progress in pursuing growth and building professionalism in

operations. Given the nature of the brokerage industry being very dynamic, changes

could be rapid and so as the challenges that emerge from time to time. A brief

description on some of the prospects and challenges of the brokerage firms are

discussed below.

12. Fragmentation: Indian brokerage industry is highly fragmented. Numerous small

firms operate in this space. Given the growing importance of technology in

operations and increasing emphasis on regulatory compliance, smaller firms might

find it constrained to make right type of investments that will help in business growth

and promotion of investor interests.

13. Capital Adequacy: Capital adequacy has emerged as an important determinant

that governs the scope of business in the financial sector. Current requirements

stipulation capital adequacy in regard to trading exposure, but in future more tighter

norms of capital adequacy might come into force as a part of the prudential norms in

the financial sector. In this background, it becomes imperative for the brokerage

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firms to focus on raising capital resources that will enable to give continuous thrust

and focus on business growth.

14. Global Opportunities: Broking in the future will increasingly become

international in character with the stock markets being open for domestic and

international investors including institutions and individuals, as also opportunities for

investing abroad. Keeping abreast with developments in international markets as also

familiarization with global standards in broking operations and assimilating major

practices and procedures will become relevant for the domestic brokerage firms.

15. Opportunities from regional finance: Regional economic integration

such as that under the European Union and the ASEAN have greatly benefited

businesses in the individual countries with cross border opportunities that helped to

expand the scope and significance of the business. Initial measures to promote South

Asian economic integration is being made by governments in the region first at the

political level to be followed up in regard to financial markets. South Asian economic

integration will provide greater opportunities for broking firms in India to pursue

cross border business. In view of several of common features prevailing in the

markets, it would be easier to make progress in this regard.

16. Product Dynamics: As domestic finance matures and greater flow of cross

border flows continue, new market segments will come into force, which could

benefit the domestic brokerage firms, if they are well prepared. For instance, in the

last three to four years, brokerage firms had newer opportunities in the form of

commodities futures, distribution of insurance products, wealth management, mutual

funds etc, and as the market momentum continues, broking firms will have an

opportunity to introduce a wider number of products.

17. Competition from foreign firms: Surging markets and growing

opportunities will attract a number of international firms that will increase the pace of

competition. Global firms with higher levels of capital, expertise and market

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experience will bring dramatic changes in the brokerage industry space which the

local firms should be able to absorb and compete. Domestic broking firms should

always give due focus to emerging trends in competition and prepare accordingly.

18. Investor Protection: Issues of investor interest and protection will assume

centre stage. Firms found not having suitable infrastructure and processes to ensure

investor safety and protection will encounter constraints from regulation as also class

action suits that investors might bring against erring firms. The nature of penalties

and punitive damages would become more severe. It is important for brokerage firms

to establish strong and streamlined systems and procedures for ensuring investor

safety and protection.

Derivative introduction:

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

variables called bases (underlying assets index) in a contractual manner. The underlying

assets can be equity, forex, commodity, bullion or any other assets. The emergence of the

market for derivative products, most notably forwards, future & option can be traced

back to the willingness of risk adverse economic agent to guard themselves against

uncertainties arising out of fluctuations in asset prices. By their very nature, the financial

markets are marked by a very high degree of volatility. Through the use of derivatives

products, it is possible to partially or fully transfer price risks by locking in asset price.

For example, wheat farmers may wish to sell their harvest at a future date to

eliminate the risk of a change in prices by that date. Such a transaction is an example of

derivative. The price of this derivative is driven by the spot price of wheat, which is theunderlying.

The financial derivatives came into spotlight in post- 1970 period due to growing

instability in the financial markets. However, since their emergence, these products have

become very popular and by 1990s, they accounted for about two third of total

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transactions in the derivatives products. In recent years, the market for financial

derivatives has grown tremendously both in terms of variety of instruments available, their

complexity and also turnover.

