Project Dissertation

A STUDY ON FINANCIAL DERIVATIVES

(FUTURES AND OPTIONS) IN
INFRASTRUCTURE SECTOR

Submitted By:
Mrinmayee Gunti
2K14/MBA/44

Under the guidance

of Dr. Archana
Singh, Assistant
Professor

DELHI SCHOOL OF MANAGEMENT

Delhi Technological University

Bawana Road Delhi 110042

Jan-May 2016
 CERTIFICATE FROM THE INSTITUTE

This is to certify that the Project Report titled “A Study on Financial Derivatives
(Futures and Options) in Infrastructure Sector” is a bonafide work carried out by
Ms. Mrinmayee Gunti of MBA 2014-16 and submitted to Delhi School of Management,
Delhi Technological University, Bawana Road, Delhi-42 in partial fulfillment of the
requirement for the award of the Degree of Masters of Business Administration.

Signature of Guide Signature of Head (DSM)

Place:
Date: Seal of Head
 DECLARATION

I Mrinmayee Gunti, student of MBA 2014-16 of Delhi School of Management, Delhi

Technological University, Bawana Road, Delhi-42 declare that Project Report on “A
Study on Financial Derivatives (Futures and Options) in Infrastructure Sector”
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.

Name of the student

Place:

Date:
 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 Dr. Archana

Singh, Assistant Professor for her constant help at each stage.

I thank Dr. Pradeep Kumar Siiri, Professor and Head of the Department, Delhi School
of Management for guiding me through proper grooves and giving me the necessary
support.

With gratitude,

MRINMAYEE GUNTI

(2K14/MBA/44)
 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 lT 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.
 TABLE OF CONTENTS

1. Introduction

2. Literature Review................................................................................. 11

3. Need, Objectives and Scope of the Study..........................................18

3.1 Need for Study

3.2 Objectives of the Study

3.3 Scope of the Study......................................................................... 18

4. Methodology .. . . 19

4.1 Data Collection Techniques ............. . 19

5. Data Analysis

5.1 Introduction to the case

5.2 Data Analysis .... . 21

............. . 22
5.3 Observation and Findings

6. Conclusion, Recommendations and Limitations..................................39

6.1 Conclusion ............. . 39

6.2 Recommendations ............. . 39

6.3 Limitations of the study ............. . 39

7. Bibliography ...... 40
 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

1
 movements of the underlying asset.

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.

4• Functions of Derivatives:

The various functions of derivatives include:

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

4 The derivatives market helps to transfer risks from those who have them but may
not like them to those who have appetite for them.
4 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.
4 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.
4 It acts as a catalyst for new entrepreneurial activity.

4• Types of Derivatives:

The most commonly used derivatives contracts are forwards, futures, options and swaps.

1. 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.

2
 2. 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.

3. 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.

4. 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.

4• 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:

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

3
 Location of settlement

4• 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.

4• Payoff of a Long Futures Position

PROFIT

Futum Prlc«

As indicated in Figure 1, if you buy (go long) a futures contract and the pnce 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.
 PROFI
T

Futu Prlcv
Fu P 1+
n r

LOSS

4• 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 specitic price within a specific time period. Alternatively the
contract may grant the other person the right to sell a specitic 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.

4• Properties of Options
Options have several unique properties that set them apart from other securities. The
following are the properties ot option:
 4 Limited Loss
4 High leverages potential
4 Limited Life

4• Parties in an Option Contract:

There are two participants in Option Contract.

1. Buyer/Ho1der/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.

2. 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.

4• Tvpes 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 in to two types:

a) 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.
b) 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.

7
 2. On the basis of the market movements:
On the basis of the market movements the option are divided into two types. They are:
a) 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.
b) 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.

3. On the basis of exercise of option:

On the basis of the exercise of the Option, the options are classified into two Categories.
a) American Option:
American options are options that can be exercised at any time up to the
expiration date. Most exchange —traded options are American.
b) European Options
European options are options that can be exercised only on the expiration date
itself. European options are easier to analyze than American options, and
properties of an American option are frequently deduced from those of its
European counterpart.

4• 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.
 4S yrtMS rM

Figurc 3: Payott 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
 4• Payoff Profiles for Put Option Holder and Writer
The same rules hold uue for buyer and seller of the put option

Figure S: Payol’f diagram of a put option holder

-X

Figure b: Payoft diagram ot' a put option writer

io
 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.

a) 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 modem 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

11
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.

b) 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.

12
 c) 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. 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 behaviour 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.

d) The Impact of Derivatives on Cash IYlarkets: 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

13
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 underying 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? Which results from index futures can be applied to electricity
futures? Which results from stock options can be applied to currency knockouts? Despite
the hundreds of papers already written in this field, the rapid growth of derivative
markets continues to provide us with new, important and interesting questions.

e) Futures Trading and Its Impact on Volatility of Indian Stock Market

Namita Rajput, Ruhi Kakkar and Geetanjali Batra
ln 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

14
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. At the practical level, a better understanding
of the mean and variance dynamics of the spot and futures market can improve risk
management and investment decisions of the market agents.

