INDUSTRIAL RESEARCH PROJECT

Project Report submitted in partial fulfillment for the

award of the degree of

BACHELOR OF BUSINESS ADMINISTRATION

Submitted by

NIKHIL SHARMA (19GSOB1010089)

NAVNEET SINGH (19GSOB1010058)
NAVNEET RAI (19GSOB1010162)

IN

BBA-FINANCE

SCHOOL OF BUSINESS

Under the supervision of

SWARNIKA PANDEY

March 2022
 SCHOOL OF BUSINESS

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Certified that this project report “………..….TITLE OF THE PROJECT……………..…..” is the

bonafide work of “…………..NAME OF THE CANDIDATE(S).…………” who carried out the

project work under my supervision.

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 ABSTRACT

The emergence of the marketplace for derivatives products, maximum substantially

forwards, futures and option, may be tracked again to the willingness of hazard-averse financial
marketers to shield themselves in opposition to uncertainties springing up out of fluctuations in
belongings prices.

Derivatives are hazard control instruments, which derive their fee from an underlying asset. The
following are 3 board classes of members within side the derivatives marketplace Hedgers,
Speculators and Arbitragers. In latest instances the Derivative markets have won significance in
phrases in their critical function within side the economy. The by-product marketplace is these
days commenced in India and maximum of the traders are blind to this, so SEBI has to take
steps to create cognizance most of the traders approximately the by-product section.

In coins marketplace the profit/lack of the traders relies upon available in the marketplace fee of
the underlying asset. But in derivatives section the investor enjoys massive earnings with
confined downside. Derivatives are in most cases used for hedging purpose. In order to growth
the derivatives marketplace in India, SEBI must revise a number of their policies like agreement
size, participation of FII within side the derivatives marketplace.
 TABLE OF CONTENTS

CONTENT PAGE NUMBERS

Chapter 1 5
Introduction Of Derivatives

Chapter 2 14
Forwards

Chapter 3 17
Futures

Chapter 4 23
Options

Chapter 5 33
Findings, Suggestions, Conclusion

Bibliography 35

LIST OF GRAPHS

GRAPH CONTENTS PAGE NO.

NO.
1 PAY-OFF FOR A BUYER OF FUTURES
2 PAY-OFF FOR A SELLER OF FUTURES
3 PAY-OFF PROFILE FOR BUYER OF A CALL OPTION
4 PAY-OFF PROFILE FOR SELLER OF A CALL OPTION
5 PAY-OFF PROFILE FOR BUYER OF A PUT OPTION
6 PAY-OFF PROFILE FOR SELLER OF A PUT OPTION
 CHAPTER 1

INTRODUCTION OF DERIVATIVES

1.1 INTRODUCTION

1.2 BASIC OF FINANCIAL DERIVATIVES

1.3 DEFINITION OF DERIVATIVES

1.4 HISTORY OF DERIVATIVES

1.5 PARTICIPANTS IN DERIVATIVES MARKET

1.6 DERIVATIVES IN INDIA

1.7 DEVELOPMENT OF DERIVATIVES MARKETS IN INDIA

1.8 FACTORS CONTRIBUTING TO GROWTH OF DERIVATIVES

1.1 INTRODUCTION

Derivatives are one of the maximum complicated instruments. The phrase by-product
comes from the phrase ‘to derive’. It suggests that it has no unbiased cost. A by - product
is a agreement whose cost is derived from the cost of some other asset, called the
underlying asset, which can be a proportion, a inventory marketplace index, an hobby
rate, a commodity, or a foreign money. The underlying is the identity tag for a by-product
agreement. When the charge of the underlying changes, the cost of the by - product
additionally changes. Without an underlying asset, derivatives do now no longer have any
meaning. For example, the cost of a gold futures agreement derives from the cost of the
underlying asset i.e., gold. The fees within side the derivatives marketplace are pushed
through the spot or coins marketplace charge if the underlying asset, that's gold on this
example.

Derivatives are very just like insurance. Insurance protects towards unique risk, along
with fire, floods, robbery and so on. Derivatives on the opposite hand, deal with
marketplace dangers – volatility in hobby rates, foreign money rates, commodity fees,
and proportion fees. Derivatives provide a legitimate mechanism for insuring towards
numerous types of dangers bobbing up within side the international of finance. They
provide a variety of mechanisms to enhance redistribution of risk, which may be
prolonged to each product existing, from espresso to cotton and stay farm animals to debt
instruments.

