Project Dissertation

A STUDY ON FINANCIAL DERIVATIVES

(FUTURES AND OPTIONS)

SUBMITTED TO:

SUBMITTED BY:

AMIT SHARMA

UNDER THE GUIDANCE OF

PROF. SACHIN KSHIRSAGAR

MARATHWADA MITRA MANDAL

INSTITUTE OF MANAGEMENT EDUCATION RESEARCH AND TRAINING

Pune 411052

(2018- 2020)

i
 CERTIFICATE FROM THE INSTITUTE

This is to certify that the Project Report titled “A Study on Financial Derivatives (Futures
and Options)” is a bonafide work carried out by Mr. Amit Sharma of MBA 2018-20 and
submitted to IMERT College in partial fulfillment of the requirement for the award of the
Degree of Masters of Business Administration.

Signature of Guide Signature of Head

Place: Seal of Head

Date:

ii
 DECLARATION

I Amit Sharma, student of MBA 2018-20 of Institute of Management Education Resource

& Training declare that Project Report on “A Study on Financial Derivatives (Futures and
Options)” submitted in partial fulfillment of Degree of Masters of Business Administration
is the original work conducted by me.

The information and data given in the report is authentic to the best of my knowledge. This
Report is not being submitted to any other University for award of any other Degree,
Diploma and Fellowship.

Place:
Name of the student:
Date:

iii
 ACKNOWLEDGEMENT

The satisfaction and euphoria that accompany the successful completion of any task would
be incomplete without mentioning the people whose constant guidance and encouragement
made it possible. I take pleasure in presenting before you, my project, which is a result of
studied blend of both research and knowledge.

I have great pleasure in expressing my indebtedness to my project mentor Prof. SACHIN

KSHIRSAGAR for his constant help at each stage.

I thank , Professor and Head of the Department, IMERT College for guiding me through
proper grooves and giving me the necessary support.

With gratitude,
Amit Sharma

iv
ABSTRACT

The emergence of the market for derivatives 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. Derivatives are
risk management instruments, which derive their value from an underlying asset. Prices in
an organized derivatives market reflect the perception of market participants about the
future and lead the price of underlying to the perceived future level.

In recent times the derivative markets have gained importance in terms of their vital role in
the economy. The increasing investments in stocks (domestic as well as overseas) have
attracted my interest in this area. Numerous studies on the effects of futures and options
listing on the underlying cash market volatility have been done in the developed markets.
Derivatives are mostly used for hedging purpose. In this segment, the investor enjoys huge
profits with limited downside.

Also, since infrastructure growth is directly correlated with improvement in economy and
with the Government’s initiative of 100 smart cities being planned, we will need solid
infrastructure development including housing, roads, highways and IT infra across the
country. So as we see India’s economic activities picking up, infrastructure sector will be
the early beneficiary apart from capital goods, power, IT. Thus, from investment point of
view, this sector seems to gain the most and investors might be watching out for these
stocks.

v
 TABLE OF CONTENTS

1. Introduction ……………… 1
2. Literature Review ……………… 10

3. Need, Objectives and Scope of the Study ……………… 15

3.1 Need for Study ……………… 15

3.2 Objectives of the Study ……………… 15

3.3 Scope of the Study ……………… 15

4. Methodology ……………… 16

4.1 Data Collection Techniques ……………… 16

5. Data Analysis ……………… 17

5.1 Introduction to the case ……………… 17

5.2 Data Analysis ……………… 18

6. Observation and Findings ……………… 28

7. Conclusion, Recommendations and Limitations ……………… 29

7.1 Conclusion ……………… 29

7.2 Recommendations ……………… 29

7.3 Limitations of the study ……………… 30

8. Bibliography ……………… 31

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 List of Graphs

Graph No. Graph Name Page Number

Figure 1 Payoff diagram of a long futures position 05
Figure 2 Payoff Diagram of a Short Futures Position 05
Figure 3 Payoff diagram of a call option holder 08
Figure 4 Payoff diagram of a call option writer 08
Figure 5 Payoff diagram of a put option holder 09
Figure 6 Payoff diagram of a put option writer 09
5.1 Analysis I 19
5.2 Analysis II 21
5.3 Comparison 22
5.4 Analysis III 23

vii
Chapter 1.
INTRODUCTION

A derivative is a security with a price that is dependent upon or derived from one or more
underlying assets. The derivative itself is a contract between two or more parties based
upon the asset or assets. Its value is determined by fluctuations in the underlying asset.
The most common underlying assets include stocks, bonds,
commodities, currencies, interest rates and market indexes.

