“A project report on EQUITIES–Cash & Derivatives”

Executive Summary

In few years Share Market has emerged as a tool for ensuring

one’s financial well being. Share Markets have not only
contributed to the India growth story but have also helped families
tap into the success of Indian Industry. As information and
awareness is rising more and more people are enjoying the benefits of
investing in Share Markets. once people are aware of Share Market
investment opportunities, the number who decide to invest in Share
Markets increases to as many as one in every five people.

This Project gave me a great learning

experience and at the same time it gave me enough scope to implement
my analytical ability.

The first part gives an insight about Share Market and its various
aspects, the Company Profile, Objective of the study, Research
Methodology. One can have a brief knowledge about Share market and
its basics through the project.
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 The second part of the Project consists of
Friday market analysis collected from past records This Project covers
the topic of “ FRIDAY MARKET INVESTING PLAN ” The data
collected has been well organized and presented. I hope the research
findings and conclusion will be of use.

CONSORTIUM SECURITIES PVT.LTD : A BRIEF

PROFILE
Consortium is one of the leading broking houses in India that
provides a wide range of services nationwide to a substantial
and diversified client base that includes retail clients, high
net worth individuals, corporates and financial institutions.

We are committed to our distinctive culture and core values,

which always place our client's interests first. Our values
emphasise integrity, transparency, commitment to
excellence and teamwork.

Over a short span of a decade, we have made tremendous

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strides that have taken us to the enviable position of one of
the leading retail broking house in the country. The company
acquired membership of National Stock Exchange equity
segment in 1996, acquired membership of National Stock
Exchange futures and options segment as a clearing and
trading member in 2000, acquired membership of Bombay
Stock Exchange (BSE) in 2000, became a depository
participant with National Securities Depository Ltd. (NSDL)
in 2001, acquired membership of two premier Commodities
Exchanges of India, namely NCDEX and MCX in 2004.

The basic strength of the company lies in technology. The

company has integrated trading screen, wherein the client
can trade on NSE, BSE and Derivatives on the single
screen. We have a large number of CTCL (computer to
computer link) installations with technology provided by
Financial Technologies and NSE IT. HCL Comnet has
connected many branches/franchisees of Consortium
through a private VSAT network (VPN), which is very
customer friendly and competitive. The company also has
commodities trading on the private VSAT network (VPN).

The spectrum of back office functions is totally automated.

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This shall ensure that the stock payout to the clients and
such other functions are carried out without manual
intervention, thus enhancing efficiency to highest levels. Our
back-office is on a highly secure oracle database.

Consortium has a very scientific risk management system in

place. The company has a separate surveillance and
monitoring department, where highly efficient and
experienced personnel are in charge of close monitoring of
terminal operations throughout the trading hours. Each and
every branch/franchisee is under continuous watch as
regards exposures, margins, timely payment of cash and
shares, turnover, mark to market profits/losses and so on.

With substantial investment in technology, and a team of

hardcore professionals, the company is confident of bringing
to the common investor the highest standards of service.

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 MANAGEMENT TEAM

Our senior Management comprises a diverse talent pool that

brings together rich experience from across industry as well as
financial services.
Mr. P S Kalra - Group Chairman
Chartered Accountant
Held several Senior Management positions with one of India's
largest industrial groups
Mr. Rohit Arora – Founder Director of AR Credit
Information Services, Evaluation, Monitoring and
Process Outsourcing Company.
Chartered Accountant
Plus 20 years of experience in Financial Services

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Mr. P Khurana-
Chartered Accountant
Plus 28 years of experience in Financial Service

Table of Contents
1. History of BSE………………………………………... 14
- Vision ……………………………………………… 15
- Awards………………………………………………. 17
- Services……………………………………………... 17
2. History of NSE………………………………………... 18
3. Role of SEBI…………………………………………… 19

- Board members of SEBI

4. Introduction…………………………………………… 20
- Listed Securities…………………………………… 22
- Permitted Securities………………………………… 22
- Tick Size………………………………………… 22
- Computation of closing price of scrip’s in the Cash
. Segment…………………………………………… 23
5. Compulsory Rolling Settlement (CRS) Segment……… 23
- Trading and settlement cycle for scrip’s under CRS...26
6. Settlement…………………………………………………….
- Demat pay-in………………………………………. 30
- Auto delivery facility………………………………. 30
- Pay-in of securities in physical form…………………31
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 - Funds Pay-in………………………………………… 32
- Securities Pay-out………………………………..…...32
- Funds Payout…..……………………………………. 33
- Dematerialization of shares…………………………..33
- Merits of Dematerialization.…………………………. 34
- Rematerialization. ……………………………… 34
7. Open interest in derivative market………………………… 35
- What is open interest……………………………………. 35
- Rising market and increasing open interest…………...... 36
- Rising market and decreasing open interest…………….. 36
- falling marker and increasing open interest……………. . 37
- falling marker and decreasing open interest……………... 37
- sideways marker and increasing open interest……………38
8. The index number…………………………………………… 38
- desirable attribute of an index…………………………..39 -
capturing behavior of portfolios……………………… ..40 -
including liquid stocks………………………………….40 -
maintaining professionally……………………………..41
– impact cost…………………………………………….. 41
9. Futures and options………………………………………….42
- trading underlying versus trading single stock futures.. 43
- derivative market at nse………………………………..44
- index derivatives………………………………………45
10. Future terminology…………………………………………..45
– business growth of futures and options market
. turnover(rs. Crore)……………………………………49
11. Eligibility for any stock to enter in derivative market…….50
- trading mechanism…………………………………..50
- volumes………………………………………………51
- index derivatives for hedging………………………..51
– pricing futures……………………………………….52
– initial margin……………………………………….. 53
- initial margin charged on f & o market……………..54
12. Convergence of futures price to spot price…………………54
- mark to market (mtm) margin……………………….56
– open interest calculation with example……………...57
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 13. Options………………………………………………………..58
- option terminology…………………………………..59
- strategies in futures and options……………………..62
14. Buying a call option………………………………………….63
– buying a put…………………………………………66
- writing the call options………………………………68
- writing the buy options………………………………70
15. Firday market analysis……………………………………….73
16. Conclusion………………………………………………….....79
17. Suggestions …………………………………………………..81
18. Bibliography………………………………………………….84

Bombay Stock Exchange Limited (the Exchange)

is the oldest stock exchange in Asia with a rich heritage. Popularly known

as "BSE", it was established as "The Native Share & Stock Brokers

Association" in 1875. It is the first stock exchange in the country to obtain

permanent recognition in 1956 from the Government of India under the

Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and

pre-eminent role in the development of the Indian capital market is widely

recognized and its index, SENSEX, is tracked worldwide.

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 • India's oldest and first stock exchange: Mumbai (Bombay) Stock

Exchange. Established in 1875. More than 6,000 stocks listed.

• Total number of stock exchanges in India: 22

• They are in: Ahmedabad, Bangalore, Calcutta, Chennai, Delhi etc.

• There is also a National Stock Exchange (NSE) which is located in

Mumbai.

• There is also an Over the Counter Exchange of India (OTCEI)

which allows listing of small and medium sized companies.

• The regulatory agency which oversees the functioning of stock

markets is the Securities and Exchange Board of India (SEBI), which is

also located in Bombay.

