A PROJECT REPORT OF STUDY ON DERIVATIVES (FUTURES & OPTIONS) AT SHAREKHAN STOCKBROKING CO. LTD.

Project report submitted in Partial fulfillment for the award of

MASTER OF BUSINESS ADMINISTRATION Submitted by: K.HARIKA Bearing Roll No=214309672008

OLIVE PG COLLEGE CHINTAPALLYGUDA-IBRAHIMPATNAM

(Affiliated to Osmania University) HYDERABAD (2009-2011)

DECLARATION
I hereby declare that the project titled DERIVATIVES (FUTURES & OPTIONS) done at sharekhan stock broking company Limited submitted by me as part of partial fulfillment for the award of the Masters of Business Administration, at OLIVE PG COLLEGE, Osmania University, Hyderabad. It is a record of bonafide work done by me. I also declare that this report has to my knowledge is my own and is neither submitted to any other university nor published any time before.
Name and address of student:

Signature of the student

Date: Place:

ACKNOWLEDGEMENT

I take this opportunity to acknowledge, all the people who rendered their valuable advice in completing my project. I take privilege to thank Mr.S.Lakshminarasimham, Principal, olive pg college for management for guiding and supporting me to carry out the project work very smoothly. I also thank Mr.S.Nagireddy,professor for his valuable suggestions and kind cooperation in completing my project work. I extend my sincere thanks and gratitude to the person who has been kind in giving me an Opportunity to do a project work in sharekhan ltd., Mr.M.venugopal,Territory manager. Last but not least, I am thankful to my parents and to all my friends for their wholehearted support and suggestions, which helped me in completing this project. K.HARIKA

ABSTRACT
Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest etc. SEBI set up a 24-member committee under Chairmanship of Dr.L.C. Gupta to develop the appropriate regulatory framework for derivatives trading in India. The committee submitted its report in March 1998. On May 11, 1998 SEBI accepted the recommendations of the committee and approved the phased introduction of derivatives trading in India beginning with stock index futures. SEBI also approved the suggestive bye-laws recommended by the committee for regulation and control of trading and settlement of derivatives contracts. My study is to know about the investors familiarity and awareness of the derivative market and their profit/loss positions in trading in types of derivatives.

CONTENTS

S.NO. 1 1.1 1.2 1.3 1.4 1.5 II 2.1 2.2 III IV

CHAPTER NAME INTRODUCTION OBJECTIVES NEED OF THE STUDY SCOPE OF THE STUDY METHODOLOGY LITERATURE REVIEW INDUSTRY PROFILE THEORETICAL FRAMEWORK COMPANY PROFILE DATA ANALYSIS & INTERPRETATION FINDINGS,SUGGESTIONS & CONCLUSIONS BIBLIOGRAPHY

PAGE NO.

VI

CHAPTER 1 INTRODUCTION

1.1 A STUDY ON DERIVATIVES:

Derivatives have vital role to play in enhancing shareholder value by ensuring access to the cheapest source of funds. Active use of derivatives instruments allows the overall business risk profile to be modified, thereby providing the potential to improve earning quality by offsetting undesired risk. Under my project report, I have studied various trends that come in the way of Derivatives market. Because impression is usually given that losses arose from derivatives are extremely complex and difficult to understand financial strategies. So after interviewing with different brokers,investors and dealers, I have tried to give a solution to these complexities. I have also found out that what would be the future of derivative market in India on the basis of interviews and observations of brokers, dealers and investors regarding future, I have found out that derivatives can indeed be used safely and successfully provided a sensible control and management strategy is established and executed. Inspite of that more awareness should be done and technical expertise knowledge should be more expanded. A derivative is a security whose value depends on the value of an underlying asset. Underlying asset can be bullion, index, share, bonds, currency, interest etc. Derivative securities have been very successful innovation in capital market. The emergence of the market for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk adverse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, financial markets are marked by a very high degree of volatility. Through the use of derivative products, is possible to partially or fully transfer price risks by a locking - in asset prices. As instruments of risk management, these generally do not influence the fluctuation 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 investor.

1.2 OBJECTIVES OF THE STUDY:

The main objectives of my final project report are as follows: To study various trends in derivative market. Comparison of the profits/losses in cash market and derivative market. To find out profit/losses position of the option writer and option holder. To study in detail the role of the future and options. To study the role of derivatives in Indian financial market. To find out that what would be the future and market potential of derivative market in India. To know the awareness & familiarity of investors, dealers and brokers hold regarding derivatives market. To know the experience of dealers, investors and brokers with derivatives till date. To get knowledge about shortcomings in Indian derivative market.

1.3 NEED OF THE STUDY:

Different investment avenues are available for the investors. Stock market also offers good investment opportunities to the investor alike all investments, they also carry certain risks. The investor should compare the risk and expected yields after adjustment of tax on various instruments. While taking an investment decision the investor may seek advice from an expert and consultancy including stock brokers and analysts. The objective here is to make the investor aware of the functioning of the derivatives.

Derivatives act as a risk hedging tool for the investors. The objective is to help the investor in selecting the appropriate derivatives instrument to attain the maximum return and to construct the portfolio in such a manner to meet the investor needs and to decide how best to reach the goals from the securities available.

To identify the investor objective constraints and performance, which help formulate the investment policy? To develop and improve the strategies in the investment policy formulated. Stockbrokers will help in the selection of asset classes and securities in each class depending upon their risk and return attributes.

1.4 SCOPE OF THE STUDY:

The study is limited to Derivatives with special references to futures and options in the Indian context .The study has only made humble attempt at evaluating derivatives only in Indian markets. The study is limited to the analysis made for types of instruments of derivatives .Each strategy is analyzed according to its risk and return characteristics and derivatives performance against the profit and policies of the company. The study is not based on the international perspective of derivatives which exists in DOW JONES and NASDAQ.

1.5 RESEARCH METHODOLOGY:

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The following steps are involved in the study :

SELECTION OF SCRIP: The sample of the stocks for the purpose of collecting
secondary data has been selected on the basis of Random Sampling. The stocks are chosen in an unbiased manner and each stock is chosen independent of the other stocks chosen. And the scrip selected is NIFTY 50. The lot is of any size, profitability position of futures, buyers and sellers & also the option holders and option writers is studied.

DATA COLLECTION: Data is collected in two forms; They are primary data and
secondary data.

PRIMARY DATA: Data from brokers. SECONDARY DATA:

Data from various books. Data from internet. Data from news papers & magazines.

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CHAPTER 2 LITERATURE REVIEW

2.1 INDUSTRY PROFILE:

A capital market is a market for securities (debt or equity), where business 12

enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). U.S. Securities and Exchange Commission. Capital markets may be classified as primary markets and secondary markets.

PRIMARY MARKET: In primary markets, new stock or bond issues are sold to investors. It is also known as new issues market.

SECONDARY MARKET: In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere.It is also known as old issues market.

DEFINITION OF STOCK EXCHANGE:

"Stock exchange means the body of individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities."

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It is an association of member brokers for the purpose of self-regulation and protecting the interests of its members. It can operate only if it is recognized by the Government under the securities contracts (regulation) Act, 1956. The recognition is granted under section 3 of the Act by the central government, Ministry of Finance. Recognised Stock Exchange means a stock exchange, which is for the time being recognised by the Central Government under Section 4 of the SC(R)A. As per Section 2(h), the term securities include(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, (ii) Derivative, (iii) Units or any other instrument issued by any collective investment scheme to the investors in such schemes, (iv) Security receipts as defined in clause (zg) of section 2 of the Securisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SARFAESI) (v) Units or any other such instrument issued to the investors under any mutual fund scheme, (vi) any certificate or instrument issued to an investor by any issuer being a special purpose distinct entity which possesses any debt or receivable, including mortgage debt, assigned to such entity, and acknowledging beneficial interest of such investor in such debt or receivable, including mortgage debt, as the case maybe. (vii) Government securities, (viii) Such other instruments as may be declared by the Central Government to be securities, and (ix) Rights or interests in securities.

BYLAWS: Besides the above act, the securities contracts (regulation) rules were also made in 1957 to regulate certain matters of trading on the stock exchanges. There are also bylaws of the exchanges, which are concerned with the following subjects. 14

Opening/closing of the stock exchanges, timing of trading, regulation of bank transfers, regulation of badla or carryover business, control of the settlement and other activities of the stock exchange, fixation of margins, fixation of market prices or making up prices, regulation of taravani business (jobbing), etc., regulation of brokers trading, brokerage charges, trading rules on the exchange, arbitration and settlement of disputes, settlement and clearing of the trading etc.

