Professional Documents
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Tabel of Contents: Chapter-1 2 - 6
Tabel of Contents: Chapter-1 2 - 6
Page No.
CHAPTER-1 2-6
Introduction
CHAPTER-2 7-
Industry analysis
CHAPTER-3
Company profile
CHAPTER-4
Conceptual framework
CHAPTER-5
Data analysis
CHAPTER-6
Bibliography
Annexure
Glossary
CHAPTER – 1
INTRODUCTION
Objectives
Methodology
Limitations
INTRODUCTION
The primary of new issue market deals with the offer and exchange of
stocks or bonds that have never been previously issued are traded in the
secondary markets, which include the organized stock exchanges and over-the-
counter market. The over-the-counter exchange of India began its operations in
the year 1990 as a second-tier source which permits smaller companies to raise
funds. In addition to these markets, national stock exchange has also started on-
line scrip less trading in India in the year 1994.Due to the increased volatility
and the risk involvement the derivatives market has been developed under
which futures and options have gained more popularity. The project deals with
Shabha securities as a member of National stock exchange, the way it functions
in; respect to futures and options market and also deals with the trading,
clearing and settlement and the regulations of Securities Exchange Board of
India in respect to Futures and Options.
2. To study the various features of stock exchange and also concentrate on the
activities of Shabha securities, Guntur as a member of national stock
exchange in the secondary market operations.
Methodology:
The project study is mainly based on both the primary and secondary
data. Major portion of the data is collected through direct interaction with the
officials and some of the theoretical support is also added to this like Journals,
Booklets etc., which provides information with regard to the existing system of
trading and settlement of futures and options. By the explanation of daily
activities done from the officials and the employees, By watching the on-line
trading system, By practically taking part in mock trading and working out with
different trading operations as a part of the project and By attending the classes
conducted by Shabha securities to its staff members.
Limitations
2. There were practically many difficulties felt while collecting the primary
data.
3. Most of the investors were not fully aware of the system and were not
clear in their answers.
5. The concept of Futures and Options itself is new to India and the
awareness was comparatively very less.
It is hoped that report would give an overall view of the subject together
with the position of Shabha securities.
CHAPTER- 2
INDUSTRY PROFILE
Capital Market
Legal Framework
INDUSTRY PROFILE
Financial markets: Finance is the integral part of modern business. Financial
markets refer to the institutional arrangements for dealing in financial assets and
credit instruments of different types, such as currency, cheques, bank deposit
bills, bill of exchange etc. The main functions of the financial markets are: To
facilitate creation and allocation of credit and liquidity, to serve as
intermediaries for mobilization of savings, to provide financial convenience and
to cater to the various credits needs of the business houses.
Types of financial markets: On the basis of credit requirements for short term
and long term purposes, financial markets are divided into two categories. One
is Money market, second one is Capital market.
Money market: Money market provides short term funds and facilitated
borrowing and lending of short term funds. It deals with bills of exchange,
banker’s acceptances, bonds etc., called “Near Money”.
Markets for corporate securities: The corporate securities, viz; bonds or debentures,
preferred stock commonly called preference shares and common stock or equity
shares are traded in carefully regulated money markets. The markets for the three
types of corporate securities include: The primary or new issue markets, the secondary
market, over-the –counter market, On-line scrip less trading market.
They are:
securities, i.e., shares or bonds that have never been previously issued are
offered. Both the new companies and the existing ones can raise capital on the
new issue market. Its prime function is to facilitate the transfer of funds from
helping corporate enterprises in securing their funds, the new issue markets
Stock market: Stock market represents the secondary market where existing
The investors want liquidity for their investments. The securities which they
hold should easily be sold when they need cash and some who want to invest in
new securities and stock exchanges facilitates both the above functions. Stock
and selling of securities. Stock exchanges are organized and regulated markets
Corporations Corporations
Banks Entrepreneurs
Money Capital
Limited physical markets: In the limited physical market, both the price
and quantity of both the orders should exactly match for the trade to take
place. This market is currently used by investors having physical securities
that are in the compulsory demat segments.
Options: Options are of two types call options and put options. They give
the buyer/seller the right but not the obligation to buy/sell a given quantity of
the underlying asset, at a given price on or before a given future date.
Leaps: The acronym leaps means long term equity anticipation securities.
These are options having a maturity of up to three years.
Before 1992 the three principal acts governing the securities market were:-
The Capital Issues (Control) Act, 1947 was replaced in May 1992. It
played an important part in the functioning of the Indian capital market for as
many as 45 years since 1947, and its provisions have now become the powers
and functions of the Securities Exchange Board of India. It was administered by
the Controller of Capital Issues in the ministry of Finance, Department of
Economic Affairs. While the Securities Contract (Regulation) Act mainly
regulates the secondary market, the Capital Issues (Control) Act mostly
regulated the primary or new issue market for securities. Indian Companies
were allowed access to International Capital market through issues of American
Depository Receipts and Global Depository Receipts.
Objectives of the Act: To protect the investing public, To ensure that the capital
structure of companies was sound and in the public interest, To regulate the
volume, terms, and conditions for Foreign Investment.
