Behaviour of Stock Market Volatility Before and After Introduction of Derivative in India

Study on
“BEHAVIOUR OF STOCK MARKET VOLATILITY BEFORE AND AFTER

INTRODUCTION OF DERIVATIVE IN INDIA”
(Orifin Fin Corp, Bangalore)
Submitted by
Venkat Pradeep Ghantasala
Registration No:
12010221097
Under the Guidance of Dr.Sudhindra Bhat
In partial fulfillment of the Course- Industry Internship Programme-IIP

in Semester II of the Master of Business Administration (2012-14)
Bangalore
BEHAVIOUR OF STOCK MARKET VOLATILITY AFTER INTRODUCTION OF DERIVATIVES
Masterof Business Administration
Industry Internship Programme (IIP)
Declaration
This is to declare that the report titled “BEHAVIOUR OF STOCK MARKET VOLATILITY
BEFORE AND AFTER INTRODUCTION OF DERIVATIVE IN INDIA” has been made
for the partial fulfillment of the Course: Industry Internship Programme (IIP) in Semester II
by me at Orifin Financial Corporation (organization) under the guidance of Dr.Sudhindra
Bhat
I confirm that this report truly represents my work undertaken as a part of my Industry
Internship Programme (IIP). This work is not a replication of work done previously by any
other person. I also confirm that the contents of the report and the views contained therein
have been discussed and deliberated with the faculty guide.
Signature of the Student :
Name of the Student (in Capital Letters) : VENKAT PRADEEP GHANTASALA
Registration No : 12010221097
2|Page
Master of Business Administration
Certificate
This is to certify that Mr.Venkat Pradeep Ghantasala Regn. No. 12010221097 has completed
the report titled “BEHAVIOUR OF STOCK MARKET VOLATILITY BEFORE AND
AFTER INTRODUCTION OF DERIVATIVE IN INDIA” under my guidance for the partial
fulfillment of the Course: Industry Internship Programme (IIP) in Semester II of the Master
of Business Administration.
Signature of Faculty Guide:
Name of the Faculty Guide: Dr.Sudhindra Bhat
3|Page
TABLE OF CONTENTS PAGE NUMBERS

EXECUTIVE SUMMARY 5
INTRODUCTION 6
DERIVATIVES 14
TYPES OF DERIVATIVES 18
CATEGORIES OF DERIVATIVES 20
COMPANY PROFILE 28
OBJECTIVES 36
RESEARCH METHODLOGY 37
ANALYSIS 40
FINDINGS 44
RECOMMANDATIONS 45
CONCLUSION 46
REFERANCE 47
4|Page
EXECUTIVE SUMMARY
Among all the innovations that have flooded the international financial markets, financial
derivatives occupy the driver's seat. Derivatives are financial instruments whose values
depend on the values of underlying assets. This research focuses on how the introduction of
Derivatives on the securities has affected the volatility of the Indian stock market. The
different types of instruments which are available for trading in the market are Options,
Futures, and Stock Index Futures. To arrive at the results a quantitative research has been
carried out on 10 stocks which were randomly selected from the National Stock Exchange.
The daily price of the stock during the following period January 1, 1999 to December 31,
1999 – PD1, January 1 2000 to December 30, 2000 – PD2, January 1, 2001 to December 31,
2001 – PD3, January 1, 2002 to December 31, 2002 – PD4, January 1, 2003 to December
2003 – PD5, January 1, 2004 to December 2004 – PD6, January 1, 2005 to December 2005 –
PD7, January 1, 2006 to December 2006 – PD8, January 1, 2007 to December 2007 – PD9,
January 1, 2008 to December 2008 – PD10 is used. PD1 represent the period before the
introduction of derivatives and PD 2, PD 3, PD 4, PD 5, PD 6, PD 7, PD 8, PD 9, PD 10
represents the period after the introduction of derivatives. As Standard deviation is a measure
of volatility it is calculated for the following periods and are compared to see if there is a
reduction in the standard deviation .The investigation reveals that there has been considerable
reduction in standard deviation from PD 1 to PD 10 . The difference between the standard
deviation for the two periods as denoted by D is computed. To arrive at the results t-test has
been carried out using the value D. It is found that t tab is less than t cal which in turn proves
that our H1 Hypothesis is true that is
“Introduction of Derivatives has reduced the Volatility in the Stock Market “
5|Page
Chapter One
6|Page
Introduction
With over 20 million shareholders, India has the third largest investor base in the
world after the USA and Japan. Over 9,000 companies are listed on the stock exchanges,
which are serviced by approximately 7,500 stockbrokers. The Indian capital market is
significant in terms of the degree of development, volume of trading and its tremendous
growth potential.
There are 23 recognized stock exchanges in India, including the Over the Counter
Exchange of India (OTCEI) for small and new companies and the National Stock Exchange
(NSE), which was set up as a model exchange to provide nation-wide services to investors.
NSE, which in the recent past has accounted for the largest trading volumes, has a fully
automated screen based system that operates in the wholesale debt market segment as well as
the capital market segment.
India's market capitalization was amongst the highest among the emerging markets.
Total market capitalization of the BSE as on July 31, 1997 was Rs 5,573.07 billion growing
by 18 percent over a period of twelve months and as of August 2005 was over $500 billion
(about Rs 22 lakh crores).
India has emerged as the world’s 15th largest equity market after it added several
companies to the billion-dollar club in terms of capitalization in the last three months, taking
the total to 81 companies. India has become the third largest Asian market (excluding Japan
and Australia) after having toppled Korea, China and Singapore that have 80, 50 and 47 firms
with billion-dollar market capitalization respectively. India is also inching closer to outpacing
Taiwan that has 84 such companies but lags far behind Hong Kong which has 107, the
highest in Asia.
Bombay Stock Exchange (BSE), one of the oldest in the world, accounts for the
largest number of listed companies and has also started a screen-based trading system with
the introduction of the Bombay On-Line Trading system.
7|Page
The number of companies listed on the BSE at the end of December 1994 was 4,702.
This was more than the aggregate total of companies listed in 9 emerging markets (Malaysia,
S.Africa, Mexico, Taiwan, Korea, Philippines, Thailand, Brazil and Chile). The number of
companies was also more than the in-developed markets of Japan, UK, Germany, France,
Australia, Switzerland, Canada and Hong Kong.
There is a large presence of FIIs in the Indian capital market with over 451 FIIs and
38 foreign brokers registered with SEBI. The cumulative investment of FIIs in the Indian
stock market stood at US$ 6.59 billion in July 1996 and US $12 billion in April 2000. Since
January 2005, FII's have pumped in $8 billion into Indian markets, compared to $8.5 billion
in entire 2004 and $6.6 billion in entire 2003. Foreign investors invested $4.02 billion in
June-August 2005, which is much higher than the $3.41 billion flows India received between
January and May.
The recent decision of the government of easing limits on inward portfolio

