ACKNOWLEDGEMENT

The beatitude, bliss and euphoria that accompany the successful completion of any task would
not be complete without the expression of appreciation of simple virtues to the people who made
it possible.

The final project report is submitted to JAIPURIA INSTITUTE OF STUDIES, Ghaziabad for
partial fulfilment of diploma, post graduate diploma in management (PGDM).

This project is an attempt to study “INVESTORS PERCEPTION TOWARDS DERIVATIVE

MARKET” at IIFL.

I would like to thanks to the Management of IIFL for giving me the opportunity to do my
two-month project training in their esteemed organization. I am highly obliged to
Mr. DIVYADEEP ARORA (AREA SALES MANAGER) for granting me to undertake my
training at SEC.63 NOIDA branch.

I express my thanks to all Sales Managers and other relationship managers under whose
guidance and direction, I gave a good shape to my training. Their constant review and excellent
suggestions throughout the project are highly commendable. My heartfelt thanks go to all the
executives who helped me to gain knowledge about the actual working and the processes
involved in various departments. I would also like to sincerely thank my faculty guide PROF.
SUMEDHA whose guidance has helped me to Understand and complete my project in a timely
and proper manner.

SOURABH SINGH RAGHUVANSHI

 DECLARATION

I do hereby declare that the project report is submitted as partial fulfillment of the requirement of
PGDM Program of JAIPURIA INSTITUTE OF STUDIES, GHAZIABAD.

The Project has been done under the guidance of Mr. DIVYADEEP AROR and PROF.
SUMEDHA JUDEJA Faculty guide JAIPURIA INSTITUTE OF STUDIES, Ghaziabad

No part of this report has not been published or submitted elsewhere for the fulfillment of any
degree or diploma for any institute or university.

SOURABH SINGH RAGHUVANSHI

 EXECUTIVE SUMMARY
New ideas and innovations have always been the hallmark of progress made by mankind. At
every stage of development, there have been two core factors that drives man to ideas and
innovation. These are increasing returns and reducing risk, in all facets of life.

The financial markets are no different. The endeavor has always been to maximize returns and
minimize risk. A lot of innovation goes into developing financial products centered on these two
factors. It has spawned a whole new area called financial engineering.

Derivatives are among the forefront of the innovations in the financial markets and aim to
increase returns and reduce risk. They provide an outlet for investors to protect themselves from
the vagaries of the financial markets. These instruments have been very popular with investors
all over the world.

Indian financial markets have been on the ascension and catching up with global standards in
financial markets. The advent of screen based trading, dematerialization, rolling settlement have
put our markets on par with international markets.

As a logical step to the above progress, derivative trading was introduced in the country in June
2000. Starting with index futures, we have made rapid strides and have four types of derivative
products- Index future, index option, stock future and stock options. Today, there are 30 stocks
on which one can have futures and options, apart from the index futures and options.

This market presents a tremendous opportunity for individual investors .The markets have
performed smoothly over the last two years and has stabilized. The time is ripe for investors to
make full use of the advantage offered by this market.

We have tried to present in a lucid and simple manner, the derivatives market, so that the individual
investor is educated and equipped to become a dominant player in the market
 TABLE OF CONTENTS
S. NO. TOPICS PAGE NO.
1. INTRODUCTION
1.1 PROFILE OF THE ORGANISATION 00
1.2 PROFILE OF THE STUDY 00
2. LITERATURE REVIEW 00
3. OBJECTIVES OF THE STUDY 00
4. RESEARCH METHODOLOGY 00
4.1 RESERCH DESIGN 00
4.2 SAMPLING AND SAMPLING DESIGN 00
4.3 HYPOTHESIS 00
4.4 DATA COLLECTION 00
4.5 ANALYTICAL AND STATISTICAL TOOLS 00
5. FINDINGS 00
6. RECOMMENDATIONS 00
7. LIMITATIONS OF THE STUDY 00
8. BIBLOGRAPHY 00
9. ANNEXURES 00
 PROFILE OF THE ORGANISATION

The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd (NSE:
INDIAINFO, BSE: 532636) and its subsidiaries, is one of the leading players in the Indian
financial services space. IIFL offers advice and execution platform for the entire range of
financial services covering products ranging from Equities and derivatives, Commodities,
Wealth management, Asset management, Insurance, Fixed deposits, Loans, Investment Banking,
GOI bonds and other small savings instruments. IIFL recently received an in-principle approval
for Securities Trading and Clearing memberships from Singapore Exchange (SGX) paving the
way for IIFL to become the first Indian brokerage to get a membership of the SGX. IIFL also
received membership of the Colombo Stock Exchange becoming the first foreign broker to enter
Sri Lanka. IIFL owns and manages the website, www.indiainfoline.com, which is one of India’s
leading online destinations for personal finance, stock markets, economy and business. IIFL has
been awarded the ‘Best Broker, India’ by Finance Asia and the ‘Most improved brokerage,
India’ in the Asia Money polls. India Infoline was also adjudged as ‘Fastest Growing Equity
Broking House - Large firms’ by Dun & Bradstreet. A forerunner in the field of equity research,
IIFL’s research is acknowledged by none other than Forbes as ‘Best of the Web’ and ‘…a must
read for investors in Asia’. Our research is available not just over the Internet but also on
international wire services like Bloomberg, Thomson First Call and Internet Securities where it is
amongst one of the most read Indian brokers. A network of over 2,500 business locations spread
over more than 500 cities and towns across India facilitates the smooth acquisition and servicing
of a large customer base. All our offices are connected with the corporate office in Mumbai with
cutting edge networking technology. The group caters to a customer base of about a million
customers, over a variety of mediums viz. online, over the phone and at our branches.
 PROFILE OF STUDY

The study has been done to know the different types of derivatives and also to know the
derivative market in India. This study also covers the recent developments in the derivative
market. Through this study I came to know the trading done in derivatives and their use in
the stock markets. The Study covers the derivatives market and its instruments. For better
understanding various strategies with different situations and actions have been given. It
includes the data collected in the recent years and also the market in the derivatives in the
recent years. This study extends to the trading of derivatives done in the National Stock
Markets.
 LITERATURE REVIEW
INTRODUCTION TO DERIVATIVES
The origin of derivatives can be traced back to the need of farmers to protect themselves against
fluctuations in the price of their crop. From the time it was sown to the time it was ready for
harvest, farmers would face price uncertainty. Through the use of simple derivative products, it
was possible for the farmer to partially or fully transfer price risks by locking-in asset prices.
These were simple contracts developed to meet the needs of farmers and were basically a means
of reducing risk.

A farmer who sowed his crop in June faced uncertainty over the price he would receive
for his harvest in September. In years of scarcity, he would probably obtain attractive prices.
However, during times of oversupply, he would have to dispose off his harvest at a very low
price. Clearly this meant that the farmer and his family were exposed to a high risk of price
uncertainty.

