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DERIVATIVES MARKET- INDIA

L.C 01695

SHIVAMOGGA

A Project Report On

A STUDY ON THE DERIVATIVES MARKET IN INDIA

Submitted By

Mr. NIRANJAN KUMAR C V

Reg. No. 510740335

A Project Report Submitted in partial fulfillment of the requirement

for the degree of Master of Business Administration of

SIKKIM MANIPAL UNIVERSITY, INDIA.

Syndicate House, Manipal 576 104

1 | P a g eHCMIT, Shimoga


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L.C 01695

SHIVAMOGGA

A PROJECT REPORT ON

DERIVATIVES MARKET IN INDIA

Submitted By

NIRANJAN KUMAR C V

Reg. No. 510740335

Internal guide: External guide:

Mr. Kaleemulla Khan Branch Manager

KARVY STOCK BROKING

A Project Report Submitted in partial fulfillment of the requirement

for the degree of Master of Business Administration of

SIKKIM MANIPAL UNIVERSITY, INDIA

Syndicate House, Manipal 576 104



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DECLARATION

I here by declare that the project report entitled

Derivatives Market In India has been prepared by me

under the guidance of Mr. Kaleemulla Khan Dept of

Management, Hoysala College, shivammoga.

This project report has been submitted to SIKKIM

MANIPAL UNIVERSITY in the partial fulfillment of

requirement for the award of Degree of Master of

Business Management Information Technology.

I also declare that this report has not been submittedany other university for the award of any Degree or

Diploma.

Date:

Place: Shivammoga

Signature of the student

(Mr. Niranjan Kumar C V)

Reg. No.510819849



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CERTIFICATE

The Project Report of

NIRANJAN KUMAR C V

Reg. No. 510740335

Entitled

A PROJECT REPORT ON


with special reference to

KARVY STOCK BROKING

is approved and is acceptable in quality and form.

Internal Examiner External Examiner



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BONAFIDE CERTIFICATE

THISISTOCERTIFYTHATMR. NIRANJAN KUMAR C VISABONAFIDE

STUDENT OF HOYSALA COLLEGE OF MANAGEMENT AND IT

STUDIES, SHIVAMOGGA FOR THE ACADEMIC YEAR 2009 2010

STUDYINGIN MBA (IT) COURSE.

This project report entitled


with special reference to KARVY STOCK BROKING is prepared by her in

partial fulfillment of MBA(IT) Course.

Date :



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Place :

GUIDE CERTIFICATE

This is to certify that the Project Report entitled A STUDY ON DRIVATIVES

MARKET IN INDIA with special reference to KARVY STOCK BROKING,

SHIVAMOGGA Submitted in partial fulfillment of the requirements for the degree of Masters

of Business Administration of Sikkim Manipal University of Health, Medical and Technological

Sciences.

Mr.NIRANJAN KUMAR C V has worked under my supervision and guidance and that

no part of this report has been submitted for the award of any other degree, Diploma,

Fellowship or Other similar titles or prizes and that the work has not been published in any

journal or Magazine.

Reg. No: . 510740335 Certified



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(Mr.somsundram)

Date: 03/12/2009

TO WHOMSOEVER IT MAY CONCERN

This is to certify that Mr. Niranjan Kumar C V Final Year student of Hoysala

College of Management and IT Studies, Shivamoga has successfully completed

the project report Derivatives Market In India from 21st April 2009 to 20th

December, 2009.

During the project he was found sincere and hardworking and it took him little

time to understand the procedures and policies of the company.

We wish him all the success in future endeavours.

For Karvy Stock Broking

Mr. Naveen Kumar

Branch Manager


Karvy Stock Brocking

308, 15th

Cross, 5th

Phase, J. P.Nagar,


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ACKNOWLEDGEMENT

I express my sincere thanks to SIKKIM MANIPAL UNIVERSITY for

making a source of inspiration all along our management career.

I express my sincere thanks to my guide Mr.SOMSUNDRAM, faculty

Member, Hoysala College of Management & IT Studies, Shivamogga and

external guide Mr. Naveen Kumar, Branch Manager, karvy stock broking for

giving me their valuable guidance and timely support to complete this project

successfully.

I express my sincere thanks to our Principal Dr. D.M. BASAVARAJU

for giving me permission to do this project report.

Last but not least, I am thankful to my friends & faculties of HCMIT who

helped me directly and indirectly in the completion of this project work. I also

thank to all the family members who have helped me in many ways to complete

this study successfully.

Date :



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Place: Mr. Niranjan Kumar C V

PART-A

COMPANY PROFILE

KARVY- Comtrade Limited

It is a venture of the prestigious Karvy group. With well established presence in the

multifarious facets of the modern financial services industry from stock broking to

registry services, it is indeed a pleasure for them to make foray into the commodities

derivatives market which opens yet another door for them to deliver their service to

the beloved customers and the investor public at large.

With the high quality infrastructure already in place and a committed Government

providing continuous impetus, it is the responsibility of the company, the

intermediaries to deliver these benefits at the door-steps of the esteemed customers.

With the expertise in financial services, existence across the lengths and breadths of

the country and an enviable technological edge, they are all set to bring the pleasure

of investing in this burgeoning market, which they touch upon the lives of a vast

majority of the population from the farmer to the corporate alike. They are confident

that the commodity futures can be a good value addition to customer portfolio.

The company provides investment, advisory and brokerage services in Indian

Commodities Markets. And most importantly, they offer a wide reach through their

branch network of over 225 branches located across 180 cities.

As the flagship company of the Karvy Group, Karvy Consultants Limited has

always remained at the helm of organizational affairs, pioneering business policies,

work ethic and channels of progress. Having emerged as a leader in the registry

business, the first of the businesses that they ventured into, they have now

transferred this business into a joint venture with Computershare Limited of

Australia, the worlds largest registrar. With the advent of depositories in the Indiancapital market and the relationships that they have created in the registry business,



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they believe that they are best positioned to venture into this activity as a Depository

Participant. They are one of the early entrants registered as Depository Participant

with NSDL (National Securities Depository Limited), the first Depository in the

country and then with CDSL (Central Depository Services Limited). Today, they

service over 6 lakhs customer accounts in this business spread across over 250

cities/towns in India and are ranked amongst the largest Depository Participants in

the country. With a growing secondary market presence, they have transferred this

business to Karvy Stock Broking Limited (KSBL), they are a associate and a

member of NSE, BSE and HSE.

KARVY Stock Broking Limited

Member - National Stock Exchange (NSE), The Bombay Stock Exchange (BSE),

and The Hyderabad Stock Exchange (HSE).

Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flowsfreely towards attaining diverse goals of the customer through varied services.

Creating a plethora of opportunities for the customer by opening up investment

vistas backed by research-based advisory services. Here, growth knows no limits

and success recognizes no boundaries. Helping the customer create waves in his

portfolio and empowering the investor completely is the ultimate goal.

It is an undisputed fact that the stock market is unpredictable and yet enjoys a high

success rate as a wealth management and wealth accumulation option. The

difference between unpredictability and a safety anchor in the market is provided by

in-depth knowledge of market functioning and changing trends, planning with

foresight and choosing one options with care. This is what they provide in their

Stock Broking services.

They offer services that are beyond just a medium for buying and selling stocks and

shares. Instead they provide services which are multi dimensional and multi-focused



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in their scope. There are several advantages in utilizing their Stock Broking

services, which are the reasons why it is one of the best in the country.

KARVY - The Finapolis

The paradigm shift from pure selling to knowledge based selling drives the business

today. With their wide portfolio offerings, they occupy all segments in the retail

financial services industry.