Today, BSE is the world's number 1

exchange in terms of the number of listed companies and the world's

5th in transaction numbers. The market capitalization as on

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December 31, 2007 stood at USD 1.79 trillion.

SERVICES

BSE also has a wide range of services to empower investors and facilitate
smooth transactions:

Investor Services: The Department of Investor Services

redresses grievances of investors. BSE was the first
exchange in the country to provide an amount of Rs.1
million towards the investor protection fund; it is an
amount higher than that of any exchange in the
country. BSE launched a nationwide investor awareness
programme- 'Safe Investing in the Stock Market' under
which 264 programmes were held in more than 200
cities.

The BSE On-line Trading (BOLT): BSE On-line Trading

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(BOLT) facilitates on-line screen based trading in
securities. BOLT is currently operating in 25,000 Trader
Workstations located across over 359 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the

world's first centralized exchange-based Internet
trading system, BSEWEBX.com. This initiative enables
investors anywhere in the world to trade on the BSE
platform.

Surveillance: BSE's On-Line Surveillance System (BOSS)

monitors on a real-time basis the price movements,
volume positions and members' positions and real-time
measurement of default risk, market reconstruction and
generation of cross market alerts.

BSE Training Institute: BTI imparts capital market

training and certification, in collaboration with reputed
management institutes and universities. It offers over
40 courses on various aspects of the capital market and
financial sector. More than 20,000 people have
attended the BTI programmes

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 Awards

• The World Council of Corporate Governance has awarded the

Golden Peacock Global CSR Award for BSE's initiatives in
Corporate Social Responsibility (CSR).

• The Annual Reports and Accounts of BSE for the year ended
March 31, 2006 and March 31 2007 have been awarded the
ICAI awards for excellence in financial reporting.

• The Human Resource Management at BSE has won the Asia

- Pacific HRM awards for its efforts in employer branding
through talent management at work, health management at
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 work and excellence in HR through technology

Drawing from its rich past and its equally

robust performance in the recent times, BSE will continue to remain
an icon in the Indian capital market

Vision

"Emerge as the premier Indian stock exchange by

establishing global benchmarks"

The National Stock Exchange (NSE) is

India's leading stock exchange covering various cities and towns across the

country. NSE was set up by leading institutions to provide a modern, fully

automated screen-based trading system with national reach. The Exchange

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has brought about unparalleled transparency, speed & efficiency, safety

and market integrity.

NSE has played a catalytic role in reforming

the Indian securities market in terms of microstructure, market practices

and trading volumes. The market today uses state-of-art information

technology to provide an efficient and transparent trading, clearing and

settlement mechanism, and has witnessed several innovations in products

& services viz. demutualisation of stock exchange governance, screen

based trading, compression of settlement cycles, dematerialisation and

electronic transfer of securities, securities lending and borrowing,

professionalisation of trading members, fine-tuned risk management

systems.

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Securities and Exchange Board of India (SEBI):

The Securities and Exchange Board

of India (SEBI) is an autonomous body established by an act of parliament in

1992. SEBI is controlled by a statutory board consisting of one chairman and

six members. SEBI’s main objective is to protect the interest of investors,

and to regulate all securities market particularly the share market. SEBI is a

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 market regulator whose major functions include regulation, superintendence

and control of all securities markets in India, overseeing the functioning of

stock exchanges, framing rules for trading practices, attending to and

removing investor grievances, framing rules for and regulating public issues,

training and education of investors, and all matters pertaining to market

intermediaries.

TRADING

Trading on the BOLT System is conducted from Monday to Friday

between 9:55 a.m. and 3:30 p.m. The scrip’s traded on the Exchange
have been classified into 'A', 'B1', 'B2','T', ‘S', ‘TS' 'F' ,'G' and 'Z'
groups.

The Exchange has for the guidance and benefit of the investors have
classified the scrip’s in the Equity Segment into 'A', 'B1', 'B2','T', ‘S',
‘TS' and 'Z' groups on certain qualitative and quantitative parameters
which include number of trades, value traded, etc.

The “F” Group represents the Fixed Income Securities.

The “T” Group represents scrip's which are settled on a trade to trade
basis as a surveillance measure.

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The “S” Group represent scrip’s forming part of the “ BSE-Indonext”
segment . The “TS” Group consist of scrip’s in the “ BSE-Indonext”
segment which are settled on a trade to trade basis as a surveillance
measure.

Trading in Govt. Securities for retail investors is done under "G" group.

The 'Z' group was introduced by the Exchange in July 1999 and
includes the companies which have failed to comply with the listing
requirements of the Exchange and/or have failed to resolve investor
complaints or have not made the required arrangements with both the
Depositories, viz., Central Depository Services (I) Ltd. (CDSL) and
National Securities Depository Ltd. (NSDL) for dematerialization of
their securities.

The Exchange also provides a facility to the market participants for on-
line trading of odd-lot securities in physical form in 'A', 'B1', 'B2'
‘T','S', ‘TS' and 'Z' groups and Rights renunciations in all the groups of
scrip’s in the Equity Segment.

With effect from December 31, 2001, trading in all securities listed in
equity segment of the Exchange takes place in one market segment,
viz., Compulsory Rolling Settlement Segment (CRS).

The scrip’s of the companies which are in demat can be traded in

market lot of one but the securities of companies which are still in the
physical form are traded on the Exchange in the market lot of generally

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either 50 or 100. However, the investors having quantities of securities
less than the market lot are required to sell them as "Odd Lots". The
facility of trading in odd lots of securities not only offers an exit route
to investors to dispose of their odd lots of securities but also provides
them an opportunity to consolidate their securities into market lots.

This facility of selling physical shares in compulsory demat scrips is

called an Exit Route Scheme. This facility can also be used by small
investors for selling upto 500 shares in physical form in respect of
scrips of companies where trades are required to be compulsorily
settled by all investors in demat mode.

Listed Securities:

The securities of companies which have signed Listing Agreement with

the Exchange are traded at the Exchange as "Listed Securities". Baring
a few scrip’s, all scrip’s traded in the Equity Segment at the Exchange
fall in this category.

Permitted Securities:

To facilitate the market participants to trade in securities of the

companies which are actively traded at other Regional Stock
Exchanges but are not listed on the Exchange, the Exchange has in
April 2002 decided to permit trading in such securities as “Permitted

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Securities" provided they meet the relevant norms specified by the
Exchange.

Tick Size:

Tick size is the minimum differences in rates between two orders on

the same side i.e., buy or sell, entered on the system for particular scrip.
Trading in scrip’s listed on the Exchange is done with the tick size of 5
paise.

However, in order to increase the liquidity and enable

the market participants to put orders at finer rates, the Exchange has
reduced the tick size from 5 paise to 1 paise in case of units of mutual
funds, securities traded in "F" group and equity shares having closing
price upto Rs. 15/- on the last trading day of the calendar month.
Accordingly, the tick size in various scrip’s quoting upto Rs.15/- is
revised to 1 paise on the first trading day of month. The tick size so
revised on the first trading day of month remains unchanged during the
month even if the prices of scrip’s undergo change.

