IIFL project

7/24/2019 IIFL project

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NATURE OF THE PROBLEM

The turnover of the stock exchanges has been tremendously

increasing from last 10 years. The number of trades and the number of investors, who are

participating, have increased. The investors are willing to reduce their risk, so they are

seeking for the risk management tools.

Prior to S!" abolishing the !#$%# system, the investors

had this system as a source of reducing the risk, as it has many problems like no strong

margining system, unclear expiration date and generating counter party risk. "n view of

this problem S!" abolished the !#$%# system.

#fter the abolition of the !#$%# system, the investors

are seeking for a hedging system, which could reduce their portfolio risk. S!" thought

the introduction of the derivatives trading, as a first step it has set up a&' member

committee under the chairmanship of $(%.).*upta to develop the appropriate

regulatory framework for derivative trading in "ndia, S!" accepted the

recommendations of the committee on +ay 11,1- and approved the phased

introduction of the derivative trading beginning with stock index futures.

There are many investors who are willing to trade in the

derivative segment, because of its advantages like limited loss and unlimited profit by

paying the small premiums.


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SCOPE OF THE STUDY:

The study is limited to $erivatives/ with special reference to futuresand options in

the "ndian context and the yderabad Stock exchange has beentaken as a representative

Sample for the study. The study cant be said as totallyperfect. #ny alteration may come.

The study has only made a humble attemptat evaluating derivation market only in "ndian

context. The study is not basedon the international perspective of derivatives markets,

which exists in2#S$#3, 24S etc.

OBJECTIVES OF THE STUDY:

T o analy5e the derivatives market in "ndia.

To analy5e the operations of futures and options.

To find out the profit6loss position of the option writer and option holder.

To study about risk management with the help of derivatives.

LIMITATIONS OF THE STUDY:

The following are the limitations of this study.

The scrip chosen for analysis is ")")" !#27 %T$ and contract taken is +#(8#P(

&00 '9 $#4S ):2T(#)T

The data collected is completely restricted to the ")")" !#27 %T$ of +#(8#P(

&00, hence this analysis cannot be as universal.


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DESCRIPTION OF THE METHOD:

The following are the steps involved in the study.

1.Selection o t!e "c#i$;

The scrip selection is done on a random basis and the scrip

selected is ")")" !#27 %T$. The lot si5e of the scrip is


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COMPA Y PROFILE


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INDIA INFOLINE

"ndia "nfoline is a one8stop financial services shop, most respected for

=uality of its advice, personali5ed service and cutting8edge technology.

Vi"ion:

):ur vision is to be the most respected company in the financial services space./

In*i& Inoline +#o,$:

The "ndia infoline group,comprising the holding

company, "ndia infoline limited and its wholly8owned subsidiaries, straddle the entire

financial services space with offerings ranging from =uity research, =uities and

derivatives trading, commodities trading, portfolio management services, mutual funds

life insurance, fixed deposits, *:" bonds and other small savings instruments to loan

products and investment banking. "ndia infoline also owns and manages the websites

www.indiainfoline.conand www.9paisa.com.

The company has a network of 9> branches spread across ?'9 cities and

towns. "t has more than 900,000 customers.

In*i& Inoline li-ite*:

"ndia "nfoline limited is listed on both the leading stock exchanges in

"ndia, vi5. the Stock xchange, +umbai @!SA and the 2ational Stock xchange @2SA

and is also a member of both the exchanges. "t is engaged in the businesses of =uities

broking, Bealth #dvisory services and Portfolio management services. "t offers broking
http://www.indiainfoline.con/http://www.5paisa.com/http://www.5paisa.com/http://www.indiainfoline.con/


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services in both )ash and $erivatives segments of 2S as well as the cash segments of

!S. "t is registered with 2S$% as well as )$S% as a depository participant, providing a

one8stop solution for clients trading in the e=uities market. "t has recently launched its

investment banking and institutional broking business.

# S!" authori5ed portfolio managerC it offers portfolio management

services to clients. These services are offered to clients as different schemes, which are

based on differing investment strategies made to reflect the varied risk8return preferences

of clients.


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In*i& Inoline Me*i& &n* Re"ec! Se#ice" Li-ite*:

The content services represent a strong support that drives

the broking, commodities, mutual fund and portfolio management services businesses.

(evenue generation is through the sale of content to financial and media houses, "ndian

as well as global.

"t undertakes e=uities research which is acknowledged by none other

than Dorbes as E!est of the web and a must read for investors in #sia. "ndia info lines

research is available not Fust over the "nternet but also on international wire services.

In*i& Inoline Co--o*itie" Li-ite*:

"ndia "nfoline )ommodities Pvt %imited is engaged in the business of

commodities broking. :ur experience in securities broking empowered us with the

re=uisite skills and technologies to allow us offer commodities broking as a contra8

cyclical alternative to e=uities broking. Be enFoy memberships with the +)G and

2)$G, two leading "ndian commodities exchanges, and recently ac=uired membership

of $*)G. Be have a multi8channel delivery model, making it among the select few to

offer online as well as offline trading facilities.


