EFFECT OF STRATEGIES ON DERIVATIVE TRADING

INDEX
S.No: CHAPTER PAGE NO.

1. CHAPTER-1 1
INTRODUCTION

 Scope of the Study

 Objectives of the Study
 Methodology of the Study
 Limitations of the Study
2. CHAPTER-1I 17
 INDUSTRY PROFILE &
 COMPANY PROFILE

3. CHAPTER-1II 30

 REVIEW OF LITERATURE

4. CHAPTER-1V 45

 DATA ANALYSIS AND

INTERPRETATION

5. CHAPTER-V 60

 FINDINGS
 SUGGESTIONS
 CONCLUSION
 BIBLIOGRAPHY

1
 CHAPTER 1

INTRODUCTION

1.1 Introduction To The Topic

Derivatives have widely been used as they facilitate hedging, that is, they enable fund
mangers of an underlying asset portfolio to transfer some parts of the risk of price
changes to others who are willing to bear such risk. Options are the specific derivative
instruments that give their owner the right to buy (call option holder) or to sell (put option
holder) a specific number of shares (assets) at a specified price (exercise price) of a given
underlying asset at or before a specified date (expiration date). In lieu of this privilege,
the holder of the option (long position) pays a market determined price (option premium)
to the writer or seller (short position) of the option.

The present study has used buy-and-hold strategies involving future & options and a
combination their-off, like Covered Call, Straddle and Strangle.

In an attempt to make appropriate investment decisions in particular under risk the

portfolio manager must be able to compare the hedging effectiveness of the strategies
involving the use of options under covered call and the pure option strategies like straddle
and strangle. The study also examines the risk and return associated to taking of future
position as buy-and-hold strategy vis-à-vis cash position.

The Indian equity market has widely been regarded as one of the best performing market
amongst the emerging markets of the world like China, Indonesia, Brazil, Russia,
Mexico, Korea etc. The first step towards introduction of derivatives trading in India was
the promulgation of the Securities Laws (Amendment) Ordinance, 1995. It withdrew the
prohibition on options in securities.

2
SEBI set up a 24 -member committee under the Chairmanship of Dr. L. C. Gupta on
November 18, 1996 to develop regulatory framework for derivatives trading in India. In
its report, the committee prescribed necessary pre-conditions for introduction of
derivatives trading in India; it recommended that derivatives should be declared as
'securities' so that the regulatory framework applicable to trading of 'securities' could also
govern trading of securities.

SEBI also set up a group in June 1998 under the Chairmanship of Prof. J. R. Varma to
recommend measures for risk containment in derivatives market. The Report worked out
the operational details of margining system, methodology for charging initial margins,
broker net worth, deposit requirement and real-time monitoring requirements.

Derivatives trading commenced in India after SEBI granted the final approval to
commence trading and settlement in approved derivative contracts on the NSE and BSE.

This has also been proved beyond doubt across the financial world that the regulatory
norms in place governing the Indian Capital Market are one of the best in the world.
Recently NSE has been awarded “Derivative Exchange of the year” by Asia Risk
Magazine.

The derivatives trading on NSE commenced on June 12, 2000 with futures trading on
S&P CNX Nifty Index, options trading on the S&P CNX Nifty Index commenced on
June 4, 2001. Individual stock options were introduced on July 2, 2001 and Individual
stock futures were introduced on November 9, 2001 by the National stock Exchange of
India.

India’s experience with the launch of equity derivatives market has been extremely
positive. The derivatives turnover on the NSE has surpassed the equity market turnover.
The turnover of derivatives on the NSE increased from Rs. 23,654 million (US $ 207
million) in 2000-01 to Rs. 130,904,779 million (US $ 3,275,076 million) in 2015-14.
India is one of the most successful developing countries in terms of a vibrant market for

3
exchange-traded derivatives. This reiterates the strengths of the modern development of
India’s securities markets, which are based on nationwide market access, anonymous
electronic trading, and a predominantly retail market. There is an increasing sense that
the equity derivatives market is playing a major role in shaping price discovery.
The factors that have been driving the growth of financial derivatives worldwide, as also
in India are increased volatility in asset prices in financial markets; increased integration
of national financial markets with international markets; development of more
sophisticated risk management tools, providing economic agents a wider choice of risk
management strategies and innovations in the derivatives markets, which optimally
combine the risks and returns over a large number of financial assets.

Subsequently, the product base has been increased to include trading in futures and
options on S&P CNX Nifty Index, CNX IT Index, Bank Nifty Index and Single securities
(188 stocks as stipulated by SEBI) and futures on interest rate. Futures and options
contracts were introduced on CNX Nifty Junior and CNX 100 indices for trading in F&O
segment on June 1, 2015.The turnover in the derivatives segment has witnessed
considerable growth since inception. In the global market, NSE ranks first (1st) in the
world in terms of number of contracts traded in the Single Stock Futures, second (2nd) in
Asia in terms of number of contracts traded in equity derivatives instrument. Since
inception, NSE established itself as the sole market leader in this segment in the country
with more than 98 % market share.

Following the implementation of reforms in the securities industry during the last decade,
Indian stock markets have stood out in the world ranking as well as in the developed and
emerging markets. India has a turnover ratio of 94.2%, which is quite comparable to the
other developed market like the US and UK which has turnover ratios of 129.1% and
141.9% respectively. As per Standard and Poor's Fact book India ranked 17th in terms of
market capitalization (18th in 2004) and 18th in terms of total value traded in stock
exchanges and 20th in terms of turnover ratio as on December 2005.

4
NSE has been ranked 14th in the global futures and options volume in 2005 against its
rank of17th in the previous year. In the top 40 Futures Exchanges of the World, NSE
stands at the 7th position in 2005 as against 10th in the year 2004. (Source: ISMR-2006,
NSE). NSE faired very well in 2015 in terms of traded volumes in futures and options
taken together, improving its worldwide ranking from 15th in 2006 to 9th in 2015. The
traded volumes in the derivatives segment of the NSE saw an increase of 95% in 2015
over the figure in 2006.

National Stock Exchange of India Limited has been awarded ‘Derivatives Exchange of
the Year’ by Asia Risk Magazine. The award recognizes best practice, quality service and
innovation in derivatives and risk management in the Asia-Pacific region. The winning
institutions are those that, over the past year, have responded best in the needs of their
clients, both on the asset and liability side, along with the end-users that have
demonstrated outstanding trading and risk management strategies.
‘Asia Risk’ is the only publication dedicated solely to the business of financial risk
management and the derivatives market in the Asia-Pacific region since 1995.

Chart 1.1:Product-wise Distribution of Turnover of F&O Segment of NSE,

2015-14

5
In terms of trading volumes in single stock futures, while the NSE was ranked first (1st)
in terms on number of contracts traded in 2006, it has shifted to second position as the
Johannesburg Stock Exchange (JSE) overtook NSE with a 265.49 million contracts
traded in 2015 at the JSE as against 179.33 contracts on the NSE.

Table 1.1: Futures on Individual Equities (Stock Futures)

(Number of Contracts- in millions)

EXCHANGE 2015 2006 %

JSE South Africa 265.49 69.67 281.06
NSE 179.32 100.29 78.81
Eurex 52.46 35.59 47.41
Liffe 75.27 29.52 155
MEFF 21.29 21.23 0.3

Source: WFE 2015 Annual Report and Statistics.

However, NSE faired very well in 2015 in terms of traded volumes in futures and options
taken together, improving its worldwide ranking from 15th in 2006 to 9th in 2015. The
traded volumes in the derivatives segment of the NSE saw an increase of 95% in 2015
over the figure in 2006.

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1.3 OBJECTIVES OF THE STUDY

 To examine the performance of various derivatives based investment strategies.

 To examine the risk associated with different investment strategies
 To examine whether derivatives can be used as an alternative to cash market
investing.

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1.4 SCOPE OF THE STUDY

 This study helps to improve investment activities in securities.

 It helps to give ideas about derivatives to students.
 New strategies can be identified by the people who actively invest in derivatives.
 Out of the money call and in the money put only selected to apply the strategies.
It may be further analysed in different dimensions. Some popular strategies only
taken in to analysis, it has a wide scope to add other derivatives based strategies.
 The boundary of the study is that the collection of data is limited to a specific time
period Jan-2015 to march-2015.

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1.6 LIMITATIONS

 Study was conducted during 2004 to 2014

 Interest rate and time value of money factors are not considered.
 The results of the present study are based on the prediction of volatility as per
GARCH Model

9
 RESEARCH METHODOLOGY
Research design

S&P CNX Nifty stock has constantly represented more than 55% of the total market
capitalization since March 2002 and it attained 56.78 % on 29th September 2015 (NSE
Fact-Book, 2014). During the last six months all the Nifty stocks had shared
approximately 41.16% of the traded value of all stocks on the NSE.

Therefore, the S&P CNX Nifty has been sampled as a portfolio that is the true
representative of the Indian Capital market to meet the objectives of the study.