On the other hand, a merchant with an ongoing requirement of grains too would face a
price risk that of having to pay exorbitant prices during dearth, although favorable prices could
be obtained during periods of oversupply. Under such circumstances, it clearly made sense for
the farmer and the merchant to come together and enter into contract whereby the price of the
grain to be delivered in September could be decided earlier. What they would then negotiate
happened to be futures-type contract, which would enable both parties to eliminate the price risk.

In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and
merchants together. A group of traders got together and created the ‘to-arrive’ contract that
permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts
proved useful as a device for hedging and speculation on price charges. These were eventually
standardized, and in 1925 the first futures clearing house came into existence.

Today derivatives contracts exist on variety of commodities such as corn, pepper, cotton, wheat,
silver etc. Besides commodities, derivatives contracts also exist on a lot of financial underlying
like stocks, interest rate, exchange rate, etc.
DERIVATIVES DEFINED

A derivative is a product whose value is derived from the value of one or more underlying
variables or assets in a contractual manner. The underlying asset can be equity, forex,
commodity or any other asset. In our earlier discussion, we saw that wheat farmers may wish to
sell their harvest at a future date to eliminate the risk of change in price by that date. Such a
transaction is an example of a derivative. The price of this derivative is driven by the spot price
of wheat which is the “underlying” in this case.

The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts in
commodities all over India. As per this the Forward Markets Commission (FMC) continues to
have jurisdiction over commodity futures contracts. However when derivatives trading in
securities was introduced in 2001, the term “security” in the Securities Contracts (Regulation)
Act, 1956 (SCRA), was amended to include derivative contracts in securities. Consequently,
regulation of derivatives came under the purview of Securities Exchange Board of India (SEBI).
We thus have separate regulatory authorities for securities and commodity derivative markets.

Derivatives are securities under the SCRA and hence the trading of derivatives is governed by
the regulatory framework under the SCRA. The Securities Contracts (Regulation) Act, 1956
defines “derivative” to include-

A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract differences or any other form of security.

A contract which derives its value from the prices, or index of prices, of underlying securities
 TYPES OF DERIVATIVES MARKET

TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives Over The Counter Derivatives

National Stock Exchange Bombay Stock Exchange National Commodity & Derivative
exchange

Index Future Index option Stock option Stock future

TYPES OF DERIVATIVES

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1. FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for a

specified price. One of the parties to the contract assumes a long position and agrees to
buy the underlying asset on a certain specified future date for a certain specified price.
The other party assumes a short position and agrees to sell the asset on the same date
for the same price. Other contract details like delivery date, price and quantity are
negotiated bilaterally by the parties to the contract. The forward contracts are n o r m a l l y
traded outside the exchanges.

The salient features of forward contracts are:

• They are bilateral contracts and hence exposed to counter - party risk..

• Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.

• The contract price is generally not available in public domain.

• On the expiration date, the contract has to be settled by delivery of the asset.
• If the party wishes to reverse the contract, it has to compulsorily go to the same
counter-party, which often results in high prices being charged.

However forward contracts in certain markets have become very standardized, as in

the case of foreign exchange, thereby reducing transaction costs and increasing
transactions volume. This process of standardization reaches its limit in the organized
futures market. Forward contracts are often confused with futures contracts. The confusion
is primarily because both serve essentially th e same economic functions of allocating
risk in the presence of future price uncertainty. However futures are a significant
improvement over the forward contracts as they eliminate counterparty risk and offer
more liquidity.

2. FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or

sell a certain underlying instrument at a certain date in the future, at a pre-set price. The future
date is called the delivery date or final settlement date. The pre-set price is called the futures
price. The price of the underlying asset on the delivery date is called the settlement price. The
settlement price, normally, converges towards the futures price on the delivery date.

A futures contract gives the holder the right and the obligation to buy or sell, which differs
from an options contract, which gives the buyer the right, but not the obligation, and the option
writer (seller) the obligation, but not the right. To exit the commitment, the holder of a futures
position has to sell his long position or buy back his short position, effectively closing out the
futures position and its contract obligations. Futures contracts are exchange traded derivatives.
The exchange acts as counterparty on all contracts, sets margin requirements, etc.
BASIC FEATURES OF FUTURE CONTRACT

1. Standardization:

Futures contracts ensure their liquidity by being highly standardized, usually by specifying:

 The underlying. This can be anything from a barrel of sweet crude oil to a short term
interest rate.
 The type of settlement, either cash settlement or physical settlement.
 The amount and units of the underlying asset per contract. This can be the notional
amount of bonds, a fixed number of barrels of oil, units of foreign currency, the notional
amount of the deposit over which the short term interest rate is traded, etc.
 The currency in which the futures contract is quoted.
 The grade of the deliverable. In case of bonds, this specifies which bonds can be
delivered. In case of physical commodities, this specifies not only the quality of the
underlying goods but also the manner and location of delivery. The delivery month.
 The last trading date.
 Other details such as the tick, the minimum permissible price fluctuation.

2. Margin:

Although the value of a contract at time of trading should be zero, its price constantly fluctuates.
This renders the owner liable to adverse changes in value, and creates a credit risk to the
exchange, who always acts as counterparty. To minimize this risk, the exchange demands that
contract owners post a form of collateral, commonly known as Margin requirements are waived
or reduced in some cases for hedgers who have physical ownership of the covered commodity or
spread traders who have offsetting contracts balancing the position.
Initial margin: is paid by both buyer and seller. It represents the loss on that contract, as
determined by historical price changes, which is not likely to be exceeded on a usual day's
trading. It may be 5% or 10% of total contract price.
Mark to market Margin: Because a series of adverse price changes may exhaust the initial
margin, a further margin, usually called variation or maintenance margin, is required by the
exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of each
day, called the "settlement" or mark-to-market price of the contract.

To understand the original practice, consider that a futures trader, when taking a position,
deposits money with the exchange, called a "margin". This is intended to protect the exchange
against loss. At the end of every trading day, the contract is marked to its present market value. If
the trader is on the winning side of a deal, his contract has increased in value that day, and the
exchange pays this profit into his account. On the other hand, if he is on the losing side, the
exchange will debit his account. If he cannot pay, then the margin is used as the collateral from
which the loss is paid.

3. Settlement:
Settlement is the act of consummating the contract, and can be done in one of two ways, as
specified per type of futures contract:
 Physical delivery - the amount specified of the underlying asset of the contract is
delivered by the seller of the contract to the exchange, and by the exchange to the buyers
of the contract. In practice, it occurs only on a minority of contracts. Most are cancelled
out by purchasing a covering position - that is, buying a contract to cancel out an earlier
sale (covering a short), or selling a contract to liquidate an earlier purchase (covering a
long).
 Cash settlement - a cash payment is made based on the underlying reference rate, such
as a short term interest rate index such as Euribor, or the closing value of a stock market
index. A futures contract might also opt to settle against an index based on trade in a
related spot market.