2.2 REGULATION OF STOCK EXCHANGES:

The securities contracts (regulation) act is the basis for operations of the stock exchanges in India. No exchange can operate legally without the government permission or recognition. Stock exchanges are given monopoly in certain areas under section 19 of the above Act to ensure that the control and regulation are facilitated. Recognition can be granted to a stock exchange provided certain conditions are satisfied and the necessary information is supplied to the government. Recognition can also be withdrawn, if necessary. Where there are no stock exchanges, the government can license some of the brokers to perform the functions of a stock exchange in its absence.

Why do we need a regulatory body for investor protection in India?

India is an informationally weak market. Boosting capital market demands restoring the confidence of lay investors who have been beaten down by repeated scams. Progressively softening interest rates and an under performing economy have eroded investment options, and require enhanced investing skills.

SECURITIES CONTRACTS (REGULATION) ACT, 1956

The Securities Contracts (Regulation) Act, 1956 [SC(R)A] was enacted to prevent undesirable transactions in securities by regulating the business of dealing therein and by providing for certain other matters connected therewith. This is the principal Act, which governs the trading of securities in India. 15

Listing of Securities
Where securities are listed on the application of any person in any recognised stock exchange, such person shall comply with the conditions of the listing agreement with that stock exchange (Section 21). Where a recognised stock exchange acting in pursuance of any power given to it by its bye-laws, refuses to list the securities of any company, the company shall be entitled to be furnished with reasons for such refusal and the company may appeal to Securities Appellate Tribunal (SAT) against such refusal.

Delisting of Securities
A recognised stock exchange may delist the securities of any listed companies on such grounds as are prescribed under the Act. Before delisting any company from its exchange, the recognised stock exchange has to give the concerned company a reasonable opportunity of being heard and has to record the reasons for delisting that concerned company. The concerned company or any aggrieved investor may appeal to SAT against such delisting.(Section 21A).

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI):

SEBI was set up as an autonomous regulatory authority by the Government of India in 1988 " to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto." It is empowered by two acts namely the SEBI Act, 1992 and the securities contract (regulation) Act, 1956 to perform the function of protecting investor's rights and regulating the capital markets.

Objectives of SEBI:
As an important entity in the market it works with following objectives:

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1. It tries to develop the securities market. 2. Promotes Investors Interest. 3. Makes rules and regulations for the securities market.

Functions of SEBI:
1. Regulates Capital Market 2. Checks Trading of securities. 3. Checks the malpractices in securities market. 4. It enhances investor's knowledge on market by providing education. 5. It regulates the stockbrokers and sub-brokers. 6. To promote research and investigation. 7. Investor education and training of the Intermediaries. 8. Inspection and enquiries.

BOMBAY STOCK EXCHANGE

This stock exchange, Mumbai, popularly known as "BSE" was established in 1875 as The Native share and stock brokers association", as a voluntary non-profit making association. It has evolved over the years into its present status as the premiere stock exchange in the country. It may be noted that the stock exchanges the oldest one in Asia, even older than the Tokyo Stock exchange which was founded in 1878. The exchange, while providing an efficient and transparent market for trading in securities, upholds the interests of the investors and ensures redressed of their grievances, whether against the companies or its own member brokers. It also strives to educate and enlighten the investors by making available necessary informative inputs and conducting investor education programmes. A governing board comprising of 9 elected directors, 2 SEBI nominees, 7 public representatives and an executive director is the apex body, which decides the policies and regulates the affairs of the exchange. 17

BSE INDICES: In order to enable the market participants, analysts etc., to track the various ups and downs in the Indian stock market, the Exchange has introduced in 1986 an equity stock index called BSE-SENSEX that subsequently became the barometer of the moments of the share prices in the Indian stock market. It is a "Market capitalization-weighted" index of 30 component stocks representing a sample of large, well-established and leading companies. The base year of Sensex is 1978-79. The Sensex is widely reported in both domestic and international markets through print as well as electronic media. Sensex is calculated using a market capitalization weighted method. As per this methodology, the level of the index reflects the total market value of all 30-component stocks from different industries related to particular base period. The total market value of a company is determined by multiplying the price of its stock by the number of shares outstanding. Statisticians call an index of a set of combined variables (such as price and number of shares) a composite Index. An Indexed number is used to represent the results of this calculation in order to make the value easier to work with and track over a time. It is much easier to graph a chart based on Indexed values than one based on actual values world over majority of the well-known Indices are constructed using Market capitalization weighted method ". In practice, the daily calculation of SENSEX is done by dividing the aggregate market value of the 30 companies in the Index by a number called the Index Divisor. The Divisor is the only link to the original base period value of the SENSEX. The Divisor keeps the Index comparable over a period of time and if the reference point for the entire Index maintenance adjustments. SENSEX is widely used to describe the mood in the Indian Stock markets. Base year average is changed as per the formula.

NATIONAL STOCK EXCHANGE

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The NSE was incorporated in Nov 1992 with an equity capital of Rs. 25 crs. The International securities consultancy (ISC) of Hong Kong has helped in setting up NSE. ISC has prepared the detailed business plans and installation of hardware and software systems. The promotions for NSE were financial institutions, insurances companies, banks and SEBI capital market ltd, Infrastructure leasing and financial services ltd and stock holding corporation ltd. It has been set up to strengthen the move towards professionalization of the capital market as well as provide nationwide securities trading facilities to investors. NSE is a national market for shares PSU bonds, debentures and government securities since infrastructure and trading facilities are provided.

NSE - NIFTY:
The NSE on April 22, 1996 launched a new equity Index. The NSE-50. The new Index which replaces the existing NSE-100 Index is expected to serve as an appropriate Index for the new segment of futures and options.Nifty means National Index for Fifty Stocks. The NSE-50 comprises 50 companies that represent 20 broad Industry groups with an aggregate market capitalization of around Rs. 1, 70,000 crs. All companies included in the Index have a market capitalization in excess of Rs 500 crs each and should have traded for 85% of trading days at an impact cost of less than 1.5%. The base period for the index is the close of prices on Nov 3, 1995, which makes one year of completion of operation of NSEs capital market segment. The base value of the Index has been set at 1000. NSE - MIDCAP INDEX: The NSE midcap Index or the Junior Nifty comprises 50 stocks that represents 21 board Industry groups and will provide proper representation of the midcap segment of the Indian capital Market.

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The base period for the index is Nov 4, 1996, which signifies two years for completion of operations of the capital market segment of the operations. The base value of the Index has been set at 1000. At present, there are 24 stock exchanges recognized under the securities contract (regulation) Act, 1956. They are List of Stock Exchanges recognized under the securities contract (regulation) Act, 1956 NAME OF THE STOCK EXCHANGE Bombay stock exchange, Ahmadabad share and stock brokers association 1957 Calcutta stock exchange association Ltd, 1957 Delhi stock exchange association Ltd, 1957 Madras stock exchange association Ltd, 1957 Indoor stock brokers association, 1958 Bangalore stock exchange, 1963 Hyderabad stock exchange, 1943 Cochin stock exchange, 1978 Pune stock exchange Ltd, 1982 U.P stock exchange association Ltd, 1982 Ludhiana stock exchange association Ltd, 1983 Jaipur stock exchange Ltd, YEAR 1875

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Gauhathi stock exchange Ltd, Mangalore stock exchange Ltd, Maghad stock exchange Ltd, Patna, Bhubaneswar stock exchange association Ltd, Over the counter exchange of India, Bombay, Saurasthra Kutch stock exchange Ltd, Vadodara stock exchange Ltd, Coimbatore stock exchange Ltd, The Meerut stock exchange Ltd, 1National stock exchange Ltd, Integrated stock exchange,

1983-84 1984 1985 1986 1989 1989 1990 1991 1991 1991 1991,1999

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2.2 THEORETICAL FRAMEWORK:

DERIVATIVES:

The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked 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 markets are 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 prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors. Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc.. Banks, Securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.

DEFINITION:
Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
1.

Securities Contracts (Regulation) Act, 1956 (SCR Act) defines derivative to be A contract which derives its value from the prices, or index of prices, of an underlying

secured or unsecured, risk instrument or contract for differences or any other form of security.
2.

securities.

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Emergence of Financial derivative products:

Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the Post-1970 period due to growing instability in the financial markets. However since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instrument available, their complexity and also turnover. In the class of equity derivatives the worlds over futures and options on stock indices have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease o use. The lower costs associated with index derivatives vis--vis derivative products based on individual securities is another reason for their growing use.

PARTICIPANTS:
The following three broad categories of participants in the derivatives market.

HEDGERS

Hedgers face risk associated with the price of an asset. They use futures or options markets to reduce or eliminate this risk.

SPECULATORS

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Speculators wish to bet on future movements in the price of an asset. Futures and options contracts can give them an extra leverage; that is, they can increase both the potential gains and potential losses in a speculative venture.

ARBITRAGEURS

Arbitrageurs are in business to take of a discrepancy between prices in two different markets, if, for, example, they see the futures price of an asset getting out of line with the cash price, they will take offsetting position in the two markets to lock in a profit.