investment, with an increase in the ceiling for FII and non-resident Indians from 24 percent to
30%, provides a tremendous incentive to FII investment. FIIs are also permitted to invest
self-owned funds in the debt market and in unlisted securities. Current list of debt funds
approved by SEBI includes UBS, HSBC, Morgan Grenfell, Buchanan Capital, amongst
others.
The capital markets in India are regulated by the Securities and Exchange Board of
India (SEBI) under the provisions of the Securities Contracts (Regulations) Act, 1956 and
Securities and Exchange Board of India Act, 1922. SEBI has issued detailed guidelines for
capital issues, disclosure by public companies and investor protection.
8|Page
Fast Facts:
- India has the third largest investor base in the world.
- India's BSE has the second most number of companies listed in the world after the NYSE.
- India is world's 15th largest equity market.
- In April 2000, total m-cap of the Indian stock exchanges was over $300 billion.
- Indian Mutual Funds hold Rs. 1,13,005 Cr. in assets as of 31st March, 2000.
- Total FII investment in India stood at $12 billion by April 2000
National Stock Exchange (NSE)
With the liberalization of the Indian economy, it was found inevitable to lift the
Indian stock market trading system on par with the international standards. On the basis of
the recommendations of high-powered Pherwani Committee, the National Stock Exchange
was incorporated in 1992 by Industrial Development Bank of India, Industrial Credit and
Investment Corporation of India, Industrial Finance Corporation of India, all Insurance
Corporations, selected commercial banks and others.
Trading at NSE can be classified under two broad categories:
(a) Wholesale debt market and
(b) Capital market.
Wholesale debt market operations are similar to money market operations - institutions and
corporate bodies enter into high value transactions in financial instruments such as
government securities, treasury bills, public sector unit bonds, commercial paper, certificate
of deposit, etc.
There are two kinds of players in NSE:
(a) Trading members and
(b) Participants.
9|Page
Recognized members of NSE are called trading members who trade on behalf of
themselves and their clients. Participants include trading members and large players like
banks who take direct settlement responsibility.
Trading at NSE takes place through a fully automated screen-based trading

mechanism, which adopts the principle of an order-driven market. Trading members can stay
at their offices and execute the trading, since they are linked through a communication
network. The prices at which the buyer and seller are willing to transact will appear on the
screen. When the prices match the transaction will be completed and a confirmation slip will
be printed at the office of the trading member.
NSE has several advantages over the traditional trading exchanges. They are as follows:
 NSE brings an integrated stock market trading network across the nation.
 Investors can trade at the same price from anywhere in the country since inter-market
operations are streamlined coupled with the countrywide access to the securities.
 Delays in communication, late payments and the malpractice’s prevailing in the