A 1600 team of highly qualified and dedicated professionals drawn from the best of

academic and professional backgrounds are committed to maintaining high levels of

client service delivery. This has propelled them to a position among the top

distributors for equity and debt issues with an estimated market share of 15% in

terms of applications mobilized, besides being established as the leading procurer in

all public issues.

To further tap the immense growth potential in the capital markets they enhanced

the scope of their retail brand, Karvy the Finapolis , thereby providing planning

and advisory services to the mass affluent. Here they understand the customer needs

and lifestyle in the context of present earnings and provide adequate advisory

services that will necessarily help in creating wealth. Judicious planning that is

customized to meet the future needs of the customer deliver a service that is

exemplary. The market-savvy and the ignorant investors, both find this service very

satisfactory. The edge that they have over competition is their portfolio of offerings

and their professional expertise. The investment planning for each customer is done

with an unbiased attitude so that the service is truly customized.

Their monthly magazine, Finapolis, provides up-dated market information on

market trends, investment options, opinions etc. Thus empowering the investor to

base every financial move on rational thought and prudent analysis and embark on

the path to wealth creation.



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KARVY Investor Services Limited

Recognized as a leading merchant banker in the country, they are registered with

SEBI as a Category I merchant banker. This reputation was built by capitalizing on

opportunities in corporate consolidations, mergers and acquisitions and corporate

restructuring, which have earned them the reputation of a merchant banker. Raising

resources for corporate or Government Undertaking successfully over the past two

decades have given them the confidence to renew their focus in this sector.

Their quality professional team and their work-oriented dedication have propelled

them to offer value-added corporate financial services and act as a professional

navigator for long term growth of their clients, who include leading corporates,

State Governments, foreign institutional investors, public and private sector

companies and banks, in Indian and global markets.

They have also emerged as a trailblazer in the arena of relationships, both at the

customer and trade levels because of their unshakable integrity, seamless service

and innovative solutions that are tuned to meet varied needs. Their team of

committed industry specialists, having extensive experience in capital markets,

further nurtures this relationship.

Their financial advice and assistance in restructuring, divestitures, acquisitions, de-

mergers, spin-offs, joint ventures, privatization and takeover defense mechanisms

have elevated their relationship with the client to one based on unshakable trust and

confidence.



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KARVY Computershare Private Limited

They have traversed wide spaces to tie up with the worlds largest transfer agent, the

leading Australian company, Computershare Limited. The company that services

more than 75 million shareholders across 7000 corporate clients and makes its

presence felt in over 12 countries across 5 continents has entered into a 50-50 joint

venture with them.

With their management team completely transferred to this new entity, they will aim

to enrich the financial services industry than before. The future holds new arenas of

client servicing and contemporary and relevant technologies as they are geared to

deliver better value and foster bigger investments in the business. The worldwide

network of Computer share will hold them in good stead as they expect to adopt

international standards in addition to leveraging the best of technologies from

around the world.

Excellence has to be the order of the day when two companies with such similarideologies of growth, vision and competence, get together.

KARVY Global Services Limited

The specialist Business Process Outsourcing unit of the Karvy Group. The legacy of

expertise and experience in financial services of the Karvy Group serves them well

as they enter the global arena with the confidence of being able to deliver and

deliver well.

Here they offer several delivery models on the understanding that business needs

are unique and therefore only a customized service could possibly fit the bill. Their

service matrix has permutations and combinations that create several options to

choose from.



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In re-engineering and managing processes or delivering new efficiencies, their

service meets up to the most stringent of international standards. Their outsourcing

models are designed for the global customer and are backed by sound corporate and

operations philosophies, and domain expertise. Providing productivity

improvements, operational cost control, cost savings, improved accountability and a

whole gamut of other advantages.

They operate in the core market segments that have emerging requirements for

specialized services. Their wide vertical market coverage includes Banking,

Financial and Insurance Services (BFIS), Retail and Merchandising, Leisure and

Entertainment, Energy and Utility and Healthcare.

KARVY- Insurance Broking PVT. LTD

At Karvy Insurance Broking Limited., they 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, they are in a position to provide tailor made policies for different segments

of customers. In their journey to emerge as a personal finance advisor, they will be

better positioned to leverage their relationships with the product providers and place

the requirements of their 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, they would be positioned to

provide the best of the products available in this business to their customers.

Their 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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KARVY Reality and Services (India) Limited

KARVY Realty & Services (India) Limited (KRSIL) is engaged in the business of

real estate and property services offering value added property services and offers

individuals and establishments a myriad of options across investments, financing

and advisory services in the realty sector promoted by the KARVY Group of

companies, Indias largest integrated financial services company. KARVY Realty &

Services India Limited carries forward its legacy of trust and excellence in investor

and customer services delivered with a passion for services and the highest level of

quality that align with global standards.



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Part-B

PROJECT OVERVIEW

The research on the general study of derivatives market has been conducted to improve

the knowledge about the derivatives market and its performance in India.

However another problem was that beyond better performance many traders are not

trading derivatives. Hence the research has been conducted to study the attitude of the

investors and traders. The derivatives market is booming in India and shows better

performance year by year. The research has been conducted in Karvy Comtrade Ltd,

which works on derivatives. 10 investors have been selected for the research on their easy

availability. The results show that lack of knowledge, fear and motivation are the main

factors leading the investors and the traders to step aside of the derivatives market. Hence

there is a need of improving marketing strategies to motivate them to invest in derivative

market.

However a Derivative can be defined as a financial instrument whose value depends on

the values of others, more basic underlying variables. The research how to trade and what

are formalities to be accomplished to trade in the derivatives market.

The methodology adopted for the research on the basis of sampling design and selection

of respondents is clear. Hence the results are better and can be easily acceptable.

This research comes across the meaning of derivatives, the trading system and guides to

play safely in the market. It would motivate the common people to trade in the derivatives

market as it explains the risks in the market and give suggestions to overcome those risks.

This report also explains the settlement procedures, the charges involved and process of

trading. Hence it enhances the confidence level and persuades to invest or trade in the

derivative market



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INTRODUCTION TO PROJECT

As a part of our curriculum, this project aims to study A GENERAL STUDY ON

DERIVATIVES MARKET IN INDIA. The study was conducted in Shimoga.

This study mainly helps to know the trading system of derivatives market and its

consequences. It creates awareness about the market and persuades to trade in a safe

manner. This study also come across various problems faced by the traders of

derivatives market and provides some suggestions to overcome it.

The study has been conducted under the guidance and assistance of company guide

and the staff members of Karvy the finapolis, shimoga and also under the faculty

members of our college.

The stock market took a diversified step by the way of trading through the

Derivatives. Lot of people with lack of knowledge and fear step back to trade in

Derivatives. The trading mechanism is such that a win-lose situation as one has to

incur the loss and the latter gains which is unlike the equity market. The basic

information about the market is provided in the latter part of this thesis. However let

us have a look at the research information proposed to be carried out.

RESEARCH PROPOSED TO BE CARRIED OUT

Listing the objectives of the study

The objectives are clear and the problem is recognized. The main of the study is to

improve the knowledge in the derivatives market and to assist others who wish to

trade in such market.

Preparing the questionnaire



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Open ended questionnaire are prepared for the purpose of the study as the there is

less chances to be biased. The questionnaire prepared to the staff of market and the

traders are different. However they are enclosed at the end of the report.

Collection of the secondary data

The secondary data is collected by referring books, magazines and internet. The

basic knowledge about the market has been collected through books, current news

and other information were collected through the internet.

Analysis of secondary data

Comparison of the secondary data is done. Screening of the various data collected.