15
 f) 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.

g) Another Look at Option Listing Effects

Stewart Mayhew and Vassil Mihov
Previous research documents that the introduction of options seems to affect the
volatility, liquidity, price and other characteristics of the underlying stock. Existing
research, however, has not adequately accounted for the fact that option listing is
endogenous, a result of decisions made by exchanges and regulators. We investigate the

16
factors affecting the exchanges’ listing decisions by comparing the characteristics of
stocks selected for option listing to other stocks that were eligible but not listed. We find
that firm size, volume, and volatility are positively related to the probability of listing,
but their relative contributions have changed significantly over time. We then use the
results of this analysis to construct various matched samples, composed of stocks that
were eligible, but not selected for option listing, and we re-examine some of the option
listing effects reported in the literature using a control-sample methodology. Contrary to
previous research, we find that in recent subperiods, volatility increases with option
listing, consistent with the hypothesis that forward-looking exchanges list options in
anticipation of increasing volatility. We verify previous findings that underlying volume
increases with option listing, and that there was a positive price effect associated with
option listing prior to 1981. However, evidence of a negative price effect after 1981
appears to be much weaker than previously reported. Finally, we document a cross-
sectional relationship between the price effect, the volume effect and the volatility effect.

17
 3. NEED, OBJECTIVES AND SCOPE OF THE STUDY
3.1 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.

3.2 Objectives of the Study:

4 To analyze the operations of futures and options in infrastructure sector.

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

and option holder.

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

3.3 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 3 companies in infrastructure
sector namely, Larsen & Toubro Ltd, Reliance Infrastructure Ltd and GMR Infrastructure Ltd.
The data collected is restricted to the month of March 2016 thus considering only the monthly
report.

18
 4. METHODOLOGY:
4.1 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 thai is collected by other people or organizations from our organization's external
environment.

To iiilfill 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, moneycontrol, 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 Smari Cities initiative by the Indian Government. The companies
chosen are L&T Ltd., Reliance Infrastructure Ltd. and GMR Infrastructure Ltd. as these are the
top performing stocks in infrastructure sector. The contract period considered is the month of
March 2016.

19
 5. DATA ANALYSIS AND INTERPRETATION
5.1 Introduction to the case:

The scrip chosen for analysis is L&T, RELIANCE INFRA and GMR INFRA and the
contract taken is March 2016 ending one —month contract.

a) Larsen & Toubro Ltd

Larsen & Toubro is a major technology, engineering, construction, manufacturing and

financial services conglomerate, with global operations. L&T addresses critical needs in
key sectors - Hydrocarbon, Infrastructure, Power, Process Industries and Defense - for
customers in over 30 countries around the world. It is headquartered in Mumbai,
Maharashtra, India. It was founded by Danish engineers taking refuge in India, as well as
an Indian financing partner.

b) Reliance Infrastructure Ltd

Reliance Infrastructure Ltd. is India's largest private sector enterprise power utility and
construction company. It is part of the Reliance Anil Dhirubhai Ambani Group. The
company is headed by Ani1 Ambani. The corporate headquarters is in Mumbai. Reliance
Infrastructure interests in Metro Rail, Airports, Bridges, Toll roads, Defence. It is major
share holder in another group company Reliance Power.

c) 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.

20
 5.2 Data Analysis:
1. Analysis of Larsen & Toubro Ltd

DATE MARKET PRICE FUTURE PRICE

26-Feb- 16 1110.65 1116.65
29-Feb- 16 1076 1083.15
1-Mar- 16 1123.95 1127.55
2-Mar- 16 1137.9 1143.2
3-Mar-16 1207.1 1212.05
4-Mar- 16 1193.2 1197.8
8-Mar- 16 1187.45 1191.55
9-Mar-16 1212.85 1219.6
10-Mar-16 1186.15 1191.45
11-Mar-16 1185.65 1192.5
14-Mar-16 1184.2 1189.65
15-Mar-16 1180.75 1186.55
16-Mar-16 1183.2 1189.65
17-Mar-16 1193.25 1197.65
18-Mar-16 1199.3 1202.7
21-Mar-16 1228.15 1232.15
22-Mar-16 1237.3 1240.45
23-Mar-16 1242.55 1245.25
28-Mar-16 1206.35 1209.9
29-Mar-16 1193.95 1197.65
30-Mar-16 1228.05 1229.75
31-Mar-16 1216.7 1216.7
Table I : II iiikci price mid Future price of UT

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 LARSEN & TOUBRO LTD scrip.
This analysis considered the March 2016 contract of L&T. The lot size is 300 and the time
period in which this analysis is done is from 26.02.2016 to 31.03.16.

