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PREFACE
Every individual who is undergoing any management course has to go under a summer training. As we know that without practical exposure one can not qualify & is not capable to work in any organization. Hence to fulfill the requirement, I completed my project report to improve my practical & professional skills.
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STUDENT DECLARATION
I Rohit Kumar student of BBA here by declared that the research report entitled A study in equity market in equities cash and derivatives is completed and submitted under the guidance of Ms. Puja chaudhary is my original work. The imperial finding in this report is based on the data collected by me. I have not submitted this project report to C.C.S University Meerut or any other University for the purpose of compliance of any requirement of any examination or degree. DATE: ROHIT KUMAR PLACE: BBA III year ROLL NO. 9423557
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CERTIFICATE
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ACKNOWLEDGMENT
I gratefully acknowledge the expert support and guidance extended to me by Aman chadha and the guidance of Ms. Puja chaudhary as regards this project and the subsequent report. There impartial and enlightened guidance and the sophisticated communication and the commodities knowledge has been on immense help and has been paramount in this project and report maintaining and further meeting the requisite standards and the dead lines.
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Executive Summary
In few years Share Market has emerged as a tool for ensuring ones financial well being. Share Markets have not only contributed to the India growth story but have also helped families tap into the success of Indian Industry. As information and awareness is rising more and
more people are enjoying the benefits of investing in Share Markets. once people are aware of Share Market investment opportunities, the number who decide to invest in Share Markets increases to as many as one in every five people. This Project gave me a great learning experience and at the same time it gave me enough scope to implement my analytical ability. The first part gives an insight about Share Market and its various aspects, the Company Profile, Objective of the study, Research Methodology. One can have a brief knowledge about Share market and its basics through the project.
The second part of the Project consists of Friday market analysis collected from past records This Project covers the topic of FRIDAY MARKET INVESTING PLAN The data collected has been well organized and presented. I hope the research findings and conclusion will be of use.
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MILESTONES
1994: Started activities in consulting and Institutional equity sales with staff of 14.
1995: Set up a research desk and empanelled with major institutional investors.
1999: Lead managed first IPO and executed first M & A deal
2003: Wealth Management assets cross Rs1500 crores Insurance broking launched
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2004: Commodities brokerage and real estate services introduced Wealth Management assets cross Rs3000crores Institutional equities business re launched and senior research team put in place Retail Branch network expands across 100 locations within India
2005: Real Estate Private Equity Fund Launched Retail Branch network expands across 200 locations within India
2006: AR Middle East, WOS acquires membership of Dubai Gold & Commodity Exchange (DGCX) Ranked amongst South Asia's top 5 wealth managers for the ultra-rich by Asia Money 2006 poll Ranked 6th in FY2006 for All India Broker Performance in equity distribution in the High Net worth Individuals (HNI) Category Ranked 9th in the Retail Category having more than 5% market share
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Completes its presence in all States across the country with offices at 300+ locations within India
2007: Citigroup Venture Capital International picks up 19.9% equity stake Retail customer base crosses 200 thousand Establishes presence in over 450 locations
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MANAGEMENT TEAM
Our senior Management comprises a diverse talent pool that brings together rich experience from across industry as well as financial services. Mr. Anand Rathi - Group Chairman Chartered Accountant Past President, BSE Held several Senior Management positions with one of India's largest industrial groups Mr. Pradeep Gupta - Vice Chairman Plus 17 years of experience in Financial Services Mr. Amit Rathi - Managing Director Chartered Accountant & MBA Plus 11 years of experience in Financial Service
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Table of Contents
1.
2. 3. 4.
5. 6.
7.
History of BSE... 14 Services 15 Awards. 17 Vision... 17 History of NSE... 18 Role of SEBI 19 Introduction 20 Listed Securities22 Permitted Securities 22 Tick Size 22 Computation of closing price of scrips in the Cash . Segment 23 Compulsory Rolling Settlement (CRS) Segment. 23 Trading and settlement cycle for scrips under CRS...26 Settlement. Demat pay-in. 30 Auto delivery facility. 30 Pay-in of securities in physical form31 Funds Pay-in.32 Securities Pay-out.....32 Funds Payout.. ...33 Dematerialization of shares...33 Merits of Dematerialization. ..34 Rematerialization. 34 Open interest in derivative market.35 What is open
interest..35 market and increasing open interest......36 Rising Page | 13
Rising market and decreasing open interest..36 falling marker and increasing open interest. ..37 falling marker and decreasing open interest...37 sideways marker and increasing open interest38 8. The index number 38 desirable attribute of an index..39 capturing behavior of portfolios ..40 including liquid stocks.40 maintaining professionally..41 impact cost.. 41 9. Futures and options.42 trading underlying versus trading single stock futures.. 43 derivative market at nse..44 index derivatives45 10. Future terminology..45 business growth of futures and options market . turnover(rs. Crore)49 11. Eligibility for any stock to enter in derivative market.50 trading mechanism..50 volumes51 index derivatives for hedging..51 pricing futures.52 initial margin.. 53 initial margin charged on f & o market..54 12. Convergence of futures price to spot price54 mark to market (mtm) margin.56 open interest calculation with example...57 13. Options..58 option terminology..59 strategies in futures and options..62 14. Buying a call option.63 buying a put66 writing the call options68 writing the buy options70 15. Friday market analysis.73
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Bombay Stock Exchange Limited (the Exchange) is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide.