The non useful data collected are screened and the data that to be collected for

primary data are planned.

Collection of Primary dataThe interaction with company guide and investors helped for the collection of the

primary data. The study of secondary data helped for the collection of some useful

data here.

Evaluation of the primary data

After the collection of the primary data, comparison between the primary data with

secondary data is made to know the reliability and accuracy of the data collected.

Suggestions from faculty guide

The suggestion from the college faculty guide is taken and it helped for the follow

ups of the research. It also helped for the clear flow of the research conducted.



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Preparing the research report

Finally the report of the research has been drawn which conveys about the research.

STATEMENT OF THE PROBLEM

A couple of months ago, a financial analyst who sells derivatives told me that fears about a

meltdown in the derivatives market were unfounded.

Yesterday, he told me - with a very worried look - "THE DERIVATIVES MARKET IS

UNWINDING!"

What does this mean? What are derivatives and why should you care if the market is

unwinding?

Well, it turns out that the reason that Bear Stearns was about to go belly-up before JP Morgan

bought it is that it had held trillions of dollars in derivatives, which were about to go south.

(The reason that JP Morgan was so eager to buy Bear Stearns is that it was on the other side

of these derivative contracts -- if Bear Stearns had gone under, JP Morgan would have taken

a huge hit. But the way the derivative agreements were drafted, a purchase by JP Morgan

canceled the derivative contracts, so that JP Morgan didn't experience huge losses. That is

probably why the Fed was so eagerto broker - and fund - the shotgun marriage. JP Morgan is

a much larger player, and if Bear's failure had caused the derivatives hit to JP Morgan, it

probably would have rippled out to the whole financial system and potentially caused an

instant depression).

In addition, the subprime prime loan crisis is intimately connected to the unwinding of the

derivatives market. Specifically, loans were repackaged into derivatives called collateralized

debt obligations (or "CDO's") and sold to both big and regional banks and investmentcompanies worldwide. The CDO's were highly-leveraged -- many times the amount of the

actual loans. When the subprime loan crisis hit, the high leverage magnified the fallout, and

huge sums of CDO derivatives became essentially worthless.

Do you remember when wealthy Orange County, California, went bankrupt in 1994? Yup,

that was because it hadinvested in bad derivatives.

And, according to a recent article by one of the world's top derivative insiders, the market forcredit default swap ("CDS") derivatives is also unraveling.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xmlhttp://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xmlhttp://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xmlhttp://www.nytimes.com/2008/03/23/business/23gret.html?ref=businesshttp://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1http://www.bloomberg.com/apps/news?pid=20601103&sid=atl3yFmV508A&refer=newshttp://www.bloomberg.com/apps/news?pid=20601103&sid=atl3yFmV508A&refer=newshttp://www.wilmott.com/blogs/satyajitdas/index.cfm/2008/5/30/The-Credit-Default-Swap-CDS-Market--Will-It-Unravelhttp://www.nytimes.com/2008/03/23/business/23gret.html?ref=businesshttp://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1http://www.bloomberg.com/apps/news?pid=20601103&sid=atl3yFmV508A&refer=newshttp://www.bloomberg.com/apps/news?pid=20601103&sid=atl3yFmV508A&refer=newshttp://www.wilmott.com/blogs/satyajitdas/index.cfm/2008/5/30/The-Credit-Default-Swap-CDS-Market--Will-It-Unravelhttp://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xmlhttp://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/23/ccfed123.xml


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And reported just today, Lehman Brothers is now on the edge, due to exposure to derivatives.

Derivatives are the Elephant in the Living Room

The subprime mortgage crisis is bad, and is hurting many people, and slowing the economy.

High oil and food prices are bad, and are hurting many people, and bringing down the

economy. But -- according to top insiders -- derivatives are the elephant in the room . . . the

single largest threat to the U.S. and world economy.

One reason is that, according to Paul Volcker, the former chairman of the Federal Reserve,

the entire modern financial system is based upon derivatives, and the financial system today

is entirely different from the traditional American or global financial system because

derivatives - a relatively new concept - now underly the entire fabric of the financial system.In short, many of the people who know the most about derivatives say that the current system

is a house of cards built upon derivatives.

Moreover, as mentioned above, the subprime and derivatives crises are closely linked.

Similarly, Britian's New Statesman newspaperlinks derivatives and rising food and

commodity prices:

"This latest food emergency has developed in an incredibly short space of time - essentially

over the past 18 months. The reason for food "shortages" is speculation in commodity futures

following the collapse of the financial derivatives markets. Desperate for quick returns,

dealers are taking trillions of dollars out of equities and mortgage bonds and ploughing them

into food and raw materials. It's called the "commodities super-cycle" on Wall Street, and it is

likely to cause starvation on an epic scale.

The rocketing price of wheat, soybeans, sugar, coffee - you name it - is a direct result of debt

defaults that have caused financial panic in the west and encouraged investors to seek "stores

of value". These range from gold and oil at one end to corn, cocoa and cattle at the other;

speculators are even placing bets on water prices."

Hiding the Ball

And yet banks and financial houses have hidden their derivatives exposureoff the balance

sheets. No wonder almost no one understands derivatives:

http://www.marketwatch.com/news/story/credit-jitters-return-lehman-worries/story.aspx?guid=%7B32A96F52-8702-40A6-8221-95B2F83AABEA%7Dhttp://www.marketwatch.com/news/story/credit-jitters-return-lehman-worries/story.aspx?guid=%7B32A96F52-8702-40A6-8221-95B2F83AABEA%7Dhttp://www.charlierose.com/shows/2008/03/18/1/a-discussion-about-the-economy-with-paul-volckerhttp://www.newstatesman.com/world-affairs/2008/04/haiti-food-price-commoditieshttp://articles.moneycentral.msn.com/Investing/ContrarianChronicles/BanksDarkOffBalanceSheetWorld.aspxhttp://articles.moneycentral.msn.com/Investing/ContrarianChronicles/BanksDarkOffBalanceSheetWorld.aspxhttp://articles.moneycentral.msn.com/Investing/ContrarianChronicles/BanksDarkOffBalanceSheetWorld.aspxhttp://articles.moneycentral.msn.com/Investing/ContrarianChronicles/BanksDarkOffBalanceSheetWorld.aspxhttp://www.marketwatch.com/news/story/credit-jitters-return-lehman-worries/story.aspx?guid=%7B32A96F52-8702-40A6-8221-95B2F83AABEA%7Dhttp://www.charlierose.com/shows/2008/03/18/1/a-discussion-about-the-economy-with-paul-volckerhttp://www.newstatesman.com/world-affairs/2008/04/haiti-food-price-commoditieshttp://articles.moneycentral.msn.com/Investing/ContrarianChronicles/BanksDarkOffBalanceSheetWorld.aspxhttp://articles.moneycentral.msn.com/Investing/ContrarianChronicles/BanksDarkOffBalanceSheetWorld.aspx


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"Not only [world's richest man] Warren Buffett, but Bond King Bill Gross, our Fed Chairman

Ben Bernanke, the Treasury Secretary Henry Paulson and the rest of America's leaders can't

'figure out'" the derivatives market.

Indeed, the government may have actively helped to hide the the derivatives mess since at

least 2006. For example, according to Business Week:

"President George W. Bush has bestowed on his intelligence czar, John Negroponte, broad

authority, in the name of national security, to excuse publicly traded companies from their

usual accounting and securities-disclosure obligations."

Former fed chairman Alan Greenspan has been a huge booster for and defender of derivatives

since 1999 or before (and see this). Did you know that the same guy that pushed subprime

loans has also aggressively pushed derivatives for many years?