Expiry is the time when the final prices of the future are determined. For many equity index and
interest rate futures contracts, this happens on the Last Thursday of certain trading month. On
this day the t+2 futures contract becomes the t forward contract.
Pricing of future contract
In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward
price) must be the same as the cost (including interest) of buying and storing the asset. In other
words, the rational forward price represents the expected future value of the underlying
discounted at the risk free rate. Thus, for a simple, non-dividend paying asset, the value of the
future/forward, , will be found by discounting the present value at time to maturity
by the rate of risk-free return .

This relationship may be modified for storage costs, dividends, dividend yields, and convenience
yields. Any deviation from this equality allows for arbitrage as follows.

In the case where the forward price is higher:

1. The arbitrageur sells the futures contract and buys the underlying today (on the spot
market) with borrowed money.
2. On the delivery date, the arbitrageur hands over the underlying, and receives the agreed
forward price.
3. He then repays the lender the borrowed amount plus interest.
4. The difference between the two amounts is the arbitrage profit.

In the case where the forward price is lower:

1. The arbitrageur buys the futures contract and sells the underlying today (on the spot
market); he invests the proceeds.
2. On the delivery date, he cashes in the matured investment, which has appreciated at the
risk free rate.
3. He then receives the underlying and pays the agreed forward price using the matured
investment. [If he was short the underlying, he returns it now.]
4. The difference between the two amounts is the arbitrage profit.
 DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS

FEATURES FORWARD CONTRACT FUTURE CONTRACT

Operational Traded directly between two parties Traded on the exchanges.
Mechanism (not traded on the exchanges).

Contract Differ from trade to trade. Contracts are standardized contracts.

Specifications

Counter-party Exists. Exists. However, assumed by the

risk clearing corp., which becomes the
counter party to all the trades or
unconditionally guarantees their
settlement.

Liquidation Low, as contracts are tailor made High, as contracts are standardized
Profile contracts catering to the needs of the exchange traded contracts.
needs of the parties.

Price discovery Not efficient, as markets are Efficient, as markets are centralized and
scattered. all buyers and sellers come to a common
platform to discover the price.

Examples Currency market in India. Commodities, futures, Index Futures and

Individual stock Futures in India.
 2. OPTIONS -

A derivative transaction that gives the option holder the right but not the obligation to buy or sell
the underlying asset at a price, called the strike price, during a period or on a specific date in
exchange for payment of a premium is known as ‘option’. Underlying asset refers to any asset
that is traded. The price at which the underlying is traded is called the ‘strike price’.There are
two types of options i.e., CALL OPTION AND PUT OPTION.

CALL OPTION:

A contract that gives its owner the right but not the obligation to buy an underlying asset-stock or
any financial asset, at a specified price on or before a specified date is known as a ‘Call option’.
The owner makes a profit provided he sells at a higher current price and buys at a lower future
price.

PUT OPTION:

A contract that gives its owner the right but not the obligation to sell an underlying asset-stock or
any financial asset, at a specified price on or before a specified date is known as a ‘Put option’.
The owner makes a profit provided he buys at a lower current price and sells at a higher future
price. Hence, no option will be exercised if the future price does not increase. Put and calls are
almost always written on equities, although occasionally preference shares, bonds and warrants
become the subject of options.
 3. SWAPS –

Swaps are transactions which obligates the two parties to the contract to exchange a series of
cash flows at specified intervals known as payment or settlement dates. They can be regarded as
portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap)
payments, based on some notional principle amount is called as a ‘SWAP’. In case of swap, only
the payment flows are exchanged and not the principle amount. The two commonly used swaps
are:

INTEREST RATE SWAPS:

Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed
rate interest payments to a party in exchange for his variable rate interest payments. The fixed
rate payer takes a short position in the forward contract whereas the floating rate payer takes a
long position in the forward contract.

CURRENCY SWAPS:

Currency swaps is an arrangement in which both the principle amount and the interest on loan in
one currency are swapped for the principle and the interest payments on loan in another
currency. The parties to the swap contract of currency generally hail from two different
countries. This arrangement allows the counter parties to borrow easily and cheaply in their
home currencies. Under a currency swap, cash flows to be exchanged are determined at the spot
rate at a time when swap is done. Such cash flows are supposed to remain unaffected by
subsequent changes in the exchange rates.
FINANCIAL SWAP:

Financial swaps constitute a funding technique which permit a borrower to access one market
and then exchange the liability for another type of liability. It also allows the investors to
exchange one type of asset for another type of asset with a preferred income stream.

The other kind of derivatives, which are not, much popular are as follows:

5. BASKETS -

Baskets options are option on portfolio of underlying asset. Equity Index Options are most
popular form of baskets.

6. LEAPS -

Normally option contracts are for a period of 1 to 12 months. However, exchange may
introduce option contracts with a maturity period of 2-3 years. These long-term option contracts
are popularly known as Leaps or Long term Equity Anticipation Securities.

7. WARRANTS -

Options generally have lives of up to one year, the majority of options traded on options
exchanges having a maximum maturity of nine months. Longer-dated options are called warrants
and are generally traded over-the-counter.

8. SWAPTIONS -

Swaptions are options to buy or sell a swap that will become operative at the expiry of the
options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the
swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option
to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.
HISTORY OF DERIVATIVES:

The history of derivatives is quite colorful and surprisingly a lot longer than most people think.
Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place
on a specified date, existed in ancient Greece and Rome. Roman emperors entered forward
contracts to provide the masses with their supply of Egyptian grain. These contracts were also
undertaken between farmers and merchants to eliminate risk arising out of uncertain future prices
of grains. Thus, forward contracts have existed for centuries for hedging price risk.

The first organized commodity exchange came into existence in the early
1700’s in Japan. The first formal commodities exchange, the Chicago Board of Trade (CBOT),
was formed in 1848 in the US to deal with the problem of ‘credit risk’ and to provide centralized
location to negotiate forward contracts. From ‘forward’ trading in commodities emerged the
commodity ‘futures’. The first type of futures contract was called ‘to arrive at’. Trading in
futures began on the CBOT in the 1860’s. In 1865, CBOT listed the first ‘exchange traded’
derivatives contract, known as the futures contracts. Futures trading grew out of the need for
hedging the price risk involved in many commercial operations. The Chicago Mercantile
Exchange (CME), a spin-off of CBOT, was formed in 1919, though it did exist before in 1874
under the names of ‘Chicago Produce Exchange’ (CPE) and ‘Chicago Egg and Butter
Board’ (CEBB). The first financial futures to emerge were the currency in 1972 in the US. The
first foreign currency futures were traded on May 16, 1972, on International Monetary Market
(IMM), a division of CME. The currency futures traded on the IMM are the British Pound, the
Canadian Dollar, the Japanese Yen, the Swiss Franc, the German Mark, the Australian Dollar,
and the Euro dollar. Currency futures were followed soon by interest rate futures. Interest rate
futures contracts were traded for the first time on the CBOT on October 20, 1975. Stock index
futures and options emerged in 1982. The first stock index futures contracts were traded on
Kansas City Board of Trade on February 24, 1982.The first of the several networks, which
offered a trading link between two exchanges, was formed between the Singapore International
Monetary Exchange (SIMEX) and the CME on September 7, 1984.
Options are as old as futures. Their history also dates back to ancient Greece and Rome. Options
are very popular with speculators in the tulip craze of seventeenth century Holland. Tulips, the
brightly colored flowers, were a symbol of affluence; owing to a high demand, tulip bulb prices
shot up. Dutch growers and dealers traded in tulip bulb options. There was so much speculation
that people even mortgaged their homes and businesses. These speculators were wiped out when
the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the
option terms.