The factors generally attributed as the major driving force behind growth of

Financial derivatives are:

Increased volatility in asset prices in financial markets.

Increased integration of national financial markets with the international

markets.

Marked improvement in communication facilities and sharp decline in their

costs.

Development of more sophisticated risk management tools, providingeconomic agents a wider choice of risk management strategies.

Innovations in the derivatives markets, which optimally combine the risks and

returns over a large number of financial assets, leading to higher returns, reduced

risks as well as financial costs as compared to individual financial assets.

Participants: - The following three broad categories of participants hedgers,

Speculators and Arbitrageurs trade in the derivatives market.

Hedgers: - They face risk associated with the price of an asset. They use futures and

Options market to reduce or eliminate this risk.

Speculators They wish to bet on future movements in the price of an asset. Future and

Option contracts can give them an extra leverage, that 19s they can increase both the

potential gains and potential losses in a speculative venture.

Arbitrageurs They are in business to take advantage of a discrepancy between prices

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In two different markets. If, for instance they see the future price of an asset getting out

of line with the cash price, they will take offsetting positions in the two markets to lock

in a profit.

Types of derivatives:-

The most commonly used derivatives contracts are forwards, future and options. Here I

look a brief look at various derivatives contracts that have come to be used.

1) Forwards :- A forward contract is a customized contract between two entities,

where settlement takes place on a specified date in the future at todays pre-agreed

price.

2) Futures: - A future contract is an agreement between two parties to buy or sell an

asset at a certain time in the future at a certain price. Future contracts are special

types forward contracts in the sense that the former are standardized exchange

traded contracts.

3) Options are of two types- Calls and Puts.

Call gives the buyer the right but not the obligation to buy a given quantity

of the underlying assets, at a given price on or before a given future date.

Put gives the buyer the right but not the obligation to sell a given quantity

of the underlying assets at a given price on or before a given date.

4) Warrants: - Option generally has lives of up to one year; the majority of options traded

on options exchanges having maximum maturity of nine months. Longer dated options are

called warrants and are generally traded over the counter.

5) Leaps: The acronyms LEAPS means long term equity anticipation securities. These

are options having a maturity of up to three years.

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6) Baskets: Baskets options are option on portfolios of underlying assets. The underlying

asset is usually a moving average or a basket of assets.

7) Swaps: - Swaps are private agreement 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;-

a) Interest Rate Swaps

b) Currency Swaps

Forwards

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 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 contractdetails like delivery date, price and quantity are negotiated bilaterally by the parties to the

contract. The forward contracts are normally traded outside the exchanges.

The salient features of forward contracts are: -

a) They are bilateral contracts and hence exposed to counter party risk.

b) Each contract is custom designed, and hence is unique in terms of contract size,

expiration date and the asset type and quality.

c) The contract price is generally not available in public domain.

d) On the expiration date, the contract has been settled by delivery of the assets

e) If the party wishers to reverse the contract, he has to compulsory go to the same

counterparty, which often results in high prices being charged.

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Forward contracts are very useful in hedging and speculating the classic hedging

application would be that of an exporter who expects to receive payment in dollar three

months later. He is exposed to the risk of exchange rate fluctuations. By using the

currency forward market to sell dollars forward, he can lock on to a rate today and reduce

his uncertainties. Similarly an importer who is required to make a payment in dollars two

months hence can reduce his exposure to exchange rate fluctuation by buying dollar

forward.

Despite it forward market world-wide are afflicted by several problems:

Lack of centralization of trading

Illiquidity, and

Counterparty risk

Futures:

Definition : A future contract can be defined as a standardized agreement between the

buyer and seller in terms of which the seller is obligated to deliver the specified asset to

the buyer on a specified date and the buyer is obligated to pay the seller then prevailing

future price in exchange of the delivery of the asset.

Parties involved:

1. Buyer of the asset

2. Exchange

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3. Seller of the asset.