traditional trading mechanism can be done away with greater operational efficiency
and informational transparency in the stock market operations, with the support of
total computerized network.
Unless stock markets provide professionalised service, small investors and foreign
investors will not be interested in capital market operations. And capital market being one of
the major sources of long-term finance for industrial projects, India cannot afford to damage
the capital market path. In this regard NSE gains vital importance in the Indian capital market
system.
10 | P a g e
Among all the innovations that have flooded the international financial markets, financial
derivatives occupy the driver's seat. These specialized instruments facilitate the shuffling and
redistribution of the innumerable risks that an investor face and, thus aids in the process of
diversifying ones portfolio. The volatility in the equity markets over the past years has
resulted in greater use of equity derivatives. The volume of the exchange traded equity
futures and options in most of the mature markets have seen a significant growth. It goes
beyond doubt that the local derivative markets in the emerging markets have witnessed
widespread use of the derivative instrument for a variety of reasons. This continuous growth
and development by the emerging market participants has resulted in capital inflows as well
as helped the investors in risk protection through hedging.
Derivatives trading commenced in India in June 2000 after SEBI granted the approval to this
effect in May 2000. SEBI permitted the derivative trading on two stock exchanges,
I.e. NSE and BSE, and their clearing house/corporation to commence trading and settlement
in approved derivative contracts. To begin with, SEBI approved trading in index futures
contracts based on S&P CNX Nifty Index and BSE-30 (Sensex) Index. This was followed by
approval for trading in options based on these two indices and options on individual
securities. The trading in index options commenced in June 2001 and trading in options on
individual securities would commence in July 2001 while trading in futures of individual
stocks started from November 2001. In June 2003, SEBI/RBI approved the trading on interest
rate derivative instruments and only NSE introduced trading in interest rate futures contracts
on June 24, 2003 on 91-day Notional T-Bills and 10-year Notional 6% coupon bearing as
well as zero coupon Bonds. Futures and Options were also introduced on CNX IT Index in
August 2003. The total exchange traded derivatives witnessed a value of Rs.4,423,333
million during 2002-03 as against Rs. 1,038,480 million during the preceding year. While
NSE accounted for about 99.5% of total turnover, BSE accounted for less than 1% in2002-
03. The market witnessed higher trading levels from June 2001 with introduction of index
options, and still higher volumes with the introduction of stock options in July 2001. There
was a spurt in volumes in November 2001 when stock futures were introduced. The calendar
year 2002 has been a remarkable year for the global derivatives market.
11 | P a g e
This year witnessed NSE making huge strides and also moved upward in the global
ranking. According to the Futures Industry Associations in the year 2002, NSE ranked 30 in
the global futures and options volume, whereas it ranks second in the world in terms of stock
futures only. The National Stock Exchange of India Limited (NSE) commenced trading in
derivatives with the launch of index futures on June 12, 2000. The futures contracts are based
on the popular benchmark CNX Nifty Index.
The Exchange introduced trading in Index Options (also based on Nifty) on June 4,
2001. NSE also became the first exchange to launch trading in options on individual
securities from July 2, 2001. Futures on individual securities were introduced on November
9, 2001. Futures and Options on individual securities are available on 144 securities
stipulated by SEBI.
The Exchange has also introduced trading in Futures and Options contracts based on
CNX-IT, BANK NIFTY, and NIFTY MIDCAP 50 indices.
This section provides you with an insight into the derivatives segment of NSE. Real-
time quotes and information regarding derivative products, trading systems & processes,
clearing and settlement, risk management, statistics etc. are available here.
12 | P a g e
CHAPTER TWO
13 | P a g e
Derivatives are financial instruments whose values depend on the values of other,
more basic underlying assets. Exchange traded financial derivatives were introduced in India
in June 2000 at the two major stock exchanges, NSE and BSE. Derivatives are used by:
1. Hedgers: For protecting against adverse movement. Hedging is a mechanism to reduce

price risk inherent in open positions. Derivatives are widely used for hedging. A Hedge can
help lock in existing profits. Its purpose is to reduce the volatility of a portfolio, by reducing
the risk.
2. Speculators: To make quick fortune by anticipating/forecasting future market movements.

Hedgers wish to eliminate or reduce the price risk to which they are already exposed.
Speculators, on the other hand are those classes of investors who willingly take price risks to
profit from price changes in the underlying. While the need to provide hedging avenues by
means of derivative instruments is laudable, it calls for the existence of speculative traders to
play the role of counter-party to the hedgers. It is for this reason that the role of speculators
gains prominence in a derivatives market.
3. Arbitrageurs: To earn risk-free profits by exploiting market imperfections. Arbitrageurs

profit from price differential existing in two markets by simultaneously operating in the two
different markets.
14 | P a g e
Types Of Derivatives
Derivatives are basically classified into two based upon the mechanism that is used to trade
on them.
Over the Counter derivatives

Exchange traded derivatives
The OTC derivatives are between two private parties and are designed to suit the
requirements of the parties concerned.
The Exchange traded ones are standardized ones where the exchange sets the standards for
trading by providing the contract specifications and the clearing corporation provides the
trade guarantee and the settlement activities
The derivatives can be classified as:
Forward
Future
Option
Swaps
15 | P a g e
1) Forward contract:
Forward contract is a one to one bipartite contract, which is to be performed in future at the
terms decided today. Forward contracts are being used in India on large scale in the foreign
exchange market to cover the currency risk.
Forward contracts being negotiated by the parties on one to one basis; offer the tremendous
flexibility to them to articulate the contract in terms of price, quantity, quality, delivery time
and place. However, forward contracts suffer from poor liquidity and default risk.
2) Futures contract:
Future contracts are the organized/standardized contracts in terms of quantity, quality,