Computation of closing price of scrip’s in the Cash

Segment:

The closing price of scrip's is computed by the Exchange on the basis

of weighted average price of all trades executed during the last 30
minutes of the continuous trading session. However, if there is no trade
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recorded during the last 30 minutes, then the last traded price of scrip
in the continuous trading session is taken as the official closing price.

Compulsory Rolling Settlement (CRS) Segment:

As per the directive by SEBI, all transactions in all groups of securities

in the Equity Segment and Fixed Income securities listed on the
Exchange are required to be settled on T+2 basis w.e.f. from April 1,
2003. The settlement calendar, which indicates the dates of the various
settlement related activities, is drawn by the Exchange in advance and
is circulated among the market participants.

Under rolling settlements, the

trades done on a particular day are settled after a given number of
business days. A T+2 settlement cycle means that the final settlement
of transactions done on T, i.e., trade day by exchange of monies and
securities between the buyers and sellers respectively takes place on
second business day (excluding Saturdays, Sundays, bank and
Exchange trading holidays) after the trade day.

The transactions in securities of companies which have made

arrangements for dematerialization of their securities are settled only in
demat mode on T+2 on net basis, i.e., buy and sell positions of a
member-broker in the same scrip are netted and the net quantity and
value is required to be settled. However, transactions in securities of
companies, which are in "Z" group or have been placed under "trade to
trade" by the Exchange as a surveillance measure (“T” and “TS”
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group) , are settled only on a gross basis and the facility of netting of
buy and sell transactions in such scrip’s is not available.

The Exchange has introduced a new segment named “BSE Indonext”

w.e.f. January 7, 2005. “S” group consists of scrips from “B1” & “B2”
group on BSE and companies exclusively listed on regional stock
exchanges having capital of 3 crores to 30 crores. All trades in this
segment are done through BOLT system under S group.

The transactions in 'F' group securities representing "Fixed Income

Securities" and " G" group representing Govt. Securities for retail
investors are also settled at the Exchange on T+2 basis.

In case of Rolling Settlements, pay-in and pay-out of both funds and

securities is completed on the same day.

The members are required to

make payment for securities sold and/ or deliver securities purchased to
their clients within one working day (excluding Saturday, Sunday,
bank & Exchange trading holidays) after the pay-out of the funds and
securities for the concerned settlement is completed by the Exchange.
This is the timeframe permitted to the members of the Exchange to
settle their funds/ securities obligations with their clients as per the
Byelaws of the Exchange.

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The following table summarizes the steps in the trading and settlement
cycle for scrip’s under CRS

 DAY ACTIVITY
T Trading on BOLT and daily downloading of
statements showing details of transactions and
margins at the end of each trading day.
Downloading of provisional securities and
funds obligation statements by member-
brokers.
6A/7A* entry by the member-brokers/
confirmation by the custodians.
T+1 Confirmation of 6A/7A data by the
Custodians upto 11:00 a.m. Downloading of
final securities and funds obligation
statements by members .
T+2 Pay-in of funds and securities by 11:00 a.m.
and pay-out of funds and securities by 1:30
p.m. The member-brokers are required to
submit the pay-in instructions for funds and
securities to banks and depositories

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 respectively by 10: 30 a.m.
T+3 Auction on BOLT at 11.00
a.m.
T+4 Auction pay-in and pay-out of funds and
securities by 12:00 noon and 1:30 p.m.
respectively.

Thus, the pay-in and pay-out of funds

and securities takes places on the second business day (i.e., excluding
Saturday, Sundays and bank & Exchange trading holidays) of the day
of the execution of the trade.

* 6A/7A : A mechanism whereby the obligation of settling the

transactions done by a member-broker on behalf of a client is passed on
to a custodian based on confirmation of latter. The custodian can
confirm the trades done by the members on-line and upto 11 a.m. on
the next trading day. The late confirmation of transactions by the
custodian after 11:00 a.m. upto 12:15 p.m., on the next trading day is,
however, permitted subject to payment of charges for late confirmation
@ 0.01% of the value of trades confirmed or Rs. 10,000/-, whichever is
less.

The settlement of the trades (money and securities) done by a member-

broker on his own account or on behalf of his individual, corporate or
institutional clients may be either through the member-broker himself
or through a SEBI registered custodian appointed by him/client. In case

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the delivery/payment in respect of a transaction executed by a member-
broker is to be given or taken by a registered custodian, then the latter
has to confirm the trade done by a member-broker on the BOLT
System through 6A-7A entry. For this purpose, the custodians have
been given connectivity to BOLT System and have also been admitted
as clearing member of the Clearing House. In case a transaction done
by a member-broker is not confirmed by a registered custodian within
the time permitted, the liability for pay-in of funds or securities in
respect of the same devolves on the concerned member-broker.
The following statements can be downloaded by the members in their
back offices on a daily basis.

a. Statements giving details of the daily transactions entered into by

the members.

b. Statements giving details of margins payable by the member-

brokers in respect of the trades executed by them.

c. Statements of securities and fund obligation.

d. Delivery/Receive orders for delivery /receipt of securities.

The Exchange generates Delivery and

Receive Orders for transactions done by the members in A, B1, B2, S
and F and G group scrip’s after netting purchase and sale transactions
in each scrip whereas Delivery and Receive Orders for “T”, “TS”,"C"
& "Z" group scrip’s and scrip’s which are traded on the Exchange on

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"trade to trade" basis are generated on gross basis, i.e., without netting
of purchase and sell transactions in a scrip. However, the funds
obligations for the members are netted for transactions across all
groups of securities.

The Delivery Order/Receive Order provides information like the scrip

and quantity of securities to be delivered/received by the members
through the Clearing House. The Money Statement provides scrip
wise/item wise details of payments/receipts of monies by the members
in the settlement. The Delivery/Receive Orders and Money Statement,
as stated earlier, can be downloaded by the members in their back
office.

Settlement

Pay-in and Pay-out for 'A', 'B1', 'B2', ‘T’, ‘S’, ‘TS’, 'C',
"F", "G" & 'Z' group of securities

The trades done on BOLT/Exchange by the members in all the

securities in CRS are now settled on the Exchange by payment of
monies and delivery of securities on T+2 basis. All deliveries of
securities are required to be routed through the Clearing House,

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The Pay-in /Pay-out of funds based on the money statement and that of
securities based on Delivery Order/ Receive Order issued by the
Exchange are settled on T+2 day.

Demat pay-in :

The members can effect pay-in of demat securities to the Clearing

House through either of the Depositories i.e. the National Securities
Depository Ltd. (NSDL) or Central Depository Services (I) Ltd.
(CDSL). The members are required to give instructions to their
respective Depository Participants (DPs) specifying details such as
settlement no., effective pay-in date, quantity, etc.

Members may also effect pay-in directly from the clients' beneficiary
accounts through CDSL. For this, the clients are required to mention
the settlement details and clearing member ID through whom they have
sold the securities. Thus, in such cases the Clearing Members are not
required to give any delivery instructions from their accounts.

In case, if a member-broker fails to deliver the securities, then the value

of shares delivered short is recovered from him at the standard/closing
rate of the scrip’s on the trading day.