Total number of stock exchanges in India: 22 They are in: Ahmedabad, Bangalore, Calcutta, Chennai, Delhi
etc.
in Mumbai.
markets is the Securities and Exchange Board of India (SEBI), which is also located in Bombay.
Today, BSE is the world's number 1 exchange in terms of the number of listed companies and the world's 5th in transaction numbers. The market capitalization as on December 31, 2007 stood at USD 1.79 trillion.
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SERVICES
BSE also has a wide range of services to empower investors and facilitate smooth transactions:
Investor Services: The Department of Investor Services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness programme- 'Safe Investing in the Stock Market' under which 264 programmes were held in more than 200 cities.
The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across over 359 cities in India.
BSEWEBX.com: In February 2001, BSE introduced the world's first centralized exchange-based Internet trading system, BSEWEBX.com. This initiative enables investors anywhere in the world to trade on the BSE
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platform.
Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-time basis the price movements, volume positions and members' positions and real-time measurement of default risk, market reconstruction and generation of cross market alerts.
BSE Training Institute: BTI imparts capital market training and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital market and financial sector. More than 20,000 people have attended the BTI programmes
Awards
The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSE's initiatives in Corporate Social Responsibility (CSR).
The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March 31 2007 have been awarded the ICAI awards for excellence in financial reporting.
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The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its efforts in employer branding through talent management at work, health management at work and excellence in HR through technology
Drawing from its rich past and its equally robust performance in the recent times, BSE will continue to remain an icon in the Indian capital market
Vision
"Emerge as the premier Indian stock exchange by establishing global benchmarks"
The National Stock Exchange (NSE) is India's leading stock exchange covering various cities and towns across the country. NSE was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity.
reforming the Indian securities market in terms of microstructure, market practices and trading volumes. The market today uses state-ofart information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualisation of stock exchange governance, screen based trading, compression of settlement cycles, dematerialisation and electronic transfer of securities, securities lending and borrowing, professionalisation of trading members, finetuned risk management systems.
The Securities and Exchange Board of India (SEBI) is an autonomous body established by an act of parliament in 1992. SEBI is controlled by a statutory board consisting of one chairman and six members. SEBIs main objective is to protect the
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interest of investors, and to regulate all securities market particularly the share market. SEBI is a market regulator whose major functions include regulation, superintendence and control of all securities markets in India, overseeing the functioning of stock exchanges, framing rules for trading practices, attending to and removing investor grievances, framing rules for and regulating public issues, training and education of investors, and all matters pertaining to market intermediaries.
TRADING
Trading on the BOLT System is conducted from Monday to Friday between 9:55 a.m. and 3:30 p.m. The scrips traded on the Exchange have been classified into 'A', 'B1', 'B2','T', S', TS' 'F' ,'G' and 'Z' groups. The Exchange has for the guidance and benefit of the investors have classified the scrips in the Equity Segment into 'A', 'B1', 'B2','T', S', TS' and 'Z' groups on certain qualitative and quantitative parameters which include number of trades, value traded, etc. The F Group represents the Fixed Income Securities. The T Group represents scrip's which are settled on a trade to trade basis as a surveillance measure.
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The S Group represent scrips forming part of the BSE-Indonext segment . The TS Group consist of scrips in the BSE-Indonext segment which are settled on a trade to trade basis as a surveillance measure. Trading in Govt. Securities for retail investors is done under "G" group. The 'Z' group was introduced by the Exchange in July 1999 and includes the companies which have failed to comply with the listing requirements of the Exchange and/or have failed to resolve investor complaints or have not made the required arrangements with both the Depositories, viz., Central Depository Services (I) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL) for dematerialization of their securities.