In all, following strategies have been developed involving the Nifty futures and options
for empirical testing, namely;

 Future
 Covered Call (Long Future with Short Call);
 Long Straddle;
 Short Straddle;
 Long Strangle; and
 Short Strangle
 Strip
 Strap
 Bull Spread
 Bear Spread
 Box Spread

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Future Contract:

A futures contract is a forward contract, which trades on an exchange. S&P CNX Nifty
futures are traded on National Stock Exchange. When only a long position is taken, it is
called long future.
Covered Call:

Under this strategy the long position on the Nifty futures is to be covered with short call
on the Nifty. In choosing the strike price of the call a distance from spot price of two
percent or more has been kept to factor in the historical growth rate of the Indian capital
market.

Straddle:

It involves taking instantaneous position (long or short) in call and as well as put with the
same strike price and expiration date. In case the position is long it is called long straddle,
in opposite case it is called short straddle.

Strangle:

It involves taking instantaneous position (long or short) in call and as well as put with the
same expiration date but different strike price of the call and option. In case the position
is long it is called long strangle, in opposite direction, it is called short strangle.

Strip
It involves taking long position in one call and as well as two puts with the same
expiration date and strike price of the call and option.

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Strap
It involves taking long position in two calls and as well as one put with the same
expiration dates and strike price of the call and option.

Bull Spread
It involves taking long position in one call and short in another call with the same
expiration date and higher strike price.

Bear Spread
It involves taking long position in one put and short in another put with the same
expiration date and lower strike price.

Box Spread
It is the combination of bull call spread and bear put spread.

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Data:

The data has been taken in different sets to meet the objectives of the study. Initially, the
first set of data comprises of daily closing price of the Nifty (January 1, 2004 to
December 31, 2014) comprising 1266 observations for assessing the daily volatility. For
predicting the volatility for the forth coming future contract, starting with effect from the
contract of January 2004, the average daily volatility of the immediate preceding
60months has been used.

Second set of data comprises of 1266 observations of daily future prices on Nifty
between January 1, 2004 and 31st December 2014 (60 months). This data has been used
in monitoring the value at risk involved due to changes in the value of portfolio taking
place because of frequent changes in price (volatility in prices).

Third set of data comprises of 251 observations of daily prices of call and put for
straddle. Fourth set of data comprises of 251 observations of each on call and put for
strangle. Fourth set of data comprises of 251 observations of each on call and put for
spreads. In case of strategies involving options, the data covered the period of 12 near
month contracts beginning 1st January 2014 to 31st December 2014.

Sources of Data:
The data have been sourced from the website of National Stock Exchange of India
(NSE). Needless to mention that to enrich the quality of the present study, other sources
of literature and relevant information have also been explored from various books,
journals, magazines, business news papers and various websites on financial planning
and investment management.

13
 Research Tools
Risk Adjusted Portfolio Performance:

William Sharpe (1966) suggested an alternative technique for performance evaluation.

Hence, Sharpe’s ratio to measure excess return per unit of risk undertaken has been used
to measure the performance of derivative based portfolio on S&P CNX Nifty. The
measure is the ratio of the risk premium of the portfolio, divided by the standard
deviation of the portfolio’s return:

Sharpe Ratio =(R − Rf)/ σ

Where, R = rate of return of the portfolio,

Rf = risk free rate of return over the same interval.

The risk free return has been the corresponding to the rate of return offered by National
Saving Certificates (NSCs) by Indian Post Office at the beginning of the calendar year
under study. Hence, the risk free rate of return taken for the calendar year 2009 was 11%,
for the year 2002 was 9.5%, for the year 2009 was 9% and 8% for the calendar years
2010 to 2014.

σ = standard deviation of the return of the portfolio.

In the present study, the actual daily log returns have been used to predict the daily
variance using the E-view software. The daily standard deviation is based on the average
of the daily SD of the 36 months immediately preceding the start of the monthly S&P
CNX Nifty Index future contract. Then this daily standard deviation has been converted
into monthly standard deviation by multiplying the square root of the actual number of
trading days during the forthcoming monthly future contract.

GARCH Model:

14
Generalized Autoregressive Conditional Heteroscedasticity recognizes that volatilities are
not constant. During some period, a particular volatility may be relatively low or high.
This model attempts to keep track of the variations in the volatility through time.

σ^2= a0+ a ε 1 2 + a2σ (n-1)^2

(n-1)^

σ^2= Variance rate

ε=Continuous compounding daily return

a = The amount of weight given to the observation at i th day

i

a0=weight assigned to long run variance rate

Mechanism of Maintaining Derivative based Investment Strategies:

The future contract on the S&P CNX Nifty has been taken as one of the derivative
portfolio named Long Future (Naked) besides other five derivative based portfolios
namely Covered Call, Long Straddle, Short Straddle, Long Strangle and Short Strangle.
All the portfolios involving derivatives would thereafter be referred as Derivative
Portfolio.
For comparison purpose, a cash portfolio on the S&P CNX Nifty over the corresponding
period of time to that of derivative portfolios has also been considered.

The modus operandi used for derivative portfolio has also been of buy-and-hold, where
Nifty Future contracts have been rolled over from one month to another month on last
day of the expiry of the future contract during the entire period under study.

However in the case of investment strategies involving options, the Straddle (long as well
as short) and Straddle (long as well as short), the following approach have been used
while deciding on the strike price.

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While selecting the strike price of call option and put option, the normal historical growth
rate of the Indian capital market has been taken into account. The BSE Sensex, since its
inception in 1978-79 that has grown at a aggregate return of 21 percent (including two
percent for dividend) where as in case of S&P CNX Nifty the annual growth has been
about 21.6 percent (including two percent for dividend) during the last seven years
ending 31st December 2015.
The standard deviation of the Indian capital based on monthly returns for last nine
calendar years ending 31st December 2006 has been 7.36 percent. Taking into account
the normal rate of return and the volatility in the India capital market, in the present study
the researcher has opted, but not restricted, to choose out-of - money calls with strike
price higher by 1-2 percent and in- the- money put with strike price higher by 1-2 percent
of the spot price on the day of entering into the contracts amounting in the formation of
straddle for the purpose of empirically examining the performance of straddle. In case of
assessing the performance of strangle the out-of-money calls with strike price higher by
1-2 percent of the spot price and out-of-the money put with strike price lesser up-to 1-2
percent of the spot price on the day on entering into contract for the month under
consideration has been taken into account for examining the risk return dynamic of the
said strategy.

CHAPTER-II
INDUSTRY PROFILE

16
Prof K GeertRouwenhorst in 'The Origins of Mutual Funds', states that the origin of
pooled investing concept dates back to the late 1700s in Europe, when "a Dutch merchant
and broker invited subscriptions from investors to form a trust to provide an opportunity
to diversify for small investors with limited means." The emergence of "investment
pooling" in England in the 1800s brought the concept closer to the US shores.

The enactment of two British laws, the Joint Stock Companies Acts of 1862 and 1867,
permitted investors to share in the profits of an investment enterprise and limited investor
liability to the amount of investment capital devoted to the enterprise. Shortly thereafter,
in 1868, the Foreign and Colonial Government Trust was formed in London.

It resembled the US fund model in basic structure, providing "the investor of moderate
means the same advantages as the large capitalists by spreading the investment over a
number of different stocks." More importantly, the British fund model established a
direct link with the US securities markets, helping finance the development of the post-
Civil War US economy.

The Scottish American Investment Trust, formed in February 1873, by fund pioneer
Robert Fleming, invested in the economic potential of the US, chiefly through American
railroad bonds. Many other trusts followed them, who not only targeted investment in
America, but led to the introduction of the fund investing concept on the US shores in the
late 1800s and the early 1900s. The first mutual or 'open-ended' fund was introduced in
Boston in March 1924. The Massachusetts Investors Trust, which was formed as a
common law trust, introduced important innovations to the investment company concept
by establishing a simplified capital structure, continuous offering of shares, and the
ability to redeem shares rather than holding them until dissolution of the fund and a set of
clear investment restrictions as well as policies.

The stock market crash of 1929 and the Great Depression that followed greatly hampered
the growth of pooled investments until a succession of landmark securities laws,
beginning with the Securities Act, 1933 and concluded with the Investment Company

17
Act, 1940, reinvigorated investor confidence. Renewed investor confidence and many
innovations led to relatively steady growth in industry assets and number of accounts.

The mutual fund industry in india:

The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India (UTI) at the initiative of the Reserve Bank of India (RBI) and the Government of
India. The objective then was to attract small investors and introduce them to market
investments. Since then, the history of mutual funds in India can be broadly divided into
six distinct phases.

Phase I (1964-87): Growth Of UTI:

In 1963, UTI was established by an Act of Parliament. As it was the only entity offering
mutual funds in India, it had a monopoly. Operationally, UTI was set up by the Reserve
Bank of India (RBI), but was later delinked from the RBI. The first scheme, and for long
one of the largest launched by UTI, was Unit Scheme 1964.

Later in the 1970s and 80s, UTI started innovating and offering different schemes to suit
the needs of different classes of investors. Unit Linked Insurance Plan (ULIP) was
launched in 1971. The first Indian offshore fund, India Fund was launched in August
1986. In absolute terms, the investible funds corpus of UTI was about Rs 600 crores in
1984. By 1987-88, the assets under management (AUM) of UTI had grown 10 times to
Rs 6,700 crores.