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Auto delivery facility :

Instead of issuing Delivery instructions for their securities delivery

obligations in demat mode in various scrip’s in a settlement /auction, a
facility has been made available to the members of automatically
generating Delivery instructions on their behalf from their CM Pool
accounts maintained with NSDL and CM Principal Accounts
maintained with CDSL. This auto delivery facility is available for CRS
(Normal & Auction) and for trade to trade settlements. This facility is,
however, not available for delivery of non-pari passu shares and shares
having multiple ISINs. The members wishing to avail of this facility
have to submit an authority letter to the Clearing House. This auto
delivery facility is currently available for Clearing Member (CM) Pool
accounts and Principal accounts maintained by the members with the
respective depositories .

Pay-in of securities in physical form:

In case of delivery of securities in physical form, the members have to

deliver the securities to the Clearing Hose in special closed pouches
along with the relevant details like distinctive numbers, scrip code,
quantity, etc., on a floppy. The data submitted by the members on
floppies is matched against the master file data on the Clearing House
computer systems. If there is no discrepancy, then the securities are
accepted.
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Funds Pay-in:

The bank accounts of members maintained with the clearing banks,

viz., Bank of India, HDFC Bank Ltd., Oriental Bank of Commerce.,
Standard Chartered Bank, Centurion Bank Ltd., UTI Bank Ltd., ICICI
Bank, Indusind Bank Ltd., Union Bank of India and Hongkong
Shanghai Banking Corporation Ltd. are directly debited through
computerized posting for their funds settlement obligations.

In case of those members, whose funds pay-in obligations are not

cleared at the scheduled time, action such as levy of penalty and/or
deactivation of BOLT TWSs, is initiated as per penalty norms
prescribed .

Securities Pay-out:

In case of demat securities, the same are credited by the Clearing

House in the Pool/Principal Accounts of the member-brokers. The
Exchange has also provided a facility to the member-brokers for
transfer of pay-out securities directly to the clients' beneficiary owner

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accounts without routing the same through their Pool/Principal
accounts in NSDL/ CDSL. For this, the concerned member-brokers are
required to give a client wise break up file which is uploaded by the
member-brokers from their offices to the Clearing House. Based on the
break up given by the member-brokers, the Clearing House instructs
depositories, viz., CDSL & NSDL to credit the securities to the
Beneficiary Owners (BO) Accounts of the clients. In case delivery of
securities received from one depository is to be credited to an account
in the other depository, the Clearing House does an inter depository
transfer to give effect to such transfers.
In case of physical securities, the Receiving Members
are required to collect the same from the Clearing House on the pay-out
day.

Funds Payout:

The bank accounts of the members having pay-out of funds are

credited by the Clearing House with the Clearing Banks on the pay-in
day itself
In case, if a member-broker fails to deliver the securities, then the value
of shares delivered short is recovered from him at the standard/closing
rate of the scrips on the trading day.

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 Dematerialization of shares:

Dematerialization as the name suggests, is a term used for conversion

of shares from their physical form to electronic form. This conversion is

done by NSDL and CDSL. The CDSL acts as a depository for BSE,

whereas the NSDL acts as a depository for NSE. After dematerialization,

shares cease to exist in their physical form.

Merits of dematerialization:

 No risk of being fake or stolen shares.

 No stamp duty while transfer of shares.

 Free from tedious paperwork as it was in the physical form.

 Stock exchanges have now discarded the concept of marketable lots,

small lots and odd lots.

Rematerialization:

Rematerialization is the reverse of dematerialization. It means to convert

the electronically held shares back into physical form. You have the

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complete freedom of conversion from electronic form to physical form

whenever you want to do so.

OPEN INTEREST IN DERIVATIVE MARKET

Open interest means the total number of open contracts on a

security, that is, the number of future contracts or options contracts that
have not been exercised, expired or full filled by delivery. Hence we
can say that the open interest position at the end of each day represents
the net increase or decrease in the number of contracts for that day.
However, it is to be noted that open interest is not the same as trading
volume. Trading volume represents the total number of contracts that
are traded during a day, inclusive of both squared –off (closed)
positions and new positions. Thus, for any day, the trading volume will
always be higher than the open interest.

What is open interest?

Every trade in the exchange would have an impact on the open

interest for that day. Say, for example, “A” buys one contract of Nifty
on Monday while “B” buys two on the same day. Open interest at the

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end of the day will be three. On Tuesday, while “A” sells his one
contract to “C”, “B” buys another Nifty contract. The open interest at
the end of the day is now four. In other words, if both parties to the
trade initiate a new position, it increases the open interest by one
contract.
But if the traders square off their existing
positions, Open interest will decrease by the same number of contracts.

However, if one of the parties to the transaction squares off his

position while the other creates one open interest will remain
unchanged. Open interest, thus, mirrors the flow of money into the
derivatives market, which makes it a vital indicator of market direction.
Here is how you interpret open interest.

RISING MARKET AND INCREASING OPEN INTEREST

If the markets are on an uptrend and open interest is also

increasing, it it’s a bullish signal. It implies the entry of new players
into the market, who are creating fresh long positions and suggests the
flow of extra money into the market.

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RISING MARKET AND DECREASING OPEN INTEREST

If despite a rise in market, the open interest decreases, it can be

interpreted as a precursor to a trend reversal. The lack of additions to
open interest shows that the markets are rising on the back of short-
sellers covering their existing positions. This also implies that money is
flowing out of the market, given that open interest is decreasing.

FALLING MARKET AND INCREASING OPEN INTEREST

When open interest records an increase in value amidst falling

market, it could be a bearish signal. Though a rise in open interest
means that new money is probably being used for creating fresh short
positions, which will lead to a further downtrend.

FALLING MARKET AND DECREASING OPEN INTEREST

If open interest decreases in a falling market, it can be attributed

to the forced squaring- off of long – positions by traders. It, thus,
represents a trend reversal, since the downtrend in the market is likely
to reverse after the long positions have been squared off. Thus, in a
falling market, a declining open interest can be considered a signal
indicating the strengthening of the market.
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SIDEWAYS MARKET AND INCRESING OPEN INTEREST

If the open interest decreases in a

sideways market, we can say that flat market trends will continue for
some more time. A decrease in open interest only represents the
squaring-off of old positions and lack of any new positions might result
in a sideways or weak trends in the market.

Though open interest is a good barometer of where the markets

are heading; it is only an indicator that helps us trade intelligently it
cannot be considered foolproof.

THE INDEX NUMBER

An index is a number which measures the change in a

set of values over a period of time. A stock index represents the change
in value of a set of stocks which constitute the index. More specifically,
a stock index number is the current relative value of a weighted
average of the prices of a pre-defined group of equities. It is a relative
value to the weighted average of prices at some arbitrarily chosen
Page | 34
starting date or base period. The starting value or base of the index is
usually set to a number such as 100 or 1000. for example the base
value of the Nifty was set to 1000 on the start date of November 3,
1994.

A good stock market index is on which captures the behavior

of the overall equity market. It should represent the market, it should be
well diversified and yet highly liquid. Movements of the index should
represent the returns obtained by “typical” portfolios in the country.
A market index is very important for its use
 As a barometer for market behavior,
 As a benchmark portfolio performance,
 As an underlying in derivative instruments like index futures,
 In passive fund management by index funds
 Also acts a barometer for lot of elements such as liquidity in the
market, the growth of the economy, the investor’s confidence,
government policies etc.