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In*i& Inoline M/etin0 Se#ice":

"ndia "nfoline +arketing and Services %imited is the holding company of "ndia "nfoline

"nsurance Services %imited and "ndia "nfoline "nsurance !rokers %imited.

@aA "ndia "nfoline "nsurance Services %imited is a registered )orporate #gent with the

"nsurance (egulatory and $evelopment #uthority @"($#A. "t is the largest )orporate

#gent for ")")" Prudential %ife "nsurance )o %imited, which is "ndiaHs largest private

%ife "nsurance )ompany. "ndia "nfoline was the first corporate agent to get licensed by

"($# in early &001.

@bA "ndia "nfoline "nsurance !rokers %imited "ndia "nfoline "nsurance !rokers %imited is

a newly formed subsidiary which will carry out the business of "nsurance broking. Be

have applied to "($# for the insurance broking license and the clearance for the same is

awaited. Post the grant of licenseC we propose to also commence the general insurance

distribution business.

In*i& Inoline Ine"t-ent Se#ice" Li-ite*:

)onsolidated shareholdings of all the subsidiary companies

engaged in loans and financing activities under one subsidiary. (ecently, :rient *lobal, a

Singapore8based investment institution invested IS$ .< million for a &&.9J stake in

"ndia "nfoline "nvestment Services. This will help focused expansion and capital raising

in the said subsidiaries for various lending businesses like loans against securities, S+

financing, distribution of retail loan products, consumer finance business and housing


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finance business. "ndia "nfoline "nvestment Services Private %imited consists of the

following step8down subsidiaries.

@aA "ndia infoline $istribution )ompany %imited @distribution of retail loan productsA

@bA +oneyline )redit %imited @consumer financeA

@cA "ndia infoline ousing Dinance %imited @housing financeA.

IIFL 2A"i&3 P#i&te Li-ite*:

""D% @#siaA Private %imited is wholly owned subsidiary which

has been incorporated in Singapore to pursue financial sector activities in other #sian

markets. Durther to obtaining the necessary regulatory approvals, the company has been

initially capitali5ed at 1 million Singapore dollars.

Hi"to#(:4

"t was originally incorporated on :ctober 1-, 19 as Probity (esearch and

Services Private %imited at +umbai under the )ompanies #ct, 19> with (egistration

2o; 11 ?


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to institutional customers to retail customers. ence the company launched "nternet

portal, www.indiainfoline.com and started providing news and market information,

independent research, interviews with business leaders and other speciali5ed features.

"n +ay &000, the name of our company changed to "ndia "nfolline.com %imited.

"n the year &000, we leveraged our position as a provider of financial information

and analysis by diversifying into transactional services, primarily for online trading in

Shares and securities and online as well as offline distribution of personal financial

products, like +utual funds and (!" !onds.

:ur broking service as launched under the brand name of 9paisa through our

subsidiary, "ndia "nfoline Securities Private %imited and www.9paisa.comthe e8broking

portal was launched for online trading in Kuly &000. !esides we also offer (eal time stock

=uotes, market news and price charts with multiple tools for technical analysis.

"n $ecember &000, our subsidiary, "ndia "nfoline "nsurance Services %imited

became a corporate agent for ")")" Prudential %ife "nsurance )ompany %imited. #nd

emerged as one of the leading corporate agents for ")")" Prudential %ife "nsurance

)ompany %imited.

"n the year &00', company launched )ommodities broking through our subsidiary

"ndia "nfoline )ommodities Private %td.
http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.5paisa.com/http://www.indiainfoline.com/http://www.5paisa.com/


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Bo* o Di#ecto#": #s per #rticles of #ssociation, !oard shall consist of not less than

three and not more than twelve directors. They are as follows;

S.2o.

2ame $esignation $irectorships in othercompanies

1. +r. 2irmal Kain )hairman and

+anaging

$irector

1. "ndia "nfoline Securities

Pvt. %td.

&. "ndia "nfoline

"nsurance Services%td.

?. "ndia "nfoline

)ommodities Pvt.%td.

&. +r.(.Lenkataraman xecutive$irector

1. "ndia "nfoline"nsurance Services

%td.

&. "ndia "nfoline.com$istribution

)ompany %td.

?. +r. Sat Pal 7hattar 2on8xecutive$irector

1. #! otels %td.&. *T% %td.

?. Prime Letcare Pvt.

%td.

'. +r. SanFiv #huFa 2on8xecutive

"ndependent$irector

1. Pagro Doods %td.

&. "ndia "nfoline"nsurance Services

%td.

9. +r. 7ranti Sinha 2on8xecutive

"ndependent

$irector

1. industan +otors

%td.

&. %arsen and Turbo

%td.>. +r. 2ilesh ShivFi

Likamsey

2on8xecutive

"ndependent$irector

1. #lpha *arments

Pvt. %td.&. +iloni )onsultants

Pvt. %td.


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5e( $#o-ote#" o t!e co-$&n(

7ey promoters of our company are +r. 2irmal Kain and +r. Lenkataraman,

professionals with a good academic and work experience.