Financial derivatives got here into the limelight within side the post-1970 period; these
days they account for 75% of the monetary marketplace interest in Europe, North
America, and East Asia. The primary distinction among commodity and monetary
derivatives lies within side the nature of the underlying instrument. In commodity
derivatives, the underlying asset is a commodity; it can be wheat, cotton, pepper,
turmeric, corn, orange, oats, soya beans, rice, crude oil, herbal gas, gold, silver and so on.
In monetary derivatives, the underlying consists of treasuries, bonds, stocks, and
inventory index, overseas exchange, Euro greenback deposits. The marketplace for
monetary derivatives has grown fairly each in phrases of sort of units and turnover.
Presently, maximum foremost institutional debtors and traders use derivatives. Similarly, many
act as intermediaries dealing in by-product transactions. Derivatives are chargeable for now no
longer most effective growing the variety of monetary product to be had however additionally
fostering greater particular methods of understanding, quantifying and dealing with monetary
chance.

Derivatives contracts are used to counter the rate dangers concerned in belongings and
liabilities. Derivatives do now no longer get rid of dangers. They divert dangers from traders
who're chance averse to people who are dangers neutral. The use of derivatives gadgets is the
part of the developing fashion amongst monetary intermediaries like banks to alternative off-
stability sheet interest for conventional traces of enterprise. The exposures to derivatives
through banks have implications now no longer most effective from the factor of capital
adequacy, however additionally from the factor of view of organizing buying and selling norms,
enterprise policies and agreement process. Trading in derivatives fluctuate from that during
equities as maximum of the derivatives are marketplace to the marketplace.

1.2 BASIC OF FINANCIAL DERIVATIVES

Financial derivative assets are assets whose values are determined by the value of some other
assets, called the underlying. There are two common types of derivative contracts, those
patterned on forwards and on options. Derivatives based on forward have linear payoffs,
meaning their pay offs move one for one with the changes in the underlying price. On the other
hand derivatives based on options have non linear payoffs, meaning their pay offs may move
proportionally more or less than the underlying price.

The party obliged to

deliver the commodity is said to have a short portion and the party obliged to take delivery of
the commodity and pay the forward price for it is said to have a long position. A party with no
obligation offsetting the forward contract is said to have an open position. A party with an open
position is something called a speculator. A party with an obligation offsetting the forward
contract is said to have a covered portion. A party with a closed position is sometimes called a
hedger.

Derivatives assets, e.g. forwards, can often be constructed from combinations of underlying
assets. Such constructed assets are called synthetic assets.
 In order to guarantee
performance while limiting risk to exchange members, the clearing house requires performance
bond from each counter party. At the initiation of a contract, both counterparties put up initial or
original margin to cover potential default losses. Both parties put up margin because at the time
a contract is initiated, it is not known whether the terminal spot price will favour the long or the
short. The loser for the day is obliged to increase his margin account and the gainer is permitted
to reduce his margin account by an amount, called variation margin, determined by the change
on the basis of the change in the futures price. Both counterparties earn a short term rate of
interest on their margin accounts.

Swap-a plain vanilla interest rate swap is an agreement between two counterparties to
exchange a stream of fixed interest rate payments of a stream of floating interest rate payments,
both streams are denominated in the same currency and are based on a notional principal
amount. The notional principal is to exchange. The design of a swap has three features that
determine its price: the maturity of the swap, the maturity of the floating rate, and the frequency
of payments.

At initiation, the price of a plain vanilla swap is set so is current value the net value of
the two interest payments streams, fixed and floating is zero. The swap can be seen as a
portfolio which, from the point of view of the payer of fixed interest is long a fixed rate bond,
both in the amount of the notional principal. The payer of the floating rate interest is long the
floater and shorts thee fixed rate bond.

A floating rate bond always trades

at par at time it is issued, the fixed rate bond, which represents the payers commitment in the
swap must then also trade at par if the swap is to have an initial value of zero. In other words,
the swap rate is the market adjusted yield to maturity on a par bond.

A forward swap is an agreement between two counter parties to commence a swap at some
future settlement date. As in the case of a cash swap, the forward swap rate is the market
adjusted par rate on a coupon bond issued at the settlement date. The rate on a forward swap can
be calculated from rates or spot rates.

Many of the derivatives instruments do not, in fact, involve the delivery of a financial
instrument in the future. They are contracts for differences. If it were not for the purposes of
avoiding the gambling laws of various countries, such financial instruments would be more
honestly called bets. Interest rate futures contracts are no less than bets on the future course of a
particular interest rating. The price written into the contract is compared with the interest rate
outcome at the agreed date or dates in the future and cash is exchanged based on the difference.
1.3 DEFINITION OF DERIVATIVES
Derivative is a product whose fee is derived from the fee of 1 or extra simple variables,
referred to as bases (Underlying assets, index, or reference rate), in a contractual manner. The
underlying asset may be equity, Fortex, commodity or every other asset. According to securities
contracts (Regulation) act 1956 , a by-product is: “Security derived from a debt tool, share, loan,
whether or not secured or unsecured, threat tool or settlement for variations or every other shape
of security.” “A settlement which derives its fee from the prices, or index of prices, of
underlying securities.” Derivatives are securities below the Securities Contract (Regulation) Act
and for this reason the buying and selling of derivatives is ruled with the aid of using the
regulatory framework below the Securities Contract (Regulation) Act.

