Executive summary

Indias economy is on the top of an ever increasing growth curve, a booming capital market,
Strong liquidity inflows have helped Indian stock markets outperform most emerging markets in
2005. It is not just foreign fund flows, which are driving market up, even domestic investors are
pouring money into equities. Indias bench mark share Index crossed 28K points for the first time
on Aug 18th 2016.

This project is focused on the derivatives, whose price is dependent upon or derived from one or
more underlying assets. The most common underlying assets include stocks, bonds,
commodities, currencies, and interest rates.

In the year 2000-01 total average daily turnover of equity market was Rs.5337 corers and that of
F&O was Rs.11 corers. But at present daily average turnover of equity market is Rs.313402
corers and whereas F&Os average daily turnover is Rs.6813542 corers for the month of
Aug2016. It clearly shows how Futures and Options are gaining its pace in recent years. In fact it
has crossed the daily average turnover of equity market.

The objective of this project is to analyze the derivatives and how the derivatives can be used as
hedging, speculation and arbitrage tool in the financial market. At the end a questionnaire is also
prepared to study the trend of Futures and Options in Dharwad city. This project is undertaken in
Geerak Marketing, Dharwad. Fifty respondents are taken from Dharwad city and a survey is
done for the same.

The investor plays a very important role in the stock market because of their big share of savings
in the country. The Regulators of the stock market never can ignore the behavior of individual
investor. This study aims to understand the behavior of individual investor in stock market,
specifically their attitude and perception with respect to the stock market. A survey is conducted
to collect data relating to the above subject.
Primary data is collected from a sample of 50 investors of Dharwadd City, Karnataka, India. The
study also attempts to find the factors Affecting the investment behavior of individual investors
such as their awareness level, duration Ofinvestment etc. Keywords: Investors Behavior, Stock
Market, Attitude, Perception, Awareness Level

Objective of the study:

To understand the perceptive of investors in equity and derivative market

Sub-objectives:

1. To understand investors behavior in equity market

2. To understand investors behavior in F&O market.

3. Comparative analysis of risk and return involved in equity and derivative market.

4. Analyzing futures and options with respect to investors, brokers and market as a whole.

5. To know, how the derivatives (F&Os) can be used as hedging, speculation and arbitrage tool in
the financial market.

Limitations of the study

1. I have limited my study regarding derivatives to futures and options only. I have not taken into
consideration regarding commodities and forward trading.

2. I have administered the questionnaire only those who trade in both derivatives and equity
market. I have not collected the responses of the investors who trade only in equity market, since
I have made comparative analysis.

3. I have carried away my project work in the Dharwad city and I have taken sample size of 50
respondents in the Dharwad city itself. I have not covered any part other than Dharwad city.

4. I could study the market movements only for 60 days and observations are related only to this
period.
5. Futures and Options are less traded compared to equities in Geerak Marketing, Dharwad.
Options are still less traded compared to futures, so I did not get much exposure to it.

Findings

1. Majority of the respondents belong to the savings group of Rs.2001-Rs.7000.

2. Majority of the respondents have invested their savings in the equity/F&Os.

3. Majority of the respondents have been in to the equity market, less than five years.

4. High returns of the equity market made the majority of the respondents to trade or invest in
equity market.

5. Sufficient time to square off their position factor made the majority of the respondents to
trade in futures and options market.

6. Majority of the respondents are trading twice in a week in futures and options segment.

7. Because of High risk involved in futures and options, majority of the respondents dont want
to trade in F&Os.

8. By closely observing safety graph we can say that majority of the respondents are happy with
respect to the safety aspect of futures and options compared to equity market.

9. By considering returns graph we may conclude that the respondents are satisfied with the
returns (ROI) in the futures and options segment when compared to equity market. We can say
this by analyzing the mean points which 3.34 (which is more than 3) for returns.

Suggestions
1. Small investors who previously unable to trade because of big lot size can now trade in the F
& O segment.

2. As per my survey, many brokers/sub-brokers are allowing their clients to trade in F & O
without collecting margin money. Those who pay margin money in full should be allowed to
trade in F & Os. Stock Exchanges with the directions of SEBI should make arrangement to
make sure that the brokers/sub-brokers are collecting the required margin money before allowing
them for trading.

4. Stock exchanges with the help of SEBI, should conduct regular training sessions for the
investors in order to educate them regarding F & O to curtail the probable risk which would be
arising out of their ignorance.

5. Some of the dealers cum investors feel that only hedging should be permitted in the F & Os
but speculation should not be allowed.

Conclusions:

In the year 2000-01 total average daily turnover of equity market was Rs.5337 crors and that of
F&O was Rs.11 crors. But at present daily average turnover of equity market is Rs. 313402 crors
and whereas F&Os average daily turnover is Rs. 6813542 crors for the month of Aug2016. It
clearly shows how Futures and Options are gaining its pace in recent years. In fact it has crossed
the daily average turnover of equity market. It is almost 4 times of equity market.
Those who were previously trading in the equity market are also trading in futures and
options market as because of its ease trading, elimination of counter party risk, quicker
settlement process (T+1) and it is standardized & regulated by the stock exchanges.

If training sessions regarding the F&O is conducted by the stock brokers/sub-brokers regularly
to the investors, it could be possible for the investors to understand it better and those who did
not understand the concept would also come forward to trade in this segment and hence still
more volumes could be generated.

Using futures as a hedging tool should be popularized. When the market is bearish investors
in the equity market used to short their stocks and deliver the securities by paying high brokerage
charges but due to introduction of futures, investors dont need to sell shares in the equity market
instead they can have short position in the futures segment. By this way the loss which is
incurred in the equity market could be set off by having short position in the futures market.
Brokerage charges are quite less in the futures market compared to equity market as the trades
are cash settled (eliminating delivery of securities).
 Trading in options is quite tricky and it needs through understanding and those who are
having good knowledge are earning handsome profits out of it. Its better not to enter options
contract without sufficient idea otherwise it could be costly affair for the individuals. Proper
guidance should be given by the broker/sub-broker to the investors in trading.

OVERVIEW ABOUT INDIAN ECONOMY:

INTRODUCTION:-

(https://theindianeconomist.com/overview-indian-economy/)

Indian economy finds itself in a dilemma, with the agriculture growth contracting to a figure of

3.2%, however, still a robust growth rate considering the weak monsoons. This also points to the

direction of rising share of commercial crops in overall agriculture production. Adding to this,

we can also see weakness creeping in the manufacturing activity, which grew, only by 0.1%. The

Capital formation growth (computed as a ratio of investment to GDP) remained low at 32.3

per cent, falling marginally from the previous quarters 32.7 per cent, whereas growth in

government expenditure slipped to 11.7 per cent from 13.4 per cent in the April-June quarter.

However, it remained high, contributing to GDP growth.

Considering few of the above figures, some might dispute the presence of any optimistic feelings

with respect to the Indian economy especially in the coming future, however, this is where the

presence of a reform oriented national government and the present global economic conditions

take the central seat. The government is already eyeing substantial reforms in the winter session

of the parliament. There is a huge probability of an increase in the cap of overseas investors in
insurance companies i.e. from 26% to 49%. This law would also raise the cap for the pension

industry. The industry also expects that an increase in cap would ultimately result in a $2 billion

inflow in the insurance sector. Adding to this impetus, are other major reforms such as the

reforms in the land and labor laws and strategy to implement Indias first nationwide service tax

union by April 2016 and if successful, economists say the measure could add 2 percentage points

to GDP growth. Recent measures such as easing of the environmental and forest clearances for

mines, roads, power stations and irrigation systems along with expansion in the monitoring role

of project monitoring group will start taking effect from the third quarter onwards, thus laying

the path for fresh foreign direct investment and future expansion in countrys infrastructure

facilities.

Focusing towards the recent happenings in the world economy, the withdrawal of quantitative

easing measures and the prospect of interest rate increase by the Federal Reserve will have a

lesser effect on the Indian economy as such an event will not affect the Indian bond markets, as

its bond market is already tricky enough for foreigners to enter at the first place, moreover, the

main foreign investments can be seen in the equity markets which are already maintaining a

positive outlook and seem to be more resilient in face of such outflows. Moreover, the

fundamentals of the economy especially in terms of its current account deficit, seems more

favorable this time in light of the commodity deflationary spiral in the world economy. This

along with the quantitative easing program being initiated by Japan and the probability that the
ECB might resort to such a program keeps India well insulated. Other global economic

weaknesses such as the slowdown in China, also does not point towards a dismal picture of the

Indian economy as only 5% of Indias exports go there. Further, quantitative easing by the Bank

of Japan hurts Asias manufacturing exporters more than service-intensive India.

Economics experts and various studies conducted across the globe envisage India and China to
rule the world in the 21st century. For over a century the United States has been the largest
economy in the world but major developments have taken place in the world economy since
then, leading to the shift of focus from the US and the rich countries of Europe to the two Asian
giants India and China. By 2025 the Indian economy is projected to be about 60 per cent the size
of the US economy. The transformation into a tri-polar economy will be complete by 2035, with
the Indian economy only a little smaller than the US economy but larger than that of Western
Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the
EU, though its impact will be a little over half that of the US India which Is now the fourth
largest economy in terms of purchasing power parity, will overtake Japan and become third
major economic power within 10 years.

Industry:

Index of industrial production, which measures the overall industrial growth rate, was 10.1% in
October 2004 as compared to 6.2% in October 2003. The double digit in IIP was aided by a
robust growth of 11.3% in the manufacturing sector followed by mining and quarrying and
electricity generation. But industrial production saw a decline in Dec 2004 when IIP dipped to
8%. Thus one of the critical challenges facing Indian economic policy consists in devising
strategies for sustained industrial growth. Final phase-out of the MFA and indias conformity
with the international intellectual property system from Jan 1 st 2005, have been two significant
development in the world of commerce and industry
Textile industry is the largest industry in terms of employment economy from the current US $37
billion to $85 billion by 2010 creation of 12 million new jobs in the textile sector and
modernization and consolidation for creating a globally competitive textile industry. With the
phasing out of quota regime under MFA, from Jan 1st 2005, developing countries including india
with both textile and clothing capacity may be able to prosper. Automobile sector has
demonstated the inherent strengths of Indian labour and capital.

The parma industry and the IT industry are two sunrise sectors for india. Among the sector that
have experienced the greatest transformation in india, the permaceutical is perhaps the most
significant. Indias WTO involvement during the last decde has encouraged our pharma
companies to adopt a strategy of R&D based innovative growth. Indian pharma exports were
14000 cores Rupees ans accounts for more than a third of the industrys turnover. Apart from
manufacture of drugs, the pharma industry offers huge for outsourcing of clinical research.

A vast pool of scientific and technical personnel and recognized expertise in medical treatment
and health care are indias strength, Indian can take advantage of its strength once patent
protection is given to the result of the researches. By participating in the international system of
intellectual property protection, india unlocks for herself vast opportunities in both exports as
well as her potential to become a global hub in the area of R&D based clinical research
outsourcing, particularly in the area of bio-technology.
Introduction and history of the capital market in India

dates back to the 18 century. When east india company securities was traded in company. Until
the end of the 19th century trading was unorganized and the main trading centers were Bombay
and culcutta. Indian capital markets are one of the oldest markets in asia as well as in the world.
Under the british companies act, the stock exchange, Mumba, came into existence in 1875. It
was an unincorporated body of stockbrokers, which started doing business in the city under a
banyan tree, in front of the town hall in Bombay. A small group of stock brokers in Bombay
joined together in 1875 to form an association called native shares and stock brokers.

