A

Project Report
ON
“Study On Derivatives In The Stock Market & Their
Importance For Hedging”
FOR
“KOTAK SECURITIES”
IN
PARTIAL FULFILLMENT OF
BACHELOR OF BUSINESS ADMINISTRATION
(T.Y.B.B.A SPECIALISATION - HRM/FINANCE/MARKETING)

Savitribai Phule Pune University

SUBMITTED TO

K.V. N NAIK SHIKSHAN PRASARAK SANSTHA’S

ARTS, COMMERCE AND SCIENCE COLLEGE
CANADA CORNER, NASHIK – 02
Under guidance of
Prof. SUPRIYA PAWAR
ACADEMIC YEAR
2021-2022
Prepared by
SARVESH RAJENDRA DHATRAK (Seat no: -14 )
 PREFACE

Derivatives have changed the world of finance as pervasively as the Internet

has changed communications .Well they are everywhere nowadays. The most
significant event in finance during the past decade has been the extraordinary
development and expansion of financial derivatives. These instruments
enhance the ability to differentiate risk and allocate it to those investors who
are most able and willing to take it -- a process that has undoubtedly improved
national productivity, growth and standards of living.
Derivatives products provide certain important economic benefits such as risk
management or redistribution of risk away from risk-averse investors towards
those more willing and able to bear risk. Derivatives also help price discovery,
i.e. the process of determining the price level for any asset based on supply and
demand. All markets face various kinds of risks. This has induced the market
par-ticipants to search for ways to manage risk.
The derivatives are one ofthe categories of risk management tools. As this
consciousness about risk management capacity of derivatives grew, the
markets for derivatives de-veloped. Derivatives markets generally are an
integral part of capital markets in developed as well as in emerging market
economies. These instruments assist business growth by disseminating
effective price signals concerning exchange rates, indices and reference rates or
other assets and thereby render both cash and derivatives.
 ACKOWLEDGEMENT
It is a great pleasure to me in acknowledging my deep sense of gratitude
to all those who have helped me in completing this project successfully. First
of all,I would like to thank Savitribai Phule Pune University for providing me
an opportunity to undertake a project as a partial fulfilment of BBA degree. In
addition providing guidance in developing in my project.

I greatly appreciate the staff of the surveyed business unit, who

responded promptly and enthusiastically to my requests for frank comments
despite their congested schedules. I am indebted to all of them, who did their
bestirring improvements through their suggestions.

I would like to thanks Dr. Vasant Wagh (Principal), Mr. Sudam Bhabad
(HOD, & Project Guide) Ms. Supriya Pawar, Ms. Neeta Sangale, Ms. Shibani
Paul, & department staff whose valuable guidance and encouragement at every
phase of the project has helped to prepare this project successfully.

All the faculties, office staff and library staff of Kr. V.N. NAIK College
Nasik and friends who helped me in some or other way in making this project.

THANK YOU.

PLACE: NASHIK Name of the student

DATE: / /2022 Sarvesh Rajendra Dhatrak

 Index
CHAPTER TITLE PAGE NO

Chapter- 1 Introduction to Project

1.1 Introduction
1.2 Basic Theoretical Concept.
1.3 Need For Study.
1.4 Objective of Study.
1.5 Literature Review
1.6 Limitation of Study.
Chapter 2 Company Profile
2.1 About Company
2.2 Vision & Mission of Organization.
2.3 History of Organization.
2.4 Product of Organization.
Chapter-3 Research Methodology
Chapter- 4 Data Analysis & Interpretation
Chapter -5 Conclusion.
Chapter- 6 Suggestions.
Chapter- 7 Bibliography.
 INTRDUCTION

Among all the innovations that have flooded the international financial
markets. financial derivatives occupy the driver's seat. These specialized
instruments facilitate the shuffling and redistribution of the risks that an
investor faces. Thus aids in the process of diversifying one's portfolio. The
volatility in the equity markets over the past years has resulted in greater use of
equity derivatives. The volume of the exchange traded equity futures and
options in most of the mature markets have seen a significant growth.

It goes beyond that the local derivative in the emerging markets have witnessed
widespread use of the derivative instrument for a variety of reasons. This
continuous growth and development by the emerging market participants has
resulted in capital inflows as well as helped the investors in risk protection
through hedging.

Derivatives trading commenced in India in June 2000 after SEBI granted the
approval to this effect in May 2000. SEBI permitted the derivative trading on
two stock exchanges, i.e. and BSE, and NSE, their clearing house/corporation
to commence trading and settlement in approved derivative contracts. Begin
with SEBI's approved trading in index futures contracts based on S&P CNX
Nifty Index and BSE-30 (Sensex) Index. This was followed by approval for
trading in options based on these two indices and options on individual
securities. The trading in index options commenced in June 2001 and trading in
options on individual securities would commence in July 2000. While trading
in futures of individual stocks started from November 2001.
In June 2003, SEBI and RBI approved the trading on interest rate derivative
instruments only in NSE. Introduced trading of interest rate futures contracts
on June 24, 2003 on 91-day Notional T-Bills and 10-year Notional 6% coupon
bearing as well as zero coupon Bonds. Futures and Options were also
introduced on CNX IT Index in August 2003. The total exchange traded
derivatives witnessed a value of Rs.5, 423, 333 million during 2002-03 as
against Rs. 1,038,480 million during the preceding year. While NSE accounted
for about 99.5% of total turnover. BSE accounted for less than 1% in 2002-03.

The market witnessed higher trading levels from June 2001 with introduction
of index options, and still higher volumes with the introduction of stock
options in July 2001. In the year 2002 has been a remarkable year for the
global derivatives market. This year witnessed NSE making huge strides and
also moved upward in the global ranking. According to the Futures Industry
Associations in the year 2002, NSE ranked 30th in the global futures and
options volume, whereas it ranks 2nd in the world, in terms of stock futures.

Securities and exchange Board of India (SEBI) signed a memorandum of

understanding (MOU) with United States Commodity Futures Trading
Commission (CFTC) in Washington on April 28, 2004. The MOU was signed
by Mr. G. N. Bajpal, Chairman, SEBI and Mr. James E.Newsome, Chairman,
CFTC. The MOU aims to strengthen communication channels and establish a
framework for assistance and mutual cooperation between the two
organizations.
The MOU marks the beginning of greater collaboration between SEBI and
CFTC too effectively

Regulate and develop futures markets, in view of greater cross-border trade and
cross market linkages brought about by the globalization of financial markets.
The two authorities intend to consult periodically about matters of mutual
interest in order to promote cooperation and market

Integrity and to further the protection of futures and options market

participants. In furtherance of the objective of promoting the development of
futures and options regulatory mechanisms would also provide technical
assistance for development of futures markets in India..

In India, the statutory, basis for regulating commodity futures' trading is found
in the Forward Contracts (Regulation) Act. 1952. which (apart from being an
enabling enactment, laying down certain fundamental ground rules) created the
permanent regulatory body known as the Forwards Markets Commission. This
commission holds overall charge of the regulation of all forward contracts and
carries out its functions through recognized association.

Too much regulation and too little regulation are both bad in respect of these
markets. Too much regulation will have a throttling effect and prevent the
entry and growth of the market. Too little regulation will lead to lack of enough
protection to investors and fear of failures in the market. The role of regulator
has many objectives the purpose of regulation is to protect the interests of
investors, infuse confidence in the market and prevents unfair trade practices.
DERIVATIVES

Derivatives are one of the most multifaceted instruments. The word derivative
comes from the word to derive. It indicates that it has no independent value. A
derivative is a contract whose value is derived from the value of another asset,
known as the underlying asset, which could be a share, a stock market index,
an interest rate, a commodity, or a currency. The underlying is the
identification tag for a derivative contract. When the price of the underlying
changes the value of the derivative also changes. Without an underlying asset,
derivatives do not have any meaning. For example, the value of a gold futures
contract derives from the value of the underlying asset i.e., gold. The prices in
the derivatives market are driven by the spot or cash market price of the
underlying asset, which is gold in this example.The basic purpose of these
instruments is to provide commitments to prices for future dates for giving
protection against adverse movements in future prices, in order to reduce the
extent of financial risks.

Indian Derivative Market

As the initial a step towards the introduction of derivatives trading in India,

SEBI set up a 24 member committee under the chairmanship of Dr. L. C.
Gupta on November 18, 1996 to develop an appropriate regulatory framework
for derivatives trading in India. The committee submitted its report on March
17, 1998 recommending that derivatives should be declared as securities so that
regulatory framework applicable to the trading of securities could also govern
the trading of derivatives. Subsequently, SEBI set up a group in June 1998
under the chairmanship of prof.J.R.Verma, to recommend submitted its report
in October 1998. It worked out the operational details of the margining system,
a methodology for charging initial margins, membership details and net-worth
criterion, deposit requirements and real-time monitoring of positions
requirements.

The exchange-traded derivatives started in India in June 2000 with SEBI

permitting BSE and NSE to introduce the equity derivative segment. To begin
with, SEBI approved trading in index futures contracts based on nifty and
Senses, which commenced trading in June2000.later, trading in index options
commenced in June 2001 and trading in options on individual stocks
commenced in July 2001. Future contracts on individual stocks started in
November 2001. Metropolitan Stock Exchange of India limited (MESI) started
trading in derivative products in February 2013. Derivatives market in India
has a history dating back in 1875. The Bombay Cotton Trading Association
started future trading in this year. History suggests that by 1900 India became
one of the world’s largest futures trading industry. However after
independence, in 1952, the government of India officially put a ban on cash
settlement and options trading. This ban on commodities future trading was
uplift in the year 2000.

The creation of National Electronics Commodity Exchange made it possible.In

1993, the National stocks Exchange, an electronics based trading exchange
came into existence. The Bombay stock exchange was already fully functional
for over 100 years then.Over the BSE, forward trading was there in the form of
Badla trading, but formally derivatives trading kicked started in its present
form after 2001 only. The NSE started trading in CNX Nifty index futures on
June 12, 2000, based on CNX Nifty 50 index.

Commodity derivatives: Commodity derivatives are investment tools that

allow investors to profit from certain commodities without possessing them.
The buyer of a derivatives contract buys the right to exchange a commodity for
a certain price at a future date. The buyer may be buying or selling the
commodity.