21
 GRAPH SHOWING THE PRICE MOVEMENT OF L&T FUTURES
130
0

1Z5

IZO
IIO
O
O Future Price
105
IOO
0
O

CONTRACT DATES

Figure 7: Graph showing pricc Inox'cIncnt of UT 1’iiturcs

•• Observations and Findings

If a person buys 1 lot i.e. 300 futures of L&T on 26th Feb, 2016 and sells on 31 s' Mar, 2016
then he will get a profit of 1216.7- 1116.65 = 100.05 per share. So he will get a total profit
of 30015 i.e. 100.05* 300.

The closing price of L&T at the end of the contract period is 1216.7 and this is considered as
settlement price.

4• Call Option
The following table explains the market price and premiums of calls.

4 The first column explains trading date

4 Second column explains the SPOT market price in cash segment on that dale.
4 The third column explains call premiums amounting at these strike prices; 1080,
1100, 1120, 1140, 1160 and 1180.

22
 STRIKE PRICE

DATE PRICE 1080 1100 1120 1140 1160 1180

26—Feb—16 1110.65 65.2 S9.25 49 39.75 31.75 25.3
29—Feb—16 1076 45.95 36.95 29.55 23.15 17.65 13.55
1—Mar—16 1123.95 69.5 S6.65 44.8 35.15 26.85 20.2
2—Mar—16 1137.9 81.9 66.15 53.45 42.9 33.65 25.8
3—Mar—16 1207.1 134.4 119.7 102.1 86.35 71.75 58
4—Mar—16 1193.2 134.4 104 87.5 75.45 60.4 48.25
8—Mar—16 1187.45 115.6 100.3 85.4 66.25 54.75 43.3
9—Mar—16 1212.85 124.95 1 25.05 105 87.85 72.7 58
10—Mar—16 1186.15 124.95 96.1 102.4 66.5 53.75 41.6
11—Mar—16 1185.65 124.95 95 79.95 64.9 51.35 39.8
14—Mar—16 1184.2 124.95 94.85 79.95 64.1 48.05 35.3
15—Mar—16 1180.75 115 89.4 78 58.6 44.75 33.5
16—Mar—16 1183.2 105.05 93 73.95 59 45.45 33.35
17—Mar—16 1193.25 105.05 101.05 82.35 59 48.25 35.15
18—Mar—16 1199.3 105.05 103 83 64.6 49.35 35.15
21—Mar—16 1228.15 105.05 131.65 110 93.65 72.45 53.85
22—Mar—16 1237.3 105.05 141 118 98 80.35 63.9
23—Mar—16 1242.55 105.05 142 117.5 104.9 86.4 65.45
28—Mar—16 1206.35 150.05 106.25 85 75 49.25 33.6
29—Mar—16 1193.95 150.05 96 79 57.4 43.1 20.95
30—Mar—16 1228.05 150.05 1 22.95 108.95 87.75 68.55 49.3
31—Mar—16 1216.7 137.3 116.7 96.3 76.55 56.25 35.95
Table 2: Market pricc and preIniuIn calls at variou s strike pricc of UT

•• Observations and Findings for Call Option

a) Buvers Pav Off:

4 Those who have purchased call option at a strike price of 1120, the premium
payable is 49.
4 On the expiry dale the spot market price closed at 1216.7. As it is in the money
for the buyer and out of the money for the seller, hence the buyer makes profit.

23
 Spot price 1216.7

Strike price - 1120.0

96.7

Premium
49.0

47.70 x 300= 14510

Buyer Profit = Rs. 14310

Incase spot price increases further, buyer profit also increases.

b) Sellers Pay Offa

It is in the money for the buyer so ii is out of the money for the seller, hence the
seller is in loss.
4 The loss is equal to the profit of buyer i.e. Rs. 14310.

4• Put Option:

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

4 The first column explains trading date.

4 Second column explains the SPOT market price in cash segment on that date.
The third column explains put premiums amounting at these strike prices: 1080,
1100, 1120, 1140, 1160, 1180.