The Exchange also provides a facility to the market participants for online trading of odd-lot securities in physical form in 'A', 'B1', 'B2' T','S', TS' and 'Z' groups and Rights renunciations in all the groups of scrips in the Equity Segment. With effect from December 31, 2001, trading in all securities listed in equity segment of the Exchange takes place in one market segment, viz., Compulsory Rolling Settlement Segment (CRS). The scrips of the companies which are in demat can be traded in market lot of one but the securities of companies which are still in the
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physical form are traded on the Exchange in the market lot of generally either 50 or 100. However, the investors having quantities of securities less than the market lot are required to sell them as "Odd Lots". The facility of trading in odd lots of securities not only offers an exit route to investors to dispose of their odd lots of securities but also provides them an opportunity to consolidate their securities into market lots. This facility of selling physical shares in compulsory demat scrips is called an Exit Route Scheme. This facility can also be used by small investors for selling upto 500 shares in physical form in respect of scrips of companies where trades are required to be compulsorily settled by all investors in demat mode.
Listed Securities:
The securities of companies which have signed Listing Agreement with the Exchange are traded at the Exchange as "Listed Securities". Baring a few scrips, all scrips traded in the Equity Segment at the Exchange fall in this category.
Permitted Securities:
To facilitate the market participants to trade in securities of the companies which are actively traded at other Regional Stock Exchanges but are not listed on the Exchange, the Exchange has in
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April 2002 decided to permit trading in such securities as Permitted Securities" provided they meet the relevant norms specified by the Exchange.
Tick Size:
Tick size is the minimum differences in rates between two orders on the same side i.e., buy or sell, entered on the system for particular scrip. Trading in scrips listed on the Exchange is done with the tick size of 5 paise. However, in order to increase the liquidity and enable the market participants to put orders at finer rates, the Exchange has reduced the tick size from 5 paise to 1 paise in case of units of mutual funds, securities traded in "F" group and equity shares having closing price upto Rs. 15/- on the last trading day of the calendar month. Accordingly, the tick size in various scrips quoting upto Rs.15/- is revised to 1 paise on the first trading day of month. The tick size so revised on the first trading day of month remains unchanged during the month even if the prices of scrips undergo change.
minutes of the continuous trading session. However, if there is no trade recorded during the last 30 minutes, then the last traded price of scrip in the continuous trading session is taken as the official closing price.
trade" by the Exchange as a surveillance measure (T and TS group) , are settled only on a gross basis and the facility of netting of buy and sell transactions in such scrips is not available. The Exchange has introduced a new segment named BSE Indonext w.e.f. January 7, 2005. S group consists of scrips from B1 & B2 group on BSE and companies exclusively listed on regional stock exchanges having capital of 3 crores to 30 crores. All trades in this segment are done through BOLT system under S group. The transactions in 'F' group securities representing "Fixed Income Securities" and " G" group representing Govt. Securities for retail investors are also settled at the Exchange on T+2 basis. In case of Rolling Settlements, pay-in and pay-out of both funds and securities is completed on the same day. The members are required to make payment for securities sold and/ or deliver securities purchased to their clients within one working day (excluding Saturday, Sunday, bank & Exchange trading holidays) after the pay-out of the funds and securities for the concerned settlement is completed by the Exchange. This is the timeframe permitted to the members of the Exchange to settle their funds/ securities obligations with their clients as per the Byelaws of the Exchange.
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The following table summarizes the steps in the trading and settlement cycle for scrips under CRS
DAY ACTIVITY T Trading on BOLT and daily downloading of statements showing details of transactions and margins at the end of each trading day. Downloading of provisional securities and funds obligation statements by memberbrokers. 6A/7A* entry by the member-brokers/ T+1 confirmation by the custodians. Confirmation of 6A/7A data by the Custodians upto 11:00 a.m. Downloading of final securities and funds obligation statements by members .
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T+2
Pay-in of funds and securities by 11:00 a.m. and pay-out of funds and securities by 1:30 p.m. The member-brokers are required to submit the pay-in instructions for funds and securities to banks and depositories respectively by 10: 30 a.m. Auction on BOLT at 11.00 a.m. Auction pay-in and pay-out of funds and securities by 12:00 noon and 1:30 p.m. respectively. Thus, the pay-in and pay-out of funds
T+3 T+4
and securities takes places on the second business day (i.e., excluding Saturday, Sundays and bank & Exchange trading holidays) of the day of the execution of the trade.