Phase II (1987-93): Entry of Public Sector Funds:

The year 1987 marked the entry of other public sector mutual funds. With the opening up
of the economy, many public sector banks and institutions were allowed to establish
mutual funds. The State Bank of India established the first non-UTI Mutual Fund, SBI
Mutual Fund in November 1987. This was followed by Canbank Mutual Fund,LIC
Mutual Fund, Indian Bank Mutual Fund, Bank of India Mutual Fund, GIC Mutual Fund
and PNB Mutual Fund. From 1987-88 to 1992-93, the AUM increased from Rs 6,700

18
crores to Rs 47,004 crores, nearly seven times. During this period, investors showed a
marked interest in mutual funds, allocating a larger part of their savings to investments in
the funds.

Phase III (1993-96): Emergence of Private Funds:

A new era in the mutual fund industry began in 1993 with the permission granted for the
entry of private sector funds. This gave the Indian investors a broader choice of 'fund
families' and increasing competition to the existing public sector funds. Quite
significantly foreign fund management companies were also allowed to operate mutual
funds, most of them coming into India through their joint ventures with Indian promoters.

The private funds have brought in with them latest product innovations, investment
management techniques and investor-servicing technologies. During the year 1993-94,
five private sector fund houses launched their schemes followed by six others in 1994-95.

Phase IV (1996-99): Growth And SEBI Regulation:

Since 1996, the mutual fund industry scaled newer heights in terms of mobilization of
funds and number of players. Deregulation and liberalization of the Indian economy had
introduced competition and provided impetus to the growth of the industry.

A comprehensive set of regulations for all mutual funds operating in India was
introduced with SEBI (Mutual Fund) Regulations, 1996. These regulations set uniform
standards for all funds. Erstwhile UTI voluntarily adopted SEBI guidelines for its new
schemes. Similarly, the budget of the Union government in 1999 took a big step in
exempting all mutual fund dividends from income tax in the hands of the investors.
During this phase, both SEBI and Association of Mutual Funds of India (AMFI) launched
Investor Awareness Programme aimed at educating the investors about investing through
MFs.

Phase V (1999-2004): Emergence of a Large and Uniform Industry:

19
The year 1999 marked the beginning of a new phase in the history of the mutual fund
industry in India, a phase of significant growth in terms of both amount mobilized from
investors and assets under management. In February 2003, the UTI Act was repealed.
UTI no longer has a special legal status as a trust established by an act of Parliament.
Instead it has adopted the same structure as any other fund in India - a trust and an AMC.

UTI Mutual Fund is the present name of the erstwhile Unit Trust of India (UTI). While
UTI functioned under a separate law of the Indian Parliament earlier, UTI Mutual Fund is
now under the SEBI's (Mutual Funds) Regulations, 1996 like all other mutual funds in
India.

The emergence of a uniform industry with the same structure, operations and regulations
make it easier for distributors and investors to deal with any fund house. Between 1999
and 2005 the size of the industry has doubled in terms of AUM which have gone from
above Rs 68,000 crores to over Rs 1,50,000crores.

Phase VI (From 2004 Onwards): Consolidation and Growth:The industry has lately
witnessed a spate of mergers and acquisitions, most recent ones being the acquisition of
schemes of Allianz Mutual Fund by Networth direct , PNB Mutual Fund by Principal,
among others. At the same time, more international players continue.

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Organizational structure of a mutual fund

A mutual fund is set up in the form of a trust, which has sponsor, trustees, asset
management company (AMC) and custodian. The trust is established by a sponsor or
more than one sponsor who is like promoter of a company. The trustees of the mutual
fund hold its property for the benefit of the unitholders. Asset Management Company
(AMC) approved by SEBI manages the funds by making investments in various types of
securities. Custodian, who is registered with SEBI, holds the securities of various
schemes of the fund in its custody. The trustees are vested with the general power of
superintendence and direction over AMC. They monitor the performance and compliance
of SEBI Regulations by the mutual fund.
SEBI Regulations require that at least two thirds of the directors of trustee company or
board of trustees must be independent i.e. they should not be associated with the
sponsors. Also are required to be registered with SEBI before they launch any scheme.
However, Unit Trust of India (UTI) is not registered with SEBI (as on January 15, 2002).

There are many entities involved and the diagram below illustrates the organizational set
up of a mutual fund:

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Working of a mutual fund
A Mutual Fund is a trust that pools the savings of a number of investors who share a
common financial goal. The money thus collected is then invested in capital market
instruments such as shares, debentures and other securities. The income earned through
these investments and the capital appreciation realized are shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most
suitable investment for the common man as it offers an opportunity to invest in a
diversified, professionally managed basket of securities at a relatively low cost. The flow
chart below describes broadly the working of a mutual fund:

to enter India including Fidelity, one of the largest funds in the world.

Advantages of mutual funds:

Mutual fund investments in stocks, bonds and other instruments require considerable
expertise and constant supervision, to allow an investor to take the right decisions. Small
investors usually do not have the necessary expertise and time to undertake any study that

22
can facilitate informed decisions. While this is the predominant reason for the popularity
of mutual funds, there are many other benefits that make mutual funds appealing.

Diversification Benefits:

Diversified investment improves the risk return profile of the portfolio. Optimal
diversification has limitations due to low liquidity among small investors. The large
corpus of a mutual fund as compared to individual investments makes optimal
diversification possible. Due to the pooling of capital, individual investors can derive
benefits of diversification.

Low Transaction Costs:

Mutual fund transactions are generally very large. These large volumes attract lower
brokerage commissions and other costs as compared to smaller volumes of the
transactions that individual investors enter into. The brokers quote a lower rate of
commission due to two reasons. The first is competition for the institutional investors
business. The second reason is that the overhead cost of executing a trade does not differ
much for large and small orders. Hence for a large order these costs spread over a large
volume enabling the broker to quote a lower commission rate.  

Availability of Various Schemes:

There are four basic types of mutual funds: equity, bond, hybrid and money market.
Equity funds concentrate their investments in stocks. Similarly bond funds primarily
invest in bonds and other securities. Equity, bond and hybrid funds are called long-term
funds. Money market funds are referred to as short-term funds because they invest in
securities that generally mature in about one year or less. Mutual funds generally offer a
number of schemes to suit the requirement of the investors.

23
Professional Management:

Management of a portfolio involves continuous monitoring of various securities and

innumerable economic variables that may affect a portfolio's performance. This requires a
lot of time and effort on part of the investors along with in-depth knowledge of the
functioning of the financial markets. Mutual funds are managed by fund managers
generally with knowledge and experience whose time is solely devoted to tracking and
updating the portfolio. Thus investment in a mutual fund not only saves time and effort
for the investor but is also likely to produce better results.

Liquidity:

Liquidating a portfolio is not always easy. There may not be a liquid market for all
securities held. In case only a part of the portfolio is required to be liquidated, it may not
be possible to see all the securities forming a part of the portfolio in the same proportion
as they are represented in the portfolio; investing in mutual funds can solve these
problems. A fund house generally stands ready to buy and sell its units on a regular basis.
Thus it is easier to liquidate holdings in a Mutual Fund as compared to direct investment
in securities.

Returns:

In India dividend received by investors is tax-free. This enhances the yield on mutual
funds marginally as compared to income from other investment options. Also in case of
long-term capital gains, the investor benefits from indexation and lower capital gain tax.

Flexibility:

Features of a MF scheme such as regular investment plan, regular withdrawal plans and
dividend reinvestment plan allows investors to systematically invest or withdraw funds
according to the needs and convenience.

24
Well Regulated:

All mutual funds are registered with SEBI and they function within the provisions of
strict regulations designed to protect the interest of investors. The SEBI regularly
monitors the operations of an AMC.

Structure of mutual funds in india:

In India, the mutual fund industry is highly regulated with a view to imparting
operational transparency and protecting the investor's interest. The structure of a mutual
fund is determined by SEBI regulations. These regulations require a fund to be
established in the form of a trust under the Indian Trust Act, 1882. A mutual fund is
typically externally managed. It is now an operating company with employees in the
traditional sense.

Instead, a fund relies upon third parties that are either affiliated organizations or
independent contractors to carry out its business activities such as investing in securities.
A mutual fund operates through a four-tier structure. The four parties that are required to
be involved are a sponsor, Board of Trustees, an asset management company and a
custodian.

Sponsor: A sponsor is a body corporate who establishes a mutual fund. It may be one
person acting alone or together with another corporate body. Additionally, the sponsor is
expected to contribute at least 40% to the net worth of the AMC. However, if any person
holds 40% or more of the net worth of an AMC, he shall be deemed to be a sponsor and
will be required to fulfill the eligibility criteria specified in the mutual fund regulation.

Board Of Trustees: A mutual fund house must have an independent Board of Trustees,
where two-thirds of the trustees are independent persons who are not associated with the
sponsor in any manner. The Board of Trustees of the trustee company holds the property
of the mutual fund in trust for the benefit of the unit-holders. They are responsible for
protecting the unit-holder's interest.

25
Asset Management Company: The role of an AMC is highly significant in the mutual
fund operation. They are the fund managers i.e. they invest investors' money in various
securities (equity, debt and money market instruments) after proper research of market
conditions and the financial performance of individual companies and specific securities
in the effort to meet or beat average market return and analysis. They also look after the
administrative functions of a mutual fund for which they charge management fee.