And the other regulatory agencies and Congress have taken a totally hands-off approach

towards derivatives.

How Big a Problem?

How big is the derivatives market? Worldwide, it is $596 TRILLION dollars*. The

derivatives market dwarfs the real market for goods and services, and acts likes an

unregulated black market.

As one writer put it:

"Its all smoke and mirrors. The financial system has decoupled from the productive elements

of the economy and is now beginning to show disturbing signs of instability."

And its not just the U.S. Derivatives salesmen have sold these babies all over the world.

Because banks, financial institutions and governments world-wide have bought significant

derivatives, the fall out will not be limited solely to the U.S. See this and this.

If the derivatives market is truly unwinding, as my investment advisor friend and some of the

top industry insiders say, we could be in for a very bumpy ride.

http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.businessweek.com/bwdaily/dnflash/may2006/nf20060523_2210.htmhttp://www.usagold.com/greenspanderivatives.htmlhttp://www.wilmott.com/blogs/satyajitdas/index.cfm/2006/5/24/Fear-and-Loathing--WMD-or-What-are-Derivativeshttp://www.bloomberg.com/apps/news?pid=20601103&sid=aZ2IzCD2ZoXYhttp://www.bloomberg.com/apps/news?pid=20601103&sid=aZ2IzCD2ZoXYhttp://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.counterpunch.org/whitney09152007.htmlhttp://www.counterpunch.org/whitney09152007.htmlhttp://www.ft.com/cms/s/0/af1e1c18-ee04-11dc-a5c1-0000779fd2ac.html?nclick_check=1http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aS_DNKFmqEx4http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aS_DNKFmqEx4http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.businessweek.com/bwdaily/dnflash/may2006/nf20060523_2210.htmhttp://www.usagold.com/greenspanderivatives.htmlhttp://www.wilmott.com/blogs/satyajitdas/index.cfm/2006/5/24/Fear-and-Loathing--WMD-or-What-are-Derivativeshttp://www.bloomberg.com/apps/news?pid=20601103&sid=aZ2IzCD2ZoXYhttp://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7Dhttp://www.counterpunch.org/whitney09152007.htmlhttp://www.counterpunch.org/whitney09152007.htmlhttp://www.ft.com/cms/s/0/af1e1c18-ee04-11dc-a5c1-0000779fd2ac.html?nclick_check=1http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aS_DNKFmqEx4


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OBJECTIVES OF THE STUDY

The following research is a part of our curriculum and it enhances the students to

improve in their special interests. So the topic was selected as am a student with

Finance as my specialization. The following are the objectives that I would

accomplish at the end of this project.

To improve my knowledge in the field of investments.

To enhance the importance and scope of Derivatives Market.

To acquire formalities to be accomplished to trade in this market.

To analyze the wideness of differentiation of this market from the other

financial markets.

To study the investors attitude and their speculations in this market

To know practical trading in this market.

To learn the calculations pertaining to derivatives market.

To know about the loopholes in this market.

To enhance myself to give some suggestions for the improvement for better

performance

To know the contribution of this market to National Income of India.



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To equip myself for the placement in the field of Finance.

SCOPE:

It is important to note that GOLD is traded more in the derivatives market. Some

details about it is provided.

Gold is a unique asset based on few basic characteristics. First, it is primarily a

monetary asset, and partly a commodity. The distinction between gold and

commodities is important. Gold has maintained its value in after-inflation terms

over the long run, while commodities have declined.

Role of gold in derivatives market

Timeless and Very Timely Investment

For thousands of years, gold has been prized for its rarity, its beauty, and above all,

for its unique characteristics as a store of value. Nations may rise and fall,

currencies come and go, but gold endures. In todays uncertain climate, many

investors turn to gold because it is an important and secure asset that can be tapped

at any time, under virtually any circumstances. But there is another side to gold that

is equally important, and that is its day-to-day performance as a stabilizing influence

for investment portfolios. These advantages are currently attracting considerable

attention from financial professionals and sophisticated investors worldwide.

Gold is an effective diversifier



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Diversification helps protect your portfolio against fluctuations in the value of any

one-asset class. Gold is an ideal diversifier, because the economic forces that

determine the price of gold are different from, and in many cases opposed to, the

forces that influence most financial assets.

Gold is the ideal gift

In many cultures, gold serves as a family treasure or a wealth transfer vehicle that is

passed on from generation to generation. Gold bullion coins make excellent gifts for

birthdays, graduations, weddings, holidays and other occasions. They areappreciated as much for their intrinsic value as for their mystical appeal and beauty.

And because gold is available in a wide range of sizes and denominations, you dont

need to be wealthy to give the gift of gold.

Gold is highly liquid

Gold can be readily bought or sold 24 hours a day, in large denominations and atnarrow spreads. This cannot be said of most other investments, including stocks of

the worlds largest corporations. Gold is also more liquid than many alternative

assets such as venture capital, real estate, and timberland. Gold proved to be the

most effective means of raising cash during the 1987 stock market crash, and again

during the 1997/98 Asian debt crisis. So holding a portion of your portfolio in gold

can be invaluable in moments when cash is essential, whether for margin calls or

other needs.



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Top Gold Demanding Nations

COUNTRIES 1996 1997 1998 1999 2000

India 506.98 736.84 814.9 838.86 855.34USA 331.56 362.04 428.3 459.71 387.55

China 374.48 406.83 314.5 343.38 329.38

SE Asia 329.69 204.04 51.63 265.62 267.18

Saudi 184.75 199.06 208.4 199.37 221.14

Turkey 153.03 201.86 172 139.03 207.15



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Recent Developments in India

World Gold Council (WGC) has estimated that the annual Indian demand for the

precious metal in recent years has been in excess of 800 tons. Most of it appears to

be meant for jewellery fabrication, and the rest, estimated at 10 to 15 percent, is

possibly meant to meet demand on account of investment and industrial processes.

A major step in the development of gold markets in India was the authorization in

July 1997 by the RBI to commercial banks to import gold for sale or loan to

jewellers and exporters. Initially, 7 banks were selected for this purpose on the basis

of certain specified criteria like minimum capital adequacy, profitability, riskmanagement expertise, previous experience in this area, etc. The number of banks

later went upto 18. On a review, since five banks had not evinced adequate interest

in this business in terms of activity, the RBI did not find it appropriate to renew

their licences for this purpose. At present, 13 banks are active in the import of gold.

The quantum of gold imported through these banks has been in the range of 500

tons per year.



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Import of gold by banks authorized by the RBI has succeeded to a large extent in

curbing illegal operations in gold and in foreign exchange markets. It has also

resulted in reducing the disparity between international and domestic prices of gold

from 57 per cent during 1986 to 1991 to 8.5 percent in 2001. The import duty on

gold, which was Rs.220 per ten grams up to January 1999, was increased toRs.400

per ten grams, and with effect from April 2001 has been reduced to Rs.250 per ten

grams. The estimates of duty realized from gold imports indicate an annual amount

varying from about Rs. 1,000 to Rs. 2,000 crore per annum since 1997.

Even though the country consumes more than 800 tons of the metal every year, the

system of assaying and hallmarking has not gained the desired importance. The low

quality of gold jewels being sold in the country and the resultant losses being

incurred by the consumers are being recognized now. Recent surveys conducted by

the Bureau of Indian Standards (BIS) jointly with Central Consumer Protection

Council in 5 major cities reveal that more than 80 per cent of the jewels being sold

in the market were of lower purity than claimed and charged for. In some cases, the

gold articles sold were 38.6 per cent short in purity in monetary terms. The low

purity results in a loss of around 16 per cent to gold jewels.