* 6A/7A : A mechanism whereby the obligation of settling the transactions done by a member-broker on behalf of a client is passed on to a custodian based on confirmation of latter. The custodian can confirm the trades done by the members on-line and upto 11 a.m. on the next trading day. The late confirmation of transactions by the custodian after 11:00 a.m. upto 12:15 p.m., on the next trading day is, however, permitted subject to payment of charges for late confirmation
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@ 0.01% of the value of trades confirmed or Rs. 10,000/-, whichever is less. The settlement of the trades (money and securities) done by a memberbroker on his own account or on behalf of his individual, corporate or institutional clients may be either through the member-broker himself or through a SEBI registered custodian appointed by him/client. In case the delivery/payment in respect of a transaction executed by a memberbroker is to be given or taken by a registered custodian, then the latter has to confirm the trade done by a member-broker on the BOLT System through 6A-7A entry. For this purpose, the custodians have been given connectivity to BOLT System and have also been admitted as clearing member of the Clearing House. In case a transaction done by a member-broker is not confirmed by a registered custodian within the time permitted, the liability for pay-in of funds or securities in respect of the same devolves on the concerned member-broker. The following statements can be downloaded by the members in their back offices on a daily basis. a. Statements giving details of the daily transactions entered into by the members. b. Statements giving details of margins payable by the memberbrokers in respect of the trades executed by them. c. Statements of securities and fund obligation.
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d. Delivery/Receive orders for delivery /receipt of securities. The Exchange generates Delivery and Receive Orders for transactions done by the members in A, B1, B2, S and F and G group scrips after netting purchase and sale transactions in each scrip whereas Delivery and Receive Orders for T, TS,"C" & "Z" group scrips and scrips which are traded on the Exchange on "trade to trade" basis are generated on gross basis, i.e., without netting of purchase and sell transactions in a scrip. However, the funds obligations for the members are netted for transactions across all groups of securities.
The Delivery Order/Receive Order provides information like the scrip and quantity of securities to be delivered/received by the members through the Clearing House. The Money Statement provides scrip wise/item wise details of payments/receipts of monies by the members in the settlement. The Delivery/Receive Orders and Money Statement, as stated earlier, can be downloaded by the members in their back office.
Settlement
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Pay-in and Pay-out for 'A', 'B1', 'B2', T, S, TS, 'C', "F", "G" & 'Z' group of securities
The trades done on BOLT/Exchange by the members in all the securities in CRS are now settled on the Exchange by payment of monies and delivery of securities on T+2 basis. All deliveries of securities are required to be routed through the Clearing House, The Pay-in /Pay-out of funds based on the money statement and that of securities based on Delivery Order/ Receive Order issued by the Exchange are settled on T+2 day.
Demat pay-in :
The members can effect pay-in of demat securities to the Clearing House through either of the Depositories i.e. the National Securities Depository Ltd. (NSDL) or Central Depository Services (I) Ltd. (CDSL). The members are required to give instructions to their respective Depository Participants (DPs) specifying details such as settlement no., effective pay-in date, quantity, etc. Members may also effect pay-in directly from the clients' beneficiary accounts through CDSL. For this, the clients are required to mention the settlement details and clearing member ID through whom they have
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sold the securities. Thus, in such cases the Clearing Members are not required to give any delivery instructions from their accounts. In case, if a member-broker fails to deliver the securities, then the value of shares delivered short is recovered from him at the standard/closing rate of the scrips on the trading day.
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Funds Pay-in:
The bank accounts of members maintained with the clearing banks, viz., Bank of India, HDFC Bank Ltd., Oriental Bank of Commerce., Standard Chartered Bank, Centurion Bank Ltd., UTI Bank Ltd., ICICI Bank, Indusind Bank Ltd., Union Bank of India and Hongkong Shanghai Banking Corporation Ltd. are directly debited through computerized posting for their funds settlement obligations. In case of those members, whose funds pay-in obligations are not cleared at the scheduled time, action such as levy of penalty and/or
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Securities Pay-out:
In case of demat securities, the same are credited by the Clearing House in the Pool/Principal Accounts of the member-brokers. The Exchange has also provided a facility to the member-brokers for transfer of pay-out securities directly to the clients' beneficiary owner accounts without routing the same through their Pool/Principal accounts in NSDL/ CDSL. For this, the concerned member-brokers are required to give a client wise break up file which is uploaded by the member-brokers from their offices to the Clearing House. Based on the break up given by the member-brokers, the Clearing House instructs depositories, viz., CDSL & NSDL to credit the securities to the Beneficiary Owners (BO) Accounts of the clients. In case delivery of securities received from one depository is to be credited to an account in the other depository, the Clearing House does an inter depository transfer to give effect to such transfers. In case of physical securities, the Receiving Members are required to collect the same from the Clearing House on the pay-out day.
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Funds Payout:
The bank accounts of the members having pay-out of funds are credited by the Clearing House with the Clearing Banks on the pay-in day itself In case, if a member-broker fails to deliver the securities, then the value of shares delivered short is recovered from him at the standard/closing rate of the scrips on the trading day.
