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KARNATAKA UNIVERSITY DHARWAD GEN Society’s GLOBAL BUSINESS SCHOOL BHAIRIDEVARAKOPPA HUBLI. (Affiliated to Karnataka University, Dharwad & Recognized by AICTE, New Delhi) PROJECT REPORT ON SUBMITTED BY Hardeep Singh Hundal MBA11007028 Global Business School | A Study of Derivatives Market in India 1 A Study of Derivatives Market in India”

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KARNATAKA UNIVERSITY DHARWAD

GEN Society’s

GLOBAL BUSINESS SCHOOL BHAIRIDEVARAKOPPA

HUBLI.

(Affiliated to Karnataka University, Dharwad & Recognized by AICTE, New Delhi)

PROJECT REPORT ON

SUBMITTED BY

Hardeep Singh Hundal

MBA11007028

UNDER THE GUIDANCE OF

Institute Guide:

Organization Guide:

Global Business School | A Study of Derivatives Market in India 1

“A Study of Derivatives Market in India”

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Dr. Ramakant Kulkarni Mr. Shankar Habib

G.E.N.Society’sGLOBAL BUSINESS SCHOOL

BHAIRIDEVARKOPPA, HUBLI – 580025

(Recognized by AICTE, New Delhi & Affiliated to Karnatak University, Dharwad)

CERTIFICATE

This is to certify that Mr. Hardeep Singh

Hundal of MBA IV Semester, Exam

No.MBA11007028 has successfully completed

her Project work titled, “A Study of Derivatives

Market” at Hindustan Financial Services”

From 15th April 2012 to 15th June 2012.

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Dr. Ramakant Kulkarni Prof. M.N.Manik Dr. Ramakant Kulkarni

Director Dean Academics Internal Guide

DECLARATION

I Hardeep Singh Hundal student of MBA IV semester student of Gen Society’s,

Global Business School, Hubli, hereby declare that the project entitled “A Study of

Derivatives Market in India” in Hindustan Financial Services, Hubli is submitted by me to

Karnataka University, Dharwad in partial fulfilment for the requirements for the award of the

degree of “Master of Business Administration (MBA)”. This project report is a work

prepared by me under the guidance of Dr. Ramakant Kulkarni.

Place: Hubli Hardeep Singh Hundal

Date: 18th June 2013 MBA IV Semester

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ACKNOWLEDGEMENT

It is my privilege to have accomplished this study under the guidance of Dr.Ramakant

Kulkarni my faculty and guide, for taking keen interest full involvement, dynamic motivation

and valuable guidance extended to me throughout the project.

I express my sincerest gratitude and thanks to honorable Mr. Shankar Habib for

whose kindness I had the precious opportunity of attaining Training at Angel Broking, under

this brilliant untiring guidance I could complete the Project being undertaken on “A Study of

Derivatives Market in India” successfully in time. His meticulous attention and valuable

suggestions have helped me in simplifying the problem in the work.

I would also like to thank the overwhelming support of all the people who gave me

an opportunity to learn and gain knowledge about the various aspects of the industry.

I am indebted to all staff members of Hindustan Financial Services for their valuable

support and cooperation during the entire tenure of this project.

Not to forget, the faculty members of Global Business School, Hubli who have kept

my spirits surging and helped me in delivering my best and made me reach up to this

platform.

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Executive Summary

The Summer Inplant Project at “Hindustan Financial Services” has given an

exposure into the investment scenario in India. The project while working at “Hindustan

Financial Services” includes advisory services i.e. educating the existing and potential

investors about stock market as an alternative source to investment. This involves catering to

the queries of the investors about the concept of stock market, the various options that an

investor can invest his money into, funds management of investors.

Analyzing the investors’ behavior includes understanding the concerns a person has

towards Stock Market, his stages in life and wealth cycle, the effect of the investments

made by the peer groups, effect of the profession he/she is in, education qualification,

importance of tax benefits, the most preferred saving tool etc. and this all is analyzed with

the help of a schedule prepared.

Understanding the significance of Derivatives market, types of instruments present in

the Indian Stock Market such as Futures, Options and Forwards. The various techniques used

to identify the trend of the market and analysing the scrip before investing.

Through the systematic investment plan invest a specific amount for a continuous

period, at regular intervals. By doing this, the investor get the advantage of rupee cost

averaging which means that by investing the same amount at regular intervals, the average

cost per unit remains lower than the average market price.

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TABLE OF CONTENTS

SL.No Topic Pg.No

1 Industry Profile 1-14

2 Company Profile 15-17

3 Introduction to Derivatives 18 – 40

4 Literature Review 41

5 Objectives 42

6 Limitations 43

7 Hypothesis 43

8 Research Methodology 44-45

9 Analysis 46-59

10 Statistical Tests 60 – 62

11 Charts & Tables 63 – 65

12 Findings 66

13 Recommendations 67

14 Questionnaire 68-70

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15 Bibliography 71

Industry Profile

Financial services

Financial services are the economic services provided by the finance industry, which

encompasses a broad range of organizations that manage money, including credit unions,

banks, credit card companies, insurance companies, consumer finance companies, stock

brokerages, investment funds and some government sponsored enterprises.

History of Indian Stock Market

The Indian broking industry is one of the oldest trading industries that have been

around even before the establishment of BSE in 1875. BSE is the oldest stock market in

India. The history of India stock trading starts with 318 persons taking membership in Native

share and Stock Brokers Association, which we know by the name Bombay Stock Exchange

or BSE in short. In 1965, BSE got permanent recognition from the Government of India. BSE

and NSE represent themselves as synonyms of India stock market. The history of India stock

market is almost the same as the history of BSE

The regulations and reforms been laid down in the equity market has resulted in rapid

growth and development .Basically the growth in the equity market is largely due to the

effective intermediaries. The broking houses not only act as an intermediate link for the

equity market but also for the commodity market, the foreign currency exchange market and

many more. The broking houses have also made an impact on foreign investors to invest in

India to certain extent. In the last decade, the Indian brokerage industry has undergone a

dramatic transformation. Large and fixed commissions have been replaced by wafer thin

margins, with competition driving down the brokerage fees, in some cases to a few basis

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

of services have enhanced from being equity products to a wide range of financial services.

Financial Products

The survey also revealed that in the past couple of years, apart from trading, the firms

have started various investment value services. The sustained growth of the economy in past

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couple of years has resulted in broking firms offering many diversified services related to

IPO’s, mutual funds, company research etc.

However, the core trading activity is still the predominant form of business, forming

90% of the firms in the sample. 67% firms are engaged in offering IPO related services. The

broking industry seems to have capitalized on the growth of the mutual fund industry, which

pegged at 40% in 2006. More than 50% of the sample broking houses deal in mutual fund

investment services. The average growth in assets under management in last two years is

almost 48% company research services. Additionally, a host of other value added services

such as fundamental and technical analysis, investment banking, arbitrage etc are offered by

the firms at different levels.

Capital Market

Capital market is a market for securities (debt or equity), where business enterprises

(companies) and governments can raise long-term funds. Capital market may be classified as

primary markets and secondary markets. In primary market new stock or bond issues are sold

to investor via a mechanism known as underwriting. In secondary markets, existing securities

are sold and brought among investors or traders, usually on a security exchange, over the

counter or elsewhere. The capital market includes e stock market (equity securities) and Bond

market (debt).

Primary and Secondary Capital Markets

A company cannot easily attract investors to invest in their securities if the investors

cannot subsequently trade these securities at will. In other words, securities cannot have a

good primary market unless it is ensured of an active secondary market.

Primary Market

Securities generally have two stages in their lifespan. The first stage is when the

company initially issues the security directly from its treasury at a predetermined offering

price. Primary market is the market for issue of new securities. It therefore essentially consist

of the companies issuing securities, the public subscribing to these securities, the regulatory

agencies like SEBI and the Government, and the intermediaries such as brokers, merchant

bankers and banks who underwrite the issues and help in collecting subscription money from

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the public. It is referred to as Initial Public offer (IPO). Investment dealers frequently buy

initial offering on the primary market and the securities on the secondary market.

Secondary Market

The second stage is when an investor or dealer makes the shares, bought from a

company treasury, available for sale to other investors on the secondary market. Secondary

market is the market for trading in existing securities, after they have been created in the

primary market. It essentially consists of the public who are buyers and sellers of securities,

brokers, mutual funds, and most importantly, the stock exchanges where the trading takes

place, such as the BSE (Bombay Stock Exchange) or NSE (National Stock Exchange).

Indian Stock Exchange

Stock Market

A stock market or equity market is a public entity (a loose network of economic

transaction, not a physical facility or discrete entity) for the trading of company stock (shares)

and derivatives at an agreed price; these are securities listed on a stock exchange as well as

those only traded privately.

Stock exchange

A stock exchange provides services for stock brokers and traders to trade stocks,

bonds and other securities. Stock exchanges also provide facilities for issue and redemption

of securities and other financial instruments and capital events including the payment of

income and dividends. Securities traded on stock exchange include shares issued by

companies, unit trusts, derivatives, pooled investment products and bonds.

Equity/Share

Total equity capital of a company is divided into equal units of small denominations,

each called a share. For example, in a company the total equity capital of Rs. 2,00,00,000 is

divided into 20,00,000 units of Rs 10 each. Each such unit of Rs. 10 is called a share. Thus,

the company then is said to have 20, 00,000 equity share of Rs 10 each. The holders of such

shares are members of the company and have voting rights. There are now stock markets in

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virtually every developed and most developing economy, with the world’s biggest being in

the United States, UK, Germany, France, India and Japan.

Market participants

Market participants include individual retail investors, institutional investors such as

mutual funds, banks, insurance companies and hedge funds, and also publically traded

corporations trading in their own shares.

Trading

Participants in the stock market range from small individual stock investors to large

hedge fund traders, who can be based anywhere.

Listing

Listing means admission of securities of an issuer to trading privileges on a stock

exchange through a formal agreement. The prime objective of admission to dealing on the

Exchange is to provide liquidity and marketability to securities.