Securities Contracts (Regulation) Act, 1956: The previously self-regulated
stock exchanges were brought under statutory Dregulations the passage of the
Securities Contracts (Regulation) Act which provides for direct and indirect
control of virtually all aspects of securities trading and the running of stock
there own listing regulations which have to conform to the minimum listing
that the whole regulatory frame work governing trading securities could apply
securities and To build up the strong and healthy investment market in which
Board of the Ministry, Justice and Company Affairs of the Union Government.
It deals with issue, allotment and transfer of securities and various aspects
projects, information about the other listed companies under the same
Objectives of the Act: To regulate the issue of capital and matters incidental
thereto, viz., content and format of prospectus, to regulate the capital structure
of the companies and to regulate the procedure for the allotment of shares and
Depositories Act, 1996: The Depositories Act, 1996 was passed to provide for
the establishment of depositories in securities with the objective of ensuring free
transferability of securities with speed, accuracy and security by De-
materializing the securities in the depository mode and providing for
maintenance of ownership records in a book entry from. In order to streamline
both the stages of settlement process, the act envisages transfer of ownership in
securities electronically by book entry without making the securities move from
person to person the transferred and other procedural requirement under the
companies act.
Regulations:
The responsibility for regulating the securities market is shared by
Securities Exchange Board of India also provides rules and regulations for:-
Prohibition of certain dealings in securities, Prohibition against market
manipulation, Prohibition of misleading statements to induce sale or purchase
securities, Investigation into alleged contravention, Duties of the person in
respect of whom an investigation has been ordered and Investigation officer
Securities and Exchange Board of India Act, 1992: Securities Exchange Board
of India Act, 1992 provides for establishment of Securities and Exchange Board
of India (SEBI) with statutory power for Protecting the interests of investors in
the securities market. Its regulatory jurisdiction extends over corporate in the
has been obliged to perform the before said functions by such measures as lit
(Stock brokers and Sub-brokers) Rules, 1992, a stock broker means a member
following condition.
to buy, sell or deal in securities in any stock exchange, He shall pay the amount
of fees for registration in the prescribed manner; and He shall take adequate
steps for redresses of grievance of the investors within one month of the date of
the receipt of the complaint and keep Securities Exchange Board of India
securities and in particular the following namely whether the stock broker. Is
effectively discharge his activities, Has any past experience in the business of
under the rules, regulations and bye-law of a stock exchange with respect to his
directors or employees.
for assisting the investors for buying, selling or dealing in securities through
such stock broker. But he or she must hold a certificate of registration granted
a) Fixed Assets
b) Pledged Securities
c) Members Card
d) Non-allowable
e) Bad Deliveries
f) Doubtful debts and advances
g) Prepaid ExpeNational Stock Exchanges
h) Intangible Assets
i) 30% Marketable Securities
6. The minimum contract value shall not be less than Rs. 2 lakhs.
Exchanges should also submit also submit details of the futures contract
they propose to introduce.
customer” rule and requires that every client shall be registered with the
trading by issuing to the client the risk disclosure document and obtain a
9. The trading members are required to have qualified approved user and
recommended that the clearing corporation must perform full novation, i.e.,
the clearing corporation should interpose itself between both legs of every
corporation should ensure that none of the Board members has trading
clearing corporation.
The regulations relating to arbitration need to be incorporated in the
minimum margin, Exposure limits based on the value at concept will be used
will be subject to exposure limits not exceeding 20 times their base capital.
Exchange Board of India from time to time, the clearing corporation must
lay down a procedure for periodic review of the net worth of its members.
market and Any changes in the bye-laws, rules or regulations which are
COMPANY PROFILE
SHABHA SECURITIES
on 22nd February 2005 and obtained the trading membership of the largest and
segment. The first Very Small Aperture Terminals (VSAT) for its trading
Since its inception the service of this organization is prompt and there is
not a single instance of payout of funds /deliveries delay to any client, from the
beginning the firm is committed to continue the same service in the future also.
with all transparency and insure that it is their sacred policy not to indulge in
own trading, therefore there is no self motives nor necessity to cancel or delay
The chairman is the head of the organization also called as the Managing
Director (MD). Under him there are 2 Executive Directors for Systems &
Inspection and for Operations. Among all the departments the Inspection
(Systems) and Senior Manager (Finance & Accounts). The different branches
and franchises of the Shabha Securities report directly to the head office and
with varied functional departments. The organizations that keep it self engaged
ORGANISATION STRUCTURE
CHAIRMAN
EXECUTIVE EXECUTIVE
DIRECTOR
DIRECTOR
DIRECTOR (Operations)
(Surveillance)
SENIOR MANAGER
SENIOR MANAGER
(Operations) INSPECTION SENIOR MANAGER
(Finance & Accounts)
MANAGER
DELIVERIES SOFTWARE HARDWARE TRADING
DP (Operations)
ORGANISATION STRUCTURE
PERSONNEL DEPARTMENT
Employee relation: The Company has recruited required personnel and trained
them for operations of the company at all branches and to maintain cordial
relations between the management and the employees.
Employee service: All the employees of the company from top to bottom,
dedicate their sincere services with co-operations, co-ordination, hard work and
team spirit which result in successful performance of Shabha Securities which
helped Shabha Securities become one of the best stock broking firm in India.