FUNCTIONS OF DERIVATIVES MARKETS:

The following are the various functions that are performed by the derivatives markets. They are: Prices in an organized derivatives market reflect the perception of market Derivatives market helps to transfer risks from those who have them but may not Derivatives trading acts as a catalyst for new entrepreneurial activity. Derivatives markets help increase saving and investment in long run.

participants about the future and lead the price of underlying to the perceived future level. like them to those who have an appetite for them.

3.5.2 TYPES OF DERIVATIVES:

The following are the various types of derivatives. They are:

FORWARDS:
A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at todays pre-agreed price. 24

FUTURES:
A futures contract is an agreement between two parties to buy or sell an asset at a certain time i at a certain price.

OPTIONS:
Options are of two types-calls and puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a give future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date.

WARRANTS:
Options generally have lives of up to one year; the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the counter.

LEAPS:
The acronym LEAPS means long-term Equity Anticipation securities. These are options having a maturity of up to three years.

BASKETS:
Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options.

SWAPS:

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Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used Swaps are:

Interest rate Swaps:

These entail swapping only the related cash flows between the parties in the same currency.

Currency Swaps:

These entail swapping both principal and interest between the parties, with the cash flows in on direction being in a different currency .

SWAPTION:
Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap.

RATIONALE BEHIND THE DEVELOPMENT OF DERIVATIVES:

Holding portfolios of securities is associated with the risk of the possibility that the investor may realize his returns, which would be much lesser than what he expected to get. There are various factors, which affect the returns: Price or dividend (interest) Some are internal to the firm likeIndustrial policy Management capabilities Consumers preference Labour strike, etc.

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These forces are to a large extent controllable and are termed as non systematic risks. An investor can easily manage such non-systematic by having a well-diversified portfolio spread across the companies, industries and groups so that a loss in one may easily be compensated with a gain in other. There are yet other of influence which are external to the firm, cannot be controlled and affect large number of securities. They are termed as systematic risk. They are: 1. Economic 2. Political 3. Sociological changes are sources of systematic risk. For instance, inflation, interest rate, etc. their effect is to cause prices of nearly all-individual stocks to move together in the same manner. We therefore quite often find stock prices falling from time to time in spite of companys earning rising and vice versa. Rationale behind the development of derivatives market is to manage this systematic risk, liquidity in the sense of being able to buy and sell relatively large amounts quickly without substantial price concession. In debt market, a large position of the total risk of securities is systematic. Debt instruments are also finite life securities with limited marketability due to their small size relative to many common stocks. Those factors favour for the purpose of both portfolio hedging and speculation, the introduction of derivatives securities that is on some broader market rather than an individual security.

FUTURES:
DEFINITION
Futures contract is an agreement two parties to buy or sell an asset a certain time in the future at a certain price. To facilitate liquidity in the futures contract, the exchange specifies certain standard features of the contract. The standardized items on a futures contract are: 27

Quantity of the underlying. The date and the month of delivery. The units of price quotations and minimum price change. Location of settlement.

FEATURES OF FUTURES:
Futures are highly standardized. The contracting parties need not pay any down payments.

Hedging of price risks. They have secondary markets too.

TYPES OF FUTURES :
On the basis of the underlying asset they derive, the futures are divided into two types:

Stock futures:
The stock future is the futures that have the underlying asset as the individual securities.

Index futures:
Index futures are the futures,which have the underlying asset as an index.

MARGINS:
Margins are the deposits which reduce counter party risk, arise in a futures contract. These margins are collect in order to eliminate the counter party risk. There are three types of margins:

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Initial Margins
Whenever a futures contract is signed, both buyer and seller are required to post initial margins. Both buyer and seller are required to make security deposits that are intended to guarantee that they will infact be able to fulfill their obligation. This deposits are initial margins and they are often referred as purchase price of futures contract.

Marking to market margins

The process of adjusting the equity in an investors account in order to reflect the change in the settlement price of futures contract is known as MTM margin.

Maintenance margin
The investor must keep the futures account equity equal to or greater than certain percentage of the amount deposited as initial margin. If the equity goes less than the percentage of the initial margin, then the investor receives a call for an additional deposit of cash known as maintenance margin to bring the equity upto the initial margin.

Pricing the Futures:

The Fair value of the futures contract is derived from a model known as the cost of carry model. This model gives the fair value of the contract.

Cost of Carry model:

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.

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F=S (1+r-q) t
where

F- Futures price S- Spot price of the underlying r- Cost of financing q- Expected Dividend yield t - Holding Period.

Futures terminology: Spot price:

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

Futures price:
The price at which the futures contract trades in the futures market.

Contract cycle:
The period over which contract trades. The index futures contracts on the NSE have onemonth, two month and three-month expiry cycle which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is introduced for trading.

Expiry date:
It is the date specifies 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.

Contract size:
The amount of asset that has to be delivered under one contract. For instance, the contract size on NSEs futures market is 50 nifties. 30

Basis:
In the context of financial futures, basis can be defined as the futures 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.

Basis=futures price-spot price Open Interest:

Total outstanding long or short position in the market at any specific time. As total long positions in the market would be equal to short positions, for calculation of open interest, only one side of the contract is counted.

Multiplier:
It is a pre-determined value used to arrive at the contract size. It is the price per index point.

Tick size:
It is the minimum price difference between two quotes of similar nature.

OPTION:
Option is a type of contract between two persons where one grants the other the right to buy a specific asset at a specific price within a specific time period. Alternatively the contract may grant the other person the right to sell a specific asset at a specific price within a specific time period. In order to have this right. The option buyer has to pay the seller the option premium. The assets on which option can be derived are stocks, commodities, indexes etc. If the underlying asset is the financial asset, then the option are financial option like stock options, currency options, index options etc, and if options like commodity option.

PROPERTIES OF OPTION:
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Options have several unique properties that set them apart from other securities. The following are the properties of option: Limited Loss High leverages potential Limited Life

PARTIES IN AN OPTION CONTRACT: Buyer of the option:

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

Writer/seller of the option:

The writer of the call /put options is the one who receives the option premium and is their by obligated to sell/buy the asset if the buyer exercises the option on him.

3.7.3 TYPES OF OPTIONS:

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

1.On the basis of the underlying asset:

On the basis of the underlying asset the option are divided into two types:

INDEX OPTIONS
The index options have the underlying asset as the index. 32

STOCK OPTIONS:
A stock option gives the buyer of the option the right to buy/sell stock at a specified price. Stock option are options on the individual stocks,mthere are currently more than 50 stocks are trading in the segment.

2.On the basis of the market movements:

On the basis of the market movements the option are divided into two types. They are:

CALL OPTION
A call option is bought by an investor when he seems that the stock price moves upwards. A

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

PUT OPTION
A put option is bought by an investor when he seems that the stock price moves downwards. A put options gives the holder of the option right but not the obligation to sell an asset by a certain date for a certain price.

3.On the basis of exercise of option:

On the basis of the exercising of the option, the options are classified into two categories.

AMERICAN OPTION
American options are options that can be exercised at any time up to the expiration date, most exchange-traded option are American. 33

.EUROPEAN OPTION European options are options that can be exercised only on the expiration date itself. European

options are easier to analyze than American options.

PAY OFF PROFILE FOR BUYER OF CALL OPTION:

S Strike price Premium/ Loss Spot price 2 Profit at spot price E1 OTM ATM ITM Out of the money At the money In the money

SP E2 SR -

E1 - Spot price 1

CASE 1: (Spot price > Strike price)

As the spot price (E1) of the underlying asset is more than strike price (S). the buyer gets profit of (SR), if price increases more than E1 then profit also increase more than SR.

CASE 2: (Spot price < Strike price)

As a spot price (E2) of the underlying asset is less than strike price (s).The buyer gets loss of (SP), if price goes down less than E2 then also his loss is limited premium (SP)

PAY-OFF PROFILE FOR SELLER OF A CALL OPTION:

The pay-off of seller of the call option depends on the spot price of the underlying asset. S - Strike price ITM In the money At the money 34 SP - Premium /profit ATM -

E1 - Spot price 1 OTM E2 SR Spot price 2

Out of the money

Profit at spot price E1

CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying is less than strike price (S). the seller gets the profit of (SP), if the price decreases less than E1 then also profit of the seller does not exceed (SP).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S) the seller gets loss of (SR), if price goes more than E2 then the loss of the seller also increase more than (SR).

PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

The pay-off of the buyer of the option depends on the spot price of the underlying asset. S - Strike price E1 - Spot price E2 SR Spot price 2 Profit at spot price E1 ITM In the money Out of the money At the money SP - Premium /profit OTM ATM

CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S). the buyer gets the profit (SR), if price decreases less than E1 then profit also increases more than (SR).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (s), the buyer gets loss of (SP), if price goes more than E2 than the loss of the buyer is limited to his premium (SP).

PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

The pay-off of a seller of the option depends on the spot price of the underlying asset. 35

S - Strike price SP - Premium/ profit E1 - Spot price 1 E2 - Spot price 2 SR -

ITM

In the money At the money Out of the money

ATM OTM -

Profit at spot price E1

CASE 1: (Spot price < Strike price)

As the spot price (E1) of the underlying asset is less than strike price (S), the seller gets the loss of (SR), if price decreases less than E1 than the loss also increases more than (SR).

CASE 2: (Spot price > Strike price)

As the spot price (E2) of the underlying asset is more than strike price (S), the seller gets profit of (SP), if price goes more than E2 than the profit of seller is limited to his premium (SP).

Factors affecting the price of an option

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

Stock price: The pay off from a call option is a amount by which the stock price exceeds the strike
price. Call options therefore become more valuable as the stock price increases and vice versa. The pay-off from a put option is the amount; by which the strike price exceeds the stock price. Put options therefore become more valuable as the stock price increases and vice versa.

Strike price: In case of a call, as a strike price increases, the stock price has to make a larger
upward move for the option to go in-the-money. Therefore, for a call, as the strike price increases option becomes less valuable and as strike price decreases, option become more valuable.

Time to expiration: Both put and call American options become more valuable as a time to
expiration increases.

Volatility: The volatility of a stock price is measured of uncertain about future stock price
movements. As volatility increases, the chance that the stock will do very well or very poor increases. The value of both calls and puts therefore increase as volatility increase.

Risk-free interest rate: The put option prices decline as the risk-free rate increases where as the
prices of call always increase as the risk-free interest rate increases. 36

Dividends: Dividends have the effect of reducing the stock price on the x- dividend rate. This has an
negative effect on the value of call options and a positive effect on the value of put options.

PRICING OPTIONS
The black- scholes formula for the price of European calls and puts on a non-dividend paying stock are:

CALL OPTION C = SN(D1)-Xe-r t N(D2) PUT OPTION P = Xe-r t N(-D2)-SN(-D1)

C = VALUE OF CALL OPTION S = SPOT PRICE OF STOCK N= NORMAL DISTRIBUTION V= VOLATILITY X = STRIKE PRICE r = ANNUAL RISK FREE RETUR t = CONTRACT CYCLE

d1 = in (S/X) + (r+ v2/2)t v\/t d2 = d1- v\/t Options Terminology:

37

Strike price
The price specified in the options contract is known as strike price or Exercise price.

Options premium
Option premium is the price paid by the option buyer to the option seller.

Expiration Date
The date specified in the options contract is known as expiration date.

In-the-money option
An In the money option is an option that would lead to positive cash inflow to the holder if it exercised immediately.

At-the-money option
An at the money option is an option that would lead to zero cash flow if it is exercised immediately

Out-of-the-money option
An out-of-the-money option is an option that would lead to negative cash flow if it is exercised immediately.

Intrinsic value of money

The intrinsic value of an option is the expiration value or the fair value.

Time value of an option

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

38

CHAPTER 3 COMPANY PROFILE

39

INTRODUCTION TO THE COMPANY

SHAREKHAN is one of the Indias leading financial services. It provides a complete life-cycle of investment solution in Equities, Derivatives, Commodities, IPO, Mutual Funds, Depository Services, Portfolio Management Services and Insurance. It also offer personalized wealth management services for High Networth individuals with a physical presence in over 300 cities of India through more than 800 "Share Shops", and an online presence through Sharekhan.com, India's premier online destination, we reach out to more than 800,000 trading customers. Sharekhan Limited offers online security broking and portfolio services to institutions and large corporate houses as well as individual investors. Sharekhan Limited was formerly known as SSKI Investor Services Private Limited. The company is based in Mumbai, India. Been in the business for over 80 years, Sharekhan can provide you with the assistance and the advice like no one else could. Sharekhan has its customers participating in the booming commodities markets with our membership at the Multi Commodity Exchange of India (MCX) and National Commodity & Derivatives Exchange (NCDEX), through.sharecon.Com Ltd. With its strong support and business units of research, distribution & advisory, sharekhan aims to become a one-stop solution to the broking and investment needs of its clients globally. SHAREKHAN STOCK BROKING COMPANY

---your guide to the financial jungle

Sharekhan is one of the leading retail brokerage of Citi Venture which is running successfully since 1922 in the country. Earlier it was the retail broking arm of the Mumbai based SSKI (SRIPAL SRAVANTHI KANTHILAL ISWARLAL)Group, which has over eight decades of experience in the stock broking business. Share khan offers its customers a wide range of

40

equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, investment advice etc. Earlier with a legacy of more than 80 years in the stock markets, the SSKI group ventured into institutional broking and corporate finance 18 years ago. SSKI is one of the leading players in institutional broking and corporate finance activities. SSKI holds a sizeable portion of the market in each of these segments. SSKIs institutional broking arm accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all Domestic Institutional portfolio investment in the country. It has 60 institutional clients spread over India, Far East, UK and US. Foreign Institutional Investors generate about 65% of the organizations revenue, with a daily turnover of over US$ 2million.The objective has been to let customers make informed decisions and to simplify the process of investing in stocks. Mission of the Sharekhan is To educate and empower the individual investor to make better investment decisions through QUALITY ADVICE INNOVATIVE PRODUCTS and SUPERIOR SERVICE.

3.2 WORK STRUCUTRE OF SHAREKHAN: Ceo & chairman:Tarun shah No. of employees:20,000(approximately)
Sharekhan has always believed in investing in technology to build its business. The company has used some of the best-known names in the IT industry, like Sun Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette, Verisign Financial Technologies India Ltd, Spider Software Pvt. Ltd. to build its trading engine and content. The 41

Citi Venture holds a majority stake in the company. HSBC, Intel & Carlyle are the other investors. On April 17, 2002 Sharekhan launched Speed Trade and Trade Tiger, are net-based executable application that emulates the broker terminals along with host of other information relevant to the Day Traders. This was for the first time that a net-based trading station of this caliber was offered to the traders. In the last six months SpeedTrade has become a de facto standard for the Day Trading community over the net. Sharekhans ground network includes over 700+ Shareshops in 130+ cities in India. The firms online trading and investment site www.sharekhan.com - was launched on Feb 8, 2000. The site gives access to superior content and transaction facility to retail customers across the country.

PRODUCT AND SERVICES OFFERED BY SHAREKHAN:

1- Equity Trading Platform (Online/Offline).

2- Commodities Trading Platform (Online/Offline).

3- Portfolio Management Service.

4- Mutual Fund Advisory and Distribution.

5- Insurance Distribution

42

6-Forex.

43

44

REASONS TO CHOOSE SHAREKHAN LIMITED:

Experience SSKI has more than eight decades of trust and credibility in the Indian stock market. In the Asia Money broker's poll held recently, SSKI won the 'India's best broking house for 2004' award. Ever since it launched Share khan as its retail broking division in February 2000, it has been providing institutional-level research and broking services to individual investors. Technology With their online trading account one can buy and sell shares in an instant from any PC with an internet connection. Customers get access to the powerful online trading tools that will help them to take complete control over their investment in shares. Knowledge In a business where the right information at the right time can translate into direct profits, investors get access to a wide range of information on the content-rich portal, www.sharekhan.com. Investors will also get a useful set of knowledge-based tools that will empower them to take informed decisions. Convenience One can call Sharekhans Dial-N-Trade number to get investment advice and execute his/her transactions. They have a dedicated call-center to provide this service via a Toll Free Number 1800-22-7500 & 39707500 from anywhere in India.

45

 Customer Service

Its customer service team assist their customer for any help that they need relating to transactions, billing, demat and other queries. Their customer service can be contacted via a toll free number, email or live chat on www.sharekhan.com. Investment Advice Sharekhan has dedicated research teams of more than 30 people for fundamental and technical research. Their analysts constantly track the pulse of the market and provide timely investment advice to customer in the form of daily research emails, online chat, printed reports etc.

BENEFITS:
Free Depository A/c Instant Cash Transfer Multiple Bank Option. Secure Order by Voice Tool Dial-n-Trade. Automated Portfolio to keep track of the value of your actual purchases. Personalized Price and Account Alerts delivered instantly to your Mobile Phone & Special Personal Inbox for order and trade confirmations. On-line Customer Service via Web Chat. Buy or sell even single share Anytime Ordering.

Email address.

Sharekhan Ltd.: BSE Cash-INB011073351; F&O-INF011073351; NSE INB/INF231073330; MAPIN 100008375; DP: NSDL-IN-DP-NSDL-233-2003; CDSL-IN-DP-CDSL-271-2004; PMS INP00000066; Mutual Fund: ARN 20.Sharekhan Commodities Pvt. Ltd.: MCX-10080; NCDEX-00132; MAPIN 100013912.