Custodian: The mutual fund is required by law to protect their portfolio securities by
placing them with a custodian. Nearly all mutual funds use qualified bank custodians.
Only a registered custodian under the SEBI regulation can act as a custodian to a mutual
fund.Over the years, with the involvement of the RBI and SEBI, the mutual fund industry
has evolved in a big way giving investors an opportunity to make the most of this
investment avenue. With a proper structure in place, the industry has been able to cater to
more number of investors. With the increase in awareness about mutual funds several
new players have joined the bandwagon

Types of mutual fund schemes

By structure:-
1. Open-Ended Schemes
2. Close-Ended Schemes
3. Interval Schemes

By investment objective:-
1. Growth Schemes
2. Income Schemes
3. Balanced Schemes
4. Money Market Schemes
Other schemes:-
1. Tax saving Schemes
2. Special Schemes
3. Index Schemes
4. Sector Specific Schemes

26
Mutual fund schemes may be classified on the basis of its structure and its investment
objective.
By Structure:
Open-ended funds Schemes:-
An open ended fund is one that is available for subscription all through the year. These do
not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value
(“NAV”) related prices. The key feature of open-end schemes is liquidity.

Closed-ended funds Schemes:--

A closed end fund has a stipulated maturity period which generally ranging from 3 to 15
years. The fund is open for subscription only during a specific period. Investors can invest in
the scheme at the time of the initial public issue and thereafter they can buy or sell the units
of the scheme on the stock exchanges where they are listed.

Interval funds Schemes:-

These combine the features of open-ended and closed-ended schemes. They are open for
sale or redemption during pre-determined intervals at NAV related prices.

By Investment Objective:-

Growth funds:-

The aim of growth funds is to provide capital appreciation over the medium to long-term.
Such schemes normally invest the majority of their corpus in equities. It has been proven
that returns from stocks, have outperformed most other kind of investments held over the
long term. Growth schemes are ideal for investors having a long-term outlook seeking
growth over a period of time.

Income funds:-

27
The aim of income funds is to provide regular and steady income to investors. Such schemes
generally invest in fixed income securities such as bonds, corporate debentures and
government securities. Income funds are ideal for capital stability and regular income.

Balanced funds:-

The aim of balanced funds is to provide both growth and regular income. Such schemes
periodically distribute a part of their earning and investment both in equities and fixed
income securities in the proportion indicated in their offer documents. In a rising stock
market, the NAV of these schemes may not normally keep pace, or fall equally when the
market falls. These are ideal for investors looking for a combination of income and moderate
growth.

Money market funds:-

For over 30 years, money market funds have treated investors well. Money market funds
have been around for 30 years and are a very popular place for investors to park their
money.

Money market funds are a type of mutual fund that invests in short-term (less than a year)
debt securities of agencies of the U.S. Government, banks and corporations and U.S.
Treasury Bills. They are fixed at $1 per share and only the yield fluctuates.

Load Funds:-

A load fund is one that charges a commission for entry of exit. That is, each time you buy or
sell units in the fund, a commission will be payable. Typically entry exit loads range from
1% to 2%. It could be corpus is put to work.

No-Load Funds:-

28
A No-Load fund is one that does not charge a commission for entry or exit. That is, no
commission is payable on purchase or sale of units in the fund. The advantage of a No-Load
fund is that the entire corpus is put to work.

Other Schemes:-

Tax saving Schemes:-

These schemes offer tax rebates to the investor under specific provisions of the Indian
income tax laws as the Government offers tax incentives for investment in Equity Linked
Saving Scheme (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income
Tax Act. The Act also provide opportunities to investors to save capital gains u/s 54EA and
54EB by investing in Mutual funds, provided the capital asset has been sold to April 1,2000
and the amount is invested before September 30,2000.

Special Schemes:-
Industry Specific Schemes:-
Industry Specific Schemes invest in the industries specified in the offer document. The
investment of these funds is limited to specific like Info Tech, FMCG, and Pharmaceuticals
etc.
Index Schemes:-
Index Funds attempt to replicate the performance of a particular index such as the BSE
sensex or the NSE.
Sectoral Schemes:-
Sectoral funds are those, which invest exclusively in a specified industry or a group of
industries or various segments such as ‘A’ Group shares or initial public offerings.

Following are assets management companies under India

Name of the asset management company website

AEGON asset management company pvt.ltd N/A
AIG global asset management company pvt ltd www.aiginvestment.co.in
Axis asset management company ltd www.axismf.com
Baroda pioneer asset management company ltd www.barodapioneer.in

29
Benchmark asset management company pvt ltd www.benchmarkfunds.com
Bharathi AXA investment managers pvt ltd www.bharathiaxa_im.com
Networth direct asset management company limited www.birlasunlife.com
Cauara robeco asset management company ltd www.canararobeco.com
Dbs cholamandalam asset management ltd www.dbscholamutualfund.com
Deutsche asset management (india) pvt ltd www.dws_india.com
Dsp black rock investment managers pvt ltd www.dspblackrock.com
Edelwesiss asset management ltd www.edelweissmf.com
Escorts asset management ltd www.escortsmutual.com
FIL fund management pvt ltd Fidelity.co.in
Fortisinvest management(india)pvt ltd www.fortisinvestmentin
Franklin templeton asset management (india) pvt ltd www.franklintempletonindia.com
Goldman sachs asset management (india) pvt ltd www.gsam.in
HDFC asset management company ltd www.hdfcfund.com
HSBC asset management (India ) pvt ltd www.assetmanagementhsbc.com/
in
ICICI prudential asset management company ltd www.icicipruame.com
IDFC asset management company pvt ltd www.idfcmf.com
ING investment management (India) pvt ltd www.ingim.co.in
JM financial asset management (India) pvt ltd www.jmfinancialmf.com
JP morgan asset management india pvt ltd www.jpmorganmf.com
Kotak Mahindra asset management company www.kotakmutual.com
(KMAMCL)
LIC mutual asset management company ltd www.licmutual.com
Mirae asset global investment (india) pvt ltd www.miraeassetmf.co.in
Morgan Stanley investmest managementpvt ltd www.morganstanley.com/indiamf
Peerless funds management co.ltd www.peerlessmf.co.in
Principal pnb asset management co pvt ltd www.principalindia.com
Quantum asset management co.pvt ltd www.quantumAMC.com

30
 COMPANY PROFILE

Incorporated in 1993, Net worth Stock Broking Limited (NSBL) has been a listed
company at Bombay Stock Exchange (BSE), Mumbai since 1995.
A Member, at the National Stock Exchange of India (NSE) and Bombay Stock Exchange,
Mumbai (BSE) on the Capital Market and Derivatives (Futures & Options) segment,
NSBL has been traditionally servicing Institutional clients and in the recent past has
forayed into retail broking, establishing branches across the country. Presence is being
marked in the Middle East, Europe and the United States too, as part of our attempts to
cater to global markets. We are a Depository participant at Central Depository Services
India (CDSL) with plans to become one at National Securities Depository (NSDL) by the
end of this quarter. We have our customers participating in the booming commodities
markets with our membership at the Multi Commodity Exchange of India (MCX) and
National Commodity & Derivatives Exchange (NCDEX), through Networth Stock.Com

31
Ltd. With its strong support and business units of research, distribution & advisory,
NSBL aims to become a one-stop solution to the broking and investment needs of its
clients, globally.
Strong team of professional’s experienced and qualified pool of human resources drawn
from top financial service & broking houses form the backbone of our sizeable
infrastructure. Highly technology oriented, the company’s scalability of operations and
the highest level of service standards has ensured rapid growth in the number of locations
& the clients serviced in a very short span of time. ‘Networthians’, as each one of our 400
plus and ever growing team members are addressed, is a dedicated team motivated to
continuously progress by imbibing the best of global practices, Indian sing
Such practices, and to constantly evolve a comprehensive suite of products &
Services trying to meet every financial / investment need of the clients.
NSE CM and Derivatives Segment SEBI Regn. 1NB230638639 & 1NF230638639
BSE CM and Derivatives Segment SEBI Regn. 1NB010638634 &
PMS SEBI Regn. 1NP000001371 CDSL DP SEBI Regn. IN-DP-CDSL
251-2004
Commodities Trading: MCX -10585 and NCDEX - 00011 (through Networth Stock.Com
Ltd.)
Hyderabad (Somajiguda)
401, Dega Towers, 4th Floor, Raj Bhavan Road, Somajiguda Hyderabad -
500 082
Andhra Pradesh.
Phone Nos.: 040-55560708, 55562256, and 30994985
Mumbai (MF Division)
49, Au Chambers, 4th Floor, Tamarind Lane, Fort
Mumbai - 400 001
Maharashtra.
Phone Nos.: 022- 22650253
Mumbai (Registered Office)
5, Church gate House, 2nd Floor, 32/ 34 Veer Narirnan Road, Fort

32
Mumbai - 400 001
Maharashtra.
Phone No. 022-22850428

The Net worth connectivity with 107 branches and growing

1 0 7 b ra n c h e s

33
Products and services portfolio
 Retail and institutional broking
 Research for institutional and retail clients
 Distribution of financial products
 PMS
 Corporate finance
 Net trading
 Depository services
 Commodities Broking

Infrastructure
• A corporate office and 3 divisional offices in CBD of Mumbai which houses
state-of-the-art dealing room, research wing & management and back offices.
• All of 107 branches and franchisees are fully wired and connected to hub at
Corporate office at Mumbai. Add on branches also will be wired and connected to
central hub
• Web enabled connectivity and software in place for net trading.
• 60 operative ID’s for dealing room

34
 • In house technology back up team to ensure un-interrupted connectivity.
1993: Networth Started with 300 Sq.ft. of office space & 10 employees
2006: Spread over 42 cities (around 70,000 Sq.ft of office space) with over 107 branches
& employee strength over 400
Market & research
Focusing on your needs
investor prefer to make own investment decisions or desire more in-depth assistance,
company committed to providing the advice and research to help you succeed.