This area mainly deals with online trading facility which is received
through Very Small Aperture Terminals into the server and finally into Hub
going to the trading system. Interacting with the clients, admitting the clients or
Investors or sub-brokers and helping out in opening the accounts and facilitating
them with the direct interaction with the online trading facility etc., are the other
works done by the Trading department. The main aspect is concerned with the
involvement of investors or clients or sub-brokers to participate in trading.
Shabha Securities
Trading Settlement
Facilities of Trades
Funds Securities
Securities
Loss
brought
by clients
Funds
Internal
NSE
Funds
Pay out to
Clients
Trading and Settlement: One of the basic services provided by Shabha
Securities Limited as a member of National Stock Exchange and National
Securities Clearing Corporation Limited (NSCCL) is to facilitate transfer of
securities from one Demat account to other on the instruction of the account
holder. In National Securities Clearing Corporation Limited (NSCCL)
depository system both transferor and the transferee have to give instructions to
their DP’s for delivering and receiving of securities. However, the Transferee
can give “Standing Instruction” (SI) to its Depository Receipts for receiving in
securities. If Standing Instruction is not given separate instructions each time
the securities have to be received.
Transfers of securities from one demat account to the other may be done for
any of the following purposes: - Transfer due to a transaction done on a person
to person basis (i.e. An ‘off market’ trade), Transfer arising out of a transaction
done on a stock exchange, Transfer arising out of a transmission and account
closure and a beneficiary account can be debited only if the beneficial owner
has given ‘Delivery Instruction’.
In the secondary market operations when shares and securities are bought
or sold, the change of hands of the possession of there shares or securities from
seller to the buyer will discharge the delivery obligation of the seller. In case of
Bombay Stock Exchange the clearing house is Bank of India Share Holdings
Limited (BOISL) and in case of National Stock Exchange the National
Securities Clearing Corporation Limited (NSCCL) is extended the responsibility
of settling the deliveries obligation of sellers and buyers dealt in a given settling
the deliveries obligation of sellers and buyers dealt in a given settlement period.
And now the process of setting the selling and buying obligation takes
place through the Demat scrips issue of delivery instructions to their respective
Depository Participants and on execution automatically the bought shares get
credited to his account and sold shares get debited.
SEBI
S to c k
D e p o s ito r ie s
E xcha ng e
C lie n ts
S to c k S to c k
B ro k e rs B ro k e rs
S u b -b r o k e r s In v e s to r s
In v e s to r s
CHAPTER – 4
Introduction to futures
Introduction to options
Statistical Techniques
Introduction to Futures:
Futures and options are now actively traded on many exchanges and
futures markets were designed to solve the problems of forward markets. A
future contract is an agreement between two parties to buy or sell an asset at a
certain time in the future at a certain price. But unlike forward contracts, the
futures contracts are standardized and exchange traded. To facilitate liquidity in
the futures contract, the exchange specifies certain standard underlying
instrument, a standard quantity and quality of the underlying instrument that can
be delivered (or which can be used for reference purposes in settlement) and a
standard timing of such settlement.
A futures contract may be offset prior to maturity by entering into an
equal and opposite transaction. More than 99% futures transactions are offset
this way.
Futures Terminology: The following terms are used in the futures market.
Futures Prices: The price at the future contract trades in the futures market.
Contract Cycle: The period over a contract trades. The index futures contracts
on the National Stock Exchange have on month, two months and three months
expiry cycles which expire on the last Thursday of every month. On the Friday
following the last Thursday, a new contract having a three-month expiry is
introduced for trading.
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 ceases to exist.
Contract Size: The amount of an asset, which has to be delivered less than one
contract. For instance, the contract size on National Stock Exchange’s future
market is 200 Nifties.
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 future prices normally exceed spot prices.
Cost of Carry: This shows the relationship between futures prices and spot
prices. 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 of entering futures contract for the first time is known as initial margin.
Marking-to-Market: In the future 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 which is known as marking-to market.
Maintaince Margin: This is some what lower than the initial margin. And is
said to ensure that the balance in the margin account never become negative. If
the balance in the margin account falls below the maintenance margin, the
investor receives a margin call and is supposed to lift up the margin account to
the required margin level before trading commences on the next day.
Introduction to Options:
History of Options: Although options have existed for a long time, they were
traded Over The Counter, without much knowledge of valuation, but today
exchange trade options are actively traded on stocks, stock indexes, foreign
currencies and future contracts.
The first trading in options began in Europe and United State as early as
the 18th century. It was in the early 1900’s that a group of firms were set up
known as put & call Brokers and Dealers Association with the aim of providing
a mechanism for bringing buyers and sellers together to buy and sell options
and if no seller could be found, the firm would undertake to write the options
itself in return for a price. But however it suffered from some deficiencies. In
1973, Black, Merton and Scholes invented the famed Black Scholes formula
and since then the market for options developed rapidly form early 80’s and
since then the daily value of shares traded started increasing.
Options Terminology:
Index Option: These options have the index has the underlying. Some options
are European while others are American. Like index futures contracts, index
options contracts are also cash settled.
Stock Options: Stock options are options on individual stock. Options currently
trade on 500 stocks in the United States. A contract gives the holder the right to
buy or cell 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 option on
the seller/writer.