Association Bombay the stock exchanges in Calcutta and Ahmadabad also industrial and
trading centers came up later. There has been much fluctuation in the stock market on account of
the American war and the battles in Europe. Sir Phiroze Jeejeebhoy was dominated the stock
market from 1946-1980. His word was law and he had a great deal of influence over both
brokers and the government. The Bombay stock exchange was recognized in may 1927 under
Bombay securities contract control act 1925. The capital arket was not well organized and
developed during the british rule because the british government was not interested in economic
growth of the country. As a result many many foreign company depended on London capital
market for fund. In the post independence period also the size of capital market is small. The
panning process started in india in 1951, with importance being given to the formation of
institutions and markets the securities contract regulation act 1956 became the parent regulation
after the Indian contract act 1872 , a basic law to be followed by security markets in india. To
regulate the issue of share prices, the controller of capital issues act (CCI) was passed in 1947.
During the first and second five year plan, the government emphasis was on the development of
the agriculture and public undertakings were healthier than Pvt. Undertakings in terms of paid up
share capital, but shares were not listed on the stock exchange. More over controller of capital
issue (CCI) closely supervised everything. These strict regulations demotivated many company.
In the 1950s century textile, tata steel company Kohinoor mills were the favorite scripts of
speculations. As speculation become rampact. The stock market came to be known as satta
bazaar. The decade of 1950s was also characterized by the establishment of a network for the
development of financial institutions loke LIC, GIC and state financial corporations.
CAPITAL MARKETS IN INDIA

A capital market is a financial market in which long-term debt or equity-backed securities are
bought and sold. Capital markets are defined as markets in which money is provided for periods
longer than a year.[1] Capital markets channel the wealth of savers to those who can put it to long-
term productive use, such as companies or governments making long-term investments.
[a]
Financial regulators, such as the Bank of England (BoE) or the U.S. Securities and Exchange
Commission (SEC), oversee the capital markets in their jurisdictions to protect investors against
fraud, among other duties.

The capital market is a vital of the financial system. Capital market provides the support of
capitalism to the country. The wave of economic reforms initiated by the government has
influenced the functioning and governance of the capital market. The Indian capital market is
also undergoing structural transformation since liberalization. The chief aim of the reforms
exercise is to improve market efficiency, make stock market transactions more transparent, curb
unfair trade practices and to bring our financial markets up to international standards. Further,
the consistent reforms in Indian capital market, especially in the secondary market resulting in
modern technology and online trading have revolutionized the stock exchange.

Capital market concerned with the industrial security market, government securities markets, and
long term loan market. Capital market deals with long term loan market. It supplies long-term
and medium term funds. It deals with shares, stocks debentures and bonds. Security dealt in
capital markets are long-term securities. It provides a market mechanism for those who have
saving and to those who have saving and to those who need funds for productive investments.
The capital market aids economic growth by moiling the savings of the economic sector and
directing the same towards channels of productive uses. Companies turn to them to raise funds
needed to finance for the infrastructure facilities and corporate activities.

The capital market is source of income for investors. When stock of other financial assets rise in
value, investors become wealthier, often they spend some of this additional wealth boost sales
and promoting economic growth. Stock value reflects investor reactions to government policy as
well, if the government adopts policies that investors believe will hurt the economy and company
profits, vice-versa. In the post-reform period, India stands as an economy that is rapidly
modernizing, globalizing and growing. India is poised as a fast growing emerging market
economy in the face of the current turmoil and pessimism. The resilience shown by India comes
from the strong macroeconomic fundamentals. India has weathered the storms of the recent
financial market crisis with great strength and stability. The household sector is coming to
prominence with impressive contribution in the national pool of savings. Rising investment
levels and improved productivity are the engines driving growth. Indians have witnessed a
doubling of average real per capital income growth during the tenth plan period. The government
has progressed towards a fiscal correction. There has also been a sharp rise in net capital inflows.
The strong institutional and macroeconomic policy framework in India is further complemented
by the gains from trade and global financial integration. Over the years, the Indian capital market
as experienced a significant structural transformation in that it now compares well with those in
developed markets. This was deemed necessary because of the gradual opening of the economy
and the need to promote transparency in alternative sources of financing. The regulatory and
supervisory structure has been overhauled with most of the power for regulating the capital
market having been vested with the securities exchange board of India (SEBI). Globalization and
financial sector reforms in India have ushered in a sea change in the financial architecture of the
economy. In the contemporary scenario, the activities in the financial markets and their
relationships with the real sector have assumed significant importance. Since the inception of the
financial sector reforms in the early 1990s, the implementation of various reform measures
including a number of structural and institutional changes in the different segments of the
financial markets has brought a dramatic change in the functioning of the financial sector of the
economy. Altogether, the whole gamut of Institutional reforms connected to globalization
program, introduction of new instruments, change in procedures, widening of network of
participants call for a re-examination of the relationship between the stock market and the
foreign sector of India.

Modern capital markets are almost invariably hosted on computer-based electronic

trading systems; most can be accessed only by entities within the financial sector or the treasury
departments of governments and corporations, but some can be accessed directly by the public.
[b]
There are many thousands of such systems, most serving only small parts of the overall capital
markets. Entities hosting the systems include stock exchanges, investment banks, and
government departments. Physically the systems are hosted all over the world, though they tend
to be concentrated in financial centers like London, New York, and Hong Kong.

A capital market can be either a primary market or a secondary market.

In primary markets, new stock or bond issues are sold to investors, often via a mechanism
known as underwriting. The main entities seeking to raise long-term funds on the primary capital
markets are governments (which may be municipal, local or national) and business enterprises
(companies). Governments issue only bonds, whereas companies often issue either equity or
bonds. The main entities purchasing the bonds or stock include pension funds, hedge
funds, sovereign wealth funds, and less commonly wealthy individuals and investment banks
trading on their own behalf. In the secondary markets, existing securities are sold and bought
among investors or traders, usually on an exchange, over-the-counter, or elsewhere.

The existence of secondary markets increases the willingness of investors in primary markets,
as they know they are likely to be able to swiftly cash out their investments if the need arises.

Capital market is a market where buyers and sellers engage in trade of financial securities like
bonds, stocks, etc. the buying and selling is undertaken by participants such as individual and
institutions. Capital market consists of primery markets and secondary markets. Primary markets
deal with trade of new issues of stocks and other securities, whereas secondary market deals with
the exchange of existing or previously issued securities. Another important devision in the capital
market is made on the basis of the nature of security traded, I.e. stock market and bond market.
Capital market deals with medium term and long term funds. It refers to all facilities and the
institutional arrangement for borrowing and lending term funds (medium term and long term).
The demand for long term funds comes from private business corporations, public corporations
and the government. The supply of funds comes largely from individual and institutional
investors, banks and special industrial financial institutions and government.
COPANY PROFILE

Geerak marketing Equities and Derivatives, Hubli.

About the founder

Mr. Nanalal Karva born in the year 1958 and completed his school Hubli, he completed his
B.com from J G collage of commerce, Hubli. After completion of graduation, he went to
Mumbai for gaining experience and served for professionally managed concerns, private
companies, for 4 years, which helped him to bring professional approach to his organization.
After gaining working experience at Mumbai, he went abroad i.e. to muscat and Kuwait for 3
years and returned to Hubli during 1985.

Mr. Nanalal Karva started Geerak marketing, an investment consultancy firm in year 1985. This
firm was established with the view to bring the people of northern part of Karnataka in the main
stream of investors at national level since its establishement the firm is continuously engaged in
serving the investors in the give scenario it will be much appropriate to say that GEERAK is
the first organization that has educated and introduced the people of this part of Karnataka to the
capital market.

Managing director of the Geerak marketing is Mr. Hiral N Karva, son of Mr. Nanalal R
Karva. Mr.Nanalal would be taking care of the entire firm.

Geerak marketing was the first incorporated as a private limited company on 16 th Jun 1992 an
sub subsequently converted into a public limited company on 25 th October 1995 and was named
as Geerak marketing stock and shares broker limited (GMSSBL).

Mr.Nanalal Karva and his family hold majority of the shares. The present worth of the company
stands around Rs.54 lacs. GMSSBAL has taken overall the activities of
Geerak marketing, this was in existence since 1985. Ultimately GMSSBL has become the
Flagship Company of Geerak group to serve the investors.Since its inception in the year 1985,
the firm has grown to reach immense heights. It has withstood all odds in the market and has
emerged as a true leader in the bargain. Geerak is widely recognized as a trustworthy
organization and has been successful in satisfying its clients interests.

SCOPE OF ACTIVITIES:

The scope of activities for Geerak has been:

Stock and shares broking as sub-broker of

National Stock Exchange (NSE)
Bombay Stock Exchange (BSE).
Investment advisory service for
Resident Indians.
Non-Resident Indians.
Mobilizing the savings of the people towards corporate.
Establishment of service centers at semi-urban and rural areas to meet the
investors needs.
Depository services which are being offered through:
Venture securities limited, Mumbai.

Company profile:

The clientele base of Geerak includes bank employees, business people retired persons,
Government employees, teachers and professors. Here some speculate while some others take up
delivery based trading. For few their objective remains investing their surplus cash while some
others enjoy hedging. Many clients also invest in mutual funds company deposits and still some
others invest other invest their money in debentures of various companies.
Geerak Branch Office:

Station road Hubli

Udayanagar Benglore
Jayanagar Benglore
Belgaum
Dharwad
Gadag
Gajendragad
Haveri
Saudatti
Ranebennur
Panvel (Maharashtra)
Valsad (Gujarat)

Brokerage charges

Trading: 0.075% -0.02% on one side depending upon the volumes and margin money paid.

Delivery brokerage: 0 1.25% depending upon the volumes and margin money paid.

Depository charges:

Accounting opening charges: 0 Rs-400

Annual maintenance charges: Rs-200 to Rs400

Transaction cost: market / off market: 0 0.105%

Minimum charges: Rs-10 to Rs-32.5.

Custody charges: 0 Rs-0.75 per month per ISIN.

Geerak marketing Equities an Derivatives (sister concern of Geerak marketing) is affiliated as a

sub-broker to VENTURA Securities Ltd. Its registered office is in Nariman point, Mumbai.
Foundation of Ventura

Founded in 1994 by chartered accountants Sajid Malik and Hemant Majethia. They are the first
generation entrepreneurs and are the principal promoters of Ventura. A dedicated and efficient
team of senior managers assists Mr. Majethia the CEO of the company. Ventura is a full service
domestic brokerage house providing value based advisory services to institutions (Foreign and
Domestic), high net worth and retail investors with its core area of operations being stock
broking. We have considerable strength and domain knowledge in the booming derivatives arket.
Ventura has achieved a reputation for innovative and unbiased research along with excellent
technical analysis and executive capabilities. Not only has Ventura.

Provided value added services to the gamut of india based funds, it has also developed the advice
driven business of high net worth and corporate clients.

VENTURAS PHILOSOPHY:

To propel corporate growth we have clear focus to service our clients with undided attention
hence, we do not carry on any proprietary trading or investament.

About Ventura

Promoters

Sajid malik, Director, is a member of the institute of chartered accountants of india and a
graduate from Bombay university and has nearly fifteen years of varied experience in corporate
advisory structured finance and private equity transaction. He has an international exposure to
developed markets in Europe, US and the Far East and has been personally involved in
international equity offerings and cross border acquisitions. He is the CEO of Genesys
international, a company focused on outsourcing of GIS and engineering design services. He is a
nonexecutive director of Ventura securities.