+r. 2irmal Kain has been the chairman and +anaging $irector of the company

since its incorporation i.e., :ctober 1-, 19. +r. Kain holds a +!# degree from ""+

#hmedabad and is a member "nstitute of )hartered #ccountants of "ndia and the

"nstitute of )ost #ccountants of "ndia. e started his career in 1- with industan

%ever %imited, a subsidiary of Inilever Plc, in their commodities trading and exports

division +r. Kain has a total experience of more than 19 years.

+r.(.Lenkataraman Foined the board with effect from Kuly 9 th, 1. e holds a

!.Tech degree in lectronics and lectrical )ommunications ngineering from ""T

7haragpur and an +!# degree from ""+ !angalore. e has senior managerial

positions in various divisions of ")")" limited, including ")")" securities limited, their

investment banking Foint venture with K.P.+organ of IS#. e also worked as an e=uity

analyst with !MB and Taib )apital )orporation %imited. e has also held the position

of #ssistant Lice President with * )apital Services "ndia %imited in their private

e=uity division. e has varied experience of more than 1' years in the financial services

sector.


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Ye 6i"e Mile"tone" o o,# eol,tion:

:ctober 19 "ncorporated as Probity (esearch and

Services Pvt. %td.

+arch 1> %aunched Probity &00, research reports on

&00 leading listed "ndian companies.

Kune 1- %aunched Probity Sector reports.

+ay 1 %aunched our internet portal

www.indiainfoline.comand

)hanged our name to "ndia "nfoline %imited.

#pril &000 :ur company forayed into distribution of

+utual funds, Dixed deposits, (!" bonds .

and other small savings Products.

Kuly &000 :ur company launched www.9paisa.comthe

8brokingPortal and started online trading

Bith membership of!S and 2S.

$ecember &000 :ur company obtained corporate agency for
http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.5paisa.com/http://www.indiainfoline.com/http://www.5paisa.com/


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")")"Prudential %ife "nsurance )ompany

%td.

September &001 :ur company became the $epositary

Participant of2S$%.

+arch &00' :ur company launched commodities trading

bytaking+embership of +)G.

#pril &00' :ur company received license from S!" to

:fferPortfolio +anagement Services.


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B,"ine""

In*i& Inoline Li-ite*

)ontent related service8 =uity research N :nline +edia Property.

In*i& Inoline Sec,#itie" Pt. Lt*.

=uities N $erivative !roking.

$epository Services.

Portfolio +anagement Services.

In*i& Inoline.co- Di"t#i7,tion Co-$&n( Lt*.

+utual funds

(!" !onds

Dixed $eposits etc.

In*i& Inoline In",#&nce Se#ice" Lt*. )orporate agents for ")")" Prudential %ife "nsurance )ompany %td.

In*i& Inoline Co--o*itie" Pt. Lt*.

)ommodities !roking.

In*i& Inoline Ine"t-ent Se#ice" Pt. Lt*.

+argin funding N financing.


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B#o/e#&0e Se#ice"

Online B#o/e#&0e: we offer subscribers real8time trading on the 2S) and !S). #part

from this we also offer commodities.

Trading on the +)G and 2)$G. )ustomers can directly place orders to buy

and sell securities through our automated order processing system.

Oline B#o/e#&0e: Be began offering offline brokerage services as a back up to our

online brokerage offering through our branches. This was mainly to address the interest

access problems faced by some of our retail customers.

Co-$etition

B#o/in0: Be face competition from small local brokers @traditionalA and pan "ndia

!rokers like 7otak Securities %td. S.S 7antilal "shwarlal securities %td, "ndiabulls

Securities %td, ")")" Beb Trade %imited, *eoFit Dinancial Service %td etc.

Di"t#i7,tion: Be face competition from small retail distributors @typically single outlet

unorgani5ed unitsA, brokers who have a distribution setup, old and established

distribution companies like !lue chip corporate "nvestment centre %imited, !aFaF

capital %td, karvy Securities %td, and banks including their P+S and wealth

+anagement desks.


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O,# "t#en0t!: :ur strengths are content and research online technology platform and

customer services.

Fin&nci&l Pe#o#-&nce

7ey aspects of your )ompanyHs financial performance for the year &00>8000

ousing $evelopment Dinance)orporation %td

$D) 190

$D) !ank %td $D)!#27 '00

ero onda +otors %td (::2$# '00

indalco "ndustries %td "2$#%):

industan %ever %td "2$%L( 1000

industan Petroleum )orporation %td "2$P(T: 1?00

")")" !ank %td ")")!#27 &9


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:il N 2atural *as )orp.%td :2*) >00

:riental !ank :f )ommerce :("2T!#27 &900

Patni )omputer Sys %td P#T2" &>00

PunFab 2ational !ank P2! >00

(anbaxy %aboratories %td (#2!#G4 1>00(eliance nergy %td (% 990

(eliance )apital %td (%)#P"T#% 99&

(eliance "ndustries %td (%"#2) ?00

Steel #uthority :f "ndia S#"% 9'00

State !ank of "ndia S!"2 &>'

Shipping )orporation of "ndia %td S)" '-00

Siemens %td S"+2S 190'

Sterlite "ndustries @"A %td ST( -

Sun Pharmaceuticals "ndia %td SI2P#(+# &&9

Syndicate !ank S42$"!#27 ?-00

Tata )hemicals %td T#T#)+ &


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Re0,l&tion o# De#i&tie T#&*in0:

S!" set up a &' member committed under )hairman of $r.%.).*upta develop the

appropriate framework for derivative trading in "ndia. The committee submitted its reportin +arch 1-. :n +ay 11,1- S!" accepted the recommendations of the committee

and approved the phased introduction of $erivatives trading in "ndia beginning with

Stock "ndex Dutures. S!" also approved he Suggestive bye8laws recommended by the

committee for regulation and control of trading and settlement of $erivatives contracts.