1.4 HISTORY OF DERIVATIVES

The records of derivatives is pretty colorful and incredibly loads longer than maximum
humans think. Forward shipping contracts, pointing out what's to be brought for a set fee at a
targeted location on a targeted date, existed in historical Greece and Rome. Roman emperors
entered ahead contracts to offer the hundreds with their deliver of Egyptian grain. These
contracts had been additionally undertaken among farmers and traders to dispose of danger
bobbing up out of unsure destiny fees of grains. Thus, ahead contracts have existed for hundreds
of years for hedging fee danger.

The first prepared commodity change got here into life withinside the
early 1700’s in Japan. The first formal commodities change, the Chicago Board of Trade
(CBOT), turned into fashioned in1848 withinside the US to cope with the trouble of ‘credit
score danger’ and to offer centralized place to barter ahead contracts. From ‘ahead’ buying and
selling in commodities emerged the commodity ‘futures’. The form of futures agreement turned
into called ‘to reach at’. Trading in futures started at the CBOT withinside the 1860’s. In 1865,
CBOT indexed the primary ‘change traded’ derivatives agreement, called the futures contracts.
Futures buying and selling grew out of the want for hedging the fee danger concerned in lots of
business operations. The Chicago Mercantile Exchange (CME), a spin-off of CBOT, turned into
fashioned in 1919, aleven though it did exist earlier than in 1874 below the names of ‘Chicago
Product Exchange’ (CPE) and ‘Chicago Egg and Butter Board’ (CEBB). The first economic
futures to emerge had been the foreign money in 1972 withinside the US. The first overseas
foreign money futures had been traded on May 16, 1972, on International Monetary Market
(IMM), a department of CME. The foreign money futures traded at the IMM are the British
Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc, the German Mark, the
Australian Dollar, and the Euro dollar. Currency futures had been observed quickly through
hobby charge futures. Interest charge futures had been traded for the primary time at the CBOT
on October 20, 1975. Stock index futures and alternatives emerged in 1982. The first inventory
index futures contracts had been traded on Kansas City Board of Trade on February 24, 1982.
The marketplace for futures and alternatives grew at a fast tempo withinside the eighties and
nineties. The crumble of the Bretton Woods regime of constant events and the advent of floating
quotes for currencies withinside the global monetary markets paved the manner for
improvement of some of monetary derivatives which served as powerful hazard control
equipment to address marketplace uncertainties.

The CBOT and the CME are the 2 biggest monetary trade withinside the international on which
futures contracts are traded. The CBOT now gives forty eight futures and alternative contracts
(with the yearly quantity at extra than 211 million in 2001). The CBOE is the biggest trade for
buying and selling inventory alternatives. The CBOE trades alternatives at the S&P a hundred
and the S&P 500 inventory indices. The Philadelphia Stock Exchange is the superior trade for
buying and selling overseas alternatives.

The maximum traded inventory indices consist of S&P 500, the Dow Jones Industrial Average,
the NASDAQ a hundred, and the Nikkei 225. The US indices and the Nikkei 225 change nearly
spherical the clock. The N225 is likewise traded at the Chicago Mercantile Exchange.

1.5 PARTICIPANTS IN DERIVATIVES MARKET

1. Trading participants:

a. Hedgers:

The system of dealing with the threat or threat control is referred to as as hedging. Hedgers are
the ones people or corporations who control their threat with the assist of spinoff products.
Hedging does now no longer imply maximizing of return. The important reason for hedging is
to lessen the volatility of a portfolio with the aid of using decreasing the threat.

b. Speculators:

Speculators do now no longer have any function on which they input into futures and choice
marketplace i.e., they take the location within side the underlying coins marketplace. They
handiest have a selected view approximately destiny charge of a commodity, shares, inventory
index, hobby prices or currency. They take into account different factors like call for and
supply, marketplace positions, open interests, financial fundamentals, worldwide events, etc. to
make predictions. They take chance in flip from excessive returns. Speculators are important in
all markets – commodities, equity, hobby prices and currency. They assist in imparting the
marketplace the whole lot preferred quantity and liquidity.
 c. Arbitrageurs:

Arbitrage is the simultaneous buy and the sale of the equal underlying in one-of-a-kind markets
in a try and make benefit from charge discrepancies among the 2 markets. Arbitrage includes
pastime on numerous one-of-a-kind units or belongings concurrently to take gain of charge
distortions judged to be handiest temporary. Arbitrage occupies a outstanding function within
side the futures world. It is the mechanism that continues charges of futures contracts aligned
well with charges of underlying belongings the goal is really to make earnings without chance,
however the complexity of arbitrage pastime is such that it's miles reserved to specifically well-
knowledgeable and skilled expert traders, ready with effective calculating and records
processing tools. Arbitrage might not be as smooth and costless as presumed.