24
 STRIKE PRICE
MARKET
DATE PRICE 1080 1100 1120 1140 1160 1180
26-Feb-16 1110.65 34.65 43.1 51.9 61.3 74 95.75
29-Feb-16 1076 44.25 53.7 66.15 81.75 95 89
1-Mar-16 1123.95 22.85 29.45 37.8 47.3 60 90
2-Mar-16 1137.9 17.95 23.8 30.8 39.8 50.2 61.3
3-Mar-16 1207.1 6.75 9 12.15 15.8 20.9 27.4
4-Mar-16 1193.2 7 9.55 12.7 17.7 23.5 31.1
8-Mar-16 1187.45 7.15 9.85 13.45 18.3 25 32.4
9-Mar-16 1212.85 4.4 5.6 7.85 10.8 15.05 20.85
10-Mar-16 1186.15 5.55 8.15 11.5 16.1 22.25 30
11-Mar-16 1185.65 4.3 6.65 9.35 13.85 19.55 27.1
14-Mar-16 1184.2 4 6 8.8 12.9 18.95 26.05
15-Mar-16 1180.75 3.75 5.85 8.55 12.8 18.7 26.8
16-Mar-16 1183.2 2.75 4.5 6.8 1O.55 16 23.6
17-Mar-16 1193.25 1.85 3.1 4.6 7.25 11.75 18.5
18-Mar-16 1199.3 1.15 1.9 2.6 4.4 7.65 12.85
21-Mar-16 1228.15 0.45 0.9 0.95 1.25 2.15 4.25
22-Mar-16 1237.3 0.2 0.6 0.7 0.75 1.25 2.4
23-Mar-16 1242.55 0.3 0.55 0.6 0.9 1.3 2.1
28-Mar-16 1206.35 0.6 O.9 1.1 1.7 2.7 5.1
29-Mar-16 1193.95 0.3 0.35 0.6S 0.98 2.1 5.08
30-Mar-16 1228.05 0.08 0.15 0.2S 0.V5 O.2 0.38
31-Mar-16 1216.7 0.4 0.05 0.05 0.08 0.05 0.1
L{l1t |lUlN[ll Qtl> N ./Otx >t /U |1XU O1 /(

4• Observations and Findings tor Put Option

a) Buyers Pay Of”f:

ii Those who have purchascd put option at a strikc pricc of’ 116(), thc prcmium
payable is 74.
ii On the cxpiry date the spot market pricc closcd at 1216.7. As it is out ot the
moncy f’or the buycr and in the money tor thc scllcr, hcncc the buyer is in loss.
ii So the buycr will lose only premium i.c. Rs. 74 per share.
So the total loss will be Rs. 222()() i.e. 74*3()

25
 b) 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 the premium i.e. 74* 300 = Rs. 22200

GRAPH SHOWING THE MOVEMENT OF SPOT AND FUTURE PRICE

1300

1250

1200
PnICE

II SO
1100
SPOT PRICE
IOSO FUTURE PRICE
1000
26 reb t6
28 reb t6

5-Mar-T6
7- Mar-T6

9- Mar-T6
TTT-Mar-T6

Mar-T6 2-
7 Mar-T6
Mar-
2-5
6 Mar-

2-9 Mar-t
T-Mar-

Mar-T6

T-Mar-T6
MarT
Mar-
T6 3-

3- T6

T6
T 7-
T5

2-3
T6
T

6
CONTRACT DATES
2

* The future price ot L&T is moving along with the market price.
* If the buy price of the future is less than the settlement price, then the buyer of
the future gets protit.
* If the selling price of the future is less than the settlement price, then the seller
incurs losses.

2. Analysis ot Reliance 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 RELIANCE INFRA scrip. This

26
analysis considered the March 2016 contract of RELINFRA. The lot size is 1300 and the

time period in which this analysis is done is from 26.02.2016 to 31.03.16.

DATE MARKET PRICE FUTURE PRICE

26-Feb- 16 410.9 411.55
29-Feb- 16 409.85 412.55
1-Mar- 16 428.9 431.6
2-Mar- 16 437.05 439.75
3-Mar-16 460.85 456.8
4-Mar- 16 470.9 460.9
8-Mar- 16 483.65 468.65
9-Mar-16 515.4 511.25
10-Mar-16 506.85 501
11-Mar-16 504.55 501.65
14-Mar-16 500.7 498.5
15-Mar-16 500.65 501
16-Mar-16 497.05 498.2
17-Mar-16 511.45 505.35
18-Mar-16 510.25 509.7
21-Mar-16 511.85 512.7
22-Mar-16 535.95 536.75
23-Mar-16 536.6 536.55
28-Mar-16 522.6 522.7
29-Mar-16 520.9 523
30-Mar-16 534.35 534.95
31-Mar-16 533.6 533.6
Table 4: II iiikci price mid I utinc pi ice ‹il RELINFR \

27
 GRAPH SHOWING THE PRICE MOVEMENT OF RELIANCE INFRA FUTURES

600

SSO SOO 450

400
Future Price
350

300

cONTRACT DATES
3-Mar-16
5-Mar-16
7-Mar-16

16
16

16
1-Mar-16
28-Feb-16

21-Mar-16
23-Mar-16
25-Mar-16
t 7- Mar-
t5-Mar-
9- Mar-

Mar-

6t
9t•- w-
M t6

t6

Mar-

Mar-
27-

29-
t6
z3
-

Figure 9: Graph showing pricc Inox'cIncnt of RELINFRA futures

•• Observations and Findings:

If a person buys 1 lot i.e. 1300 futures of RELINFRA on 26* Feb, 2016 and sells on 31"
Mar, 2016 then he will get a profit of 533.6-411.55= 122.05 per share. So he will get a
total profit of 158665 i.e. 122.05* 13tXl

The closing price of RELINFRA at the end of the contract period is 533.6 and this is
considered as settlement price.