DESIRABLE ATTRIBUTE OF AN INDEX

A good market index should have the following attributes:

Page | 35
  It should capture the behavior of a large variety of different
portfolios in the market.
 The stocks included in the index should be highly liquid.
 It should be professionally maintained.

Capturing Behavior Of Portfolios

A good market index should accurately reflect the behavior of the

overall market as well as of different portfolios. This is achieved by
diversification in such a manner that a portfolio is not vulnerable to any
individual stock or industry risk. A well diversified index is more
representative of the market. However there is diminishing returns
form diversification, there is very little gain by diversifying beyond a
point; the more serious problem lies in the stocks that are included in
the index when it is diversified. We end up including illiquid stocks,
which actually worsen the index. Since an illiquid stock does not
reflect the current price behavior of the market, its inclusion in index
results in an index, which reflects, delayed or stale price behavior
rather than current price behavior of the market.

Including Liquid Stocks

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 Liquidity is much more than trading frequency, it is about ability
to transact at a price, which is very close to the current market price.
For example, a stock is considered liquid if one can buy some shares at
around Rs.120.05 and sell at around Rs.119.95, when the market price
is ruling at Rs.120. a liquid stock has very tight bid ask spread.

Maintaining Professionally

It is now clear that an index should contain as many stocks with

as little impact cost as possible. This necessarily means that the same
set of stocks would not satisfy these criteria at all times, a good index
methodology must therefore incorporate a steady pace of change in the
index set. It is crucial that such changes are made at a steady pace. It is
very healthy to make a few changes every year, each of which is small
and does not dramatically alter the character of the index, on a regular
basis, the index set should be reviewed, and brought inline with the
current state of market, to meet the application needs of users, a time
series of the index sold be available.

Impact cost

Market impact cost is a measure of the liquidity of the market. It

reflects the costs faced when actually trading an index. For a stock to
qualify for possible inclusion into the index, it has to have market
impact cost of below 0.75% when doing Nifty trades of half a crores
Page | 37
rupees. The market impact cost on a trade of Rs.3 million of the full
Nifty works out to be about 0.05%. This means that if Nifty is at 4000,
a buy order goes through at 4002, i.e. 4000+ (4000*0.0005) and a sell
order gets 3998 i.e. 4000-(4000*0.0005)

FUTURES AND OPTIONS

An option is different form futures in several ways. At practical

level, the option buyer faces an interesting situation. He pays for the
options in full at the time it is purchased. After this, he only has an
upside. There is no possibility of the options position generating any
further losses to him. This is different form futures, which is free to
enter into, but can generate very large losses. This characteristic makes
options attractive to many occasional market participants, who cannot
put in the time to closely monitor their futures positions.
Buying put options is buying insurance. To buy a put option on
Nifty is to buy insurance which reimburses the full extent to which
Nifty drops below the strike price of the put option. This is attractive to
many people, and to mutual funds creating “guaranteed return
products”.

Page | 38
 TRADING UNDERLYING VERSUS TRADING SINGLE
STOCK FUTURES

The single stock futures market in India has been a great success
story across the world. NSE ranks first in the world in terms of number
of contracts traded in single stock futures. One of the reasons for the
success could be the ease of trading and settling these contracts.
To trade securities, a customer must open a security trading
account with a securities broker and a demat account with a securities
depository. Buying security involves putting up all the money upfront.
With the purchase of shares of a company, the holder becomes a part
owner of the company. The shareholder typically receives the rights
and privileges associated with the security, which may include the

Page | 39
receipt of dividends, invitation to the annual shareholders meeting and
the power to vote.
Selling securities involves buying the security before selling it.
Even in cases where short selling is permitted, it is assumed that the
securities broker owns the security and then “lends” it to the trader so
that he can sell it, besides, even if permitted, short sales on security can
only be executed on an up tick.

To trade futures, a customer must open a futures trading account

with a derivatives broker. Buying futures simply involves putting in the
margin money. They enable the futures traders to take a position in the
underlying security without having to open an account with a securities
broker. With the purchase of futures on a security, the holder
essentially makes a legally binding promise or obligation to buy the
underlying security at some point in the future. Security futures do not
represent ownership in a corporation and the holder is therefore not
regarded as a shareholder.

DERIVATIVE MARKET AT NSE

The derivatives trading on the NSE commenced with S&P CNX

Nifty Index futures on June 12, 2000. The trading in index options
commenced on June 4, 2001 and trading in options on individual
securities commenced on July 2, 2001. Single stock futures were

Page | 40
launched on November9, 2001. Today, both in terms of volume and
turnover, The mini derivative Futures & Options contract on
S&P CNX Nifty was introduced for trading on January 1,
2008 while the long term option contracts on S&P CNX
Nifty were introduced for trading on March 3 2008

NSE is the largest derivatives exchange in India.

Currently, the derivatives contracts have a
maximum of 3-month expiration cycles. Three contracts are available
for trading, with 1 month, 2 months and 3 months expiry.
A new contract is introduced on the next trading day following
the expiry of the near month contract.

INDEX DERIVATIVES

Index derivatives are derivative contracts which have the index

as the underlying. The most popular index derivatives contract the
world over is index futures and index options. NSE’s market index, the
S&P CNX Nifty was scientifically designed to enable the launch of
index- based products like index derivatives and index funds. The first
derivative contract to be traded on NSE’s market was the index futures
contract with the Nifty as the underlying. This was followed by Nifty
options and thereafter by sectoral indexes, CNX IT and BANK Nifty
contracts.
Page | 41
FUTURES TERMINOLOGY

SPOT PRICE: The price at which an asset trades in the spot market

FUTURES PRICE: The price at which the futures contract trades in

the futures market.

CONTRACT CYCLE: The period over which a contract trades. The

index futures contracts on the NSE have one month, two months and
three months expiry cycles which expire on the last Thursday of the
month. Thus a January expiration contract expires on the last Thursday
of January.

EXPIRY DATE: It is the date specified in the futures contract. This is

the last day on which the contract will be traded, at the end of which it
will cease to exist.

CONTRACT SIZE: The amount of asset that has to be delivered

under one contract. For instance, the contract size on NSE’s futures
market is 200 Nifties.

Page | 42
BASIS: In the context of financial futures, basis can be defined as the
futures price minus the spot price, there will be a different basis for
each delivery month for each contract. In a normal market, basis will
be positive; this reflects that futures prices normally exceed spot prices.

COST OF CARRY: the relationship between futures prices and spot

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

INITIAL MARGIN: the amount that must be deposited in the margin

account at the time
a futures contract is first entered into is known as initial margin.

MARKET TO MARKET: in the futures market, at the end of each

trading day, the margin account is adjusted to reflect the investor’s gain
or loss depending upon the futures closing price. This is called
Marking-to-market.

MAINTENANCE MARGIN: This is somewhat lower than the initial

margin. This is set to ensure that the balance in the margin account
never becomes negative. If the balance in the margin account falls
below the maintenance margin, the investor receives a margin call and
is expected to top up the margin account to the initial margin level
before trading commences on the next day.
Page | 43
A futures contract is different from the underlying stock in the
following ways:

 When we buy a stock, we pay the full value of the transaction

(i.e. the number of shares multiplied by market price of each
share) whereas in futures we pay only the margin which is a
fraction of the total transaction value.