2. Intermediary Participants:

a. Brokers:

For any buy and sale, agents carry out a vital feature of bringing customers and dealers
together. As a member in any futures exchanges, can be any commodity or finance, one want
now no longer to be a speculator, arbitrageur or hedger. By distinctive feature of a member of a
commodity or economic futures alternate one get a proper to transact with different individuals
of the equal alternate. All people hedging their transaction exposures or speculating on charge
motion want now no longer be and for that rely cannot be individuals of futures or alternatives
alternate. A non-member has to deal in futures alternate via member only. This offers a member
the function of a broker. This pastime of a member is charge hazard unfastened due to the fact
he isn't always taking any function in his account, however his different hazard is customers
default hazard. He cannot default in his responsibility to the clearing house, although purchaser
defaults. So, this hazard top class is likewise in-built in brokerage recharges. More and extra
involvement of non-individuals in hedging and hypothesis in futures and alternatives
marketplace will growth brokerage commercial enterprise for member and extra quantity in flip
reduces the brokerage. Thus an increasing number of participation of buyers apart from
individuals offers liquidity and intensity to the futures and alternatives markets.

1.6 DERIVATIVES IN INDIA

India has commenced the improvements in monetary markets very late. Some of the current
trends initiated via way of means of the regulatory government are very essential on this
respect. Futures buying and selling were authorized in positive commodity exchanges. Bombay
Stock Exchange has commenced futures buying and selling in cottonseed and cotton beneath the
BOOE and beneath the East India Cotton Association. Necessary infrastructure has been created
via way of means of the National Stock Exchange and the Bombay Stock Exchange for buying
and selling in inventory index futures and the graduation of operations in decided on scripts.
Liberalized trade price control gadget has been brought within side the yr 1992 for regulating
the go with the drift of overseas trade. A committee headed via way of means of S.S. Tarapore
changed into constituted to enter the deserves of complete convertibility on capital accounts.
RBI has initiated measures for releasing the hobby price structure. It has additionally expected
Mumbai Inter Bank Offer Rate (MIBOR) on the road of London Inter Bank Offer Rate
(LIBOR) as a step toward introducing Futures buying and selling in Interest Rates and Forex.
Badla transactions were banned in all 23 inventory exchanges from July 2001. NSE has
commenced buying and selling in index alternatives primarily based totally at the NIFTY and
positive Stocks.

1.7 DEVELOPMENT OF DERIVATIVES MARKETS IN INDIA

The first step in the direction of advent of derivatives buying and selling in India turned into
the promulgation of the Securities Laws (Amendment) Ordinance, 1995, which withdrew the
prohibition on alternatives in securities. The marketplace for derivatives, however, did now no
longer take off, as there has been no regulatory framework to control buying and selling of
derivatives. SEBI installed a 24-participants committee below the Chairmanship of Dr. L. C.
Gupta on November 18, 1996 to broaden suitable regulatory framework for derivatives buying
and selling in India. The committee submitted its record on March 17, 1998 prescribing
essential pre-situations for advent of derivatives buying and selling in India. The committee
encouraged that derivatives have to be declared as ‘securities’ in order that regulatory
framework relevant to buying and selling of ‘securities’ may also govern buying and selling of
securities. SEBI additionally install a set in June 1998 below the Chairmanship of Prof.
J.R.Varma, to endorse measures for danger containment in derivatives marketplace in India.
The record, which turned into submitted in October 1998, labored out the operational
information of margining system, technique for charging preliminary margins, broking internet
worth, deposit requirement and real-time tracking requirements. The Securities Contract
Regulation Act (SCRA) turned into amended in December 1999 to encompass derivatives in the
ambit of ‘securities’ and the regulatory framework had been evolved for governing derivatives
buying and selling. The act additionally made it clear that derivatives will be prison and
legitimate handiest if such contracts are traded on a identified inventory exchange, accordingly
precluding OTC derivatives. The authorities additionally rescinded in March 2000, the 3 decade
vintage notification, which prohibited ahead buying and selling in securities. Derivatives buying
and selling started out in India in June 2000 after SEBI granted the very last approval to this
impact in May 2001. SEBI accredited the spinoff segments of inventory exchanges, NSE and
BSE, and their clearing house/business enterprise to begin buying and selling and agreement in
accredited derivatives contracts. To start with, SEBI accredited buying and selling in index
futures contracts primarily based totally on S&P CNX Nifty and BSE-30 (Sense) index. This
turned into observed via way of means of acclaim for buying and selling in alternatives
primarily based totally on those indexes and alternatives on character securities.