delivery time and place for settlement on any date in future. These contracts are traded on
exchanges. In a nutshell futures markets are the extension of the forward contracts.
These markets being organized/standardized are very liquid by their own nature. Therefore,
liquidity problem, which persists in the forward market, does not exist in the futures market.
In these markets, clearing corporation/house becomes the counter-party to all the trades or
provides the unconditional guarantee for the settlement of trades’ i.e.: assumes the financial
integrity of the whole system. In other words, we may say that the credit risk of the
transactions is eliminated by the exchange through the clearing corporation/house
3) Options:
An option is a contract, which gives the buyer (holder) the right, but not the obligation, to buy
or sell specified quantity of the underlying assets, at a specific price on or before a specified
time. The underlying may be physical commodities like wheat/ rice/ cotton/ gold/ oil etc. or
financial instruments like equity stocks/ stock index/ bonds etc. There are two types of
Options
Call Option: A call option gives the holder (buyer/ one who is long call), the right to buy
specified quantity of the underlying asset at a specified price on or before a specified time.
The seller (one who is short call) however, has the obligation to sell the underlying asset if
the buyer of the call option decides to exercise his option to buy.
16 | P a g e
Put Option: A Put option gives the holder (buyer/ one who is long Put), the right to sell
specified quantity of the underlying asset at a specified price on or before a specified time.
The seller (one who is short put) however, has the obligation to buy the underlying asset if
the buyer of the put option decides to exercise his option to sell.
4) Swaps:
Swap can be defined as "A financial transaction in which two counterparties agree to
exchange streams of payments, or cash flows, over time". Generally, two types of swaps are
generally seen i.e. interest rate swaps and currency swaps. A swap results in reducing the
borrowing cost of both parties. The two major types of swaps are as follows-
Interest Rate Swap: Interest payments streams of differing characters are periodically
exchanged. There are three main types:
Coupons swaps: fixed for floating rates
Basic swaps: the exchange of one bench-mark for another under floating rates
Currency swap: It involves cash flows (on principal and repayments alone) in two currencies.
The exchange rate used is the ruling spot rate between the two currencies. A currency
swap can also be considered as a series of forward contracts. Even a currency swap
can be combined with an interest rate swap; in that case, the dollar outflows would
carry LIBOR-based interest rate. As weaker counter parties would not be able to get
swap quotes for a longer maturity.
17 | P a g e
DERIVATIVE MARKET IN INDIA
An important step towards introduction of derivatives trading in India was the promulgation
of the Securities Laws (Amendment) Ordinance, 1995, which lifted the prohibition on
"options in securities" (NSEIL, 2001). However, since there was no regulatory framework to
govern trading of securities, the market could not develop. SEBI set up a committee in
November 1996 under the chairmanship of Dr. L.C. Gupta to develop appropriate regulatory
framework for derivatives trading. The committee suggested that if derivatives could be
declared as "securities" under SCRA, the appropriate regulatory framework of "securities"
could also govern trading of derivatives. SEBI also set up a group under the chairmanship of
Prof. J.R. Varma in 1998 to recommend risk containment measures for derivatives trading.
The Government decided that a legislative amendment in the securities laws was necessary to
provide a legal framework for derivatives trading in India.
Consequently, the Securities Contracts (Regulation) Amendment Bill 1998 was introduced in
the Lok Sabha on 4 th July 1998 and was referred to the Parliamentary Standing Committee
on Finance for examination and report thereon. The Bill suggested that derivatives may be
included in the definition of "securities" in the SCRA whereby trading in derivatives may be
possible within the framework of that Act. The said Committee submitted the report on 17th
March 1999.
The Committee was of the opinion that the introduction of derivatives, if implemented, with
proper safeguards and risk containment measures, will certainly give a fillip to the sagging
market, result in enhanced investment activity and instill greater confidence among
investors/participants. The Committee was of the view that since cash settled contracts could
be classified as "wagering agreements" which can be null and void under Section 30 of the
Indian Contracts Act, 1872, and since index futures are always cash settled, such futures
contracts can be entangled in legal controversy. The Committee, therefore, suggested an
overriding provision as a matter of abandoned caution-"Notwithstanding anything contained
in any other Act, contracts in derivatives as per the SCRA shall be legal and valid". Further,
since Committee was convinced that stock exchanges would be better equipped to undertake
trading in derivatives in sophisticated environment it would be prudent to allow trading in
derivatives by such stock exchanges only. The Committee, therefore, suggested a clause-"The
derivative shall be traded and settled on stock exchanges and clearing houses of the stock
18 | P a g e
exchanges, respectively in accordance with the rules and bye-laws of the stock exchange".
The Proposed Bill, which incorporated the recommendations of the said Parliamentary
Committee, was finally enacted in December 1999.
DERIVATIVES PRODUCTS LEGALLY PERMITTED TO BE TRADED IN INDIAN
1 Equity Derivatives (Index/stock futures/options) -Legally permitted to be traded