The futures markets were designed to solve the problem that exists in forward markets.

A futures market is an agreement between two parties to buy or sell an asset at a certain

time in the future at a certain price. But unlike forward contracts, the future contracts are

standardized and exchange traded. To facilitate liquidity in the futures contract the

exchange specified certain standard features of the contract. It is a standardized contract

with standard underlying instrument, a standard quantity and quality of the underlying

instrument that can be delivered and a standard timing of such settlement. A future

contract may be offset prior to maturity by entering into an equal and opposite

transaction. More than 99% of futures transactions are offset this way.

Futures terminology:

1) Spot price: The price at which an asset trades in the spot market.

2) Futures price: The price at which the futures contract trades in the futures

market.

3) Contract cycle: The period over which contract trades. The index future contract

on the NSE have one month, two month and three month expire cycles Which

expires on the last Thursday of the month.

4) Expiry date: It is the date specified in the futures contract. Thus is the last date

on which the contract will be traded at the end or which it will cease to exist.

5) Contract size: The amount of asset that has to be delivered less than one contract.

6) Basis: In the context of financial futures, basis can be defined on the future price

minus the spot price. There is a different basis for each delivery month for each

contact. In a normal market basis is positive.

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7) Cost of carry: the relationship between futures price and spot price can be

summarized in terms of what is known as the cost of carry.

8) Initial margin: the amount that must be deposited in the margin account at the

time of a futures contract is first entered into it is known as initial margin.

9) Marking to margin: in the futures market at the end of each trading day the

margin account in adjusted to reflect the investors gain or loss depending upon

the futures closing price.

10) Maintenance margin: this is somewhat lower than the initial margin. This is set

to ensure that the balance in the margin account never becomes negative.

Trading in the futures segment

It is traded basically on NSE. Unlike cash segment, a certain margin in paid is futures

segment. It operates in T+1 basis. Margins are pre-decided as per the lot size. This isvery useful for these investors, who do not have entire amount to invest. In future

contracts they pay only a certain margin and enter into trading.

For e.g.: Mr. X, who trades in cash market, wishes to buy 650 shares of Reliance @ Rs

350 per share. For this he will have to invest 650*350 = 227500. But he does not have

this much amount to invest.

Now in futures market he will buy one July lot 650 shares of Reliance by paying a

premium around only 15% of total amount. In this case the total cost of Mr. X for 1 lot of

Reliance will be only Rs 34125.

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The main drawback of this trading in that it acts in T+1 basis, means a trader has to settle

his position everyday, until he closes his trading in particular scrip.

Risk also can be hedged in futures market by imposing stop loss

Stop loss: This facility allows the investor to release an order into the system, after the

market price of the security reaches or crosses a threshold price, called trigger price.

E.g.: Mr. X bought 1 July lot of Cipla at Rs 320 per share by paying 15% margin.

However he does not want to take risk of downward movement, he imposed a stop loss at

Rs 310 per share.

In this case Mr. X made his limit by Rs 10 per share, however he can fetch unlimited

profit as price keeps going up.

Futures derivatives trading: Future trading can be done on stocks as well as on Indices

like IT index, Auto index, Pharma index etc.

Stock future trading: Lets first understand what the meaning of futures trading is. In

simple language one future contract is group of stocks (one lot) which has to be bought

with certain expiry period and has to be sold (squared off) within that expiry period.

Suppose if you buy futures of Wipro of one month expiry then you have to sell it within

that one month period.

Important - Future contract get expires at every last Thursday of every month.

If you buy October month expiry future contract then you have to sell it within last

Thursday of October month. Likewise you can buy two months and three months expiry

period future contract.

You can buy maximum of three month expiry period.

For example - suppose this is month of October then you have to buy till maximum

month of December expiry and you have to sell it within last Thursday of December

month. You can sell anytime between these periods.