Derivatives either be traded over-the-counter (OTC) or on an exchange. OTC derivatives

constitute the greater proportion of derivatives in existence and are unregulated, whereas
derivatives traded on exchanges are standardized. OTC derivatives generally have greater
risk for the counterparty than do standardized derivatives.

Originally, derivatives were used to ensure balanced exchange rates for goods traded
internationally. With differing values of different national currencies, international traders
needed a system of accounting for these differences. Today, derivatives are based upon a
wide variety of transactions and have many more uses. There are even derivatives based on
weather data, such as the amount of rain or the number of sunny days in a particular
region.

Three broad categories of participants – hedgers, speculators, arbitrageurs trade in the

derivatives market.

1. Hedgers:
These are investors with a present or anticipated exposure to the underlying asset which is
subject to price risks. Hedgers use the derivatives markets primarily for price risk
management of assets and portfolios.

2. Speculators:
These are individuals who take a view on the future direction of the markets. They take a
view whether prices would rise or fall in future and accordingly buy or sell futures and
options to try and make a profit from the future price movements of the underlying asset.

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3. Arbitrageurs:
They take positions in financial markets to earn riskless profits. The arbitrageurs take short
and long positions in the same or different contracts at the same time to create a position
which can generate a riskless profit.

Functions of Derivatives:

The various functions of derivatives include:

Derivatives help in discovery of future as well as current prices.

The derivatives market helps to transfer risks from those who have them but may not like
them to those who have appetite for them.
Derivatives, due to their inherent nature, are linked to the underlying cash markets. With
the introduction of derivatives, the underlying market witnesses higher trading volumes
because of participation by more players who would not otherwise participate for lack of
an arrangement to transfer risk.
Speculative trades shift to a more controlled environment of derivatives market. In the
absence of an organized derivatives market, speculators trade in the underlying cash
markets. Margining, monitoring and surveillance of the activities of various participants
become extremely difficult in these kind of mixed markets.
It acts as a catalyst for new entrepreneurial activity.

Types of Derivatives:

The most commonly used derivatives contracts are forwards, futures, options and swaps.
a. Forwards: A forward contract is a customized contract between two entities, where
settlement takes place on a specific date in the future at today's pre-agreed price.

b. Futures: A futures contract is an agreement between two parties to buy or sell an asset
at a certain time in the future at a certain price. Futures contracts are special types of
forward contracts in the sense that the former are standardized exchange-traded
contracts.

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c. 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 given 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.

d. Swaps: 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.

A. Introduction to Futures:
A Futures contract is an agreement between two parties to buy or sell an asset at a certain
time in the future at a certain price. Future markets were designed to solve the problems
that exist in forward markets. But unlike forward contracts, the futures contracts ate
standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard features of the contract. It is a standardized contract
with standard underlying instrument, a standard quantity and quality of the underlying
instrument that can be delivered, (or which can be used for reference purposes in
settlement) and a standard timing of such settlement.

The standardized items in a futures contract are:

Quantity of the underlying
Quality of the underlying
Date and Month of Delivery
The units of Price quotations and
Minimum price changes
Location of settlement

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Types of Futures
On the basis of the underlying asset they derive, the futures are divided into following
types:

1. Stock Futures
The stock futures are the futures that have the underlying asset as the individual securities.
The settlement of the stock futures is of cash settlement and the settlement price of the
future is the closing price of the underlying security.

2. Index Futures
Index futures are the futures, which have the underlying asset as an Index. The Index
futures are also cash settled. The settlement price of the Index futures shall be the closing
value of the underlying index on the expiry date of the contract.

3. Commodity Futures
In this case, the underlying asset is a commodity. It can be an agricultural commodity like
wheat corn, or even a precious asset like gold, silver etc.

4. Financial Futures
In this case, the underlying assets are financial instruments like money market paper,
Treasury Bills, notes, bonds etc.

5. Currency Futures
Currency futures are those in which the underlying assets are major convertible currencies
like the U.S. dollar, the Pound Sterling, the Euro and the Yen etc.

The mechanics of futures trading are straightforward: both buyers and sellers deposit funds
traditionally called margin but more correctly characterized as a performance bond or good
faith deposit with a brokerage firm. This amount is typically a small percentage, less than
10 percent of the total value of the item underlying the contract.

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Payoff of a Long Futures Position

Figure 1: Payoff diagram of a long futures position

As indicated in Figure 1, if you buy (go long) a futures contract and the price goes up, you
profit by the amount of the price increase times the contract size; if you buy and the price
goes down, you lose an amount equal to the price decrease times the contract size.