through stock exchanges approved by SEBI
2 Commodity Trading -Commodity futures are permitted. Commodity futures permitted
only for trading in commodities approved by the Government in Commodity Exchanges
recognised by Forward Markets Commission. Option contracts in commodities trading are
not permitted.
3 Foreign Exchange Derivatives -Forward Contracts as approved by RBI permitted to
be transacted by Banks and other approved foreign-exchange dealers.
4 OTC rupee derivatives in the form of Forward Rate Agreements (FRAs)/Interest Rate
Swaps (IRS) -These were introduced by RBI in India in July 1999 in terms powers vested
with it Foreign Exchange Management Act, 2000. These derivatives enable banks, primary
dealers (PDs) and all-India financial institutions (FIs) to hedge interest
5 rate risk for their own balance sheet management and for market-making purposes.
Banks/PDs/FIs can undertake different types of plain vanilla FRAs/IRS. Swaps having
explicit/implicit option features such as caps/floors/collars are not permitted now.
6 Exchange Traded Interest Rate Derivatives were introduced by RBI/SEBI during
June, 2003. These can be traded through stock exchanges by primary dealers subject to
conditions stipulated by RBI. OTC Rupee derivatives are presently not permitted.
The different derivatives products traded in the Indian Markets are as under:
19 | P a g e
CATEGORIES OF DERIVATIVES TRADED IN INDIA
1 Commodities Futures for Coffee, Oil Seeds, Oil (Castor, Palmolein), Pepper, Cotton,
Jute and Jute Goods are traded in the Commodities Futures. Forward Markets Commission
regulates the trading of commodities futures.
2 Index futures based on Sensex and Nifty Index are also traded under the supervision
of SEBI.
3 RBI has permitted Banks, FIs and PDs to enter into forward rate agreement
(FRAs)/interest rate swaps in order to facilitate hedging of interest rate risks and ensuring
orderly development of the derivatives market;
4 NSE became the first exchange to launch trading in options on individual securities.
Trading in options on individual securities commenced from July 2, 2001. Option contracts
are American style and cash settled and are available on 41 securities stipulated by the
Securities & Exchange Board of India (SEBI)
5 NSE commenced trading in futures on individual securities on November 9, 2001.
The futures contracts are available on 41 securities stipulated by the Securities & Exchange
Board of India (SEBI).BSE also has started trading in individual stock options & futures
(both Index & Stocks) around the same time as NSE
20 | P a g e
DERIVATIVES IN INDIA: A CHRONOLOGY
DATE PROGRESS
14-Dec-95 NSE asked SEBI for permission to trade index futures.
18-Nov-96 SEBI setup L. C. Gupta Committee to draft a policy framework for index futures.
11-May-98 L. C. Gupta Committee submitted report.
RBI gave permission for OTC forward rate agreements (FRAs) and interest rate
07-Jul-99
swaps
24-May-00 SIMEX chose Nifty for trading futures and options on an Indian index.
25-May-00 SEBI gave permission to NSE and BSE to do index futures trading.
09-Jun-00 Trading of BSE Sensex futures commenced at BSE.
12-Jun-00 Trading of Nifty futures commenced at NSE.
31-Aug-00 Trading of futures and options on Nifty to commence at SIMEX.
21 | P a g e
DERIVATIVE MARKETS TODAY
The prohibition on options in SCRA was removed in 1995. Foreign currency options
in currency pairs other than Rupee were the first options permitted by RBI.
The Reserve Bank of India has permitted options, interest rate swaps, currency swaps
and other risk reductions OTC derivative products.
Besides the Forward market in currencies has been a vibrant market in India for
several decades.
In addition the Forward Markets Commission has allowed the setting up of
commodities futures exchanges. Today we have 18 commodities exchanges most of which
trade futures e.g. The Indian Pepper and Spice Traders Association (IPSTA) and the Coffee
Owners Futures Exchange of India (COFEI).
In 2000 an amendment to the SCRA expanded the definition of securities to included
Derivatives thereby enabling stock exchanges to trade derivative products.
The year 2000 heralded the introduction of exchange traded equity derivative
products
22 | P a g e
EQUITY DERIVATIVES EXCHANGES IN INDIA
In the equity markets both the National Stock Exchange of India Ltd. (NSE) and The
Stock Exchange, Mumbai (BSE) were quick to apply to SEBI for setting up their derivatives
segments.
NSE as stated earlier commenced derivatives trading in the same year i.e. 2000 AD,
while BSE followed after a few months in 2001.
Both the exchanges have set-up an in-house segment instead of setting up a separate
exchange for derivatives.
NSE's Futures & Options Segment was launched with Nifty futures as the first
product.
BSE's Derivatives Segment, started with Sensex futures as it's first product.
Stock options and stock futures were introduced in both the Exchanges in the year
2001
23 | P a g e
HISTORICAL DATAS OF DERIVATIVE TRADING IN INDIA
The first year of operations not surprisingly saw modest volumes. Average monthly
traded value was around Rs. 240 crore, approximately Rs. 12 crore per day. The period
January to March saw better volumes reflecting the higher levels of volatility in the
underlying market. However, the kink in the curve came in 2001, an interesting year for
derivatives. Three new products, index options, options on individual securities and futures
on individual securities were introduced in 2001. At about the same time, SEBI introduced
T+5 rolling settlements and banned deferral products. The number of users enabled to
participate in derivatives trading also rose as members gradually acquired SEBI approval.
By June 2001 volumes had touched Rs. 800 crore and in July, it crossed Rs. 2,000 crore.
September 2001 saw a huge surge in derivatives volumes globally. India was no exception
and saw volumes cross Rs. 5,000 crore. Stock futures were introduced in November 2001.
Given the market’s historical preference to think in terms of individual securities even when
they intend to take an exposure to the market at large, market volumes jumped. Current
volumes are stable at around Rs. 1200 crore per day with fairly liquid contracts in the near
month. The F&O segment witnessed a record turnover of Rs. 2,156 crore on February 28,
2002.
24 | P a g e
Advantages of Derivatives:
1. Enable Price Discovery: derivatives encourage more and more people with objectives of
hedging, speculation, arbitrage to take part in the market, which in turn increase competition.
Hence there are more and more people who keep track of prices.
2. Facilitates Transfer of Risk: By their very nature, the derivatives instruments do not
involve risk. Instead, they redistribute risk between the various market participants.
3. Provide Leveraging: In order to take position in derivatives, you require very small
initial outlay of capital in comparison to taking position in the spot market.
4. Lower Transaction costs: Derivative lead to low transaction costs due to the high no. of
participants that take part in the market.
25 | P a g e
Disadvantages of Derivatives
1. Raises Volatility: Derivatives require a small initial capital due to leveraging derivatives
provide , therefore a large no. of market participants can take part in derivatives which leads
to speculation and raises volatility in the markets.
2. Higher no. of Bankruptcies: Due to the existence of leveraged in derivatives, participants

assume positions which do not match their financial capabilities and eventually lead
to bankruptcies.
3. Increased need of regulation: There a Large no. of participants who take speculative
positions. It is necessary to stop these activities and prevent people from getting bankrupt and
to stop the chain of defaults.
26 | P a g e
CHAPTER THREE
27 | P a g e
Company Profile
ORIFIN Fincorp is a premier financial service provider organization dealing with individual
and corporate with customized financial solutions. It works towards understanding customer
financial goals and risk profile. Expertise combined with thorough understanding of the
financial markets results in appropriate investment solutions for you. At ORIFIN we realize
your dreams, needs, aspirations, concerns and resources are unique. This is reflected in every
move we make with and for you. We have deep appreciation for the Value of building an
everlasting most valuable relationship with customer.
Why ORIFIN Fincorp?
All financial services under single roof