In the recent past, RBI has been actively pursuing the issue of upgrading the quality

of trade and products through a system of assaying and hallmarking with

Government of India and BIS. The major objectives of introducing a proper

assaying and hallmarking system in the country are enabling consumer protection,

developing export competitiveness of the gold jewels industry, introducing gold

based financial products, which will help in mopping up the vast dormant gold

resources with the domestic sector and developing India into a leading gold market

centre in the world.

The Government of India announced the Gold Deposit Scheme in 1999 and RBI

issued guidelines to the banks intending to launch the scheme in October 1999. Five

banks have launched their schemes under the guidelines and the quantum of gold

mobilized so far has been about 7 tonnes. Unfortunately, the scheme has not evoked

the expected response. A number of reasons can be cited for the low response,

prominent among them being depositors losing the making charges spent on jewels(as the banks would convert them into primary form before accepting as deposits),



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the low carat of jewels, low rate of return on deposit (as seen by the depositors) and

the absence of any amnesty.

However numerous data were covered on the study was covered under the study of

the derivatives market in India. Howver the clearing and settlement of the futures

and options have to seen. They are as follows;

Clearing and settlement of Futures

Clearing mechanism in NSE

The open position of CM is calculated by averaging of the open position of all the

Trading Members clearing through them.

A TMs open position is calculated by adding up his proprietary open positions and

clients open positions.

The proprietary open position is calculated on net basis and client positions will be

calculated on gross basis.

Settlement Mechanism

The Nifty Index Futures and options contracts are cash settled. The CM are required

to open bank account specified by NSCCL. The open positions in the index futures

contracts are marked to market at the settlement priceof the contract at the end of

each trading day. The members who have a loss position should pay the loss amount

to NSCCL which is then transferred to the members who have made profits. This is

known as daily market to market settlement. The closing price of index futures

contract which is computed by taking the weighted average of the prices of the daily

settlement price.

On the expiry of the futures contract, NSCCL marks the open position of CM to the

final settlement price and the resulting profit or loss is settled in cash.



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Settlement of Options Contracts

Settlement of Index Options Contract

In the index option contract the premium has to be paid or received is calculated for

each CM after netting the positions at the end of each day. The CM who has to pay

the premium has to pay to NSCCL and this is adjusted with those who have to

receive the premium. This is known as daily premium settlement. On the expiry day

of the options contract, NSCCL will determine the outstanding in the money

contracts based on the final settlement price and resulting profit or loss will be

settled in cash. The final settlement price is the closing value of the underlying

index price on the expiration day of the contract. The final settlement profit or loss

will be the difference between the stock price and the final settlement price of the

relevant index option contract. Final settlement profit or loss amount is credited or

debited to the relevant CMs clearing bank account on the day next the expiry day.

Settlement of Options Contract on Individual Securities

The premium to be paid or received is netted across all option contracts on

individual securities at the client level to determine the net premium payable or

receivable at the end of each day. The settlement procedure is similar to that of the

index option contracts. Interim exercise settlement price is the clearing price of the

underlying security on the exercise day. The settlement value is the difference

between the strike price and the exercise settlement price of the option contract. The

exercise settlement value is debited or credited to the CMs clearing bank account

on the third day of the exercise day.

However besides the second largest populated country India is not seen in top list of

commodity exchange. The main reason is that lack of knowledge and many people

are risk averse. The commodities are traded world wide but the farmers are not

interested to trade in the derivatives market. There is lack of motivation for our

farmers to trade in derivatives. Apart from these the investors tend to invest in



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equities rather than derivatives. Hence Indian Derivatives market is not performing

up to the mark.

Apart from it is should be noted that the brokers receive message from the market

very fastly. So they can guide the investors to earn better profits. The online traders

do not get such information and may end up by huge losses.

METHODOLOGY

Sampling design:

The sample selected for the purpose of research is the investors who trade frequently and

staff of the Karvy comtrade. The karvy comtrade posses nearly 2000 to 3000 investors,among nearly 800 trade in derivatives. The intra day transactions are carried by nearly 20

people and only 10 people are considered as active customers.

Type of sampling



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Convenience sampling which is a type of non probability sampling is carried while

selection of samples. The selection of investors from the population based on their

easy availability and accessibility to the researcher has been taken.

Criteria for selection of samples

Degree of accuracy

As the samples selected on the basis of the convenience (samples are selected on

their availability) the information collected carries a good wieghtage. The samples

are informed that they are under research and they came forward as respondents.

Time

The time taken for the research is a long time. Under various circumstances the

same questions were asked and the responses were not changed. Hence there was no

time constraint or the influence of time upon the investors.

Prior knowledge

The investors were not new to the market. They have seen the ups and down since

many years. Hence the prior knowledge of respondents was good.

Research design

Nature of research design



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Experience survey

The research can be categorized under the experience survey as it conducted to gain

additional knowledge on derivatives market as a lot of important information is not

freely available. The handful of secondary data is available on the subject but it is

not sufficient to trade in the derivatives market.

However at first the objectives of the study was listed and then the secondary data

was collected and then it was analyzed, prepared the questionnaire, interaction with

company guide, investors which was the primary data collected. After the collection

of the primary data, compared the primary data with secondary data and the

evaluation of the primary data is carried out to know the reliability and accuracy of

the data collected. However the suggestions from faculty guide has been taken and

prepared the research report

Questionnaire design

(The questionnaire is enclosed under the section Annexure)

Probing was made when felt necessary.

The following are decision taken to collect the information required

Required information:

The research objectives were clear before conducting the research. While framing

questionnaire it was ensured that the questions are designed to draw information

that will fulfill research objectives.

Target respondents

Before conducting research it was decided that the target respondents to be thefrequent investors or speculators as they possess more knowledge about trading.



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This was a crucial step because target respondents becomes important as the task of

developing a questionnaire that will be suitable to all cross sectional groups of a

diversified investors.

Data that was gathered

In short, the common information collected from the investors who stands of the

opinion that the require of investment is more in currency market and commodity

market. The loss incurred or the profit earned is huge amount. A small changes in

the value of gold or currencies subject huge loss. Hence the risk is more in options

of derivatives market under gold or currency. Many investors show less interest to

trade in futures and even on commodities as such.

Sources from which the data was collected

Both the primary data and secondary data are the sources of data collection.

Through the primary data information regarding investors attitude towards the

investment in derivatives market is studied and through the secondary data the details of

derivatives market is collected.

Data collection

Time of data collection

The time for the collection of secondary information around 15 days and for the

primary data 45 days

Field condition during the data collection



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The market was showing a positive response and the investors were showing keen

interest in investment. The affect of recession was not in light as many companies

showed better profits. Moreover there was hike in the prices of commodities as well.

Human resource in the research

One person to conduct the research under the guidance of the company guide and

faculty guide

Training

We were well trained during our SIP as it was just like a research. The faculty guide

and company guide are trained as per the institution and company norms

respectively.

Data analysis

Data handling

The secondary data collected are screened and then the primary data has been

collected. It was important to acquire knowledge on the derivatives at first and then

follow the primary research. The data collected are not mismanaged and are true

information as they are collected from the popular sources. The investors are of

speculative in nature who posses good knowledge about the market.

Ground work

A clear ground work has been done to pursue the research as the objectives were

clear. On the basis of the objectives the secondary data were collected. Contacting

the company guide and investors was a major ground work in the research. The

permission to conduct the research was taken from the college and company.



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LIMITATIONS

Various sites have been referred to collect the secondary data. But some sitesprovided wrong data, the genuine of the data was not good.

The books referred failed to provide complete details and hence it made to refermore books and web sites.