Figure 2 reflects the profit and loss potential of a short futures position. If you sell (go
short) a futures contract and the price goes down, you profit by the amount of the price
decrease times the contract size; if you sell and the price goes up, you lose an amount
equal to the price increase times the contract size. These profits and losses are paid daily
via the futures margining system.

Figure 2: Payoff Diagram of a Short Futures Position

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 B. Introduction to Options

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 of 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 Options
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:

There are two participants in Option Contract.

a. Buyer/Holder/Owner 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.

b. Seller/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 exercises on him.

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Types of Options:
The Options are classified into various types on the basis of various variables. The
following are the various types of options.
a. On the basis of the underlying asset:
On the basis of the underlying asset the option are divided in to two types:
Index options:
These options have the index as the underlying. Some options are European while others
are American. Like index futures contracts, index options contracts are also cash settled.
Stock options:
Stock 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.

b. 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 gives the holder the right but not the obligation to buy an asset by a certain
date for a certain price. It is brought by an investor when he seems that the stock price
moves upwards.
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. It is bought by an investor when he seems that the stock price
moves downwards.

c. On the basis of exercise of option:

On the basis of the exercise 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 options are American.
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, and properties of an
American option are frequently deduced from those of its European counterpart.

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Payoff Profiles for Call Option Holder and Writer
A Call option is a bullish instrument, which is purchased when you expect prices to rise
and want to benefit from that rise. As you can see in the payoff diagram above the value of
call option increases when prices rise but the downside when prices fall is limited to the
premium lost when the option is not exercised.

Figure 3: Payoff diagram of a call option holder

Figure 4: Payoff diagram of a call option writer

Unlike the buyer of a call, the seller of a call is obligated to perform. His upside is the premium
that he retains when the call option is not exercised; his downside is the direct inverse of the payoff
profile of the buyer of the call

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Payoff Profiles for Put Option Holder and Writer
The same rules hold true for buyer and seller of the put option

Figure 5: Payoff diagram of a put option holder

Figure 6: Payoff diagram of a put option writer

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Chapter: 2
LITERATURE REVIEW
Derivatives market is an innovation to cash market. Approximately its daily turnover
reaches to the equal stage of cash market. Numerous studies on the effects of futures and
options listing on the underlying cash market volatility have been done in the developed
markets. The following research papers contributed towards my interest in this area and
have also formed the basis for my study.

Behaviour of Stock Market Volatility after Derivatives

Golaka C Nath, Research Paper (NSE)
Financial market liberalization since early 1990s has brought about major changes in the
financial markets in India. The creation and empowerment of Securities and Exchange
Board of India (SEBI) has helped in providing higher level accountability in the market.
New institutions like National Stock Exchange of India (NSEIL), National Securities
Clearing Corporation (NSCCL), National Securities Depository (NSDL) have been the
change agents and helped cleaning the system and provided safety to investing public at
large. With modern technology in hand, these institutions did set benchmarks and
standards for others to follow. Microstructure changes brought about reduction in
transaction cost that helped investors to lock in a deal faster and cheaper.
One decade of reforms saw implementation of policies that have improved transparency in
the system, provided for cheaper mode of information dissemination without much time
delay, better corporate governance, etc. The capital market witnessed a major
transformation and structural change during the period. The reforms process have helped to
improve efficiency in information dissemination, enhancing transparency, prohibiting
unfair trade practices like insider trading and price rigging. Introduction of derivatives in
Indian capital market was initiated by the Government through L C Gupta Committee
report. The L.C. Gupta Committee on Derivatives had recommended in December 1997
the introduction of stock index futures in the first place to be followed by other products
once the market matures. The preparation of regulatory framework for the operations of
the index futures contracts took some more time and finally futures on benchmark indices
were introduced in June 2000 followed by options on indices in June 2001 followed by
options on individual stocks in July 2001 and finally followed by futures on individual
stocks in November 2001.

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Do Futures and Options trading increase stock market volatility?
Dr. Premalata Shenbagaraman, Research Paper (NSE)

Numerous studies on the effects of futures and options listing on the underlying cash
market volatility have been done in the developed markets. The empirical evidence is
mixed and most suggest that the introduction of derivatives do not destabilize the
underlying market. The studies also show that the introduction of derivative contracts
improves liquidity and reduces informational asymmetries in the market. In the late
nineties, many emerging and transition economies have introduced derivative contracts,
raising interesting issues unique to these markets. Emerging stock markets operate in very
different economic, political, technological and social environments than markets in
developed countries like the USA or the UK. This paper explores the impact of the
introduction of derivative trading on cash market volatility using data on stock index
futures and options contracts traded on the S & P CNX Nifty (India). The results suggest
that futures and options trading have not led to a change in the volatility of the underlying
stock index, but the nature of volatility seems to have changed post-futures. We also
examine whether greater futures trading activity (volume and open interest) is associated
with greater spot market volatility. We find no evidence of any link between trading
activity variables in the futures market and spot market volatility. The results of this study
are especially important to stock exchange officials and regulators in designing trading
mechanisms and contract specifications for derivative contracts, thereby enhancing their
value as risk management tools.