1.8 FACTORS CONTRIBUTING TO GROWTH OF DERIVATIVES

1. Price Volatility:

A fee is what one can pay to collect or use something of fee. The gadgets having fee can be
commodities, nearby foreign money or overseas currencies. The idea of fee is apparent to nearly
each person whilst we talk commodities. There is a fee to be paid for the acquisition of meals
grain, oil, petrol, metal, etc. the fee one can pay to be used of a unit of any other person’s cash is
referred to as hobby rate. And the fee one can pay in one’s personal foreign money for a unit of
any other foreign money is referred to as an trade rate. Prices are normally decided through
marketplace forces. In a marketplace, customer have ‘call for’ and manufacturers or provider
have ‘deliver’, and the collective interplay of call for and deliver within side the marketplace
determines the fee. These elements are continuously interacting within side the marketplace
inflicting modifications within side the fee over a quick length of time. Such modifications
within side the fee are acknowledged as ‘fee volatility’. This has 3 elements: the velocity of fee
modifications, the frequency of fee modifications and the value of fee modifications.

2. Globalization of Markets:

Earlier, managers needed to cope with home monetary concerns; what passed off in different a
part of the sector turned into in most cases irrelevant. Now globalization has multiplied the
dimensions of markets and as significantly stronger opposition it has benefited customers who
can't achieve higher exceptional items at a decrease cost. It has additionally uncovered the
cutting-edge enterprise to considerable dangers and, in lots of cases, caused reduce income
margins.

3. Technological Advances:

A considerable boom of spinoff devices has been pushed through technological breakthrough.
Advances on this vicinity consist of the improvement of excessive pace processors, community
structures and stronger technique of information entry. Closely associated with advances in
laptop era are advances in telecommunications. Improvement in communications permit for
instant global conferencing, Data transmission through satellite. At the equal time there have
been considerable advances in software program applications without which laptop and
telecommunication advances might be meaningless. These facilitated the greater fast motion of
records and therefore its instant effect on marketplace fee.
 CHAPTER 2

FORWARDS

2.1 Introduction

2.2 Definition

2.3 Types And Features Of Forward Contracts

2.4 Valuing Forward Contracts

2.5 Pricing And Valuation Of Foreign Currency Forward Contract

 2.1 INTRODUCTION

A settlement that obligates one counter birthday celebration to shop for and the alternative
to promote a particular price, quantity and date within side the destiny is referred to as a ahead
settlement. Forward contracts are the crucial sort of ahead-primarily based totally derivatives.
They are the most effective derivatives. There is a separate ahead marketplace for multitude of
underlying, along with the conventional agricultural or bodily commodities, in addition to
foreign money and hobby rates. The extrude within side the fee of forward settlement is kind of
proportional to the extrude within side the fee of its underlying asset. These contracts create
credit score exposures. As the fee of the settlement is conveyed simplest on the maturity, the
events are uncovered to the threat of default throughout the existence of the settlement. Forward
contracts are custom designed with the phrases and situations tailor-made to match the precise
business, economic or threat control goals of the counter events. Negotiations frequently take
vicinity with appreciate to settlement size, transport grade, transport locations, transport dates
and credit score phrases.

2.2 DEFINITION

A forward settlement may be described as a settlement among parties, a customer and a

supplier, that requires the transport of an asset at a destiny date with a rate agreed today. It is a
customized settlement among parties. The forward marketplace is a standard time period use to
explain the casual marketplace thru which those contracts are entered into. Standardized ahead
contracts are referred to as futures contracts and are traded on futures exchanges. Often, the
customer of the settlement is known as lengthy and supplier of the settlement is known as short.

2.3 TYPES AD FEATURES OF FORWARD CONTRACTS

1. Commodity Forwards:
A commodity forwards settlement may be described as a settlement in which one celebration
consents to supply the underlying commodity to any other celebration a exact destiny time. The
underlying commodity may be oil, a valuable metallic or some other commodity. Producers of
commodities take manufacturing choices primarily based totally on expectancies of charge they
might get hold of whilst the real output arrives. Similarly, consumers of commodities of inputs
or very last items take choices primarily based totally at the availability and fee of commodity at
specific factors of time in a year. At the initiation of settlement, the events additionally specify
the quantity, exceptional and charge of the commodity they might supply on the market or
accumulate for buy at a predetermined ate in destiny.
2. Currency Forward Contracts:
Currency forward market’s improvement over time may be attributed to rest of presidency
controls over trade charges of maximum the currencies. Currency forwards contracts are
primarily utilized by banks and organizations to manipulate forex risk. For example, Microsoft
its European subsidiary to ship €12 million in duration of three months. On receiving the Euros
from the subsidiary, Microsoft will convert them into greenbacks. Thus, Microsoft is largely
lengthy on Euros, because it has to promote Euros. At the equal time it's far quick on
greenbacks because it has to shop for the greenbacks.

3. Equity Forwards:
Equity forward can be defined as a contract calling for the purchase of an individual stock, a
stock portfolio or a stock index on a forward date.