The provision in the S) @ ( A # governs the trading in the securities. The

amendment of the S) @ ( A # to include $("L#T"LS/ within the ambit of ESecurities

E in the S) @ ( A # made trading in $erivatives possible within the framework of the#ct .

1. ligibility criteria as prescribed in the %.).*upta committee report may apply to

S!" for grant of recognition under Section ' of the S) @ ( A #, 19> at start

$erivatives Trading. The derivatives exchange6segment should have a separate

governing council and representation of trading 6 clearing members shall be

limited to maximum of '0J of the total members of the governing council. The

exchange shall regulate the sales practices of its members and willobtain

approval of S!" before start of Trading in any derivative contract.

%. The exchange shall have minimum 90 members.

'. The members of an existing segment of the exchange will not automatically

become the members of the derivative segment. The members of the derivatives

segment need to fulfill the eligibility conditions as lay down by the %.).*upta

)ommittee.

?. The clearing and settlement of derivatives trades shall be through a S!"

approved )learing ouse complying with the eligibility conditions as lay down

!y the committee have to apply to S!" for grant of approval.


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. $erivatives broker6dealers and )learing members are re=uired to seek registration

from S!"

. The +inimum contract value shall not be less than (s.& %akh xchange should

also submit $etails of the futures contract they purpose to introduce.

9. The trading members are re=uired to have =ualified approved user and sales

person who have passed a certification programme approved by S!".

DITI(SDITI(S


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DEFINITION:

# Duture contract is an agreement between two parties to buy or sell an asset at a certain

time in the future at a certain price. To facilities li=uidity in the futures contract, the

exchange specifies certain standard features of the contract. The standardi5ed items on a

futures contract are;

3uantity of the underlying

3uality of the underlying

The date and the month of delivery

The units of price =uotations and minimum price change

%ocation of settlement

T($e" o ,t,#e":

:n the basis of the underlying asset they derive, the futures are divided into two types;

Stoc/ ,t,#e":


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The stock futures are the futures that 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.

In*e< ,t,#e":

The 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.

Ptie" in t!e F,t,#e" Cont#&ct:

There are two parties in a future contract, the !uyer and the Seller. The buyer of the

futures contract is one who is LON+ on the futures contract and the seller of the futures

contract is one who is SHORT on the futures contract.

The pay off for the buyer and the seller of the futures contract are as follows.

PAYOFF FOR A BUYER OF FUTURES:


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D

1

&

P

%LOSS

PROFIT

CASE 1:

The buyer bought the future contract at @DAC if the futures price goes to 1 then the buyer

gets the profit of @DPA.

CASE %:

The buyer get loss when the future price goes less than @DAC if the futures price goes to &

then the buyer gets the loss of @D%A.

PAYOFF FOR A SELLER OF FUTURES:


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D1

&

P

%LOSS

PROFIT


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D QDITI(S P(")

1, & Q STT%+2T P(").

CASE 1:The Seller sold the future contract at @DAC if the futures price goes to 1 then the seller

gets the profit of @DPA.

CASE %:The Seller gets loss when the future price goes greater than @DAC if the futures price goes

to & then the Seller gets the loss of @D%A.

MAR+INS:+argins are the deposits, which reduce counter party risk, arise in a futures contract.

These margins are collected in order to eliminate the counter party risk.

T!e#e e t!#ee t($e" o -in":

Initi&l Min:

Bhenever a futures contract is signed, both buyer and seller are re=uired to post initial

margin. !oth buyer and seller are re=uired to make security deposits that are intended toguarantee that they will infact be able to fulfill their obligation. These deposits are "nitial

margin and they are often referred as performance margins. The amount of margin is

roughly 9J to 19J of total purchase price of futures contract.

M/in0 to M/et Min:

The process of adFusting the e=uity in an investors account in order to reflect thechange in the settlement price of futures contract is known as +T+ +argin.

M&inten&nce -in:


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The investor must keep the futures account e=uity e=ual to or greater than certain

percentage of the amount deposited as "nitial +argin. "f the e=uity goes less than that

percentage of "nitial margin, then the investor receives a call for an additional deposit ofcash known as +aintain +argin to bring the e=uity up to the "nitial margin.

P#icin0 t!e F,t,#e":

The fair value of the futures contract is derived from a model known as the )ost of )arry

model. This model gives the fair value of the futures contract.