HEMANT MAJETHAI, director is member of the institute of chartered accountant of india and
a graduate from Bombay university and has nearly fifteen years of experience in the capital
markets relationaships. Mr. Majethia is the CEO of ventura securities. It was his vision to create
an all india network of brokers relationship and build the distribution strength of Ventura.

SERVICES PROVIDED BY VENTURA

Stock brokerage, having membership with BSE and NSE

Member of MCX
Depository participant of the NSDL depository
Ventura securities Ltd. (ventura) commenced operations in 1994 as a stock broking
house. Over the past two decades, we have grown into a group of companies that
provides a complete array of financial products and services. Through a large network of
sub-brokers, we offer our clients the opportunit to invest and trade in equity and equity
derivatives, commodities, mutual funds, fixed income products and currency futures.

We also directly facilitate clients who wish to trade in equity online via our in house,
customized and ready to use software pointer which enables seamless processes and
flawless execution. We adhere to a well defined risk management system and settlement
mechanism thereby conducting fully complaint operations. Beyond investment avenues,
the Ventura group is constantly committed to providing investors with access to timely
and relevant research and data to ensure an informed and fruitful investment experience.

MISSION

To build true relationships and strive towards customer delight, through constant
innovation on a strong foundation of dedicated and trained resources.

COMPANY PROFILE

Establishment:14/10/1994
Tag line: kyon ki bhaiya, sabse beda rupaiya
Type of company: public
Online stock brokers company Ltd.
Listing type: unlisted
Industry category: finance
Company nature: company limited by shares
 Head quarter office:dhannur ground floor 15 sir p m road fort Mumbai,
maharastra.
India 400001

Key people

DIN/DPIN/PAN Directors name Appointment Designation

Date
00176916 JUZER YUSUF 16/06/2008 Whole time
GABAJIWALA director
00400473 HEANT 14/10/1994 Whole time
KULINKUMAR director
MAJETHIA
00400366 SAJID SIRAJ MALIK 14/10/1994 Director
00400518 GANAPATHY 03/11/2014 Additional
VISHWANATHAN director
AADPG1269N JUZER YUSUF 03/09/2008 Secretary
GABAJIWALA

Number of branches

Capital employed

Ventura securities Ltd is a public company registered on 14/10/1994. The ha an authorized

capital of Rs-60000000 and paid up capital of Rs-55491600.
Services provided by VENTURA

Stock brokerage, having membership with BSE and NSE

Member of MCX
Depository participant of the NSDL depository.

There is a two Depository system in India as follow:

1. National Securities Depository LTD. (NSDL):

The NSDL, the first depository in India which has been promoted by three premier
institutions in India, i.e. Industrial Development Bank of India, UTI and NSE. The NSDL
started from November 8 1996. The NSDL is a public limited company framed under the
companies Act 1956 wit a paid up capital of Rs. 105 crore, The NSDL carries out its
operations through participants and the clearing corporation of the stock exchange, wit
participants acting as market intermediaries through whom NSDL interacts with the
investors and clearing members. NSDL performs the following functions through
depository participants : 1. Enables the surrender and withdrawal of securities to and
from the depository (dematerialisation and rematerialisation). 2. Maintains investor
holdings in the electronic form. 3. Effects settlement of securities traded on the
exchanges. 4. Carries out settlement of trades not done on the stock exchange (off-market
trades). 5. Transfer of securities. 6. Pledging/hypothecation of dematerialised securities.
7. Electronic credit in public offerings of companies or corporate actions. 8. Receipt of
non-cash corporate benefits like bonus rights, etc. in electronic form. 9. Stock Lending
and Borrowing. 2. Central Depository Services LTD (CDSL) CDSL was promoted by
Bombay Stock Exchange Limited (BSE) jointly with leading banks such as State Bank of
India, Bank of India, Bank of Baroda, HDFC Bank, Standard Chartered Bank, Union
Bank of India and Centurion Bank. CDSL was set up with the objective of providing
convenient, dependable and secure depository services at affordable cost to all market
participants. It commenced its operation n march 22 1999. BSE has 45% stake in CDSL
while the bank have a 55% stake. CDSL has been preferred platform by the government
of India for carrying out actual share transactions PSUs disinvestment have been done
 through CDSL system. Every transaction at CDSL is doing at one e-space. The
centralized system of CDSL keeps a watch on every transaction. All leading stock
exchanges have established connectivity with the CDSL.
CDSLs demat services are extended through its agents called Depository Participants
(DP). The DP is the link between the investor and CDSL. An investor who opens a demat
account with a DP can utilise the services offered by CDSL. While the DP processes the
instructions of the investor, the account and records thereof is maintained with CDSL. A
DP is thus a "service centre" for the investor.
CDSL's system is based on centralised database architecture with on-line connectivity
with DPs. Because of this centralised architecture, the cost for setting up a DP outfit
under CDSL system is significantly lower. Similarly, the recurring costs to be incurred by
a CDSL-DP in terms of maintaining back-ups and the related data storage are minimal.
This enables a CDSL-DP to offer depository services to investors at an attractive price
and at the same time achieve break-even faster at much lower volumes. The centralised
architecture also allows CDSL-DP to make available to the investors a to-the-minute
status of their account and transactions. CDSL-DPs can also set up branches with direct
electronic connectivity with CDSL.

CDSL perform a wide range of securities related functions through DPS. The services of
Depository participants are as follow:
1. To record and maintenance of individual investors beneficial holding in an electronic
form.
2. Dematerializations of physical securities and Dematerializations of securities.
3. To give facility for locking of investor accounts.
4. To give facility for pledge and hypothecation of securities.
5. To make settlement of trades in electronic shares.
6. To issue a form for public offerings.

Exchanges in India

The stock exchanges are the important player of the capital market. They are the citadel of
capital and fortress of finance. They are the platform of trading in securities and as such they
assists and control the buying and selling of securities. Thus, stocks exchanges constitute of a
market where securities issued by the central and state, governments, public bodies and joint
stock companies are traded. There are mainly four stock exchanges in India as follow:

1. Bombay Stock Exchange (BSE)

2. National Stock Exchange (NSE)

3. The Over The Counter Exchange of India (OTCEI)

4. Regional Stock Exchanges

1. Bombay Stock Exchange (BSE):

The BSE is a voluntary, nonprofit making association of broker members. It emerged as premier
sock exchange after the 1960s. T increased pace of industrialization caused by the two world
wars, protection to the domestic industry and the governments fiscal policies aided the growth
of new issues which, in turn, helped the BSE to prosper. The BSE dominated the Indian capital
market b accounting for more than 60 per cent of the all India turnover. Until 1992, the BSE
operated like a closed club of select members. The SEBI taking over the reins of the stock
market, the BSE had brought about changes in its operational policies. On March 1995 the BSE
had open outcry system of trading, the BSE turned to electronic trading whereby brokers trade
using computers and technology. This system is known as the BSE on line trading system. This
system helped in improving trading volumes, significantly reducing the spread between buy and
sell orders, better trading in odd lot shares, fixed income instruments, and dealings in the
renunciation of right shares. The BSE is still in the process of reforming itself. The involvement
of BSE brokers and its elected members in a series of scams has affected its image and small and
institutional investors have more or less lost faith in it. It is in the process of organising and
restructuring itself into a corporate entity

2. National Stock Exchange (NSE): The NSE was set up in 12th November 1992 to
encourage stock exchange reform through system modernization and competition. The
reach of NSE has been extended to 21 cities of which six cities dont have stock
exchanges of their own. It is an electronic screen based system where members have
equal access and equal opportunity of trade irrespective of their location in different parts
 of the country as they are connected trough a satellite network. The system helps to
ingrates the national market and provides a modern system with a complete audit trial of
all transactions. The NSE establishes a nationwide trading facility for equities, debt
instruments and hybrid. It insures all investors all over the country equally access through
an appropriate communication network. It provide a fair, efficient, and transparent
securities market to investors through an electronic trading system, and to provide the
current international standards of securities markets. The NSE introduced for the first
time in India, fully automated screen based trading eliminating the need for physical
trading floors. The NSE was the first exchange to grant permission to brokers for internet
trading. NSE incorporated a separate entity NSE IT LTD in October 1999 to service the
securities industry in additional to the management of IT requirement of NSE. The NSE
was the third largest exchange in the world in 2005 in terms of the number of
transactions.
3. The Over The Counter Exchange of India (OTCEI)
The OTCEI was promoted jointly by the ICICI, SBI, UTI, Capital markets Ltd., Can ban
Financial services Ltd., LIC, GIC. It was recognised as a stock exchange under the
securities contracts act 1956 with effect from august 23 1989. The OTCEI was
incorporated as a company under section-25 of the companies act 1956 on September 20
1990, with an authorized capital of Rs. 5 crore. The OTCEI is based on the model of
national association of securities dealers automated quotation (NASDAQ) of USA, with
modifications to suit the Indian conditions. It commenced operations from October 6
1992. The OTCEI arose out of the need to have a second tire market in t he country. It
was set up to provide small and medium companies.
It allowed companies with a paid up capital as low as 30 lacs to get listed, It
brought screen based trading system in vogue for the first time; this was quite different
from the open outcry system at BSE. Moreover, each strip listed on the exchange had at
least two market makers who continuously gave two way quotes. Market makers are
merchant bankers willing to make a market in securities by continuously offering buy and
sell quotes. They act as a dealer cum stockiest and do not charge any commission or
brokerage. Their profit margin is the spread between the bid and offer prices. A voluntary
market maker can be appointed for a period of six months. Market making is a unique
concept of OTCEI. The other player on OTCEI is the custodian or registrar a safe keeper
 of share certificates. The OTCEI provides a liquid cash market for retail investors with a
T+3 rolling settlement systems and no problem of bad of short deliveries. 4. Regional
Stock Exchanges The regional stock exchanges provided investors an access to big
brokers in Mumbai. They also served as a link between the local companies and local
investors. They promoted trading in local scripts. This lead to a competition among issuer
and they listed their securities on as many exchanges as possible to attract investors from
all over the country. Each regional stock exchange followed its own practice and
procedures in respect of listing and trading of securities, clearing and settlement of
transaction, and risk containment measures. Following exchanges are Regional Stock
Exchanges.
1. Bombay Stock Exchange
2. National Stock Exchange
3. Over The Counter Stock Exchange
4. Kolkata Stock Exchange
5. Uttar Prades Stock Exchange
6. Ahmedabad Stock Exchange
7. Delhi Stock Exchange
8. Pune Stock Exchange
9. Ludhiana Stock Exchange
10. Bangulore Stock Exchange
11. Hydrabad Stock Exchange
12. Saurashtra and Kachchh Stock Exchange
13. Chennai Stock Exchange
14. Madhyaprades Stock Exchange
15. Vadodara Stock Exchange
16. Guwahati Stock Exchange
17. Bhuvaneshwar Stock Exchange
18. Coachin Stock Exchange
19. Magadh Stock Exchange
20. Coimbatore Stock Exchange
21. Jaipur Stock Exchange
22. Manglore Stock Exchange

Indexes of BSE

1. SENSEX:
BSE SENSEX or Bombay Stock Exchange Sensitive Index is a value-weighted index
composed of 30 stocks started in April, 1984. It consists of the 30 largest and most
actively traded stocks, representative of various sectors, on the Bombay Stock
 Exchange. These companies account for around one-fifth of the market capitalization
of the BSE. At irregular intervals, the Bombay Stock Exchange (BSE) authorities
review and modify its composition to make sure it reflects current market conditions.
The index is calculated based on a free-float capitalization method; a variation of the
market cap method. Instead of using a company's outstanding shares it uses its float,
or shares that are readily available for trading. The free-float method, therefore, does
not include restricted stocks, such as those held by company insiders.
2. BSE National Index:
This made is trade up of 100 scrips with 1982-84 as the base year. The special
features of this index is that it includes prices of scrips in other major Region stock
exchanges i.e. Delhi, Calcutta, Ahmedabad and Madras, bangulore etc. The average
price of the scrip is taken for the compilation of the index.
3. BSE 200:
It was introduced in May 1994 wit 1989-90 as the base year. This index consists of
equity shares of 200 companies selected on the basis of market capitalisation, volume
of turnover and strength of the companies fundamentals. It comprises if scrips of both
specified and non-specified groups. The average price of the scrip is taken for the
compilation of the index.
4. Dollex:
Dollex is nothing but BSE-200 Dollar values so that may be useful to foreign
investors. This index consists of equity shares of 200 companies selected on the basis
of market capitalisation, volume of turnover and strength of the companies
fundamentals. It comprises if scrips of both specified and non-specified groups. In
Dollex, The BSE 200 is modified by dividing the current rupee market value by
rupee-dollar conversion rates.
5. BSE 500
It was introduced in 1999 with the base year 1999 itself. It is treated to be a standard
index covering all sections of the economy as well as the major part of capitalization.
This index consists of equity shares of 500 companies selected on the basis of market
capitalisation, volume of turnover and strength of the companies fundamentals. The
average price of the scrip is taken for the compilation of the index.
Indexes of NSE: The common and popular name of the NSE index in CNX index All NSE
indexes are prepared by the Indian Index Services and products Ltd. (IISL) which is as join
venture of NSE and CRISIL and S & P.