2.4 VALUING FORWARD CONTRACTS

The price of a forward agreement on the time, it's miles first entered into is zero. At a later
stage, it is able to show to have a fantastic or bad price. It is crucial for banks and different
economic establishments to price the agreement every day. Using the notation added earlier, we
assume K is the transport charge for a agreement that become negotiated a while ago, the
transport date is T years from today, and r is the 7-12 months risk-unfastened hobby rate. The
variable F₀ is the forward charge that could be relevant if we negotiated the country today.

2.5 PRICING AND VALUATION OF FOREIGN CURRENCY FORWARD

CONTRACTS

Foreign forex transactions have to be treated very carefully. Exchange charge is quoted in
phrases of devices of home forex in keeping with unit of overseas forex. This is likewise
referred to as direct quote.
 CHAPTER 3

FUTURES

3.1 INTRODUCTION

3.2 TYPES OF FUTURES

3.3 PAY-OFF FOR A BUYER OF FUTURES

3.4 PAY-OFF FOR A SELLER OF FUTURES

3.5 MARGINS

3.6 PRICING THE FUTURES

3.1 INTRODUCTION

DEFINITION:

A Futures settlement is among events to shop for or promote an asset a positive time
within side the destiny at a positive price. To facilitate liquidity within side the futures
settlement, the alternate specifies positive preferred functions of the settlement. The
standardized objects on a futures settlement are:

 Quantity of the underlying

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

FEATURES OF FUTURES:

 Futures are highly standardized

 The contracting parties need to pay only margin money
 Hedging of price risks.
 They have secondary markets to.

3.2 TYPES OF FUTURES

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

 Stock futures
 Index futures
 Parties in the futures contracts:

There are two parties in a futures contract, the buyer and the seller. The buyer of the
futures contract is one who is LONG on the futures contract and the seller of the futures
contract is who is SHORT on the futures contract.

The pay off for the buyer and the seller of the futures of the contracts are as follow:

3.3 PAY-OFF FOR A BUYER OF FUTURES:

CASE 1:- The buyer bought the futures contract at (F); if the future price goes to S1 then
the buyer gets the profit of (FP).

CASE 2:- The buyer gets loss when the future price goes less then (F), if the future price
goes to S2 then the buyer gets the loss of (FL).

3.4 PAY-OFF FOR A SELLER OF FUTURES:

F-FUTURES PRICE S1, S2 – SETTLEMENT PRICE

CASE 1:- The seller sold the futures contract at (F); if the futures goes to S1 then the
seller gets the profit of (FP).

CASE2:- The seller gets loss when the future price goes greater than (F), if the future
price goes to S2 then the seller gets the loss of (FL).

3.5 MARGINS
 Margins are the deposits which lessen counter celebration risk, in a futures
contract. These margins are accumulated so as to get rid of the counter celebration
risk. There are three types of margins:

 Initial margins:

Whenever a futures agreement is signed, each consumer and vendor are required to
publish preliminary margins. Both consumer and vendor are required to make
safety deposits which are meant to assure that they may in truth be capable of fulfil
their obligation. These deposits are preliminary margins.

 Marking to market margins:

The method of fixing the fairness in an investor’s account in an effort to replicate

the alternate within side the agreement rate of the futures settlement is called MTM
margin.

 Maintenance margin:

The investor ought to maintain the futures account fairness same to or more than positive
percent of the quantity deposited as preliminary margin. If the fairness is going much less than
that percent of preliminary margin, then the investor gets a name for a further deposit of coins
called upkeep margin to deliver the fairness up to the preliminary margin.

3.6 PRICING THE FUTURES

The Fair cost of the futures settlement is derived from a version is aware of
because the fee of bring version. This version offers the truthful cost of the
settlement.

Cost of Carry:

F=S (1+r-q) ͭ
Where
F- Futures price
S- Spot price of the underlying
r- Cost of financing
q- Expected Dividend yield
t- Holding Period

Basis:

In the context of economic futures, foundation may be described because the

futures fee minus the spot fee. The may be a distinctive foundation for every
shipping month for every contract, in a ordinary market, foundation may be
positive. This displays that futures costs generally exceed spot costs.

Cost of Carry:

The courting among futures expenses and notice expenses may be summarized in
phrases of what's referred to as the value of carry. This measures the garage value
plus the hobby this is paid to finance the asset much less the earnings earned at the
asset.