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Successful trading in futures

Future or derivative trading is the process of buying or selling stock future or index

future for a certain period of time and squaring off before the expiry date. Expiry period

can be of one month, two month and three month and not more then of three month. Its

not compulsion that you have to square off your positions on the expiry date or wait till

the expiry period but in fact you can square off at any time even, at the same day, or youcan hold as long as you want but remember to square off before expiry date.

Most of the times on 3rd month expiry future you may see very less trading volumes.

Generally most of the traders/investors trade or invest on current month future or second

month future contract and you may see very low volumes on last month means third

month expiry .

Lot size (group of stocks in one future contract) varies from future to future contract.

For example Reliance Industries future lot size has 150 quantities of shares while a Tata

Consultancy service has 250 shares. In the same manner all futures have different lot

sizes decided by SEBI (Securities Exchange Board of India). The margin (in other words

price of one lot size) varies on daily basis based on its stocks closing price.

You can also buy and sell or sell and buy future contract on the same day of any expiry

month. This is called as day trading or intraday in futures.

Selling future contract before buying is called short selling. Short selling is allowed in

futures trading.

Major Advantages of Futures Trading over Stock Trading

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Margin is available: In future trading you get margin to buy (but can hold only up to

maximum of 3 months), while in stock trading you must have that much of amount in

your account to buy.

For example - If you plan to buy stock XYZ at Rs. 100 and quantity 1000 shares then

you have to pay 1 lakh rupees (RS 100 x1000 qty). But if you plan to buy XYZ future

contract and that contract lot size has 1000 quantity of shares then instead of paying 1

lakh rupees you have to pay just 20% to 30% of whole amount which comes to 20

thousand to 30 thousand rupees.

In short in future trading you have to pay just 20% to 30% of the whole amount what you

pay if you buy stock of that price. But limitation for this is your expiry period. Means if

you bought future of one month expiry then you have to square off within that one month

likewise you can buy maximum of three months expiry.

Possible to do short selling :You can short sell futures- You can sell futures without

buying them which is called short selling and later buy within your expiry period, to

cover up your positions. This is not possible in stocks. You cant sell stocks before

buying them in delivery (you can do in intraday). You can short sell futures and cancover off within your expiry period.

For example - If expiry period of your future contract is of 1 month then you have time

frame of one month to cover off your order like wise if your future expiry period is of

two months then you have time frame of two months and this continues till three months

and not more then three months.

In short selling of futures also you get margin as you get in buying of futures.

Brokerages are low: Brokerages offered for future trading are less as compared to stock

delivery trading.

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Disadvantages of Future Trading over Stock Trading

Limitation on holding: If you buy or sell a future contract then you have limitation of

time frame to square off your position before expiry date.

For example - If you buy or sell future contract of one month expiry period then

you have to square off your position before your expiry date of that month, so in this

example you got one month period. So likewise if you go for two month expiry period

then you get 2 months and if you go for three month expiry then you will get 3 month

expiry period to square off your position.

Level of Risk: Due to margin facility in future trading you may earn huge profit by

investing fewer amounts but at the contrary side if your trade goes wrong then you may

have to suffer huge loss.

Limitation on stocks: You cant do future trading on all stocks. You can only do on

listed stocks on Nifty and Jr. Nifty.

Important points to Remember while doing future trading

First of all you have to decide whether you want to buy stock derivatives or

index derivative. After this you have to select the expiry period. Once you buy

certain expiry period then you have to sell (cover off) your order before that

period. Its no need to wait till the expiry period, you can even square off on the

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same day (if you are getting profit) or anytime whenever you feel to book profit,

no compulsion to cover off your order on the last day of expiry.

Check out for Futures current market price.

Futures Lot Size (number of shares in that particular Lot).

Futures Lot price (this is the amount you must have in your account to buy one

lot of future) also called as margin amount.

Selection of expiry period - you want to trade on expiry of one month, two

month or last 3rd month.

No need to wait till expiry period can book profit wherever applicable.