Strong business alliances
Customized solutions for individuals
No Account Opening charges.
Flexibility of choosing slab as per your trading pattern.
Subscription starts from as low as Rs 1000/-
Time validity for 12 months.
Trading allowed in equity, commodity, Currency.
Free trading software.
Client has the flexibility of trading through branch, online or integrated dealing desk.
28 | P a g e
COMPETITIVE STRENGTH
 Regional management (Regional hub and spoke topology) for retail operation Large
and diverse distribution network Strong track record of high growth and profitability
Strong risk management system Well established brand .
 ORIFIN Fincorp Services(P) Ltd, has strategically offices located and business
partners , with various business outlets in all prime locations of India
 Equities & Equity Derivatives (NSE, BSE).
 Commodity Futures (MCX, NCDEX)
 Currency Futures (MCX ¡V SX).
 Depository Services (NSDL, CDSL).
 Mutual Funds (AMFI).
 Insurance ¡V Life and Non Life / Group Insurance (IRDA).
 IPOs, Bonds and fixed Deposits.
 Loans.
A. EQUITY BROKING
 Regional management (Regional hub and spoke topology) for retail operation Large
and
diverse distribution network Strong track record of high growth and profitability Strong
risk management system Well established brand
 Technical Analysis
ORIFIN Fincorp has its own Equity Research team with rich experience in
identifying and analyzing attractive investment opportunities with fundamental
long-term growth potential. The team also has a division specializing in Technical
Analysis, which offers technical tips for short term and day trading.
29 | P a g e
 Seamless Execution
We provide unmatched flexibility and the power of choice to the clients for
executing trades through multiple channels, viz., through our main office or
branches, at any of our franchise centers or over telephone. A client may use any
of these secured channels to communicate his/her orders, and he/she would be
identified by his/her account code. We have endeavored to design all our
processes and systems with a client-centric focus to provide a client the
convenience of transacting with us through the mode and channel of his/her
preference.
 Daily Analysis
Outlines the day¡¦s market outlook, latest domestic and international market
developments, our call on the upcoming economic and market environment and
highlights the stocks which we expect to outperform over the months Ahead
B. DERIVATIVES TRADING
 Outlines the day¡¦s market outlook, latest domestic and international market
developments, our call on the upcoming economic and market environment and
highlights the stocks which we expect to outperform over the months Ahead
C. DEPOSITORY SERVICES
 We provide depository participant with CDSL and NSDL. ORIFIN Fincorp offers a
range of Services including:
FINANCIAL PRODUCTS DISTRIBUTION PRODUCT BASKET

 Our Financial Products Distribution (FPD) desk handles all types of primary market
Investments you may require. Be it a Mutual Fund, Life Insurance, General Insurance,
Health insurance, States. Channel across the country providing easy access to our
clients is dispersed over several
30 | P a g e
Mutual Funds
 Our team tracks the performance of Mutual Funds across the gamut of investor
options and advises investors. In addition to tracking the key performing funds and
analyzing the portfolios and maturity profiles of different funds, our FPD team is
geared to advice investors on the available options / NFOs to best suit their
investment needs.
Insurance
 ORIFIN Fincorp is a leading intermediary in the LIFE and General Insurance market
licensed by Insurance Regulatory and Development Authority of India. At, ORIFIN
Fincorp we analyze the client's requirement and capacity to understand their risk
exposure and then evaluate their insurance portfolio in terms of its adequacy to
protect the same. Our focus is to develop cost effective and near foolproof insurance
package for our clients. In the event of a claim, our team facilitates the process to
ensure speedy settlements. ORIFIN Fincorp has professional relationships with major
Life and non-life insurance companies in the country and is well poised to provide its
clients a comprehensive risk management strategy. (With Our Key Partners)
Bonds
 For investors who prefer risk-free returns without the tension of volatile markets, the
best option is the Go for Savings Bond. These bonds have sovereign guarantee and
thus give safe returns.
Corporate Fixed Deposits

 ORIFIN Fincorp takes the help of its own Research Desk in order to choose and cater
Fixed Deposits of blue chip corporate.
IPO's
 In case of IPOs of Equities, PSL markets almost all the major issues that hit the Indian
Capital Market.
31 | P a g e
Customized Services
 And if you are interested in any of the above investments, we would be privileged to
be of assistance to you to invest your money safely. All you have to do is to call your
Nearest ORIFIN Fincorp Office and any of our team members will get in touch with
you.
OTHER SERVICES
 Account opening facilities
 Dematerialization of physical shares
 Re-materialization
 Pledging
 Redemptions
 PAN
Company Directors
 Radical Business Services Private Limited.
 Mr.Prbhaka.H.N. Managing Director
 Dr:Vijay Director
 Mr.Shamsundara Director
 Architects& Developers
 Mr.Mruthunjaya Managing Director
 Ajay Hiremath Director
 Chandrasekhar Varma Director
32 | P a g e
Branch information
ORIFINFincorp Services (P) Ltd. #171/10,
2nd Floor, 32nd E Cross, 4th T Block,
Jayanagar, Bangalore-560041.
 Mr.Vijayakumar.HM Public Relation officer.
 Mr.Annappa.D Admin Associate.
 Mr.Athiqur Rahaman Operation Associate.
 Mr.Smruti Ranjan Business Associate.
33 | P a g e
CHAPTER FOUR
34 | P a g e
OBJECTIVES OF THE STUDY