Open interest:

Total super lengthy or brief role within side the marketplace at any unique time. As
general lengthy positions within side the marketplace could be identical to brief
positions, for calculation of open interest, simplest one facet of the agreement is
counter.
 CHAPTER 4

OPTIONS

4.1 INTRODUCTION

4.2 TYPES OF OPTIONS

4.3 PAY-OFF PROFILE FOR BUYER OF A CALL OPTION

4.4 PAY-OFF PROFILE FOR SELLAR OF A CALL OPTION

4.5 PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

4.6 PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

4.7 PRICING OPTIONS

4.1 INTRODUCTION
DEFINITION:

Option is a form of settlement among people in which one presents the alternative the proper to
shop for a particular asset at a particular rate inside a particular time duration. Using other
choice the settlement may also provide the alternative individual the proper to promote a
particular asset at a particular rate inside a particular time duration. In order to be consequently
proper, the choice client has to pay the vendor of the choice premium. A belongings in which
choice may be make from are stocks, commodities, indexe etc. Then the underlying asset is the
monetary asset, when the choice are monetary choice we a inventory alternatives, forex
alternatives, index alternatives, & if alternatives by something of value (commodity) choice.

PROPERTIES OF OPTION:

Options have more than two but not a lot of properties that set them apart from other securities.

The following are the properties of option:

• Limited Loss

• High takes advantage of potential

• Limited Life

PARTIES IN AN OPTION CONTRACT:

1. Buyer of the option:

The client of an choice is one that with the aid of using paying choice top rate buys the proper
however now no longer the duty to exercising his choice on seller/writer.

2. Writer/seller of the option:

The author of the call /placed alternatives is the only who gets the choice top class and is there
through obligated to sell/purchase the valuable things (asset) if the purchaser physical activities
the choice on him.

4.2 TYPES OF OPTIONS:

A options are well know into different types on the basis of different variables. The following
are the different types of options.

1. On the basis of the underlying asset:

Based on underlying asset the option are dividing into two parts:

 INDEX OPTIONS

The index options by the underlying asset as index.

 STOCK OPTIONS

An inventory choice offers the consumer of the choice the proper to shop for promote
inventory at a special price. Stock choice are alternatives at the person shares, there are
presently extra than a hundred and fifty shares, there are presently extra than a hundred
and fifty shares are buying and selling within side the segment.

2. On the basis of the market moving information:

the basis of the market moving, the option are two types: calls and puts.


 CALL OPTION

The call option is bought a person or investor, then seems that the stock price moving
upwards direction. The call option is gives the holder of the option the right but not the
responsibility or duty to buy the asset by the fixed date for a fixed price.

 PUT OPTION

The put option is brought by person or investor, then he seems that the stock price
moving downwards direction. The put option gives the holder of the option right but not
the responsibility to sell an asset by the fixed date for a fixed price.
4.3 PAY-OFF PROFILE FOR BUYER OF A CALL OPTION
A pay-off of a buyer options depending on the current price of the underlying asset. The graph
showing the pay-off of buyer the call option.

S- Striking price SR- profit at current price E1

SP- premium Loss or superior loss OTM - Out of the money

E1 - Current price ATM - At the money

E2- Current price 2 ITM - In the money

CASE 1: (Spot price > Strike price)

The current price (ET) of a underlying asset is more than current price (S). The buyer gets
profit( benifit) of (SR), when the price increases more than E1 then profit also increase more
than SR.

CASE 2: (Spot price < Striking price)

The current price (E2) of the underlying asset is less than striking price(s)

The buyer geting loss (SP), the price going down less than E2 then also his loss is limited to
his premium price or superior price (SP).

4.4 PAY-OFF PROFILE FOR SELLAR OF A CALL OPTION

A pay-off of seller of the call option depending on current price of the underlying asset.

The graph shows that pay-off a seller of a call option:

S- Striking price SR- profit at current price E1

SP- Premium Loss OTM - Out of the money

E1 - Current price ATM - At the money

E2- Current price 2 ITM - In the money

CASE 1: (current price < Striking price)

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

CASE 2: (current price > Strike price)

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

4.5 PAY-OFF PROFILE FOR BUYER OF A PUT OPTION

The pay-off of the buyer of the option depends on the spot price of the underlying asset. The
following graph shows the pay-off of the buyer of a call option.

S- Striking price SR-gain at current price

SP- Premium Loss or superior loss E1 OTM - Out of the money

E1 - Current price ATM - At the money

E2-Current price 2 ITM - In the money

CASE 1: ( current price < Strike price)

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

CASE 2: (current price > Strike Price)

As current price (E2) of the underlying asset is more than strike price (s), the buyer gets loss of
(SP), if price go more than E2 than the loss of the buyer is limited to hiss premium or superior
(SP).
4.6 PAY-OFF PROFILE FOR SELLER OF A PUT OPTION

The pay-off of seller of the option depending on current price of the underlying asset. The
graph is showing the pay-off of seller of put option are below :

S- Striking price

SP- Premium Loss

El - current price

E2- Current price 2

SR-profit or gain at current price El

OTM - Out of the money

ATM - At the money or amount

ITM - In the money or amount

CASE 1: (Current price < Striking price)

The current price (E1) of the underlying asset is less than striked price (S), the seller got the loss
of (SR), the price decreases less than E1 than that loss also increases more than (SR).
CASE 2: (Current price > Striking price)

The current price (E2) of the underlying asset is more than strike price (S), the seller geting
profit of (SP), the price goes more than E2 than that profit of seller is limited to his premium or
superior (SP).