Writer of an Option: The writer of a call/put option is the one who receives the
option premium and is here by obliged to sell/buy the asset if he buyer exercises
on him.
There are two basic type of options i.e., call options and put options.
Call Option: A call option gives the holder the right but not the obligation to
buy an asset by a certain date for a certain price.
Put Option: A put option gives the holder the right but not the obligation to sell
an asset on a certain date for a certain price.
Option Price: Option price is the price which the option buyer pays to the
option seller.
Strike Price: The price specified in the options that can be exercised at any time
up to the expiration date. It is widely used.
American Options: American options are options that can be exercised at any
time up to the expiration date.
European Options: European options are options that can be exercised only on
the expiration date itself.
Intrinsic Value: 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 In-The-Money, if it is In-The-Money, if the call is Out-of-The-Money
then its intrinsic value is zero.
Time Value of an Option: Time value of an option is the difference between its
premium and its intrinsic value. A call that is Out-of-The-Money has only time
value. Usually, the maximum time values exist when the option is At-The-
Money the longer time to expiration the greater is a call’s time value all else
equal. At expiration a call should have no time value.
When would one use options instead of futures? At a practical level, the option
buyer faces an interesting situation. He pays for the option in full at the time it is
purchased, after this he only has an upside. There is possibility of generating any
further losses to him (other than the funds already paid for options). Where as in
futures, it is free to enter into, but can generate very large losses. This makes options
very attractive to the market participants who cannot put time to closely monitor their
future positions. Buying put options is buying insurance as it reimburses the full
extent to which Nifty drops below the strike price of the put option. This is attractive
to many people and mutual funds creating “guaranteed return products”. Selling put
options is selling insurance, so any one who feels like earning revenues by selling
insurance can set himself up to do so on the index options market.
Generally, options offer “nonlinear pay offs” where futures offers only
“linear pay off”. By combining futures and option, a wide variety of innovative
and useful pay off structures can be created.
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 Nifty, it has to have market impact cost of below
1.5% when doing Nifty trades off half a crore rupees. The market impact cost
on a trade of Rs.3 million of the full nifty works out to be about 0.2%. This
means that if Nifty is at 1000, a buy order goes through at 1002,i.e.
1000+(1000*0.002) and sell order gets 998, i.e. 1000-(1000*0.002).
Price Weighted Index Calculation: In the example below can see that Grasim
Inds and Telco have a similar weightage irrespective of the number of
outstanding shares. In a price weighted index, a small capitalization firm had a
high stock price but relatively few outstanding shares. In the present example
the base index = 1000 and the index value works out to be 1049.56.
Index = (2970.20/2829.75)*1000=1049.56
Company Share price at time 0 (Rs.) Share price at time 1(Rs.)
Grasim inds 351.55 340.50
Telco 329.10 350.40
SBI 274.60 280.40
Wipro 1335.25 1428.75
Bajaj 539.25 570.25
Total 2829.75 2970.20
Equally Weighted Index: In an equally weighted index all the components have
similar weightage irrespective of their price or their market capitalization. The
above table gives an example of how an equally weighted index is calculated. In
the above table we can see that Grasim Inds and Wipro have a similar
weightage irrespective of their share price and number of outstanding shares. In
the present example the base index = 1000 and the index value works out to be
1036.21.
Where:
Current market capitalization = sum of (current market price * outstanding
shares) of all securities in the index.
Base market capitalization = sum of (market price * issue size) of all securities
as on base data.
In the example below we can see that each stop affects the index value in
proportion to the market value of all outstanding shares. In the present example,
the base index = 1000 and the index value works out to be 1002.60.
The Cost of Carry Model: We use fair value calculation of futures to decide the
no-arbitrage limits on the price of a futures contract. This is the basis for the
cost-of-carry model where the price of the contract is defined as:
F=S+C
Where
F= Future price
S= Spot price
C=Holding costs or carry costs
Ans: From the discussion above we know that the futures price is nothing but
the spot price plus the cost-of-carry. Let us try to work out the components of
the cost-of-carry model.
1. What is the spot price of the silver? The spot price of silver,
S = Rs.7000/kg.
2. What is the cost of financing for a month?( 1 + 0.15)30/365
3. What are the holding costs? Let us assume that the storage cost =0.
In this case the fair value of the futures price, works out to be = Rs.708
Black and Scholes start by specifying a simple and well known equation
that models the way in which stock prices fluctuate. This equation called
Geometric Brownian Motion implies that stock returns will have a long normal
distribution meaning that the logarithm of the stock’s return will follow the
normal distribution. Black and Scholes then propose that the option’s price is
determined by only two variables that are allowed to change, time and the
underlying stock price. The other factors – the volatility, the exercise price and
the risk-free rate do affect the option’s price but they are not allowed to change.
where
and
The Black/Scholes equation is done in continuous time. This requires
continuous compounding. The ‘r’ that figures in this is in (1+r). Example if
the interest rate per annum is 12%, you need to use in 1.12 or 0.1133, which
is the continuously compounded equivalent of 12% per annum. N ( ) is the
cumulative normal distribution. N (d1) is called the delta of the option which
is a measure of change in option price with respect to change in the price of
the underlying asset. Sigma a measure of volatility is the annualized standard
deviation of continuously compounded returns on the underlying. When
daily stigmas are given, they need to be converted into annualized sigma.