The first call and put options were invented by an American financier, Russell
Sage, in 1872. These options were traded over the counter. Agricultural commodities options
were traded in the nineteenth century in England and the US. Options on shares were available in
the US on the over the counter (OTC) market only until 1973 without much knowledge of
valuation. A group of firms known as Put and Call brokers and Dealer’s Association was set up
in early 1900’s to provide a mechanism for bringing buyers and sellers together.

On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up at
CBOT for the purpose of trading stock options. It was in 1973 again that black, Merton, and
Scholes invented the famous Black-Scholes Option Formula. This model helped in assessing
the fair price of an option which led to an increased interest in trading of options. With the
options markets becoming increasingly popular, the American Stock Exchange (AMEX) and the
Philadelphia Stock Exchange (PHLX) began trading in options in 1975.

The market for futures and options grew at a rapid pace in the eighties and nineties. The collapse
of the Bretton Woods regime of fixed parties and the introduction of floating rates for currencies
in the international financial markets paved the way for development of a number of financial
derivatives which served as effective risk management tools to cope with market uncertainties.

The CBOT and the CME are two largest financial exchanges in the world on which futures
contracts are traded. The CBOT now offers 48 futures and option contracts (with the annual
volume at more than 211 million in 2001).The CBOE is the largest exchange for trading stock
options. The CBOE trades options on the S&P 100 and the S&P 500 stock indices. The
Philadelphia Stock Exchange is the premier exchange for trading foreign options. The most
traded stock indices include S&P 500, the Dow Jones Industrial Average, the Nasdaq 100, and
the Nikkei 225. The US indices and the Nikkei 225 trade almost round the clock. The N225 is
also traded on the Chicago Mercantile Exchange.

INDIAN DERIVATIVES MARKET

Starting from a controlled economy, India has moved towards a world where prices fluctuate
every day. The introduction of risk management instruments in India gained momentum in the
last few years due to liberalisation process and Reserve Bank of India’s (RBI) efforts in creating
currency forward market. Derivatives are an integral part of liberalisation process to manage
risk. NSE gauging the market requirements initiated the process of setting up derivative markets
in India. In July 1999, derivatives trading commenced in India

Table Chronology of instruments

1991                        Liberalization process initiated 

14 December 1995 NSE asked SEBI for permission to trade index futures.
18 November 1996 SEBI setup L.C.Gupta Committee to draft a policy framework for
index futures.
11 May 1998 L.C.Gupta Committee submitted report.
7 July 1999 RBI gave permission for OTC forward rate agreements (FRAs) and
interest rate swaps.
24 May 2000 SIMEX chose Nifty for trading futures and options on an Indian
index.
25 May 2000 SEBI gave permission to NSE and BSE to do index futures trading.
9 June 2000 Trading of BSE Sensex futures commenced at BSE.
12 June 2000 Trading of Nifty futures commenced at NSE.
25 September 2000 Nifty futures trading commenced at SGX.
2 June 2001 Individual Stock Options & Derivatives

Need for derivatives in India today

In less than three decades of their coming into vogue, derivatives markets have become the most
important markets in the world. Today, derivatives have become part and parcel of the day-to-
day life for ordinary people in major part of the world. Until the advent of NSE, the Indian
capital market had no access to the latest trading methods and was using traditional out-dated
methods of trading. There was a huge gap between the investors’ aspirations of the markets and
the available means of trading. The opening of Indian economy has precipitated the process of
integration of India’s financial markets with the international financial markets. Introduction of
risk management instruments in India has gained momentum in last few years thanks to Reserve
Bank of India’s efforts in allowing forward contracts, cross currency options etc. which have
developed into a very large market.

Myths and realities about derivatives

In less than three decades of their coming into vogue, derivatives markets have become the most
important markets in the world. Financial derivatives came into the spotlight along with the rise
in uncertainty of post-1970, when US announced an end to the Bretton Woods System of fixed
exchange rates leading to introduction of currency derivatives followed by other innovations
including stock index futures. Today, derivatives have become part and parcel of the day-to-day
life for ordinary people in major parts of the world. While this is true for many countries, there
are still apprehensions about the introduction of derivatives. There are many myths about
derivatives but the realities that are different especially for Exchange traded derivatives, which
are well regulated with all the safety mechanisms in place.

What are these myths behind derivatives?

 Derivatives increase speculation and do not serve any economic purpose

 Indian Market is not ready for derivative trading
 Disasters prove that derivatives are very risky and highly leveraged instruments
 Derivatives are complex and exotic instruments that Indian investors will find difficulty
in understanding
 Is the existing capital market safer than Derivatives?
Derivatives increase speculation and do not serve any economic purpose
Numerous studies of derivatives activity have led to a broad consensus, both in the private and
public sectors that derivatives provide numerous and substantial benefits to the users. Derivatives
are a low-cost, effective method for users to hedge and manage their exposures to interest rates,
commodity

Prices or exchange rates. The need for derivatives as hedging tool was felt first in the
commodities market. Agricultural futures and options helped farmers and processors hedge
against commodity price risk. After the fallout of Bretton wood agreement, the financial markets
in the world started undergoing radical changes. This period is marked by remarkable
innovations in the financial markets such as introduction of floating rates for the currencies,
increased trading in variety of derivatives instruments, on-line trading in the capital markets, etc.
As the complexity of instruments increased many folds, the accompanying risk factors grew in
gigantic proportions. This situation led to development derivatives as effective risk management
tools for the market participants.

Looking at the equity market, derivatives allow corporations and institutional investors
to effectively manage their portfolios of assets and liabilities through instruments like stock
index futures and options. An equity fund, for example, can reduce its exposure to the stock
market quickly and at a relatively low cost without selling off part of its equity assets by using
stock index futures or index options.

By providing investors and issuers with a wider array of tools for managing risks and
raising capital, derivatives improve the allocation of credit and the sharing of risk in the global
economy, lowering the cost of capital formation and stimulating economic growth. Now that
world markets for trade and finance have become more integrated, derivatives have strengthened
these important linkages between global markets increasing market liquidity and efficiency and
facilitating the flow of trade and finance.
Indian Market is not ready for derivative trading

Often the argument put forth against derivatives trading is that the Indian capital market is not
ready for derivatives trading. Here, we look into the pre-requisites, which are needed for the
introduction of derivatives, and how Indian market fares:

PRE-REQUISITES INDIAN SCENARIO

Large market Capitalization India is one of the largest market-capitalized countries in Asia
with a market capitalization of more than Rs.765000 crores.