46

CHAPTER 4 & 5 DATA ANALYSIS AND INTERPRETATION

47

Tata Motors Limited

Tata Motors Ltd (NSE: TATAMOTORS, BSE: 500570, NYSE: TTM) is a multinational corporation headquartered in Mumbai, India. Part of the Tata Group, it was formerly known as TELCO (TATA Engineering and Locomotive Company).Tata Motors is Indias largest automobile company, with consolidated revenues of USD 20 billion in 2009-10. It is the leader in commercial vehicles and among the top three in passenger vehicles. Tata Motors has products in the compact, midsize car and utility vehicle segments. The company is the world's fourth largest truck manufacturer, the world's second largest bus manufacturer, and employs 24,000 workers. Since first rolled out in 1954, Tata Motors has produced and sold over 4 million vehicles in India.Established in 1945, when the company began manufacturing locomotives, the company manufactured its first commercial vehicle in 1954. Tata Motors is a dual-listed company traded on both the Bombay Stock Exchange, as well as on the New York Stock Exchange. Tata Motors in 2005, was ranked among the top 10 corporations in India with an annual revenue exceeding INR 320 billion.

Parent Founder(s) Headquarters

Tata group JRD Tata Mumbai, Maharashtra, India [1] Ratan Tata, Chairman Ravi Kant, Vice Chairman Carl Peter Forster, CEO Prakash Telang, MD (India Operations) Ravi Pisharody, President (CVBU)

Key people

Revenue Net income Total assets Total equity Employees

94,481.34 crore (US$20.5 billion) (2009) [2] 2,571.06 crore (US$557.92 million) (2009)[2] $15.430 billion (2009) $763 million (2009) 25,000 [3] 48

FUTURES AND EQUITIES:

TIMESTAMP SPOT PRICE FUTURE PRICE EXPIRY_DT DECEMBER 15-Dec-10 1322.9 1304.6 30-Dec-10 16-Dec-10 1347 1341.85 30-Dec-10 20-Dec-10 1351 1341.6 30-Dec-10 21-Dec-10 1350 1344.9 30-Dec-10 22-Dec-10 1365.15 1367.55 30-Dec-10 23-Dec-10 1352.75 1349.2 30-Dec-10 24-Dec-10 1306.15 1312.15 30-Dec-10 27-Dec-10 1301.1 1300 30-Dec-10 28-Dec-10 1268.9 1271.15 30-Dec-10 29-Dec-10 1273.85 1275.55 30-Dec-10 30-Dec-10 1300.15 1300.65 30-Dec-10 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11 1308.35 1308.45 1298.4 1282.8 1261 1190.2 1176.7 1158.05 1218 1236.7 1182.4 1178.85 1199.55 1192.75 1194.7 1187.4 1188.3 1166 1195.85 1305.5 1304 1297.8 1281.5 1260.7 1193.45 1174.8 1158.1 1213.65 1223.75 1173.25 1170.1 1195.8 1180.3 1191.55 1187.7 1185.15 1159.85 1195.8 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11

49

CALL OPTION:
STRIK E PRICE 1250 72 103 103.2 101.4 119.15 103.25 66.9 55 28.05 28.05 50.3 1150 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 1308.3 5 1308.4 5 1298.4 1282.8 1261 1190.2 1176.7 1158.0 5 1218 1236.7 1182.4 1178.8 5 1199.5 5 168 166 166 166 166 65.25 54.35 41.4 78.5 87.8 46.95 39.9 54.7 50

TIMESTAMP EXPIRY_DT CLOSE DECEMBER 15-Dec-10 30-Dec-10 1322.9 16-Dec-10 30-Dec-10 1347 20-Dec-10 30-Dec-10 1351 21-Dec-10 30-Dec-10 1350 1365.1 22-Dec-10 30-Dec-10 5 1352.7 23-Dec-10 30-Dec-10 5 1306.1 24-Dec-10 30-Dec-10 5 27-Dec-10 30-Dec-10 1301.1 28-Dec-10 30-Dec-10 1268.9 1273.8 29-Dec-10 30-Dec-10 5 1300.1 30-Dec-10 30-Dec-10 5 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11

1300 41.4 63.75 58.65 57.85 75 57.6 26.8 16.5 5.05 3.35 0.15 1200 119 113 105 94.55 78.05 36.6 29.7 23.35 45.3 50.4 22.85 17 22.8

1350 21.25 32.95 28.55 26.95 36.05 22.45 7.65 3.7 1.1 0.5 0.05 1250 77.15 76.1 70.15 60.55 45.15 19.65 14.85 10.9 23.2 25.9 10.2 6.55 8

19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11

27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11

1192.7 5 1194.7 1187.4 1188.3 1166 1195.8 5

41.8 49.3 43.4 39.7 16.4 43

14.55 17.3 13 8.95 1.45 0.05

4.15 4.75 2.9 1.75 0.4 0.05

51

PUT OPTION:
TIMESTAMP DECEMBER 15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 22-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 30-Dec-10 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11 EXPIRY_DT 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 SPOT PRICE 1322.9 1347 1351 1350 1365.15 1352.75 1306.15 1301.1 1268.9 1273.85 1300.15 STRIKE PRICE 1250 17.9 9.95 7.55 5.4 2.6 2.75 4.15 4.2 6.55 3.15 0.05 1150 5.7 4.55 5.15 7.3 7.95 22.3 31.4 37.45 15.25 12.25 24 20.95 9.65 12.15 8.45 6.35 4.65 8.05 0

1300 35.95 20.05 16.95 13.3 6.75 7.75 14.9 17.05 32.8 27.45 0.1 1200 11.2 10.45 11.05 15.1 17.65 42.8 54.65 65.15 31.2 26.4 49.05 47.3 27.4 34.45 27.45 25.2 24.2 41.55 0

1350 64.45 40 36 32.15 18.7 23.8 44.9 53.35 81.45 75.45 48 1250 21.9 22.05 23.5 29.95 35.4 74.45 88.1 107.75 57.1 53.45 87.7 86.35 70 79.95 65 66 66.2 92.9 0

27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11

1308.35 1308.45 1298.4 1282.8 1261 1190.2 1176.7 1158.05 1218 1236.7 1182.4 1178.85 1199.55 1192.75 1194.7 1187.4 1188.3 1166 1195.85

52

ANALYSIS:
The objective of this analysis is to evaluate the profit/loss position of futures and options. This analysis is based on sample data taken of TATA MOTORS CO. LTD scrip. This analysis considered the Dec & Jan contract of TATA MOTORS CO. LTD. The lot size of TATA MOTORS CO. LTD is 250, the time period in which this analysis done is from 15.12.10 31.01.11.

Future Market
BUYER 03/01/11(bought) 14/01/01(sold) 1304 1173.5 loss= 130.75 Net loss=loss on each share*lot size =130.75*250 =32687.5 rs.

HEDGING Short concept(FUTURES)

03/01/11 12/01/11 (sold) (buy back) 1304.6 1213.65

EQUITY
03/01/11 12/01/11 (bought) (sold) 1308.45 1218 Loss= 90.45 Net loss=loss on each share*no. of shares purchased

profit= 90.3 Net profit=pfofit on each share*lot size =90.35*250

=90.45*250 =22612.5rs. =22587.5 rs.

53

The loss occurred in equity market is covered by making hedging in futures market.By hedging the total loss is 25rs(22612.5-22587.5) which is minimum and will be more if he would have hedged any other day.

Entry on dec 15th and when to exit

Max. profit 15/12/12 (bought) 1304.6 22/12/12 (sold) 1367.55 max. loss 15/12/12 28/12/12 (bought) (sold) 1304.6 1271.15 loss=33.45 Max loss=loss per share*lot size =33.45*250=8362.5rs

Profit= 62.95 Max profit=profit per share*lot size =62.95*250=15737.5rs

On any other day client will not exceed the above loss or the above profit.