 There is no time limit of settlement in cash market but in case of

futures contracts, they are dated. An Indian futures settlement
currently takes place on the last Thursday of every month. So the
current month’s futures expire on the month’s last Thursday. If a
trader has to carry his position to the next month, he has to shift
his position to the next month’s future.

 One can only go long in the spot market. We cannot short sell
unless we borrow the stock, something which is neither cheaper
nor convenient whereas one can go long or short on the futures
depending on his short term view of the markets.

 The cash market has a lot of none, i.e. a person can buy any stock
in the multiple of one unit where as a futures contract is the
smallest unit which one can trade in the futures market.
Page | 44
  There is no way of taking a position on the index through the
cash market whereas futures facilitate trading of index futures.

A futures contract price is the sum of cash price

and the monthly cost of carry. The cost of carry should always be
positive because a futures trade is really a carried forward product
similar to the erstwhile badla. But just as badla rates sometimes
become negative when the market sentiment is bearish, the cost of
carry can also similarly be negative when the sentiment is poor.

Business growth of futures and options

market: Turnover (Rs.crore)

Mont Index Index Stock Stock

h futures options options futures
Jun-00 35 0 0 0
Jun-01 590 195 0 0
Jun-02 2,123 389 4,642 16,178
Jun-03 9,348 1,942 15,042 46,505
Jun-04 64,017 8,473 7,424 78,392
Jun-05 77,218 16,133 14,799 1,63,096
Jun-06 2,43,572 57,969 11,306 2,43,950
Jun-07 2,40,797 92,503 21,928 4,51,314
Jun-08 3,77,939 3,08,709 21,430 3,75,987

Page | 45
Source: NCFM Derivative Module Work Book

ELIGIBILITY FOR ANY STOCK TO ENTER IN

DERIVATIVE MARKET

 Non promoter holding (free float capitalization) should not be

less than Rs.750 crores for the last 6 months.
 Daily Average Trading value should not be less than 5 crores in
last 6 months
 It must be traded least 90% of Trading days in last 6 months.
 Non Promoter Holding must at least be 30%
 BETA should not be more than 4 (for previous 6 months)

TRADING MECHANISM

The futures and options trading system of NSE, called NEAT-

F&O trading system, provides a fully automated screen-based trading
for Nifty futures & options and stock futures & options on a nation

Page | 46
wide basis and an online monitoring and surveillance mechanism. It
supports an anonymous order driven market which provides complete
transparency of trading operations and operates on strict price-time
priority. It is similar to that of trading of equities in the cash market
segment. The NEAT-F&O trading system is accessed by two types of
users. The trading members have access to functions such as order
entry, order matching, order and trade management. It provides
tremendous flexibility to users in terms of kinds of orders that can be
placed on the system. various conditions like Immediate or Cancel,
Limit/Market price, Stop loss, etc. can be built into an order. The
clearing members use the trader workstation for the purpose of
monitoring the trading members for whom they clear the trades.
Additionally, they can enter and set limits to positions, which a trading
member can take.

VOLUMES

The trading volumes on NSE’s derivatives market have seen a

steady increase since the launch of the first derivatives contract, i.e.
index futures in June 2000. The average daily turnover at NSE now
exceeds Rs.35000 crores. A total of 216,883,573 contracts with a
total turnover of Rs. 7,356,271 crores were traded during 2006-
2007.

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INDEX DERIVATIVES FOR HEDGING

To understand the use and functioning of the index derivatives

markets, it is necessary to understand the underlying index. By looking
at an index, we know how the market is faring. Index derivatives allow
people to cheaply alter their risk exposure to an index (hedging) and to
implement forecasts about index movements (speculation). Hedging
using index derivatives has become a central part of risk management
in the modern economy.

Pricing the Futures

A futures price can be simply derived by applying

the cost of carry logic, by which the fair value of a futures contract can
be determined. Every time the observed price deviates form the fair
value, arbitragers would enter into trades to capture the arbitrage profit.
This in turn would push the futures price back to its fair value. The cost
of carry model used for pricing futures is as follows:

F=SerT

Where:

Page | 48
r= cost of financing continuously compounded interest rate

T= Time till expiration in years

e= 2.71828

Example:

Security XYZ ltd trades in the spot market at Rs. 1150. Money can be
invested at 11% p.a. The fair value of a one month futures contract on
XYZ is calculated as follows:

F = SerT

=1150*e0.11*1/12

=1160

INITIAL MARGIN

 At the inception of a contract every client is required to pay

initial margin. This margin is must to every trading member.
 Initial margins are charged on Trade by Trade basis

Page | 49
  Initial margins are charged by NSCCL
 Initial margins are charged for the purpose of recovery and safe
guard against the fluctuation in the market.
 A future value is calculated on cost of carry model.

INITIAL MARGINS CHARGED ON F&O MARKET

Index futures: 5%
Index options: 3%
Stock options: 7.5%

CONVERGENCE OF FUTURES PRICE TO SPOT PRICE

As the delivery month of a futures contract is approached, the

futures price converges to the spot price of the underlying asset. When
the delivery period is reached, the futures price equals or is very close
to the spot price.
To see why this so, we first suppose that the futures price is above
the spot price during the delivery period. Traders then have a clear
arbitrage opportunity:

 Short a futures contract

 Buy the asset
Page | 50
  Make the delivery

These steps are certain to lead to a profit

equal to the amount by which the futures price exceeds the spot price.
As traders exploit this arbitrage opportunity, the futures price will fall.
Suppose next that the futures price is below the spot price during the
delivery period. Companies interested in acquiring the asset will find it
attractive to enter into a long futures contract and then wait for delivery
to be made. As they do so, the futures price will tend to rise.

The result is that the futures price is very

close to the spot price during the delivery period.

The convergence of the futures price to the spot

price when future price is above the spot price can
be pictorially represented as follow:

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 Figure: A
The convergence of the futures price to the spot
price when future price is below the spot price can
be pictorially represented as follows:

Figure: B

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MARK TO MARKET (MTM) MARGINS

 MTM margins is charged on continuous Basis t the end of each

day on Daily basis of cumulative net out standing open position.

 CM (clearing member) is responsible to collect and settle the

daily MTM Margins (Profits/loss) from their trading members
according to their open positions.

 TM (Trading Member) are responsible to collect and settle the

daily MTM margins for pay in/ pay out of their clients according
to the clients open position.

 For calculating MTM margin future last ½ hour average price is

takes, if it is not traded on that day or last half hour MTM is
calculated on theoretical price model.

 MTM margin balance at he year end shown in current asset

account.

OPEN INTEREST CALCULATION

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Open interest means out standing orders of (long position + short
position)
Contracts in a particular point of time.

OPEN INTEREST CALCULATION (EXAMPLE)

200(Total buy)-400(total sell) = 200 short (net position)

Client Open Position

Client A 400(Total buy) - 200(total sell) = 200 long net position

Client B 200(total buy) - 400(total sell) = 200 short net position

Client C 500(total buy) - 400(total sell) = 100 long net position

= 500 long + short

Trading Member Total Open Position = 700 long+ short

Clearing member open position: All trading member open position and
custodial participants
open positions

Page | 54
OPTIONS

An option is a contract, or a provision of a contract, that gives

one party (the option holder) the right, but not the obligation, to
perform a specified transaction with another party (the option issuer or
option writer) according at specified terms. The owner of a property
might sell another party an option to purchase the property any time
during the next three months at a specified price. For every buyer of an
option there must be a seller. The seller is often referred to a s the
writer. As with futures, options are brought into existence by being
traded, if none is traded, none exists; conversely, there is no limit to the
number of option contracts that can be in existence at any time. As with
futures, the process of closing out options positions will cause contracts
to cease to exist, diminishing the total number.