Securities

A Security gives the holder an ownership interest in the assets of a company. For

example, when a company issues security in the form of stock, they give the purchaser an

interest in the company’s assets in exchange for money. There are a number of reasons why a

company issues securities: meeting a short – term cash crunch or obtaining money for an

expansion are just two.

WHAT IS SEBI AND WHAT IS ITS ROLE?

In 1988 the Securities and Exchange Board of India (SEBI) was established by the

Government of India through an executive resolution, and was subsequently upgraded as a

fully autonomous body (a statutory Board) in the year 1992 with the passing of the Securities

and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of Government

Control, a statutory and autonomous regulatory board with defined responsibilities, to cover

both development & regulation of the market, and independent powers have been set up.

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Paradoxically this is a positive outcome of the Securities Scam of 1990-91. 

OBJECTIVES OF SEBI

The promulgation of the SEBI ordinance in the parliament gave status to SEBI in

1992. According to the preamble of the SEBI, the three main objectives are:

To protect the interests of the investors in securities

To promote the development of securities market

To regulate the securities market

FUNCTIONS OF SEBI

The main functions entrusted with SEBI are:

Regulating the business in stock exchange and any other securities market

Registering and regulating the working of stock brokers, share transfer agents,

bankers to the issue, trustees of trust deed, registrars to an issue, merchant bankers,

underwriters, portfolio managers, investment advisers and such other intermediaries

who may be associated with securities market in any manner.

Registering and regulating the working of collective investment schemes including

mutual funds

Promoting and regulating self-regulatory organizations

Prohibiting fraudulent and unfair trade practices in the securities market

Promoting investors education and training of intermediaries in securities market

Prohibiting insiders trading in securities

Regulating substantial acquisition of shares and takeover of companies

Calling for information, undertaking inspection, conducting enquiries and audits of

the stock exchanges, intermediaries and self-regulatory organizations in the securities

market.

Since its inception SEBI has been working targeting the securities and is attending to the

fulfillment of its objectives with commendable zeal and dexterity. The improvements in the

securities markets like capitalization requirements, margining, establishment of clearing

corporations etc. reduced the risk of credit and also reduced the market.

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SEBI has introduced the comprehensive regulatory measures, prescribed registration

norms, the eligibility criteria, the code of obligations and the code of conduct for different

intermediaries like, bankers to issue, merchant bankers, brokers and sub-brokers, registrars,

portfolio managers, credit rating agencies, underwriters and others. It has framed bye-laws,

risk identification and risk management systems for Clearing houses of stock exchanges,

surveillance system etc. which has made dealing in securities both safe and transparent to the

end investor.

Another significant event is the approval of trading in stock indices (like S&P CNX Nifty

& Sensex) in 2000. A market Index is a convenient and effective product because of the

following reasons:

It acts as a barometer for market behavior;

It is used to benchmark portfolio performance;

It is used in derivative instruments like index futures and index options;

It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the national level,

and also to diversify the trading products, so that there is an increase in number of traders

including banks, financial institutions, insurance companies, mutual funds, primary dealers

etc. to transact through the Exchanges. In this context the introduction of derivatives trading

through Indian Stock Exchanges permitted by SEBI in 2000 AD is a real landmark.

SEBI appointed the L. C. Gupta Committee in 1998 to recommend the regulatory

framework for derivatives trading and suggest bye-laws for Regulation and Control of

Trading and Settlement of Derivatives Contracts. The Board of SEBI in its meeting held on

May 11, 1998 accepted the recommendations of the committee and approved the phased

introduction of derivatives trading in India beginning with Stock Index Futures. The Board

also approved the "Suggestive Bye-laws" as recommended by the Dr LC Gupta Committee

for Regulation and Control of Trading and Settlement of Derivatives Contracts.

SEBI then appointed the J. R. Verma Committee to recommend Risk Containment Measures

(RCM) in the Indian Stock Index Futures Market. The report was submitted in

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November1998. 

However the Securities Contracts (Regulation) Act, 1956 (SCRA) required amendment to

include "derivatives" in the definition of securities to enable SEBI to introduce trading in

derivatives. The necessary amendment was then carried out by the Government in 1999. The

Securities Laws (Amendment) Bill, 1999 was introduced. In December 1999 the new

framework was approved. Derivatives have been accorded the status of `Securities'. The ban

imposed on trading in derivatives in 1969 under a notification issued by the Central

Government was revoked. Thereafter SEBI formulated the necessary regulations/bye-laws

and intimated the Stock Exchanges in the year 2000. The derivative trading started in India at

NSE in 2000 and BSE started trading in the year 2001.

Bombay Stock Exchange (BSE)

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage,

now spanning three centuries in its 133 years of existence. What is now popularly known as

BSE was established as "The Native Share & Stock Brokers' Association" in 1875. BSE is the

first stock exchange in the country which obtained permanent recognition (in 1956) from the

Government of India under the Securities Contracts (Regulation) Act 1956. BSE's pivotal and

pre-eminent role in the development of the Indian capital market is widely recognized. It

migrated from the open outcry system to an online screen-based order driven trading system

in 1995. Earlier an Association of Persons (AOP), BSE is now a corporatized and

demutualised entity incorporated under the provisions of the Companies Act, 1956, pursuant

to the BSE (Corporatization and Demutualization) Scheme, 2005 notified by the Securities

and Exchange Board of India (SEBI). With demutualization, BSE has two of world's best

exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector

by providing it with an efficient access to resources. There is perhaps no major corporate in

India which has not sourced BSE's services in raising resources from the capital market.

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. An investor can choose from more than 4,700 listed companies,

which for easy reference, are classified into A, B, S, T and Z groups.

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The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic

stature, and is tracked worldwide. It is an index of 30 stocks representing 12 major sectors.

The SENSEX is constructed on a 'free-float' methodology, and is sensitive to market

sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices, including

12 sect oral indices.

BSE has entered into an index cooperation agreement with Deutsche Börse. This agreement

has made SENSEX and other BSE indices available to investors in Europe and America.

Moreover, Barclays Global Investors (BGI), the global leader in ETFs through its iSharesÂ

brand, has created the 'iShares BSE SENSEX India Tracker' which tracks the SENSEX.

The ETF enables investors in Hong Kong to take an exposure to the Indian equity market.

The first Exchange Traded Fund (ETF) on SENSEX, called "SPICE" is listed on BSE. It

brings to the investors a trading tool that can be easily used for the purposes of investment,

trading, hedging and arbitrage. SPICE allows small investors to take a long-term view of the

market.

BSE provides an efficient and transparent market for trading in equity, debt

instruments and derivatives. It has a nation-wide reach with a presence in more than 359

cities and towns of India. BSE has always been at par with the international standards. The

systems and processes are designed to safeguard market integrity and enhance transparency

in operations.

BSE is the first exchange in India and the second in the world to obtain an ISO

9001:2000 certification. It is also the first exchange in the country and second in the world to

receive Information Security Management System Standard BS 7799-2-2002 certification for

its BSE On-line Trading System (BOLT). BSE continues to innovate. In recent times, it has

become the first national level stock exchange to launch its website in Gujarati and Hindi to

reach out to a larger number of investors. It has successfully launched a reporting platform

for corporate bonds in India christened the ICDM or Indian Corporate Debt Market and a

unique ticker-cum-screen aptly named 'BSE Broadcast' which enables information

dissemination to the common man on the street. In 2006, BSE launched the Directors

Database and ICERS (Indian Corporate Electronic Reporting System) to facilitate

information flow and increase transparency in the Indian capital market.

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While the Directors Database provides a single-point access to information on the

boards of directors of listed companies, the ICERS facilitates the corporate in sharing with

BSE their corporate announcements. 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 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. 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

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National Stock Exchange (NSE)

The National Stock Exchange of India is a stock Exchange that is located in Mumbai,

Maharashtra. The National Stock Exchange basically function in three market sections, that

is, (CM) the Capital Market Section); F&Q (The Future and Options Market Sections) and

WDM (Wholesale Debt Market Segment).  It is important place where the trading of shares,

debt etc takes place.

It was in year 1992 that the National stock Exchange was for the first time

incorporated in India. It was not regarded as a stock exchange at once. Rather, the national

Stock exchange was incorporated as a tax paying company and had got the recognition of a

stock exchange only in year 1993 the recognition was given under the provisions of the

Securities Contracts (Regulation) Act, 1956.

The National Stock exchange is highly active in the field of market capitalization and

thus aiming it the ninth largest stock exchange in the said field. Similarly, the trading of the

stock exchange in equities and derivatives is so high that it has resulted in high turnovers and

thus making it the largest stock exchange in India.

It is the stock exchange wherein there is the facility of electronic exchange offering

investors. This facility is available in almost types of equitable transactions such as equities,

debentures, etc. it is also the largest stock exchange if calculated in the terms of traded

values.

Origin and History of the National Stock Exchange

The National Stock exchange was incorporated for the first time in November, 1992.

The national stock exchange was not incorporated as the national stock exchange; rather, it

had got the recognition of the recognized stock exchange in April, 1993. The National stock

Exchange has increased its trading facilities in June 1994 when the WDM (Wholesale Debt

Market Segment) was gone live. It is basically one of the three market segments in which the

national stock Exchange works. In the same year, 1994 November, the Capital Market (CM)

segment of the stock exchange goes live through VSAT.

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The National Stock Exchange has become the first Clearing Corporation in India by

the introduction of NSCCL in April 1995. In the same year, 1995 July, it has introduced the

Investor protection fund which is a very important function introduced by the national Stock

Exchange.

The National stock Exchange had grown with leaps and bounds and had shown

tremendous growth mainly in all the fields and thus making it the largest stock exchange of

India by October, 1995.

The concept of NSCCL was extended by the introduction of clearing and settlement

with the help of NSCCL in year 1996. The National stock Exchange has introduced its Index

for the first time in year April 1996. The index was known as the S&P CNXNifty Index. In

year June 1996, it has introduced the Settlement Guarantee Fund. The National Securities

Depositor Fund was launched by the National Stock exchange in year 1996, November, and

thus making it the first stock exchange who becomes the first depository in India.