OPTION MARKET
CALL OPTION
On 15th dec bought 6 Lots of TATA MOTORS that is 1500(250*6) IN THE MONEY Spot price Less:-strike price Amount Less:-premium Profit/loss -9.45 -28.85 -16.2 1312.55 1250 62.55 72 AT THE MONEY 1312.55 1300 12.55 41.40 OUT OF THE MONEY 1312.55 1350 -37.45 21.25

If client enters on this particular day he will get loss at any cost. 54

PUT OPTION
On 13th jan bought 6 Lots of TATA MOTORS that is 1500(250*6) IN THE MONEY 1250 1223.75 26.25 12.25 14 AT THE MONEY 1200 1223.75 23.75 26.4 -2.65 OUT OF THE MONEY 1150 1223.75 -73.75 53.45 -20.3

Strike price Less:-spot price Amount Less:Profit/loss

Client can get profit by entering on this date at IN THE MONEY. Graph showing price movement of FUTURE & MARKET

RELIANCE COMMUNICATIONS
55

Looking back, looking forward

Reliance Anil Dhirubhai Ambani Group, an offshoot of the Reliance Group founded by Shri Dhirubhai H Ambani (1932-2002), ranks among Indias top three private sector business houses in terms of net worth. The group has business interests that range from telecommunications (Reliance Communications Limited) to financial services (Reliance Capital Ltd) and the generation and distribution of power (Reliance Infrastructure Limited). Reliance ADA Groups flagship company, Reliance Communications, is India's largest private sector information and Communications Company, with over 100 million subscribers. It has established a pan-India, high-capacity, integrated (wireless and wireline), convergent (voice, data and video) digital network, to offer services spanning the entire infocomm value chain. Other major group companies Reliance Capital and Reliance Infrastructure are widely acknowledged as the market leaders in their respective areas of operation. Graph showing price movement of FUTURE & MARKET

56

Type Industry Founded Founder(s) Headquarters Area served

Public (NSE: RCOM, BSE: 532712) Telecommunications 2004 Dhirubhai Ambani Navi Mumbai, Maharashtra, India India Anil Ambani (Chairman) Satish Seth (MD) Wireless Telephone Internet

Key people

Products

Television Data Cards Recharge Vouchers VC

57

FUTURES AND EQUITIES:

TIMESTAMP DECEMBER 15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 22-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 30-Dec-10 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11 MARKET 129.35 128.95 126.85 127.45 128.2 128.6 141.95 137 139.4 138.7 138.45 FUTURE 129.95 129.45 126.85 128.05 128.75 129.05 142.55 137.2 139.7 138.85 138.5 EXPIRY_DT 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10

145.35 148.25 144.3 140.05 139.75 139.35 135.25 137.65 138.65 138.5 138.5 131.65 132.1 130.8 133.4 136.4 134.8 132.9 127.7

146.3 148.7 145.1 140.8 140.75 139.3 135.35 138.25 138.8 138.8 138.7 131.95 132.6 130.95 133.75 136.5 134.9 132.95 127.7

27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11

CALL OPTION:
TIMESTAMP DECEMBER 15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 22-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 SPOT PRICE 129.35 128.95 126.85 127.45 128.2 128.6 141.95 137 139.4 138.7 STRIKE PRICE 120 11.95 11.35 8.55 1.3 0.95 9.9 0.25 17.1 22.5 0.05 130 5.25 4.55 3 4.95 4.15 2.55 0.75 7.65 9.6 0.1 140 2.15 1.65 0.85 13 11.85 0.55 3.45 2.2 2.35 2.35

58

30-Dec-10 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11

138.45

19.2 130 18.25 1.25 16.45 12.85 13.1 10.85 8.65 10.95 10.8 10.1 10.35 5.25 5 2.55 5.05 0.65 5.3 3.5 0.1

8.4 140 10.5 3.3 9.3 6.55 6.55 5.65 3.75 4.65 4.55 4.5 4.15 1.45 1.1 9.55 0.9 4.7 0.55 0.15 0.05

0.05 150 5.9 7.7 4.7 3.05 3.1 2.6 1.6 1.9 1.75 1.6 1.35 0.5 0.35 18.8 0.3 15 0.15 0.05 0.05

145.35 148.25 144.3 140.05 139.75 139.35 135.25 137.65 138.65 138.5 138.5 131.65 132.1 130.8 133.4 136.4 134.8 132.9 127.7

PUT OPTION:
STRIKE TIMESTAMP DECEMBER 15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 22-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 30-Dec-10 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 SPOT PRICE 129.35 128.95 126.85 127.45 128.2 128.6 141.95 137 139.4 138.7 138.45 PRICE 120 2.1 1.75 1.85 1.3 0.95 0.75 0.25 0.2 0.1 0.05 0.05 130 1.75 1.25 1.6 2.1 2.05 2.2 3.1 2.35 1.9 1.85 130 5.4 5 5.7 4.95 4.15 3.5 0.75 0.85 0.25 0.1 0.05 140 4.25 3.3 4.35 5.8 5.65 6.3 8.15 6.25 5.6 5.5 140 12 13.75 13.75 13 11.85 11.5 3.45 5 2.7 2.35 1.4 150 9.5 7.7 9.75 12.45 12.1 13.4 15.5 12 12.45 11.9

145.35 148.25 144.3 140.05 139.75 139.35 135.25 137.65 138.65 138.5

59

14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11

138.5 131.65 132.1 130.8 133.4 136.4 134.8 132.9 127.7

1.7 3.5 2.55 2.55 1.35 0.65 0.6 0.5 2

5.25 9.75 8.2 9.55 6.9 4.7 5.5 7.05 11.45

12.1 16.05 18.8 18.8 20.4 15 16.15 14.5 20.8

ANALYSIS:
The objective of this analysis is to evaluate the profit/loss position of futures and options. This analysis is based on sample data taken of RELIANCE COMMUNICATIONS scrip. This analysis considered the Dec & Jan contract of RELIANCE COMMUNICATIONS. The lot size of RELIANCE COMMUNICATIONS is 2000, the time period in which this analysis done is from 15.12.10 31.01.11. Future Market 03/01/11(bought) 14/01/01(sold) 148.7 138.7 Loss= 10 Net loss=loss on each share*lot size =10*2000 =20000 rs.

HEDGING

60

Short concept(FUTURES)
03/01/11 18/01/11 (sold) (buy back) 148.7 132.6

EQUITY
03/01/11 18/01/11 (bought) (sold) 148.25 132.1 Loss= 16.15 Net loss=loss on each share*no. of shares purchased

profit= 16.1 Net profit=profit on each share*lot size =16.1*2000 =32200 rs.

=16.15*2000 =32300rs.

The loss occurred in equity market is covered by making hedging in futures market. By hedging the total loss is 100rs (32300-32200) which is minimum and will be more if he would have hedged any other day.

Entry on dec 16th and when to exit

Max. Profit 16/12/12 (bought) 129.45 24/12/12 (sold) 142.55 max. loss 16/12/12 20/12/12 (bought) (sold) 129.45 126.85 loss=2.6 Max loss=loss per share*lot size =2.6*2000=5200rs

Profit= 13.1 Max profit=profit per share*lot size =13.1*2000=26200rs

On any other day client will not exceed the above loss or the above profit.

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OPTION MARKET
CALL OPTION
On 30th dec client bought 3 Lots of RELIANCE COMMUNICATIONS that is (2000*3=6000)

Spot price Less:-strike price Amount Less:-premium Profit/loss *lot size Total profit/loss

IN THE MONEY 138.45 120 18.45 19.2 -0.75 6000 -4500

AT THE MONEY 138.45 130 8.45 8.4 0.05 6000 300

OUT OF THE MONEY 138.45 140 -1.55 0.05 -1.5 6000 -9000

If client enters on this particular day he will get profit only at strike price 130 at AT THE MONEY.

PUT OPTION
On 25th Jan bought 3 Lots of RELIANCE COMMUNICATIONS that is 6000(2000*3) OUT OF THE MONEY 130 132.9 -2.9 0.5 -2.4 AT THE MONEY 140 132.9 7.1 7.05 0.05 IN THE MONEY 150 132.9 17.1 14.5 2.6

Strike price Less:-spot price Amount Less:-premium Profit/loss

62

*lot size
Total profit/loss

6000
-14400

6000
300

6000
15600

Client can get profit by entering on this date at AT THE MONEY & IN THE MONEY.

HEDGING
As buyers think to purchase at less cost they will opt for 130 strike price and as sellers think to sell at highest price they opt for 150 strike price. So making hedging at 130 call & 150 put.

IDBI
The Industrial Development Bank of India Limited (IDBI) (BSE: 500116) is one of India's leading public sector banks and 4th largest Bank in overall ratings. RBI categorised IDBI as an "other public sector bank". It was established in 1964 by an Act of Parliament to provide credit and other facilities for the development of the fledgling Indian industry. It is currently 10th largest development bank in the world in terms of reach with 1300 ATMs, 758 branches and 513 centers. Some of the institutions built by IDBI are the National Stock Exchange of India (NSE), the National Securities Depository Services Ltd (NSDL), the Stock Holding Corporation of India (SHCIL), the Credit Analysis & Research Ltd, the Export-Import Bank of India(Exim Bank), the Small Industries Development Bank of India(SIDBI), the Entrepreneurship Development Institute of India, and IDBI BANK, which today is owned by the Indian Government, though for a brief period it was a private scheduled bank.