4• Call Option
The following table explains the market price and premiums of calls.

4 The first column explains trading dale

4 Second column explains the SPOT market price in cash segment on that dale.
4 The third column explains call premiums amounting at these strike prices: 4£D,
410, 420, 430, 440, 450.

28
 STRIKE PRICE
DATE MARKET PRICE 400 410 420 430 440 450
26-Feb-16 410.9 32.55 26.95 22.3 18.25 15 11.8
29-Feb-16 409.85 30.75 23.8 19.45 15.1 12 9.3
1-Mar-16 428.9 39.9 33.6 27.25 21.65 16.9 13.3
2-Mar-16 437.05 48 38.95 33 26.4 21.5 17.25
3-Mar-16 460.85 53.85 38.95 43.6 36.25 29.95 24.1
4-Mar-16 470.9 53.85 54 45.05 39.1 32.6 25.35
8-Mar-16 483.65 74.5 58.4 49.6 45 35 30.7
9-Mar-16 515.4 114.6 72.5 92.7 90 72.9 65.75
10-Mar-16 506.85 111.55 94.95 90.95 87.45 68.6 60.8
11-Mar-16 504.55 111.55 99.05 77 80 64 54
14-Mar-16 500.7 111.55 99.05 80.05 80 60.7 53.95
15-Mar-16 500.65 104.8 99.05 83.55 80 61.8 58.85
16-Mar-16 497.05 84 99.05 70.8 80 61.65 53.6
17-Mar-16 511.45 84 101.9 86.7 80 73 57.6
18-Mar-16 510.25 109 101.9 84.3 80 70 61.25
21-Mar-16 511.85 109 101.9 91.8 82.5 70.85 61.9
22-Mar-16 535.95 109 101.9 107.05 102.45 92.5 81.55
23-Mar-16 536.6 109 101.9 120 110 98 87
28-Mar-16 522.6 109 101.9 115 99 94 78.85
29-Mar-16 520.9 109 101.9 115 94 90 78.85
30-Mar-16 534.35 133.1 101.9 115 106 90 84
31-Mar-16 533.6 133.1 123.25 115 103.1 95.9 84.6
/:ft^l ?‘ : I:fl \k‘ I [ ^ I I k v‘ LII IU [ ^I k‘ I II III I II k Ltl I • )”' JI \ Lt I I ' DLI x *II I \v‘ ] I I v ?‘ › )” t/ L [ \” t/ . \

fi• Observations and Findings for Call Option

a) Buyers Pay Of”f:

ii Those who havc purchased call option at a strike price ot 42(), the premium
payable is 22.3.
ii On the cxpiry dale the spot market price closcd at 533.6. As it is in the money tor
lhc buycr and out ot the money for lhc scllcr, hcncc thc buycr makes prof’it.

29
 Spot price 533.6

Strike price - 420.0

113.6

Premium - 22.3

91.30 x 1300 = 118690

Buyer Profit = Rs. 118690

lncase spot price increases further, buyer profit also increases.

b) Sellers Pay Off:

4 It is in the money for the buyer so it is out of the money for the seller, hence the
seller is in loss.
4 The loss is equal to the profit of buyer i.e. Rs. 118690.

4• Put Option

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

4 The first column explains trading date

4 Second column explains the SPOT market price in cash segment on that date.
4 The third column explains put premiums amounting at these strike prices: 400, 410,
420, 430, 440, 450.