Thus an option is the right to buy or sell a specified amount of a

financial instrument at a pre- arranged price on, or before, a particular
date.

There are two options which can be exercised:

 Call option, a right to buy is referred to as a call option.

 Put option, the right to sell is referred as a put option.
Page | 55
OPTION TERMINOLOGY

INDEX OPTIONS: these options have the index as the underlying.

Some options are European while others are American. European style
options can be exercised only on the maturity date of the option, which
is known as the expiry date. An American style option can be exercised
at any time up to, and including, the expiry date. It is to be noted that
the distinction has nothing to do with geography. Both type of the
option are traded through out the world

STOCK OPTIONS: Stock options are options on individual stocks.

A contract gives the holder the right to buy or sell shares at the
specified price.

BUYER OF AN OPTION: the buyer of an option is the one who by

paying the option premium buys the right but not the obligation to
exercise his options on the seller/writer.

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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 exercised on him.

STRIKE PRICE: the price specified in the options contract is known

as the strike price or the exercise price.

IN THE MONEY OPTION: An in the money option is an option

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

AT THE MONEY OPTION: An at the money option is an option

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

OUT OF THE MONEY OPTION: An out of the money (OTM)

option is an option that would lead to a negative cash flow if it were
Page | 57
exercised immediately. A call option on the index is out of the money
when the current index stands at a level which is less than the strike
price(i.e. spot price < strike price). If the index is much lower than the
strike price, the call is said to be deep OTM. In the case of a put, the
put is OTM if the index is above the strike price.

INTRINSIC VALUE OF AN OPTION: The option premium can

be broken down into two components- intrinsic value and time value.
The intrinsic value of a call is the amount the option is ITM, if it is
ITM. If the call is OTM, its intrinsic value is zero.

TIME VALUE OF AN OPTION: The time value of an option is the

difference between its premium and its intrinsic value. Usually, the
maximum time value exists when the option is ATM. The longer the
time to expiration, the greater is an option’s time value, or else equal.
At expiration, an option should have no time value.

STRATEGIES IN FUTURES AND OPTIONS

The following are the four basic strategies in options market

which can be further designed in combination of one or more of the
basic strategies, but all the complex strategies are based on the

Page | 58
following 4 basic kind of strategies, so the understanding of these 4
strategies is very essential before we go any further:

BUYING A CALL OPTION

A buyer of the option paying a premium (price) for the option to

buy a specified quantity at a specified price any time prior to the
maturity of the option.

We can consider the live example of taking a call option of GMR

Infrastructure at a strike price of Rs.500, a call can be taken upto a
duration of 3 months form now. Here we have taken a call at the strike
price of Rs.500, at a premium of Rs. 25 on 01-06-2009.

The following is the tabulation of the payoffs at expiration.

STOCK PRICE ON GROSS PAYOFF ON NET PAYOFF ON

EXPIRY OPTION OPTION
Page | 59
 400 0 -25
450 0 -25
500 0 -25
550 50 25
600 100 75
650 150 125
700 200 175
750 250 225
Table: A

The following is the graphical representation of the above strategy:

CALL OPTION PAYOFF

300
250
200
PAYOFF

150 GROSS PAYOFF

100 NET PAYOFF

50
0
-50
400 450 500 550 600 650 700 750
PRICE

Figure: C

In the above example when GMR falls to a price of Rs.400, the

buyer of the option can purchase the share form the market at Rs.400
Page | 60
with out exercising the right to buy the stock at Rs.500. However, on
that he incurs a loss of Rs.25 as the premium being paid for the option
remaining unexercised. But suppose that the share prices rise to Rs.750
then the holder of the option has the right to purchase that share at a
price of Rs.500 form the seller of the option. In this case any price level
above Rs.525 (500+25), which is the breakeven point, results in a profit
for the buyer of the option. Investment in the above option is
Rs.25*1000=Rs.25000.

In the above diagram we can notice that the payoffs are one to
one after the price of the underlying security rises above the exercise
price. When the security price is less than the exercise price, the option
is referred to as out of the money.
Form the above figure it can be seen that the investor who is
already long i.e. holds a stock bears a loss only to the extent of Rs.25
because no matter if the share price fall below Rs.500 the investor is
not holding any stock. Once the investor is either long or short the
stock he can adopt any of these strategies to hedge his risk.
The above strategy was applied in the month of June
The following are the updates

DATE STRIKE OPEN HIGH LOW

PRICE
01-06-2009 500 27 27 23
15-06-2009 500 54 64.75 52.45
21-06-2009 500 99 104.50 99

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27-06-2009 500 200.90 249 200.90
Table: B

As it can be seen from the above table that the call option price of
the stock has given a fantastic return of over 900% on investment of
Rs.25000 only. Here the risk of the above investment was limited only
to Rs.25000

BUYING A PUT
The second strategy is the put strategy where the buyer of the put
option has to pay a premium(price) for the option to sell a specified
quantity at a specified price any time prior to the maturity of the option.
Here we take the example of buying a put option on the stock of AIR
DECCAN. The exercise price was Rs.140. The premium paid on the
above option was Rs.4.10 on 04-06-2009. investment in the above
strategy is Rs.4.10*2500=Rs.10,250.

The pay off form a put can be illustrated. Notice that the payoffs are
one to one when the price of the security is less than the exercise price.

PRICE GROSS PAYOFF NET PAYOFF

110 30 24.9
120 20 14.9
130 10 4.9

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 140 0 -4.1
150 0 -4.1
160 0 -4.1
170 0 -4.1
Table: C

Following are the update of the above option

DATE STRIKE OPEN HIGH LOW

PRICE
04-06-2009 140 4.40 4.40 4.40
07-06-2009 140 4.00 4.00 4.00
08-06-2009 140 4.90 8.75 4.90
27-06-2009 140 6.75 6.75 6.75
Table: D

The following is the graphical representation of the above strategy:

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 PUT OPTION PAYOFF

35
30
25
20
PAYOFF

15 GROSS PAYOFF
10 NET PAYOFF
5
0
-5
-10
110 120 130 140 150 160 170
PRICE

Figure: D

A put option is a contact giving its owner the right to sell a fixed
amount of a specified underlying asset at a price at any time on or
before a fixed date. On the expiration date, the value of the put on a per
share basis will be the larger of the exercise price minus the stock price
or zero.

In the above diagram we can notice how the down side risk is
minimized if the stock is volatile and the share prices may fall.

Here an investor will get profits only if the stock falls below Rs.134.9
In this option the investor has gained 64.6% with in a month.