The CNX stands for following:

C = CRISIC

N = NSE

X = Index

The letters S & P with any index indicates that it is supported by standard and poor.

1. S & P CNX NIFTY:

It is popular index of NSE. It was introduced in April 96 with 95 as the base year. It
comprised of a well-diversified 50 stock index accounting for 23 sectors of the
economy of the total traded value of NIFTY stocks is about 59% of the total market
capitalization. The average price of the scrip is taken for the compilation of the index.

2. S & P CNX DIETY:

It is popular index of NSE. It is nothing but S & P CNX NIFTY expressed in dollars
and hence, it is basically a dollar dominated index. So that may be useful to foreign
investors. It comprised of a well-diversified 50 stock index accounting for 23 sectors
of the economy of the total traded value of NIFTY stocks is about 59% of the total
market capitalization. The average price of the scrip is taken for the compilation of
the index. It is computed at one line rupee, Dollar exchange rate.
3. CNX NIFTY Junior:
This index was launched in December 1996 and S & P CNX NIFTY and CNX
NIFTY Junior together account for 100 most liquid stocks in India. The average price
of the scrip is taken for the compilation of the index. The two indexes are
synchronized so that they will always operate as disjoint sets in the sense that as that a
stock will never appear in both indexes at the same time.
4. S & P CNX 500 Equity Index:
 It comprises of 500 stock covering 79 companies. It is purely a market capitalization
weighted index. It covers 97% of the total turnover in BSE and 73% of the total
market capitalization. 5. CNX Midcap 200 Index: As per the very name implies, it is
the index for the stock of mid cap companies, covering industries having market
capitalization between Rs. 150 crores and Rs. 1000 crores.
5. CNX Segment Indexes:
This index reflects the stock market performance of the various segments of the
Indian corporate sector like multinationals, and PSUs etc.
6. NSE Government Security Index:
This index is meant for all government of India bonds issued after April 1992 but
redeemable after 1997. The base date of the Index is 1st January, 1997. This index is
calculated on daily basis with the help of market capitalization.
Trading Cycle
Earlier, settlement was done at the end of the settlement period which varied from 14
days to 30 days, depending on the securities traded. The introduction of the rolling
settlement in 2001, led to the settlement being carried out in T+5 days, i.e., the 5th
day after the trade. This settlement time reduced to T+3 in 2002 and T+2 in 2003.
This is in accordance with international standards.

Demutualization
Stock exchanges were owned, controlled and managed by brokers. This led to a
conflict of interest over the settlement of disputes as self got precedence over
regulations. The regulators advised the stock exchanges for 51% representation by
non-broker members. In May 2007, 51% of the equity share capital of the BSE was
placed with Indian Corporate, non-broker members, private equity funds etc.
USES OF DERIVATIVES:

Derivatives are supported to provide the following services:

One of the most different services provided by the derivatives is to control, avoid, shift and
manage efficiently different types of risks through various strategies like hedging, arbitraging,
spreading, etc. derivatives assist the holders to shift or modify suitably the risk characteristics of
their portfolios.

These are specifically useful in highly volatile financial market conditions like erratic trading.
Highly flexible interest rates, volatile exchange rates and monetary choice

Derivatives serves as barometers of the future trend in prices which result in the discovery of
new prices both on the spot and future markets. Further, they help in disseminating different
information regarding the futures markets trading of various commodities and securities to the
society which enable to discover or form suitable or correct or true equilibrium prices in the
markets. As a result, they assist in appropriate and superior allocation of resources in the society.

As we see that in derivatives trading no immediate full amount of the transaction is required
since most of them are based on the margin trading. As a result, large number of traders,
speculaters, arbitrageurs operates in such markets. So derivatives trading enhance liquidity and
reduce transaction costs in the markets for underlying assets.

The derivatives assist the investors, traders and managers of large pools of funds to devise such
strategies so that they make proper asset allocation increase their yields and achieve other
investment goals.

It has been observed from the derivatives trading in the market that the derivatives have some
then out price fluctuating, squeeze the price spread, integrated price structure at different points
of time and remove gluts and shortage in the market.
The derivatives trading encourages the competitive trading in the markets, different risk taking
performance of the market operates like speculators, hedgers, traders, arbitrageurs, etc. resulting
in increase in trading volume in the country. They also attract young investors, professionals and
others experts who will act as catalyst to the growth of financial markets.

Lastly, it is observed that derivatives trading develop the market towards complete markets.
Complete market concept refers to that situation where no particular investors be better off than
others. Or patterns of all additional securities are spanned by the already existing securities in it,
or there is no further scope of additional security.

Definition:

Derivative is a product whose value is derived from the value of one or more basic variables,
called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying
asset can be equity, firex, commodity or any other asset. For example, wheat farmers may wish
to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a
transaction is an example of a derivative. The price of this derivative is driven by the spot price
of wheat which is the underlying.

In the Indian context the securities contracts (regulation) act, 1956 defines derivative to
include-

1. A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
2. A contract which derives its value from the prices, or index of prices, of underlying
securities.
3. In the international markets, various derivative products are traded. To start

With, we need to understand the following three products.

Forward.
Future, and
Options.
What are forward contracts?
Forward contract is a one to one bipartite contract, which is to be performed in future at
the terms decided today. Let us understand the concept with the help of as illustration.
Illustration:
Two parties A and B entire in to a contract to buy and sell 100 shares of SBI at Rs.900 per
share, two months down the line from the date of contract. Assume A is the buyer and B
is the seller. In the instant case, product (share of SBI), quantity of the product (100
shares), product price (900) and time of delivery (2 months from the date of contract)
have beer. Determined and well understand in advance by the both the parties concerned.
Delivery and payment (settlement of the trade) will take place ass per the terms of this
contract on the designated date and place. This is a simple example of forward contract.

Forward contracts are being used in India on large scale in the foreign exchange market
to cover the currency risk.

Forward contracts, being negotiated by the parties on one to one basis, offer the
tremendous flexibility to them to articulate the contract in terms of price, quantity, quality
( in case of commodity), delivery time and place. Forward contracts are plagued with
poor liquidity and default risk

Products, participants and functions:

Derivatives contracts are of different types. The most common ones are forwards, futures,
options and swaps. Participants who trade in the derivatives market can be classified
under the following three board categories - hedgers, speculators, and arbitragers.

1. Hedgers: the farmers example that we discussed about was a case of hedging.
Hedgers face risk associated with the price of an asset. They use the futures or option
markets to reduce or eliminate this risk.
2. Speculators: speculators are participants who to bet on future movements in the price
of an asset. Futures and options contracts can give them leverages: that is, by putting
in small amount of money upfront, they can take large positions on the market. As a
result of this leveraged speculative position, they increase the potential for large gains
as well as large losses.

3. Arbitrages: arbitragers work at making profits by taking advantage of discrepancy

between prices of the same product across different markets. If, for example, they are
the futures price of an asset getting out of line with the cash price, they would take
offsetting positions in the two markets to lock in the profit.
 Whether the underlying asset is a commodity or a financial asset, derivative markets
performs a number of economic functions.

Prices in an organized derivatives market reflect the perception of market participants

about the future and lead the prices of underlying to the perceived future level. The prices
of derivatives coverage with the prices of the underlying at the expiration of the
derivative contract. Thus derivatives help in discovery of future as well as current prices.
The derivative market helps to transfer risks from those who have them but may not like
them to those who have an appetite for them.
Derivatives, due to their inherent nature, are linked to the underlying cash markets.
With the introduction of derivatives, the underlying market witnessed higher trading
volumes because of participation by more players who would not otherwise participated
for lack of an arrangement to transfer risk.
Speculative traders shift to a more controlled environment of the derivatives market. In
the absence of an organized derivatives markets. Margining, monitoring and surveillance
of the activities of various participants become extremely difficult in these kinds of mixed
markets.
An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity. Derivatives have a history of attracting many
bright, creative, well-educated people with an entrepreneurial attitude. They often
energize others to create new products and new employment opportunities, the benefit of
which is immense.
Derivatives markets help increase savings and investment in the long run. The transfer of
risk enables market participants to expand their volume of activity.

Futures

Futures markets were designed to solve the problems that exist in forward markets. A futures
contract is an agreement between two parties to buy or sell an asset at a certain time in future at a
certain price. But unlike forward contacts, the futures contracts are standardized and exchange
traded. To facilitate liquidity in the future contracts, the exchange specifies certain standard
quality of the underlying instrument, a standard quantity and quality of the underlying instrument
that can be delivered, and a standard timing of such settlement. A futures contract may be offset
prior to maturity by entering into an equal and opposite transaction. More than 99% of futures
transactions are offset this way.

The standardized items in a futures contract are:

Quantity of the underlying

Quality of the underlying
The date and the month of delivery
The units of price quotation and minimum price change
Location of settlement

Futures terminology:

Spot price:

The price at which an asset trades in the spot market.

Futures price:

The price at which a contract the futures contract trades in the futures market.

Contract cycle:

The period over which a contract trades. The commodity future contracts on the NCDEX have
one-month, two-month and three-month expiry cycles, which expire on the 20th day of the
delivery month. Thus a January expiration contract expires on the 20 th of January and February
expiration contract ceases trading on the 20th February. On the next trading day following the
20th, a new contract having a three-month expiry I introduced for trading.

Expiry date:

It is the date specified in the futures contract. This is the last day on which the contract will be
traded, at the end of which it will cease to exist.

Delivery date:
The amount of asset that has to be delivered under one contract. For instance, the delivery unit
for futures on long staple cotton on the NCDEX is 55 bales. The delivery unit for the silver
futures contract is 30 kg.

Basis:

Basis can be defined as the future price minus the spot price. There will be a different basis for
each delivery month for each contract. In a normal market, basis will be positive. This reflects
that futures prices normally exceed spot prices.

Cost of carry:

The relationship between futures prices and spot prices can be summarized in terms of what is
known as the cost of carry. This measures the storage cost plus the interest that is paid to finance
the asset less the income earned on the asset.

Initial margin:

The amount that must be deposited in the margin account at the time a futures contract is first
entered into is known as initial margin.