Type Industry Founded

Public (BSE: 500116) Banking Financial services

July 1964

Headquarters Mumbai, India

63

Key people
Products

Type

Finance and insurance 17,563.59 crore (US$3.81 billion) (2010) 1,031.13 crore (US$223.76 million) (2010) 8,989

Revenue
Net income

Employees

GRAPH SHOWING MARKET AND FUTURES PRICE MOVEMENT:

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FUTURES AND EQUITIES:

TIMESTAMP DECEMBER 15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 31-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 30-Dec-10 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11 MARKET 155.8 161.15 161.75 166.15 166.65 164.65 164.35 162.05 159.15 160.25 160.35 FUTURE 155.8 162.15 162.3 166.6 166.55 165.1 165 162.1 159.65 160.75 160.25 EXPIRY_DT 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10

165.05 166.05 162.75 157.95 156.75 152.55 148.7 148 152.1 148.1 146.6 140.75 155.15 155.3 150.05 151.05 152.7 151.85 142.2

166.05 167.2 163.35 158.95 157.2 152.8 148.85 148.35 152.7 148.2 146.8 141.25 144.15 145.2 150.3 151.2 152.9 152 142.15

27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11 27-Jan-11

65

CALL OPTION:
TIMESTAMP DECEMBER 15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 22-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 30-Dec-10 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11 SPOT PRICE 150 155.8 161.15 161.75 166.15 166.65 164.65 164.35 162.05 159.15 160.25 160.35 8.75 13.15 13 17.65 16.85 15.8 15.2 12.1 9.85 11.3 9.5 140 26.9 26.9 26.9 26.9 26.9 15.15 11.65 9.3 14.1 10.25 9.4 4.55 6.05 6.55 10.85 11.65 13.1 12 1.85 160 3.9 6.1 5.6 8.15 7.65 6.3 5.65 3.15 1.4 1.5 0.15 150 17.5 18 14.95 11.4 10.05 6.9 4.95 4.5 6.4 3.9 3 1.25 1.4 1.5 3.2 3.4 4.3 3.05 0.05 170 1.55 2.15 2.05 2.75 2.4 1.6 1.05 0.4 0.15 0.1 0.05 160 9.75 10.45 8 5.75 4.75 3.1 2 1.6 2.45 1.35 0.85 0.4 0.3 0.35 0.6 0.55 0.65 0.25 0.05 STRIKE PRICE

165.05 166.05 162.75 157.95 156.75 152.55 148.7 148 152.1 148.1 146.6 140.75 155.15 155.3 150.05 151.05 152.7 151.85 142.2

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PUT OPTION:
TIMESTAMP DECEMBER 15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 22-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 30-Dec-10 JANUARY 31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11 MARKET 150 155.8 161.15 161.75 166.15 166.65 164.65 164.35 162.05 159.15 160.25 160.35 8.75 13.15 13 17.65 16.85 15.8 15.2 12.1 9.85 11.3 9.5 140 26.9 26.9 26.9 26.9 26.9 15.15 11.65 9.3 14.1 10.25 9.4 4.55 6.05 6.55 10.85 11.65 13.1 12 1.85 SRIKE PRICE 160 3.9 6.1 5.6 8.15 7.65 6.3 5.65 3.15 1.4 1.5 0.15 150 17.5 18 14.95 11.4 10.05 6.9 4.95 4.5 6.4 3.9 3 1.25 1.4 1.5 3.2 3.4 4.3 3.05 0.05 170 1.55 2.15 2.05 2.75 2.4 1.6 1.05 0.4 0.15 0.1 0.05 160 9.75 10.45 8 5.75 4.75 3.1 2 1.6 2.45 1.35 0.85 0.4 0.3 0.35 0.6 0.55 0.65 0.25 0.05

ANALYSIS:
The objective of this analysis is to evaluate the profit/loss position of futures and options. This analysis is based on sample data taken of IDBI scrip. This analysis considered the Dec & Jan contract of IDBI. The lot size of IDBI is 2000, the time period in which this analysis 31.01.11. done is from 15.12.10

165.05 166.05 162.75 157.95 156.75 152.55 148.7 148 152.1 148.1 146.6 140.75 155.15 155.3 150.05 151.05 152.7 151.85 142.2

Future Market
BUYER 03/01/11(bought) 14/01/01(sold) 167.2 148.725 loss= 18.475 Net loss=loss on each share*lot size 67

=18.475*2000 =36950 rs.

Entry on dec 15th and when to exit

Max. Profit 15/12/10 (bought) 155.8 21/12/10 (sold) 166.6 No loss 15/12/10 (bought) on any date (sold) 155.8 at any price no loss

Profit= 10.8 Max profit=profit per share*lot size =10.8*2000=21600rs

On any other day client will not exceed the above profit and he dont have any chance of getting loss.

OPTION MARKET
CALL OPTION
On 13th Jan client bought 4 Lots of IDBI that is (2000*4=8000)
IN THE MONEY 148.1 140 8.1 10.25 -2.15 8000 AT THE MONEY 148.1 150 -1.9 3.9 2 8000 OUT OF THE MONEY 148.1 160 -11.9 1.35 -10.55 8000

Spot price Less:-strike price Amount Less:-premium Profit/loss *lot size

68

Total profit/loss

-17200

16000

-84400

If client enters on this particular day he will get profit only at strike price 150 at AT THE MONEY.

PUT OPTION
On 25th Jan bought 4 Lots of IDBI that is 8000(2000*4) IN THE MONEY 160 151.85 8.15 0.05 8.1 8000
64800

Strike price Less:-spot price Amount Less:-premium Profit/loss *lot size

Total profit/loss

AT THE MONEY 150 151.85 -1.85 1.1 -0.75 8000

-6000

OUT OF THE MONEY 140 151.85 -11.85 8.6 -3.25 8000

-26000

Client can get profit by entering on this date at IN THE MONEY.

HEDGING
As buyers think to purchase at less cost they will opt for 140 strike price and as sellers think to sell at highest price they opt for 160 strike price. So making hedging at 140 calls & 160 put on 27th Jan 2011 eliminates the risk.
CALL OPTION AT 140 STRIKE PRICE Spot price 142.2 Less:-strike price Amount 140 2.2 PUT OPTION AT 160 STRIKE PRICE Strike price 160 Less:-spot price Amount 142.2 17.8

69

Less:-premium Profit/loss *lot size Total Profit/loss

1.85 0.35 2000 700

Less:-premium Profit/loss *lot size Total Profit/loss

17.8 0 2000 0

By hedging the total profit is 700rs which is maximum and will be less if he would have hedged any other day.

IOC
Indian Oil Corporation, or Indian Oil, (BSE: 530965 | NSE: IOC) is an Indian stateowned oil and gas company. It is Indias largest commercial enterprise, ranking 125th on the Fortune Global 500 list in 2010. Indian Oil and its subsidiaries account for a 47% share in the petroleum products market, 34.8% share in refining capacity and 67% downstream sector pipelines capacity in India. The Indian Oil Group of Companies owns and operates 10 of India's 19 refineries with a combined refining capacity of 65.7 million metric tons per year. Indian Oil operates the largest and the widest network of fuel stations in the country, numbering about 17606 (15557 regular ROs & 2049 Kisan Sewa Kendra). It has also started Auto LPG Dispensing Stations (ALDS). It supplies Indane cooking gas to over 47.5 million 70

households through a network of 4,990 Indian distributors. In addition, Indian Oil's Research and Development Center (R&D) at Faridabad supports, develops and provides the necessary technology solutions to the operating divisions of the corporation and its customers within the country and abroad. Subsequently, Indian Oil Technologies Limited - a wholly owned subsidiary, was set up in 2003, with a vision to market the technologies developed at Indian Oil's Research and Development Center. It has been modelled on the R&D marketing arms of Royal Dutch Shell and British Petroleum.

71

Type

State-owned enterprise Public (BSE: 530965 NSE: IOC) Oil and Gas 1964 New Delhi, India S V Narasimhan, [[Chairman][acting]] Oil Petroleum Natural gas Petrochemical Fuel Lubricant 272,689.95 crore (US$60.54 billion) (200910) 10,220.55 crore (US$2.27 billion) (200910) $29.672 billion (2009-10) $11.686 billion (2009-10) 36,307 (2009)

Industry Founded Headquarters Key people

Products

Revenue

Net income

Total assets Total equity Employees

72

FUTURES AND EQUITY:

TIMESTAMP DECEMBER 15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 22-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 30-Dec-10 MARKET 380.5 379.35 367.65 363.95 366.45 362.55 354.8 354.3 347.65 348.45 337.3 FUTURE 382.4 380.9 369.45 366.2 368.6 363.85 356 354.5 348.4 348.3 337.2 EXPIRY_DT 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10 30-Dec-10