An Analysis Of Variations Of Implied Volatilities Of A Selected Sample Of Indian

Call Options
Dr. Debasis Bagchi
In India, trading in derivatives was recently introduced. Market Regulators find volatility
in Indian market is much higher than in developed market. The higher volatility induces
investors to buy Call options since they are willing to pay higher premium. This paper
seeks to understand what are the causes of volatility and examines the implied volatility of
Call options of a sample of largest traded option stocks in India. Volume of options traded,
strike price, option premium and stock price in various combinations are used as variables
in the analysis.
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The investigation yields mixed results. In certain cases, the mean volatility of in-the-
money call options is higher than that of out-of-the-money call options while in other cases
opposite results are observed. The regression analysis finds that the volume of traded
option has a significant negative relationship on the implied volatility. The ratio of strike
price plus premium to stock price is also found to be negatively related to implied
volatility. There exists positive relationship of these two variables on implied volatility in
some cases. The results are similar to the findings of Rubenstein. The reasons for the
contradictory results are not clear but may perhaps be due to fluidity of general political
and economic condition prevailing in India during the period under study. This may have
led to asymmetric behavior on the part of the investors. However, it was found that
premium-volume differential of the call options is positively related to the volatility of all
the sample stocks.

The Impact of Derivatives on Cash Markets: What Have We Learned?

Stewart Mayhew
This paper summarizes the theoretical and empirical research on how the introduction of
derivative securities affects the underlying market. The theoretical research has revealed
that there are many different aspects of the relationship between cash and derivative
markets. Although many models predict that derivatives should have a stabilizing effect,
this result normally requires restrictive assumptions. At the end of the day, the theoretical
literature gives ambiguous predictions about the effects of derivatives markets. As for the
empirical literature, research has uncovered several stylized facts, most of which suggest
that derivatives tend to help stabilize prices and improve liquidity in the underlying
market, and that some price discovery occurs in derivative markets. It should be noted,
however, that there are also many studies that come to the conclusion that derivatives have
had no significant impact on cash markets. In addition, this research has concentrated
primarily on exchange-traded derivatives in developed countries. Selected papers have
been written about particular developing markets here and there, but it is difficult to derive
firm conclusions.
We are in a period of vast growth of derivative markets. We see this growth both in OTC
markets and on exchanges, in developed and developing nations, in the introduction of new
types of contracts, and in the extension of derivatives to new underlying markets. Now,
more than ever, we need to fully understand the relationship between derivative and cash
markets. Which results from the developing markets may be applied to emerging markets?
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Futures Trading and Its Impact on Volatility of Indian Stock Market
Namita Rajput, Ruhi Kakkar and Geetanjali Batra
In a perfectly functioning world, every bit of information should be replicated concurrently
in the both spot market and its futures markets. However, in actuality, information can be
disseminated in one market first and then send out to other markets owing to market
imperfections. The study investigates how much of the volatility in one market can be
explained by volatility innovations in the other market and how fast these movements
transfer between these markets. Thus, the lead-lag relationship in returns and volatilities
between spot and futures markets is of interest to academicians, practitioners, and
regulators. If volatility spillovers exist from one market to the other, then the volatility
transmitting market may be used by market agents, who need to cover the risk exposure
that they face, as a very important vehicle of price discovery. For example, the information
about instantaneous impact and lagged effects of shocks between spot and futures prices
may be used in decision making regarding hedging activities A deep understanding of the
dynamic relation of spot and futures prices and its relation to the basis provides these
“agents” the ability to use hedging in a more skilled mode. Furthermore, if a return
analysis is questionable, volatility spillovers provide an alternative measure of information
transmission. Owing to these grounds, research committed to the relationship between
futures and spot returns (first moments) has been capacious with this interest growing to
examining higher moment dependencies (time- varying spillovers) between markets.
An investor who is trading in futures market should always watch out for volatility in the
stock market. From regulators point of view, whenever there is unexpected volatility in
spot market; regulator should take necessary steps to curb the volatility. Otherwise the
excess volatility in the spot market will spillover to futures market thereby making the
futures market unstable. Spot market reacts to information faster than futures market and
serves as a price discovery vehicle for futures market. The possible reasons are that S&P
CNX Nifty futures is relatively new, retail and proprietary investors contribute around 90%
of the trading value of Indian derivatives market, while institutional investors are mainly
dealing with spot market.
Institutional investors, both foreign and domestic are a force to reckon with in the Indian
stock market. They provide efficiency to any market in which they are. They will make
new information reflected in the stock prices as early as possible. With proper risk
management system in place, they should be given equal access to both spot and
derivatives market.
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Will increased regulation of stock index futures reduce stock market volatility?
Sean Becketti and Dan J. Roberts
The high correlation between stock index futures prices and stock prices, combined with
the low cost of futures trading, has led some observers to blame high levels of stock index
futures activity for recent bouts of volatility in the stock market. Circuit breakers were
adopted partly to reduce futures activity in order to reduce stock market volatility. Higher
margins also have been proposed to reduce futures activity. However, circuit breakers and
higher margins impose costs on investors and may have adverse effects on the functioning
of financial markets. Thus, reducing futures market activity to reduce stock market
volatility makes sense only if futures trading is responsible for volatility.