30
 STRIKE PRICE
MARKET
DATE PRICE 400 410 420 430 440 450
26-Feb-16 410.9 21.15 25.4 30.4 39 48.55 48.75
29-Feb-16 409.85 16.95 21.45 25.7 39 45 48.75
1-Mar-16 428.9 9.2 11.95 16.05 19.8 25 48.75
2-Mar-16 437.05 7.45 9.9 13.05 17.05 21.25 26.45
3-Mar-16 460.85 4 5.4 7.5 10.05 13.5 17.25
4-Mar-16 470.9 3.4 4.7 6.5 8.85 11.8 15.6
8-Mar-16 483.65 2.8 3.7 5.1 6.9 9.25 12.25
9-Mar-16 515.4 1.3 1.75 2.35 3.25 4.1 5.5
10-Mar-16 506.85 1.3 1.45 2.1 2.9 3.95 5.4
11-Mar-16 504.55 1.05 1.5 1.65 2.5 3.4 4.55
14-Mar-16 500.7 1.1 1 1.75 2.3 2.7 4.1
15-Mar-16 500.65 0.7 0.7 0.95 1.85 2 2.95
16-Mar-16 497.05 0.6 0.6 0.9 1.3 1.85 2.85
17-Mar-16 511.45 0.4 0.15 0.45 0.9 1.1 1.6
18-Mar-16 510.25 0.25 0.2 0.3 0.5 0.7 0.95
21-Mar-16 511.85 0.2 0.2 0.2 0.4 0.35 0.65
22-Mar-16 535.95 0.05 0.05 0.05 0.1 0.25 0.3
23-Mar-16 536.6 0.1 0.05 0.05 0.35 0.2 0.25
28-Mar-16 522.6 0.05 0.05 0.05 0.2 0.2 0.2
29-Mar-16 520.9 0.1 0.1 0.05 0.05 0.1 0.1
30-Mar-16 534.35 0.05 0.1 0.05 0.15 0.1 0.1
31-Mar-16 533.6 0.05 0.1 0.05 0.05 0.05 0.05
/:ft^l ?‘ l^ : I:fl \k‘ I [ ^ I I k v‘ LII IU [ ^I k‘ I II III I II ] +LI T x I I I \ :fl I › II * x II I \k‘ [ ^I I k v‘ ' Tl i/ L L I t"t/. \

4• Observations And Findings For Put Option

a) Buyers Pay Of”f:

ii Those who have purchased put option at a strike price of’ 45(), lhc premium
payable is 48.75.
ii On lhc expiry dale the spot markcl price closcd at 533.6. As it is out of lhc
moncy f’or the buycr and in thc money for thc scllcr, hcncc the buyer is in loss.
ii So the buycr will lose only premium i.c. Rs. 48.75 pcr sharc.
So the total loss will be Rs. 63375 i.e. 48.75* 13()()

31
 b) Sellers Pay Off:

The seller is entitled only to the premium if he is in the money i.e., in protit.
So his profit is only the premium i.e. 48.75* 1300 = Rs. 63375

GRAPH SHOWING THE MOVEMENT OF SPOT AND FUTURE PRICE

6DD

SSD

SDD

45D

4DD SPOT PRICE

35D FUTURE PRICE
3DD
26 reb t6
2-8 Feb-t6

25 Mar T 6
2-3 Mar-T6
T5-Mar-T6
T-Mar-T6
3- Mar-t 6

T 3- Mar-t 6
5- Mar-T6

T6 2 T Mar
6 T 9- Mar-
7-Mar-t 6

29 MarT 6
9- Mar-T6
TT-Mar-T6

7-Mar-t 6
T7-Mar-t

T6

2
CONTRACT DATES

* The future price ot RELINFRA is moving along with the market price.
* If the buy price of the future is less than the settlement price, then the buyer
of the future gets protit.
* If the selling price of the future is less than the settlement price, then the
seller incurs losses.

3. Analysis ot GMR Infrastructure Ltd

The objective of this analysis is to evaluate the protit/loss position of futures and
options. This analysis is based on sample data taken ot GMR INFRA scrip. This analysis
considered the March 2016 contract ot GMRlNFRA. The lot size is 390fl0 and the time
period in which this analysis is done is from 26.02.2016 to 31.03.16.

32
 DATE MARKET PRICE FUTURE PRICE
26-Feb- 16 11.15 11.3
29-Feb- 16 10.9 11
1-Mar- 16 11.4 11.5
2-Mar- 16 11.55 11.65
3-Mar-16 11.6 11.75
4-Mar- 16 11.85 11.95
8-Mar- 16 12 12.1
9-Mar-16 12.15 12.25
10-Mar-16 11.85 11.95
11-Mar-16 11.85 11.95
14-Mar-16 11.55 11.65
15-Mar-16 11.6 11.7
16-Mar-16 11.65 11.8
17-Mar-16 11.55 11.6
18-Mar-16 11.55 11.6
21-Mar-16 11.8 11.9
22-Mar-16 12 12
23-Mar-16 11.75 11.8
28-Mar-16 11.4 11.45
29-Mar-16 11.3 11.35
30-Mar-16 11.5 11.55
31-Mar-16 11.6 11.6
Table 7: II iiikci mid Futinc price ‹il G XIRINFR \

33
 GRAPH SHOWING THE PRICE MOVEMENT OF GMR INFRA
13 FUTURES

12

Future Price

10.5

10
2-8 Feb-t6

2s- Mar-t6
23-Mar-16

25-Mar-16
11—Mar— 1

13-Mar -16

t6 29-Mar-
J8-Mar -J6

2-7 Mar-
5-Mar-

9-Mar -

6t
9t•- w-
1-Mar-
16

J6
t6

16
6

CONTRACT DATES

Figure 11: Graph showinpp• price mod crncnt of’ GM RINFRA 1’iiturcs

•• Observations and Findings:

If a person buys 1 lot i.e. 39000 futures of GMRINFRA on 26* Feb, 2016 and sells on 31 st
Mar, 2016 then he will get a profit of 11.6-11.3= 0.3 per share. So he will get a total profit of
11700 i.e. 0.3* 39000.