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The investors have good knowledge about trading but they lack the theoreticalknowledge. They were speculative in nature and they had good knowledge on the

time of changes in the prices.

It is assumed that as the market was positive and hence they were showing keeninterest in trading. But the same sort of attitude may not be hoped when the

market performance is not up to the mark.

ANALYSIS AND INTERPRETATION OF THE DATA

The very big myth in common people is that they perceive the derivative market is

small. But the derivative market in India are about Rs. 11 trillion worth per annum.



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The future market is 5 20 times that of the spot market. The following table

depicts the following:

Market Annual Physical

Trade (Rs . Cr)

3 times multiple

(Rs in Cr)

5 times

multiple

(Rs in Cr)

Bullion 40000 120000 200000

Metals 60000 180000 300000

Agriculture 500000 1500000 2500000

Energy 500000 1500000 2500000

Total 1100000 3300000 5500000

Per day 4400 13200 22000

Information collected through research

Steps to Trading



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The investor who likes to trade in derivatives market has to open an account with

the broker. The Karvy comtrade ltd, charges Rs 2000 to open an I zone account

from which the investor can trade in both equity market and derivatives market.

After opening the account by submitting his documents, it will be forwarded to the

Head Quarters of Karvy comtrade ltd, which is located in Hyderabad. It analysis

the document and his account. The initial margin is fixed which is 5% to 10% of

the contract value.

Code will be given on the account for the accessability of trading for the investor.

The investor has to trade on this code, where the commission charges apply on

code basis. The code will be forwarded to regional office.

The investor can trade after the completion of the above process. When a contract

takes place he has give 0.05% commission to Karvy comtrade ltd.

Safety measures



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Trade only through registered Members.

In the interest of our own safety, it is important to trade only through registered

members since the commodity exchanges have jurisdiction over them in terms of their

own rules, bye laws, etc and can therefore, play a role in resolving investor grievances

or even take action against the members if necessary. The exchange has no jurisdiction

over entities who are not their members.

Be familiar with FMC guidelines and rules, regulations, byelaws, circulars, etc. of

MCX.

Be familiar with FMC guidelines and rules, bye laws, etc. of the exchange to have an

adequate understanding of the legal framework under which the commodity futures are

traded. This would be useful in terms of giving you a better understanding of the

procedures relating to trading, clearing and settlement, your rights as investor, etc.

Take an informed decision

Be sure while taking an informed decision. Read the product note available on the

exchange website to understand the commodity specifications. Keep track ofGovernment policy announcements such as the Minimum Support Price, Export/Import

policy, etc, which have a significant impact on the prices of commodities. Also keep

track of exchange announcements made through circulars regarding the methodology of

computation of due date rates, launch of new contracts, etc. Understand the commodity

thoroughly. Study historical and seasonal price movements of the commodity.

Understand the Delivery and Settlement Procedure.



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Thoroughly understand the delivery and settlement procedure which differs from

commodity to commodity in terms of quality implications, place of delivery, options,

penalties, margins, etc. This information is given in the product note available on the

website. Understanding of delivery would help in avoiding rejection of your delivery.

Understand and Comply with Taxation and other relevant laws.

Before initiating a trade, ascertain whether the price of the commodity is inclusive or

exclusive of various taxes applicable at the delivery centre at the given point of time.

Be aware of implications of various taxes such as Sales tax, Service tax, VAT, etc.

Make sure that you understand and comply with accounting standards for derivatives.

Pay all applicable margins. Collect / pay mark-to-market margins on a daily basis.

Pay all the applicable margins on your futures position to the member. Also, collect or

pay (as the case may be) mark-to-market margins from/to the member which are

required to be settled on a daily basis.

Insist on documentation with the member such as Member Client agreement, and Know

Your Client.



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Enter into an agreement with the member since that would ensure that you have

recourse to all the investor protection mechanisms of the exchange. Co-operate with the

member in filling up the 'Know Your Client form. This form has been devised to ensure

that a member knows all his clients properly, and you are thus protected from the risk

which may arise out of a member having unsuitable clients. Only clients with pan

numbers are allowed to trade on commodity exchanges.

Read and understand the Risk Disclosure Document.

The Risk Disclosure Document provides valuable insight into the risk associated with

futures trading. It is therefore, in your interest to carefully read and understand this

document.

Insist on signed Contract Notes containing all relevant information such as Member

Registration Number, Order Details, Trade Rate, Quantity, etc.

Insist on signed contract notes with all the relevant information for all your trades. The

contract note is a proof of the transaction between you and the member and is

absolutely essential for you to be able to approach the exchange for redressal of your

complaints, availing arbitration mechanisms, etc.

Obtain receipt for collateral deposited with the Members.

Take a receipt from your members for collateral deposited with them.



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Insist on a periodical statement of your ledger account.

Monitor your account with the member properly by insisting on a periodical statement

of your ledger account.

Close the de-mat account in case of a long absence.

Structure of Commodity Market



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Trading system

The best five buy and sell orders for every contract available for trading are visible to

the market and orders are matched based on price time priority logic. Orders can be

placed with time conditions and/ or price conditions



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Time related Conditions

DAY order- A Day order is valid for the day on which it is entered. If the order is not

matched during the day, the order gets cancelled automatically at the end of the trading

day.

GTC - A Good Till Cancelled (GTC) order is an order that remains in the system until

the expiry of the respective contract in which it is entered or until when the same is

cancelled by the member.

GTD - A Good Till Date (GTD) order is valid till the date specified by the member.

After the specified date the unexecuted orders get automatically cancelled by the

system.

IOC - An Immediate or Cancel (IOC) order allows a member to execute the orders as

soon as the same is placed in the market, failing which the order will get cancelled

immediately

Price Conditions

Limit Order The order wherein the price is to be specified while placing the same.

Market Order The order at the best available price at the time of placing the same.



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Trade timings

Monday to Saturday: 9:55 a.m. to 11:00 p.m.

Special Session (order cancellation session) is held to cancel the pending orders prior to

opening of market

Normal Session:

Monday through Friday: 10:00 a.m. to 11:30 p.m.

(up to 11:55 p.m. on account of day light savings typically between every November

and March of the following year)

Saturdays: 10:00 a.m. to 2:00 p.m.

Agri-commodities are available for futures trading up to 5:00 p.m. whereas non agri-

commodities (bullions, metals, energy products) are available up to 11:30 pm /

11.55pm.



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Trading Holidays

1 Mahashivratri2 Id-E-Milad

3 Good Friday / Holi (1 st Day)

4 Ambedkar Jayanti

5 Mahavir Jayanti

6 Maharashtra Day

7 Buddha Purnima

8 Independence Day

9 Ganesh Chathurthi

10 Ramzan Id / Gandhi Jayanti

11 Dasera

12 Diwali (Laxmi Pujan)

13 Diwali ( Bhaubeez)

14 Gurunanak Jayanti

15 Bakri-Id

16 Christmas

The Exchange may alter / change any of the above Holidays, for which a separate

circular will be issued in advance.

Trading related documents

Application for New User ID creation

Application for Change of User Name



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User Id cancellation

Application for User ID/ Member ID mapping

Increase/ Decrease in Maximum Order Size of trade

Increase/ Decrease in Turnover limit

Enablement of Pro facility

Reset of Member Admin/ User Id password

Application for Cancellation of orders

Application for Square-off of trades

Trading rules

The Derivatives Trading at BSE takes place through a fully automated screen-based

trading platform called DTSS (Derivatives Trading and Settlement System).The

DTSS is designed to allow trading on a real-time basis. In addition to generating

trades by matching opposite orders, the DTSS also generates various reports for the

member participants.