Dematerialization of shares:
Dematerialization as the name suggests, is a term used for conversion of shares from their physical form to electronic form. This conversion is done by NSDL and CDSL. The CDSL acts as a depository for BSE, whereas the NSDL acts as a depository for NSE. After dematerialization, shares cease to exist in their physical form.
Merits of dematerialization:
No risk of being fake or stolen shares. No stamp duty while transfer of shares. Free from tedious paperwork as it was in the physical form.
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Rematerialization:
Rematerialization is the reverse of dematerialization. It means to convert the electronically held shares back into physical form. You have the complete freedom of conversion from electronic form to physical form whenever you want to do so.
are traded during a day, inclusive of both squared off (closed) positions and new positions. Thus, for any day, the trading volume will always be higher than the open interest.
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Also acts a barometer for lot of elements such as liquidity in the market, the growth of the economy, the investors confidence, government policies etc.
the index when it is diversified. We end up including illiquid stocks, which actually worsen the index. Since an illiquid stock does not reflect the current price behavior of the market, its inclusion in index results in an index, which reflects, delayed or stale price behavior rather than current price behavior of the market.
Maintaining Professionally
It is now clear that an index should contain as many stocks with as little impact cost as possible. This necessarily means that the same set of stocks would not satisfy these criteria at all times, a good index methodology must therefore incorporate a steady pace of change in the index set. It is crucial that such changes are made at a steady pace. It is very healthy to make a few changes every year, each of which is small and does not dramatically alter the character of the index, on a regular basis, the index set should be reviewed, and brought inline with the
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current state of market, to meet the application needs of users, a time series of the index sold be available.
Impact cost
Market impact cost is a measure of the liquidity of the market. It reflects the costs faced when actually trading an index. For a stock to qualify for possible inclusion into the index, it has to have market impact cost of below 0.75% when doing Nifty trades of half a crores rupees. The market impact cost on a trade of Rs.3 million of the full Nifty works out to be about 0.05%. This means that if Nifty is at 4000, a buy order goes through at 4002, i.e. 4000+ (4000*0.0005) and a sell order gets 3998 i.e. 4000-(4000*0.0005)
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options attractive to many occasional market participants, who cannot put in the time to closely monitor their futures positions. Buying put options is buying insurance. To buy a put option on Nifty is to buy insurance which reimburses the full extent to which Nifty drops below the strike price of the put option. This is attractive to many people, and to mutual funds creating guaranteed return products.
The single stock futures market in India has been a great success story across the world. NSE ranks first in the world in terms of number of contracts traded in single stock futures. One of the reasons for the success could be the ease of trading and settling these contracts.
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To trade securities, a customer must open a security trading account with a securities broker and a demat account with a securities depository. Buying security involves putting up all the money upfront. With the purchase of shares of a company, the holder becomes a part owner of the company. The shareholder typically receives the rights and privileges associated with the security, which may include the receipt of dividends, invitation to the annual shareholders meeting and the power to vote. Selling securities involves buying the security before selling it. Even in cases where short selling is permitted, it is assumed that the securities broker owns the security and then lends it to the trader so that he can sell it, besides, even if permitted, short sales on security can only be executed on an up tick. To trade futures, a customer must open a futures trading account with a derivatives broker. Buying futures simply involves putting in the margin money. They enable the futures traders to take a position in the underlying security without having to open an account with a securities broker. With the purchase of futures on a security, the holder essentially makes a legally binding promise or obligation to buy the underlying security at some point in the future. Security futures do not represent ownership in a corporation and the holder is therefore not regarded as a shareholder.
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INDEX DERIVATIVES
Index derivatives are derivative contracts which have the index as the underlying. The most popular index derivatives contract the world over is index futures and index options. NSEs market index, the
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S&P CNX Nifty was scientifically designed to enable the launch of index- based products like index derivatives and index funds. The first derivative contract to be traded on NSEs market was the index futures contract with the Nifty as the underlying. This was followed by Nifty options and thereafter by sectoral indexes, CNX IT and BANK Nifty contracts.
FUTURES TERMINOLOGY SPOT PRICE: The price at which an asset trades in the spot market FUTURES PRICE: The price at which the futures contract trades in
the futures market.
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A futures contract is different from the underlying stock in the following ways: When we buy a stock, we pay the full value of the transaction (i.e. the number of shares multiplied by market price of each share) whereas in futures we pay only the margin which is a fraction of the total transaction value. There is no time limit of settlement in cash market but in case of futures contracts, they are dated. An Indian futures settlement currently takes place on the last Thursday of every month. So the current months futures expire on the months last Thursday. If a trader has to carry his position to the next month, he has to shift his position to the next months future. One can only go long in the spot market. We cannot short sell unless we borrow the stock, something which is neither cheaper
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nor convenient whereas one can go long or short on the futures depending on his short term view of the markets. The cash market has a lot of none, i.e. a person can buy any stock in the multiple of one unit where as a futures contract is the smallest unit which one can trade in the futures market. There is no way of taking a position on the index through the cash market whereas futures facilitate trading of index futures.