Financial derivative: A financial derivative is a contract between two or more

parties whose value is based on an agreed-upon underlying financial asset (like
a security) or set of assets (like an index). Common underlying instruments
include bonds, commodities, currencies, interest rates, market indexes, and
stocks.

Forwards: Forwards are over the counter (OTC) derivatives that enable buying
or selling an underlyingon a future date, at an agreed upon price. The terms of
a forward contract are as agreed between counterparties.

Futures: Futures are exchange traded forwards. A future is a contract for

buying or selling a specific underlying, on a future date, at a price specified
today, and entered through a formal mechanism on an exchange. The terms of
the contract are specified by the exchange.

Options: An option is a contract that gives the right, but not an obligation, to
buy or sell the underlying on or before a stated date and at a stated price. While
buyer of option pays the premium and buys the right, writer/seller of option
receives the premium with obligation to sell/buy the underlying asset, if the
buyer exercises his right.

Swaps: A swap is an agreement made between two parties to exchange cash

flow in the future according to a prearranged formula. Swaps are, broadly
speaking, series of forward contracts. Swaps help market participants manage
risk associated with volatile interest rates, currency exchange rates and
commodity prices.

Exotic Derivatives: Exotic Derivatives usually refers to more complex,

unusual and specific derivative contracts that depend on the value of some
underlying asset or defined set of assets.

LEAPS: LEAPS (an acronym for Long Term Equity Anticipation Security) are
options of longer terms than other more common options. In traditional short-
term options, LEAPS are available in two forms, calls and puts.
HEDGING

A hedge is an investment that is made with the intention of reducing the risk
of adverse price movements in an asset. Normally, a hedge consists of taking
an offsetting or opposite position in a related security. A hedge is an
investment position intended to offset potential losses or gains that may be
incurred by a companion investment. A hedge can be constructed from many
types of financial instruments, including, stocks, exchange-traded
funds, insurance, forward contracts, swaps, options, gambles, many types
of over-the-counter and derivative products, and futures contracts.

Public futures markets were established in the 19th century to allow

transparent, standardized, and efficient hedging of
agricultural commodity prices; they have since expanded to include futures
contracts for hedging the values of energy, precious metals, foreign currency,
and interest rate fluctuations.

Hedging is recognizing the dangers that come with every investment and
choosing to be protected from any untoward event that can impact one’s
finances. One clear example of this is getting car insurance. In the event of a
car accident, the insurance policy will shoulder at least part of the repair costs.
1.1 Basic Theoretical Concept

 DERIVATIVES
With the opening of the economy to multinational and the adoption of the
liberalized economic policies the economy is driven more towards the free
market economy. The complex nature of the financial structuring is self
involves the utilization of multicurrency transaction. It exposes the clients,
particularly corporate clients to various risks such as exchange rate risk,
interest risk, economic risk & political risk
In the present state of the economy there is an imperative need for the
corporate clients to protect their operating profits by shifting some of the
uncontrollable financial risk to those who are able bear and manage them.
Thus, risk management becomes a must for survival since there is a high
volatility in the present's financial markets
In the context, derivatives occupy an important place as a risk reducing
machinery. Derivatives are useful to reduce of the risks. In fact, the financial
service companies can play a very dynamic role in dealing with such risk. They
can ensure that the above risks are hedged by using derivatives like forwards,
futures, options, swaps
In a broad sense, many commonly used instruments can be called derivatives
since they derive their value from underlying assets. For instance, equity share
its self is a derivatives, since it derives its value from the underlying assets.
Similarly one takes an insurance against his house covering all risks
DEFINITION
Derivatives are the financial instruments, which derive their value from some
other financial instruments, called the underlying. The foundation of all
derivatives market is the underlying market, which could be spot market for
gold, or it could be a pure number such as the level of the wholesale price
index of a market price.
“A derivative is a financial instrument whose value depends on the Value of
other basic underlying variables”
-"John c hull"

According to the Securities Contract (Regulation) Act, 1956, derivatives

include: A security derived from a debt instrument, share, and loan whether
secured or unsecured, risk instrument or contract for differences or any other
form of Security. A contract, which derives its value from the prices or index
of prices of underlying securities.
Therefore, derivatives are specialized contracts to facilitate temporarily for
hedging which is protection against losses resulting from unforeseen price or
volatility changes. Thus, derivatives are a very important tool of risk
management.
Derivatives perform a number of economic functions like price discovery, risk
transfer and market completion. The simplest kind of derivative market is the
forward market. Here a buyer and seller write a contract for delivery at a
specific future date and a specified future price. In India, a forward market
exists in the form of the dollar rupee market. But forward market suffers from
two serious problems; Counter party risk resulting in comparatively high rate
of contract noncompliance And poor liquidity.
Futures markets were invented to cope with these two difficulties of forward
markets. Futures are standardized forward contracts traded on an organized
stock exchange. In essence, a future contract is a derivative instrument whose
value is derived from the expected price of the underlying security or asset or
index at a pre-determined future date.
Derivatives are financial contracts that are designed to create market price
exposure to changes in an underlying commodity, asset or event. In general
they do not involve the exchange or transfer of principal or title. Rather their
purpose is to capture, in the form of price changes, some underlying price
change or event. The tem derivative refers to how the prices of these contracts
are derived from the price of some underlying security or commodity or from
some index, interest rate, exchange rate or event. Examples of derivatives
include futures, forwards, options and swaps, and these can be combined with
each other or traditional securities and loans in order to create hybrid
instruments or structured securities.
Players of trading in Futures & Option

The minimum quantity trade in is one market lot. The market lot is different for
on NSE Derivatives stocks/index. Time to time list will keep changing
CNXIT ICICI Oriental Bank
NIFTY Infosys PNB
ACC IOC Polaris
Andhra Bank MTNL Ranbaxy
Bajaj Auto ONGC Wipro
Bank of Baroda Nalco REL
Bank of India Tisco Union Bank
BEL M&M TCS
Dell Maruti Tata TEA
HCL Tech Grasim Ind ITC
BHEL IPCL RIL
BPCL Hero Honda I-Flex
Canada Bank HDFC Bank HPCL
Cipla HLL Tata Power
Gail Hindalco Gujrat Abuja
  DERIVATIVES IN INDIA

A derivative is a security or contract designed in such a way that its price is

derived from the price of an underlying asset. For instance, the price of a gold
futures contract for October maturity is derived from the price of gold.
Changes in the price of the underlying asset affect the price of the derivative
security in a predictable way. The term derivatives can simply be understood as
those items that do not have their own independent values. Rather they have
derived values. Derivatives have a significant place in finance and risk
management. A Derivative is financial instrument whose pay-off is derived
from some other asset which is called an underlying asset.

Evolution of derivatives

In the 17th century, in Japan, the rice was been grown abundantly; later the
trade in rice grew and evolved to the stage where receipts for future delivery
were traded with a high degree of standardization. This led to forward trading.
In 1730, the market received official recognition from the "Tokugawa
Shogunate" (the ruling clan of shoguns or feudal lords). The Dojima rice
market can thus be regarded as the first futures market, in the sense of an
organized exchange with standardized trading terms.
The first futures markets in the Western hemisphere were developed in the
United States in Chicago. These markets had started as spot markets and
gradually evolved into futures trading. This evolution occurred in stages. The
first stage was the starting of agreements to buy grain in the future at a pre-
determined price with the intension of actual delivery. Gradually these
contracts became transferable and over a period of time, particularly delivery
of the physical produce. Traders found that the agreements were easier to buy
and sell if they were standardized in terms of quality of grain, market lot and
place of delivery. This is how modern futures contracts first came into being.
The Chicago Board of Trade (CBOT) which opened in 1848 is, to this day the
largest futures market in world.
  Kinds of financial derivatives
1) Forwards
2) Futures
3) Options
4) Swaps

1) Forwards
A forward contract refers to an agreement between two parties, to exchange an
agreed quantity of an asset for cash at a certain date in future at a
predetermined price specified in that agreement. The promised asset may be
currency, commodity, instrument etc, In a forward contract, a user (holder)
who promises to buy the specified asset at an agreed. price at a future date is
said to be in the long position. On the other hand, the user who promises to sell
at an agreed price at a future date is said to be in 'short position".

2) Futures
A futures contract represents a contractual agreement to purchase or sell a
specified asset in the future for a specified price that is determined today. The
underlying asset could be foreign currency, a stock index, a treasury bill or any
commodity. The specified price is known as the future price. Each contract also
specifies the delivery month, which may be nearby or more deferred in time.
The undertaker in a future market can have two positions in the contract: -
a) Long position is when the buyer of a futures contract agrees to purchase the
underlying asset.
b) Short position is when the seller agrees to sell the asset. Futures contract
represents an institutionalized, standardized form of forward contracts. They
are traded on an organized exchange, which is a physical place of trading floor
where listed contract are traded face to face.
A futures trade will result in a futures contract between 2 sides- someone going
long at a negotiated price and someone going short at that same price. Thus, if
there were no transaction costs, futures trading would represent a Zero sum
game' what one side wins, which exactly match what the other side loses.
Types of futures contracts

a) Agricultural futures contracts:

These contracts are traded in grains, oil, livestock, forest products, textiles and
foodstuff. Several different contracts and months for delivery are available for
different grades or types of commodities in question. The contract months
depend on the seasonality and trading activity.

b) Metallurgical futures contract:

This category includes genuine metal and petroleum contracts. Among the
metals, contracts are traded in

1. Gold.
2. Silver.
3. Platinum and
4. Copper. Of the petroleum products, only heating oil, crude oil and
gasoline is traded.

c) Interest rate futures contract

These contracts are traded on treasury bills, notes, bonds, and banks
certification of deposit, as well as Eurodollar.

d) Foreign exchange futures contract

These contracts are trade in the British Pound, the Canadian Dollar, the
Japanese Yen, the Swiss Franc and the Deutsche Mark. Contracts are also
listed on French Francs, Dutch Guilders and the Mexican Peso, but these have
met with only limited success.