JANUARY 31-Dec-10 342.4 3-Jan-11 353.6 TIMESTAMP SPOT PRICE 4-Jan-11 348.8 DECEMBER 5-Jan-11 349.5 15-Dec-10 380.5 6-Jan-11 341.55 16-Dec-10 379.35 7-Jan-11 343.75 20-Dec-10 367.65 10-Jan-11 335.2 21-Dec-10 363.95 11-Jan-11 328.3 22-Dec-10 366.45 12-Jan-11 319.55 23-Dec-10 362.55 13-Jan-11 310.35 24-Dec-10 354.8 14-Jan-11 309.8 27-Dec-10 354.3 17-Jan-11 314.25 28-Dec-10 347.65 18-Jan-11 314 29-Dec-10 348.45 19-Jan-11 313.65 30-Dec-10 337.3 20-Jan-11 312.95 21-Jan-11 JANUARY 24-Jan-11 31-Dec-10 25-Jan-11 3-Jan-11 27-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 TIMESTAMP 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11 327.8 329.85 342.4 336.8 353.6 328.7 348.8 349.5 341.55 343.75 335.2 328.3 319.55 310.35 309.8 314.25 SPOT PRICE 314 313.65 312.95 327.8 329.85 336.8 328.7

344.95 27-Jan-11 355.1 27-Jan-11 STRIKE PRICE27-Jan-11 351.55 350.95 340 27-Jan-11360 27.7 343.75 45 27-Jan-11 45 27-Jan-11 27.7 344.3 45 27-Jan-11 27.7 335.3 27.7 330.15 45 27-Jan-11 27.7 321.4 45 27-Jan-11 45 27-Jan-11 11.2 310.95 45 27-Jan-11 5.2 311.05 314.25 45 27-Jan-11 2.7 314.6 45 27-Jan-11 1.3 1.45 314.5 45 27-Jan-11 0.5 27-Jan-11 0.2 313.1 328.2 27-Jan-11 330.05 320 27-Jan-11340 107.6 27-Jan-11 17.85 337.3 107.6 27-Jan-11 23 328.8 107.6 19 107.6 19.25 107.6 13.5 107.6 12 107.6 12 107.6 10.95 11.65 5.6 8.4 3.45 6.4 2.55 8.55 2.85 1.65 STRIKE 7.05 PRICE 4 0.85 5 0.4 73 8.75 2.3 14 3.4 19 2.05 14.55 0.05

380 14.15 11 5.85 5.9 5 3.1 1.45 0.6 0.3 0.15 0.05 360 9.15 11.4 8.65 9.5 6.6 5.5 4.5 3.4 2.25 1.7 1.5 1.1 1.1 0.55 0.55 0.75 0.5 0.75 0.05

CALL OPTION: PUT OPTION:

15-Dec-10 16-Dec-10 20-Dec-10 21-Dec-10 22-Dec-10 23-Dec-10 24-Dec-10 27-Dec-10 28-Dec-10 29-Dec-10 30-Dec-10

380.5 379.35 367.65 363.95 366.45 362.55 354.8 354.3 347.65 348.45 337.3

340 3 3 3 3 3 3 3 7.75 9.75 9.75 1.5 320 0.45 0.85 0.85 8.3 8.3 8.3 8.3 8.3 8.3 14.8 14.8 14.8 11.7 9 9 2.6 0.8 0.15 0.15

360 4.5 6 6 6 6 7 9 9 13 11.5 11.5 340 12 2.3 2.3 7.95 8.5 9.9 10 10 10 31 31 23 23 25 25 25 25 3.1 3.1

380 11.6 11.6 15 18 13.05 13.05 13.05 13.05 13.05 32 34.5 360 15 15 15 15 15 24.7 24.7 24.7 24.7 24.7 48 48 48 48 48 48 48 48 28.45

31-Dec-10 3-Jan-11 4-Jan-11 5-Jan-11 6-Jan-11 7-Jan-11 10-Jan-11 11-Jan-11 12-Jan-11 13-Jan-11 14-Jan-11 17-Jan-11 18-Jan-11 19-Jan-11 20-Jan-11 21-Jan-11 24-Jan-11 25-Jan-11 27-Jan-11

342.4 353.6 348.8 349.5 341.55 343.75 335.2 328.3 319.55 310.35 309.8 314.25 314 313.65 312.95 327.8 329.85 336.8 328.7

ANALYSIS:
The objective of this analysis is to evaluate the profit/loss position of futures and options. This analysis is based on sample data taken of IOC scrip. This analysis considered the Dec & Jan contract of IOC. The lot size of IOC is 500, the time period in which this analysis done is from 15.12.10 31.01.11.

Future Market
BUYER 74

04/01/11(bought) 14/01/01(sold)

351.55 311.05 Loss= 40.05

Net loss=loss on each share*lot size =40.05*500 =20025 rs.

Entry on dec 16th and when to exit

No profit 16/12/10 (bought) 380.9 On any date (sold) at any price No profit 16/12/10 max. Loss (bought) 380.9 337.2 43.7 Max loss=loss per share*lot size =43.7*500=21850rs On any other day client will not exceed the above loss and he dont have any chance of getting profit.

30/12/10 (sold)

OPTION MARKET
CALL OPTION
On 17th Jan client bought 6 Lots of IOC that is (500*6=3000)
IN THE MONEY 314.25 320 -5.75 AT THE MONEY 314.25 340 -25.75 OUT OF THE MONEY 314.25 360 -45.75

Spot price Less:-strike price Amount

75

2.85 Less:-premium Profit/loss *lot size Total profit/loss 8.55 -14.3 3000 -42900 -28.6 3000 -85800 1.1 -46.85 3000 -140550

If client enters on this particular day he will not get profit only at any strike price.

PUT OPTION
On 25th Jan bought 6 Lots of IOC that is 3000(500*6) IN THE MONEY 360 336.8 23.2 0.15 23.05 3000
69150

Strike price Less:-spot price Amount Less:-premium Profit/loss *lot size

Total profit/loss

AT THE MONEY 340 336.8 3.2 3.1 0.1 3000

300

OUT OF THE MONEY 320 336.8 -16.8 48 -64.8 3000

-194400

Client can get profit by entering on this date at IN THE MONEY & AT THE MONEY.

HEDGING
As buyers think to purchase at less cost they will opt for 320 strike price and as sellers think to sell at highest price they opt for 360 strike price.So making hedging at 140 calls & 160 put on 12th jan 2011 eliminates the risk.
CALL OPTION AT 320 STRIKE PRICE Spot price 319.55 PUT OPTION AT 360 STRIKE PRICE Strike price 360

76

Less:-strike price Amount Less:-premium Profit/loss *lot size Total Profit/loss

320 Less:-spot price -0.45 Amount 11.65 Less:-premium -12.1 Profit/loss 3000 *lot size -36300 Total Profit/loss 47250 3000 15.75 24.7 40.45 319.55

By hedging the total profit is 10950rs (47250-36300) which is maximum and will be less if he would have hedged any other day.

77

CHAPTER 6 FINDINGS AND CONCLUSIONS

78

FINDINGS:

The scrip value of reliance communications is declined due to 2G scam problem. IDBI has well versed exchanged in providing good sound loans to industrial sector so the share value of IDBI increased. As per present condition it is good to invest in banking sector. There are many reasons that the market is going down such as political issues,inflation etc:Derivative market is a good return market compared to equity market.

79

CONCLUSION:Derivative products serve the vitally important economic functions of price discovery and risk management. The transparency, which emerges from their trading mechanism, ensures the price discovery in the underlying market. Further they serve as a risk management tools by facilitating the trading of risks among the market participants. These products enable market participants to take the desired risks. From the above project it is proved that the underlying stock values changes according to the news. Depending on underlying stock prices the derivative values also changes. By doing above analysis we can know when to buy, at what time to sell and how much risk we can take. Above project has done practical analysis on three companies for one and a half month. Se Graphs and tables are used to analyze more.

FUTURE ENHANCEMENT:-

In future I like to introduce software based on this analysis. It automatically calculates the problem and gives us result. By using this software we can get more accurate values. It also tells that depending on the news how the share value will fluctuate, where to buy the options and futures and where to sell it. This software also gives the fundamental analysis on the individual company. By using this software we can analyze more and help to take profitable decisions.

80

LIMITATIONS OF THE STUDY:

The following are the limitations of the study:

The Scrip chosen for analysis is Nifty50 and the contract taken in dec 2010 is a 45 days contract ending in jan. The data collected is completely restricted to the NIFTY 50 hence this analysis cannot be taken universally. The data collected is basically confined to secondary sources, with very little amount of primary data associated with the project. There is a constraint with regard to time allocated for the research study. The availability of information in the form of annual reports & price fluctuations of the companies is a big constraint to the study. The subject of derivatives is vast. It requires extensive study and research to understand the depth of the various instruments operating in the market. The derivative market is a dynamic one .premiums, contract rates, strike price fluctuates on demand and supply basis. Therefore data related to last few trading months was only considered and interpreted.

81

BIBLIOGRAPHY

Prasanna Chandra

Investment analysis &portfolio mgmt

Websites:
www.derivatives.com www.nseindia.com www.moneycontrol.com www.money.rediff.com www.bseindia.com www.sharekhan.com www.sebi.gov.in

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