A futures contract price is the sum of cash price and the monthly cost of carry. The cost of carry should always be positive because a futures trade is really a carried forward product similar to the erstwhile badla. But just as badla rates sometimes become negative when the market sentiment is bearish, the cost of carry can also similarly be negative when the sentiment is poor.
Mont Index
Index
Stock
Stock
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h
Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08
futures
35 590 2,123 9,348 64,017 77,218 2,43,572 2,40,797 3,77,939
options
0 195 389 1,942 8,473 16,133 57,969 92,503 3,08,709
options
0 0 4,642 15,042 7,424 14,799 11,306 21,928 21,430
futures
0 0 16,178 46,505 78,392 1,63,096 2,43,950 4,51,314 3,75,987
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TRADING MECHANISM
The futures and options trading system of NSE, called NEATF&O trading system, provides a fully automated screen-based trading for Nifty futures & options and stock futures & options on a nation wide basis and an online monitoring and surveillance mechanism. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. It is similar to that of trading of equities in the cash market segment. The NEAT-F&O trading system is accessed by two types of users. The trading members have access to functions such as order entry, order matching, order and trade management. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system. various conditions like Immediate or Cancel, Limit/Market price, Stop loss, etc. can be built into an order. The clearing members use the trader workstation for the purpose of monitoring the trading members for whom they clear the trades. Additionally, they can enter and set limits to positions, which a trading member can take.
VOLUMES
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The trading volumes on NSEs derivatives market have seen a steady increase since the launch of the first derivatives contract, i.e. index futures in June 2000. The average daily turnover at NSE now exceeds Rs.35000 crores. A total of 216,883,573 contracts with a total turnover of Rs. 7,356,271 crores were traded during 20062007.
This in turn would push the futures price back to its fair value. The cost of carry model used for pricing futures is as follows: F=SerT Where: r= cost of financing continuously compounded interest rate T= Time till expiration in years e= 2.71828
Example:
Security XYZ ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. The fair value of a one month futures contract on XYZ is calculated as follows: F = SerT =1150*e0.11*1/12 =1160
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INITIAL MARGIN
At the inception of a contract every client is required to pay initial margin. This margin is must to every trading member. Initial margins are charged on Trade by Trade basis Initial margins are charged by NSCCL Initial margins are charged for the purpose of recovery and safe guard against the fluctuation in the market. A future value is calculated on cost of carry model.
To see why this so, we first suppose that the futures price is above the spot price during the delivery period. Traders then have a clear arbitrage opportunity: Short a futures contract Buy the asset Make the delivery
These steps are certain to lead to a profit equal to the amount by which the futures price exceeds the spot price. As traders exploit this arbitrage opportunity, the futures price will fall. Suppose next that the futures price is below the spot price during the delivery period. Companies interested in acquiring the asset will find it attractive to enter into a long futures contract and then wait for delivery to be made. As they do so, the futures price will tend to rise. The result is that the futures price is very close to the spot price during the delivery period.
The convergence of the futures price to the spot price when future price is above the spot price can be pictorially represented as follow:
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Figure: A
The convergence of the futures price to the spot price when future price is below the spot price can be pictorially represented as follows:
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Figure: B
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For calculating MTM margin future last hour average price is takes, if it is not traded on that day or last half hour MTM is calculated on theoretical price model. MTM margin balance at he year end shown in current asset account.
Open interest means out standing orders of (long position + short position) Contracts in a particular point of time.
Client C
= 500 long + short Trading Member Total Open Position = 700 long+ short Clearing member open position: All trading member open position and custodial participants open positions
OPTIONS
An option is a contract, or a provision of a contract, that gives one party (the option holder) the right, but not the obligation, to perform a specified transaction with another party (the option issuer or option writer) according at specified terms. The owner of a property might sell another party an option to purchase the property any time during the next three months at a specified price. For every buyer of an option there must be a seller. The seller is often referred to a s the writer. As with futures, options are brought into existence by being traded, if none is traded, none exists; conversely, there is no limit to the number of option contracts that can be in existence at any time. As with
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futures, the process of closing out options positions will cause contracts to cease to exist, diminishing the total number.
Thus an option is the right to buy or sell a specified amount of a financial instrument at a pre- arranged price on, or before, a particular date. There are two options which can be exercised: Call option, a right to buy is referred to as a call option. Put option, the right to sell is referred as a put option.