Co"t o C#( Mo*el: tFS 21#43

;!e#e

F4 F,t,#e" P#ice

S4 S$ot $#ice o t!e Un*e#l(in0

#4Co"t o Fin&ncin0

4 E


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The period over which a contract trades, the index futures contracts on the 2S

have :ne8month, two8months and three8month expiry cycles which expire on the last

Thursday of the month, thus a Kanuary expiration contract expires on the last Thursday of

Kanuary and a Debruary expiration contract ceases trading on the last Thursday of

Debruary. :n the Driday following the last Thursday, a new contract having a three8month

expiry is introduced for trading.

E


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Total outstanding long or short positions in the market at any specific time, as total long

positions for market would be e=ual to short positions, for calculation of open interest,

only one side of the contract is counted.

OPTIONS


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DEFINITION:

The option is types of contract between two persons where one

grants the other the right to buy a specific asset at a specific price with in a specified time

period. #lternatively the contract may grand other person the right to sell a specific asset

at a specific price within a specific time period. "n order to have the right, the option

buyer has to pay the seller of the option premium

The asset on which option can be derived are stocks,

commodities, indexes etc. if the underlying asset is a financial asset, than the option are

financial options like stock, options, currency options, index options etc, and if theunderlying asset is the non8financial asset the option are non8financial options like

commodity options.

PROPERTIES OF OPTIONS: :ptions as several uni=ue properties that set them a part from other

securities, the following are the properties of options;

%imited %oss

igh leverage potential

%imited %ife

PARITES IN AN OPITON CONTRACT:


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1. B,(e# o t!e o$tion: The buyer of the option is one who buys paying option premium

buys the right but not the obligation to exercise is option on seller6writer.

%. ;#ite#GSelle# o t!e o$tion: The writer of a call6put options is the one who receives the options

premium and is there by obligated to sell 6buy the asset if the buyer exercise the option on

him.

TYPES OF OPTIONS:

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

following are various types of options;

1. On t!e 7&"i" o t!e ,n*e#l(in0 &""et:

:n the basis of the underlying asset the options are divided into two types:

INDE= OPITONS: The index options have the underlying asset as the index.

STOC5 OPTIONS: # stock option gives the buyer of the options the right to buy6sell stock at aspecified price. Stock options are options on the individual stocks, there are currently

more than 90 stocks are trading this segment.

%. On t!e 7&"i" o t!e -/et -oe-ent:

:n the basis of the market movement the option are divided into two types.

They are:

CALL OPTION:


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# call option is bought buy an investor when he seems that the stock

price moves upwards. # call option gives the holder of the options the right but not the

obligations to buy asset by a certain date for a certain price.

PUT OPTION:

# put option is bought by investors when he seems that the stock

price moves downwards. # put option gives the holder of the options right but not the

obligation to sell an asset by a certain date for a certain price.

'. On t!e 7&"i" o e


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1#T+

:T+

"T+

(P(:D"T

%:SS

P

&

S

P&(4o $#oile o# 7,(e# o & c&ll o$tion:

The pay8off of a buyer options depends on the spot price of the underlying asset. The

following graph shows the pay8off of buyer of a call option;

S 4 St#i/e $#ice OTM 4 O,t o T!e Mone(

SP 4 P#e-i,-GLo"" ATM 4 At T!e Mone(

E1 4 S$ot $#ice 1 ITM 4 In T!e Mone(

E% 4 S$ot $#ice %


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1

#T+

:T+

"T+

(

P(:D"T

%:SS

P&

S

SR 4 $#oit &t "$ot $#ice E1

CASE 1: 2 S$ot P#ice St#i/e P#ice3

#s the spot price @1A of the underlying asset is more than strike price @SA. The buyergets the Profit of @S(A, if price increase more than 1 than profit also increase more than

S(.

CASE %: 2 S$ot P#ice St#i/e P#ice3

#s the spot price @&A of the underlying asset is less than strike price @sA. The buyer getsloss of @SPA, if price goes down less than & than also his loss is limited to his premium

@SPA.

P&(4o $#oile o# "elle# o & c&ll o$tion:

The pay8off of seller of the call option depends on the spot price of the underlying asset.

The following graph shows the pay8off of seller of a call option:

S 4 St#i/e $#ice ITM 4 In T!e Mone(


E1 4 S$ot $#ice 1 OTM 4 O,t o T!e Mone(

E% 4 S$ot $#ice %


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#s the spot price @1A of the underlying asset is less than strike price @SA. The seller

gets the Profit of @SPA, if price decreases less than 1 than also profit of the seller does

not exceed @SPA.


#s the spot price @&A of the underlying asset is more than strike price @SA. The seller gets

loss of @S(A, if price goes down less than & than the loss of the seller also increases

more than @S(A.

P&(4o $#oile o# 7,(e# o & $,t o$tion:

The pay8off of buyer of the option depends on the spot price of the underlying asset. The

following graph shows the pay off of the buyer of a call option;


47/82


48/82


49/82

(

P(:D"T

%:SS

P

S


SP 4 P#e-i,-GLo"" OTM 4 O,t o T!e Mone(

E1 4 S$ot $#ice 1 ATM 4 At T!e Mone(

E% 4 S$ot $#ice %



#s the spot price @1A of the underlying asset is less than strike price @SA. The buyer

gets the Profit of @S(A, if price decreases less than 1 than the profit also increases more

than @S(A.