Factors affecting the price of an option:

The followed are the different elements that have an effect on the fee of an choice they're Stock
fee: The pay-off of a name choice the quantity through the inventory fee goes beyond the
strike fee. Call other choices as a result come out as extra treasured because the inventory fee
will increase and the other way around, too. The pay-off of a placed choice the amount through
which the strike fee exceeds the inventory fee. Put other choices as a result come out as extra
treasured because the inventory fee will increase and the other way around, too. Striked fee: In
the case of a name, as a strike fee will increase, the inventory fee has to make a bigger upward
circulate for the choice to move in-the-money. Thus, for a name, because the strike fee will
increase choice turns into much less treasured and as strike fee decreases, choice emerge as
extra treasured. Time to expiration: Both placed and contact American alternatives emerge as
extra treasured as a time to expiry will be increasing .

Volatility: a volatility a inventory fee is assess of unsure approximately destiny inventory fee
movements. As volatility will increase, the threat that the inventory will do thoroughly or very
negative will increase. The price of each calls and places consequently growth by as volatility
growth.

Risk- free interest rating: a placed choice costs decrease because the risk-loose charge will
increase wherein because the costs of name usually growth because the risk-loose hobby charge
will increase.

Dividends: Dividends had that mpact of lowering the inventory fee at the x - dividend charge.
That has the terrible impact at the price of name alternatives & wonderful impact at the price of
placed alternatives.

4.7 PRICING OPTIONS

A Black- Scholes method for price of European calls and puts by the non dividend paying
stock are below :
 CALL OPTION

C=SN (D1)-Xeˉ ͬ ͭ N(D2)

 PUT OPTION

Xeˉ ͬ ͭ N (-D2)-SN (-D2)

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

d₁= ᴸn (S/X) + (r+ v^2/2) t

d₂= d₁-v√
 CHAPTER-5

FINDINGS, SUGGESTIONS, CONCLUSION

5.1 FINDINGS

5.2 SUGGESTIONS

5.3 CONCLUSION
5.1 FINDINGS
 Derivatives marketplace in India continues to be in its improvement level. It isn't always
at par with world’s derivatives marketplace.
 Speculation has brought on many small buyers to lose their precious savings.
 Derivatives units are simplest for better price of transaction. A man or woman dealer
unearths it hard to put money into by-product marketplace.
 As it miles nevertheless in improvement level human beings are ignorant of by-product
units available.

5.2 SUGGESTIONS
 Derivatives marketplace must be advanced with a purpose to maintain it at par with
different by-product markets within side the world.
 Speculation must be discouraged.
 There need to be extra by-product gadgets geared toward man or woman investors.
 FEDAI and RBI must behavior seminars concerning the usage of derivatives to train to
diverse sections of investors which must consist of individuals, cash changers, financial
institution dealers, company dealers, etc.

5.3 CONCLUSION
The monetary advantages of derivatives aren't depending on the dimensions of the organization
buying and selling them. The selection approximately whether or not to apply derivatives ought
to be driven, now no longer through the company’s size, however through its strategic
objectives. However, it's far crucial that each one customer of derivatives, no matter size,
apprehend how their contacts are structured, the specific rate and danger traits of these
instruments, and the way they may carry out beneath demanding and risky monetary conditions.
Without a genuinely described danger control strategy, use of economic derivatives may be
dangerous. But, whilst used wisely, economic derivatives can boom shareholders price through
presenting a way to high a corporations danger exposures and coins flows.

The SEBI’s advisory committee to derivatives has proposed a

hard and fast of measures to enhance liquidity within side the markets. These measures as soon
as authorized through the SEBI board, might allow FII participation in all derivatives products.
With most effective a marginal investment, you'll be able to take large, positions within side the
marketplace. The alternatives marketplace might select out up in Indian subcontinent pretty
quick no matter the nuances of the complicated arithmetic concerned within side the valuation
of the alternatives, in view of intuitive expertise of alternatives is excellent.

BIBLIOGRAPHY

Following is the list of books referred:

 Derivatives Analysis and Valuation

- The ICFAI University Press
 Financial Derivatives: Risk Management
- V.K. Bhalla
 Option, Futures and Other Derivatives
- John C. Hull

The following websites were used:

1. http://www.strategies-tactics.com/derivatives.htm#risk
2. http://www.numa.com/ref
3. http://www.nseindia/content/fo/fo_historicaldata.htm
4. http://www.nseindia/content/equities/eq_historicaldata.htm
5. http://www.derivativesindia/script/glossary/indexobasic.asp