3) Options

An option contract is a contract where it confers the buyer, the right to either
buy or to sell an underlying asset (stock, bond, currency, and commodity) etc.
at a predetermined price, on or before a specified date in the future. The price
so predetermined is called the *Strike price' or 'Exercise price'. Depending on
the contract terms, an option may be exercisable on any date during a specified
period or it may be exercisable only on the final or expiration date of the period
covered by the option contract.
Option Premium
In return for the guaranteeing the exercise of an option at its strike price, the
option seller or writer charges a premium, which the buyer usually pays
upfront. Under favorable circumstances the buyer may choose to exercise it.
Alternatively, the buyer may be allowed to sell it. If the option expires without
being exercised, the buyer receives no compensation for the premium paid.

Writer
In an option contract, the seller is usually referred to as "writer", since he is
said to write the Contract. If an option can be excised on any date during its
lifetime it is called an American Option. However, if it can be exercised only
on its expiration date, it is called an European Option.

Option instruments

a) Call Option
A Call Option is one, which gives the option holder the right to "buy" an
underlying asset at a pre-determined price.

b) Put Option
A put option is one, which gives the option holder the right to "sell" an
underlying asset at a pre-determined price on or before the specified date in the
future.

c) Double Option
A Double Option is one, which gives the Option holder both the right to
"buy" and "sell".
Underlying asset at a pre-determined price on or before a specified date in the
future.

4) SWAPS

A SWAP transaction is one where two or more parties’ exchange (swap) one
pre-determined
Payment for another.
There are three main types of swaps: -

a) Interest Rate swap

An Interest Rate swap is an agreement between 2 parties to exchange interest
obligations or Receipts in the same currency on an agreed amount of notional
principal for an agreed period of time.
b) Currency swap
A currency swap is an agreement between two parties to exchange payments or
receipts in One currency for payment or receipts of another. c) Commodity
swap
A commodity swap is an arrangement by which one party (a commodity
user/buyer) agrees to Pay a fixed price for a designated quantity of a
commodity to the counter party (commodity producer/seller), who in turn pays
the first party a price based on the prevailing market price (or an accepted
index thereof) for the same quantity.
Derivatives are financial instruments whose values depend on the values of
other, more basic underlying assets. Exchange traded financial derivatives were
introduced in India in June 2000 at the two major stock exchanges, NSE and
BSE. Derivatives are used by:
1. Hedgers: For protecting against adverse movement. Hedging is a
mechanism to reduce price risk inherent in open positions. Derivatives are
widely used for hedging. A Hedge can help lock in existing profits. Its purpose
is to reduce the volatility of a portfolio, by reducing the risk.
2. Speculators: To make quick fortune by anticipating/forecasting future
market movements. Hedgers wish to eliminate or reduce the price risk to which
they are already exposed. Speculators, on the other hand are those class of
investors who willingly take price risks to profit from price changes in the
underlying. While the need to provide hedging avenues by means of derivative
instruments is laudable, it calls for the existence of speculative traders to play
the role of counter-party to the hedgers. It is for this reason that the role of
speculators gains prominence in a derivatives market.
3. Arbitrageurs: To earn risk-free profits by exploiting market imperfections.
Arbitrageurs profit from price differential existing in two markets by
simultaneously operating in the two different markets.
  DERIVATIVE MARKET IN INDIA
An important step towards introduction of derivatives trading in India was the
Promulgation of the Securities Laws (Amendment) Ordinance, 1995, which
lifted the Prohibition on "options in securities" (NSEIL, 2001). However, since
there was no Regulatory framework to govern trading of securities, the market
could not develop.
SEBI Set up a committee in November 1996 under the chairmanship of Dr.
L.C. Gupta to Develop appropriate regulatory framework for derivatives
trading. The committee suggested that if derivatives could be declared as
"securities" under SCRA, the appropriate regulatory framework of "securities"
could also govern trading of derivatives. SEBI also set up a group under the
chairmanship of Prof. J.R. Varma in 1998 to recommend risk containment
measures for derivatives trading. The Government decided that a legislative
amendment in the securities laws was necessary to provide a legal framework
for derivatives trading in India.
Consequently, the Securities Contracts (Regulation) Amendment Bill 1998 was
introduced in the Lok Sabha on 4th July 1998 and was referred to the
Parliamentary Standing Committee on Finance for examination and report
thereon. The Bill suggested that derivatives may be included in the definition
of "securities" in the SCRA whereby trading in derivatives may be possible
within the framework of that Act.
The said Committee submitted the report on 17th March 1999. The Committee
was of the opinion that the introduction of derivatives, if implemented, with
proper safeguards and risk containment measures, will certainly give a fillip to
the sagging market, result in enhanced investment activity and instill greater
confidence among investors/participants. The Committee was of the view that
since cash settled contracts could be classified as "wagering agreements" which
can be null and void under Section 30 of the Indian Contracts Act, 1872, and
since index futures are always cash settled, such futures contracts can be
entangled in legal controversy. The Committee, therefore, suggested an
overriding provision as a matter of abandoned caution
"Notwithstanding anything contained in any other Act, contracts in derivatives
as per the SCRA shall be legal and valid". Further, since Committee was
convinced that stock exchanges would be better equipped to undertake trading
in derivatives in sophisticated environment it would be prudent to allow trading
in derivatives by such stock exchanges only. The Committee, therefore,
suggested a clause- "The derivative shall be traded and settled on stock
exchanges and clearing houses of the stock exchanges, respectively in
accordance with the rules and bye-laws of the stock exchange". The Proposed
Bill, which incorporated the recommendations of the said Parliamentary
Committee, was finally enacted in December 1999.

Equity Derivatives in India

 Equity index futures are the most widely traded futures contract while
single stock futures on the whole contribute to a larger percentage of
the traded volumes
 Equity index options are the most widely traded options contract in the
exchange
 FII's are very active in the equity derivative markets in India. Retail
presence is also high in the equity derivative market
Interest Rate and Currency Derivatives in India
 The market for Overnight Index Swaps (OIS) is the most active interest
rate derivative
 OIS is based on the overnight call money benchmark, NSE Mibor
 Other interest rate derivatives include swaps on government bond
benchmarks Currency derivatives is dominated by forward market
though options are picking up

 DERIVATIVES PRODUCTS LEGALLY PERMITTED TO BE

TRADED IN INDIAN

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

traded through stock exchanges approved by SEBI

2. Commodity Trading Commodity futures are permitted. Commodity futures

permitted only for trading in commodities approved by the Government in
Commodity. Exchanges recognized by Forward Markets Commission. Option
contracts commodities trading are not permitted.
3. Foreign Exchange Derivatives - Forward Contracts as approved by RBI
permitted to be transacted by Banks and other approved foreign-exchange
dealers.

4. OTC rupee derivatives in the form of Forward Rate Agreements

(FRAS)/Interest Rate Swaps (IRS)- These were introduced by RBI in India in
July 1999 in terms powers vested with it For Exchange Management Act,
2000. These derivatives enable banks, primary dealers (PDs) and all-India
financial institutions (Fls) to hedge interest.
5. Rate risk for their own balance sheet management and for market-making
purposes. Banks/PDs/Fls can undertake different types of plain vanilla
FRAS/IRS. Swaps having explicit/implicit option features such as
caps/floors/collars are not permitted now.
6. Exchange Traded Interest Rate Derivatives were introduced by RBI/SEBI
during June. 2003. These can be traded through stock exchanges by primary
dealers subject to conditions stipulated by RBI. OTC Rupee derivatives are
presently not permitted.

 CATEGORIES OF DERIVATIVES TRADED IN INDIA

1. Commodities Futures for Coffee. Oil Seeds. Oil (Castor, Palmolein). Pepper,
Cotton. Jute and Jute Goods are traded in the Commodities Futures. Forward
Markets Commission regulates the trading of commodities futures.
2. Index futures based on Sensex and Nifty Index are also traded under the
supervision of SEBI.
3. RBI has permitted Banks, FIs and PDs to enter into forward rate agreement
(FRAS)/interest rate swaps in order to facilitate hedging of interest rate risks
and ensuring orderly development of the derivatives market
4. NSE became the first exchange to launch trading in options on individual
securities. Trading in options on individual securities commenced from July 2,
2001. Option contracts are American style and cash settled and are available on
41 securities stipulated by the Securities & Exchange Board of India (SEBI)
5. NSE commenced trading in futures on individual securities on November 9,
2001. The futures contracts are available on 41 securities stipulated by the
Securities & Exchange Board of India (SEBI).BSE also has started trading in
individual stock options & futures (both Index & Stocks) around the same time
as NSE.

 Trading Strategies of Derivatives

1. Buy downside put as insurance when long stocks

2. Sell upside call to collect premium when upside is limited

3. Buy call spread expecting limited upside

4. Buy put spread expecting limited downside

5. Buy strangle or straddle expecting volatility ahead

6. Synthetic short - buy put sell call

Most PMs buy options not sell

Trading Strategies Buy Straddle

1. Buy both ATM call and put

2. Max gain: unlimited

3. Max loss: time decay (theta)

4. Buy gamma and kappa, pay theta

5. Short dated straddle-buy more gamma

Long dated straddle-buy more kappa

Trading Strategies Buy strangle

1. Buy both OTM call and put

2. Max gain: unlimited

3. Max loss: time decay, theta.

4. You buy gamma and kappa, earn theta

5. Short dated strangle-buy more gamma

6. Long dated strangle-buy more kappa

Diversify your risk comparing to straddle and cheaper

Trading Strategies
John Murphy is a very popular author, columnist, and speaker on the subject of
StockCharts.com is very glad to include his trading in our educational material.
If you find this information useful, please visit the Murphy Morris web site for
additional examples of John's insight.
1. Buy downside put as insurance when long stocks

2. Sell upside call to collect premium when upside is limited

3. Buy call spread expecting limited upside

4. Buy put spread expecting limited downside

5. Buy strangle or straddle expecting volatility ahead

6. Synthetic short-buy put sell call

Buy call option
Expecting more upside

Sell put option

Expecting limited downside

  Derivative Based Instruments

o Derivative Instruments are instruments at which their values are

derived from the value of an underlying physical or financial assets

o Derivative Instruments include:

Forward Contracts Futures Contracts

Salam Contracts Swap Contracts

Option Contracts (Call & Put) Combination & Embedded Contracts

o Derivative Instruments are mainly used as risk management tools

o Participation in risk and reward is an important feature of Islamic

finance & investments

o Management of risk is an integral part of Islamic mode of financing

Call Options

o Call Options are contracts at which the owner of the Call (buyer or long
position holder) after paying a premium (option premium) to the seller
of the Call, gains the right but not the obligation to buy a given asset
with a specific quality at a specific price (strike price) at or until a
specific date (strike date).
o A Call Option is not an obligation
o The seller of a Call Option (short position holder) has no obligations to
sell the asset until the Call is exercised by the Option buyer
o When the Call is exercised the seller is obliged to sell the asset at the
strike price
o Call Option buyer thinks the asset price will rise and the seller thinks the
opposite
o A Call Option buyer usually uses this instrument to insure or hedge the
cost of the needed raw materials or the maximum price he/she wants
to pay for the purchase of an asset
o Call Options are mainly traded in the organized exchanges and to some
degree in the OTC markets.
Short Call Option

Put Options:
o Put Options are contracts at which the owner of the Put (buyer or long
position holder) after paying a premium (option premium) to the seller
of the Put, gains the right but not the obligation to sell a given asset
with a specific quality at a specific price (strike price) at or until a
specific date (strike date).
o A Put Option is not an obligation
o The seller of a Put Option (Short Position holder) has no obligations to
buy the asset until the Put is exercised by the Option buyer
o When the Put is exercised the seller is obliged to buy the asset at the
strike price
o Put Option buyer thinks the asset price will fall and the seller thinks the
opposite
o A Put Option buyer usually uses this instrument to insure or hedge the
income resulting from the sale of an asset or the minimum price he/she
receives from the sale of an asset
o Put Options are mainly traded in the organized exchanges and to some
degree in the OTC markets
Short put option

Underlying Asset Price

An option gives its owner the right to buy or sell an underlying asset on or
before a given date at a fixed price.
Option belong to a broader class of assets called contingent claims
The most popular model for pricing options is the block-scholes model which
was published in 1973 the year in which the Chicago board of options
exchange the first organized options exchange in the world was also setup - it
was a rare occurrence in the field of finance when a seminal theoretical
breakthrough coincided with a major institutional development.
HOW OPTIONS WORK

The options to buy is a call option & the option to sell is a put options
The options holder is the buyer of the option & the option writer is the seller of
the option.
The fixed price at which the option holder can buy & sell the underlying asset
is called the striking price.
The date when the option expires is referred to as the expiration date.
The act of buying or selling the underlying asset as per the option contract is
called exercising the option.
Options traded on an exchange are called exchange-traded options.
Options are said to be:-
1. ATM-At The Money
2. ITM-In The Money
3. OTM-Out of The Money

Call option Put option

ATM exercise price-market price Exercise price = market price

ITM exercise price market price Exercise price > market price
OTM exercise price market price Exercise price < market price

The value of an option if it were to expire immediately is called its intrinsic

value.
The excess of the market price of any option over its intrinsic value is called
the time value of the option.
Exchange traded options are standardized in terms of quantity cycle, expiration
date, strike prices, type of option, & mode of settlement.
  EQUITY OPTIONS IN INDIA

There are two popular types of equity options index options and options on
individual securities.
Types of Equity Option
o Bombay Stock Exchange
o National Stock Exchange

INDEX OPTION:
Index options are options on stock market indices. Currently the
most popular. index options option in India is the option on the S&P CNX
Nifty which is traded on the NSE. The salient features of this contract are as
follows
1. The contract size is 200 times the underlying index.

2. The options contracts have a maximum of three month trading cycle

Near month
Next month
Far month:
A new contract will be introduced on the next trading day

3. It is a European style option contract

4. The expiry day is the last Thursday of the expiry month or previous trading
day if the last Thursday is a trading holiday

6. The contract is cash settled. The settlement is done a day after the
expiry day based on the expiration price as may be decided by the
exchange.
GROWTH OF DERIVATIVES MARKET IN INDIA

Equity derivatives market in India has registered an "explosive growth" and is

expected to continue the same in the years to come. Introduced in 2000,
financial derivatives market in India has shown a remarkable growth both in
terms of volumes and numbers of traded contracts. NSE alone accounts for 99
percent of the derivatives trading in Indian markets. The introduction of
derivatives has been well received by stock market players. Trading in
derivatives gained popularity soon after its introduction. In due course, the
turnover of the NSE derivatives market exceeded the turnover of the NSE cash
market. For example, in 2008, the value of the NSE derivatives markets was
Rs. 130, 90,477.75 Cr. whereas the value of the NSE cash markets was only
Rs. 3,551,038 C. If we compare the trading figures of NSE and BSE,
performance of BSE is not encouraging both in terms of volumes and numbers
of contracts traded in all product categories. Among all the products traded on
NSE in F& O segment, single stock futures also known as equity futures, are
most popular in terms of volumes and number of contract traded, followed by
index futures with turnover shares of 52 percent and 31 percent, respectively.
In case of BSE, index futures outperform stock futures.

Product wise Turnover of F&O at NSE from 2000-2008

Stock future Index future Stock option Index option

52 31 13 4
 NSE DERIVATIVES SEGMENT TURNOVER

Year Index Stock Index Stock Interest Total Average

s future future option option rate daily
future turnover
2010 2583617.9 2558863.5 2358916.9 149498.4 0 7650896.80 46938.0
2009 2 5 0 0 0 2

2008 3820667.2 7548563.2 1362110.8 359136.5 0 13090477.7 52153.3

7 3 8 5 5 0

2007 2539574 3830967 791906 193795 0 7356242 29543

2006 1513755 2791697 338469 180253 0 4824174 19220
2005 772147 1484056 121943 168836 202 2546982 10107
2004 554446 1305939 52816 217207 0 2130610 8388
2003 43952 286533 9246 100131 0 439862 1752
2002 21483 51515 3765 25163 --- 101926 410
2365 --- --- --- 2365 11
 IMPORTANCE OF DERIVATIVES FOR HEDGING

What is Hedging?

Hedging in finance refers to protecting investments. A hedge is an investment

status, which aims at decreasing the possible losses suffered by an associated
investment. Hedging is used by those investors investing in market-linked
instruments. To hedge, you technically invest in two different instruments with
adverse correlation. The best example of hedging is availing of car insurance to
safeguard your car against damages arising due to an accident. The hedging
techniques are not only employed by individuals but also by asset management
companies (AMCs) to mitigate various risks and to avoid the potential negative
impacts. Hedging does not prevent the investments from suffering losses, but it
just reduces the extent of negative impact. Hedging is employed in the
following areas:

Securities Market:
This area includes investments made in shares, equities, indices, and so on. The
risk involved in investing in the securities market is known as equity or
securities risk.

Commodities Market: This area includes metals, energy products, farming

products, and so on. The risk entailed in investing in the commodities market is
referred to as the commodity risk.

Interest Rate: This area includes borrowing and lending rates. The risk
associated with the interest rates is termed as the interest rate risk.
Weather: This might seem interesting, but hedging is possible in this area as
well.

Currencies: This area comprises foreign currencies and has various associated
risks such as volatility and currency risk.

 Types of Hedging Strategies

Hedging strategies are broadly classified as follows:

Forward Contract:
It is a contract between two parties for buying or selling assets on a specified
date, at a particular price. This covers contracts such as forwarding exchange
contracts for commodities and currencies.
Futures Contract:
This is a standard contract between two parties for buying or selling assets at
an agreed price and quantity on a specified date. This covers various contracts
such as a currency futures contract.

Money Markets: These are the markets where short-term buying, selling,
lending, and borrowing happen with maturities of less than a year. This
includes various contracts such as covered calls on equities, money market
operations for interest, and currencies.

How do Investors Hedge?

The AMCs generally employ the following hedging strategies to mitigate

losses:

Asset Allocations:
This is done by diversifying an investor’s portfolio with various classes of
assets. For instance, you can invest 40% in the equities market and the rest in
stable asset classes. This balances your investments.

Structure:
This is done by investing a certain portion of the portfolio in debt instruments
and the rest in derivatives. Investing in debt provides stability to the portfolio
while investing in derivatives protects you from various risks.

Through Options:
This strategy includes options of calls and puts of assets. This facilitates you to
secure your portfolio directly.
 Advantages of Hedging

o Hedging limits the losses to a great extent.

o Hedging increases liquidity as it facilitates investors to invest in various
asset classes.
o Hedging requires lower margin outlay and thereby offers a flexible price
mechanism.
How much do Firms Hedge with Derivatives?

Corporate risk management 1s thought to be an important element of a firm's

overall business strategy. Stulz (1996, pp. 23-24) draws upon extant theories of
corporate risk management to argue ''the primary goal of risk management is to
eliminate the probability of costly lower-tail outcomes - those that would cause
financial distress or make a company unable to carry out its investment
strategy.
Financial derivatives - currency, interest rate, and commodity derivatives - are
one means of managing risks facing corporations. If a firm's derivative
positions generate positive cash flows or value in periods of economic
adversity, then those derivatives are deemed to hedge the firm's risk. Previous
research presents mixed evidence that corporate uses of financial derivatives
are consistent with the extant theories of corporate hedging. With the exception
of industry studies like Tufano (19%) and a detailed case study like Brown
(2001), previous research analyzes categorical data on whether corporations
use financial derivatives, or data on the notional principal of corporate
derivative positions to test whether corporate uses of derivatives accord with
the corporate risk management theories. 2 However, none of the previous
studies documents large-sample evidence on the magnitude of risk hedged by
the firms' financial derivatives.
The primary objective of our study is to provide insight into the importance of
corporations' financial derivatives portfolios in managing risk For a random
sample of 234 large non-financial corporations, we present detailed evidence
on the cash flow and market value sensitivities of financial derivative
portfolios to extreme changes in the underlying assets' prices. That is, for
simultaneous extreme changes in interest rates, exchange rates, and commodity
prices, we estimate the dollar cash flow that a firm would derive from its
derivatives portfolio, referred to as the cash flow sensitivity; and the change in
the market value of the firm's derivatives portfolio, referred to as the market
value sensitivity. For each sample firm, we estimate the derivatives portfolio's
cash flow and market value sensitivities using corporate disclosures about the
types of interest rate, currency, and commodity derivative securities held by a
firm, the notional principals of each type of security, and the derivatives'
remaining time to maturity. Information about corporate derivative positions is
gathered from firms' Form 10-K filings with the Securities and Exchange
Commission (SEC) for the fiscal year 1997.
In estimating the magnitude of risk hedged by a firm's derivatives portfolio, we
make three assumptions intended to ensure that we do not underestimate the
importance of derivatives securities in firms' hedging programs. First, we
assume each firm's entire derivatives portfolio hedges its downside risk
exposure (i.e., the cash flow generated by each derivative security is perfectly
negatively correlated with the firm's unhedged cash flow). Second, we estimate
the sensitivity of each firm's derivatives positions to extreme changes in the
underlying asset prices (i.e., interest rates, currency exchange rates, or
commodity prices), where we define an extreme change as three times the
annual standard deviation of the historical time series of movements in the
asset prices. Finally, we assume that the prices of all three underlying assets
simultaneously experience a three standard deviation change, and that the
effects of these price movements on the cash flows and value of firms'
derivatives positions are perfectly positively correlated.
How Companies Use Derivatives to Hedge Risk
If you are considering a stock investment and read the company uses
derivatives to hedge some risk, should you be concerned or reassured? Warren
Buffett's stand is famous: He has attacked all derivatives, saying he and his
company "view them as time bombs, both for the parties that deal in them and
the economic system...derivatives are financial weapons of mass destruction,
carrying dangers that, while now latent, are potentially lethal."
On the other hand, the trading volume of derivatives has escalated rapidly, and
non-financial companies continue to purchase and trade them in ever-greater
numbers .To help you evaluate a company's use of derivatives for hedging risk,
we'll look at the three most common ways to use derivatives for hedging.