Because of the efforts and introduction of new concept in the field of trading, the

National stock Exchange has received the BEST IT USAGE award by the computer Society

of India in the year November, 1996. It has also received an award for the TOP IT USER in

the name of “Dataquest award” in year December, 1996.

The National stock exchange has also introduced another index in year December

1996 in the name of CNX Nifty Junior in year 1996.  It had again received an award for the

BEST IT USAGE award by the computer Society of India in the year December, 1996. In

May, 1998 it had launched its first website. Further in October 1999, it had launched the

NSE.IT LTD. Further in year October, 2002, it had launched the Government securities

index.

The growth of the National Stock Exchange has been tremendous in every field. It

had introduced several programmes and has achieved various achievements and awards while

working best in the field in which it is working. The efforts and hard work that is contributed

by the National Stock exchange has been tremendous and thus making an important and

unique stock exchange in India.

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Over the Counter Exchange of India (OTCEI)

OTCEI (Over the Counter Exchange of India) was incorporated in 1990 as a Section

25 company under the Companies Act 1956 and is recognized as a stock exchange under

Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid

enterprising promoters in raising finance for new projects in a cost effective manner and to

provide investors with a transparent & efficient mode of trading. Modeled along the lines of

the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital

markets such as screen-based nationwide trading, sponsorship of companies, market making

and scrip less trading. As a measure of success of these efforts, the Exchange today has 115

listings and has assisted in providing capital for enterprises that have gone on to build

successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water,

etc.  

Trading at OTCEI is done over the centers spread across the country. Securities traded

on the OTCEI are classified into:

Listed Securities - The shares and debentures of the companies listed on the OTC can be

bought or sold at any OTC counter all over the country and they should not be listed

anywhere else Permitted

Securities - Certain shares and debentures listed on other exchanges and units of mutual

funds are allowed to be traded.

Initiated debentures - Any equity holding at least one lakh debentures of a particular scrip

can offer them for trading on the OTC.

OTCEI

Is the first screen based nationwide stock exchange in India.

Is the first exchange to introduce Market Making in India.

Is the first exchange to introduce Sponsorship of companies in India.

Is the only exchange to allow listing of companies with paid-up below Rs.3 crores.

Is the only exchange to allow companies with less than 3 year track record to tap

capital market.

Has shifted trading from counter receipts to share certificates.

Has introduced Weekly Settlement Cycle.

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Allows short selling.

DETAILS OF STOCK EXCHANGES

Sr.

No.

Name of the Exchange Valid Upto

 

 

1 Ahmedabad Stock Exchange Ltd. PERMANENT 

2 Bangalore Stock Exchange Ltd. PERMANENT 

3 Bhubaneswar   Stock Exchange Ltd. June 04, 2012 

4 Bombay Stock Exchange Ltd. PERMANENT 

5 Calcutta Stock Exchange Ltd. PERMANENT 

6 Cochin Stock Exchange Ltd. November 07, 2011 

7 Delhi Stock Exchange Ltd. PERMANENT 

8 Gauhati Stock Exchange  Ltd. April 30, 2012 

10 Interconnected Stock Exchange of India Ltd. November 17, 2011 

11 Jaipur   Stock Exchange Ltd. January 08, 2012 

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12 Ludhiana   Stock Exchange  Ltd. April 27, 2012 

13 Madhya Pradesh Stock Exchange Ltd PERMANENT 

14 Madras Stock Exchange Ltd. PERMANENT 

15 MCX Stock Exchange Ltd September 15, 2011 

16 National Stock Exchange of India Ltd. PERMANENT 

17  OTC Exchange of India August 22, 2012 

18 Pune   Stock Exchange Ltd. September 01, 2012 

19 U.P. Stock Exchange Limited June 02, 2012 

20 United Stock Exchange of India Limited March 21, 2012 

21 The Vadodara   Stock Exchange Ltd. January 03, 2012 

Company Profile

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History of the company

SBICAP Securities Limited:

SBICAP Securities Ltd (SSL) is a 100% subsidiary of SBI Capital Markets Ltd which

is one of the oldest players in the Indian Capital Market and has a dominant position in the

Indian primary capital markets. SBICAP Securities Limited is a part of the SBI Group.

Business Overview:

SBICAP Securities Ltd (SSL) is a 100% subsidiary of SBI Capital Markets Ltd which

is one of the oldest players in the Indian Capital Market and has a dominant position in the

Indian primary capital markets. SBI Capital Markets Ltd. commenced broking activities in

March 2001 to fulfill the secondary market needs of Financial Institutions, FIIs,

Mutual Funds, Banks, Corporates, High Networth Individual, Non-residential

Investors and Retail domestic investors. SBICAP Securities Ltd. (SSL) is a company, which

has been formed to take over the broking operations of SBI Capital Markets Ltd. SSL

commenced operations in the first quarter of financial year of 2006-2007.

Services currently offered include Institution Equity, Retail Equity, Derivatives,

Broking, Depository Participant services, E-Broking. SSL is registered with the Securities

Exchange Board of India for its various services, a summary of which is as under:

Registered with/as Registration No.

SEBI – Stock Broker – NSE INB231052938

SEBI – Stock Broker – BSE INB011053031

SEBI – Stock Broker – NSE – F&O INF231052938

SEBI – Depository Participant IN – DP – CDSL – 370 – 2006

SEBI – Portfolio Manager INP000002098

SBI Group

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Asset Management Business

SBI Investment

Operate and manage venture capital funds

SBI Asset Management

Investment advisory services, investment trust management

SBI Capital

Operate and manage buyout and revitalization funds

SBI Capital Solutions

Mezzanine fund management

SBI VEN CAPITAL PTE

Overseas investments

Brokerage & Investment Banking Business

SBI Securities

Comprehensive online securities company

SBI Fund Bank

Consulting of mutual fund sales and operation of mutual funds information website

based on its unique evaluation and analysis

SBI Liquidity Market

Offering market Infrastructure and services of Forex trading to financial firms and

developing related systems and products.

Financial Services Business

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SB1 Insurance

Non-life insurance company using primarily the Internet

SBI Lease

Comprehensive leasing business

SBI Card

Credit card business

SBI Business Solutions

Back Office support services

SBI Marketing

Advertising agency

SBI Business Support

Contact center and temporary staff service for corporations

Housing and Real Estate Business

SBI Mortgage

Long-term, fixed-rate housing loans

SBI Planners

Architectural construction and consulting services

Others

SBI Net Systems

R & D, Sales and Maintenance for financial system and provision of information

security products and solution services.

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Definition of Derivatives

One of the most significant events in the securities markets has been the development and

expansion of financial derivatives. The term “derivatives” is used to refer to financial

instruments which derive their value from some underlying assets.

The underlying assets could be equities (shares), debt (bonds, T-bills, and notes),

currencies, and even indices of these various assets, such as the Nifty 50 Index.

Derivatives derive their names from their respective underlying asset. Thus if a

derivative’s underlying asset is equity, it is called equity derivative and so on. Derivatives can

be traded either on a regulated exchange, such as the NSE or off the exchanges, i.e., directly

between the different parties, which is called “over-the-counter” (OTC) trading. (In India

only exchange traded equity derivatives are permitted under the law.)

The basic purpose of derivatives is to transfer the price risk (inherent in fluctuations

of the asset prices) from one party to another; they facilitate the allocation of risk to those

who are willing to take it. In so doing, derivatives help mitigate the risk arising from the

future uncertainty of prices.

For example, on November 1, 2009 a rice farmer may wish to sell his harvest at a

future date (say January 1, 2010) for a pre-determined fixed price to eliminate the risk of

change in prices by that date. Such a transaction is an example of a derivatives contract. The

price of this derivative is driven by the spot price of rice which is the "underlying".

Origin of Derivatives

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While trading in derivatives products has grown tremendously in recent times, the

earliest evidence of these types of instruments can be traced back to ancient Greece. Even

though derivatives have been in existence in some form or the other since ancient times, the

advent of modern day derivatives contracts is attributed to farmers’ need to protect

themselves against a decline in crop prices due to various economic and environmental

factors.

Thus, derivatives contracts initially developed in commodities. The first “futures”

contracts can be traced to the Yodoya rice market in Osaka, Japan around 1650. The farmers

were afraid of rice prices falling in the future at the time of harvesting. To lock in a price (that

is, to sell the rice at a predetermined fixed price in the future), the farmers entered into

contracts with the buyers.

These were evidently standardized contracts, much like today’s futures contracts.

In 1848, the Chicago Board of Trade (CBOT) was established to facilitate trading of forward

contracts on various commodities. From then on, futures contracts on commodities have

remained more or less in the same form, as we know them today.

While the basics of derivatives are the same for all assets such as equities, bonds,

currencies, and commodities, we will focus on derivatives in the equity markets and all

examples that we discuss will use stocks and index (basket of stocks).

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Derivatives in India

In India, derivatives markets have been functioning since the nineteenth century, with

organized trading in cotton through the establishment of the Cotton Trade Association in

1875.Derivatives, as exchange traded financial instruments were introduced in India in June

2000.The National Stock Exchange (NSE) is the largest exchange in India in derivatives,

trading in various derivatives contracts. The first contract to be launched on NSE was the

Nifty 50 index futures contract. In a span of one and a half years after the introduction of

index futures, index options, stock options and stock futures were also introduced in the

derivatives segment for trading. NSE’s equity derivatives segment is called the Futures &

Options Segment or F&O Segment. NSE also trades in Currency and Interest Rate Futures

contracts under a separate segment.

A series of reforms in the financial markets paved way for the development of

exchange-traded equity derivatives markets in India. In 1993, the NSE was established as an

electronic, national exchange and it started operations in 1994. It improved the efficiency and

transparency of the stock markets by offering a fully automated screen-based trading system

with real-time price dissemination. A report on exchange traded derivatives, by the L.C.

Gupta Committee, set up by the Securities and Exchange Board of India (SEBI),

recommended a phased introduction of derivatives instruments with bi-level regulation (i.e.,

self-regulation by exchanges, with SEBI providing the overall regulatory and supervisory

role). Another report, by the J.R. Varma Committee in 1998, worked out the various

operational details such as margining and risk management systems for these instruments. In

1999, the Securities Contracts (Regulation) Act of 1956, or SC(R)A, was amended so that

derivatives could be declared as “securities”. This allowed the regulatory framework for

trading securities, to be extended to derivatives. The Act considers derivatives on equities to

be legal and valid, but only if they are traded on exchanges.