#s the spot price @&A of the underlying asset is more than strike price @SA, the buyer gets

loss of @SPA, if price goes more than & than the loss of the buyer is limited to his

premium @SPA.

P&(4o $#oile o# "elle# o & $,t o$tion:The pay8off of seller of the option depends on the spot price of the underlying asset. The

following graph shows the pay8off of the seller of a put option;


50/82

"T+

1

#T+:T+

"T+

(

P(:D"T

%:SS

P

&S



E1 4 S$ot $#ice 1 OTM 4 O,t o T!e Mone(

E% 4 S$ot $#ice %


#s the spot price @1A of the underlying asset is less than strike price @SA. The seller

gets the %oss of @S(A, if price decreases less than 1 than the loss also increases more

than @S(A.



51/82

#s the spot price @&A of the underlying asset is more than strike price @SA, the seller

gets profit of @SPA, if price goes more than & than the profit of the seller is limited to his

premium @SPA.

F&cto#" &ectin0 t!e $#ice" o &n o$tion:

The following are the various factors that affect the price of an option. They are:

Stoc/ $#ice:

The pay8off from a call options is the amount which the stock price exceed the strike

price. )all options therefore become more valuable stock price increases and vice versa.

The pay8off from put option is the amountC by which the strike price exceeds the stock

price. Put options therefore become more valuable as the stock price increase and vice

versa .

St#i/e $#ice:

"n the case of a call, as the strike price increases, the stock has to make a larger upwards

move for the option to go in the money. Therefore, for a call, as the strike increase, option

become less valuable and as strike price decrease, option becomes more valuable.

Ti-e to e


52/82

The option prices decline as the risk Q free rate increase where as the price of calls always

increases the risk Q free interest rate increases.

Dii*en*":

$ividends have the effect of reducing the stock price on the ex8dividend date. This hasnegative effect on the value of call option and a positive effect on the value of put

options.

PRICIN+ OPTIONS:

The !lack Scholes Dormulas for the prices of uropean )alls and puts on an non8

dividend paying stock are;

CALL OPITONS:

4#t

C SN 2D134=e N2D%3

PUT OPITONS:

-rt

P R Ge 2 @8$&A8S2@8$&A

Bhere) Q L#%I :D )#%% :PT":2

S Q SP:T P(") :D ST:)7G8 ST("7 P(")

r 8 #22I#% ("S7 D( (TI(2

t 8 ):2T(#)T )4)%sd Q ST#2$#($ $L"#T":2

& ln@S6GA@r v 6&At

d1 R 888888888888888888888888

sd t

d& R d1 8"*t


53/82

O$tion" Te#-inolo0(:

St#i/e P#ice:

The price specified in the options contract is known as a strike price or exercise

price.

O$tion P#e-i,-:

:ptions premium is the price paid by the options buyer to the option seller.

E


54/82

Int#in"ic V&l,e o &n O$tion:

The intrinsic value of an option is "T+, if option is "T+. "f the option is :T+, its

intrinsic value is M(:.

Ti-e V&l,e o &n O$tion:

The time value of an option is the difference between its premium and its intrinsic value.


55/82

#2#%4S"S#2#%4S"S

ANALYSI

S:

The obFective of this to analysis is to evaluate the profit6loss position of option holder and

option writer. This analysis is based on the sample data, taken ")")" !#27 ltd scrip.

This analysis considered Kune first week contract of ")")". The lot si5e of ")")" is


56/82

P#ice o ICICI in t!e C&"! M/et:

DATE

?08Kun819&8Kun819

&>8Kun819

&98Kun819&'8Kun819

&?8Kun819

&&8Kun81918Kun819

1-8Kun819

18Kun819

198Kun819

1&8Kun819

118Kun819108Kun819

08Kun819

0-8Kun819098Kun819

0'8Kun819

0?8Kun8190&8Kun819

018Kun819

MAR5ET PRICE

?0-?11.&

?11..>0 1.9 1.-1&8+#(80 &>&.9 1 &10.9 &10.9

1?8+#(80 &-'.&9 ? 1>.1 908+#(80 ?0-.9.0

&>8+#(80 ?-9.&0 &.1 11 1?9.- -1'.-?18+#(80 ?>9..-

018#P(80 ??0.&0 -.9 1>? 1?-9.9

TOTAL 'K?. 29414.93


59/82

CA4'%8 CA4'8

PREMIUM VOLUME

28883

TOTAL

VALUE

28883

PREMIUM VOLUME

28883

TOTAL

VALUE

28883

10 1&0.& 1&0& 10 1?0 1?00

19 1&9.1 1-.9 < 1'9.& 101>.'