High Liquidity in the underlying The daily average traded volume in Indian capital market today
is around 7500 crores. Which means on an average every
month 14% of the country’s Market capitalisation gets traded.
These are clear indicators of high liquidity in the underlying.

Trade guarantee The first clearing corporation guaranteeing trades has become
fully functional from July 1996 in the form of National
Securities Clearing Corporation (NSCCL). NSCCL is
responsible for guaranteeing all open positions on the National
Stock Exchange (NSE) for which it does the clearing.

A Strong Depository National Securities Depositories Limited (NSDL) which started

functioning in the year 1997 has revolutionalised the security
settlement in our country.

A Good legal guardian In the Institution of SEBI (Securities and Exchange Board of
India) today the Indian capital market enjoys a strong,
independent, and innovative legal guardian who is helping the
market to evolve to a healthier place for trade practices.
What kind of people will use derivatives?

Derivatives will find use for the following set of people:

• Speculators: People who buy or sell in the market to make profits. For example, if you will
the stock price of Reliance is expected to go upto Rs.400 in 1 month, one can buy a 1 month
future of Reliance at Rs 350 and make profits

• Hedgers: People who buy or sell to minimize their losses. For example, an importer has to pay
US $ to buy goods and rupee is expected to fall to Rs 50 /$ from Rs 48/$, then the importer can
minimize his losses by buying a currency future at Rs 49/$

• Arbitrageurs: People who buy or sell to make money on price differentials in different
markets. For example, a futures price is simply the current price plus the interest cost. If there is
any change in the interest, it presents an arbitrage opportunity. We will examine this in detail
when we look at futures in a separate chapter. Basically, every investor assumes one or more of
the above roles and derivatives are a very good option for him.

Comparison of New System with Existing System

Many people and brokers in India think that the new system of Futures & Options and banning
of Badla is disadvantageous and introduced early, but I feel that this new system is very useful
especially to retail investors. It increases the no of options investors for investment. In fact it
should have been introduced much before and NSE had approved it but was not active because
of politicization in SEBI.

The figure 2.1 –2.4 shows how advantages of new system (implemented from June 20001) v/s
the old system i.e. before June 2001

New System Vs Existing System for Market Players

 Figure 2.1

Speculators

Existing SYSTEM New

Approach Peril &Prize Approach Peril &Prize

1) Deliver based 1) Both profit & 1) Buy &Sell stocks 1) Maximum

Trading, margin loss to extent of on delivery basis loss possible

Trading & carry price change. 2) Buy Call &Put to premium

Forward transactions. by paying paid

2) Buy Index Futures premium

Hold till expiry.

Advantages

 Greater Leverage as to pay only the premium.

 Greater variety of strike price options at a given time.

Figure 2.2

Arbitrageurs

Existing SYSTEM New

Approach Peril &Prize Approach Peril &Prize

1) Buying Stocks in 1) Make money 1) B Group more 1) Risk free

one and selling in whichever way the promising as still game.

another exchange. Market moves. in weekly settlement

forward transactions. 2) Cash &Carry

2) If Future Contract arbitrage continues

more or less than Fair price

 Fair Price = Cash Price + Cost of Carry.

Figure 2.3

Hedgers

Existing SYSTEM New

Approach Peril & Prize Approach Peril & Prize

1) Difficult to 1) No Leverage 1) Fix price today to buy 1) Additional

offload holding available risk latter by paying premium. cost is only

during adverse reward dependant 2) For Long, buy ATM Put premium.

market conditions on market prices Option. If market goes up,

as circuit filters long position benefit else

limit to curtail losses. Exercise the option.

3) Sell deep OTM call option

with underlying shares, earn

Premium + profit with increase

price
Advantages
 Availability of Leverage

Figure 2.4

Small Investors

Existing SYSTEM New

Approach Peril &Prize Approach Peril &Prize

1) If Bullish buy 1) Plain Buy/Sell 1) Buy Call/Put options 1) Downside

stocks else sell it. implies unlimited based on market outlook remains

profit/loss. 2) Hedge position if protected &

holding underlying upside

stock unlimited.

Advantages
 Losses Protected.
Exchange-traded vs. OTC derivatives markets

The OTC derivatives markets have witnessed rather sharp growth over the last few years, which
has accompanied the modernization of commercial and investment banking and globalisation of
financial activities. The recent developments in information technology have contributed to a
great extent to these developments. While both exchange-traded and OTC derivative contracts
offer many benefits, the former have rigid structures compared to the latter. It has been widely
discussed that the highly leveraged institutions and their OTC derivative positions were the main
cause of turbulence in financial markets in 1998. These episodes of turbulence revealed the risks
posed to market stability originating in features of OTC derivative instruments and markets.

The OTC derivatives markets have the following features compared to exchange-traded
derivatives:

1. The management of counter-party (credit) risk is decentralized and located within

individual institutions,
2. There are no formal centralized limits on individual positions, leverage, or margining,
3. There are no formal rules for risk and burden-sharing,
4. There are no formal rules or mechanisms for ensuring market stability and integrity, and
for safeguarding the collective interests of market participants, and
5. The OTC contracts are generally not regulated by a regulatory authority and the
exchange’s self-regulatory organization, although they are affected indirectly by national
legal systems, banking supervision and market surveillance.

Some of the features of OTC derivatives markets embody risks to financial market stability.

The following features of OTC derivatives markets can give rise to instability in institutions,
markets, and the international financial system: (i) the dynamic nature of gross credit exposures;
(ii) information asymmetries; (iii) the effects of OTC derivative activities on available aggregate
credit; (iv) the high concentration of OTC derivative activities in major institutions; and (v) the
central role of OTC derivatives markets in the global financial system. Instability arises when
shocks, such as counter-party credit events and sharp movements in asset prices that underlie
derivative contracts, occur which significantly alter the perceptions of current and potential
future credit exposures. When asset prices change rapidly, the size and configuration of counter-
party exposures can become unsustainably large and provoke a rapid unwinding of positions.

There has been some progress in addressing these risks and perceptions. However, the progress
has been limited in implementing reforms in risk management, including counter-party, liquidity
and operational risks, and OTC derivatives markets continue to pose a threat to international
financial stability. The problem is more acute as heavy reliance on OTC derivatives creates the
possibility of systemic financial events, which fall outside the more formal clearing house
structures. Moreover, those who provide OTC derivative products, hedge their risks through the
use of exchange traded derivatives. In view of the inherent risks associated with OTC
derivatives, and their dependence on exchange traded derivatives, Indian law considers them
illegal.

FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES:

Factors contributing to the explosive growth of derivatives are price volatility, globalisation of
the markets, technological developments and advances in the financial theories.

A.} PRICE VOLATILITY –

A price is what one pays to acquire or use something of value. The objects having value maybe
commodities, local currency or foreign currencies. The concept of price is clear to almost
everybody when we discuss commodities. There is a price to be paid for the purchase of food
grain, oil, petrol, metal, etc. the price one pays for use of a unit of another person’s money is
called interest rate. And the price one pays in one’s own currency for a unit of another currency
is called as an exchange rate.