Marking to market (MTM):

In the futures market, at the end of each trading day, the margin account is adjusted to reflect the
investors gain or loss depending upon the futures closing price. This is called marketing to
market.

Maintenance margin:

This is somewhat lower than the initial margin. This is set to ensure that the balance in the
margin account never becomes negative. If the balance in the margin account falls below the
maintenance margin, the investor receives a margin call and is expected to top up the margin
account to the initial margin level before trading commences on the next day.
 As discussed earlier, futures contract is a standardized, transferable, exchange-traded contract
that requires delivery of a commodity, bond, currency, or stock index, at a specified price, on a
specified future date. Generally, the delivery does not occur, instead, before the contract expires,
the holder usually squares their position by paying or receiving the difference between the
current market price of the underlying asset and the price stipulated in the contract.

Unlike options, futures contracts convey an obligation to buy. The risk to the holder is unlimited.
Because the payoff pattern is symmetrical, the risk to the sellor is unlimited as well. Money lost
and gained by each party on a futures contract are equal and opposite. In other words, a future
trading is a zero-sum proposition.

Futures contracts are forward contracts, meaning they represent a pledge to make a certain
transaction at a future date. The exchange of assets occurs on the date specified in the contract.
Futures are distinguished from generic forward contracts in that they contain standardized terms,
trade on a formal exchange, are regulated by overseeing agencies, and are guaranteed by
clearinghouses. Also, in order to insure that payment will occur, futures have a margin
requirement that must be settled daily. Finally, by making an offsetting trade, taking delivery of
goods, or arranging for an exchange of goods, futures contracts can be closed.

How does futures trading works?

Futures contracts are purchased when the investor expects the price of the underlying security to
rise. This is known as going long. Because he has purchased the obligation to buy goods at the
current price, the holder will profit if the price goes up, allowing him to sell his futures contract
for a profit or take delivery of the goods on the future date at the lower price.
The opposite of going long is going short. In this case, the holder acquires the obligation to sell
the underlying commodity at the current price. He will profit if the price declines before the
future date.

Hedgers trade futures for the purpose of keeping price risk in check. Because the price for a
future transaction can be set in the present, the fluctuations in the interim can be avoided. If the
price goes up, the holder will be buying at a discount. If the price goes down, he will miss out on
the new lower price. Hedging with futures can even be used to protect against unfavorable
interest rate adjustments. While hedgers attempt to avoid risk, speculators trade delivery on
goods. Like options, futures contracts can also be used to create spread that profit from price
fluctuations.

Accounts used to trade futures must be settled with respect to the margin on a daily basis. Gains
and losses are tallied on the day that they occur. Margin accounts that fall below a certain level
must be credited with additional funds.

Difference between forward and futures contracts:

1. Forward contracts, being negotiated by the party on one to one basis, offer the
tremendous flexibility to them to articulate in terms of the price, quantity, quality
(in case of commodities), delivery time and place.
This flexibility is missing in case of futures contracts as contracts have standard
quantity, quality,(in case of commodities), delivery and place
2. In the forward market, one party may be at an absolute disadvantage in case of
non availability of the information on underlying to him\ her.
 In the future market, geographically segmented areas are integrated as futures
provide a common platform to all operators to operate in. therefore, every bit of
information gets quickly reflected on the prices of asset which results in
elimination of this non-availability of information risk, which exist in the forward
market.
3. Further problem in the forward contracts is the final settlement. Assume that A
and B have entered into the contract to buy and sell the shares. Assume, 15 days
down the line, Mr. wants to transfer his position to say Mr., it is to be understood
that Mr. is stranger to the whole transaction between A and C. means when this
come to settlement. A will take delivery of shares from B and give it to C and then
take money from C to give it to B. similarly, B may enter into a contract with say
party D, to which Mr. would be stranger.

In futures market, clearing corporation\ house maintains the accounts of all the
operators in the market and so is in position to tell on the last trading day of the
contract that two are the counter-parties to each other and provides the solution to
the settlement problem which is very acute in the forward market.

Forward contracts are standardized and traded on the exchange become futures contracts.
Therefore all futures contracts are standardized forward contracts.

Further, we may say that forward and futures do the same but futures do it better and more
efficiently because of transparency and robust risk management in their case. These futures
contracts may be settled through physical delivery of assets or only in cash settlement features of
these futures contracts are well defined in the contract specification by the exchange. For
example, the entire index based derivatives (index futures and index option), worldwide are
essentially settled in cash. These contracts, to be settled only in cash, are designed as cash settled
contracts.
The emergence of the market for derivative products, most notably forwards, futures and options,
can be traced back to the willingness of risk-averse economic agents to guard themselves against
uncertainties arising out of fluctuations in asset prices. By their very nature, the financial market
is marked by a very high degree of volatility. Through the use of derivative products, it is
possible to partially or fully transfer price risks by locking in asset process. As instruments of
risk management, these generally do not influence the fluctuations in the underlying asset prices.
However, by locking in asset prices, derivative products minimize the impact of fluctuations in
asset prices on the profitability and cash flow situation of risk-averse investors.

The national stock exchange of india limited (NSE) commenced trading in derivatives with the
launch of index futures on June 12, 2000. The futures contracts are based on the popular
benchmark S&P CNX nifty index.

Factors driving the growth of derivatives:

Over the last three decades, the derivative market has been a phenomenal growth. A large variety
of derivatives have been launched at exchanges across the world. Some of the factors driving the
growth of financial derivatives are:

1. Increased volatility in asset prices in financial markets

2. Increased integration of national financial markets with the intenational markets.
3. Development of more sophisticated risk management tools, providing economic
agents a wider choice of risk management strategies, and
4. Innovations in the derivatives markets, which optimally combine the risks and returns
over a large number of financial asset leading to higher returns, reduced risk as well
as transactions costs as compared to individual financial assets.
 5. Marked improvements in communication facilities and sharp decline in their costs.

Setting futures contracts in India:

Futures contracts are usually not settled with physical delivery. The purchase or sale of an
offsetting position can be used to settle an existing position, allowing the speculator or hedger to
realize profits or losses from the original contract. At this point the margin balance is returned to
the holder along with any additional gains, or the margin balance plus profit as a credit toward
the holders loss. Cash settlement is used for contracts like stock or index futures that obviously
cannot result in delivery.

The purpose of the delivery option is to insure that the futures rice and the cash price of good
coverage at the expiration date. If this were not true, the good would be available at two different
prices at the same time. Traders could then make a risk- free profit by purchasing stocks in the
market with the lower price and selling in the futures market with the higher price. That strategy
is called arbitrage. It allows some traders to profit from very small differences in price at the time
of expiration.

Trading in futures is regulated by the Securities and Exchange Board of India (SEBI). SEBI
exists to guard against traders controlling the market in an illegal or unethical manner, and to
prevent fraud in the futures market.

Advantages of Futures Trading in India:

There are many advantages of trading futures over other investment alternatives such as savings
accounts, stocks, bonds, options, real estate and collectibles.

1. High leverage.

The primary attraction, of course, is the potential for large profits in a short period of time. The
reason that futures trading can be so profitable is the high leverage. To own a futures contract
an investor only has to put up a small fraction of the value of the contract (usually around 10-
20%) as margin. In other words, the investor can trade a much large amount of the security than
if he bought it outright, so if he has predicted the market movement correctly, his profits will be
multiplied (ten-fold on a 10% deposit). This is an excellent return compared to buying and taking
physical delivery in stocks.

2. Profit in both Bull & Bear markets.

In futures trading, its easy to sell (also referred to as going short) as it is to buy (also referred to
as going long). By choosing correctly, you can make money whether prices go up or down.
Therefore, trading in the futures markets offers the opportunity to profit from any potential
economic scenario. Regardless of whether we have inflation or deflation, boom or depression,
hurricanes, droughts, famines or freezes, there is always the potential for profit making
opportunities.

3. Lower transaction cost.

Another advantage of futures trading is much lower relative commissions. Your commission for
trading a future contract is one tenth of a percent (0.10-0.20%). Commissions on individual
stocks are typically as much as one percent for both buying and selling.

4. High liquidity.

The most futures markets are very liquid, i.e. there are huge amounts of contracts traded every
day. This ensures that market orders can be placed very quickly as there are always buyers and
sellers for most contracts.

The phenomenal growth of financial derivatives across the world is attributed the fulfillment of
needs of hedgers, speculators and arbitragers by these products. We first look at how trading
futures differs from trading the underlying spot. We then look at the payoff of these contracts,
and finally at how these contracts can be used by various entities in the economy.

A payoff is the likely profit or loss that would accrue to a market participant with change in the
price of the underlying asset. This is generally depicted in the form of payoff diagrams which
show the price of the underlying asset on the X-axis and the profits or loss on the Y-axis.

Pricing futures:
Pricing of future contract is very simple. Suing the cost of carry logic, we calculate the value of a
futures contract. Every time the observed price deviates from the fair value, arbitragers would
enter into trades to capture the arbitrage profit. This in turn would push the futures price back to
its fair value. The cost of carry model used for pricing futures is given below.

Whereas:

R=cost of financing (using continuously compounded interest rate)

T=Time till expiration in years.

Application of futures

We look here at some applications of futures contracts. We refer to single stock futures.
However since the index is nothing but security whose price or level is a weighted
average securities constituting an index, all strategies that can be implemented using
stock futures can also be implemented using index futures.

Hedging: long security, sell futures:

Futures can be used as an effective risk management tool. Take the case of an investor
who holds the shares of a company and gets uncomfortable with market movements in
the short run. He sees the value of his security falling from Rs.450 to Rs.390 in the
absence of stock futures; he would either suffer the discomfort of a price fall or sell the
security in anticipation of a market upheaval. With security futures he can minimize his
price risk. All he needs to do is enter into an offsetting stock futures position in this case,
take on a short futures position. Assume that the sport price of the security he holds in
 Rs.390. two month futures cost him Rs.402. for this he pay an initial margin. Now if the
security falls any further, he will suffer losses on the security he holds. However, the
losses he suffers on the security, will be offset by profits he makes on his short futures
position. Take for instance that the price of his security falls to Rs.350. the fall in the
price of the security will result in a fall in the price of futures. Futures will now trade at a
price lower than the price at which he entered into a short futures position benches his
short futures position will start making profits. The loss of Rs.400 incurred on the
security he holds, will be made up by the profits made on his short futures position.
Index futures in particular can be very effectively used to get rid of the market risk
of portfolio. Every portfolio contains a hidden index exposure or a market exposure. This
statement true for all portfolios, whether a portfolio is composed of index securities or
not, in the case of portfolios, most of the portfolio risk is accounted for by index
fluctuations
(unlike individual securities, where only 30-60% of the securities risk is accounted for by
index fluctuations). Hence a position long portfolio and short nifty can often become one
tenth as risky as the long portfolio position.

Warning:

Hedging does not always make money. The best that can be achieved using hedging is the
removal of unwanted exposure, i.e. unnecessary risk/ the hedged position will make less profit
than the un hedged position, half the time. One should not enter into a hedging strategy hoping to
make excess profits for sure; all that can come out of hedging is reduced risk.

Speculation: Bullish security, by futures:

Take the case of a speculator who has a view on the direction of the market. He would like to
trade based on this view. He believes that a particular security that trades at Rs.1000 is
undervalued and expects its price to go up in the next two- three months. How can he trade based
on this belief? In the absence of a deferral product, he would have to buy the security and hold
onto it. Assume he buys 100 shares which cost him one lack rupees. His hunch proves correct
and two months later the security closes at Rs.1010. he makes a profit of Rs.1000 on an
investment of Rs.100000 for a period of two months. This works out to an annual return of 6%.