Foreign Exchange Risks

One of the more common corporate uses of derivatives is for hedging foreign
currency risk, or foreign exchange risk, which is the risk a change in currency
exchange rates will adversely impact business results.
Let's consider an example of foreign currency risk with ACME Corporation, a
hypothetical U.S.-based company that sells widgets in Germany. During the
year, ACME Corp sells 100 widgets, each priced at 10 euros. Therefore, our
constant assumption is that ACME sells 1,000 euros worth of widgets.
When the dollar-per-euro exchange rate increases from $1.33 to $1.50 to $1.75,
it takes more dollars to buy one euro, meaning the dollar is depreciating or
weakening. As the dollar depreciates, the same number of widgets sold
translates into greater sales in dollar terms. This demonstrates how a
weakening dollar is not all bad: It can boost export sales of U.S. companies.
Alternatively, ACME could reduce its prices abroad, which, because of the
depreciating dollar, would not hurt dollar sales; this is another approach
available to a U.S. exporter when the dollar is depreciating.
The above example illustrates the "good news" event that can occur when the
dollar depreciates, but a "bad news" event happens if the dollar appreciates and
export sales end up being less. In the above example, we made a couple of very
important simplifying assumptions that affect whether the dollar depreciation is
a good or bad event:
1. We assumed ACME Corp. manufactures its product in the U.S. and
therefore incurs its inventory or production costs in dollars. If instead,
ACME manufactured its German widgets in Germany, production costs
would be incurred in euros. So even if dollar sales increase due to
depreciation in the dollar, production costs will go up too. This effect on
both sales and costs is called a natural hedge: The economics of the
business provide its own hedge mechanism. In such a case, the higher
export sales (resulting when the euro is translated into dollars) are
likely to be mitigated by higher production costs.

2. We also assumed all other things are equal, and often they are not. For
example, we ignored any secondary effects of inflation and whether
ACME can adjust its prices. Even after natural hedges and secondary
effects, most multinational corporations are exposed to some form of
foreign currency risk. Now let's illustrate a simple hedge a company like
ACME might use. To minimize the effects of any USD/EUR exchange
rates, ACME purchases 800 foreign exchange futures contracts against
the USD/EUR exchange rate. The value of the futures contracts will not,
in practice, correspond exactly on a 1:1 basis with a change in the
current exchange rate (that is, the futures rate won't change exactly
with the spot rate), but we will assume it does anyway. Each futures
contract has a value equal to the gain above the $1.33 USD/EUR rate
(only because ACME took this side of the futures position; the counter-
party will take the opposite position).
In this example, the futures contract is a separate transaction, but it is designed
to have an inverse relationship with the currency exchange impact, so it is a
decent hedge. Of course, it's not a free lunch: If the dollar were to weaken
instead, the increased export sales are mitigated (partially offset) by losses on
the futures contracts.
Hedging Interest Rate Risk
Companies can hedge interest rate risk in various ways. Consider a company
expecting to sell a division in one year and receive a cash windfall it wants to
"park" in a good risk-free investment. If the company strongly believes interest
rates will drop between now and then, it could purchase (or take a long position
on) a Treasury futures contract. The company is effectively locking in the
future interest rate.
Here is a different example of a perfect interest rate hedge used by Johnson
Controls (JCI), as noted in its 2004 annual report:
Fair value hedges: The Company [JCI] had two interest rate swaps
outstanding on September 30, 2004, designated as a hedge of the fair value of a
portion of fixed-rate bonds…The change in fair value of the swaps exactly
offsets the change in fair value of the hedged debt, with no net impact on
earnings.3
Johnson Controls is using an interest rate swap. Before it entered into the swap,
it was paying a variable interest rate on some of its bonds (e.g., a common
arrangement would be to pay LIBOR plus something and to reset the rate every
six months). We can illustrate these variable rate payments with a down-bar
chart.
The swap requires JCI to pay a fixed rate of interest while receiving floating-
rate payments. The received floating-rate payments (shown in the upper half of
the chart below) are used to pay the pre-existing floating-rate debt.

JCI is then left only with the floating-rate debt and has therefore managed to
convert a variable-rate obligation into a fixed-rate obligation with the addition
of a derivative. Note the annual report implies JCI has a perfect hedge: The
variable-rate coupons JCI received exactly compensate for the company's
variable-rate obligations.
Commodity or Product Input Hedge
Companies depending heavily on raw-material inputs or commodities are
sensitive, sometimes significantly, to the price change of the inputs. Airlines,
for example, consume lots of jet fuel. Historically, most airlines have given a
great deal of consideration to hedging against crude-oil price increases.
Monsanto produces agricultural products, herbicides, and biotech-related
products. It uses futures contracts to hedge against the price increase of
soybean and corn inventory:
Changes in commodity prices:
Monsanto uses futures contracts to protect itself against commodity price
increases...these contracts hedge the committed or future purchases of, and the
carrying value of payables to growers for soybean and corn inventories. A 10
percent decrease in the prices would have a negative effect on the fair value of
those futures of $10 million for soybeans and $5 million for corn. We also use
natural-gas swaps to manage energy input costs. A 10 percent decrease in the
price of gas would have a negative effect on the fair value of the swaps of $1 m
There are many other derivative uses, and new types are being invented. For
example, companies can hedge their weather risk to compensate them for the
extra cost of an unexpectedly hot or cold season. The derivatives we have
reviewed are not generally speculative for the company. They help to protect
the company from unanticipated events: adverse foreign exchange or interest
rate movements and unexpected increases in input costs.
The investor on the other side of the derivative transaction is the speculator.
However, in no case are these derivatives free. Even if, for example, the
company is surprised with a good-news event like a favorable interest rate
move, the company (because it had to pay for the derivatives) receives less on
a net basis than it would have without the hedge.
 NEED FOR STUDY

The primary purpose behind derivative contracts is the transfer of risk without
the need to trade the underlying. This allows for more effective risk
management within companies and the broader economy. In addition, the
derivatives market plays a role in information discovery and market efficiency.
However, despite the benefits, there are criticisms that derivatives are misused
and add to market volatility.
The futures market aids in price discovery. Futures prices can be thought of as
a forecast of future spot prices, but in reality, they only provide a little more
information than the spot price. However, they do so in an efficient manner. A
futures price also indicates what price would be acceptable to avoid
uncertainty.
In the case of options, one of the characteristics of the asset underlying the
option is volatility. Using option pricing models, the volatility of the
underlying asset can be determined. This is the volatility implied by the price
of the option. The level of implied volatility is a good measure of general
uncertainty in the market or a measure of fear.
Operational Advantages
There are some operational advantages to the derivative market:
1. Derivatives have lower transaction costs than transacting in the
equivalent underlying asset.
2. Derivatives markets typically have greater liquidity than the underlying
market.
3. Derivatives allow short positions to be entered into easily.
Market Efficiency
Markets can be thought of as reasonably efficient. When prices deviate from
fundamental values, the derivatives market offers a low-cost way to exploit the
mispricing. Less capital is required, transaction costs are lower, and shorting is
made possible.Investors are also far more willing to trade if they know they can
manage their risks. This increased willingness to trade increases the number of
market participants, which increases market liquidity.

Speculation and Gambling

For hedging to work, there must be speculators on the other side of the trade.
The more speculators the market attracts, the cheaper it becomes to hedge.
Unfortunately, the perception of speculators is not a good one. They are
thought to be short-term traders who seek to make a short-term profit and
engage in price manipulation and trade at extreme prices. The profit from
short-term trading is taxed more heavily than profit from long-term trading – a
way of “punishing” these activities.
Many view derivatives trading as a form of legalized gambling; however, there
are notable differences. For example, gambling benefits only a limited number
of participants. Generally, it does not help society as a whole, while the
derivatives market brings extensive benefits to the financial services industry.

Destabilization and Systemic Risk

Opponents of the derivatives market claim the operational benefits result in an
excessive amount of speculative trading, bringing instability to the financial
markets. They argue that as speculators use large amounts of leverage, they are
subjecting themselves and their creditors to high risk if the market moves
against them. Defaults by speculators can lead to defaults by their creditors,
and these chain-reaction events can be systemic. Instability can, therefore, be
spread through the market.

Another criticism of derivatives is their complexity. Although it is unclear why

complex mathematics should create criticism, when the models on which
derivative pricing is based break down due to sometimes irrational actions by
financial market participants, the model builders are often blamed for failing to
capture financial market reality accurately.
 OBJECTIVE OF THE STUDY

 To analyse the role of derivatives in the Indian stock market

 To identify and compare the futures, options, and swaps in derivatives

in Indian stock market.

 To illustrate the growth and performance of futures and options and

swaps.

 To assess performance of Indian Derivative Market.