X is the exercise price, S the spot price and T the time to expiration
measured in years.
Pay Off: A payoff is the likely profit/loss that would accrue at a market
participant with change in the price of the underlying asset.
Payoff for Futures: Futures contracts have linear pay off. It means that the
losses as well as profits for the buyer and the seller of a futures contract are
unlimited.
Payoff for Buyer of Futures:
Long Futures: The pay off for a person who buys a futures contract is similar
to the payoff a person who holds an asset. He has a potentially unlimited upside
as well as a potentially unlimited downside.
Proft
1320
Loss
The figure shows the profit/losses for a long futures position. The
investor bought futures when the index was at 1320. If the index goes up, his
futures position starts making profit. If the index falls, his futures position stars
showing losses.
Short Futures: The payoff for a person who sells a future contract has a
potentially unlimited upside as well as a potentially unlimited down side.
Profit
1320
Loss
The investor sold futures when the nifty was at 1320. If the index goes
down the short futures position start making profits, and when the index goes
up, it starts making losses.
Long Asset: In this basic position, an investor buys the underlying asset, Nifty
for instance, for 1200, and sells it at a future date at an unknown price, SP (Spot
Price). Once it is purchased, the investor is said to be “long” the asset.
Profit
+60..........................................................................
Nifty
The above figure shows the profit/loses from a long position on the index.
An investor bought the index at 1220. If the index goes up, he profits, if the
index falls he looses.
Payoff Profile for Seller of Asset:
Short Asset: In this basic position, an investor shorts the underlying asset. Nifty
for instance, for 1220, and buys it back at a future date at an unknown price,
Spot price. Once it is sold, an investor is said to be “short” the asset.
Profit
+60
Nifty
Loss -60
The above figure shows the profit/losses from short positions on the
index. An investor sold the index at 1220. If the index falls, he profits, if the
index raises he losses.
Payoff Profile for Buyer of Call Options:
Long Call: A call option gives right to the buyer to buy the underlying asset at
the strike price specified in the option. The profit/losses that the buyer makes on
the option depend on the spot price of the underlying. If upon expiration, the
spot price exceeds the strike price, he makes a profit. Higher the spot price more
is the profit he makes. If the spot price of the underlying is less than the strike
price, he lets is option expire unexercised. His loss in this case is the premium
he paid for buying the options.
Profit
0 1250
Nifty
Loss 86.60
The figure shows the profit/losses for the buyer of a three-month Nifty
1250 call option. In the above figure as the spot Nifty rises, the call option is in-
the-money. If upon expiration, Nifty closes above the strike of 1250, the buyer
would exercise his option and profit possible on this option are potentially
unlimited. However if Nifty falls below the strike of 1250, he lets the option
expire. His losses are limited to the extent of the premium he paid for buying
the option.
Payoff for Writer of Call Option:
Short Call: A call option gives right to the buyer 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 on the option depends on the spot
price of the option.
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. If upon expiration the spot price of the
underlying is less than the strike price, the buyers do not exercise his option and
the writer has to keep the premium.
Profit
0 1250
Nifty
86.60
Loss
In the above figure, if upon expiration, Nifty close above the strike price
of 1250 the buyer would exercise his option on the writer and the writes would
suffer a loss to the extent of the difference between the Nifty close and strike
price, the loss here is unlimited to the premium of Rs. 86.60 charged by him.
Payoff File for Buyer of Put Options:
Long Put: A put option gives right to the seller to sell the underlying asset at
the strike price specified in the option. If upon expiration, the spot price is
below the strike price, he makes a profit. If the spot price of the underlying is
higher than the strike price, he lets his option un-exercised; his loss in this case
is the premium he paid for buying the option.
Profit
0 1250
Nifty
61.70
Loss
DATA ANALYSIS
market
market
TRADING SYSTEM
Trading System of National Stock Exchange: The futures and options trading
system of National Stock Exchange called National Exchange for Automated
Trading (NEAT) Futures and Options trading system provides a fully automated
screen-based trading for nifty futures on a national wide basis and an online
monitoring and surveillance mechanism. It supports an order driven market and
provides complete transparency of trading operations and is similar to that of
trading of equities in the cash market segment.
The software for the futures and options market has been developed to
facilitate efficient and transparent trading in futures & options instruments.
Many modifications have been performed in the existing capital market trading
system so as to market it suitable for trading futures and options.
1. Trading Members
2. Clearing Members
3. Participants
1. Trading Member: Trading Members are a member of National Stock
Exchange, Shabha Securities Limited is one such member and these members
can trade either on their own account or on behalf of their clients including
participants. The exchange assign a trading member ID to each trading member
and each trading member can have more than one user. The number of users
allowed for each trading member is notified by the exchange from time to time.
Each user of a trading member must be registered with the exchange and is
assigned on unique user ID.
The Shabha Securities provides trading facilities to its clients with the
help of National Exchange for Automated Trading (NEAT) - futures and
options supports an order driven market, where in orders match automatically.
Order matching is essentially on the basis of security, its price, time and
quantity. All quantity fields are in units and price in rupees. The lot size on the
futures market is for 200 Nifties and 30 scrips are traded in Shabha Securities.