The closing price of GMRINFRA at the end of the contract period is 11.6 and this is
considered as settlement price.

4• Call Option

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

4 The first column explains trading date

34
ii Second column cxplains the SPOT market pricc in cash segment on that datc.
ii The third column cxplains call premiums amounting at these strike priccs: 1(), 12.5,
15, 17.5, 2() and 22.5.

STRIKE PRICE
MARKET
DATE PRICE 10 12.5 15 17.5 20 22
26-Feb-16 11.15 1.65 0.5 0.15 0.05 0.05 0.7S
29-Feb-16 10.9 1.35 0.35 0.1 0.05 0.05 0.7S
1-Mar-16 11.4 1.7 0.4 0.1 0.05 0.05 0.7S
2-Mar-16 11.55 1.9 0.45 0.1 0.05 0.05 0.7S
3-Mar-16 11.6 1.95 0.45 0.1 0.05 0.05 0.7S
4-Mar-16 11.85 1.95 0.5 0.15 0.05 0.05 0.7S
8-Mar-16 12 2.15 0.55 0.15 0.05 0.05 0.7S
9-Mar-16 12.15 2.35 0.6 0.15 0.05 0.05 0.7S
10-Mar-16 11.85 2 0.45 0.1 0.05 0.05 0.7S
11-Mar-16 11.85 2 0.4 0.1 0.05 0.05 0.7S
14-Mar-16 11.55 2 0.3 0.05 0.05 0.05 0.7S
15-Mar-16 11.6 1.7 0.3 0.05 0.05 0.05 0.7S
16-Mar-16 11.65 2 0.3 0.05 0.05 0.05 0.7S
17-Mar-16 11.55 2 0.2 0.05 0.05 0.05 0.7S
18-Mar-16 11.55 2 0.2 0.05 0.05 0.05 0.7S
21-Mar-16 11.8 2 0.2 0.05 0.05 0.05 0.7S
22-Mar-16 12 2 0.2 0.05 0.05 0.05 0.7S
23-Mar-16 11.75 2 0.1 0.05 0.05 0.05 0.7S
28-Mar-16 11.4 1.55 0.05 0.05 0.05 0.05 0.7S
29-Mar-16 11.3 1.4 0.05 0.05 0.05 0.05 0.7S
30-Mar-16 11.5 1.55 0.05 0.05 0.05 0.05 0.7S
31-Mar-16 11.6 1.6 0.05 0.05 0.05 0.05 0.7S
/:ft^l ‘ : I:fl \v‘ I [ ^ I I v v‘ LII IU [ ^I v‘ I II III I II v LII l* :fl \ :t] IT › £l • II I \v‘ ] I I v v‘ ' T I (ilñlT{[ |’|{.\

4• Observations and Findings For Call Option

a) Buyers Pay Of”f:

ii Those who have purchased call option at a strike pricc of’ 15, lhc premium
payable is ().15.
ii On the cxpiry date the spot market price closcd at 11.6. As it is out of’ thc moncy
for the buycr and in thc money tor thc scllcr, hcncc the buyer is in loss.

35
 ii So the buycr will lose only premium i.c. (). 15 per share.
So the total loss will be Rs. 585() i.c. ().l5*39(N)()

b) Sellers Pay Ott:

ii Thc scllcr is cntitled only to the premium it he is in lhc money i.e. in protil.
ii So his profit is only premium i.e. (). 15 * 39()()() = Rs. 585()