Milestones in the development of Indian Derivative Market

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November 18, 1996 L.C. Gupta Committee set up to draft a policy framework for

introducing derivatives

May 11, 1998 L.C. Gupta committee submits its report on the policy Framework

May 25, 2000 SEBI allows exchanges to trade in index futures

June 12, 2000 Trading on Nifty futures commences on the NSE

June 4, 2001 Trading for Nifty options commences on the NSE

July 2, 2001 Trading on Stock options commences on the NSE

November 9, 2001 Trading on Stock futures commences on the NSE

August 29, 2008 Currency derivatives trading commences on the NSE

August 31, 2009 Interest rate derivatives trading commences on the NSE

February 2010 Launch of Currency Futures on additional currency pairs

October 28, 2010 Introduction of European style Stock Options

October 29, 2010 Introduction of Currency Options

Two important terms

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Before discussing derivatives, it would be useful to be familiar with two

terminologies relating to the underlying markets. These are as follows:

Spot Market

In the context of securities, the spot market or cash market is a securities market in

which securities are sold for cash and delivered immediately. The delivery happens after the

settlement period. Let us describe this in the context of India. The NSE’s cash market

segment is known as the Capital Market (CM) Segment. In this market, shares of SBI,

Reliance, Infosys, ICICI Bank, and other public listed companies are traded.

The settlement period in this market is on a T+2 basis i.e., the buyer of the shares

receives the shares two working days after trade date and the seller of the shares receives the

money two working days after the trade date.

Index

Stock prices fluctuate continuously during any given period. Prices of some stocks

might move up while that of others may move down. In such a situation, what can we say

about the stock market as a whole? Has the market moved up or has it moved down during a

given period? Similarly, have stocks of a particular sector moved up or down?

To identify the general trend in the market (or any given sector of the market such as

banking), it is important to have a reference barometer which can be monitored. Market

participants use various indices for this purpose. An index is a basket of identified stocks, and

its value is computed by taking the weighted average of the prices of the constituent stocks of

the index.

A market index for example consists of a group of top stocks traded in the market and

its value changes as the prices of its constituent stocks change. In India, Nifty Index is the

most popular stock index and it is based on the top 50 stocks traded in the market. Just as

derivatives on stocks are called stock derivatives, derivatives on indices such as Nifty are

called index derivatives.

Definitions of Basic Derivatives

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There are various types of derivatives traded on exchanges across the world. They

range from the very simple to the most complex products. The following are the three basic

forms of derivatives, which are the building blocks for many complex derivatives instruments

(the latter are beyond the scope of this book):

Forwards

Futures

Options

Knowledge of these instruments is necessary in order to understand the basics of

derivatives. We shall now discuss each of them in detail.

Forwards

A forward contract or simply aforward is a contract between two parties to buy or sell

an asset at a certain future date for a certain price that is pre-decided on the date of the

contract. The future date is referred to as expiry date and the pre-decided price is referred to

as Forward Price. It may be noted that Forwards are private contracts and their terms are

determined by the parties involved.

A forward is thus an agreement between two parties in which one party, the buyer,

enters into an agreement with the other party, the seller that he would buy from the seller an

underlying asset on the expiry date at the forward price. Therefore, it is a commitment by

both the parties to engage in a transaction at a later date with the price set in advance. This is

different from a spot market contract, which involves immediate payment and immediate

transfer of asset. The party that agrees to buy the asset on a future date is referred to as a long

investor and is said to have a long position. Similarly the party that agrees to sell the asset in

a future date is referred to as a short investor and is said to have a short position. The price

agreed upon is called the delivery price or the Forward Price.

Forward contracts are traded only in Over the Counter (OTC) market and not in stock

exchanges. OTC market is a private market where individuals/institutions can trade through

negotiations on a one to one basis.

Futures

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Like a forward contract, a futures contract is an agreement between two parties in

which the buyer agrees to buy an underlying asset from the seller, at a future date at a price

that is agreed upon today. However, unlike a forward contract, a futures contract is not a

private transaction but gets traded on a recognized stock exchange. In addition, a futures

contract is standardized by the exchange. All the terms, other than the price, are set by the

stock exchange (rather than by individual parties as in the case of a forward contract). Als o,

both buyer and seller of the futures contracts are protected against the counter party risk by an

entity called the Clearing Corporation. The Clearing Corporation provides this guarantee to

ensure that the buyer or the seller of a futures contract does not suffer as a result of the

counter party defaulting on its obligation. In case one of the parties defaults, the Clearing

Corporation steps in to fulfill the obligation of this party, so that the other party does not

suffer due to non-fulfillment of the contract. To be able to guarantee the fulfillment of the

obligations under the contract, the Clearing Corporation holds an amount as a security from

both the parties. This amount is called the Margin money and can be in the form of cash or

other financial assets. Also, since the futures contracts are traded on the stock exchanges, the

parties have the flexibility of closing out the contract prior to the maturity by squaring off the

transactions in the market.

The basic flow of a transaction between three parties, namely Buyer, Seller and

Clearing Corporation is depicted in the diagram below:

Options

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Like forwards and futures, options are derivative instruments that provide the

opportunity to buy or sell an underlying asset on a future date.

An option is a derivative contract between a buyer and a seller, where one party (say

First Party) gives to the other (say Second Party) the right, but not the obligation, to buy from

(or sell to) the First Party the underlying asset on or before a specific day at an agreed-upon

price. In return for granting the option, the party granting the option collects a payment from

the other party. This payment collected is called the “premium” or price of the option.

The right to buy or sell is held by the “option buyer” (also called the option holder);

the party granting the right is the “option seller” or “option writer”. Unlike forwards and

futures contracts, options require a cash payment (called the premium) upfront from the

option buyer to the option seller. This payment is called option premium or option price.

Options can be traded either on the stock exchange or in over the counter (OTC) markets.

Options traded on the exchanges are backed by the Clearing Corporation thereby minimizing

the risk arising due to default by the counter parties involved. Options traded in the OTC

market however are not backed by the Clearing Corporation.

There are two types of options—call options and put options—which are explained

below.

Call option

A call option is an option granting the right to the buyer of the option to buy the

underlying asset on a specific day at an agreed upon price, but not the obligation to do so. It

is the seller who grants this right to the buyer of the option. It may be noted that the person

who has the right to buy the underlying asset is known as the “buyer of the call option”.

The price at which the buyer has the right to buy the asset is agreed upon at the time

of entering the contract. This price is known as the strike price of the contract (call option

strike price in this case).

Since the buyer of the call option has the right (but no obligation) to buy the

underlying asset, he will exercise his right to buy the underlying asset if and only if the price

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of the underlying asset in the market is more than the strike price on or before the expiry date

of the contract. The buyer of the call option does not have an obligation to buy if he does not

want to.

Put option

A put option is a contract granting the right to the buyer of the option to sell the

underlying asset on or before a specific day at an agreed upon price, but not the obligation to

do so. It is the seller who grants this right to the buyer of the option.

The person who has the right to sell the underlying asset is known as the “buyer of the

put option”. The price at which the buyer has the right to sell the asset is agreed upon at the

time of entering the contract. This price is known as the strike price of the contract (put

option strike price in this case).

Since the buyer of the put option has the right (but not the obligation) to sell the

underlying asset, he will exercise his right to sell the underlying asset if and only if the price

of the underlying asset in the market is less than the strike price on or before the expiry date

of the contract. The buyer of the put option does not have the obligation to sell if he does not

want to.

Terminology of Derivatives

In this section we explain the general terms and concepts related to derivatives.

Spot price (ST)

Spot price of an underlying asset is the price that is quoted for immediate delivery of

the asset.

For example, at the NSE, the spot price of Reliance Ltd. at any given time is the price

at which Reliance Ltd. shares are being traded at that time in the Cash Market Segment of the

NSE. Spot price is also referred to as cash price sometimes.

Forward price or futures price (F)

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Forward price or futures price is the price that is agreed upon at the date of the

contract for the delivery of an asset at a specific future date. These prices are dependent on

the spot price, the prevailing interest rate and the expiry date of the contract.

Strike price (K)

The price at which t he buyer of an option can buy the stock (in the case of a call

option) or sell the stock (in the case of a put option) on or before the expiry date of option

contracts is called strike price. It is the price at which the stock will be bought or sold when

the option is exercised. Strike price is used in the case of options only; it is not used for

futures or forwards.

Expiration date (T)

In the case of Futures, Forwards, Index and Stock Options, Expiration Date is the date

on which settlement takes place. It is also called the final settlement date.

Types of Options

Options can be divided into two different categories depending upon the primary

exercise styles associated with options. These categories are:

European Options: European options are options that can be exercised only on the

expiration date.

American options: American options are options that can be exercised on any day on or

before the expiry date. They can be exercised by the buyer on any day on or before the final

settlement date or the expiry date.

Contract size

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As futures and options are standardized contracts traded on an exchange, they have a

fixed contract size. One contract of a derivatives instrument represents a certain number of

shares of the underlying asset. For example, if one contract of BHEL consists of 300 shares

of BHEL, then if one buys one futures contract of BHEL, then for every Re 1 increase in

BHEL’s futures price, the buyer will make a profit of 300 X 1 = Rs 300 and for every Re 1

fall in BHEL’s futures price, he will lose Rs 300.

Contract Value

Contract value is notional value of the transaction in case one contract is bought or

sold. It is the contract size multiplied but the price of the futures. Contract value is used to

calculate margins etc. for contracts. In the example above if BHEL futures are trading at Rs.

2000 the contract value would be Rs. 2000 x 300 = Rs. 6 lacs.

Margins

In the spot market, the buyer of a stock has to pay the entire transaction amount (for

purchasing the stock) to the seller. For example, if Infosys is trading at Rs. 2000 a share and

an investor wants to buy 100 Infosys shares, then he has to pay Rs. 2000 X 100 = Rs.