Prices are generally determined by market forces. In a market, consumers have ‘demand’ and
producers or suppliers have ‘supply’, and the collective interaction of demand and supply in the
market determines the price. These factors are constantly interacting in the market causing
changes in the price over a short period of time. Such changes in the price are known as ‘price
volatility’. This has three factors: the speed of price changes, the frequency of price changes and
the magnitude of price changes.

The changes in demand and supply influencing factors culminate in market adjustments through
price changes. These price changes expose individuals, producing firms and governments to
significant risks. The breakdown of the BRETTON WOODS agreement brought and end to the
stabilising role of fixed exchange rates and the gold convertibility of the dollars. The
globalisation of the markets and rapid industrialisation of many underdeveloped countries
brought a new scale and dimension to the markets. Nations that were poor suddenly became a
major source of supply of goods. The Mexican crisis in the south east-Asian currency crisis of
1990’s has also brought the price volatility factor on the surface. The advent of
telecommunication and data processing bought information very quickly to the markets.
Information which would have taken months to impact the market earlier can now be obtained in
matter of moments. Even equity holders are exposed to price risk of corporate share fluctuates
rapidly.

These price volatility risks pushed the use of derivatives like futures and options increasingly as
these instruments can be used as hedge to protect against adverse price changes in commodity,
foreign exchange, equity shares and bonds.

B.} GLOBALISATION OF MARKETS –

Earlier, managers had to deal with domestic economic concerns; what happened in other part of
the world was mostly irrelevant. Now globalisation has increased the size of markets and as
greatly enhanced competition .it has benefited consumers who cannot obtain better quality goods
at a lower cost. It has also exposed the modern business to significant risks and, in many cases,
led to cut profit margins

In Indian context, south East Asian currencies crisis of 1997 had affected the competitiveness of
our products vis-à-vis depreciated currencies. Export of certain goods from India declined
because of this crisis. Steel industry in 1998 suffered its worst set back due to cheap import of
steel from south East Asian countries. Suddenly blue chip companies had turned in to red. The
fear of china devaluing its currency created instability in Indian exports. Thus, it is evident that
globalisation of industrial and financial activities necessitates use of derivatives to guard against
future losses. This factor alone has contributed to the growth of derivatives to a significant
extent.

C.} TECHNOLOGICAL ADVANCES –

A significant growth of derivative instruments has been driven by technological breakthrough.

Advances in this area include the development of high speed processors, network systems and
enhanced method of data entry. Closely related to advances in computer technology are advances
in telecommunications. Improvement in communications allow for instantaneous worldwide
conferencing, Data transmission by satellite. At the same time there were significant advances in
software programmes without which computer and telecommunication advances would be
meaningless. These facilitated the more rapid movement of information and consequently its
instantaneous impact on market price.

Although price sensitivity to market forces is beneficial to the economy as a whole resources are
rapidly relocated to more productive use and better rationed overtime the greater price volatility
exposes producers and consumers to greater price risk. The effect of this risk can easily destroy a
business which is otherwise well managed. Derivatives can help a firm manage the price risk
inherent in a market economy. To the extent the technological developments increase volatility,
derivatives and risk management products become that much more important.

D.} ADVANCES IN FINANCIAL THEORIES –

Advances in financial theories gave birth to derivatives. Initially forward contracts in its
traditional form, was the only hedging tool available. Option pricing models developed by Black
and Scholes in 1973 were used to determine prices of call and put options. In late 1970’s, work
of Lewis Edeington extended the early work of Johnson and started the hedging of financial
price risks with financial futures. The work of economic theorists gave rise to new products for
risk management which led to the growth of derivatives in financial markets.
BENEFITS OF DERIVATIVES
Derivative markets help investors in many different ways:
1.] RISK MANAGEMENT –
Futures and options contract can be used for altering the risk of investing in spot market. For
instance, consider an investor who owns an asset. He will always be worried that the price may
fall before he can sell the asset. He can protect himself by selling a futures contract, or by buying
a Put option. If the spot price falls, the short hedgers will gain in the futures market, as you will
see later. This will help offset their losses in the spot market. Similarly, if the spot price falls
below the exercise price, the put option can always be exercised.
2.] PRICE DISCOVERY –
Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices
are believed to contain information about future spot prices and help in disseminating such
information. As we have seen, futures markets provide a low cost trading mechanism. Thus
information pertaining to supply and demand easily percolates into such markets. Accurate
prices are essential for ensuring the correct allocation of resources in a free market economy.
Options markets provide information about the volatility or risk of the underlying asset.
3.] OPERATIONAL ADVANTAGES –
As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they
offer greater liquidity. Large spot transactions can often lead to significant price changes.
However, futures markets tend to be more liquid than spot markets, because herein you can take
large positions by depositing relatively small margins. Consequently, a large position in
derivatives markets is relatively easier to take and has less of a price impact as opposed to a
transaction of the same magnitude in the spot market. Finally, it is easier to take a short position
in derivatives markets than it is to sell short in spot markets.
4.] MARKET EFFICIENCY –
The availability of derivatives makes markets more efficient; spot, futures and options markets
are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is possible to
exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help
to ensure that prices reflect true values.
5.] EASE OF SPECULATION –
Derivative markets provide speculators with a cheaper alternative to engaging in spot
transactions. Also, the amount of capital required to take a comparable position is less in this
case. This is important because facilitation of speculation is critical for ensuring free and fair
markets. Speculators always take calculated risks. A speculator will accept a level of risk only if
he is convinced that the associated expected return is commensurate with the risk that he is
taking.
The derivative market performs a number of economic functions.
 The prices of derivatives converge with the prices of the underlying at the expiration of
derivative contract. Thus derivatives help in discovery of future as well as current prices.
 An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity.
 Derivatives markets help increase savings and investment in the long run. Transfer of risk
enables market participants to expand their volume of activity.

DEVELOPMENT OF DERIVATIVES MARKET IN INDIA

The first step towards introduction of derivatives trading in India was the promulgation of the
Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in
securities. The market for derivatives, however, did not take off, as there was no regulatory
framework to govern trading of derivatives. SEBI set up a 24–member committee under the
Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory
framework for derivatives trading in India. The committee submitted its report on March 17,
1998 prescribing necessary pre–conditions for introduction of derivatives trading in India. The
committee recommended that derivatives should be declared as ‘securities’ so that 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 in India. The report, which was submitted in October
1998, worked out the operational details of margining system, methodology for charging initial
margins, broker net worth, deposit requirement and real–time monitoring requirements. The
Securities Contract Regulation Act (SCRA) was amended in December 1999 to include
derivatives within the ambit of ‘securities’ and the regulatory framework were developed for
governing derivatives trading. The act also made it clear that derivatives shall be legal and valid
only if such contracts are traded on a recognized stock exchange, thus precluding OTC
derivatives. The government also rescinded in March 2000, the three decade old notification,
which prohibited forward trading in securities. Derivatives trading commenced in India in June
2000 after SEBI granted the final approval to this effect in May 2001. SEBI permitted the
derivative segments of two stock exchanges, NSE and BSE, and their clearing house/corporation
to commence trading and settlement in approved derivatives contracts. To begin with, SEBI
approved trading in index futures contracts based on S&P CNX Nifty and BSE–30 (Sense)
index. This was followed by approval for trading in options based on these two indexes and
options on individual securities.