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Order Matching Rules

Order Conditions

Order Matching Rules

Order Matching takes place after order acceptance wherein the system searches for

an opposite matching order. If a match is found, a trade is generated. The order

against which the trade has been generated is removed from the system. In case the

order is not exhausted further matching orders are searched for and trades generated

till the order gets exhausted or no more match-able orders are found. If the order isnot entirely exhausted, the system retains the order in the pending order book.

Matching of the orders is in the priority of price and timestamp. A unique trade-id is

generated for each trade and the entire information of the trade is sent to the relevant

Members.

Order Conditions

The derivatives market is order driven i.e. the traders can place only orders in the

system. Following are the order types allowed for the derivative products. These

order types have characteristics similar to the ones in the cash market.

Limit Order

An order for buying or selling at a limit price or better, if possible. Any unexecuted

portion of the order remains as a pending order till it is matched or its duration

expires. An order that becomes a limit order only when the market trades at a

specified price.

Market Order

An order for buying or selling at the best price prevailing in the market at the time

of submission of the order.



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There are two types of Market Orders

Partial Fill Rest Kill (PF): execute the available quantity and kill any unexecuted

portion.

Partial Fill Rest Convert (PC): execute the available quantity and convert any

unexecuted portion into a limit order at the traded price.

All orders have the following attributes

Order Type (Limit / Market PF/Market PC/ Stop Loss)

Asset Code, Product Type, Maturity, Call/Put and Strike Price

Buy/Sell Indicator

Order Quantity

Price

Client Type (Propritory / Institutional / Normal)

Client Code

Order Retention Type (GFD / GTD / GTC)

Good For Day (GFD) - The lifetime of the order is that trading session

Good Till Date (GTD) - The life of the order is till the number of days as specified

by the Order Retention Period.

Good Till Cancelled (GTC) - The order if not traded will remain in the system till it

is cancelled or the series expires, whichever is earlier.



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Order Retention Period (in calendar days) : This field is enabled only if the value of

the previous attribute is GTD. It specifies the number of days the order is to be

retained.

Protection Points Protection Points : This is a field relevant in Market Orders and

Stop Loss orders. The value enterable will be in absolute underlying points and

specifies the band from the touchline price or the trigger price within which the

market order or the stop loss order respectively can be traded.

Risk Reducing Orders (Y/N)

When a Member's collateral falls below 50 lacs, he will be allowed to put only risk

reducing orders and will not be allowed to take any fresh positions. It is not

essentially a type of order but a mode into which the Member is put into when he

violates his collateral limit. A Member who has entered the risk-reducing mode will

be allowed to put only one risk reducing order at a time

National Commodity Exchanges and Regional Commodity Exchanges

Demutualization has gathered pace around the world and Indian commodity

exchanges are also looking into it. Existing single and regional commodity

exchanges have realized the possible threat that the national level exchange may

pose on their future.

Given the experience of the regional stock exchanges in India, commodity

exchanges are becoming proactive to counter such a threat. Commodity exchanges

may not face the threat of extinction because of the following reasons.

(1) Commodity exchanges are trading in futures contracts on those commodities,

which have some regional relevance. It is not going to be as easy as a share of a

company to get listed in a different exchange.



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(2) Delivery of commodity is a physical activity; delivery of shares is an electronic

activity.

(3) Commodity exchange members are stakeholders in those commodities where in

stock exchange members were never the owners of the stock to control where the

stock should get traded.

(4) Importance of commodity exchanges are linked to the stakeholders of that

particular commodity wherein success of a stock exchange is more on transparency

and low transaction cost.

Above reasons are possibilities; national level exchanges could encourage the

existing commodity exchanges and their members to the national stream. Such

exchanges and members are of relevance to the Indian economy as a whole and for

the success of commodity futures in particular.

Member of derivative segment in BSE

Steps to become a member of derivative segment in BSE



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Types of Memberships in the BSE Derivatives Segment



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Trading Member

A Trading Member should be an existing Member of BSE cash segment. A TradingMember has only trading rights but no clearing rights. He has to associate with a

Clearing Member to clear his trades.

Trading-Cum-Clearing Member

A Trading-cum-Clearing Member should be an existing Member of BSE cash

segment. A TCM can trade and clear his trades. In addition, he can also clear the

trades of his associate Trading Members.

Professional Clearing Member / Custodial Clearing Member:

A Professional Clearing Member need not be a Member of BSE cash segment. A

PCM has no trading rights and has only clearing rights i.e. he just clears the trades

of his associate Trading Members & institutional clients.

Limited Trading Member



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A Limited Trading Member need not be a Member of BSE cash segment. A LTM

has only trading rights and no clearing rights. He has to associate with a Clearing

Member has to clear his trades.

Self Clearing Member

A Self Clearing Member should be an existing Member of the BSE cash segment.

An SCM can clear and settle trades on his own account or on account of his client

only and not for any other Trading Member.



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FINANCIAL REQUIREMENT AND FEE CHART FOR MEMBERS OF

BSE DERIVATIVES SEGMENT

Sl

No

Particulars PCM / CCM

/ TCM /

SCM

TM LTM

Members of

other Stock

Exchanges

whose Clearing

member is a

subsidiary

Company of a

Regional

Exchange

Others

1 Net Worth300(PCM /

TCM)

100 (SCM)

25 10 25

2Security Deposit

Interest Free Cash - 2.5 2.5 2.5

Cash/Cash Equivalents

(#)

2.5 2.5 2.5 2.5

Approved Securities 2.5 2.5 2.5 2.5

Total 50 7.5 7.5 7.5

3 Processing Fees _ _ _ _

4 Annual Charges (*) 0.50 0.25 0.25 0.25

5 One Time Charges

Exchange Fee

(Refundable Deposit)

5 _ _ _

Regulators of Derivatives Market in India



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Just as SEBI regulates the stock exchanges, the derivatives market are regulated by

the FMC (Forward Market Commission). The FCM works under the purview of the

Ministry of Food, Agriculture and Public Distribution

The commodities on which futures trading takes place

Almost all commodities known to us are traded in the derivatives market. However

there are 180 commodities are traded in this market. They have categorized as

follows, only some important commodities traded are taken into consideration.

Bullion Gold and Silver

Oil and oil

seeds

Castor seeds, soya beans, castor oil, refined soya oil, soyameal,

RBD palmolein, crude palm oil, ground nut oil, mustard seed oil,

cotton seed oil, cotton seed oilcake, cotton seed, menthe oil.

Spices Pepper, red chilly, jeera, turmeric, cardamom, coriander

Metals Steel long, steel flat, copper, nickel, tin, steel ingots, zinc,

aluminium

Fibre Kapas, long staple cotton, medium staple cotton

Pulses Chana, urad, yellow peas, tur, masur

Cereals Rice, basmati rice, wheat, maize, sarbati rice.

Energy Crude oil, furnace oil, natural gas, heating oil

Others Rubber, guar seed, guargum, cashew, cashew kernel, sugar, gur,

coffee, silk

Interpretation of futures price quotations



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Open High Low Settle Change Life time Open

interestHigh low

Dec 250 255 248 252 2 265 245 11000

Mar 230 233 223 232 2 243 220 23000

May 220 224 217 223 3 233 215 12330

July 240 243 236 243 3 249 230 3600

Sep 230 234 229 225 -5 240 225 1245

Dec 260 265 254 255 -3 270 250 5688

The first column gives the maturity of the contract that is the month in which the

contract will expire.

The second column, OPEN denotes the price for the first trade on that particular

trading day.