2,00,000 to the seller. The settlement will take place on T+2 basis; that is, two days after the

transaction date. In a derivatives contract, a person enters into a trade today (buy or sell) but

the settlement happens on a future date. Because of this, there is a high possibility of default

by any of the parties.

Futures and option contracts are traded through exchanges and the counter party risk

is taken care of by the clearing corporation. In order to prevent any of the parties from

defaulting on his trade commitment, the clearing corporation levies a margin on the buyer as

well as seller of the futures and option contracts. This margin is a percentage (approximately

20%) of the total contract value. Thus, for the aforementioned example, if a person wants to

buy 100 Infosys futures, then he will have to pay 20% of the contract value of Rs 2,00,000 =

Rs 40,000 as a margin to the clearing corporation. This margin is applicable to both, the

buyer and the seller of a futures contract.

Moneyness of an Option

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“Moneyness” of an option indicates whether an option is worth exercising or not i.e. if

the option is exercised by the buyer of the option whether he will receive money or not.

“Moneyness” of an option at any given time depends on where the spot price of the

underlying is at that point of time relative to the strike price. The premium paid is not taken

into consideration while calculating moneyness of an Option, since the premium once paid is

a sunk cost and the profitability from exercising the option does not depend on the size of the

premium. Therefore, the decision (of the buyer of the option) whether to exercise the option

or not is not affected by the size of the premium. The following three terms are used to define

the moneyness of an option.

In-the-money option

An option is said to be in-the-money if on exercising the option, it would produce a

cash inflow for the buyer. Thus, Call Options are in-the-money when the value of spot price

of the underlying exceeds the strike price. On the other hand, Put Options are in-the- money

when the spot price of the underlying is lower than the strike price. Moneyness of an option

should not be confused with the profit and loss arising from holding an option contract. It

should be noted that while moneyness of an option does not depend on the premium paid,

profit/loss do. Thus a holder of an in-the-money option need not always make profit as the

profitability also depends on the premium paid.

Out-of-the-money option

An out-of-the-money option is an opposite of an in-the-money option. An option-

holder will not exercise the option when it is out-of-the-money. A Call option is out-of-the-

money when its strike price is greater than the spot price of the underlying and a Put option is

out-of-the money when the spot price of the underlying is greater than the option’s strike

price.

At-the-money option

An at-the-money-option is one in which the spot price of the underlying is equal to

the strike price. It is at the stage where with any movement in the spot price of the

underlying, the option will either become in-the-money or out-of-the-money.

Applications of Derivatives

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In this chapter, we look at the participants in the derivatives markets and how they use

derivatives contracts.

Participants in the Derivatives Market

As equity markets developed, different categories of investors started participating in

the market. In India, equity market participants currently include retail investors, corporate

investors, mutual funds, banks, foreign institutional investors etc. Each of these investor

categories uses the derivatives market to as a part of risk management, investment strategy or

speculation. Based on the applications that derivatives are put to, these investors can be

broadly classified into three groups:

· Hedgers

· Speculators, and

· Arbitrageurs

Hedgers

These investors have a position (i.e., have bought stocks) in the underlying market but

are worried about a potential loss arising out of a change in the asset price in the future.

Hedgers participate in the derivatives market to lock the prices at which they will be able to

transact in the future. Thus, they try to avoid price risk through holding a position in the

derivatives market. Different hedgers take different positions in the derivatives market based

on their exposure in the underlying market. A hedger normally takes an opposite position in

the derivatives market to what he has in the underlying market.

Speculators

A Speculator is one who bets on the derivatives market based on his views on the

potential movement of the underlying stock price. Speculators take large, calculated risks as

they trade based on anticipated future price movements. They hope to make quick, large

gains; but may not always be successful. They normally have shorter holding time for their

positions as compared to hedgers. If the price of the underlying moves as per their

expectation they can make large profits. However, if the price moves in the opposite direction

of their assessment, the losses can also be enormous.

Arbitrageurs

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Arbitrageurs attempt to profit from pricing inefficiencies in the market by making

simultaneous trades that offset each other and capture a risk-free profit. An arbitrageur may

also seek to make profit in case there is price discrepancy between the stock price in the cash

and the derivatives markets.

Uses of Derivatives

Risk management

The most important purpose of the derivatives market is risk management. Risk

management for an investor comprises of the following three processes:

Identifying the desired level of risk that the investor is willing to take on his

investments;

Identifying and measuring the actual level of risk that the investor is carrying; and

Making arrangements which may include trading (buying/selling) of derivatives

contracts that allow him to match the actual and desired levels of risk.

Market efficiency

Efficient markets are fair and competitive and do not allow an investor to make risk

free profits. Derivatives assist in improving the efficiency of the markets, by providing a self-

correcting mechanism. Arbitrageurs are one section of market participants who trade

whenever there is an opportunity to make risk free profits till the opportunity ceases to exist.

Risk free profits are not easy to make in more efficient markets. When trading occurs, there is

a possibility that some amount of mispricing might occur in the markets. The arbitrageurs

step in to take advantage of this mispricing by buying from the cheaper market and selling in

the higher market. Their actions quickly narrow the prices and thereby reducing the

inefficiencies.

Price discovery

One of the primary functions of derivatives markets is price discovery. They provide

valuable information about the prices and expected price fluctuations of the underlying assets

in two ways:

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First, many of these assets are traded in markets in different geographical locations.

Because of this, assets may be traded at different prices in different markets. In derivatives

markets, the price of the contract often serves as a proxy for the price of the underlying asset.

For example, gold may trade at different prices in Mumbai and Delhi but a derivatives

contract on gold would have one value and so traders in Mumbai and Delhi can validate the

prices of spot markets in their respective location to see if it is cheap or expensive and trade

accordingly.

Second, the prices of the futures contracts serve as prices that can be used to get a

sense of the market expectation of future prices. For example, say there is a company that

produces sugar and expects that the production of sugar will take two months from today. As

sugar prices fluctuate daily, the company does not know if after two months the price of

sugar will be higher or lower than it is today. How does it predict where the price of sugar

will be in future? It can do this by monitoring prices of derivatives contract on sugar (say a

Sugar Forward contract). If the forward price of sugar is trading higher than the spot price

that means that the market is expecting the sugar spot price to go up in future. If there were

no derivatives price, it would have to wait for two months before knowing the market price of

sugar on that day. Based on derivatives price the management of the sugar company can

make strategic and tactical decisions of how much sugar to produce and when.

What is Open Interest (OI) and Contract in the enclosed charts?

Open interest is the total number of options and/or futures contracts that are not closed

out on a particular day, that is contracts that have been purchased and are still outstanding

and not been sold and vice versa. A c ommon misconception is that open interest is the same

thing as volume of options and futures trades. This is not correct since there could be huge

volumes but if the volumes are just because of participants squaring off their positions then

the open interest would not be large. On the other hand, if the volumes are large because of

fresh positions being created then the open interest would also be large.

The Contract column tells us about the strike price of the call or put and the date of

their settlement. For example, the first entry in the Active Calls section (4500.00-August)

means it is a Nifty call with Rs 4500 strike price, that would expire in August. It is interesting

to note from the newspaper extract given above is that it is possible to have a number of

options at different strike prices but all of them have the same expiry date.

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There are different tables explaining different sections of the F&O markets.

1. Positive trend: It gives information about the top gainers in the futures market.

2. Negative trend: It gives information about the top losers in the futures market.

3. Future OI gainers: It lists those futures whose % increases in open interest are among the

highest on that day.

4. Future OI losers: It lists those futures whose % decreases in open interest are among the

highest on that day.

5. Active Calls: Calls with high trading volumes on that particular day.

6. Active Puts: Puts with high trading volumes on that particular day.

Settlement of Derivatives

Settlement refers to the process through which trades are cleared by the

payment/receipt of currency, securities or cash flows on periodic payment dates and on the

date of the final settlement. The settlement process is somewhat elaborate for derivatives

instruments which are exchange traded. (They have been very briefly outlined here. For a

more detailed explanation, please refer to NCFM Derivatives Markets (Dealers) Module).

The settlement process for exchange traded derivatives is standardized and a certain set of

procedures exist which take care of the counterparty risk posed by these instruments. At the

NSE, the National Securities Clearing Corporation Limited (NSCCL) undertakes the clearing

and settlement of all trades executed on the F&O segment of NSE. It also acts as a legal

counterparty to all trades on the F&O segment and guarantees their financial settlement.

There are two clearing entities in the settlement process: Clearing Members and Clearing

Banks.

Clearing members

A Clearing member (CM) is the member of the clearing corporation i.e., NSCCL. These are

the members who have the authority to clear the trades executed in the F&O segment in the

exchange. There are three types of clearing members with different set of functions:

1) Self-clearing Members: Members who clear and settle trades executed by them only on

their own accounts or on account of their clients.

2) Trading cum Clearing Members: They clear and settle their own trades as well as trades

of other trading members (TM).

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3) Professional Clearing Members (PCM): They only clear and settle trades of others but

do not trade themselves. PCMs are typically Financial Institutions or Banks who are admitted

by the Clearing Corporation as members.

Clearing banks

Some commercial banks have been designated by the NSCCL as Clearing Banks.

Financial settlement can take place only through Clearing Banks. All the clearing members

are required to open a separate bank account with an NSCCL designated clearing bank for the

F&O segment. The clearing members keep a margin amount in these bank accounts.

Settlement of Futures

When two parties trade a futures contract, both have to deposit margin money which

is called the initial margin. Futures contracts have two types of settlement: (i) the mark-to-

market (MTM) settlement which happens on a continuous basis at the end of each day, and

(ii) the final settlement which happens on the last trading day of the futures contract i.e., the

last Thursday of the expiry month.