1& 1?9.& 1>&&.' > 1>'.& -9.&

- 1'0 11&0 ' 1-9.1 191.& 0.&9

9 1&9.' >&< ?.19 11.> >0?.9'

? 1-1.& 9'?.> &.10 &10.9 ''&.09

& 1-9.& 1?0.' 10 1?0 1?00

1 99 99 - 1?< 10>

0 ?9 0 ' 1>9 >>0

0 '- 0 1 &&9.1 &&9.10 9.' 0 10 1-9 1-90

1 ?9.1 ?9.1 1? 1&9 1>&9

- -9.1 >-0.- 1& 1?0 19>0

110 0 1' 1?'1

> 9.> 9


60/82

$#T

MAR5E

T

PRICE

CA4'8

PREMIU

M

VOLUME

28883

TOTAL

VALUE

28883

0&8+#(80 ?'0.90 9.> 1&0.? >


61/82

CA4?88 CA4?%8

PREMIUM VOLUME

28883

TOTAL

VALUE

28883

PREMIUM VOLUME

28883

TOTAL

VALUE

28883

& 1&0 &'0 1 1&0.9 1&0.9

1 19?.> 19?.> 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

0 0 0 0 0 0

& 119.' &?0.- 0 0 0

? 1&0.> ?>1.- 0 0 0

' 11-.> '9.19

0 0 0 &.9 1?9.> ??

> 1?9 -10 1.- 1'>.9 &>?.&1.9

0?8+#(80 ?&-.10 & 1'.9 &

0'8+#(80 ?&'.-.9 1>-.9

098+#(80 ?0'.&0 0 0 00>8+#(80 &>.'0 0 0 0

08+#(80 &-'.?0 0 0 0

118+#(80 &>.>0 0 0 01&8+#(80 &>&.9 0 0 0

1?8+#(80 &-'.-9 0 0 0

1>8+#(80 ?0-.-

&?8+#(80 ?99.10 10 9.> 9>

&'8+#(80 ?>9. &'.-&98+#(80 ?.&


63/82

PA4'?8 PA4'8

PREMIUM

1-1&

10

>

'&.1

0

0

1&.9

'.?10

1'>.-

-9.-.'

1?-.'

1>-.'

1&1>-.'

'-.>

?-.&

0'.&

>.'1>&.'1>-.>

1?>.1

>-.9.'190

1?->

--0.-

?'&.-1'1.->

1'.9

1->.'>-.'

9>.&-.&&9.'

?-.'

9.9

TOTA

L

VALUE28883

>'0

0

0

00

0

0

00

01&'.''

0

1>.-91'.'

.?&

1&&-.9

1'1.&>-'

'99.&-'.>9?.?'

119.&

'9?.>

119.

DATE MAR5ET

PRICE

PA4?88

PREMIUM VOLUME

28883

TOTAL

VALUE

28883

0&8+#(80 ?'0.90 0 0 0

0?8+#(80 ?&-.10 0 0 0

0'8+#(80 ?&'.


64/82

098+#(80 ?0'.&0 0 0 0

0>8+#(80 &>.'0 0 0 0

08+#(80 &-'.?0 0 0 0118+#(80 &>.>0 0 0 0

1&8+#(80 &>&.9 0 0 0

1?8+#(80 &-'.-9 0 0 01>8+#(80 ?0-..>9 1 1&0 1&0

&?8+#(80 ?99.10 &.9 1&-.9 ?&1.&9

&'8+#(80 ?>9.


65/82

P#8'&0 P#8''0

PREMIUM

0

0

00

0

0

00

0

0

00

00

0

00

1.-

1.9

00

000

TOTAL

VOLUME

288830

0

00

0

0

00

0

0

00

00

0

00

>

9


66/82

NET PAY OFF FOR CALL OPITON HOLDERS AND

;RITERS:

MAR5ET

PRICE

CALLS

VOULME

28883

PREMIUM

28883

PROFITTO

HOLDE

R

28883

NETPROFIT

TO

HOLDE

R

28883

NETPROFIT

TO

;RITE

R

28883

?>0.&0 ?&0 &>&1.? 1>&>'.- -111.'> -111.'> 8-111.'>

?>0.&0 ?'0 ?9'.> &'1'.? '?19. '?19. 8'?19.

?>0.&0 ?>0 ?&.? &'-&>.> &'0'0.0.&0 '00 1>9>.< 90


67/82

FINDIN+S:

The premium of the options with strike price of ?>0 and ?-0 is high since most of the

period of the contract the cash market moving around ?-0 mark.


68/82

FINDIN+S:

1. The contracts with strike price ?-0,'00,'&0 get no profit since there strike price is

more than the settlement price.

&. The contract with strike price ?&0,?'0,?>0 gets the profit.


69/82

NET PAY OFF OF PUT OPTION HOLDERS AND

;RITERS:

MAR5E

TPRICE

PUT

S

VOULME

28883

PREMIU

M28883

PROFIT

TOHOLDER

28883

NET

PROFITTO

HOLDER

28883

NET

PROFITTO

;RITER

28883

?>0.&0 ?'0 &110.1 10.&0 '&0 9.9 1 99?&.>' 99?&.>' 899?&.>'

?>0.&0 ''0 0 0 0 0 0

OBSERVATIONS AND FINDIN+S:

Six put options are considered with six different strike prices.