The third and the fourth column HIGH and LOW denotes the highest and lowes

price at which a particular contract traded on that day.

The fifth column SETTLE stands for the settlement price. It is determined by the

settlement committee by using a formula which considers the prices at which

trading took place during the last few minutes of the closing time.

The sixth column CHANGE represents the difference between todays settlement

price and yesterdays settlement price. It can be positive or negative.

The HIGH and the LOW in the seventh column denotes the highest and the lowest

ever price at which the contract was traded till date.

The last column OPEN INTEREST denotes the cumulative number of contracts that

are due to delivery. In other words it is the number of futures contract that has to be

settled on or before expiry date.

Turnover in financial market and commodity market



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Market segments 2002-03

(Rs in

crores)

2003-04

(Rs in

crores)

2004-05

(Rs in

crores)

Government Securities Market 1,544,376 2,518,322 2,827,872Forex Market 658,035 2,318,531 3,867,936

Total Stock Market Turnover (I+

II)

1,374,405 3,745,507 4,160,702

National Stock Exchange (a+b) 1,057,854 3,230,002 3,641,672

a)Cash 617,989 1,099,534 1,147,027

b)Derivatives 439,865 2,130,468 2,494,645

Bombay Stock Exchange (a+b) 316,551 515,505 519,030a)Cash 314,073 503,053 499,503

b)Derivatives 2,478 12,452 19,527

Commodities Market NA 130,215 500,000

Leading commodity exchange of the world

Some of the leading exchanges of the world are

New York Mercantile Exchange (NYMEX),

London Metal Exchange (LME)

Chicago Board of Trade (CBOT).

Leading commodity markets of India

The government has now allowed national commodity exchanges, similar to the BSE & NSE,

to come up and let them deal in commodity derivatives in an electronic trading environment.

These exchanges are expected to offer a nation-wide anonymous, order driven, screen based

trading system for trading. The Forward Markets Commission (FMC) will regulate these

exchanges.

Consequently four commodity exchanges have been approved to commence business in this

regard. They are:



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Multi Commodity Exchange (MCX) located at Mumbai.

National Commodity and Derivatives Exchange Ltd (NCDEX) located at Mumbai.

National Board of Trade (NBOT) located at Indore.

National Multi Commodity Exchange (NMCE) located at Ahmedabad.

Derivatives - Governing / Clearing Council

GOVERNING COUNCILNon-Executive Chairman - Public Representative - Mr. Jagdish Kapoor

Managing Director & Chief Executive Officer - Mr. Madhu Kannan

Chief Operating Officer - Mr. M. L. Soneji

CLEARING COUNCIL

Non-Executive Chairman - Public Representative - Mr. Jagdish Kapoor

Managing Director & Chief Executive Officer - Mr. Madhu Kannan

Chief Operating Officer - Mr. M. L. Soneji

FINDINGS



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The research has helped to gain knowledge over various aspects in the derivatives market.

Various changes has been seen in the derivatives market. The Indian market is performing

well in these days.

The stock exchange Mumbai created history by launching the first exchange traded financial

derivatives product in India, the Sensex Futures. The trading was inaugurated by Prof. J R

Varma, member of SEBI and chairman of committee responsible for formulation of risk

containment measures for the derivatives market. The first historical trade of 5 contracts of

June series was done on June 9, 2000 at 9.55.03 am between M/s Kaji & Maulik Securities

Pvt. Ltd and M/s Emkay Share & Stock Brokers Ltd., @ 4755

However the following are the findings of the research

Commodity futures help us to procure or sell the commodities at a price

decided month before the actual transaction, so risk on any fluctuation in

prices may be a minimized.

By taking positions in the futures one can effectively lock in the price at

which he wish to sell his produce.

One can store the underlying commodities in exchange approved warehouse

and sell in the futures to realize the future value of the commodity.

Selling commodity in futures contract can give assured demand at the time of

harvest.

One can fix the rate of commodities to purchase in future before itself. For

instance if an industrialist want to purchase raw materials and there is a



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scenario of increase in prices for it, he can fix a price for the raw materials

now itself.

One can avoid risk of short supply of raw materials by buying a commodity

futures contract by which he is assured of supply of a fixed quantity of

materials at a pre decided price at the appointed time.

In the derivatives market, the commodity prices are less volatile than the

stock prices and hence it is relatively safer.

As many of the commodities are prices on International standards there is

ample scope for manipulation.

There will be a doubt on the physical deliveries of the commodities traded

through the exchange among many common people. Of course the exchanges

in order to maintain the futures prices in line with spot market, have made

provisions of settlement of contracts by physical deliveries.

There is no need of paying the sales tax if the trade is squared off, however

the sales tax is applicable only in case of trade which result into delivery.

Options in goods are prohibited under section 19 of the Forward Contracts

(Regulation) Act, 1952.

India is a signatory of WTO, as such the producers and traders have

opportunities to explore the global market.



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FCI Food Corporation of India is working with storage of commodities

where many farmers and traders have considered it as a failure. Futures

market will produce their own kind of smoothing between the present and the

future. If the future price is high and the present price is low, an arbitrager

will buy today and sell in the future, if the future price is low the arbitrageur

will buy in the futures market. These activities produce their own "optimal"

buffer stocks, smooth prices. They also work very effectively when there is

trade in agricultural commodities, arbitrageurs on the futures market will use

imports and exports to smooth Indian prices using foreign spot markets.

In case of any dispute with a Member regarding the trades, a client holding a

valid contract note has the right to obtain redressal as per the byelaws of the

Exchange, including arbitration.

The risk of loss in case of options is high. A small drop of prices couldaccount of large amount of loss to the investors.

Many respondents wish to trade in futures as it is of less risk. But the

respondents who can considered as speculators wish to trade in options.

The minimum price needed to trade in commodity market is Rs 15000/-. The

investors need to deposit initial margin which is between 5% to 10% of the

contract and also pay the broker while opening an account which is around

Rs.2000/-. It seems to be burden on the prospective investors who wish to

trade in derivatives and hence they step aside.



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The experienced investors would like to trade privately that is on line trading

and other open the account with brokers and trade.

The returns from derivatives market are free from the direct influence of the

equity and debt market which means that they are capable of being used as

effective hedging instruments providing better diversification

The margins in the commodity futures market are less than the F&O section

of the equity market.

SUGGESTIONS / RECOMMENDATION

The derivatives helps to transfer the risk of the people, the discovery of the

anticipated prices are made. Derivatives promote the investment and saving in the

long run. Retail investors (including small brokerages trading for themselves) are

the major participants in equity derivatives, accounting for about 60% of turnover in

October 2005, according to NSE. There were several changes in the trading system

due to the globalization in India and hence responding to the changes the several

Nation wide Multi Commodity Exchange [NMCE] was set up in the year 2002 by

the usage of modern practices such as electronic trading and clearing. The

Government of India has constituted a committee to explore and evaluate issues

pertinent to the establishment and funding of the proposed national commodity



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exchange for the nationwide trading of commodity futures contracts, and the other

institutions and institutional processes such as warehousing and clearing houses.

The charges implied has to be lowered down

Market information and market knowledge has to be provided to the common man

Motivate the farmers to trade in futures to sell their commodities

Enlighten the general traders about the market

Motivate the general traders to trade in derivatives market

The restriction on traders and the brokers have to minimized

Tax reduction or exemption is to be provided. Financial assistance may be given to farmers to trade in futures.

Government should interfere if in case any manipulations takes place while trading

international.

Timely research should be conducted to see the performance of the derivatives

market. This enables to overcome the hurdles and assure better performance.

CONCLUSION

In India Derivative Market plays a m