 To analyse the factors contributing towards the growth of Derivative

Markets.

 To identify the investment pattern of the investors.

 To give the investors an idea of selecting the best derivative

instruments.

 To identify the threats and flaws while Hedging and investing in

Derivative Market.


 LITERATURE REVIEW

Various studies have been conducted to assess the impact of derivatives trading
on the stock market throughout the globe. Some of the important contributions
are as follow:
Rafael Santamaria (1976) analyzed the effect of the introduction of derivatives
(futures and options) in the Spanish market on the volatility and on the trading
volume of the underlying Index for the period from October 1990 to December
1994.He used three models of conditional volatility GARCH,
EGARCH and GJR to study this effect and found significant impact on
variance: the evidence indicates that the conditional volatility of the underlying
Index declines after derivative markets are introduced. The trading volume of
Ibex-35 increases significantly. In addition, the introduction of the derivative
contracts in Spain confirms a decrease in uncertainty in the underlying market
and an increase in liquidity which possibly enhance their efficiency.
Cox (1976) asserts that the introduction of derivatives market causes a
stabilising influence on the underlying market because of the speed at which
information is incorporated into the prices as well as the amount of information
reflected in expected prices. This event would be mainly because derivative
markets attract an additional set of traders to the market and because these
markets, which have lower transaction costs, transmit the new information to
the spot market more quickly. It provides circumstances which are more
favourable to entering the financial markets and therefore the dispersal of the
risk is improved Edwards (1988) studied whether Stock Index Futures trading
destabilised the spot market in the long run. Using variance ratio F tests for the
period June 1973 to May 1987, he concluded that the introduction of futures
trading did not induce a change in spot volatility in the long run.
Gupta (2002) has examined the impact of introduction of Index Futures on
stock market volatility. Further, he has also examined the relative volatility of
Spot market and Futures market. He has used daily price data (high, low, open
and close) for BSE Sensex and S&P CNX Nifty Index from June 1998 to June
2002. Similar data from June 9, 2000 to March 31, 2002 have also been used
for BSE Index Futures and from June 12, 2000 to June 30, 2002 for the Nifty
Index Futures. He has used four measures of volatility out of which the first is
based upon close-to-close prices, the second upon open-to-open prices, the
third is Parkinson’s Extreme Value Estimator, and the fourth is Garman-Class
measure volatility (GKV). The empirical results indicated that the over-all
volatility of the underlying stock market has declined after the introduction of
Index Futures on both the indices.
Raju and Karande (2003) studied price discovery and volatility in the context
of introduction of Nifty Futures at the National Stock Exchange (NSE) in June
2000. Co-integration and Generalised Auto Regressive Conditional
Heteroskedasticity (GARCH) techniques are used to study price discovery and
volatility respectively. The major findings are that the Futures market (and not
the Spot market) responds to deviations from equilibrium; price discovery
occurs in both the Futures and the Spot market, especially in the later half of
the study period. The results also show that volatility in the Spot market has
come down after the introduction of Stock Index Futures.
Shenbagaraman (2003) examined the impacts of the introduction of the
derivatives contracts such as Nifty Futures and Options contracts on the
underlying Spot market volatility have been examined using a model that
captures the heteroskedasticity in returns that is recognised as the Generalised
Auto Regressive Conditional Heteroskedasticity (GARCH) Model. She used
the daily closing prices for the period 5th Oct. 1995 to 31st Dec. 2002 for the
CNX Nifty the Nifty Junior and S&P 500 returns.
Vol. - I No. - 1, June-2010 3 indicated that derivatives introduction has had no
significant impact on Spot market volatility but the nature of the GARCH
process has changed after the introduction of the Futures trading.
Bandivadekar and Ghosh (2005) examined the impact of the introduction of
Index Futures on the volatility of stock market in India employing daily data of
Sensex and Nifty CNX for period of Jan 1997-March 2003 the return volatility
has been modeled using GARCH framework. They found strong relationship
between information of introduction of derivatives and return volatility. They
have concluded that the introduction of derivatives has reduced the volatility of
the stock market.
Alexakis Panayiotis (2007) investigated the effect of the introduction of Stock
Index Futures on the volatility of the Spot equity market and contributes in this
way to the contrasting arguments with respect to the stability and destabilising
effects of such products. The statistical results indicated that the index of
Futures trading is fully consistent with efficient market operation as it exerts a
stabilizing effect in the spot market, reducing volatility asymmetries and
improves the quality and speed of the flow of information.
Behavior of Stock Market Volatility after Derivatives

Financial market liberalization since early 1990s has brought about major
changes in the financial markets in India. The creation and empowerment of
Securities and Exchange Board of India (SEBI) has helped in providing higher
level accountability in the market. New institutions like National Stock
Exchange of India (NSEIL), National Securities Clearing Corporation
(NSCCL), and National Securities Depository (NSDL) have been the change
agents and helped cleaning the system and provided safety to investing public
at large. With modern technology in hand, these institutions did set
benchmarks and standards for others to follow. Microstructure changes brought
about reduction in transaction cost that helped investors to lock in a deal faster
and cheaper.
One decade of reforms saw implementation of policies that have improved
transparency in the system, provided for cheaper mode of information
dissemination without much time delay, better corporate governance, etc.
The capital market witnessed a major transformation and structural change
during the period. The reforms process have helped to improve efficiency in
information dissemination, enhancing transparency, prohibiting unfair trade
practices like insider trading and price rigging. Introduction of derivatives in
Indian capital market was initiated by the Government through L C Gupta
Committee report. The L.C. Gupta Committee on Derivatives had
recommended in December 1997 the introduction of stock index futures in the
first place to be followed by other products once the market matures. The
preparation of regulatory framework for the operations of the index futures
contracts took some more time and finally futures on benchmark indices were
introduced in June 2000 followed by options on indices in June 2001 followed
by options on individual stocks in July 2001 and finally followed by futures on
individual stocks in November 2001.
Do Futures and Options trading increase stock market volatility?
Numerous studies on the effects of futures and options listing on the
underlying cash market volatility have been done in the developed markets.
The empirical evidence is mixed and most suggest that the introduction of
derivatives do not destabilize the underlying market. The studies also show that
the introduction of derivative contracts improves liquidity and reduces
informational asymmetries in the market. In the late nineties, many emerging
and transition economies have introduced derivative contracts, raising
interesting issues unique to these markets. Emerging stock markets operate in
very different economic, political, technological and social environments than
markets in developed countries like the USA or the UK. This paper explores
the impact of the introduction of derivative trading on cash market volatility
using data on stock index futures and options contracts traded on the S & P
CNX Nifty (India). The results suggest that futures and options trading have
not led to a change in the volatility of the underlying stock index, but the nature
of volatility seems to have changed post futures. We also examine whether
greater futures trading activity (volume and open interest) is associated with
greater spot market volatility. We find no evidence of any link between trading
activity variables in the futures market and spot market volatility. The results
of this study are especially important to stock exchange officials and regulators
in designing trading mechanisms and contract specifications for derivative
contracts, thereby enhancing their value as risk management tools.
 LIMITATION OF STUDY

1. The study is limited by time and cost factors.

2. The sample size chosen is limited to stock futures of ten underlying
script’s.
3. The limited period of study may not be detailed and full-fledged in all
aspects.
4. The respondent may be artificial, or the respondent may be biased
5. The sample size taken for research may not give exact figure or may not
cover the entire popularity. Therefore, it doesn’t be the entire
perceptions of investors.
 Chapter: 2
COMPANY PROFILE

The Kotak Mahindra Group

Established in 1985, Kotak Mahindra Group is one of India's leading financial
services conglomerates. In February 2003, Kotak Mahindra Finance Ltd.
(KMFL), the Group's flagship company, received banking license from the
Reserve Bank of India (RBI), becoming the first non-banking finance company
in India to convert into a bank - Kotak Mahindra Bank Ltd (KMBL).
Kotak Mahindra Group offers a wide range of financial services that
encompass every sphere of life. From commercial banking, to stock broking,
mutual funds, life and general insurance and investment banking, the Group
caters to the diverse financial needs of individuals and the corporate sector.
The premise of Kotak Mahindra Group’s business model is concentrated India,
diversified financial services. The bold vision that underscores the Group’s
growth is an inclusive one, with a host of products and services designed to
address the needs of the unbanked and insufficiently banked.
Kotak Mahindra Group has a global presence through its subsidiaries in UK,
USA, Gulf Region, Singapore and Mauritius with offices in London, New
York, California, Abu Dhabi, Mauritius and Singapore respectively. As on 31st
December, 2019, Kotak Mahindra Bank Ltd has a national footprint of 1,539
branches and 2,447 ATMs, and branches in GIFT City and DIFC (Dubai).
 KOTAK SECURITIES

Kotak Securities Limited (KSL), a subsidiary of Kotak Mahindra Bank, is one

of India’s largest full-service stock broking firms catering to retail and
institutional investors across all segments of the capital market.

Through a tie-up with partner brokers, the company also provides direct access
to the US markets. Supported by a strong research team, robust digital trading
platform, large branch network & franchisee base, and referral coordinators
spread across Kona Kona of India, KSL processes lakhs of secondary market
trades every day.

KSL provides a wide array of services including investment options in equities,

derivatives (equities, commodities, currency) and mutual funds. It also offers
margin trade funding, depository services and third-party products like
insurance.

27 lakh customer accounts

153 number of Branches
1332 Franchisees
We cater to customers from 361 cities across India.

We are corporate members with the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE). We are also a depository participant with
National Securities Depository Limited (NSDL) and Central Depository
Services Limited (CDSL).

 Adjudged as the Best Broker by Finance Asia Country Awards, 2019

 The above numbers are as on December 31, 2019.

Kotak Securities is one of the leading stock broking companies in India and a
subsidiary of Kotak Mahindra Bank Limited - a renowned private-sector bank.
As a stock broking company, Kotak Securities brings to you more than 25
years of experience in serving a diverse customer base of retail and institutional
investors.
Stability: We are a subsidiary of Kotak Mahindra Bank and one of the oldest
and largest stock broking firms in the Industry. We have been the first and only
NBFC to receive the license to be converted into a bank.