OPTION TERMINOLOGY INDEX OPTIONS: these options have the index as the underlying.
Some options are European while others are American. European style options can be exercised only on the maturity date of the option, which is known as the expiry date. An American style option can be exercised at any time up to, and including, the expiry date. It is to be noted that the distinction has nothing to do with geography. Both type of the option are traded through out the world
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strike price, the call is said to be deep ITM.. In the case of a put, the put is ITM if the index is below the strike price.
maximum time value exists when the option is ATM. The longer the time to expiration, the greater is an options time value, or else equal. At expiration, an option should have no time value.
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We can consider the live example of taking a call option of GMR Infrastructure at a strike price of Rs.500, a call can be taken upto a duration of 3 months form now. Here we have taken a call at the strike price of Rs.500, at a premium of Rs. 25 on 01-06-2009.
The following is the tabulation of the payoffs at expiration. STOCK PRICE ON GROSS PAYOFF ON NET PAYOFF ON EXPIRY 400 450 500 550 600 650 700 750 Table: A OPTION 0 0 0 50 100 150 200 250 OPTION -25 -25 -25 25 75 125 175 225
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Figure: C
In the above example when GMR falls to a price of Rs.400, the buyer of the option can purchase the share form the market at Rs.400 with out exercising the right to buy the stock at Rs.500. However, on that he incurs a loss of Rs.25 as the premium being paid for the option remaining unexercised. But suppose that the share prices rise to Rs.750 then the holder of the option has the right to purchase that share at a price of Rs.500 form the seller of the option. In this case any price level above Rs.525 (500+25), which is the breakeven point, results in a profit for the buyer of the option. Investment in the above option is Rs.25*1000=Rs.25000. In the above diagram we can notice that the payoffs are one to one after the price of the underlying security rises above the exercise
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price. When the security price is less than the exercise price, the option is referred to as out of the money. Form the above figure it can be seen that the investor who is already long i.e. holds a stock bears a loss only to the extent of Rs.25 because no matter if the share price fall below Rs.500 the investor is not holding any stock. Once the investor is either long or short the stock he can adopt any of these strategies to hedge his risk. The above strategy was applied in the month of June The following are the updates DATE 01-06-2009 15-06-2009 21-06-2009 27-06-2009 Table: B STRIKE PRICE 500 500 500 500 OPEN 27 54 99 200.90 HIGH 27 64.75 104.50 249 LOW 23 52.45 99 200.90
As it can be seen from the above table that the call option price of the stock has given a fantastic return of over 900% on investment of Rs.25000 only. Here the risk of the above investment was limited only to Rs.25000
BUYING A PUT
The second strategy is the put strategy where the buyer of the put option has to pay a premium(price) for the option to sell a specified
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quantity at a specified price any time prior to the maturity of the option. Here we take the example of buying a put option on the stock of AIR DECCAN. The exercise price was Rs.140. The premium paid on the above option was Rs.4.10 on 04-06-2009. investment in the above strategy is Rs.4.10*2500=Rs.10,250.
The pay off form a put can be illustrated. Notice that the payoffs are one to one when the price of the security is less than the exercise price. PRICE 110 120 130 140 150 160 170 Table: C GROSS PAYOFF 30 20 10 0 0 0 0 NET PAYOFF 24.9 14.9 4.9 -4.1 -4.1 -4.1 -4.1
Following are the update of the above option DATE STRIKE PRICE OPEN HIGH LOW
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PAYOFF
110
120 130
160
170
Figure: D A put option is a contact giving its owner the right to sell a fixed amount of a specified underlying asset at a price at any time on or before a fixed date. On the expiration date, the value of the put on a per share basis will be the larger of the exercise price minus the stock price or zero.
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In the above diagram we can notice how the down side risk is minimized if the stock is volatile and the share prices may fall. Here an investor will get profits only if the stock falls below Rs.134.9 In this option the investor has gained 64.6% with in a month.
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Following is the payoff chart for the above option: PRICE 110 120 130 140 150 160 170 Table: E GROSS PAYOFF 0 0 0 0 -10 -20 -30 NET PAYOFF 8.5 8.5 8.5 8.5 -1.5 -11.5 -21.5
Following are the updates of the option rates in the market: DATE 01-Jun-2009 12-Jun-2009 20-Jun-2009 28-Jun-2009 Table: F STRIKE PRICE 140.00 140.00 140 140 OPEN 8.5 2.4 4.35 4.30 HIGH 8.5 4.2 4.85 4.90 LOW 8.5 2.1 2.35 4.2
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PAYOFF
110
120
130
160 170
Figure: E From the above we can notice that the liability is potentially unlimited when a investor are writing options.