The exchange notifies the regular lot size and risk size for each of the contracts
traded on this segment from time to time. The trading of futures and options in
Shabha Securities has started from November, 2001. When any orders enter in
the trading system, it is an active order. It tries to find a match on the other side
of the book. If it finds a match, a trade is generated. If it does not find a match,
the order becomes passive and is shown in the respective outstanding order
book in the system.
1. Corporate Manager
2. Branch Manager
3. Dealer
1. Corporate Manager: The term ‘corporate manager’ is assigned to a user
placed at the highest level in a trading firm. Such a user can performs all
the functions such as order and trade related activities, receiving reports
for all branches of the trading member firm and also dealers for the firm.
Additionally, a corporate can define exposure limits for the branches of
the firm. This facility is available only to the corporate manager.
3. Dealer: Dealers are users at the lower most level of the hierarchy in
Shabha Securities. A dealer can perform and view trade related activities
only for oneself and does not have access to information on other dealers
under the same branch or other branches.
Market Sprea / Combination Order Entry: The National Exchange for
Automated Trading (NEAT) Futures and Options trading system also enables to
enter spread/combination trades for its trading members like Shabha Securities.
Basket Trading: order to provide a facility for easy arbitrage between futures
and cash market, National Stock Exchange introduced basket trading facility.
This enables the generation of portfolio offline order files in the derivatives
trading system and its executions in the cash segment. A trading member can
buy or sell a portfolio through a single order, once he determines its size. The
system automatically works out the quantity of each security to be bought or
sold in proportion to their weights in the portfolio.
Futures and Options Market Instruments: The futures and options segment of
National Stock Exchange provides trading facilities for the following derivative
instruments are Index based futures; Index based options and Individual stock
options.
Contract Cycle:
Jan 30 contract
Feb 27 contract
Mar 27 contract
Apr 24 contract
May 29 contract
June 26 contract
Depending on the time period for which you want to take exposure index
futures contracts. You can place buy and sell orders in the respective contracts.
Each futures contract has a separate limit order book. All passive orders are
stacked in the system in terms of price-time priority and trades take place at the
passive order price. The best buy order for a given futures contract will be the
order to buy the index at the highest index level whereas the best sell order will
be the order to sell the index at the lowest index level.
Contract Specification for Options: Trading in Europe style Nifty options has
already commenced on the National Stock Exchange. Contracts at different
strikes, having one-month, two-month and three-month expiry cycles are
available for trading. In due course, there will be one-month, two-month and
three-month options, each with five different strikes available for trading.
Options contracts are specified as Expiry Month-Year-Call / Put-American /
European-Strike. Just as in the futures contracts, each option product has its
own order book and its own prices. All index options are cash settled and expire
on the last Thursday of the month. The clearing corporation does the novation.
Just as in the case of futures, trading is in minimum market lot size of 200 units.
The volumes traded at Shabha Securities are very high and volume traded
per day is 4 crores approximately and the volume traded per month is between
80 crores to 100 crores per month which constitute a considerable part in the
overall volume traded at National Stock Exchange.
1. Clearing Members
2. Clearing Bank
Trading member Shabha Securities trades in the futures and options segment for
himself and two of his clients. The table shows its proprietary position. A buy
position 200@1000 means 200 units at the rate of Rs. 1000
Trading Member Shabha Securities Open Sell Close Sell Open Buy Close Buy
Client position
Clearing Bank (CB): Funds settlement will take place through clearing banks.
Clearing members can have a single bank account with one of the approved
clearing banks, which can be common across the capital market and futures and
options.
Open Position Calculation: As index futures and index options contracts are
cash settled, obligation calculation in the futures and options market would
involve the determination of open position in contracts in the Proprietary
position-net basis and Client position-gross basis.
For example the open position for proprietary = Buy – Sell i.e., 200 – 400 =
200short. The open position for client = Buy (0) – Sell © i.e., 400 – 200 = 200
long, Sell (0) – Buy© i.e., 600 – 200 = 400short.
Assume that the position on Day 1 is carried forward to the next trading
day and the following trades are also executed.
Trading member Shabha Securities trades in the in the futures and options
segment for himself and two of his clients. The table shows his client position.
Trading Member Shabha Securities Buy Open Sell Close Sell Open Buy Close
Client position
Client A 400@1109 200@1000
Management and Settlement: Nifty index futures and Nifty index options are
cash settled i.e., through exchange of cash differences in value. NSCCL charges
an upfront initial margin for all the open positions of a clearing member up to
client level. It computes the initial margin percentage for each Nifty index
futures contract on a daily basis and informs the clearing members. The clearing
members in turn collect the initial margin from the trading members and their
respective clients. A similar process for margin collection will be followed for
options trading.
Settlement of Index Futures Contracts: The indexes futures are cash settled on a
daily basis by marking to market and are finally settled on expiry of the Nifty
index futures contract.
1. Daily Settlement: All open positions are market to market to the daily
settlement price of the Nifty index futures contract and the resulting losses are
collected from the loss making Clearing Members and paid to the profit making
Clearing Members
The daily settlement price for each Nifty index futures contracts is the
closing price of the Nifty index futures contract, which is typically computed by
taking the weighted average price for the last half an hour’s trades. After daily
settlement, all the open positions are reset to the daily settlement price. The
Clearing Members are in turn responsible to collect and settle for the daily mark
to market profits/losses incurred by the trading members and their clients
clearing settlement through them.