Innovators in the Industry: We have been the first in providing many

products and services which have now become industry standards.
 First to provide Margin Financing to the customers.
 First to enable investing in IPOs and Mutual Funds on the phone.
 Providing SMS alerts before execution of depository transactions.
 Launching of Mobile application to track portfolio.
 AutoInvest - A systematic investing plan in Equities and Mutual
fund.
 Innovation - Broking app which allows you to access markets
across platforms, mobiles and tablets allowing registered and
guest users to view live prices, track portfolio and trade.

Value: Whether you are a customer with a small or large wallet size, you can
expect us to bring value to you, in every form.
 Quality Research
 Quick trade execution
 Low brokerage
 Accounts that suit your investment profile
 Risk Profiler
 Superior Customer Service

Service: We believe in the highest standards of service and that's precisely

what we offer.
Robust Technology: We have developed our own proprietary trading platform
which is robust, and among the best in the industry. We have more than 150
technology professionals constantly working on upgrading and speeding up all
our systems.

Centralized Risk Management System: Unlike many other players we have a

centralized risk management system. This allows us to offer the same levels of
service to customers across all locations.

Customer Service is available in 10 different languages: English, Hindi,

Marathi, Gujarati, Tamil, Malayalam, Kannada, Telugu, Punjabi and Bengali.

Exceptional Research: We have our own in-house research team. The in-
house research team is one of the best in the industry and they have years of
experience in the financial markets. They scan through the plethora of stocks
and find the scrips that have a high potential of providing you good returns.
 Our investors get Technical, Fundamental, Derivatives, Macro-
economic and mutual fund research.

Large Presence: We are present in 393 cities with 1,539 branches, franchisees
and satellite offices across India. Numbers as on December, 31, 2019.
Our Services
So what does investing with India’s largest stock broking firm mean for you as
a customer? Well, all your stock broking needs get managed under one roof.
No more running from pillar to post, to keep track of your finances!

Stock Broking services

Trade in the Stock Market, invest in IPOs, Mutual Funds or Currency
Derivatives using whichever mode that suits you best. Online, offline or even
on our stock trading app, we offer stock trading at your fingertips.
Portfolio Management services
Not sure of what stocks to buy or sell? Unable to keep all your investments in
one place? Don’t know how to make your money work for you? Our Portfolio
Management Service with expert advice is just the answer for your woes.
Dual benefit: Stock Brokers + Depository Participants
Kotak Securities is not just a stock broking firm. We are also participants with
depositories like the NSDL and the CSDL. That means you can now execute
transactions using our stock broking services and settle your trades using our
depository services!
Research Expertise
Benefit from in-depth stock market analysis thanks to our dedicated research
division. We publish various sector-specific research, company-specific
research, macroeconomic studies, fundamental and technical analysis of stocks
that you can avail before investing your hard-earned money.
Updated Market Data
Apart from research that we offer, you benefit from the street smart tips, up-to-
the-minute market information and inside news that our extensive sales teams
deliver on a daily basis.
International Reach
Your financial interests go beyond India? Don’t worry, so do ours! Kotak
Securities has a well-entrenched presence in the Asia Pacific, European,
Middle Eastern and American markets. You can trust us with your money in
any part of the globe.
LEADING STEPS

Helping you invest your money is a job we take very seriously. Which is why
we pioneered some of these services. Here’s a quick look:

 Mobile stock trading app to keep track of your investments on the go

 Facility of Margin Finance for online stock trading
 Investing in IPOs and Mutual Funds over the phone
 SMS alerts before execution of depository transactions
 AutoInvest - A systematic investing plan in Equities and Mutual funds
 Provision of margin against securities automatically using shares in your
demat account
 VISION & MISSION OF ORGANIZATION

The Global Indian Financial Services Brand

Our customers will enjoy the benefits of dealing with a global Indian brand that
best understands their needs and delivers customised pragmatic solutions
across multiple platforms.
We are a world class Indian financial services group. Our technology and best
practices are bench-marked along international lines while our understanding
of customers will be uniquely Indian.
We are more than a repository of our customers' savings. We, the group, are a
single window to every financial service in a customer's universe.
The Most Preferred Employer in Financial Services
A culture of empowerment and a spirit of enterprise attracts bright minds with
an entrepreneurial streak to join us and build long-term careers with us.
Working with a home grown professionally managed company, which has
benefited from partnerships with international leaders, gives our people a
perspective that is universal as well as unique.
The Most Trusted Financial Services Company
We have created an ethos of trust across all our constituents. Adhering to high
standards of compliance and corporate governance is an integral part of
building trust.
Value Creation
Value creation rather than size alone will be our business driver.
 HISTORY OF ORGANIZATION

Kotak Securities our Share Broking Service

Kotak Securities was founded in 1994 as a subsidiary of Kotak Mahindra Bank

and is proud to be the nation’s best broker* today.

In 1985, Uday Kotak founded what later became an Indian financial services

conglomerate. In February 2003, Kotak Mahindra Finance Ltd. (KMFL), the
group's flagship company, received a banking licence from the Reserve Bank
of India. With this, KMFL became the first non-banking finance company in
India to be converted into a bank.

In a study by Brand Finance Banking 500 published in February 2014

by Banker magazine, KMBL was ranked 245th among the world's top 500
banks with a brand valuation of around US$481 million and brand rating of
AA+.

Our numbers speak for ourselves:

17 Lakh customer accounts
Over 8 Lakh trades per day
Our national footprint is 1,539 branches, franchisees and satellite offices
We cater to customers from 393 cities across India

We are corporate members with the Bombay Stock Exchange(BSE) and the
National Stock Exchange(NSE). We are also a depository participant with
National Securities Depository Limited (NSDL) and Central Depository
Services Limited (CDSL).
 PRODUCTS

 KEAT Pro X — Online Stock Trading Software

We love to spoil you with the trading experience of your choice.

Just as some people love to watch action movies on the big screen, we know
traders who love to jump into the market action on their big screens – desktops,
tablets and laptops.
KEAT Pro X, our high-speed online stock trading software, makes your trading
experience vivid and alive.
Buy and sell securities in real-time. Track the market action live. Monitor your
investment portfolio at your convenience. And much more.

Benefits of KEAT Pro X

Completely free
Our multi-functional online stock trading software comes completely free with
your Kotak Securities Trading Account.

Highly integrated
Execute all your trades in equities, derivatives and currencies in the Indian
markets on a single platform.

Customizable
Our online stock trading software allows you to create watchlists with any
combination of stocks, sectors, and stock market indices of your choice. You
can even customize the user interface to your liking.

Be fully in charge of your portfolio

With KEAT Pro X, you can keep a complete tab on all your trading activities –
from viewing order confirmations and trade executions to monitoring your
gains and losses, and much more.
Key Features of KEAT Pro X

Live-streaming of stock market data

High-speed stock market trading

Up-to-date account information

Well-researched stock recommendations

Customizable watch lists

Stock price charting tools

Complete control of your portfolio

Free for all our clients

Get Started with KEAT Pro X
KEAT Pro X could be a game-changer for your trades. This powerful trading
tool is also incredibly easy to use. Follow these easy steps to begin your KEAT
Pro X experience:
Step 1: Login to your trading account on www.kotaksecurities.com with your
User Id, Password, and Security Key/Access Code.
Step 2: Click on the ‘Trading Tools’ tab and select ‘KEAT Pro X’.
Step 3: Click on the ‘Download’ button to install it on your machine.
Not sure which version of KEAT Pro X is running on your machine? To find
out, click on ‘Help’ and then choose ‘About Us’. You could also check the top
header of the main terminal.
Have questions about software updates? Whenever we introduce
improvements, your KEAT Pro X version gets automatically updated. You can
start using any new features right away!
Fastlane

Are you a stock market trader with an old, slow computer? Do your computer’s
permissions prevent you from installing .exe files in it? Then Fastlane, our
light and fast Java based trading application, is just for you.

With Fastlane, you can now track the markets live, make trades, create
watchlists and more without installing full-fledged trading software on your
computer.

Fastlane comes with a list of S&P CNX NIFTY scrips streaming live on it by
default. You can modify the list of shares as per your choice once you get
started.

Features of Fastlane

 Check your open positions

 Check funds available in your trading account
 View company reports and get stock recommendations from our
research division

Benefits of Fastlane:-

All the benefits of a full-fledged trading software in a light, fast applet.

Circumvent firewalls on your work computer with Fastlane

No need to install or run any software to access it

Create your own watchlist on Fastlane:

As mentioned above, Fastlane comes with S&P CNX Nifty shares streaming
live by default. You cannot remove or edit the Nifty list but you can definitely
create your own watchlist of stocks. Here’s how:

 Right click on the live stream of shares. A drop down menu will appear.
 Choose ‘Watchlist’ from the dropdown menu and click on ‘Create New’.
 A new blank watchlist will be created into which you can add stocks of
your choice. Pick a name for your watchlist and proceed to add shares
to your new watchlist.
 In your new, blank watchlist simply right click on any row and choose
‘Add scrip’ from the dropdown menu.
 You will get a pop-up window that asks you for the name of the share
you want to add. Enter the name of the stock you want to watch, the
exchange on which it is traded (BSE or NSE) and the type of instrument
you want – equity, futures, options etc. That’s it! You have added your
first stock to your custom watchlist.
 There is no limit to the number of watchlists you can create or the
quantity of shares per watchlist.
Xtralite

Have a slow internet connection? Frustrated by the slow speed at which you
transact? Do not worry
Kotak Securities introduces Xtralite, an extra-light, super-fast trading website
specially designed for trading using slow internet connections. Now, you can
use your existing internet connections to trade in the equity and derivative
markets.