Today a speculator can take exactly the same position on the security by using futures
contracts. Let us see how this works. The security trades at Rs.1000 and the two-month futures
trades at 1006. Just for the sake of comparison, assume that the minimum contract value is
100000. He buys 100 security futures for which he pays a margin of Rs.20000. two months later
the security copses at 1010. On the day of expiration, the futures price converges to the spot price
of 12 %. Because of the leverage they provide, security futures from an attractive option for
speculator.

Speculation: bearish security, sell future:

Stock futures can be used by a speculator who believes that a particular security is overvalued
and is likely to see a fall in price. How can he trade based on his opinion? I the absence of a
deferral product, there wasnt much he could do to profit from his opinion. Today all he needs to
do is sell stock futures.
Let us understand how this works. simple arbitrage ensures that futures on an individual
securities move correspondingly with the underlying security, as long as there is sufficient
liquidity in the market for the security. If the security price rises, so will the futures price. If the
security price falls, so will the futures price. Now take care of the trader would expects to see a
fall in the price of ABC ltd. He sells one two month contract of futures on ABC ltd at R.240
(each contact for 100 underlying shares). He pays a small margin on the same. Two months later,
when the futures contracts expires, ABC closes at Rs.220. on the day of expiration, the spot and
the futures price converges. He has made a clean profit of Rs.20 per share. For the one contract
that he bought, this works out to be Rs.2000.
Arbitrage: overpriced futures: buy spot, sell futures:
The cost of carry ensures that the futures price stay in tune with the spot price. Whenever the
futures price deviates substantially from its fair value, arbitrages opportunities arise.
If you notice that futures on a security that you have been observing seem ovPriced
1. On day one, borrow funds; buy the security on the cash or spot market at Rs.1000
2. Simultaneously, sell the futures on the security at Rs.1025
3. Take delivery of the security purchased and hold the security for a month.
 4. On the futures expiration date, the spot and the futures price converge. Now unwind the
position.
5. Say the security closes at Rs.1015, sell the security.
6. Futures position expired with profit of Rs.10.
7. The result is a riskless profit of Rs15 on the spot position and Rs.10 on the futures
position.
8. Return the reward funds.

When does it make sense to enter into this arbitrage? If your cost of borrowing funds to buy the
security is less than the arbitrage profit possible, it makes sense for you to arbitrage. This is
termed as cash and carry arbitrage. We have to remember, however that exploiting an arbitrage
opportunity lnvolves trading on the spot and futures market. In the real world, one has to build in
the transaction costs into the arbitrage strategy.

Arbitrage: Under-priced futures: buy futures, sell spot:

Whenever the futures price deviates substantially from its fair value, arbitrage opportunities
arise. It could be the case that you notice the futures on a security you hold seem under-priced.
How can you cash in on this opportunity to earn riskless profits? Say for instance, ABC ltd.
Trades at Rs.1000. one month ABC futures trade at R.965 and seem under-prices. As an
arbitrageur, you can make riskless profit by entering into the following set of transactions.

1. On day one, sell the security in the cash or spot market at Rs.1000.

2. Make delivery of the security.

3. Simultaneously, buy the futures on the security at Rs.965.

4. on the futures expiration date, the spot and the futures price converge. Now unwind the
position.

5. say the security closes at Rs.975. buy back the security.

6. the futures option expires with a profit of Rs.10.

7. the result is riskless profit of Rs.25 on the position and Rs.10 on the future position.
If the returns you get by investing in instruments are more than the return from the arbitrage
trades, it makes sense for you to arbitrage. This is termed as reverse cash and carry arbitrage. It is
this arbitrage activity that ensures that the spot and futures prices stay in line with the cost of
carry as we can see; exploiting arbitrage involves trading on the spot market. As more and more
players in the market develop the knowledge and skills to do cash and carry and reserve cash and
carry, we will see increased volumes and lower spreads in both the cash as well as the derivatives
market.

Options:

Today worldwide options are traded on wide range of underlying assets. Like commodities,
securities, currencies, indices, and metals. An active over the counter market (OTC market, also
called unorganized market) in option has been in existence in the U.S for more than a century.
(OTC market is off the exchange market). In OTC market options on individual scrips were
traded in the U.S under the auspices of put and call dealers association and were first traded on
an organized exchange in 1973, when the Chicago Board Option Exchange (CBOE) came into
being. CBOE listed call options on 18 stocks and since then, the growth in the business has been
unprecedented in both organized and unorganized markets. Let us understand the basics of
options.

Options are fundamentally different from forward and futures contracts. An option gives the
holder of the option the right to do something. The holder does not have to exercise this right. In
contract, in a forward or futures contract, the two parties have committed themselves to doing
something. Whereas it costs nothing (except margin requirements) to enter into a futures
contract, the purchase of an option requires an up-front payment.

Option terminology:
Options: commodity options are options with a commodity as the underlying. For instance a
gold options contract would give the holder the right to buy or sell specified quantity of gold at
the price specified in the contract.

Stock options: tock options are options on individual stocks. Options currently trade on over
500 stocks in the United states. A contract gives the holder the right to buy or sell shares at the
specified price.

Buyer of an option: the buyer of an option is the one who by paying the option premium buys
the right but not the obligation to exercise his option on the seller writer.

Writer of an option: the writer of a call/ put option is the one who receives the option premium
and is thereby obliged to sell/ buy the asset if the buyer exercise on him.

There are two basic types of options, call options and put options.

Call option: A call option gives the holder the right but not the obligation to buy an asset by a
certain date for a certain price.

Put option: A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price.

Option price: option price is the price which the option buyer pays to the option seller. It is also
referred to as the option premium.

Expiration date: the date specified in the options contract is known as the expiration date, the
exercise date, the strike date or the maturity.

Strike price: the price specified in the options contract is known as the strike price or the
exercise price.

American options: American options are options that can be exercised at any time up to the
expiration date. Most exchange-traded options are American.
European options: European options are options that can be exercised only on the expiration
date itself. European options are easier to analyze than American options, and properties of an
American option are frequently reduced from those of its European counterpart.

In the money option: an in the money option is an option that would lead to a positive cash flow
to the holder if it were exercised immediately. A call option on the index is said to be in the
money when the current index stands at a level higher than the strike price (i.e. spot price strike
price). If the index is much higher than the strike price, the call is said to be deep in the money.
In the case of a put, the put is in the money if the index is below the strike price.

At the money option: at the money option is an option that would lead to zero cash flow if it
were exercised immediately. An option on the index is at the money when the current index
equals the strike price (i.e spot price = strike price).

Out of the money option: an out of the money option is an option that would lead to negative
cash flow it was exercised immediately. A call option on the index is out of the money when the
current index stands at a level which is less than the strike price (i.e. spot price strike price). If
the index is much lower than the strike price, the call is said to be deep out of the money. In the
case of put, the out is out of the money if the index is above the strike price.

Intrinsic value of an option: the option premium can be broken down into two components
intrinsic value and time value. The intrinsic value of a call is the amount the option is In the
money, if it is in the money. If the call is out of the money, its intrinsic value is zero.

Time value of an option: the time value of an option Is the difference between its premium and
its intrinsic value. Both calls and puts have time value. An option that is out-of-the-money or at-
the-money has only time value. Usually, the maximum time value exists when the option is at-
the-money. The longer the time to expiration, the greater is an options time value, all else equal.
At expiration, an option should have no time value.

Options payouts:
The optimality characteristic of option results in a non linear payoff for options in simple words,
it means that the losses for the buyer of an option are limited however the profits are potentially
unlimited. For a writer, the payoff is exactly the opposite. His profits are limited to the option
premium however his losses are potentially unlimited. These non linear payoffs are fascinating
as they lend themselves to be used to generate various payoffs by using combinations of options
and underlying. We look here at the six basic payoffs.

Payoff profile of buyer of asset

In the basic position, an investor buyer the underlying asset, Nifty for instance, for Rs.2220, and
sells it at a future date at an unknown price, once it is purchased, the investor is said to be long
the asset. The figure shows the payoff for a long position on the Nifty.

Payoff profile for seller of asset: short asset

In this basic position, an investor shorts the underlying asset, Nifty for instance, for 2220, and
buys it back at a future date at an unknown price, St. Once it is sold, the investor is said to be
short the asset. The figure shows the payoff for a short position on the Nifty.

Payoff profile for buyer of call options: long call

A call option gives the buyer the right to buy the underlying asset at the strike price specified in
the option. The profit or loss that the buyer makes on the option depends on spot price of the
underlying. If upon expiration, the spot price exceeds the strike price, he makes a profit. Higher
the spot price more is the profit he, makes. If the spot price of the underlying is less than the
strike price he lets his option expires unexercised. His loss in this case is the premium he paid for
buying the option. The figure give the payoff for the buyer of a three month call option with a
strike of Rs.2250 bought at a premium of Rs.86.6
The figure shows the profits or losses from a long position on the index. The investor bought the
index at Rs.2220. if the index goes up, he profits. If thee index falls he losses.

Payoff for investor who went Long Nifty at 2220

The following figure shows the profits or losses from a short position on the index. The investor
sold the index at Rs.2220. if the index falls, he profits. If the index rises, he makes losses.

Payoff for investor who went short Nifty at Rs.2220

The figure shows the profits or losses for the buyer of a three month Nifty Rs.2250 call option.
As can be seen as the spot Nifty rises, the call option is in the money. If upon expiration, Nifty
closes above the strike Rs.2250, the buyer would exercise his option and profit to the extent of
the difference between the Nifty-close and the strike price. The profits possible on this option are
potentially unlimited. However if Nifty falls below the strike of Rs.2250, he lets the option
expire. His losses are limited to the extent of the premium he paid for buying the option.

Payoff profile for writer of call options: short call

A call option gives the buyer the right to buy the underlying asset at the strike price specified in
the option. For selling the option, the writer of the option charges a premium. The profit or loss
that the buyer makes on the option depends on the spot price of the underlying. Whatever is an
buyers profit is the sellers loss. If upon expiration, the spot price exceeds the strike price, the
buyer will exercise thee option on the writer. Hence as the spot price increases the writer of the
option starts making losses. Higher the spot price, more is the loss he makes. If upon expiration
the spot price of the underlying is less than the strike price, the buyer lets his option expire
unexercised and the writer gets to keep the premium. In the following figure the payoff for the
writer of a three month call option with a strike of Rs.2250 sold at a premium of Rs.86.60.

The figure shows the profits or losses for the seller of a three-month Nifty Rs.2250 call option.
As the spot Nifty rises, the call option is in the money and the writer starts making losses. If
upon expiration, Nifty closes above the strike of Rs.2250, the buyer would exercise his option on
the writer who would suffer a loss to the extent of the difference between the Nifty close and the
strike price. The loss that can be incurred by the writer of the option is potentially unlimited,
whereas the maximum profit is limited to the extent of the upfront option premium of Rs.86.60
charged by him.

Payoff for writer of call option

Payoff profile for buyer of put options: Long put

A put option gives the buyer the right to sell the underlying asset at the strike price specified in
the option. The profit or loss that the buyer makes on the option depends on the spot price of the
underlying. If upon expiration, the spot price is below the strike price, he makes a profit. Lower
the spot price. More is the profit he makes. If spot price of the underlying is higher than the
strike price. He lets his option expire un exercises. His loss in this case is the premium he paid
for buying the option. The following figure gives the payoff for the buyer of a three month put
option with a strike of Rs.2250 bought at a premium of Rs.61.70

The following figure shows the profits or losses of a three month Nifty Rs.2250 put option. As
can be seen, as the spot Nifty falls, the put option is in the money. If upon expiration, Nifty
closes below the strike of Rs.2250, the buyer would exercise his option and profit to the extent of
the difference between the strike price and Nifty close. The profits possible on thi option can be
as high as strike price. However if nifty rises above the strike of Rs.2250, he lets the option
expire. His losses are limited to the extent of the premium he paid for buying the option.