 To gather Equity Derivatives of the selected companies.
 Then to determine the standard deviation of these companies.
 To see if these standard deviation has volatility in the share market.
35 | P a g e
CHAPTER FIVE
36 | P a g e
RESEARCH METHOD
We have used the daily stock market data from January 1999 to October 2010. We have
calculated daily returns using the
following equation:
Rt = Log(Pt/Pt-1)*100
where Rt is the daily return, Pt is the value of the security on day t and Pt-1 is the value
of the security on day t-1.
We have calculated the standard deviation of returns using the following methods:
N _
2 =(Rt-R)2/(N-1)
t =1
where R is the average return over the period. We have calculated the standard deviation
for the various period. We have used the closing stock prices of 15 companies from NSE
INDIA website which have Futures and Options during the for the period January 1999
to October 2003.
We have divided the entire period into blocks
The justification for sub-periods is that we have given 6 months time after introduction of
all available four products (futures on individual stocks and indices, options on individual
stocks and indices) to settle down We have taken the period from June 2000 to
BEHAVIOUR OF STOCK MARKET VOLATILITY AFTER INTRODUCTION OF
DERIVATIVE
November 2001 as the intervening period during which various derivative products were
introduced in the market.
To arrive at our conclusion we have used t –test.. Using the standard deviation for
the period PD 1 and PD 2 the value of D is calculated or the 15 stocks . Mean of
this D value is found out which is represented by D
D values is calculated which is denoted by SD.
For the t-test t cal is tabulated by using the following equation:
t cal=d/(SDsqrt(N)
N is the number of observations.
IFf t tab < t cal then our null hypothesis is true
37 | P a g e
Following are the companies selected for the analysis
These companies have been selected by observation of their performance in

their selected industry and are being consistent in maintaining their performance and
giving theirs share holders good returns through number of years.
1. Dr REDDY
2. HDFC
3. HLL
4. ICICI
5. INFOSYS
6. WIPRO
7. TISCO
8. ONGC
9. ITC
10. UTI
38 | P a g e
CHAPTER SIX
39 | P a g e
CHAPTER ANALYSIS & DISCUSSION

Standard deviation for different periods
Stock DR REDDY HDFC HLL ICICI INFOSYS

PD 1 4.1766 3.807 2.799 4.25 6.6891
PD 2 4.5202 2.3748 1.9287 4.112 4.0886
PD 3 2.0154 3.0028 1.5739 2.6648 2.8253
PD 4 2.0865 1.6964 1.7668 2.2904 3.0116
PD 5 2.0484 1.8089 1.7846 2.272 3.3128
PD 6 2.0222 3.3848 1.7346 3.1345 3.5374
PD 7 1.9998 3.0128 1.6538 3.971 3.7812
PD 8 1.0534 2.8563 1.943 2.3453 4.0249
PD 9 1.5203 2.234 1.3423 3.7456 4.2684
PD 10 2.0868 1.8931 1.8345 2.5634 4.5124
Stock WIPRO TISCO ONGC ITC UTI

PD 1 9.5975 3.5875 3.6393 3.5596 4.2141
PD 2 5.1006 2.9302 2.4228 2.363 3.11
PD 3 3.0909 2.2438 3.3477 1.8483 2.7454
PD 4 2.9942 2.066 2.1063 1.5167 2.6667
PD 5 3.0205 2.0822 2.0815 1.4297 2.9785
PD 6 2.9648 2.0984 2.0567 1.7794 3.2903
PD 7 2.9296 2.1146 2.0319 2.1345 2.6021
PD 8 2.8944 2.0532 1.5204 1.793 2.9139
PD 9 2.8592 2.0306 1.4957 1.2371 3.2257
40 | P a g e
Stock DIFFERENCE
DR REDDY 2.1282
HDFC 1.9981
HLL 1.0144
ICICI 1.978
INFOSYS 3.3763
WIPRO 6.577
TISCO 1.5053
ONGC 1.5578
ITC 2.1299
UTI 1.2356
41 | P a g e
Using the standard deviation for the period PD 1 and PD 2 the value of D is calculated or the
15 stocks . Mean of this D value is found out which is represented by D and standard
deviation of D values is calculated which is denoted by SD.
For the t-test t cal is tabulated by using the following equation:
t cal=d/(SDqurt(N)
N is the number of observations.
In this particular case the values are as shown in the table given below and is tabulated as
follows
Mean 2.13036
Std. Deviation 1.425837
NOS 15
N-1 14
T CALCULATED 5.78667
T TABULATED 1.76
t cal = 2.13036/(1.425837/sqrt 15) = 5.78667

t tab is got from the t table and it is 1.76
t tab < t cal
42 | P a g e
Has Introduction of derivatives reduced the volatility?
Derivatives were introduced in India in June 2000. So in order to find out whether there is
reduction in volatility in the stock market the standard deviation of the stocks for the period
before and after the introduction of derivatives was tabulated as standard deviation is a
measure of volatility. The standard deviation calculated for the 10 stocks selected from the
National Stock exchange for the different periods PD1 to PD-10 reveals that there is a
considerable reduction in the standard deviation as shown in the tables there is a considerable
reduction in the volatility. Also the t-test carried out with the value D which is the difference
between the standard deviation for the period PD 1 and PD 2 zero downs to the conclusion
that t tab is less than t cal which in return proves that our H1 is true i.e.
“Introduction of Derivatives has reduced the Volatility in the stock market.”
43 | P a g e
FINDINGS
 Technical analysis can be directly correlated to typical investor’s psychology.
 And many theories in technical analysis are based on the investor psychology.
 According to this research many investors are not firm and they are exhibiting two
typical behaviors namely greed and fear.
 The prices shoot up in distinct manner, they follow the Fibonacci series.
 Technical analysis can‘t be a reliable tool for the long-term investments in to the
stock.
 Identification some of the patterns like wedge formation, triangle formations is