Networth providing Every investor has different needs, different preferences, and
different viewpoints. Whether following services to their customers,
 Daily Morning Notes
 Market Musing
 Company Reports
 Theme Based Reports
 Weekly Notes
 IPOs
 Sector Reports
 Stock Stance
 Pre-guarter/Updates
 Bullion Tracker
QUALITY POLICY
To achieve and retain leadership, Networth shall aim for complete customer satisfaction,
by combining its human and technological resources, to provide superior quality financial
services. In the process, Networth will strive to exceed Customer’s expectations.
As per the quality policy, Networth will
 Build in house processes that will ensure transparent and harmonious
relationships with its clients and investors to provide high quality of services.
 Establish a partner relationship with in its investor service agents and vendors that
will help in keeping up its commitments to the customers.

35
  Provide high quality of work life for all its employees and equip them with
adequate knowledge & skill so as to respond to customer’s needs.
 Continue to uphold the values of honesty & integrity and strive to establish
unparalleled standards in business ethics.
 Use state-of-the art information technology in developing new and innovative
financial products and services to meet the changing needs of investors and
clients.
Strive to be a reliable source of value-added financial products and services and
constantly guide the individuals and institutions in making a judicious choice of it.
Strive to keep all stake-holders (share holders, clients, investors, employees, suppliers
and regulatory authorities) proud and satisfied.
Key Personnel
• Mr. S P Jain – CMD Networth Stock Broking Ltd.
A qualified Chartered Accountant with over 15 years of experience in the
capital markets.
• Mr. Deepak Mehta – Head PMS
Over 12 years of experience in the capital markets and has the prior work
experience of serving on the Equity desk of Reliance.
• Mr.Viral Doshi – Equity Strategist
A qualified Chartered Accountant with experience of over a decade in technical
analysis with respect to equity markets.
• Mr. Vinesh Jain – Asst. Fund Manager
A qualified MBA graduate specializing in finance and over two years of
experience in the capital markets.
• Research and the Back office.
We have sought to provide premium financial services and information, so
that the power of investment is vested with the client. We equip those who invest
with us to make intelligent investment decisions, providing them with the
flexibility to either tap into our extensive knowledge and expertise, or make their
own decisions. We made our debut into the financial world by servicing
Institutional clients, Now, powered by a top-notch research team and a network of

36
 experts, we provide an array of financial products & services spanning entire
India. Our strong support, technology-driven operations and business units of
research, distribution, advisory, wide array of products & services coalesce to
provide you with a one-stop solution to cater to all your investment needs. Our
single minded objective is to help you grow your Networth.

OUR GROUP COMPANIES

Net worth Stock Broking Ltd. [NSBL]

NSBL is a member of the National Stock Exchange of India Ltd (NSE) and the Bombay
Stock Exchange Ltd (BSE) in the Capital Market and Derivatives (Futures & Options)
segment. NSBL has also acquired membership of the currency derivatives segment
with NSE, BSE & MCX-SX. It is Depository participants with Central Depository
Services India (CDSL) and National Securities Depository (India) Limited (NSDL). With
a client base of over 1L loyal customers, NSBL is spread across the country though its
over 230+ branches. NSBL is listed on the BSE since 1994.
Net worth Wealth Solutions Ltd. [NWSL] 
NWSL is into the business of delivery of Financial Planning & Advice. It’s vision is to
‘Advice & Execute money related solutions to/for our customers in the most Convenient
& Consolidated manner, while making sure that their experience with us is always
pleasant & memorable resulting in positive advocacy’. The product & Services include
Financial Planning, Life Insurance, On-line Trading Account, Mutual Funds,
Debentures/Bonds, General Insurance, Loans and Depository Services.
NetworthStock.ComLtd.[NSCL]
NSCL is the commodities arm of NSBL. It is a member at the Multi Commodity

37
Exchange of India (MCX) and National Commodity & Derivatives Exchange (NCDEX)
and is backed by solid research & analytics in Commodities.
 NetworthSoftTechLtd.[NSL]
NSL is an ISO 9001:2000 Certified Company. It is into Application Development &
maintenance. Building & Implementation of packaged software across various functions
within the Financial Services Industry is at its core. It also provides data center services
which include hosting of websites, applications & related services. It combines a unique
delivery model infused by a distinct culture of customer satisfaction.
Ravisha Financial Services Pvt. Ltd. [RFSL]
RFSL is a RBI registered NBFC engaged in financing, primarily it provides loan against
securities

Principles & Values

At Net worth Stock Broking Ltd. success is built on teamwork, partnership and the
diversity of the people. At the heart of our values lie diversity and inclusion. They are a
fundamental part of our culture, and constitute a long-term priority in our aim to become
the world's best international bank.

Values
 Responsive
 Trustworthy
 Creative
 Courageous

Approach

 Participation:- Focusing on attractive, growing markets where we can leverage

our relationships and expertise
 Competitive positioning:- Combining global capability, deep local knowledge and
creativity to outperform our competitors

38
  Management Discipline:- Continuously improving the way we work, balancing
the pursuit of growth with firm control of costs and risks Commitment to
stakeholders

 Customers:- Passionate about our customers' success, delighting them with the
quality of our service
 Our People:- Helping our people to grow, enabling individuals to make a
difference and teams to win
 Communities:- Trusted and caring, dedicated to making a difference
 Investors:- A distinctive investment delivering outstanding performance and
superior returns
 Regulators: - Exemplary governance and ethics wherever we are.

MARKET PROFILE

NATIONAL STOCK EXCHANGE

The National Stock Exchange of India (NSE) situated in Mumbai - is the largest and most
advanced exchange with 1016 companies listed and 726 trading members. Capital market
reforms in India and the launch of the Securities and Exchange Board of India (SEBI)
accelerated the incorporation of the second Indian stock exchange called the National
Stock Exchange (NSE) in 1992. After a few years of operations, the NSE has become the
largest stock exchange in India.

Three segments of the NSE trading platform were established one after another. The
Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital
Market (CM) segment was opened at the end of 1994. Finally, the Futures and Options

39
segment began operating in 2000. Today the NSE takes the 14th position in the top 40
futures exchanges in the world.

In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX
Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified
index of 50 stocks from 25 different economy sectors. The Indices are owned and
managed by India Index Services and Products Ltd (IISL) that has a consulting and
licensing agreement with Standard & Poor's.

In 1998, the National Stock Exchange of India launched its web-site and was the first
exchange in India that started trading stock on the Internet in 2000. The NSE has also
proved its leadership in the Indian financial market by gaining many awards such as 'Best
IT Usage Award' by Computer Society in India (in 1996 and 1997) and CHIP Web
Award by CHIP magazine (1999).

The NSE is owned by the group of leading financial institutions such as Indian Bank or
Life Insurance Corporation of India. However, in the totally de-metalized Exchange, the
ownership as well as the management does not have a right to trade on the Exchange.
Only qualified traders can be involved in the securities trading.

The NSE is one of the few exchanges in the world trading all types of securities on a
single platform, which is divided into three segments: Wholesale Debt Market (WDM),
Capital Market (CM), and Futures & Options (F&O) Market.

Each segment has experienced a significant growth throughout a few years of their
launch. While the WDM segment has accumulated the annual growth of over 36% since
its opening in 1994, the CM segment has increased by even 61% during the same period.
The National Stock Exchange of India has stringent requirements and criteria for the
companies listed on the Exchange. Minimum capital requirements, project appraisal, and
company's track record are just a few of the criteria. In addition, listed companies pay
variable listing fees based on their corporate capital size.

NSE Nifty

40
The S&P CNX Nifty (nicknamed Nifty 50 or simply Nifty), is the leading index for large
companies on the National Stock Exchange of India. S&P CNX Nifty is a well
diversified 50 stock index accounting for 22 sectors of the economy. It is used for a
variety of purposes such as benchmarking fund portfolios, index based derivatives and
index funds.

Nifty was developed by the economists Ajay Shah and Susan Thomas, then at IGIDR.
Later on, it came to be owned and managed by India Index Services and Products Ltd.
(IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialized
company focused upon the index as a core product. IISL have a consulting and licensing
agreement with Standard & Poor's (S&P), who are world leaders in index services.

CNX stands for CRISIL NSE Indices. CNX ensures common branding of indices, to
reflect the identities of both the promoters, i.e. NSE and CRISIL. Thus, 'C' stands for
CRISIL, 'N' stands for NSE and X stands for Exchange or Index. The S&P prefix belongs
to the US-based Standard & Poor's Financial Information Services.