4• Put Option

STRIKE PRICE
MARKET
DATE PRICE 10 12.5 15 17.5 20 22.5
26-Feb-16 11.15 0.35 1.65 3.75 6.1 8.5 6.45
29-Feb-16 10.9 0.4 1.85 3.75 6.1 8.5 6.45
1-Mar-16 11.4 0.3 1.35 3.6 6.1 8.5 6.45
2-Mar-16 11.55 0.25 1.25 3.45 6.1 8.5 6.45
3-Mar-16 11.6 0.25 1.2 3.45 6.1 8.5 6.45
4-Mar-16 11.85 0.15 1.15 3.45 6.1 8.5 6.45
8-Mar-16 12 0.2 0.95 3.45 6.1 8.5 6.45
9-Mar-16 12.15 0.1 0.85 2.8 6.1 8.5 6.45
10-Mar-16 11.85 0.15 1 3.1 6.1 8.5 6.45
11-Mar-16 11.85 0.15 0.95 3.1 6.1 8.5 6.45
14-Mar-16 11.55 0.15 1.15 3.1 6.1 8.5 6.45
15-Mar-16 11.6 0.15 1.05 3.1 6.1 8.5 6.45
16-Mar-16 11.65 0.15 1.1 3.1 6.1 8.5 6.45
17-Mar-16 11.55 0.1 1.15 3.25 6.1 8.5 6.45
18-Mar-16 11.55 0.05 1.05 3.25 6.1 8.5 6.45
21-Mar-16 11.8 0.05 0.9 3.25 6.1 8.5 6.45
22-Mar-16 12 0.05 0.9 3.1 6.1 8.5 6.45
23-Mar-16 11.75 0.05 0.75 3.1 6.1 8.5 6.45
28-Mar-16 11.4 0.05 1.15 3.1 6.1 8.5 6.45
29-Mar-16 11.3 0.05 1.15 3.1 6.1 8.5 6.45
30-Mar-16 11.5 0.05 1 3.55 6.1 8.55 6.45

36
 4• Observations And Findings For Put Option
a) Buyers Pav Off:

4• Those who have purchased put option at a strike price of 22.5, the premium
payable is 6.45.
4• On the expiry date the spot market price closed at 11.6. As it is in the money for
the buyer and out of the money for the seller, hence the buyer makes profit.

Strike price 22.50

Spot price - 11.60

10.90

Premium — 6.45

4.45x 39000= 173550

Buyer Profit = Rs. 173550

In case spot price decreases further, buyer’s profit will increase.

b) Sellers Pay Off:

4 It is in the money for the buyer so it is out of the money for the seller, hence the
seller is in loss.
4 The loss is equal to the profit of buyer i.e. Rs. 173550.

37
 GRAPH SHOWING THE MOVEMENT OF SPOT AND FUTURE PRICE
12.5

12

11.5
PnICE

SPOT PRICE
10.5
FUTURE PRICE
10

CONTRACT DATES

* The future price ot GMRINFRA is moving along with the market price.
* If the buy price of the future is less than the settlement price, then the buyer of
the future gets protit.
* If the selling price of the future is less than the settlement price, then the seller
incurs losses.

38
6. Conclusion, Recommendations and Limitations:

6.1 Conclusion

In derivative segment the profit/loss of the option writer purely depends on the
fluctuations of the underlying asset.
In bullish market the call option writer incurs more losses so the investor is
suggested to go for a call option to hold, where as 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, where as the put option writer will get
more losses, so he is suggested to hold a put option.

6.2 Recommendations:
The derivatives market is newly started in India and it is not known by every
investor, so SEBI has to take steps to create awareness among the investors about
the derivative segment.
In order to increase the derivatives market in India, SEBI should revise some of
their regulations like contract size, participation of FH in the derivatives market.
Contract size should be minimized because small investors cannot afford this
much of huge premiums.

6.3 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 L&T Ltd, Reliance
Infrastructure Ltd and GMR Infrastructure Ltd during March 2016. Hence this analysis
cannot be taken universal.
Also, it is not based on the international perspective of derivatives markets, which
exists in NASDAQ, etc. It is limited to Indian context only.

39
7. BIBLIOGRAPHY

a) Books

Hull, 1. (2006). Options, futures, and other derivatives. Upper Saddle River, N.J.:
Pearson/Prentice Hall.
Gordon, E. and Natarajan, K. (2009). Financial markets and services. Mumbai
[India]: Himalaya Pub. House.

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.
Becketti, S., & Roberts, D. -J. (1990). Will Increased Regulation of Stock Index
Futures Reduce Stock Market Volatility? Economic Review, Federal Reserve
Bank of Kansas City, 33—46.
Mayhew, Stewart, 2000, The Impact of Derivatives on Cash Markets: What have
we learned? , Working paper, University of Georgia.
Shenbagaraman Premalata (2003), "Do Futures and Options trading increase
stock market volatility" NSE NEWS, National Stock Exchange of India, Jan.

c) Websites
http://www.nseindia.com

http://www.investopedia.com

http://www.moneycontrol.com
 ADHERENCE SHEET

Last Date Signature of Mentors

Title of the Project/Area of Topic

Finalization 21-Jan-16

Literature Review/Objectives of the study 2-Feb-16

Methodology 18-Feb-16

Questionnaire/Data Collection tools 3-Mar-16

Data Collection 17-Mar-16

Analysis 24-Mar-16

Conclusion and Recommendations 1-Apr-16

First Draft 15-Apr-16

Final Report/Binding and Submission 3-May-16

41