Mark to market settlement

To cover for the risk of default by the counterparty for the clearing corporation, the

futures contracts are marked-to-market on a daily basis by the exchange. Mark to market

settlement is the process of adjusting the margin balance in a futures account each day for the

change in the value of the contract from the previous day, based on the daily settlement price

of the futures contracts (Please refer to the Tables given below.). This process helps the

clearing corporation in managing the counterparty risk of the future contracts by requiring the

party incurring a loss due to adverse price movements to part with the loss amount on a daily

basis. Simply put, the party in the loss position pays the clearing corporation the margin

money to cover for the shortfall in cash. In extraordinary times, the Exchange can require a

mark to market more frequently (than daily). To ensure a fair mark-to-market process, the

clearing corporation computes and declares the official price for determining daily gains and

losses. This price is called the “settlement price” and represents the closing price of the

futures contract. The closing price for any contract of any given day is the weighted average

trading price of the contract in the last half hour of trading.

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Final settlement for futures

After the close of trading hours on the expiry day of the futures contracts, NSCCL

marks all positions of clearing members to the final settlement price and the resulting

profit/loss is settled in cash. Final settlement loss is debited and final settlement profit is

credited to the relevant clearing bank accounts on the day following the expiry date of the

contract. Suppose the above contract closes on day 6 (that is, it expires) at a price of Rs.

1040, then on the day of expiry, Rs. 100 would be debited from the seller (short position

holder) and would be transferred to the buyer (long position holder).

Settlement of Options

In an options trade, the buyer of the option pays the option price or the option

premium. The options seller has to deposit an initial margin with the clearing member as he is

exposed to unlimited losses. There are basically two types of settlement in stock option

contracts: daily premium settlement and final exercise settlement. Options being European

style, they cannot be exercised before expiry.

Daily premium settlement

Buyer of an option is obligated to pay the premium towards the options purchased by

him. Similarly, the seller of an option is entitled to receive the premium for the options sold

by him. The same person may sell some contracts and buy some contracts as well. The

premium payable and the premium receivable are netted to compute the net premium payable

or receivable for each client for each options contract at the time of settlement.

Exercise settlement

Normally most option buyers and sellers close out their option positions by an

offsetting closing transaction but a better understanding of the exercise settlement process can

help in making better judgment in this regard. Stock and index options can be exercised only

at the end of the contract.

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Final Exercise Settlement

On the day of expiry, all in the money options are exercised by default. An investor

who has a long position in an in-the-money option on the expiry date will receive the exercise

settlement value which is the difference between the settlement price and the strike price.

Similarly, an investor who has a short position in an in-the-money option will have to pay the

exercise settlement value.

Accounting and Taxation of Derivatives

The Institute of Chartered Accountants of India (ICAI) has issued guidance notes on

accounting of index future contracts from the view point of parties who enter into such future

contracts as buyers or sellers. For other parties involved in the trading process, like brokers,

trading members, clearing members and clearing corporations a trade in equity index futures

is similar to a trade in, say shares, and accounting remains similar as in the case of buying or

selling of shares.

Taxation of Derivative Instruments

Prior to the year 2005, the Income Tax Act did not have any specific provision

regarding taxability of derivatives. The only tax provisions which had indirect bearing on

derivatives transactions were sections 73(1) and 43(5). Under these sections, trade in

derivatives was considered “speculative transactions” for the purpose of determining tax

liability. All profits and losses were taxed under the speculative income category. Therefore,

loss on derivatives transactions could be set off only against other speculative income and the

same could not be set off against any other income. This resulted in high tax liability.

Finance Act, 2005 has amended section 43(5) so as to exclude transactions in

derivatives carried out in a “recognized stock exchange” from ‘speculative transaction’. This

implies that derivatives transactions that take place in a “recognized stock exchange” are not

taxed as speculative income or loss. They are treated under the business income head of the

Income tax Act. Any losses on these activities can be set off against any business income in

the year and the losses can be carried forward and set off against any other business income

for the next eight years.

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MCX

MCX (Multi Commodity Exchange of India Ltd.) an independent and de-mutualised

multi commodity exchange has permanent recognition from Government of India for

facilitating online trading, clearing and settlement operations for commodity futures markets

across the country.

Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of

India, HDFC Bank, State Bank of Indore, State Bank of Hyderabad, State Bank of

Saurashtra, SBI Life Insurance Co. Ltd., Union Bank of India, Bank of India,

Bank of Baroda, Canera Bank, Corporation Bank

Headquartered in Mumbai, MCX is led by an expert management team with deep

domain knowledge of the commodity futures markets.

Today MCX is offering spectacular growth opportunities and advantages to a large

cross section of the participants including Producers / Processors, Traders, Corporate,

Regional Trading Canters, Importers, Exporters, Cooperatives, Industry Associations,

amongst others MCX being nation-wide commodity exchange, offering multiple

commodities for trading with wide reach and penetration and robust infrastructure.

MCX, having a permanent recognition from the Government of India, is an

independent and demutualised multi commodity Exchange. MCX, a state-of-the-art

nationwide, digital Exchange, facilitates online trading, clearing and settlement operations for

a commodities futures trading.

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NCDEX

National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven

commodity exchange. It is a public limited company registered under the Companies Act,

1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23,2003.

It has an independent Board of Directors and professionals not having any vested

interest in commodity markets.

It has been launched to provide a world-class commodity exchange platform for

market participants to trade in a wide spectrum of commodity derivatives driven by best

global practices, professionalism and transparency.

Forward Markets Commission regulates NCDEX in respect of futures trading in

commodities. Besides, NCDEX is subjected to various laws of the land like the Companies

Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other

legislations, which impinge on its working.

It is located in Mumbai and offers facilities to its members in more than 390 centres

throughout India. The reach will gradually be expanded to more centres. 

NCDEX currently facilitates trading of thirty six commodities - Cashew, Castor Seed,

Chana, Chilli, Coffee, Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil,

Gold, Guar gum, Guar Seeds, Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry

Green Cocoons, Pepper, Rapeseed - Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy

Oil, Rice, Rubber, Sesame Seeds,  Silk, Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black

Matpe), Wheat, Yellow Peas, Yellow Red Maize & Yellow soyabean meal.

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NMCE

National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by Central

Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation

of India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State

Agricultural Marketing Board (GSAMB), National Institute of Agricultural Marketing

(NIAM), and Neptune Overseas Limited (NOL).

While various integral aspects of commodity economy, viz., warehousing,

cooperatives, private and public sector marketing of agricultural commodities, research and

training were adequately addressed in structuring the Exchange, finance was still a vital

missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that

linkage. Even today, NMCE is the only Exchange in India to have such investment and

technical support from the commodity relevant institutions.

NMCE facilitates electronic derivatives trading through robust and tested trading

platform, Derivative Trading Settlement System (DTSS), provided by CMC. It has robust

delivery mechanism making it the most suitable for the participants in the physical

commodity markets.

It has also established fair and transparent rule-based procedures and demonstrated

total commitment towards eliminating any conflicts of interest.

It is the only Commodity Exchange in the world to have received ISO 9001:2000

certification from British Standard Institutions (BSI).

NMCE was the first commodity exchange to provide trading facility through internet,

through Virtual Private Network (VPN).

NMCE follows best international risk management practices. The contracts are

marked to market on daily basis. The system of upfront margining based on Value at Risk is

followed to ensure financial security of the market.

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In the event of high volatility in the prices, special intra-day clearing and settlement is

held. NMCE was the first to initiate process of dematerialization and electronic transfer of

warehoused commodity stocks.

The unique strength of NMCE is its settlements via a Delivery Backed System, an

imperative in the commodity trading business. These deliveries are executed through a sound

and reliable Warehouse Receipt System, leading to guaranteed clearing and settlement.

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Literature Review

Dr Premalata (2003) examines the impact of introducing index futures and options

contracts on the volatility of the underlining stock index in India. The results suggest that

futures and options trading have not led to a change in the volatility of the underlying stock

index. Susan Thomas and Ajay Shah (2003) examine the characteristics, growth in liquidity

and turnover of Futures and Options.

Snehal Bandwadekar and Saurabh Ghosh (2003) identify that derivative products

like futures and options on Indian Stock Market have become important instruments of price

discovery, portfolio diversification and risk hedging in recent times. Ashutosh Vashishtha

(2010) examines that derivative turnover has grown from 2365 crores in 2000-01 to Rs

11010482 crores, within a short span of eight years derivative trading in India has surpassed

cash segment in terms of volume and turnovers.

O.P Gupta(2004) study suggest that the overall volatility of the stock market has

declined after the introduction of the index futures for both Nifty and Sensex indices,

However there is no conclusive evidence. Sandeep Srivastava (2005) uses the call and put

option open interest and volume based predictors as given by Bhuyan and Yan (2002). The

results show that these predictors have significant explanatory power with open interest being

more significant as compared to trading volume.

Golaka C Nath (2005) studies the behaviour of volatility in cash market after the

introduction of derivatives. Rajendra P. Chitale (2003) examines issues and impediments in

the use of different types of derivatives available for use by these institutional investors in

India. Sumon Bhaumik and Suchismita Bose (2007) examines the impact of expiration of

derivatives contracts on the underlying cash market on trading volumes, returns and volatility

of returns.

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TITLE OF THE PROJECT

“A Study of Derivatives Market in India”

PURPOSE OF THE STUDY

The study has been done to know the different types of derivatives and also to know

the derivative market in India. This study also covers the recent developments in the

derivative market taking into account the trading in past years. Through this study I came to

know the trading done in derivatives and their use in the stock markets.

IMPORTANCE OF STUDY

The project covers the derivatives market and its instruments. For better

understanding various strategies with different situations and actions have been given. It

includes the data collected in the recent years and also the market in the derivatives in the

recent years. This study extends to the trading of derivatives done in the National Stock

Markets.

OBJECTIVES OF THE STUDY

To know the investors perception towards investment in Derivative Market

To know different types of Derivatives instruments

To analyse the performance of Derivatives Trading since 2001with special reference

to Futures & Options

(a) In terms of Turnover

(b) In terms of Traded Quantity

(c) In terms of No of Contracts Traded

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LIMITATIONS OF THE STUDY

The time available to conduct the study was only 2 months. Being a wide topic I had a

limited time.

Limited resources were available to collect the information about commodity trading

The primary data has been collected through a structured questionnaire to a sample of

100 investors, which may not reflect the opinion of the entire population.

HYPOTHESIS OF THE STUDY

H0: Income and investment in different type of derivative instruments are not related.