NSE other indices

 S&P CNX Nifty

 CNX Nifty Junior
 CNX 100
 S&P CNX 500
 CNX Midcap
 S&P CNX Defty & CNX Midcap 200

41
 CHAPTER-III
LITERATURE REVIEW

Thenmozhi M (2002) studied the impact of the introduction of index futures on

underlying index volatility in the Indian markets. Applying Variance Ratio Test,
Ordinary Least Square Multiple Regression Technique, she concluded that futures trading
have reduced the volatility in the spot markets. Further in a lead lag analysis. Thenmozhi
found that the futures market leads the spot index returns by one day. But this study
neglected inherent time varying characteristics and clustering of volatility and possible
autocorrelation. Therefore, the inferences drawn are unreliable. While analyzing the data
relating to Indian stock market from June 2000 till October 2002, M. T. Raju and Kiran
Karande (2003) concluded that introduction of futures has helped in reducing volatility in
the cash market. Premalatha Shenbagaraman (2003) examined the impact of introduction
of NSE Nifty index futures on Nifty index. Using an event study over the period from
October 1995 to December 2002, she tested for changes in the volatility before and after
the introduction. Using GARCH techniques to model the time series, she concluded that

42
futures trading have not led to a change in the volatility of the underlying stock index but
the structure of volatility seemed to have changed in post-futures period.
Nagaraj KS and Kotha Kiran Kumar (2004) studied the impact of Index futures trading
on spot market volatility using the data from June 12, 2000 to Feb. 27, 2003 of S&P CNX
Nifty. Using ARMA-GARCH Model, the study also examined the effect of the Sept. 11
terrorist attack on the nifty spot-futures relation. The study found that the post Sept. 11
attack, the relation between futures trading activity and spot volatility has strengthened,
implying that the market has become more efficient in assimilating the information into
its prices.
M Thenmozhi and M Sony Thomas (2004) analyzed the relationship between stock index
futures and corresponding stock market volatility of the NSE- Nifty using the GARCH
technique. Using the data from 1995 to 2003, the study concluded the reduction of
volatility in the underlying stock market and increased market efficiency.

Gauri Mohan, Saurabh Kumar, and Sriharsha Pappu (2004) analyzed the data of NSE
NIFTY from 13th July 1998 to11th July 2002 to measure the impact of futures trading on
National Stock Exchange (NSE) of India and concluded that introduction of future had
increased the efficiency of market by quicker dissemination of information. But change
in volatility of the underlying stock market could not be completely attributed to the
introduction of futures trading.
Gupta (2003) tried to examine the impact of introduction of index futures on the
underlying stock market volatility in India and then compared the futures market
volatility with the spot market volatility. Analyzing the daily price data for BSE Sensex
and S&P CNX Nifty Index from June 1998 to June 2002, the empirical results reported
that the over-all volatility of the stock market has declined after the introduction of the
index futures for both of the indices. However, there was no conclusive evidence, which
suggested that, the futures volatility was higher (lower) in comparison to the underlying
stock market in terms of both the indices.
While analysing the data for S&P CNX Nifty for the period ranging form June 1999 to
December 2005, S V Ramana Rao (2015) concluded that the volatility has increased after
the introduction of index futures.

43
 CHAPTER 4
ANALYSIS AND INTERPRETATION

It can be concluded from the descriptive statistics for the daily returns as presented in
Table- 4.1, that the data is not normally distributed, which seems to be a general
phenomenon worldwide for stock returns. The coefficient of kurtosis is greater than three
which characterize that the returns are distributed in the form of leptokurtosis exhibiting
fat tails and excess peakedness at the mean. From these characteristics thus it may
concluded that it is eligible for fitted in the form of GARCH model.

Table 4.1: Behaviour of Stock Returns

44
400
Series: Daily Return
Sample 1/02/20 1412/31/2014
Observations 1248
300
Mean 0.017914
Median 0.139210
200 Maximum 7.659829
Minimum -13.94419
Std. Dev. 1.887967
Skewness -0.999814
100 Kurtosis 9.678404

Jarque-Bera 2527.178
Probability 0.000000
0
-10 -5 0 5

Table 4.2: Comparison of Long Futures and Cash Market

FUTURES CASH
Return SD Sharpe Return SD Sharpe
24.69 101.34 0.2428 2011 8.8 27.59 0.0289
200.36 107.29 1.8667 2012 25.43 17.65 0.9879
289.31 81.09 4.5667 2013 36.93 26.11 1.1082
304.71 81.75 4.7263 2014 46.89 25.42 1.526
-154.48 84.64 -1.8142 2015 -64.25 44.31 -1.6079

Chart 4.2: Comparison of Long Futures and Cash Market

45
Interpretation

The results of the derivative based portfolio on S&P CNX Nifty Index future and the cash
portfolio of the corresponding index have been presented in the Table-4.2 and shown in
Figure- 4.2.

The thorough analysis of the table, suggests that during the entire 60 months beginning 1 st
Jan 2004 under study, the derivative portfolio based of S&P CNX Nifty Index future does
not at all amount in higher degree of risk when compared with the cash portfolio being
held in proportion to the index composition, rather compensates very smartly for higher
degree of risk under taken by the investors, as suggested by the Sharpe’s ratio (William
Sharpe, 1966). The Sharpe’s ratio was in favour of derivative portfolio to cash portfolio.

The examination of the table also suggest that, it is only during the calendar year 2014,
when Sharpe’s ratio (-1.8142 vs -1.6079) was slightly in favour of cash portfolio than
derivative portfolio, whereas during all remaining calendar years under study the

46
Sharpe’s ratio has been in favour of the derivative portfolio by huge margins of more
than 100 percent during 2006 and 2015.

Table 4.3: Comparison of Covered call and Cash Market

COVERED CALL CASH
Return SD Sharpe Period Return SD Sharpe
-134.09 117.45 -1.1338442 Jan-14 -16.65 15.3 -1.132
-54.63 55.48 -0.9861211 Feb-14 2.27 11.26 0.1419
-84.01 20.77 -4.0486278 Mar-14 -9.01 14.93 0.6947
54.17 97.02 0.54720676 Apr-14 8.89 5.9 1.3946
-77.76 92.58 -0.8407863 May-14 -5.75 5.52 -1.1623
-105.84 19.85 -5.3360202 Jun-14 -18.23 8.68 -2.1778
81.08 132.68 0.61049141 Jul-14 7.9 14.68 0.5342

47
 -74.28 109.8 -0.6772313 Aug-14 0.87 7.4 0.0274
-79.19 35.24 -2.2494325 Sep-14 -10.04 10.69 -1.0018
-214.68 95.09 -2.2479756 Oct-14 -28.06 22.69 -1.2662
-71.99 100.32 -0.7184011 Nov-14 -4.38 17.57 -0.23
104.68 124.03 0.83528179 Dec-14 7.76 11.38 0.6239
Chart 4.3: Comparison of Covered call and Cash Market

Interpretation

The results of the derivative portfolio (covered call on S&P CNX Nifty Index) and the
cash portfolio of the corresponding index have been presented in the Table- 4.3 and
shown in the Figure- 4.4. The period of study covered was 12 months ending on 31 st
December 2014, The results indicate that in terms of aggregate return (-5.28%) the cash
portfolio has an edge over the derivative portfolio during the entire period of study, and

48
in terms of risk compensation as point out by Sharpe’s ratio, it is the cash portfolio that
has an edge over derivative portfolio.

Table 4.4: Comparison of Long Straddle and Cash Market

LONG STRADDLE   CASH

Return SD Sharpe   Return SD Sharpe
172.211 78.91 2.18135851 Jan-14 -16.65 15.3 -1.132
-177.86 247.23 -0.7197347 Feb-14 2.27 11.26 0.1419
-169.42 115.59 -1.4663898 Mar-14 -9.01 14.93 0.6947
-44.96 228.5 -0.1927352 Apr-14 8.89 5.9 1.3946
56.82 224.43 0.25394978 May-14 -5.75 5.52 -1.1623
34.29 17.65 1.8815864 Jun-14 -18.23 8.68 -2.1778

49
 45.87 347.67 0.13170535 Jul-14 7.9 14.68 0.5342
-28.92 228.5 -0.1269147 Aug-14 0.87 7.4 0.0274
-199.96 224.43 -0.895314 Sep-14 -10.04 10.69 -1.0018
-37.25 228.5 -0.1633698 Oct-14 -28.06 22.69 -1.2662
-48.85 224.43 -0.2189948 Nov-14 -4.38 17.57 -0.23
-37.27 230.68 -0.1619126 Dec-14 7.76 11.38 0.6239

-17.1 -64.43

Chart 4.4: Comparison of Long Straddle and Cash Market

Interpretation

The results of the option based strategy called Straddle on S&P CNX Nifty Index and the
cash portfolio of the corresponding index have been presented in the Table- 4.4 for long
straddle.
The through perusal of the tables shows that the Sharpe’s ratio favours the long straddle
only during January, May, June and July. Hence, results advocate that there is no use of
going in for the options based strategy called straddle (long).

50
In terms of aggregate return (-17.1% vs -64.43%) the derivative portfolio strategies of
Long Straddle has resulted in negative returns. Hence, in the present study, the proposed
methodology of selecting the strike price of the straddle only on the basis of long term
historical growth rate needs to be revisited, as it does not provide any evidence to support
such strategy for rational investors either in terms of risk, return or combination thereof.