Method of Short Selling

Short selling (selling before buying in future trading) In future trading you can do short

selling and buy (cover) later when price comes down from your selling price you can

short sell stock future as well as index future. But again same restriction will apply and

that is of expiry period.

Options

Definition: Option is a legal contract in which the writer of the option grants to the

buyer, the right to purchase from or sell to the writer a designated instrument or a scrip at

a specified price within a specified period of time.

Parties involved:

1) Buyer of the asset

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2) Exchange

3) Seller of the asset

Options are fundamentally different from forwards and futures contracts. An option gives

the holder of the option the right to do something. The holder does not have to exercise

this right. In contrast, in a forward or futures contract, the two parties have committed

themselves to doing something.

There are two types of options:

1) call option

2) put option

A call option gives the holder the right but nit the obligation to buy an asset by a

certain price. E.g.: X purchases a call option from Y of REL it means Y gives theright to purchase REL at a fix strike price within a certain period.

Where as a put option gives the holder the right but not the obligation to sell an

asset by a certain date for a certain price.

Options terminology;

Index option: These options have the index as the underlying. Some options are

European, American. E.g. index futures contracts, index options contracts are

also settled.

Stock option: Stock options are options on individual stock. Options currently

trade on over 500 stocks in the US.

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Buyer of an option: The buyer of an option is the one who by paying the option

premium buys the right but not the obligation to exercise his option on the

seller\writer.

Writer of an option: The writer of a call\put is the one who receives the option

premium and is thereby obliged to sell \buy the asset if the buyer wishes to

exercise his option.

Option price: It is the price which the option buyer pays to the option seller. It is

also referred as the option premium.

Expiration date: The date specified in the options contract is known as

expiration date, the exercise date, the striker date or the maturity.

Strike price: The price specified in the options contract.

In the money option : A call option on the index is said to be in the money when

the current value of index at a level higher than the strike price(i.e. spot

price>strike price )

At-the-money option: An at-the-money (ATM) option is an option that would

lead to zero cash flow if it were exercised immediately. An option on the index is

at-the-money when the value of current index equals the strike price (i.e. spot

price = strike price)

Out-of-the-money option: An out-of-money (OTM) option is an option thatwould lead to a negative cash flow it was exercised immediately. A call option on

the index is said to be out-of-the-money when the value of current index stands at

a level which is less than the strike price (i.e. spot price < strike price)

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Since hedging is mostly done by means of option nowadays. There are certain

strategies which are considered before hedging the positions or risks by the investors:

Options strategies

1. Long Call: A long call can be an ideal tool for investors who wish to participate from

an upward price movement in the underlying stock.

2. Long Put: A long put can be an ideal tool for an investor who wishes to participateprofitably from a downward price move in the underlying stock.

3. Married Put: An investor purchasing a put while at the same time purchasing an

equivalent number of shares of the underlying stock is establishing a married put

position- a hedging strategy with a name from an old IRS ruling.

4. Protective Put: An investor who purchases a put option while holding shares of the

underlying stock from a previous purchase is employing a protective put.

5. Covered Call: The covered call is a strategy in which an investor writes a call option

contract while at the same time owning an equivalent number of shares of the

underlying stock. If this stock is purchased simultaneously with writing the call

contract the strategy is commonly referred to as a buy-write. If the shares are already

held from a previous purchase it is commonly referred to an overwrite.

6. Cash Secured Put: According to the terms of a put contract, a put writer is obligated

to purchase an equivalent number of underlying shares at the puts strike price if

assigned an exercise notice on the written contract. Many investors write puts

because they are willing to be assigned and acquire shares of the underlying stock in

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exchange for the premium received from the puts sales. For this discussion, a put

writers position will be considered as cash-secured if he has on deposit with his

brokerage firm a cash amount sufficient to cover such a purchase of all option

contracts

Documents

Final Project Report(Aditya Ahuja)