To reduce the effect of futures on stock market volatility, regulations aimed at reducing the
general level of futures activity have already been adopted or have been proposed. While
these regulations may or may not reduce stock market volatility, they certainly will impose
costs on participants in the stock index futures market. Because the regulations are costly,
it is important to find out whether the stock index futures market actually contributes to
stock market volatility.

This article finds little or no relationship between stock market volatility and either the
existence of, or the level of activity in, the stock index futures market. As a result, while
circuit breakers and higher margins may be useful for other reasons, their depressing
influence on the volume of futures trading is unlikely to reduce stock market volatility.

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Chapter: 3
NEED, OBJECTIVES AND SCOPE OF THE STUDY

Need for study:

In recent times the Derivative markets have gained importance in terms of their vital role
in the economy. Through the use of derivative products, it is possible to partially or fully
transfer price risks by locking-in asset prices. As the volume of trading is tremendously
increasing in derivatives market, this analysis will be of immense help to the investors.
Also, since infrastructure growth is directly correlated with improvement in economy and
with the Government’s initiative of 100 smart cities being planned, we will need solid
infrastructure development including housing, roads, highways and IT infra across the
country. So as we see India’s economic activities picking up, infrastructure sector will be
the early beneficiary apart from capital goods, power, IT. Thus, from investment point of
view, this sector seems to gain the most and investors might be watching out for these
stocks.

Objectives of the Study:

 To study the futures and options in infrastructure sector.

 To find the profit/loss position of futures buyer and seller and also the option writer

and option holder.

 To study about risk management with the help of derivatives.

Scope of the Study:

The study is limited to “Derivatives” with special reference to futures and options in
infrastructure sector. The study is limited to the stocks of just one company in
infrastructure sector namely, GMR Infrastructure Ltd. The data collected is restricted to the
month of January, February & March 2020 thus considering only the monthly report.

15
Chapter: 4
Research Methodology:

Data Collection:
Marketing research requires data, and secondary data is often the most convenient and
cost- effective option. Secondary data, is data collected by someone other than the user.
The sources of secondary data can be categorized into internal sources and external
sources.

Internal sources include data that exists and is stored inside the organization. External data
is data that is collected by other people or organizations from our organization's external
environment.

To fulfill the objectives of the study, data has been collected through Secondary data
collection. Secondary data was collected from the journals, news links, books, etc. Various
web portals like those of nse, money control, Investopedia, etc. were referred to.

The study is focused on infrastructure sector as investors would be watching out for the
stocks of this sector in the wake of Smart Cities initiative by the Indian Government. The
company chosen is GMR Infrastructure Ltd. as this is the top performing stock in
infrastructure sector. The contract period considered is the month of March 2020.

Data analysis tool

 line charts
 Column charts.

16
Chapter: 5
DATA ANALYSIS AND INTERPRETATION

Introduction to the case:

The scrip chosen for analysis is GMR INFRA and the contract taken is March 2020 ending
three –month contract.

GMR Infrastructure Ltd

GMR Group is an infrastructural company headquartered in Bangalore. The company was

founded in 1978 by Grandhi Mallikarjuna Rao. Employing the Public Private Partnership
model, the Group has successfully implemented several iconic infrastructure projects in
India. The Group also has a global presence with infrastructure operating assets and
projects in several countries including Turkey, South Africa, Indonesia, Singapore, the
Maldives and the Philippines.

Analysis of GMR Infrastructure Ltd

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 GMR INFRA scrip. This analysis
considered the March 2020 contract of GMRINFRA. The lot size is 45000 and the time
period in which this analysis is done is from 01.01.2020 to 26.03.2020.