Table 4.5: Comparison of Short Straddle and Cash Market

SHORT STRADDLE   CASH

 
 
Return SD Sharpe   Return SD Sharpe
-172.21 48.41 -4.5590 Jan-14 -16.65 15.3 -1.132
177.85 247.53 0.7181 Feb-14 2.27 11.26 0.1419
169.42 115.96 2.4064 Mar-14 -9.01 14.93 0.6947
138.33 21.98 6.2889 Apr-14 8.89 5.9 1.3946
-56.81 137.99 -0.4123 May-14 -5.75 5.52 -1.1623

51
 -34.28 16.63 -2.0058 Jun-14 -18.23 8.68 -2.1778
54.13 61.81 0.8743 Jul-14 7.9 14.68 0.5342
28.92 17.82 1.6181 Aug-14 0.87 7.4 0.0274
199.96 120.94 1.6526 Sep-14 -10.04 10.69 -1.0018
37.25 115.05 0.3231 Oct-14 -28.06 22.69 -1.2662
48.85 8.19 5.9485 Nov-14 -4.38 17.57 -0.23
137.27 62.52 2.1942 Dec-14 7.76 11.38 0.6239
             
-0.51       -64.43    

Chart 4.5: Comparison of Short Straddle and Cash Market

Interpretation

The results of the option based strategy called Short Straddle on S&P CNX Nifty Index
and the cash portfolio of the corresponding index have been presented in the table-4.5 for
short straddle.

52
The through perusal of the tables shows that the Sharpe’s ratio favours more than six
months in the entire period of 12 months under study. Hence, results advocate that there
is no use of going in for the options based strategy called straddle (short).

In terms of aggregate return (-0.5169) the derivative portfolio strategy of Straddle have
resulted in negative returns. Hence, in the present study, the proposed methodology of
selecting the strike price of the straddle only on the basis of long term historical growth
rate needs to be revisited, as it does not provide any evidence to support such strategy for
rational investors either in terms of risk, return or combination thereof.

Table 4.6: Comparison of Strip and Cash Market

 
STRIP CASH

Return SD Sharpe   Return SD Sharpe

36.11 34.67 1.0393 Jan-14 -16.65 15.3 -1.132
-386.44 298.79 -1.2936 Feb-14 2.27 11.26 0.1419
-377.80 61.1 -6.1846 Mar-14 -9.01 14.93 0.6947
15.40 278.04 0.0551 Apr-14 8.89 5.9 1.3946

53
 -84.70 70.79 -1.1977 May-14 -5.75 5.52 -1.1623
-72.16 8.87 -8.1432 Jun-14 -18.23 8.68 -2.1778
45.87 84.46 0.5486 Jul-14 7.9 14.68 0.5342
-30.85 54.25 -0.5701 Aug-14 0.87 7.4 0.0274
-244.16 150.12 -1.6202 Sep-14 -10.04 10.69 -1.0018
-90.14 108.20 -0.8338 Oct-14 -28.06 22.69 -1.2662
-34.35 40.15 -0.8325 Nov-14 -4.38 17.57 -0.23
-24.89 5.98 4.1727 Dec-14 7.76 11.38 0.6239
             
-304.83       -64.43    

Chart 4.6: Comparison of Strip and Cash Market

Interpretation
The results of the option based strategy called Straddle on S&P CNX Nifty Index and the
cash portfolio of the corresponding index have been presented in the Table- 4.6 for strip.

The through perusal of the tables shows that the Sharpe’s ratio (0.5486) favours the strip
only during July. Hence, results advocate that there is no use of going in for the options
based strategy called strip.

54
In terms of aggregate return the derivative portfolio strategies of strip has resulted in
negative returns. Hence, in the present study, the proposed methodology of selecting the
strike price of the straddle only on the basis of long term historical growth rate needs to
be revisited, as it does not provide any evidence to support such strategy for rational
investors either in terms of risk, return or combination thereof.

Table 4.7: Comparison of Strap and Cash Market

STRAP       CASH    
Return SD Sharpe   Return SD Sharpe
172.20 107.64 1.5990 Jan-14 -16.65 15.3 -1.132
-224.04 279.48 -0.7983 Feb-14 2.27 11.26 0.1419
-380.44 111.29 -4.4193 Mar-14 -9.01 14.93 0.6947
167.06 387.15 0.4313 Apr-14 8.89 5.9 1.3946
-107.74 194.32 -0.5548 May-14 -5.75 5.52 -1.1623
44.10 107.37 0.4100 Jun-14 -18.23 8.68 -2.1778

55
 -74.77 84.35 -0.8860 Jul-14 7.9 14.68 0.5342
-38.93 24.63 -1.5835 Aug-14 0.87 7.4 0.0274
-35.64 24.26 -1.5359 Sep-14 -10.04 10.69 -1.0018
-12.74 16.19 -0.7923 Oct-14 -28.06 22.69 -1.2662
54.85 47.09 1.1418 Nov-14 -4.38 17.57 -0.23
0.39 37.80 0.0083 Dec-14 7.76 11.38 0.6239
             
-231.31       -64.43    

Table 4.7: Comparison of Strap and Cash Market

Interpretation

The results of the option based strategy called Straddle on S&P CNX Nifty Index and the
cash portfolio of the corresponding index have been presented in the Table- 4.7 for strip.

56
The through perusal of the tables shows that the Sharpe’s ratio (1.5990 and 0.4100)
favours the strip only during January and June. Hence, results advocate that there is no
use of going in for the options based strategy called strap.

In terms of aggregate return the derivative portfolio strategies of strap has resulted in
negative returns. Hence, in the present study, the proposed methodology of selecting the
strike price of the straddle only on the basis of long term historical growth rate needs to
be revisited, as it does not provide any evidence to support such strategy for rational
investors either in terms of risk, return or combination thereof.

Table 4.8: Comparison of Long Strangle and Cash Market

57
  
LONG STRANGLE CASH

Return SD Sharpe   Return SD Sharpe

-706.63 231.54 -4.0522 Jan-14 -16.65 15.3 -1.132
-11.86 491.27 -0.0243 Feb-14 2.27 11.26 0.1419
-329.13 224.34 -1.4674 Mar-14 -9.01 14.93 0.6947
324.11 461.21 0.7004 Apr-14 8.89 5.9 1.3946
-44.69 260.08 -0.1721 May-14 -5.75 5.52 -1.1623
-594.46 388.03 -1.5295 Jun-14 -18.23 8.68 -2.1778
491.69 767.32 0.6406 Jul-14 7.9 14.68 0.5342
-84.36 407.33 -0.2073 Aug-14 0.87 7.4 0.0274
-376.85 206.82 -1.8224 Sep-14 -10.04 10.69 -1.0018
-1018.98 454.04 -2.2443 Oct-14 -28.06 22.69 -1.2662
-312.85 499.30 -0.6267 Nov-14 -4.38 17.57 -0.23
325.38 451.30 0.7208 Dec-14 7.76 11.38 0.6239
             
-322.93       -64.43    
Chart 4.8: Comparison of Long Strangle and Cash Market

Interpretation

58
The results of the yet another option based strategy called Strangle (long) on S&P CNX
Nifty Index and the cash portfolio of the corresponding index have been presented in the
Table- 4.8 for long strangle.
It has been found that in the case of option based strategy called Strangle (long), its
performance has further deteriorated as compared to straddle in terms of both (risk as
well as return).
In case of long strangle, the entire initial capital has been lost. The Sharpe ratio has been
lower during the entire period under study in case of short as well as long strangle.

Table 4.9: Comparison of Short Strangle and Cash Market

SHORT STRANGLE     CASH    

Return SD Sharpe   Return SD Sharpe
706.63 190.78 4.7035 Jan-14 -16.65 15.3 -1.132
11.86 491.27 0.0239 Feb-14 2.27 11.26 0.1419
329.13 224.34 1.4667 Mar-14 -9.01 14.93 0.6947
-61.55 276.26 -0.2231 Apr-14 8.89 5.9 1.3946
44.69 75.13 0.5938 May-14 -5.75 5.52 -1.1623
594.46 388.03 1.5291 Jun-14 -18.23 8.68 -2.1778
-291.69 625.90 -0.4661 Jul-14 7.9 14.68 0.5342
84.36 265.91 0.3169 Aug-14 0.87 7.4 0.0274
376.85 206.82 1.8217 Sep-14 -10.04 10.69 -1.0018
1018.98 454.04 2.2440 Oct-14 -28.06 22.69 -1.2662
312.85 499.30 0.6264 Nov-14 -4.38 17.57 -0.23
-62.69 265.54 -0.2363 Dec-14 7.76 11.38 0.6239
             
322.93       -64.43    

Chart 4.9: Comparison of Short Strangle and Cash Market

59
Interpretation

The results of the yet another option based strategy called Strangle on S&P CNX Nifty
Index and the cash portfolio of the corresponding index have been presented in the Table-
4.9 for short strangle.

It has been found that in the case of option based strategy called Strangle ( short), its
performance has show big positive return compared to straddle in terms of both (risk as
well as return).

In case of long strangle, the entire initial capital has been lost, where as in case of short
Strangle capital have been increased by more than three times. The Sharpe ratio has been
higher during the entire period under study in case of short as well as long strangle.