H1: Income and investment in different type of derivative instruments are related.

H0: Age and purpose of Investing in Derivative market are not related.

H1: Age and purpose of Investing in Derivative market are related.

H0: Income per annum and monthly income available for investment are related

H1: Income per annum and monthly income available for investment are related

H0: Maturity period of investment and results of investment are no related.

H1: Maturity period of investment and results of investment are related.

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RESEARCH METHODOLOGY

Descriptive Research

Data Collection Method

Primary Data

Secondary Data

Primary Data

Primary data was collected through a structured questionnaire. The Questionnaire was

distributed through online platform by E-mail.

Secondary Data

Under Secondary sources, information was collected from internal & external

sources. I made use of Internet and miscellaneous sources (such as brochures, pamphlets)

under external sources.

Sampling Design

Sampling Unit: Hubli

Sampling Size: 100

Sampling Method: Convenience Sampling

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Measurement Techniques Used

Software Package for Social Science (SPSS) has been used for the purpose of this

analysis.

CHI SQUARE test was used for testing the Hypothesis

More specifically the process was organized. The research questionnaire was pre-tested

through pilot survey. In its draft form it went under a pre test with Channel Partner of two

different companies. The second pre-test was conducted after discussion with the experts in

the field.

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ANALYSIS OF THE RESULTS

1. Gender of the respondents

Interpretation: From the questionnaire it is observed that 84% of the respondents are

Male and 16% of them are Female.

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Table 1: What is your Gender?

Frequency Percent Valid Percent

Cumulative Percent

Male 84 84.0 84.0 84.0

Female 16 16.0 16.0 100.0

Total 100 100.0 100.0

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2. Age of the respondents

Table 2: What is your Age?

Frequency Percent Valid Percent

Cumulative Percent

Between 18 - 24 23 23.0 23.0 23.0

Between 25 - 34 22 22.0 22.0 45.0

Between 35 - 44 46 46.0 46.0 91.0

Between 45 -54 9 9.0 9.0 100.0

Total 100 100.0 100.0

Interpretation: 46% of the respondents fall under the age category of 35 – 44 years,

23% of them fall under 18 -24 years were as 22% of the respondents are between the age

category of 25 -34 years and 9% of the respondents are Between the age group of 45 – 54

years.

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3. Occupation of the respondents

Table 3: Which of the following best describes your current Occupation?

Frequency Percent Valid Percent

Cumulative Percent

Employee 37 37.0 37.0 37.0

Businessman 34 34.0 34.0 71.0

Student 10 10.0 10.0 81.0

Professional 19 19.0 19.0 100.0

Total 100 100.0 100.0

Interpretation: From the above chart it is clear that majority of the respondents are

employee with a weightage of 37% , Next are Businessman with a total of 34% and

Professionals being 19% and Students 10%.

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4. Educational Qualification of the respondents

Table 4: What is your Educational Qualification?

Frequency Percent Valid Percent

Cumulative Percent

Undergraduate 33 33.0 33.0 33.0

Graduate 35 35.0 35.0 68.0

Post Graduate 21 21.0 21.0 89.0

Professional Degree

11 11.0 11.0 100.0

Total 100 100.0 100.0

Interpretation: Majority of the respondents are Graduate being 35% were are

Undergraduate are closely followed with 33%, Post graduates consist of 21% and

Professional Degree Holders are 11%.

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5. Income per Annum of the respondents

Table 5: What is your approximate Income per Annum?

Frequency Percent Valid Percent

Cumulative Percent

Below 1,50,000/- 15 15.0 15.0 15.0

Between 1,50,001 - 3,00,000/- 39 39.0 39.0 54.0

Between 3,00,001 - 4,50,000 14 14.0 14.0 68.0

4,50,000/- and Above 32 32.0 32.0 100.0

Total 100 100.0 100.0

Interpretation: 39% of the respondents have annual income between 1,50,001 –

3,00,000/- were as respondents having income above 4,50,000/- are 32%, between 3,00,001/-

- 4,50,000/- are 14% and below 1,50,000/- are 15%.

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6. Percentage of monthly income available for investment in Derivatives

Table 6: What percentage of your monthly household income would you invest in Derivatives?

Frequency Percent Valid Percent Cumulative Percent

Between 5 - 10% 27 27.0 27.0 27.0

Between 11 - 15% 41 41.0 41.0 68.0

Between 16 - 20% 32 32.0 32.0 100.0

Total 100 100.0 100.0

Interpretation: 41% of the respondents invest between 11 – 15% of the monthly

household income in Derivatives, were as 32% of the respondents would invest between 16-

20% and 27% of the respondents invest between 5 – 10% in Derivatives Market.

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7. Kind of risk perceive while investing in Derivatives

Table 7: What kind of risk do you perceive while investing?

Frequency Percent Valid Percent

Cumulative Percent

Uncertainty of Returns 43 43.0 43.0 43.0

Slump in Market 34 34.0 34.0 77.0

Fear of Company Windup

9 9.0 9.0 86.0

Others 14 14.0 14.0 100.0

Total 100 100.0 100.0

Interpretation: 43% of the respondents feel that Uncertainty of Returns is the major

risk they perceive while investing in Derivative Market, were as 34% of the respondents feel

Slump in Market and 9% of the respondents feel that fear of company windup is the risk they

perceive while investing in Derivatives.

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8. Purpose of Investing in Derivatives Market

Table 8: What is the purpose of investing in Derivative Market?

Frequency Percent Valid Percent

Cumulative Percent

To Hedge Funds 33 33.0 33.0 33.0

Risk Control 29 29.0 29.0 62.0

Stable Income 21 21.0 21.0 83.0

Direct Investment

17 17.0 17.0 100.0

Total 100 100.0 100.0

Interpretation: 33% of the respondents invest in Derivatives to hedge funds, 29% of

them invest for risk control, 21% of the respondents for stable income and 17% invest as a

direct investment.

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9. Participation in different type of Derivative instrument

Table 9: In which of the following would you like to participate?

Frequency Percent Valid Percent

Cumulative Percent

Index Futures 16 16.0 16.0 16.0

Index Options 29 29.0 29.0 45.0

Stock Futures 19 19.0 19.0 64.0

Stock Options 24 24.0 24.0 88.0

Currency Futures/Options

12 12.0 12.0 100.0

Total 100 100.0 100.0

Interpretation: From the above chart we find that 29% of the respondent would like to

participate in Index Options were as 24% of the respondents’ would like to invest in Stock

Options, Stock Futures and Index Futures attract 19 and 16% respectively and respondents

liking to invest in Currency Futures and Options are 12%.

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10.Interest of investment in terms of time frame

Table 10: Which contract maturity period would interest you for trading in?

Frequency Percent Valid Percent

Cumulative Percent

1 Month 34 34.0 34.0 34.0

2 Months 9 9.0 9.0 43.0

3 Months 27 27.0 27.0 70.0

6 Months 22 22.0 22.0 92.0

1 Year 8 8.0 8.0 100.0

Total 100 100.0 100.0

Interpretation: 34% of the respondents would like to invest their money for 1 Month,

27% of them for 3 months, 22% of the respondents for 6 months, 9% of the respondents for 2

months and 8% of the respondents for 1 Year.

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11.Investment in Derivatives market

Table 11: How often do you invest in Derivative Market?

Frequency Percent Valid Percent

Cumulative Percent

Between 1 - 10 times 62 62.0 62.0 62.0

Between 11 - 25 times 14 14.0 14.0 76.0

26 - 50 times 15 15.0 15.0 91.0

Regularly 9 9.0 9.0 100.0

Total 100 100.0 100.0

Interpretation: Majority of the respondents 60% of them invest between 1 – 10 times a

year in Derivatives, were as respondents investing between 11 – 25 times, 26 – 50 times and

regularly are 14%, 15% and 9% respectively.

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12.Result of Investment

Table 12: What was the result of your Investment?

Frequency Percent Valid Percent

Cumulative Percent

Great Results 17 17.0 17.0 17.0

Moderate but acceptable

50 50.0 50.0 67.0

Disappointed 33 33.0 33.0 100.0

Total 100 100.0 100.0

Interpretation: 50% of the respondents are moderate about their results in investing in

Derivatives market, 17% of the respondents have great results and 33% of the respondents

are disappointed with their investment in Derivatives Market.

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H0: Income and investment in different type of derivative instruments are not

related.

H1: Income and investment in different type of derivative instruments are

related.

What is your approximate Income per Annum? * In which of the following would you like to participate?

Cross Tab

CountIn which of the following would you like to

participate?TotalIndex

FuturesIndex

OptionsStock

FuturesStock

OptionsCurrency

Futures/Options

What is your approximate Income per Annum?

Below 1,50,000/-

3 4 2 0 6 15

Between 1,50,001 - 3,00,000/-

3 14 11 11 0 39

Between 3,00,001 - 4,50,000

3 3 0 5 3 14

4,50,000/- and Above

7 8 6 8 3 32

Total 16 29 19 24 12 100

Chi-Square Tests

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Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 28.958a 12 .004

Likelihood Ratio 35.930 12 .000

Linear-by-Linear Association .315 1 .575

N of Valid Cases 100

a. 12 cells (60.0%) have expected count less than 5. The minimum expected count is 1.68.

The value of chi-squared statistic is 28.958. The chi-squared statistic has 12 degree of

freedom. The p value (.004) is less than 0.05. Hence there is significant relationship between

income and investment in different type of derivative instruments.

H0: Age and purpose of Investing in Derivative market are not related.

H1: Age and purpose of Investing in Derivative market are related.

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What is your Age? * What is the purpose of investing in Derivative market?

Cross Tab

CountWhat is the purpose of investing in Derivative

market?TotalTo Hedge

FundsRisk

ControlStable Income

Direct Investment

What is your Age?

Between 18 – 24

10 0 8 5 23

Between 25 – 34

3 14 2 3 22

Between 35 – 44

17 12 8 9 46

Between 45 -54

3 3 3 0 9

Total 33 29 21 17 100

Chi-Square Tests

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 26.109a 9 .002Likelihood Ratio 32.568 9 .000Linear-by-Linear Association .616 1 .432

N of Valid Cases 100

a. 8 cells (50.0%) have expected count less than 5. The minimum expected count is 1.53.