WRITING THE CALL OPTIONS

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 A call option gives the buyer the right to buy the underlying asset
at the strike price specified in the option. For selling the option, the
writer of the option charges a premium. The profit/loss that the buyer
makes on the option depends on the spot price of the underlying.
Whatever is the buyer’s profit is the seller’s loss. If upon expiration,
the spot price exceeds the strike price, the buyer will exercise the
option on the writer. Hence as the spot price increases the writer of the
option starts making losses. Higher the spot price more is the loss he
makes, if upon expiration the spot price of the underlying is less than
the strike price, the buyer lets his option expire unexercised and the
writer gets to keep the premium.

As the options are always costly at the beginning of the month we have
written a call option on CAIRN INDIA LIMITED ON 1st of June at a
strike price of Rs.140 with a premium of Rs.8.5,

Following is the payoff chart for the above option:

PRICE GROSS PAYOFF NET PAYOFF

110 0 8.5
120 0 8.5
130 0 8.5
140 0 8.5
150 -10 -1.5
160 -20 -11.5
170 -30 -21.5

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 Table: E

Following are the updates of the option rates in the market:

DATE STRIKE OPEN HIGH LOW

PRICE
01-Jun-2009 140.00 8.5 8.5 8.5
12-Jun-2009 140.00 2.4 4.2 2.1
20-Jun-2009 140 4.35 4.85 2.35
28-Jun-2009 140 4.30 4.90 4.2
Table: F
The following is the graphical representation of the above strategy:

CALL WRITTING PAYOFF CHART

15
10
5
0
PAYOFF

-5
GROSS PAYOFF
-10
-15 NET PAYOFF
-20
-25
-30
-35
110 120 130 140 150 160 170
PRICE

Figure: E

From the above we can notice that the liability is potentially

unlimited when a investor are writing options.
150
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 Here we can see that the investment in this option is nil, as the
call writer will get the premium at which he is writing. The net return
on this option at the expiry period was Rs.10,624.

WRITING OF PUT OPTIONS

A put option gives the buyer the right to sell the underlying asset
at the strike price specified in the option. For selling the option, the
writer of the option charges a premium, the profit/loss that the buyer
makes on the option depends on the spot price of the underlying.
Whatever is the buyer’s profit is the seller’s loss. If upon expiration,
the spot price of the underlying happens to be below the strike price,
the buyer will exercise the option on the writer. If upon the expiration
the spot price of the underlying is more than the strike price, the buyer
lets his option expire un-exercised and the writer gets to keep the
premium.

The put writer will first get a premium of amount Rs.9375

Following is the payoff chart of writing the put option

PRICE GROSS PAYOFF NET PAYOFF

650 -150 -125
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700 -100 -75
750 -50 -25
800 0 25
850 0 25
900 0 25
Table: G

The following is the graphical representation of the above strategy:

WRITING PUT OPTION PAYOFF

50

0
PAYOFF

-50 GROSS PAYOFF

-100 NET PAYOFF

-150

-200
650 700 750 800 850 900
PRICE

Figure: F

As with the written call, the upside is limited to the premium of the
option (the initial price). The downside is limited to the minimum asset
price-which is zero. We can clearly see from these diagrams that the

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investor, depending upon his risk appetite and the outlook about the
market conditions, can minimize his losses.

The net return on this option at the expiry period was Rs.8, 212.5

FIRDAY MARKET ANALYSIS

DIFFERENC
DATE 1 2 3 4 5 E

06-Mar 8198 8104 8348 8047 8326 128

13-Mar 8344 8481 8793 8481 8757 413
20-Mar 9002 8951 9000 8867 8967 -35
1003 1012 1004
27-Mar 10003 7 8 9913 8 45
1106 1134 1094 1102
17-Apr 10947 8 0 6 3 76
1115 1136 1107 1132
24-Apr 11135 0 3 0 9 194
1209 1218 1176 1187
08-May 12117 2 1 5 6 -241
1194 1221 1194 1217
15-May 11872 9 9 9 2 300
1366 1393 1361 1388
22-May 13736 3 7 1 7 151
1432 1472 1432 1462
29-May 14296 0 7 0 5 329

PRE'S
1 CLOSED
2 Open

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3 HIGH
4 LOW
5 CLOSING

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 Conclusions according to my study

 Volatile markets are characterized by wide price

fluctuations and heavy trading.
 Inverters get time to pay money ie clearing of cheque will
be on monday.
 Settlement day or closing day of week.
In my study its says that to invest on
Thursday and withdraw on firday . stock broker says Monday
as black monday

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 CONCLUSIONS

1) Derivatives in equity specially are more suited to provide for

hedging and more cost effective. It has less risky and more
profitable.

2) As the stock Index Futures and Options are available, the FII’s
buying /selling operations can be performed at greater speed and
less cost and without adding too much to market volatility.

3) Most of investors are trading not only in derivatives for hedging,

but also for other purposes.

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4) Derivatives do not create any new risk. They simply manipulate
risks and transfer them to those who are willing to bear these
risks.

5) Hedging through derivatives reduces the risk of owning a

specified asset, which may be share currency etc.

6) All derivative instruments are very simple to operate. Treasury

managers and portfolio managers can hedge all risks without
going through the tedious process of hedging each day and
amount/share separately.

7) Derivatives also offer high liquidity. Just as derivatives can be

contracted easily, it is also possible for companies to get out of
positions in case that market reacts otherwise. This also does not
involve much cost.

8) Derivatives are not only desirable but also necessary to hedge the
complex exposure and volatility that the financial companies
generally face in the capital markets today.

9) All derivative products are low cost products. Companies can

hedge a substantial portion of their balance sheet exposure, with
a low margin requirement.

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 There is no assured route for

success. This is a fact which is universally applicable and so in case of

investment. There is no short cut formula which could be applied

instantly and make money out of it instantly in the stock market.

Therefore, a good investment takes time, patience, hard work and

perseverance to achieve success. Over the next ten – twenty years, Indian

capital market and stock market may offer some of the best and lucrative

opportunities to make big money as compared to other investment

avenues.

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 SUGGESTIONS

1. There is a need to educate the investor in futures and options

market, due to its complex nature an investor fails to understand
the risk reward of a particular strategy, which may result into
losses for the investor.

2. An investor must also be thought as to which strategy must be

applied at what situation, as application of appropriate strategy at
appropriate situation will results into profitable transactions

3. An investor must also be suggested to write certain derivative

exams conducted by leading financial organization in the country
for proper understanding of the derivative market.

4. The research reports must be made more explanatory which must

show the risk covered in a particular strategy and the return

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 which the investor can expect, it must be accompanied by payoff
chart along with the line graph of the strategy suggested.

5. Anand Rathi Securities can conduct certain investor education

camps in collaboration with leading media channels, which will
serve both the purpose which are brand advertisement and
investor awareness.

6. There is a need to start derivative trading at all stock exchanges

in all over India. As of now it’s limited to BSE and NSE.

7. A formal mechanism should be established for co-ordination

between SEBI and RBI in respect of all financial derivatives

8. Administrative machinery of existing stock exchanges should be

strengthened wherever necessary. Tight supervision is essential
for successful derivative trading.

9. SEBI has to implement more powerful rules and regulations and

implement certain measures for taking strict action against all
illegal transactions.

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 BIBLIOGRAPHY

• WWW.GOOGLE.COM
• WWW.WIKIPEDIA.COM
• WWW.BSEINDIA.COM
• WWW.NSEINDIA.COM
• WWW.NET A SHARE.COM
• WWW.MONEYCONTROL.COM

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