The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on
individual securities commenced in July 2001. Futures contracts on individual stocks were
launched in November 2001. The derivatives trading on NSE commenced with S&P CNX Nifty
Index futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and
trading in options on individual securities commenced on July 2, 2001. Single stock futures were
launched on November 9, 2001. The index futures and options contract on NSE are based on
S&P CNX Trading and settlement in derivative contracts is done in accordance with the rules,
byelaws, and regulations of the respective exchanges and their clearing house/corporation duly
approved by SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are
permitted to trade in all Exchange traded derivative products.

The following are some observations based on the trading statistics provided in the NSE report
on the futures and options (F&O):

•Single-stock futures continue to account for a sizable proportion of the F&O segment. It
constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this
phenomenon is that traders are comfortable with single-stock futures than equity options, as the
former closely resembles the erstwhile badla system.

• On relative terms, volumes in the index options segment continue to remain poor. This may be
due to the low volatility of the spot index. Typically, options are considered more valuable when
the volatility of the underlying (in this case, the index) is high. A related issue is that brokers do
not earn high commissions by recommending index options to their clients, because low
volatility leads to higher waiting time for round-trips.

• Put volumes in the index options and equity options segment have increased since January
2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in
June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming
pessimistic on the market.
• Farther month futures contracts are still not actively traded. Trading in equity options on most
stocks for even the next month was non-existent.

• Daily option price variations suggest that traders use the F&O segment as a less risky
alternative (read substitute) to generate profits from the stock price movements. The fact that the
option premiums tail intra-day stock prices is evidence to this. If calls and puts are not looked as
just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one
impact on the option premiums.

 The spot foreign exchange market remains the most important segment but the
derivative segment has also grown. In the derivative market foreign exchange swaps
account for the largest share of the total turnover of derivatives in India followed by
forwards and options. Significant milestones in the development of derivatives market
have been (i) permission to banks to undertake cross currency derivative transactions
subject to certain conditions (1996) (ii) allowing corporates to undertake long term
foreign currency swaps that contributed to the development of the term currency swap
market (1997) (iii) allowing dollar rupee options (2003) and (iv) introduction of currency
futures (2008). I would like to emphasise that currency swaps allowed companies with
ECBs to swap their foreign currency liabilities into rupees. However, since banks could not
carry open positions the risk was allowed to be transferred to any other resident corporate.
Normally such risks should be taken by corporates who have natural hedge or have
potential foreign exchange earnings. But often corporate assume these risks due to interest
rate differentials and views on currencies.
This period has also witnessed several relaxations in regulations relating to forex markets
and also greater liberalisation in capital account regulations leading to greater integration
with the global economy.

 Cash settled exchange traded currency futures have made foreign currency a separate
asset class that can be traded without any underlying need or exposure a n d on a leveraged
basis on the recognized stock exchanges with credit risks being assumed by the central
counterparty
 OBJECTIVE OF STUDY

 TO UNDERSTAND THE CONCEPT OF DERIVATIVES AND DERIVATIVE

TRADING.

 TO UNDERSTAND THE PRODUCT OFFERINGS OF INDIA INFOLINE WITH

RESPECT TO FUTURES.

 TO KNOW THE AWARENESS OF DERIVATIVE AMONG THE CUSTOMERS OF

INDIA INFOLINE.

 TO FIND OUT WHAT PROPORTION OF INVESTOR ARE INVESTING IN SUCH

DERIVATIVE ALONG WITH THEIR INVESTMENT PATTERN AND PRODUCT
PREFERENCES.


 RESEARCH METHODOLOGY

4.1: RESEARCH DESIGN-

Non probability

The non –probability respondents have been researched by selecting the persons who do the trading
in derivative market. Those persons who do not trade in derivative market have not been interviewed.

DESCRIPTIVE RESEARCH
The research design specifies the methods and procedures for conducting a particular study.
The type of research design applied here is ‘DESCRIPTIVE’ as the objective is to check the
position of DERIVATIVE MARKET among the customer of IIFL. The objectives of the study
have restricted the choice of research design upto descriptive research design. This research will
help the firm to know the investors perception and the factors affecting their investing behavior.

4.2: SAMPLING METHODOLOGY-

SAMPLING TECHNIQUE-Initially a rough draft was prepared a pilot study was done to
check the accuracy of the questionnaire and certain change were made to prepare the final
questionnaire to make it more judgmental.

SAMPLING UNIT-The customers of INDIA INFOLINE who were asked to fill out the
questionnaire is the sampling unit. These respondents comprise of the person dealing in stock
market. The people have been interviewed in the companies, telephonic interviews and through
internet.

SAMPLE SIZE-The sample size was restricted to 100 respondents.

SAMPLING AREA-The area of research was INDIA INFOLINE Company.

TIME – 2 months.
 4.4: DATA COLLECTION
There are two types of sources of data which is being used for the study-

PRIMARY SOURCE OF DATA-

Preparing a questionnaire is collecting primary source of data

and its was collected by interviewing the investors.

SECONDARY SOURCE OF DATA-

For having the detailed study about this topic, it is necessary

to have some of the secondary information, which is collected from the following:-

 Magazines
 Journals
 Books
 Internet

4.5: Analysis –
Education qualification of the investors. .

Educational No. of
Background Result
UNDERGRADUAT 12
E
GRADUATE 20
POST GRADUATE 46
PROFESSIONAL 22
 UNDERGRADUATE
PROFESSIONAL22 12%
22%
GRADUATE
20%

POST GRADUATE
46%

To know that whether the investors are trading in derivative market or not.

Frequency

Frequencies Percentage

Yes 37 37.0

No 63 63.0

Total 100 100.0

 TRADING PREFERENCE

37%

YES
NO

63%

Inference: from the above graph out of 100 investors, only 37% investors means 37 respondent
are trading in derivative market and 63% means 63 respondents are not trading in derivative
market.

Reason why investors are not trading in trading in derivative market.

Reasons Frequency Percent

Lack of knowledge 13 20.6

Lack of awareness 9 14.3

High risky 31 49.2

Huge amount of 8 12.7

investment

Other 2 3.2

Total 63 100.0
 REASON FOR NOT INVESTING

OTHER
3% LACK OF KNOWLEDGE
HUGE INVESTMENT 21%
13%
LACK OF AWARENESS
14%

HUGE RISK
49%

Inference: From the above graphical representation you can see that 49.2% investors think that
the derivatives are high risky whereas 3.2% investors don’t have specify their reasons for not
trading in derivative market.

To know that why investors are trading in derivative market.