The current market price on the expiry date is (s.?>0.&0 and this is considered as

final settlement price.

The premium paid by the options holders whose strike price is far and greater thanthe current market price have paid high amounts of premium than those who are

near to the current market price.

The put options holders whose strike price is more than the current market price

are said to be "n8The8+oney. The puts with strike price ?-0,'00,'&0,''0 are said

to be "n8The8+oney, since, if they exercise they will get profits.

The put options holders whose strike price is less than the current market price are

said to be :ut8:f8The8+oney. The put with strike price ?'0,?>0 are said to be

:ut8:f8The8+oney, since, if they exercise, they will get losses.


70/82

FINDIN+S:

The premium of the option with strike price ?>0 is higher when compared to other

strike prices. This is because of the movement of the cash market price of the ")")"

between ?&0 and ?-0.


71/82

FINDIN+S:

The put option holders whose strike price is more than the settlement price are "n8

The8+oney

The put option whose strike price is less than the settlement price are :ut8:f8The8

+oney


72/82

DATA OF ICICI FUTURES OF THE MAY MONTH:

DATE FUTURE CLOSIN+PRICE 2R".3 CASH CLOSIN+PRICE 2R".3

?08Kun819&8Kun819

&>8Kun819

&98Kun819&'8Kun819

&?8Kun819

&&8Kun819

18Kun8191-8Kun819

18Kun819198Kun819

1&8Kun819

118Kun819108Kun819

08Kun819

0-8Kun819098Kun819

0'8Kun819

0?8Kun819

0&8Kun819018Kun819

?11.?9?1'.'

?1'.99

?1-.9?&0..9

?1-.?0

?0&.1

?00.9

&?.-9&

&--.09&-.-9

&>.>9

&.'9


73/82

42185

42184

42181

42180

42179

42178

42177

42174

42173

42172

42171

42170

42167

42166

42165

42164

42163

42160

42159

42158

42157

42156260

270

280

290

300

310

320

330

Chart Title

FUTURE C!"I#$ PRCE Rs. CA"% C!"I#$ PRICE Rs

OBSERVATIONS AND FINDIN+S:

The cash market price of the ")")" is moving below the futures price.

"f the buy price of the futures is less than the settlement price, then the buyer of the

futures gets loss.

"f the selling price of the futures is less than settlement price, then the seller incur

profit.


74/82

SUMMARYSUMMARY


75/82

SUMMARY

$erivative market is an innovation to cash market. #pproximately its daily turnover

reaches to the e=ual stage of cash market. The average daily turnover of the 2S

derivative segment is

Presently the available scrips in futures and options segment

"n cash market the profit6loss of the investor depends on the market price of the

underlying asset. The investors may incur huge profits or he may incur huge losses.

!ut it derivatives segment the investor enFoys huge profits with limited downside.

"n cash market the investor as to pay the total money, but in derivatives the investor

has to pay premium or margins, which are some percentage of total money.

$erivatives are mostly used for hedging purpose.

"n the derivatives segment the profit6loss of the option holder6option writer is purely

depended on the fluctuations of the underlying asset


76/82

CONCLUSIONSCONCLUSIONS


77/82

CONCLUSIONS

"n bullish market the call options writer incurs more losses so the investor is suggested

to go for a call option to hold, where as the put options holder suffers in bullish

market, so he is suggested to write a put option.

"n bearish market the call options holder will incur more losses so the investor is

suggested to go for a call options to write, where as the put options writer will get

more losses, so he is suggested to hold a put options.

"n the above analysis the market price of ")")" !ank %T$ is having low volatility, so

the call options writers enFoy more profit to holders.


78/82

RECOMMENDATIRECOMMENDATI

ONSONS

R ECOMMENDATIONS

The derivative market is newly started in "ndia and it is not known by every

investor, so S!" has to take steps to create awareness among the investors about

the derivative segment.


79/82

"n order to increase the derivative market in "ndia, S!" should revise some of

their regulations like contract si5e, participation of D"" in the derivative market.

)ontract si5e should be minimi5ed because small investor cannot afford this much

of huge premiums

S!" has to take further steps in the risk management mechanism.

S!" has to take measures to use effectively the derivatives segment as a tool of

hedging.


80/82

BIBLOGRABIBLOGRA

PHYPHY


81/82

BIBLIO+RPAHY

BOO5S

FINANCIAL MANA+EMENT 4 PRASANNA CHANDRA

DERIVATIVES CORE MODULE 4 NCFM MATERIAL

SECURITY ANALYSIS OF PORTFOLIO MANA+EMENT

4AVADHANI

;EBSITES

666.*e#i&tie"in*i&.co-

666.in*i&inoline.co-

666.n"ein*i&.co-

666.7"ein*i&.co-

666.!"ein*i&.o#0

666.$&i"&.co-
http://www.derivativesindia.com/http://www.indiainfoline.com/http://www.nseindia.com/http://www.bseindia.com/http://www.hseindia.org/http://www.5paisa.com/http://www.derivativesindia.com/http://www.indiainfoline.com/http://www.nseindia.com/http://www.bseindia.com/http://www.hseindia.org/http://www.5paisa.com/


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