Thus final settlement is also in cash. Final settlement losses are debited to
the Clearing Members clearing bank account on T+1 morning; the Clearing
Members making profit receive credit on the same day. The total payin / payout
of funds for a CM for the purpose of daily settlement and final settlement is the
net of payin / payout of funds across all his registered trading members and
clients.
Index options on the Nifty are a European style option which means that
they can only be exercised upon maturity. Exercise of options can be of two
types, voluntary and automatic. Voluntary exercise is when a clearing member
exercises as in-the-money index option contract at his violation, whereas
automatic exercise is when all in-the-money index option contracts are
automatically deemed to be irrevocably exercised, on the expiration date. Nifty
option contracts have an automatic exercise.
Settlement for Index Option Contracts: Index options contracts on the
Nifty will have a daily premium settlement and a final settlement on the
exercise date.
1. Daily Premium Settlement: Clearing Members with long position in the index
option contracts are obliged to payin to Clearing Corporation the premium value
at which the index option contracts were purchased and Clearing Member with
a short position in the index option contracts are entitled to receive the premium
value at which the index option contracts are sold. Premium will be settled on
T+1 basis.
ILLUSTRATION 1:
Age of investors
30
25
20
15 No.of responses
10
0
Less 25-35 35-45 45
than 25 above
Age and educational background of the traders play and important role in
their trading decision and outlook
Most of the traders lie in the middle aged group between 25-35 and 35-45
which is 40% and 37%respectively
TABLE 2: EDUCATIONAL BACKGROUND
PARTICULARS NO.OF RESPONSES
Non Graduates 6
Graduates 27
PG 19
Others 8
TOTAL 60
ILLUSTRATION 2:
educational Background
30
25
20
15 No.of responses
10
5
s
te
0
s
a
te
rs
u
G
a
e
d
th
ra
o
ra
g
g
n
o
N
90% of the traders are graduates and post graduate of 45% are graduates
and the remaining are the post graduates
The large percentage of traders from science and arts show that even
without basic formal training in commerce it is easy to operate in the stock
markets through learning and experience.
TABLE 3: MEMBERSHIP
ILLUSTRATION 3:
No. of responses
33%
Member
Client
67%
Shabha securities have many shareholders who trade in the stock markets.
But the number of clients who are not members of clients who are not members
is close two –thirds i.e., 76%.
TABLE 4: EXCHANGE
PARTICULARS NO.OF RESPONSES PERCENTAGES
NSE 32 54
BSE 11 18
NSE AND BSE 17 28
TOTAL 60 100
ILLUSTRATION 4:
No.of responses
28%
NSE
BSE
54%
NSEANDBSE
18%
TABLE 5: SEGMENT
PARTICULARS NO.OF RESPONSES PERCENTAGES
Cash segment 28 47
F&O segment 8 13
Both Cash and F&O 24 40
TOTAL 60 100
ILLUSTRATION 5:
Cash segment F&O segment
Trading in cash segment is relatively the F&O segment and is also more
popular because of its simplicity. This can be seen from the fact that 88% of
traders in the cash segment while only 52%jof trader’s trade in the F&O
segment .hence there is need it increase awareness about derivatives, which is
relatively a new concept.
ILLUSTRATION 6:
25
22
21
20
15
Series1
10 9
8
0
Less than 1-3 years 3-5 years Above 5
1-year years
The study reveals that only 12% if their clients have joined in the past 1-
year hence the marketing activities of the company have to be more aggressive
to wide its clients in the wake of new brokers and sub brokers coming up in the
city.
ILLUSTRATION 7:
No.of responses
27%
YES
NO
73%
The percentage of traders, who have already traded though some other
brokers before shifting to shabha security is 27% which shows that the services
provided by shabha security , are superior to the brokers moreover there are
73%of traders who have started their activities with shabha security. Which
speaks of its reputation as the best broker’s hyd.?
ILLUSTRATION 8:
No.of responses Earningper share
CompanyImage
Profitability
8% 7%
7% 15% All thee
13%
EPS&C OMPANY
IMAGE
8% 20% EPS&profitability
22%
Profitability&company
image
Fundamental analysis
The study reveals that investors use varied parameters to make their
investment decision profitability and image of the company are the two
prominent parameters used by most investors. A combination of more than one
parameter is also used by the investors.
The study reveals that news papers and annual reports are the most
popular sources of information. Both of which used by 76% of the investors
either independently of or in combination with other sources of information.
Shabha and technical analysis from various websites are also popular sources of
information used by 26% of traders.
ILLUSTRATION 10:
No.of responses
20 18
18
16
14
12
10 No.of responses
8 6
6
4 2
2
0
Speculation Hedging Arbitrage
ILLUSTRATION 11:
No.of responses
16 15
14
12 11
10
8 No.of responses
6
4
2
0
Futures Options
Options are the less risky than futures because the maximum loss is
limited to the premium paid and the profit potential is unlimited. This is
supported by the study, which reveals that 58% of the investors trade more in
options in futures.