The value of chi-squared statistic is 26.109. The chi-squared statistic has 9 degree of

freedom. The p value (.002) is less than 0.05. Hence there is significant relationship between

age and purpose of Investing in Derivative market.

H0: Income per annum and monthly income available for investment are related

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H1: Income per annum and monthly income available for investment are related

What is your approximate Income per Annum? * What percentage of your monthly household income would you invest in Derivatives?

Cross Tab

CountWhat percentage of your monthly

household income would you invest in Derivatives? Total

Between 5 - 10%

Between 11 - 15%

Between 16 - 20%

What is your approximate Income per Annum?

Below 1,50,000/- 3 3 9 15

Between 1,50,001 - 3,00,000/-

5 17 17 39

Between 3,00,001 - 4,50,000

2 6 6 14

4,50,000/- and Above 17 15 0 32

Total 27 41 32 100

Chi-Square Tests

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 30.130a 6 .000Likelihood Ratio 38.871 6 .000Linear-by-Linear Association 22.017 1 .000

N of Valid Cases 100

a. 4 cells (33.3%) have expected count less than 5. The minimum expected count is 3.78.

The value of chi-squared statistic is 30.130. The chi-squared statistic has 6 degree of

freedom. The p value (.000) is less than 0.05. Hence there is significant relationship between

income per annum and monthly income available for investment.

H0: Maturity period of investment and results of investment are no related.

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H1: Maturity period of investment and results of investment are related.

What contract maturity period would interest you for trading in? * What was the result of your investment?

Cross Tab

CountWhat was the result of your investment? Total

Great Results

Moderate but

acceptable

Disappointed

What contract maturity period would interest you for trading in?

1 Month 9 16 9 34

2 Months 0 3 6 9

3 Months 0 19 8 27

6 Months 5 9 8 22

1 Year 3 3 2 8

Total 17 50 33 100

Chi-Square Tests

Value df Asymp. Sig. (2-sided)

Pearson Chi-Square 17.583a 8 .025Likelihood Ratio 22.085 8 .005Linear-by-Linear Association .010 1 .921

N of Valid Cases 100

a. 8 cells (53.3%) have expected count less than 5. The minimum expected count is 1.36.

The value of chi-squared statistic is 17.583. The chi-squared statistic has 8

degree of freedom. The p value (.025) is more than 0.05. Hence there is no significant

relationship between maturity period of investment and results of investment.

Derivatives Turnover in BSE & NSE

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  BSE NSEYear No of Contracts Turnover (Cr) No of Contracts Turnover (Cr)2001-02 105527 1926 4196873 1019252002-03 138037 2478 16767852 4398652003-04 382258 12074 57008110 21304682004-05 531719 16112 77017185 25470532005-06 203 9 157619271 48242512006-07 1781220 59006 216883573 73562702007-08 7453371 242308 425013200 130904772008-09 496502 11775 657390497 110104822009-10 9026 234 677293922 176636552010-11 5623 154 1034212062 292482212011-12 32222825 808476 1205045464 31349732

Comparison of Derivatives Turnover with Equity turnover on BSE & NSE

Equity Turnover in BSE & NSE  BSE NSEYear Traded Quantity Turnover (Cr) Traded Quantity Turnover (Cr)2001-02 182196 307292 278408 5131672002-03 221401 314073 364065 6179892003-04 390441 505053 713301 10995342004-05 477171 518715 797685 11400722005-06 664455 816074 844486 15695582006-07 560777 956185 855456 19452872007-08 653010 1578857 1498469 35510382008-09 739600 1100074 1426355 27520232009-10 1136513 1378809 2215530 41380232010-11 990777 1105027 1824515 35774102011-12 654137 667498 1616978 2810893

Table showing comparison of Derivatives Turnover and Equity Turnover in BSE

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2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-120

200000

400000

600000

800000

1000000

1200000

1400000

1600000

1800000

Turnover of Derivatives in BSE (Cr)Turnover of Equity in BSE(Cr)

(source: sebi.gov.in)

Derivatives was introduced first time in India in 2001. There after Derivatives market

has seen a huge growth in terms traded contracts and turnover. From the above chart we can

see that derivatives turnover in the year 2001 – 02 was 1,926 crores compared to equity

turnover of 3,07,292. In BSE the equity turnover is superior compared to derivatives turnover

but after the financial year 2011- 12 the momentum has shifted from equity to derivatives and

in the financial year 2011 – 2012 the derivatives turnover overtook the equity turnover for the

1st time ever, the derivatives turnover stood at 8,08,476 crores compared to equity turnover of

6,67,498 which is 21% more of equity turnover clearly showing the emergence of derivatives

market on BSE.

Table showing comparison of Derivatives Turnover and Equity Turnover in NSE

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2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-120

5000000

10000000

15000000

20000000

25000000

30000000

35000000

Turnover of Derivatives in NSE(Cr)Turnover of Equity in NSE(Cr)

(source: sebi.gov.in)

Derivatives was introduced first time in India in 2001. There after Derivatives

market has seen a huge growth in terms traded contracts and turnover. From the above chart

we can see that derivatives turnover in the year 2001 – 02 was 1,01,925 crores compared to

equity turnover of 5,13,167 but after the financial year 2003 -04 derivatives has seen a huge

up growth, It has outperformed equity segment both in volumes and turnover. In the financial

year 2011 – 2012 the derivatives turnover stood at 3,13,49,732 crores compared to equity

turnover of 28,10,893 which is 1015% more of equity turnover clearly showing the

emergence of derivatives market on NSE.

Findings

84% of the respondents are Male and 16% of them are Female.

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Most of the investors who invest in derivatives market are graduate.

Majority of the investors who invest in derivative market have a income of above

1,50,001 – 3,00,00/-

46% of the respondents fall under the age category of 35 – 44 years

Investors generally perceive uncertainty of returns type of risk while investing in

derivative market.

Most of investor’s purpose of investing in derivative market is to hedge their funds.

Most of investors participate in Index Options.

From this survey we come to know that most of investors make a contract of 1 month

maturity period.

Investors invest 1 -10 times a year in Derivatives Market.

The result of investment in derivative market is generally moderate but acceptable.

Hypothesis test shown that there is relationship between Income and investment in

different type of derivative instruments, Age and purpose of Investing in Derivative

market , Income per annum and monthly income available for investment

Derivatives turnover compared to Equity turnover is superior on NSE.

Recommendations

Knowledge needs to be spread concerning the risk and return of derivative market.

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Page 73: Derivatives presentation

Investors should have knowledge of technical analysis, especially 5 Day moving

averages as derivatives trading is for a short period of time Investors should analysis

their script with the help of 5 Day moving average before making their trades.

Investors’ portfolio should only consist of 15 – 20% Derivatives contracts or scripts.

As derivatives trading is very risky investors should have only a small portion of their

portfolio consisting of derivatives.

SEBI should conduct seminars regarding the use of derivatives to educate individual

investors.

As FII play a prominent role in Derivatives trading, an individual investor should

keep himself updated with various economic trends, government policies, company

and industry announcements.

ANNEXURE

SURVEY QUESTIONNAIRE FOR INVESTORS

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Page 74: Derivatives presentation

Dear Sir/Mam,

This questionnaire is meant for educational purposes only.

The information provided by you will be kept secure and confidential.

1. Name: ___________________________________________

2. Gender

a) Male b) Female

3. Age

a. Below 18 Years

b. Between 18 – 24 Years

c. Between 25- 34 Years

d. Between 45 -54 Years

e. Above 55 Years

4. Occupation

a. Employee

b. Business

c. Student

d. Professional

5. Educational Qualification

a. Undergraduate

b. Graduate

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c. Post Graduate

d. Professional Degree Holder

6. Income per Annum

a. Below 1,50,000

b. 1,50,000 – 3,00,000

c. 3,00,000 – 5,00,000

d. Above 5,00,000

7. Normally what percentage of your monthly household income could be

available for investment?

a. Between 5% to 10%

b. Between 11% to 15%

c. Between 16% to 20%

d. Between 21% to 25%

e. More than 25%

8. What kind of risk do you perceive while investing in the stock market?

a. Uncertainty of returns

b. Slump in stock market

c. Fear of being windup of company

d. Other

9. What is the purpose of investing in Derivative market?

a. To hedge funds

b. Risk control

c. More stable

d. Direct investment

10.In which of the following would you like to participate?

a. Index Futures

b. Index Options

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c. Stock Futures

d. Stock Options

e. Currency Futures / Options

11. What contract maturity period would interest you for trading in?

a. 1 month

b. 2 months

c. 3 months

d. 6 months

e. 9 months

f. 12 months

12. How often do you invest in Derivative market?

a. 1-10 times in a year

b. 11-50 times

c. More than 50 times

d. Regularly

13.What was the result of your Investment?

a. Great results

b. Moderate but acceptable

c. Disappointed

Bibliography

nseindia.com

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bseindia.com

sebi.gov.in

Ashutosh Vashishtha and Satish Kumar “Development of Financial Derivatives Market in India- A Case Study”

Dr. Premalata Shenbagaraman “Do Futures and Options trading increase stock market volatility?”

Golaka C Nath “Behaviour of Stock Market Volatility after Derivatives”

O.P. Gupta “Effect Of Introduction Of Index Futures On Stock Market Volatility:The Indian Evidence”

Rajendra P. Chitale “Use of Derivatives by India’s Institutional Investors:Issues and Impediments”

Sandeep Srivastava “Informational Content Of Trading Volume And Open Interest – An Empirical Study Of Stock Option Market In India”

Ajay Shah and Susan Thomas “The evolution of the securities markets in India in the 1990s”

Snehal Bandivadekar and Saurabh Ghosh “Derivatives and Volatility on Indian Stock Markets”

Sumon Bhaumik and Suchismita Bose “Impact of Derivatives Trading on Emerging Capital Markets: A Note on Expiration Day Effects in India”

Susan Thomas and Ajay Shah “Equity derivatives in India: The state of the art”

Global Business School | A Study of Derivatives Market in India 77