60
 Table 4.10: Comparison of Bear Spread and Cash Market

BEAR SPREAD     CASH    

Return SD Sharpe   Return SD Sharpe
1051.05 328.57 4.1986 Jan-14 -16.65 15.3 -1.132
-331.97 977.95 -0.3395 Feb-14 2.27 11.26 0.1419
14.64 245.09 0.0594 Mar-14 -9.01 14.93 0.6947
-49.90 45.64 -1.0951 Apr-14 8.89 5.9 1.3946
-105.24 39.13 -2.6916 May-14 -5.75 5.52 -1.1623
146.78 178.21 0.8232 Jun-14 -18.23 8.68 -2.1778
-49.95 139.11 -0.3596 Jul-14 7.9 14.68 0.5342
-107.76 40.88 -2.6380 Aug-14 0.87 7.4 0.0274
38.48 104.41 0.3713 Sep-14 -10.04 10.69 -1.0018
359.56 227.04 1.5833 Oct-14 -28.06 22.69 -1.2662
-44.54 285.04 -0.1530 Nov-14 -4.38 17.57 -0.23
-37.27 44.37 -0.8418 Dec-14 7.76 11.38 0.6239
             
34.09       -64.43    

Chart 4.10: Comparison of Bear Spread and Cash Market

Interpretation

61
The results of the yet another option based strategy called Bear Spread on S&P CNX
Nifty Index and the cash portfolio of the corresponding index have been presented in the
Table- 4.10 for long strangle and in the Table- 4.8 for short strangle.

It has been found that in the case of option based strategy called Bear spread, its
performance has shown some positive compared to other derivatives strategies

In case of Bear Spread, Capital has been increased by more than 30%. The Sharpe ratio
has been average during the entire period under study in case of Bear Spread

Table 4.11: Comparison of Bull Spread and Cash Market

62
    
BULL SPREAD CASH

Return SD Sharpe   Return SD Sharpe

0.54 34.67 0.0138 Jan-14 -16.65 15.3 -1.132
0.07 0.33 -0.0057 Feb-14 2.27 11.26 0.1419
0.24 0.12 1.3976 Mar-14 -9.01 14.93 0.6947
178.17 125.82 1.4154 Apr-14 8.89 5.9 1.3946
0.99 125.29 0.0072 May-14 -5.75 5.52 -1.1623
-0.01 0.71 -0.1274 Jun-14 -18.23 8.68 -2.1778
94.46 66.09 1.4128 Jul-14 7.9 14.68 0.5342
-0.03 66.09 -0.0012 Aug-14 0.87 7.4 0.0274
-0.01 0.02 -4.6782 Sep-14 -10.04 10.69 -1.0018
-0.02 0.01 -9.4867 Oct-14 -28.06 22.69 -1.2662
0.17 0.14 0.6757 Nov-14 -4.38 17.57 -0.23
190.22 134.38 1.4149 Dec-14 7.76 11.38 0.6239
         
-24.75     -64.43    

Chart 4.11: Comparison of Bull Spread and Cash Market

Interpretation

63
The results of the yet another option based strategy called Bull Spread on S&P CNX
Nifty Index and the cash portfolio of the corresponding index have been presented in the
Table- 4.11

It has been found that in the case of option based strategy called Bull spread; its
performance has shown very negative compared to Bear spread.

In case of Bull Spread, Capital has been decreased by more than 23%. The Sharpe ratio
has been lower during the entire period under study in case of Bear Spread

Table 4.12: Comparison of Box Spread and Cash Market

64
 BOX SPREAD   CASH
Return SD Sharpe   Return SD Sharpe
1051.59 454.56 2.3183 Jan-14 -16.65 15.3 -1.132
-165.95 860.93 -0.1928 Feb-14 2.27 11.26 0.1419
14.88 127.87 0.1157 Mar-14 -9.01 14.93 0.6947
64.13 34.82 1.8392 Apr-14 8.89 5.9 1.3946
-52.12 82.20 -0.6350 May-14 -5.75 5.52 -1.1623
74.38 88.75 0.8259 Jun-14 -18.23 8.68 -2.1778
21.75 36.51 0.5936 Jul-14 7.9 14.68 0.5342
-54.89 54.49 -1.0090 Aug-14 0.87 7.4 0.0274
19.23 51.71 0.3704 Sep-14 -10.04 10.69 -1.0018
179.77 114.51 1.5829 Oct-14 -28.06 22.69 -1.2662
-21.68 142.45 -0.1528 Nov-14 -4.38 17.57 -0.23
76.47 69.41 1.10059 Dec-14 7.76 11.38 0.6239
         
4.67     -64.43    

Chart 4.12: Comparison of Box Spread and Cash Market

Interpretation

65
The results of the yet another option based strategy called Box Spread on S&P CNX
Nifty Index and the cash portfolio of the corresponding index have been presented in the
Table- 4.12

It has been found that in the case of option based strategy called Box spread; its
performance has shown average compared to Bear spread and Bull Spread.

In case of Bull Spread, Capital has been decreased by more than 23%. The Sharpe ratio
has been lower during the entire period under study in case of Bear Spread. In case of
Bear Spread, Capital has been increased by more than 30%. The Sharpe ratio has been
average during the entire period under study in case of Bear Spread. Here, Capital has
been increased by more than 4%

CHAPTER -V
FINDINGS

66
 FUTURES
The results of the derivative based portfolio on S&P CNX Nifty Index future and the
cash portfolio of the corresponding index shown that during the entire 60 months
beginning 1st Jan 2004 under study, the derivative portfolio based of S&P CNX Nifty
Index future does not at all amount in higher degree of risk when compared with the
cash portfolio being held in proportion to the index composition, rather compensates
very smartly for higher degree of risk under taken by the investors.

COVERED CALL
The results of the derivative portfolio (covered call on S&P CNX Nifty Index) and
the cash portfolio of the corresponding index indicate s that in terms of aggregate
return, the cash portfolio has an edge over the derivative portfolio during the entire
period of study, and in terms of risk compensation as point out by Sharpe’s ratio, it is
the cash portfolio that has an edge over derivative portfolio.

STRADDLE
In terms of aggregate return the derivative portfolio strategy of Straddle have resulted
in negative returns. Hence, in the present study, the proposed methodology of
selecting the strike price of the straddle only on the basis of long term historical
growth rate needs to be revisited, as it does not provide any evidence to support such
strategy for rational investors either in terms of risk, return or combination thereof.

Strip
In terms of aggregate return the derivative portfolio strategies of strip has resulted in
negative returns. Hence, in the present study, the proposed methodology of selecting
the strike price of the straddle only on the basis of long term historical growth rate
needs to be revisited, as it does not provide any evidence to support such strategy for
rational investors either in terms of risk, return or combination thereof.

67
 Strap
The through perusal of the tables shows that the Sharpe’s ratio favours the strip only
during January and June. Hence, results advocate that there is no use of going in for
the options based strategy called strap.

Strangle
In case of long strangle, the entire initial capital has been lost, where as in case of
short Strangle capital have been increased by more than three times. The Sharpe ratio
has been higher during the entire period under study in case of short as well as long
strangle.
Bear spread
It has been found that in the case of option based strategy called Bear spread, its
performance has shown some positive compared to other derivatives strategies. In
case of Bear Spread, Capital has been increased by more than 30%. The Sharpe ratio
has been average during the entire period under study in case of Bear Spread.

Bull Spread
In case of Bull Spread, Capital has been decreased by more than 23%. The Sharpe
ratio has been lower during the entire period under study in case of Bear Spread. In
case of Bear Spread, Capital has been increased by more than 30%. The Sharpe ratio
has been average during the entire period under study in case of Bear Spread. Here,
Capital has been increased by more than 4%.

CONCLUSION
As Warren Buffet said, analysis on many of derivatives strategies proved to be “Weapons
for Mass Destruction”. The performance of derivative portfolio on S&P CNX Nifty

68
Future has be found to be exceptionally remunerative to the leveraged investors if
margins are maintained as suggested by the 99%. Of all 1529 trading days falling under
the present study, there has not been a single default for want of margins to be maintained
for derivative exposure.

Hence it may be concluded that both the derivative based strategies involving Future and
the Bear spread on the leading index S&P CNX Nifty of the Indian Capital Market has
proved to be better than a cash portfolio held on same Index. However, in case of pure
option based investment strategies on the leading Indian Indices (S&P CNX Nifty)
involving the Straddle (both long as well as short) and the Strangle (both long as well as
short) have lagged far behind in terms of both risk and return to the cash portfolio held on
the same index. Hence, option based strategies may be used, having understood the
dynamics of volatilities (risk), only over a short period of time to take advantage of price
swings/movements and cannot be used as a long term strategy.

BIBLIOGRAPHY

1. Damodar N.Gujarati, “Basic Econometrics”, Pearson Education Inc, 2006

69
2. Jhon C. Hull,” Options, Futures and other Derivatives”, Tata McGraw-Hill, 2015
3. Fact Book (various issues), National Stock Exchange of India (NSE)
4. Gauri Mohan, Saurabh Kumar and Sriharsha Pappu, “Understanding volatility -
The Case of the Introduction of Futures Trading in the National Stock Exchange,
India”,http://papers.ssrn.com/sol3/papers.cfm?abstract_id=333520, 2004.
5. Indian security Market Review 2014, by NSE, India.
6. www.nseindia.com

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