Payoff profile for buyer of put options: Short put

A put option gives the giver the right to sell the underlying asset at the strike price specified in
the option. For selling the option, the writer of the option charges a premium. The profile or loss
that the buyer makes on the option depends on the spot price of the underlying. Whatever is the
buyers profit is the sellers loss. If upon expiration, the spot price happens to be below the strike
price, the buyer will exercise the option on the writer. If upon expiration the spot price of the
underlying is more than strike price, the buyer lets his option expire unexercised and the writer
gets to keep the premium. The following figure gives the payoff for the writer of three month
put option with strike of Rs.2250 sold at a premium of Rs.61.70.

Pricing of option:

An option buyer has the right but not the obligation to exercise on the seller. The worst that can
happen to a buyer is the loss of the premium paid by him. His downside is limited to this
premium, but his upside is potentially unlimited. This optionality is precious and has value,
which is expressed terms of the option price.

Just like in other free markets, it is the supply and demand in the secondary market that drives
the price of an option.

There are various models which help us get close to the true price of an option. Most of these are
variants of the celebrated black-scholes model formula so to price options we dont really need to
memorize the formula. All wee need to know is the variables that go in the model.
 The Black schools equation is done in continuous time. This requires continuous
compounding. The r that figures in this is In(1 + r). example: if the interest rate per
annum is 12%, you need to use In 1.12 or 0.1133, which is the continuously compounded
equivalent of 12% per annum.
N () is the cumulative normal distribution. N(d1) is called the delta of the option which is
a measure of change in option price with respect to change in the price of the underlying
asset.
Delta a measure of volatility, is the annualized standard deviation of continuously
compounded returns on the underlying. When daily sigma are given, they need to be
converted into annualized sigma.

Application of options

We look here at some applications of options contracts. We refers to single stock options here.
However since the index Is nothing but a security whose price or level is weighted average of
securities constituting the index, all strategies that can be implemented using stock futures can
also be implemented.

Hedging: have underlying buy puts

Owners of stocks or equity portfolio often experience discomfort about the overall stock market
moment. As an owner of stock or an equity portfolio, sometimes you may have a view that stock
prices will fall in the near future. At other times you may see that the market is in for a few days
or weeks of massive volatility, and you do not have an appetite for this kind of volatility. The
union budget is a common and reliable source of such volatility. Market volatility is always
enhanced for a one week before two weeks after a budget. Many investors simple do not want
the fluctuation of these three weeks. One way to protect your portfolio from potential downside
due to a market drop is to buy insurance using put options.

Index and stock options are cheap and easily implementable way of seeking this insurance. The
idea is simple. To protect the value of hours portfolio from falling below a particular level buy
the right number of put options with the right strike price. If you are only concerned about the
particular stock that you hold, buy put options on that stock. If you are concerned about the
overall portfolio, buy put options on the index. When the stock price falls our stock will lose
value and the put options bought by you will gain, effectively ensuring that the total value of you
stock plus pit does not fall below a particular level. This level depends on the strike price of the
stock options chosen by you. Similarly when the index falls, your portfolio will lose value and
the put options bought by you will gain, effectively ensuring that the value of our portfolio does
not fall below a particular level. Thi depends on the strike price of the index options chosen by
you.Portfolio insurance using put options is of particular interest to mutual funds who already
own well-diversified portfolios. By buying puts, the fund can limit its downside in case of a
market fall.

Trading system of derivatives:

S&P CNX nifty futures

A futures contract is a forward contract, which is traded on an Exchange. NSE commenced

trading in index futures on June 12, 2000. The index futures contracts are based on the popular
market benchmark S&P CNX Nifty index.

Selection criteria for indices:

NSE defines the characteristics of the futures contract such as the underlying index, market lot,
and the maturity date of the contract. The futures contracts are available for trading from
introduction to the expiry date.

Contract specifications
Trading parameters

Contract specifications

Security descriptor

The security descriptor for the S&P CNX futures contracts is;

Market type : N

Instrument type : FUTIDX

Underlying : NIFTY

Expiry date : Date of contract expiry

Instrument type represents the instrument i.e. futures on index.

Underlying symbol denotes the underlying index which is S&P CNX Nifty

Expiry date identifies the date of expiry of the contract

Underlying instrument

The underlying index is S&P CNX NIFTY.

Trading cycle:

S&P CNX Nifty futures contracts have a maximum of 3 month trading cycle the near month
(one), the next month (two) and the far month (three). A new contract is introduced on the
trading day following the expiry of the near month contract. The new contract will be introduced
for three month duration. This way, at any point in time, three will be 3 contracts available for
trading in the market i.e. one near month, one mid month and one far month duration
respectively.

Expiry day:

S&P CNX Nifty futures contracts expiry on the last Thursday of the expiry month, if the last
Thursday is a trading holiday, the contracts expire on the previous trading day.
Trading parameters:

Contract size:

The value of the futures contracts on Nifty may not be less than Rs.2 lac at the time of
introduction. The permitted lot size for futures contracts & options contracts shall be the same
for a given underlying or such lot size as may be stipulated by the Exchange from time to time.

Price steps:

The price step in respect of S&P CNX Nifty futures contracts is Rs.0.05.

Base prices:

Base price of S&P CNX Nifty futures contracts on the first day of trading would be theoretical
futures price. The base price of the contracts on subsequent trading days would be the daily
settlement price of the futures contracts.

Price bands:

There are no day minimum/maximum price ranges applicable for S&P CNX Nifty futures
contracts. However, in order to prevent erroneous order entry by trading members, operating
ranges are kept at +/- 10%. In respect of orders which have come under price freeze, members
would be required to confirm to the exchange that there is no inadvertent error in the order entry
and that the order is genuine. On such confirmation the exchange may approve such order.

Quantity freeze:

Order which may come to the exchange as a quantity freeze shall be based on the notional value
of the contract of around Rs.5 cores. In respect of orders which have come under quantity freeze,
members would be required to confirm to the exchange that there is no inadvertent error in the
order entry and that the order is genuine. On such confirmation, the exchange may approve such
order. However, in exceptional cases, the exchange may, at its discretion, not allow the orders
that have come under quantity freeze for execution for any reason whatever including non-
availability of turnover / exposure limits.

Order type / order, book / order attribute:

Regular lot order

Stop loss order
Immediate or cancel
Spread order

Trading:

NSE introduced for the first time in India, fully automated screen based trading. It uses a
modern, fully computerized trading system designed to offer investors across the length and
breadth of the country a safe and easy way to invest.

The NSE trading system called National Exchange for Automated Trading (NEAT) is a fully
automated screen based trading system, which adopts the principle of an order driven market.

Market Timings:

Trading on the derivatives segment takes place on all days of the week (except Saturdays and
Sundays and holidays declared by the Exchange in advance).

The market timing of the derivatives segment are:

Normal market / exercise market open time: 09:55 hours

Normal market close: 15:30 hours

Set up cut of time for position limit/collateral value: till 15:30 hours

Trade modification end time / exercise market: 16:15 hours.

Clearing and settlement:

National securities clearing corporation limited (NSCCL) undertakes clearing and settlement of
all trades executed on the futures and options (F&O) segment of the NSE. It also acts as legal
counterparty to all trades on the F&O segment and guarantees their financial settlement.

Clearing mechanism:

The clearing mechanism essentially involved working out open positions and obligations of
clearing members. This position considered for exposure and daily margin purposes. The open
positions of clearing members are arrived at by aggregating the open positions of all the trading
members an all custodial participants clearing through him, in contracts in which they have
traded. A trading members open position is arrived at as the summation of his proprietary open
position and clients open positions, in the contracts in which he has traded. While entering
orders on the trading members required identify the orders, whether proprietary or client through
indicator provided in the order entry screen. Proprietary positions are calculated on net basis for
each contract. Clients positions are arrived at by summing together net positions of each
individual client. A trading member open position is the sum of proprietary open position, client
open long position and client short position.

Settlement mechanism:

All futures and options contracts are such settled i.e through exchange of cash. The underlying
for index futures or options of Nifty index cannot be delivered. These contracts, therefore, have
to be settled in cash. Futures and options on individual securities can be delivered as in the spot
market. However, it has been currently mandated that stock options and futures would also be
cash settled. The settlement amount for a clearing member is netted across all their trading
members or clients, with respect to their obligations on marketed to market, premium and
exercise settlement.

Settlement of futures contracts:

Futures contracts have 2 types of settlements, the mark to market settlement which happens on a
continuous basis at the end of each day and the final settlement which happens on the last trading
day of futures contract.
MTM settlement:

All futures contracts for each member are marked to market (MTM) to the daily settlement price
of all relevant futures contracts at the end of each day. The profit or losses are computed as the
difference between:

1. The trade price and the days settlement price for contracts executed during the day but
not squared up.
2. The previous days settlement price and the current days settlemtn price for brought
forward contracts.
3. The buy price and the sell price for contracts executed during the dy and squared up.

Final settlement:

On expiration day of the futures contracts, after the close of trading hours, NSCCL marks all
positions of clearing member to the final settlement price end the resulting profit or loss is settled
in cash. Final settlement loss or profit amount is debited or credited to the relevant clearing
members clearing bank account on the day following expiry day of the contract.

Settlement prices for futures:

Daily settlement price on a trading day is the closing price of the respective futures contracts on
such day. The closing price for a futures contract is currently calculated as last half an hour
weighted average price of the contract in the F&O segment of NSE. Final settlement price is the
closing price of the relevant underlying index / security in the capital market segment of NSE, on
the last trading day of contract. The closing price of the underlying index / secriy is currently its
last half an hour weighted average value in the capital market segment of NSE.

Settlement of option contracts

Options contracts have three types of settlements, daily premium settlement, exercise settlement,
interim exercise settlement in the case of option contracts on securities and final settlement.
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 option sold by him.
The premium payable amount and the premium receivable amount are netted to compute the net
premium payable or receivable amount for each client for each option contract.

Exercise settlement:

Although most option buyers and sellers close out their options positions by an offsetting closing
transaction, an understanding of exercise can help an option buyer determine whether exercise
might be more advantages than an offsetting sale of the option. There is always a possibility of
the option seller being assigned an exercise once an exercise of an option has been assigned to an
option seller; the option seller is bound to fulfill his obligation even though he may not hae been
notified on the assignment.

Interim exercise settlement:

Interim exercise settlement takes place only for option contracts on securities. An investor can
exercise his in the money options at any time during trading hours, through is trading member.
Interim exercise settlement is effected for such options at the close of the trading hours, through
his trading member. Interim exercise settlement is effected for such options at the close of the
trading hours, on the day of exercise. Valid exercised option contracts are assigned to shot
positions in the option contract with the same series on a random basis, at the client level. The
clearing member who has exercised the option receives the exercise settlement value per unit of
the option from the clearing member who has been assigned the option contract.

final exercise settlement:

final exercise settlement is effected for all open long in the money strike price options existing at
the close of trading hours, on the expiration day of an option contract. All such along positions
are exercised and automatically assigned to short positions in options in option contracts with the
same series, on a random basis. The investor who has long in the money options on the expiry
date will receive the exercise settlement value per unit of the option from the investor who has
been assigned the option contract.