difficult for a fresher. Because these patterns vary from one week to many months. So
a professional experienced investor can rightly identify such patterns.
44 | P a g e
RECOMMENDATIONS
 The stock should be evaluated using technical analysis before buying them to find out
the right buying price and to forecast the future price movements.
 Short-term investors should always be updated with the latest new about the chosen
script company (mergers, acquisitions, expansions, announcement of bonus and
splitting of shares and declaration of warrants etc).
 Short-term investors should buy on rumors and sell on news.
 Investors should rid two characteristics i.e. fear and greed.
45 | P a g e
CONCLUSION
 Technical analysis can be used as a reliable tool for investing in to stocks.
 Many investors (cash market retail investors) are not having right mental setup to
trade in to stocks; there lies the importance of technical analysis.
 Especially it is more useful in identifying the identification of buying points and

selling points.
 Technical analysis is more reliable and useful for short term and medium term
investors.
 For short term investments fundamental analysis is not needed at all.
 Technical analysis for long-term investment is not so much tenable, but the
combination of fundamental analysis and technical analysis can provide a strong
weight age to the estimation of the price or future prediction of price.
 For Short term investment technical analysis is enough to predict the next possible
price targets without using fundamental analysis.
 As standard deviation is a measure of volatility we conclude that “Introduction Of

Derivatives has reduced the volatility in the stock market.”
46 | P a g e
REFERENCES
Websites
 www.nseindia.com
 www.bseindia.com
 www.tradingpicks.com
 www.sharekhan.com
 www.indiabulls.com
 www.moneycontrol.com
47 | P a g e

Behaviour of Stock Market Volatility Before and After Introduction of Derivative in India

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Behaviour of Stock Market Volatility Before and After Introduction of Derivative in India

Uploaded by

Copyright:

Available Formats

Study on

“BEHAVIOUR OF STOCK MARKET VOLATILITY BEFORE AND AFTER

(Orifin Fin Corp, Bangalore)

Under the Guidance of Dr.Sudhindra Bhat

In partial fulfillment of the Course- Industry Internship Programme-IIP

Masterof Business Administration

Industry Internship Programme (IIP)

Signature of the Student :

Name of the Student (in Capital Letters) : VENKAT PRADEEP GHANTASALA

Master of Business Administration

Signature of Faculty Guide:

Name of the Faculty Guide: Dr.Sudhindra Bhat

TABLE OF CONTENTS PAGE NUMBERS

“Introduction of Derivatives has reduced the Volatility in the Stock Market “

The recent decision of the government of easing limits on inward portfolio

- India is world's 15th largest equity market.

- Total FII investment in India stood at $12 billion by April 2000

National Stock Exchange (NSE)

Trading at NSE can be classified under two broad categories:

(a) Wholesale debt market and

(b) Capital market.

There are two kinds of players in NSE:

(a) Trading members and

Trading at NSE takes place through a fully automated screen-based trading

 Delays in communication, late payments and the malpractice’s prevailing in the

1. Hedgers: For protecting against adverse movement. Hedging is a mechanism to reduce

2. Speculators: To make quick fortune by anticipating/forecasting future market movements.

3. Arbitrageurs: To earn risk-free profits by exploiting market imperfections. Arbitrageurs

Over the Counter derivatives

The derivatives can be classified as:

Future contracts are the organized/standardized contracts in terms of quantity, quality,

Coupons swaps: fixed for floating rates

DERIVATIVE MARKET IN INDIA

DERIVATIVES PRODUCTS LEGALLY PERMITTED TO BE TRADED IN INDIAN

1 Equity Derivatives (Index/stock futures/options) -Legally permitted to be traded

CATEGORIES OF DERIVATIVES TRADED IN INDIA

DERIVATIVES IN INDIA: A CHRONOLOGY

11-May-98 L. C. Gupta Committee submitted report.

09-Jun-00 Trading of BSE Sensex futures commenced at BSE.

12-Jun-00 Trading of Nifty futures commenced at NSE.

31-Aug-00 Trading of futures and options on Nifty to commence at SIMEX.

DERIVATIVE MARKETS TODAY

EQUITY DERIVATIVES EXCHANGES IN INDIA

HISTORICAL DATAS OF DERIVATIVE TRADING IN INDIA

2. Higher no. of Bankruptcies: Due to the existence of leveraged in derivatives, participants

Why ORIFIN Fincorp?

All financial services under single roof

FINANCIAL PRODUCTS DISTRIBUTION PRODUCT BASKET

Corporate Fixed Deposits

OBJECTIVES OF THE STUDY

Following are the companies selected for the analysis

These companies have been selected by observation of their performance in

CHAPTER ANALYSIS & DISCUSSION

Stock DR REDDY HDFC HLL ICICI INFOSYS

Stock WIPRO TISCO ONGC ITC UTI

t cal = 2.13036/(1.425837/sqrt 15) = 5.78667

Has Introduction of derivatives reduced the volatility?

“Introduction of Derivatives has reduced the Volatility in the stock market.”

 Identification some of the patterns like wedge formation, triangle formations is

 Short-term investors should buy on rumors and sell on news.

 Investors should rid two characteristics i.e. fear and greed.

 Technical analysis can be used as a reliable tool for investing in to stocks.