150
Here we can see that the investment in this option is nil, as the call writer will get the premium at which he is writing. The net return on this option at the expiry period was Rs.10,624.
Whatever is the buyers profit is the sellers loss. If upon expiration, the spot price of the underlying happens to be below the strike price, the buyer will exercise the option on the writer. If upon the expiration the spot price of the underlying is more than the strike price, the buyer lets his option expire un-exercised and the writer gets to keep the premium. The put writer will first get a premium of amount Rs.9375
Following is the payoff chart of writing the put option PRICE 650 700 750 800 850 900 Table: G GROSS PAYOFF -150 -100 -50 0 0 0 NET PAYOFF -125 -75 -25 25 25 25
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Figure: F
As with the written call, the upside is limited to the premium of the option (the initial price). The downside is limited to the minimum asset price-which is zero. We can clearly see from these diagrams that the investor, depending upon his risk appetite and the outlook about the market conditions, can minimize his losses. The net return on this option at the expiry period was Rs.8, 212.5
DATE 06-Mar 13-Mar 20-Mar 27-Mar 17-Apr 24-Apr 08-May 15-May 22-May 29-May
1 8198 8344 9002 10003 10947 11135 12117 11872 13736 14296
2 8104 8481 8951 1003 7 1106 8 1115 0 1209 2 1194 9 1366 3 1432 0
3 8348 8793 9000 1012 8 1134 0 1136 3 1218 1 1221 9 1393 7 1472 7
4 8047 8481 8867 9913 1094 6 1107 0 1176 5 1194 9 1361 1 1432 0
5 8326 8757 8967 1004 8 1102 3 1132 9 1187 6 1217 2 1388 7 1462 5
-35
45 76 194
-241
300 151 329
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Inverters get time to pay money ie clearing of cheque will be on monday. Settlement day or closing day of week. In my study its says that to invest on Thursday and withdraw on firday . stock broker says Monday as black monday
CONCLUSIONS
1)
Derivatives in equity specially are more suited to provide for hedging and more cost effective. It has less risky and more profitable.
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2) As the stock Index Futures and Options are available, the FIIs buying /selling operations can be performed at greater speed and less cost and without adding too much to market volatility. Most of investors are trading not only in derivatives for hedging, but also for other purposes. 4) Derivatives do not create any new risk. They simply manipulate risks and transfer them to those who are willing to bear these risks. 5) Hedging through derivatives reduces the risk of owning a specified asset, which may be share currency etc. 6) All derivative instruments are very simple to operate. Treasury managers and portfolio managers can hedge all risks without going through the tedious process of hedging each day and amount/share separately. 7) Derivatives also offer high liquidity. Just as derivatives can be contracted easily, it is also possible for companies to get out of positions in case that market reacts otherwise. This also does not involve much cost.
3)
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8) Derivatives are not only desirable but also necessary to hedge the complex exposure and volatility that the financial companies generally face in the capital markets today. 9) All derivative products are low cost products. Companies can hedge a substantial portion of their balance sheet exposure, with a low margin requirement.
There is no assured route for success. This is a fact which is universally applicable and so in case of investment. There is no short cut formula which could be applied instantly and make money out of it instantly in the stock market. Therefore, a good investment takes time, patience, hard work and perseverance to achieve success. Over the next ten twenty years, Indian capital market and stock market may offer some of the best and lucrative opportunities to make big money as compared to other investment avenues.
SUGGESTIONS
1. There is a need to educate the investor in futures and options market, due to its complex nature an investor fails to understand
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the risk reward of a particular strategy, which may result into losses for the investor. 2. An investor must also be thought as to which strategy must be applied at what situation, as application of appropriate strategy at appropriate situation will results into profitable transactions An investor must also be suggested to write certain derivative exams conducted by leading financial organization in the country for proper understanding of the derivative market. 4. The research reports must be made more explanatory which must show the risk covered in a particular strategy and the return which the investor can expect, it must be accompanied by payoff chart along with the line graph of the strategy suggested. 5. Anand Rathi Securities can conduct certain investor education camps in collaboration with leading media channels, which will serve both the purpose which are brand advertisement and investor awareness. There is a need to start derivative trading at all stock exchanges in all over India. As of now its limited to BSE and NSE.
3.
6.
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7. A formal mechanism should be established for co-ordination between SEBI and RBI in respect of all financial derivatives 8. Administrative machinery of existing stock exchanges should be strengthened wherever necessary. Tight supervision is essential for successful derivative trading. 9. SEBI has to implement more powerful rules and regulations and implement certain measures for taking strict action against all illegal transactions.
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BIBLIOGRAPHY
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