Regulatory framework:

SEBI set up a 24 member committee under the chairmanship of Dr. L. C. Gupta to develop the
appropriate regulatory framework for derivatives trading in India. On may 11th 1998 SEBI
accepted the recommendations of the committee and approved the phased introduction of
derivatives trading in India beginning with stock index futures.

The provisions in the SC(R) A and the regulatory framework developed there under govern
trading in securities. The amendment of the SC(R)A to include derivatives within the ambit of
securities in the SC(R)A trading in derivatives possible within the framework of the Act.

1. Any exchange fulfilling the eligibility criteria as prescribed in the L C Gupta committee
report can apply to SEBI for grant of recognition under section 4 of the SC(R)A, 1956 to
start trading derivatives. The derivatives exchange or segment should have a separate
governing council and representation of trading or clearing members shall be limited to
maximum of 40% of the total members of the governing council. The exchange would
have to regulate the sales practices its members and would have to obtain prior approval
of SEBI before start of trading in any derivative contract.
2. The exchange should have minimum 30 members
3. The members of an existing segment of the exchange would not automatically become
the members of derivative segment. The members of an derivative segment would need
to fulfill the eligibility conditions as laid down by the L C Gupta committee.
4. The clearing and settlement of derivatives trades would be through a SEBI approved
clearing corporation or house. Clearing corporation or houses complying with the
eligibility conditions as laid down by the committee have to apply to SEBI for grant of
approval.
5. Derivative broker or dealers and clearing members are required to seek registration from
SEBI. This is an addition to their registration as broker of existing stock exchanges. The
 minimum net worth for clearing members of the derivatives clearing corporation or house
shall be Rs.300 lac.
6. The minimum contract value shall not be less than Rs.2 lac. Exchange have to submit
details of the futures contracts they propose to introduce.
7. The initial margin requirement, exposure limits linked to capital adequacy and margin
demands related to the risk of loss on the position will be prescribed by SEBI or
exchange from time to time.
8. The L C Gupta committee report requires strict enforcement of know your customer
rule and requires that every client shall be registered with the derivatives broker. The
members of the derivatives segment are also required to make their clients aware of the
risks involved in derivatives trading by issuing to the client the risk disclosure document
and obtain a copy of the same duty signed by the client.
9. The trading members are required to have qualified approved used and sales person who
have passed a certification program approved by SEBI.

Methodology

Background of the study undertaken

Methodology:

1. Sampling area: Dharwad

2. Sampling elements: Questionnaire is administered those who both futures and options.
3. Mode of asking questions: Questionnaire and personal interactions with the client and
internal guide
4. Sampling size: 50 respondents
5. Sampling method: The sample will be selected based on the random sampling method
(probability sampling method), directly approaching the sampling elements and
collecting the data by giving the questionnaire.
6. Data collection method: primary as well as secondary data is collected for the study.
A. Primary data
Primary data is collected from the questionnaire which is administered to the respondents who
trade both futures and options and equity market. The data is also collected through interacting
with the clients and mutual fund in Dharwad city.

B. Secondary data

Secondary data I collected through the websites such as like

1. www.nseindia.com
2. www.bseindia.com
3. www.derivativesmarket.com
4. www.moneycontrol.com
5. www.indiainfoline.com
6. www.sharekhan.com
7. www.sebi.com
8. www.tradepicks.com
9. www.indiabulls.com
10. www.poweertrade.com etc.

C. software used

MS excel and MS word.

Limitations of the study

1. I have limited my study regarding derivatives to futures and options only. I have not
taken into consideration regarding commodities and forward trading.
2. I have administered the questionnaire only those who trade in the both derivatives and
equity market. I have not collected the responses of the investors who trade only in equity
market, since I have made comparative analysis.
3. I have carried away my project work in the Dharwad city and I have taken sample size of
50 respondents in the Dharwad city itself. I have not covered any part other than
Dharwad city.
4. I could study the market movements only for 60 days and observations are related only to
this period.
5. Futures and options are less traded compared to equities in Geerak marketing Dharwad.
Options are still less traded compared to futures, so I did not get much exposure to it.
 Mode of analysis

A. Please tick the following about your monthly savings?

cumulative
No choice Frequency percentage valid percent percent

1 Below Rs.2000 6 12 12 12

2 Rs.2000 to Rs.7000 22 44 44 44

3 Rs.7000 to Rs.10000 13 26 26 26

4 Above Rs.10000 9 18 18 18

5 Total 50 100 100

 22
25
20
13
15 9
10 6

5
0

Interpretation:

From the above chart it is clear that majority of the respondents are from the
savings group of Rs.2001-Rs.7000 family which amounts for 48% of the total
respondents of 50. And only 10% of the respondents are form the savings group of
above Rs.10000.

B. In which of the following you have invested your savings?

No Choice Frequency Percentage

1 Mutual Funds 18 36
2 Stocks / F&O 34 68
3 Post Office 3 6
4 Gold / Jewelers 4 8
5 Real Estate 10 20
6 Bank (FD, Savings) 8 16
7 Insurance 4 8
8 Private Lendings 3 6
9 Business 1 2
10 Fixed Assets 2 4
 34
35

30

25
18
20

15
10 9 10
8 7 8
10 6
44 5 4
2 33 3 2
5 1 1
0

Interpretation: From the above chart it is clear that 34 % of the respondents are
invested their savings in the Stocks/F&O which is highest among the investor who
trades both F&O and equity market. Mutual funds ranks second in terms of savings
preferences of the investors, which amounts to 18% as a whole. Next priority is
given to the Real estate savings by the investors, which amounts to 10%. The least
preference is give to Private lending and Fixed assets investments which amounts
to 1% each.

C. Since how long you are into the Equity market?

No. choice Frequency percentage

1 Less than 5 years 33 66

2 More than 5-10 years 11 22

3 More than 10-15 years 3 6

4 More than 15 years 3 6

 Chart Title
More than 15 years ; 6%
More than 10-15 years; 6%

More than 5-10 years; 22%

Less than 5 years ; 66%

Interpretation: From the above graph its clear that among 50 respondents 33 of
them were into the equity market for less than 5 years, which amounts to 66%. 11
respondents are there in the equity market for more than 5 years and less than 10
years, which amount to 22% of the total share. 3 respondents are into the market
for more than 10 years and less than 15 years, which amount to 14% as a whole.
Only 3 respondents are there in the equity market for more than 15 years, which
amount to 6% as a whole.

D. What factors made you to invest in Equity market?

No. Choice Frequency Percentage

1 High Returns 25 50

2 Transparency 5 10

3 Relatives / Friends 8 16

4 High Liquidity 8 16

5 Easy To Trading 2 4
 25
20
15 25
10
5 8 7
5
2
0

Interpretation: From the above chart its clear that,

Out of 50 respondents 25 are in the opinion that because of the high returns
factor made them to invest in to the Equity market, which amounts to 50% as a
whole, which enjoys top most priority for being invested into the equities.

8 respondents are in the opinion that because of their relatives and friends
recommendations they have invested in to the equity market, which amounts 16%
as a whole. This enjoys second priority for the investors for being investing into
the equities.

For 5 respondents transparency in the equity market made them to invest into it,
which amounts to 10% as a whole.

Because of high liquidity factor 8 respondents out of 50 are investing in the

equity market, which amounts to 16% as a whole.

Out of 50 only 2 respondents feels that ease of trading made him to invest into
the equity market, which amounts to 4% as a whole.

E. Which of the following factors made you to invest in derivatives (F&O)?

 No. choice Frequency Percentage

1 Less brokerage 5 10

2 Less investment (on margin) 11 22

3 sufficient time to square of 14 28

4 good hedging tool 11 22

5 high returns 9 18

Total 50

14
12
10
8 14
11 11 9
6
4 5
2
0

Interpretation:

From the above graph it is clear that:

Among 50 respondents, 14 of them are investing in F&Os because of sufficient

time to square off their position, which amount to 28% as a whole and also enjoy
top most priority by the investors.
 Out of 50 respondents, 11 of them are inventing in F&Os because of good
hedging tool and also 09 of them investing because of the high returns factors in
the F&Os, which amount to 22% each as a whole.

11 respondents are in the opinion that investing in F &O is preferable because

of less investment (only margin) reason, which amount to 22% as a whole.

5 respondents are investing in the F&Os because of low brokerage charges,

which amount to 10% as a whole and which is lowest preferred option by the
investors.

F. How often you trade in Derivatives (F&O)?

No. Choice Frequency Percentage

1 Daily 22 44

2 Twice In A Week 9 18

3 Once In A Month 10 20

4 Rarely 8 16
 25 22

20

15
10
9
8
10

0
Daily twice in a week once In a month rarely

Interpretation:

From the above chart its clear that:

Out of 50 respondents, 22 are trading daily which amount to 44% as a whole

and 8 of them are trading rarely in futures and options.

9 respondents are trading twice in a week, which amount to 18% as a whole and
it is the highest among the investors.

10 respondents are trading once in a month, which amounts to 20% as a whole.

And also which is least among the investors
 G. If you are trading rarely, why you dont prefer much to trade in
derivatives (F & O)? [Skip, if you are regular investor]

No. Choice Frequency Percentge

1 Difficult To Understand 17 34
2 High Margin Money 10 20
3 Lot Size Is Big 7 14
4 Won't Get The Delivery Of Securities 3 6
5 High Option Premium 3 6
6 Not Interested In Speculation 3 6
7 High Risk Involved 7 14

17
18
16
14 10
12
10 7 7
8
6 3 3 3
4
2
0

Interpretation:

From the above chart its clear that:

Out of 7 responses given by the 50 respondents, investors dont trade much in

futures and options because of high risk involved in it, which amount to 14% and
also which ranks top in the investors opinion.
 3 responses say that they dont want to trade in F&O because they are not
interested in speculation, which amounts to 06 % as a whole.

10 responses say that they dont want to trade in F&Os because of high margin
money and high option premium prevailing, which amounts to 20% each as a
whole.

17 responses from the 50 respondents say that they dont prefer much to trade
in F&Os because its difficult to understand, which amount to 34% as a whole. And
8 responses say that because of big lot size they dont prefer much to trade in
F&Os regularly.
 H. A1

No. Choice Frequency Percentage

1 highly dissatisfied 4 8
2 dissatisfied 10 20
3 neutral 13 26
4 satisfied 18 36
5 strongly satisfied 5 10

18
18
16 13
14
10
12
10
8 5
4
6
4
2
0

Interpretation:

From the above graph it is clear that:

Out of 50 respondents 36% of the respondents are satisfied with the safety in
trading in Futures and Options compared to equity market, which is the highest
percentage as a whole.

26% of the respondents are having neutral opinion with respect to the safety
aspects of F&Os when compared to the Equity market.
20% of the respondents are dis-satisfied with respect to safety aspect of the
Futures and Options compared to the Equity market.

8% of the respondents are highly dis-satisfied with respect to the safety aspect of
the Futures and Options compared to Equity market.

Only 10% of the respondents are highly satisfied with respect to the safety
aspects F&Os compared to the Equity market.

Mean shows 3.14 points (which is more than 3 points) regarding safety aspect
of trading in Futures and Options compared to Equity market. By this we could
conclude that majority of the respondents are satisfied of safety parameter of F&Os
comparatively.

B1. RETURNS

No. Choice Frequency Percentage

1 Highly Dissatisfied 3 6
2 Dissatisfied 12 24
3 Neutral 7 14
4 Satisfied 18 36
5 Strongly Satisfied 9 18
Total 50
 18
18
16
12
14
12 9
10 7
8
6 3
4
2
0