Case: In December 2019, Government say we will Made 100 new houses, so most of the
people Buy infrastructure shares. So I selected GMR infra share for analysis.
According to Technical Analysis: Closing Price - 19
Target - 30
Time Frame - 85 Days

17
A. Future Contract
January Contract Price
Date Market Price Future Price
1-Jan-20 19 21
2-Jan-20 21.7 21.85
3-Jan-20 22.65 22.8
6-Jan-20 22.6 22.7
7-Jan-20 23.3 23.4
8-Jan-20 24.15 24.25
9-Jan-20 24.1 24.25
10-Jan-20 23.9 24.05
13-Jan-20 23.7 23.85
14-Jan-20 23.55 23.75
15-Jan-20 23.95 24.2
16-Jan-20 23.9 24
17-Jan-20 23.5 23.6
20-Jan-20 23.2 23.3
21-Jan-20 23.1 23.2
22-Jan-20 23.05 23.15
23-Jan-20 23.9 24
24-Jan-20 24.2 24.3
27-Jan-20 23.8 23.8
28-Jan-20 23.65 23.7
29-Jan-20 23.8 23.8
30-Jan-20 23.25 23.25 Contract Expire
31-Jan-20 22.85 22.9

Source: Researcher’s survey conducted on

18
Analysis 1

Grap Showing Price movement of GMR Infra Future

25

24.25
24.25 24.2 24.3
24 24.05 24 24
23.85
23.75 23.823.723.8
23.6
23.4 23.323.2
23.15 23.25
23 22.9
22.8 22.7

22
21.85

21 21

20

Future Price January contract date

Graph: 5.1

Data Interpretation:
 If the person invest in cash segment in the month of January he can earn 22.85-19
= 3.85 rs per share.
If the person buy 45000 share so the profit amount is 45000*3.85= 173250 rs.

 And if the person buy January future contract, he can earn profit for 23.25 - 21
= 2.25rs per share.
If the person buy 1 lot i.e.45000 share so the profit amount is 45000 * 2.25 =
101250 rs.

19
February Contract Price
Date Market Price Future Price
3-Feb-20 21 21.65
4-Feb-20 22 22.1
5-Feb-20 22.9 23
6-Feb-20 23.3 23.3
7-Feb-20 23.5 23.55
10-Feb-20 23.3 23.4
11-Feb-20 23.05 23.2
12-Feb-20 22.95 23.1
13-Feb-20 23.75 23.85
14-Feb-20 23.1 23.1
17-Feb-20 22.55 22.65
18-Feb-20 22.55 22.6
19-Feb-20 23.05 23.2
20-Feb-20 23.65 23.7
24-Feb-20 25.45 25.45
25-Feb-20 25.55 25.6
26-Feb-20 25.45 25.45 Contract Expire
27-Feb-20 22.8 22.8 Corona Effect
28-Feb-20 20 20.05

Source: Researcher’s survey conducted on

20
Analysis 2

Grap Showing Price Movement Of Gmr Infra Future

26
25.625.45
25.45
25

24 23.85
23.55 23.7
23.3 23.423.2 23.2
23 23 23.1 23.1
22.65
22.6 22.8
22 22.1
21.65
21

20 20.05
6-Feb-20
3-Feb-20
4-Feb-20
5-Feb-20

7-Feb-20
8-Feb-20
9-Feb-20
10-Feb-20
11-Feb-20
12-Feb-20
13-Feb-20
14-Feb-20
15-Feb-20
16-Feb-20
17-Feb-20
18-Feb-20
19-Feb-20
20-Feb-20
21-Feb-20
22-Feb-20
23-Feb-20
24-Feb-20
25-Feb-20
26-Feb-20
27-Feb-20
28-Feb-20
Future Price February Contract Date

Graph: 5.2

Data Interpretation:
 If the person invest in cash segment in the month of February he have loss of 21-20
= 1 rs per share.
If the person buy 45000 share so the loss amount is 45000*1= 45000 rs.

 And if the person buy February future contract, he can earn profit for 25.45 – 21.65
= 3.8rs per share.
If the person buy 1 lot i.e.45000 share so the profit amount is 45000 * 3.8
= 171000 rs.