ILLUSTRATION 12:
No.of responses
25
21
20
15
No.of responses
10
5 3
2
0
1 month contract 2month contract 3month contract
Trading in the futures and option is done in contract with there different
expiry dates. Out of which trading in one month a contract is more popular
because of the relatively predictable fluctuations of the near futures. It is very
difficult to speculation on price tow months and three months later, which
accounts for the low percentage of trades of 12% and 8% in these contracts.
ILLUSTRATION 13:
No.of responses
18%
27%
AVERAGE
GOOD
BEST
55%
The study reveals the reasons for which shabha securities is rated as one
of the best broking firms in Guntur. The company charges low brokerage and is
prompt in pay in and payout of shares and funds. It provides good facilities and
services to its clients and the management to its clients through shabha review
and guide the client in their trading activities.
CHAPTER-6
SUMMARY, SUGGESTIONS AND CONCLUSION
SUMMARY
The study was carried for about a period 2 months and has been done to bring
about the orientation about the financial markets to the general public and increase the
awareness in these aspects. The increased competition and growing need for creating
liquidity of capital has lead to the formation of stock exchanges like National Stock
Exchange and Bombay Stock Exchange etc., and systematic regulations of Securities
Exchange Board of India has provided protection to the investors and the investing
people has considerably increased from the past few years.
It has been observed that without the existence of these members of National
Stock Exchange like Shabha Securities the investor’s position would have been in a
highly troublesome state. The increased volatility in asset prices of financial markets,
integration of financial markets with the international markets, the improving
communication facilities, and development of more sophisticated risk management
tools have lead to the emergence of derivatives products, out of which Futures and
Options had gained more popularity.
The futures and options market provides the investor a market which optimally
combines the risks and returns leading to higher returns, reduced risk as well as low
transaction cost comparatively. The National Stock Exchange provides a Futures and
Options trading system called National Exchange for Automated Trading - Futures
and Options which provides fully automated screen on a national -wide basis. In
Futures and Options market indexed based futures, index based options and individual
stock options are traded. In Futures and Options market 30 scrips are traded and the
lot size on the futures market is for 200 Nifties. There is no possibility of for buying a
single share in Futures and Options market as that of capital market. The market lot is
fixed for every scrip and it is differs from scrip to scrip that is at present for Rnabaxy
the market lot is 500.
Shabha Securities, as a member of National Stock Exchange provides trading
facilities in Futures and Options to its members. They provide different order types
and conditions basing on time, price and other conditions, a combination of them is
also allowed. Shabha Securities, as a member of National Stock Exchange trades
contracts with different expiry cycles which expire on the last Thursday of the
respective trade cycle expiry month. The best buy order for a contract will be the order
to buy the index at the highest index level where as the best sell order will be the order
to sell the index at the lowest index level. In options, basing on the strike price there
exists at-the-money option in –the-money option and our of the money options. There
is no possibility for incurring huge losses in options as may be in the case of futures.
This may be considered as an advantage to options over the futures.
Shabha Securities also acts as a clearing member for its client and provides
various services to its clients at very lower costs. The entire trading member should
make their payment to National Stock Exchange on T+1 day (Trading day+ 1 basis).
Margin of the futures market consists of daily margining that is initial margins and
market-to-market profit/loss. The Shabha Securities provides not only the day end
position to its clients, but also provides intra-day positions to its clients facilitating
them. However National Stock Exchange withdraws the trading facilities if minimum
margins are not maintained by the trading members like Shabha Securities with
National Stock Exchange. It provides daily settlement and final settlement to its
client’s futures and daily premium settlement and final settlement for options.
SUGGESTIONS
Futures and Options market plays a vital role in today’s economy and
India through lately entered this segment is now improving and the Government
should provide more assistance for the improvisation of the derivatives market.
Shabha Securities is the one among the few which provides trading in futures
and options volume traded would be doubled compared to the present traded
volumes in India. Let us hope that India would make its mark in the Derivatives
market and hope that Shabha Securities role in it would be remarkable in this
effort.
QUESTIONNAIRE
1. Name ___________________________________.
2. Age
b. 25-35
c. 35-45
d. 45&above
3. Qualification
b. Graduates
c. P G
d. Others
a. NSE
b. BSE
c. HSE
d. Any other
a. Depository
b. Futures& Options
c. Both
7. Do you have knowledge of derivatives market?
a. < 1year
b. 1-3 years
c. > 3 years
Yes /NO
b. Company image
c. Profitability
d. Any other________________________________
a. News papers
b. Annual reports
c. Friends& Relations
d. Ant other_______________________________
a. Speculation
b. Arbitrage
c. Hedging
14. Which other companies do you think should be included in future and options segment?
_______________
15. Which would you recommend as the three most favorable scrip’s for investments?
___________________
Thank you,
Date: Signature
2.
ANNEXURE
SCRIP LOT SCRIP LOT SCRIP LOT SCRIP LOT
Notes:
The (+) key in the numeric pad is used for buy order entry screen
and (-) key is used for sell order entry screen.
BIBLIOGRAPHY
- John C Hull
Financial Markets and institutions
- L. M. BHOLE
Financial Management
- V. K. BHALLA
Circulars from National Stock Exchange
Website:
Www. nseindia.com
www.sebi.com
www.derivativesindia.com
GLOSSARY
CM – Clearing Member
TM – Trading Member