DERIVATIVE INDIAN SENERIO

A PROJECT SUBMITTED TO UNIVERSITY OF

MUMBAI THE PARTIAL COMPLETION OF
DEGREE B.COM (MANAGEMENT STUDIES)
UNDER THE FACULTY OF COMMERCE

BY

PRATIK MANOJ TIWARI

Section 1.01 PROJECT GUIDE

PROFESSOR SANJAY JHA

SHREE SHANKAR NARAYAN COLLEGE OF ARTS,

COMMERCE AND PROFESSIONAL COURSE
NAVGHAR ROAD, BHAYANDER (EAST),
THANE – 401105

ACADEMIC YEAR – 2021-2022

SEMESTER VI

T.Y.BMS

1
 DERIVATIVE INDIAN SENERIO

A PROJECT SUBMITTED TO UNIVERSITY OF

MUMBAI THE PARTIAL COMPLETION OF
DEGREE B.COM (MANAGEMENT STUDIES)
UNDER THE FACULTY OF COMMERCE

BY

PRATIK MANOJ TIWARI

Section 1.02 PROJECT GUIDE

PROFESSOR SANJAY JHA

SHREE SHANKAR NARAYAN COLLEGE OF ARTS,

COMMERCE AND PROFESSIONAL COURSE
NAVGHAR ROAD, BHAYANDER (EAST),
THANE – 401105

ACADEMIC YEAR – 2021-2022

SEMESTER VI

2
 Section 1.03 T.Y.BMS
DECLARARTION

I, PRATIK MANOJ TIWARI here by, declare that the work embodied in this
project work titled “DERIVATIVE INDIAN SENERIO” forms my own
contribution to the research work carried out under the guidance PROF.
SANJAY JHA is a result of my own research work and has not been previously
submitted to any other university for any other Degree/Diploma to this or any
other university.

Wherever reference has been made to previous work of others, it has been
clearly indicated as such and include in the bibliography.

I, here by further declare that all information of this document has been obtained
and presented in accordance with academic rules and ethical conduct.

Place:

Date: Signature of the student

Mr. PRATIK MANOJ TIWARI

Certified by,

3
Prof. Sanjay Jha

SHANKAR NARAYAN COLLEGE OF ARTS & COMMERCE

BHAYANDER (EAST), THANE-401105

CERTIFICATE

This is to certify that Mr. PRATIK MANOJ TIWARI has worked and duly completed his
Project Work for the degree of Master in Commerce under the Faculty of Commerce his project
is entitled, “DERIVATIVE INDIAN SENERIO” under my supervision.

I further certify that the entire work has been done by the learner under my guidance and that
no part of it has been submitted previously for any Degree or Diploma of any University.

It is his own work and facts reported by his personal findings and investigations.

______________________ ______________

Internal Project Guide Principal

Prof. Sanjay Jha Dr. V.N.Yadav

__________________ _______________

External Guide Co-Ordinator

4
 Prof. Sanjay Jha

Date of Submission: -

(a) ACKNOWLEDGEMENT

It gives me immense pleasure in presenting my project on topic

“DERIVATIVE INDIAN SENERIO”.

I would firstly like to thank University of Mumbai to design M.Com

Program also to my college Management for providing me Post
Graduation program in the college as well as good infrastructure and
sincerely thank our Principal sir Dr. V.N. Yadav for providing me
support and giving me opportunity to do Post Graduation in our college
and completing the project.

I would also like to express my profound guide Prof. Sanjay Jha and
Co-ordinator who as so ably guided my research project with her vast
find of knowledge advice and constant encouragement without which
this project would have not been possible. I candidly appreciate her
implicit and valuable contribution in drawing up this project work.

I take this opportunity to highlight the valuable contribution of

TY.BMS coordinator Prof. Sanjay Jha and all my professors, my
colleagues and especially my parents who had always supported and
encouraged the success of this project report to large extent is also
dedicated to them also.

5
I would also like to thank all those who helped me and whom I have
forgotten to mention in this space.

Thank you !
INDEX

Sr. Particular Pg.

No no.
1 Introduction

1.1 Trading in different financial market

1.2 Regulatory framework for derivatives

1.2.1 Factors driving growth of derivative

1.3 Trading in derivative market

1.3.1 How investors invest in derivatives

1.4 Application of financial derivative

1.5 Policies issues for Indian derivatives

1.5.1 Benefit of trading in derivatives

6
 1.6 Risk involved in trading derivative

1.7 Sebi advisor committee for derivative

1.8 Investor protection for derivative

1.8.1 Customer protection / Fairness regulation

1.8.2 Recent sebi guidelines for derivatives

1.8.3 Clearing mechanisms

1.8.4 Clearing members

1.9 Investors awareness measures by sebi

1.9.1 The function of sebi relating to investors

awareness

1.9.2 Investors assistance and education

1.9.3 Investor awareness and protection workshop

1.9.4 Investor protection fund

1.9.5 Investor education and protection fund

7
 2 Review literature

3 Research methodology

3.1 Statement of problem

3.2 Objectives of study

3.3 Importance of the study

3.4 Methods of data collection

3.5 Limitation of the study

3.6 Findings, data analysis and interpretation

4 Suggestions

5 Conclusion

6 Bibliography

Questionnaire

8
 1.INTRODUCTION

Financial market is a place where buyers and sellers engage themselves

in a trade of assets which comprise stocks, bonds, currencies,
derivatives etc. via a middle man called broker. Financial market talks
about the primary market, FDIS, alternative investment options,
banking and insurance and the pension sectors. The history of Indian
capital market span backs 200 years, around the end of the 18th century.
It was at this time India was under the rule of East India Company.
Market of India initially deve around Mumbai, with around 200 to 250
security brokers participating in active trade during the second half of
the 19th century. Financial market consists of the following market :

9
1. Capital Market: it is the market for companies and individual who
want to grow in tandem. It's a platform where public and private sector
often sell their stakes to raise funds. The asset under the market don't
have any fixed maturity time, however one can book ones profit at any
point in time if prices are volatile. Capital market can be further
classified in two types they are as follows:

a. Primary market- it comprise of new issue called as IPOs are made in

primary market. It is a market for new issue of shares of an organization
for the first time.

b. Secondary market: it can be referred as aftermarket. It is a market

where previously issued stocks, bonds and debentures are bought and
sold.