21
March Contract Price
Date Market Price Future Price
2-Mar-20 20.05 19.95
3-Mar-20 20.2 20.25
4-Mar-20 20.1 20.05
5-Mar-20 20 20.25
6-Mar-20 19.5 19.45
9-Mar-20 18.65 18.55
11-Mar-20 18.4 18.35
12-Mar-20 17.7 15.9
13-Mar-20 16.7 14.6
16-Mar-20 16.5 16.05
17-Mar-20 16.6 16.4
18-Mar-20 16.2 16.05
19-Mar-20 16 15.9
20-Mar-20 17.15 17.15
23-Mar-20 15.9 15.85
24-Mar-20 16 16.05
25-Mar-20 16.25 16.35
26-Mar-20 16.25 16.25 Contract Expire

Source: Researcher’s survey conducted on

Grap Showing Price Movement Of GMR Infra Future

21
20 20.25
19.95 20.25
20.05
19.45
19
18.55 18.35
18
17 17.15
16.4 16.35
16.25
16 15.9 16.05 16.05
15.9 16.05
15.85
15
14.6
14
2-Mar-20
3-Mar-20
4-Mar-20
5-Mar-20
6-Mar-20
7-Mar-20
8-Mar-20
9-Mar-20
10-Mar-20
11-Mar-20
12-Mar-20
13-Mar-20
14-Mar-20
15-Mar-20
16-Mar-20
17-Mar-20
18-Mar-20
19-Mar-20
20-Mar-20
21-Mar-20
22-Mar-20
23-Mar-20
24-Mar-20
25-Mar-20
26-Mar-20

Future Price March Contract Date

Graph: 5.3

22
Analysis 3

GMR Infra Future Cotract Prices

30
25.45
25 23.25
21 21.65
19.95
20
16.25
15

10

0
January February March

Contract open price Contarct Expire

Graph: 5.4
1. Data analysis for speculator point of view:
If a person buy 1 lot i.e. 45000 futures of Gmr Infra On 1st Jan, 2020 and sell on 26th
march, 2020 then he will get a loss of 21-16.25=4.75 per share. So he will get a total loss
of 213750i.e. 4.75*45000.
The closing price of GMRINFRA at the end of the contract period is 16.25 and this is considered as
settlement price.

2. Data analysis for Arbitrageurs point of view:

 If a person buy 45000 shares in cash 19 RS per share and another side make a sell
position in Future market for 1 lot i.e. 45000 shares in RS 21 per share on 1 st Jan,
2020.
 On the expire date 26th march we complete the transaction
Transaction 1, sell 45000 shares in cash rs 16.25 then he will get a loss of 19-16.25=2.75
per share. So he will get total loss 123750 i.e. 2.75*45000

Transaction 2, buy 1 lot i.e. 45000 shares in RS 16.25 and sell in RS 21 per shares then he
will get profit 21-16.25=4.75 per shares. So he will get a total profit 213750 i.e.
4.75*45000.

So overall profit is 213750-123750= 90000.

23
3. Data analysis for Hedgers point of view:
 If a person buy 45000 shares in cash rs 19 per shares on 1st Jan, 2020 after 27th Feb
market starting to goes down because of Corona Virus. If market goes down we
make a sell position in future market for 1 lot i.e. 45000 shares in RS 20 per share
on 28th Feb, 2020.

 On the expire date 26th march we complete the transaction.

Transaction 1, sell 45000 shares in cash rs 16.25 then he will get a loss of 19-16.25=2.75
per share. So he will get total loss 123750 i.e. 2.75*45000

Transaction 2, buy 1 lot i.e. 45000 shares in RS 16.25 and sell in RS 20 per shares then he
will get profit 20-16.25=3.75 per shares. So he will get a total profit 168750 i.e.
3.75*45000.

So overall profit is 168750-123750=45000

Data Interpretation:
 For Investment Purpose Future is Not good, We saw in Data analysis for speculator
point of view, If person invest in future they get loss 213750 rs.
 Future can provide guaranteed profit and fixed profit for using arbitrage strategy,
we saw in Data analysis for Arbitrageurs point of view, If person use second
strategy they get fixed profit for rs 90000.
 Future is better for risk management, we saw in Data analysis for Hedgers point of
view, If person use third strategy they get profit for rs 45000.

24
B. Option :
1. Speculator point of view : Call option

The following table explains the market price and premiums of calls.

The first Table show open and close price of Gmr Infra.

Market Price January February March

Open Price 19 21.5 20.05
Close Price 23.25 25.65 16.25

The second table explains call premiums amounting at these strike prices: 20, 21, 22, 23,
24 & 25.