Frequency Percent

Don’t trade 63 63.0

Huge return 28 28

Hedge against risk 5 5

More reliable 3 3

More liquid 1 1

Total 100 100

 OBJECTIVE OF TRADING

MORE RELIABLE MORE LIQUID

3% 1%
HEDGE AGAINST RISK
5%
HUGE RETURN
28%

DON’T TRADE
63%

Inference: From the above graph we can see that 32.5% investors are most preferred the
objective of high return and 1% investors preferred liquidity while they are trading in derivative
market.

To know the preference of the investors while they are trading in derivative market.

Frequency Percent

Don’t trade 63 63.0

Index futures 2 1.0

Stock futures 2 1.0

Index option 5 2.5

Stock option 65 32.5

Total 100 100

 OBJECTIVE OF TRADING

MORE RELIABLE MORE LIQUID

3% 1%
HEDGE AGAINST RISK
5%
HUGE RETURN
28%

DON’T TRADE
63%

Preference in terms of investment derivative market.

Frequency Percentage

Don’t trade 63 63

Long term 16 16

Medium term 10 10

Short term 11 11

Total 100 100

 TIME PERIOD
SHORT TERM
11%
MEDIUM TERM
10%

LONG TERM
16% DON’T TRADE
63%

Inference: From the above graph we can see that 16% their money for long term while 10% for
medium term and 11% for short term.

To know the annual income of the investor trading in derivatives.

Frequency Percent

Don’t trade 63 63.0

Less than 1,50,000 2 2

1,50,000-5,00,000 6 6

5,00,000-10,00,000 12 12

More than 10,00,000 17 17

Total 100 100

 INVESTORS ANNUAL INCOME
ABOVE 10,00,000
8%
5,00,000-10,00,000
15%

1,50,000-5,00,000
11%
DON’T TRADE
63%

BELOW 1,50,000
3%

Inference: From the above graph we can see that 3% investors have less than 1,50.000 annual
income, 11% of investors have the 1,50,000-5,00,000 annual income, 15%investors have the 5
to 10 lakhs income and 8% investors have 10 lakhs and above annual income.

To know investors are how much percentage of their income trade in derivative market.

Frequency Percent

Don’t trade 63 63.0

Less than 5% 8 8

5%-10% 15 15

10%-20% 12 12

More than 20% 2 2

Total 100 100

 % OF INCOME INVESTED

MORE THAN 20%

10%-20% 2%
12%
5%-10%
15%

DON’T TRADE
63%

LESS THAN 5%
8%

Inference: From the above graph we can see that 15% investors invests in 5% to 10% of their
income in the derivative market. While only 2% investors are investing more than 20% of their
income.

To know the investors expectation towards their investment in derivative market.

Frequency Percent

Don’t trade 63 63.0

5%-10% 11 11

11%-15% 12 12

16%-20% 8 8

More than 20% 6 6

Total 100 100

 EXPECTED RETURN
MORE THAN 20%
15%-20% 6%
10%-15% 8%
12%

DON’T TRADE
5%-10% 63%
11%

Inference: From the above we can see that 12% investors are expect the 11% to 15% of their
investment .and 6% investors are expect the more than 20% rate of return.

To know that investors are satisfied with the performance of the derivative market or not in terms
of expected return.

frequency Percentage

Don’t trade 63 63
satisfied 21 21
Not satisfied 14 14
Neutral 2 2
Total 100 100
 LEVEL OF SATISFACTION
NEUTRAL
NOT SATISFIED 2%
15%

SATISFIED
21%
DON’T TRADE
62%

Inference: From the above Graph we can see that 21% are agreeing for satisfaction and 15%
are not satisfied.
 FINDINGS
 The awareness regarding Derivative among investor is 91 percent.

 Investors who invest in derivative market have a income of above 5,00,000

 Investors generally perceive slump in stock market kind of risk while investing in
derivative market.
 People are generally not investing in derivative market due to lack of knowledge and
difficulty in understanding and it is very risky also.
 Most of investor purpose of investing in derivative market is to earn huge return.
 People generally prefer to take advice from news network before investing in derivative
market.
 Most of investors participate in stock index futures.
 From this survey we come to know that most of investors make a contract of 3 month
maturity period.
 Investors invest regularly in derivative market.
 The result of investment in derivative market is generally moderate but acceptable.
 RECOMMENDATION
1. Only 37 investors are trading whereas 63 are not trading .so attract them for trading.

2. 9 are lack of awareness so make them aware with the derivative so increase the
customer.

4. RBI should play a greater role in supporting derivatives


5. There must be more derivative instruments aimed at individual investors.

6. SEBI should conduct seminars regarding the use of derivatives to educate individual
investors.

7. Out of 63, 13 don’t have knowledge for derivative so provide them knowledge for trading
in derivative market.

8. Those who are not satisfied with the derivative by knowing their behavior of investment
make them satisfied. Because negative word mouth of the customers fall down the business.
And good word of mouth builds the business.
 LIMITAITONS OF STUDY

1. LIMITED TIME:
The time available to conduct the study was only 2 months. It being a wide topic, had a
limited time.

2. LIMITED RESOURCES:
Limited resources are available to collect the information about the commodity trading.

3. VOLATALITY:
Share market is so much volatile and it is difficult to forecast anything about it whether you
trade through online or offline.
 BIBLOGRPHY

1. Donald R Cooper & Pamela S Schindler, “Business Research Methods”, Eighth Edition, Tata
McGraw-Hill, New York, 2003.
2. N D Vohra and B R Bagri, “Future and options” 2nd Edition, seventh reprint 2006 Tata
McGraw-Hill Publishing Company Ltd, 2006.

3. Naresh K. Malhotra, Marketing Research an Applied Orientation, Fourth Edition, Pearson

Education.

4. C.R. Kothari, Research Methodology Methods & Techniques, Second Edition, New Age
Publications.
 ANNEXURE
QUESTIONNAIRE
Name:-_____________________ Educational Qualification:-________________

Occupation:-____________________ Contact No. :-________________

1. Are you trading in derivative market?

‰ Yes ‰ No

2. Reason for not investing in derivative market?

‰ Lack of knowledge ‰ Lack of awareness

‰ Huge risk ‰ huge amount of investment

‰ Other

3. What is the objective to invest in derivative market?

‰ Huge return ‰ hedge against risk

‰ More reliable ‰ more liquid

4. Your preference in terms of investment derivative market?

‰ Short term ‰ Medium term ‰ Long term

5. Income Range:

‰ Below 1,50,000 ‰ 1,50,000 – 3,00,000

‰3,00,000 – 5,00,000 ‰ Above 5,00,000

6. The % of your income you invest in derivative market?

‰ Less than 5% ‰ 5%-10%

‰ 10%-20% ‰ More than 20%

7. What is the rate of return you expect from derivative market ?

‰ 5%-10% ‰ 11%-15 %

‰ 16%-20% ‰ above 20%

8. Are you satisfied with the current performance of derivative market in

Terms of expected return?

‰ Yes ‰ No ‰ Neutral