Benefits of xtralite:

Works on slow internet connections

Designed to work on mobile

Full access to Quotes, order placement in the equity and derivative segments
and order status

Allows monitoring your portfolio and instantly placing Buy / Sell trades

Check the funds available in your account for trading

Access to Kotak Securities’ research

 RESEARCH METHODOLOGY

PRIMARY DATA
Raw data, also known as primary data, are data (e.g., numbers, instrument
readings, figures, etc.) collected from a source. In the context of examinations,
the raw data might be described as a raw score.
If a scientist sets up a computerized thermometer which records the
temperature of a chemical mixture in a test tube every minute, the list of
temperature readings for every minute, as printed out on a spreadsheet or
viewed on a computer screen are "raw data". Raw data have not been subjected
to processing, "cleaning" by researchers to remove outliers, obvious instrument
reading errors or data entry errors, or any analysis (e.g., determining central
tendency aspects such as the average or median result). As well, raw data have
not been subject to any other manipulation by a software program or a human
researcher, analyst or technician. They are also referred to as primary data.
Raw data is a relative term (see data), because even once raw data have been
"cleaned" and processed by one team of researchers, another team may
consider these processed data to be "raw data" for another stage of research.
Raw data can be inputted to a computer program or used in manual procedures
such as analyzing statistics from a survey. The term "raw data" can refer to the
binary data on electronic storage devices, such as hard disk drives (also
referred to as "low-level data").
Data has two ways of being created or made. The first is what is called
'captured data', and is found through purposeful investigation or analysis. The
second is called 'exhaust data', and is gathered usually by machines or
terminals as a secondary function. For example, cash registers, smartphones,
and speedometers serve a main function but may collect data as a secondary
task. Exhaustive data is usually too large or of little use to process and becomes
'transient' or thrown away.
MODES TO COLLECT PRIMARY DATA:

1. DIRECT PERSONAL INTERVIEWS: The investigator personally meets

concerned individuals and collects the required information from them. When
the area to be covered is vast, this method may prove very costly and time-
consuming. Still, this method is concerned useful for certain laboratory
experiments or localized inquires. Due to the personal bias of the investigator,
errors are likely to influence the results.
2. INDIRECT PERSONAL INTERVIEWS: We interview the third parties
or witnesses having information, whenever the direct sources do not exist, or
the informants hesitate to respond for some reason or other. The reliance is not
placed on the evidence of one witness only, because some of the informants are
likely to give wrong information deliberately.
3. COLLECTION THROUGH QUESTIONNAIRES: The questionnaires
are usually sent by mail to inquire through several pertinent questions. In
questionnaires, there is a space for entering the asked information asked. The
informants are requested to return the questionnaires to the investigator within
a certain period. This method is cheap, reasonably expeditious, and good for
extensive inquiries. However, only a small percentage of recipients respond to
questionnaires if there is no incentive involved.
4. COLLECTION THROUGH ENUMERATORS: In this method, trained
enumerators collected the information. They assist the informants in making
the entries in the schedules or questionnaires correctly. If the enumerator is
well trained, experienced, and discreet, then you can get the most reliable
information through this method. Enumerator driven approach works best for a
large scale governmental or an organizational inquiry. Private individuals or
institutions cannot adopt this method as its cast would be prohibitive to them.
5. COLLECTION THROUGH LOCAL SOURCES: In this method, the
agents or local correspondents collect and send the required information, using
their judgment as to the best way of obtaining it, but there is no formal
collection of data. This method is cheap and expeditious but gives only the
estimates. It may involve local agents' bias.

 
 SECONDARY DATA
Secondary data refers to data that is collected by someone other than the
primary user. Common sources of secondary data for social science include
censuses, information collected by government departments, organizational
records and data that was originally collected for other research purposes.
Primary data, by contrast, are collected by the investigator conducting the
research.
Secondary data analysis can save time that would otherwise be spent collecting
data and, particularly in the case of quantitative data, can provide larger and
higher-quality databases that would be unfeasible for any individual researcher
to collect on their own. In addition, analysts of social and economic change
consider secondary data essential, since it is impossible to conduct a new
survey that can adequately capture past change and/or developments. However,
secondary data analysis can be less useful in marketing research, as data may
be outdated or inaccurate.
Secondary data can be obtained from different sources:
• Information collected through censuses or government departments like
housing, social security, electoral statistics, tax records
• internet searches or libraries
• GPS, remote sensing
• Books, Magazine, News paper, etc.
Secondary data is available from other sources and may already have been used
in previous research, making it easier to carry out further research.
Administrative data and census data may cover both larger and much smaller
samples of the population in detail. Information collected by the government
will also cover parts of the population that may be less likely to respond to the
census (in countries where this is optional).A clear benefit of using secondary
data is that much of the background work needed has already been carried out,
such as literature reviews or case studies Secondary data is key in the concept
of data enrichment, which is where datasets from secondary sources are
connected to a research dataset to improve its precision by adding key
attributes and values. Secondary data can provide a baseline for primary
research to compare the collected primary data results to and it can also be
helpful in research design.
 DATA ANAlYSIS & INTERPRETATION

QUESTIONNAIRE:
1. When is a forward contract useful?
Answer:
A forward contract involves two parties agreeing to do a future date for a
specific quantity and price. While the parties agree on the terms, they don't
exchange any goods or funds until the agreed-upon date. This type of contract
may be useful when speculation potential prices. For example, if you have
information that indicates prices for a certain good may increase in the future,
you may benefit from using a forward contract to secure the current, more
affordable price for your future exchange.

2. When should someone trade in derivatives?

Answer:
If you're interested in futures trading, it may be beneficial if you're interested in
investing, concerned about hedging or looking to leverage your activities to
make a higher profit. Options trading may be beneficial if you're hoping to
protect your portfolio through a smaller premium payment and want to
participate in the market without a large quantity of stock or trading. However,
both may be beneficial if you're concerned about liquidity, transaction costs
and making profits with reduced amounts of risk capital.

3. Regarding options, can you tell me the difference between at the money,
in the money and out of the money?
Answer:
An at-the-money option is an option that, if exercised immediately, would lead
to zero cash flow. This may occur if an option's current price equals its strike
price. An out-of-the-money option is an option that, if exercised immediately,
would create a negative cash flow. A call option may be out of the money if its
current price is less than the strike price, but a put option may be out of the
money if its current price is above the strike price.
4. How to compare the difference between futures and forward contracts?
Answer:
The most significant difference between futures and forward contracts is how
you can trade them. You trade forwards contracts over the counter, but you
trade futures contracts on exchanges. As a result, you can only trade specific
futures contracts on exchange. Forward contracts, however, provide more
flexibility because they're negotiated privately, may represent assets and may
change settlement dates if both parties involved agree.

5. Why is it important to consider interest rates when determining the

price of options?

Answer:
When determining the price of options, it's essential to consider interest rates.
This is because higher interest rates typically lower the value of call options if
all else is equal. This is a result of the net present value concept.

6. What are hedging techniques?

Answer:
Hedging is a risk management strategy employed to offset losses in
investments by taking an opposite position in a related asset. The reduction in
risk provided by hedging also typically results in a reduction in potential
profits. Hedging strategies typically involve derivatives, such as options and
futures contracts.

7. When Should Firms Not Worry about Hedging?

Answer:
Firms do not have to hedge their position if international parity conditions
(such as the unbiasedness efficiency hypothesis, uncovered interest parity,
and purchasing power parity) hold, in which case there will be no foreign-
exchange risk to worry about. These conditions might hold only in the long run
but short-run deviations do exist
8. How would you assess your risk tolerance regarding the exposures that
may impact your business?

Answer:

Determing risk tolerance depends on the identification of the risk factors and
the degree to which the stakeholders are willing to take such risks. The first
step in identifying project risk tolerances is determining the extent of negative
impact the organization is willing to risk.

9. How important is it for you to know for certain the future value of your
exposure regardless of the actual outcome?

Answer:

Present value takes the future value and applies a discount rate or the interest
rate that could be earned if invested. Future value tells you what an investment
is worth in the future while the present value tells you how much you'd need in
today's dollars to earn a specific amount in the future.

10. Is proprietary trading a good career?

Answer:

Also known as “prop trading,” it offers higher earnings potential much earlier
in your career than jobs like investment banking or private equity. It's arguably
the most merit-based industry within finance: if you make millions of dollars
for your firm, you'll earn some percentage of it.
 CONCLUSION

From this study it is concluded that the Options give more returns
compared to futures. The stock market will give high returns to the investors
who can bear high risk. Where derivatives are instrument used to minimize the
risk and covered the loss occurred in the stock market. The options will give
more returns and less risk when compared to futures.

Innovation of derivatives have redefined and revolutionized the

landscape of financial industry across the world and derivatives have earned a
well-deserved and extremely significant place among all the financial products.
Derivatives are risk management tool that help in effective management of risk
by various stakeholders. Derivatives provide an opportunity to transfer risk,
from the one who wish to avoid it; to one, who wish to accept it. India’s
experience with the launch of equity derivatives market has been extremely
encouraging and successful. The derivatives turnover on the NSE has
surpassed the equity market turnover. Significantly, its growth in the recent
years has surpassed the growth of its counterpart globally.
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 2007-08. India is one of the most successful developing
countries in terms of a vibrant market for exchange-traded derivatives. This
reiterates the strengths of the modern development of India’s securities
markets, which are based on nationwide market access, anonymous safe and
secure 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.
Factors like increased volatility in financial asset prices; growing
integration of national financial markets with international markets;
development of more sophisticated risk management tools; wider choices of
risk management strategies to economic agents and innovations in financial
engineering, have been driving the growth of financial derivatives worldwide
and have also fuelled the growth of derivatives here, in India. There is no better
way to highlight the significance and contribution of derivatives but the
comments of the longest serving Governor of Federal Reserve.

Alan Greenspan: “Although the benefits and costs of derivatives remain the
subject of spirited debate, the performance of the economy and the financial
system in recent years suggests that those benefits have materially exceeded
the costs."
 SUGGESTION

 The market is based on economic issues, global news and company’s

related news. So while investing investors have to know about all these
issues.

 The risk-taking investors get more returns.

 Margin of safety helps the investor todetermine when they can buy and
sell the stocks safely.

 Investors should possess basic knowledge about derivatives prior to

investment

 Options are giving more returns with less risk than the futures.

 Hedging provides muted returns as it eats away from your return stream.
A hedge is useful only if you expect a sudden spike in volatility. If you
expect the returns to go up higher, then a hedge will only be a drag on
your portfolio performance.

 Hedging involves buying a financial asset to offset the risk of another. The
purchase of financial assets come with transaction costs. If the trade for
the hedge is not well planned and executed, it can end up eating away
your returns by incurring heavy transaction costs.
 Bibliography

 www.google.com
 www.researchgate.net
 casi.sas.upenn.edu
 en.wikipedia.org
 www.referenceforbusiness.com
 www.kotaksecurities.com
 www.nseindia.com