Strick price Call premium Put premium

20 1.65 2.25
21 0.95 3.2
22 0.3 4.15
23 0.15 5
24 0.05 6.25
25 0.05 8.25
Source: Researcher’s survey conducted on

Data Interpretation:
 Buyers Pay Off:
Those who have purchased call option at a strike price of 23, the premium payable is 0.15.
On the expiry date the spot market price closed at 16.25. As it is out of the money for the
buyer and in the money for the seller, hence the buyer is in loss.
So the buyer will lose only premium i.e. 0.15 per share.
So the total loss will be Rs. 6750 i.e. 0.15*45000

 Sellers Pay Off:

The seller is entitled only to the premium if he is in the money i.e. in profit.
So his profit is only premium i.e. 0.15* 45000 = Rs. 6750

25
 2. Hedgers point of view: Put Option
The following table explains the market price and premiums of calls.

 The first Table show open and close price of Gmr Infra.

Market Price January February March

Open Price 19 21.5 20.05
Close Price 23.25 25.65 16.25

 The second table explains call premiums amounting at these strike prices: 20, 21,
22, 23, 24 & 25.
Strick price Call premium Put premium
20 1.65 2.25
21 0.95 3.2
22 0.3 4.15
23 0.15 5
24 0.05 6.25
25 0.05 8.25
Source: Researcher’s survey conducted on

Data Interpretation:
 If a person buy 45000 shares in cash rs 19 per shares on 1st Jan, 2020 after 27th
Feb market starting to goes down because of Corona Virus. If market goes down
we buy a put option on strick price 20 & the premium payable is 2.25.

 On the expire date 26th march we complete the transaction.

Transaction 1, sell 45000 shares in cash rs 16.25 then he will get a loss of 19-16.25=2.75
per share. So he will get total loss 123750 i.e. 2.75*45000

26
Transaction 2,
On the expiry date the spot market price closed at 16.25. As it is in the money for the buyer
and out of the money for the seller, hence the buyer makes profit.

Strike price - 20
Spot price - 16.25

3.75

Premium - 02

1.75x 4500 0= 78750

Buyer Profit = Rs 78750

So overall loss is 123750- 78750 = 45000

27
Chapter: 6
Observations & Findings

Observations:
 Future & Option is the best Strategy for derivative market.
 Now a day’s most of the people use future and option for trading purpose.
 For investment purpose future & option is not good.
 In bullish market the call option writer incurs more losses.

Findings:
 Future & Option is better for risk management.
 Future can provide guaranteed profit and fixed profit for using arbitrage strategy.
 In future, trading is done in lot size not a shares.
 If we invest in option, we can earn unlimited profit with fixed loss

28
Chapter: 7
7.1 Conclusion

 Derivatives are financial instruments under this includes futures, forwards,

options and swaps.

 These instruments are used for risk management and hedging by taking opposite

position in the future market.

 In future we can’t buy one or two share, we have to trade in lot. In case of

GMR Infra 1lot = 45000 shares.

 In bullish market the call option writer incurs more losses so the investor is

suggested to go for a call option to hold, whereas the put option holder suffers

in a bullish market, so he is suggested to write a put option.

 In bearish market the call option holder will incur more losses so the investor

is suggested to go for a call option to write, whereas the put option writer will

get more losses, so he is suggested to hold a put option.

7.2 Recommendations:

 The derivatives market is newly started in India and it is not known by every
investor & so read term and policy carefully.

 We should not take a sell position in option because our loss is unlimited with
fixed profit.

 In future and option contract amount is maximum so small investors should

not use future & option for investment purpose. Only use for risk
management.

 If person use future arbitrage strategy, first we calculate return of future

should more than bank return.

29
7.3 Limitations of the Study:

 The study is limited to “Derivatives” with special reference to futures and

options in the infrastructure sector.

 The data collected is completely restricted to the stocks of GMR Infrastructure

Ltd during March 2020. Hence this analysis cannot be taken universal.

 While collecting data, we had to wait till March.

 Lack of knowledge, most of the people don’t know about Derivatives.

30
8. BIBLIOGRAPHY

a) Books

 Hull, J. (2006). Options, futures, and other derivatives. Upper Saddle River,
N.J.: Pearson/Prentice Hall.

b) Journals
 Nath, G. C. (2003), “Behaviour of Stock Market Volatility after Derivatives”,
NSE Working Paper.
 Rajput, N., Kakkar, R. and Batra, G. (2013). Futures Trading and Its Impact
on Volatility of Indian Stock Market. AJFA, 5(1).
 Mihov, V. and Mayhew, S. (n.d.). Another Look at Option Listing Effects.
SSRN Electronic Journal.

c) Websites
 http://www.nseindia.com 3 march, 10 March

 http://www.investopedia.com 3 march, 12 march

 http://www.moneycontrol.com 5 march, 1 april, 7 april

 http://shodhganga.inflibnet.ac.in 20 march,

 https://in.investing.com/stock-screener Every Day

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