1. Money market:-money market means market where money or its

equivalent can be traded. Money market consists of financial institution
and dealers in money or credit who wish to generate liquidity.it is better
known as place where large institutions and government manage their
short term cash needs. Maturities range from one day to one year. As a
major platform in financial market where securities and financial
instruments with short term maturities are traded is called the money
market. Financial instruments like treasury bills, certificate of deposits,
commercial paper and banks acceptance are some of the short term debt
securities traded in money market. The main Indian financial indices
are-BSE 30, sensex index and NSE 50, nifty index. In Sensex 30 listed
companies are considered to check the performance of stock market.
And in nifty 50 companies are considered.

10
1. Derivative market: The areas of existence of derivatives was
commodities, it was associated by traders in Bombay which was named
as Bombay Cotton Traders Association (BCTA) in 1875 and started
dealting with the future contract by the starting of 19th century
derivatives in India crawled to top making India one of the world's
largest in future contract. After this in 1999 finally the derivative gets
exchange traded and they legalized and it started smooth functioning.in
India it takes place either on separate and independent derivative
exchange or on a separate segment of an existing stock exchange.
Derivative exchange functions as a self regulatory organizations and
SEBI act as an oversight regulator. Before derivative trading began,
NSE and BSE were all electronic equity spot markets by an
international standards, they were small markets. Derivative trading
which started in June 2000, was an turning point in many ways. And
after all the changes had fallen into place, NSE and BSE were both
amongst the top 10 exchanges in the world by the number of
transactions. Derivatives are new segment of secondary market
operation in India. The measures of this trade is complex, making it
hard for Indian investors to understand and also to make profit in
derivatives trading. This research aims to measure the investors
perception and investment decision on Indian derivative market.
Derivative market serve as a risk reducing tool. It promotes economic
efficiency by directing funds from those who do not have an immediate
use for these funds to those who are in need of funds. It also channels
money provided by savers and depository institutions to borrowers and
investees through a variety of derivative instruments.A derivative is an
instrument whose value is derived from the value of one or more
underlying assets which can be commodities, precious metals, currency,
bonds, stocks, stock indices etc. four most common examples of
derivative instruments are forwards, futures, options and swaps. Let us
discuss in details,

11
 I. Forwards - a forward contract is an agreement between two parties
to exchange at a future date a given quantity of commodity for a
specific price is called forward price.

II. Futures futures contract are standardized forward contract that

transacted through an exchange. In futures the buyer and the seller
stipulate product, grade, quantity and location and leaving price
as the only variable.

• Options-option gives the holder right but not the obligation. to

perform the contract. There is two options are there which is call
option: gives them right to buy the contract. Put option: gives
them right to sell the contract at maturity or expiration date.
• Swaps a commodity swap is a type of swap agreement whereby
floating price based on an underlying commodity is traded for a
fixed price. The vast majority of commodity swap involves oil.

Following diagram shows types of different derivatives which are being

traded.

12
Participants in derivative market

1. Hedgers hedger faces risk associated with price of an asset. They

use. futures or option market to reduce this risk. Hedgers are those
who enter into a derivative contract with the objective of covering
price risk.

2. Speculators: they are the persons who wish to bet on future

movements in the price of an asset they enter into derivative contract
to make profit by

assuming risk at a future date.

3. Arbitrageurs they are in business to take advantage of discrepancy

between prices in two different market. Arbitrageurs used to invest in
two different market at the same time.

1.1 Trading in different financial market:

. How different investors are investing in financial market to gain

certain amount of profits. Let us discuss in detail. 1. Capital market - it
is market where companies issue shares in order to raise and meet
their capital requirement. This market is also known as

stock market. Under this company issues different types of shares

carrying

different benefits such as:

13
a. Equity shares are the ownership capital for the company. Holder of
this capital are the owners of the organization. These type of shares
are carrying dividend which always fluctuate. Sometimes they may
not get dividend also if company doesn't have sufficient fund after
paying all the expenses.

Investors who are ready to take risk. only cautious about the returns
can invest in the equity shares of the company.

b. Preference shares: these are the share of the company which carries
some preferential right in respect of getting dividend prior to the
equity shares. These shares carries fixed rate of dividend. They are the
co-owners of the business. They will get their fixed rate of dividend
even if company doesn't have profit.

investors who are cautious about their returns and not ready to take
risk can invest in preference shares.

These are the two types of shares which company can issue in order to
raise funds or capital. When company issues these shares for the first
time as an IPO they are said to be issued in primary market. After that
when these shares are again traded by the holders or investors it can be
termed as trading in secondary market. In the organization for the
purpose of raising capital company also issues debentures, bonds etc.
but they are debt capital of the company. Investor who invest in this
becomes the creditor of the company as these are the debt instruments
they carry fixed rate of returns. They are least bother about company's
performance or profit company has to pay the fixed rate of returns to
them and they also create charge on company's asset being a loan
provider.
14
2. Money Market :-investors invest in money market because it is
important for business as it allows companies with a temporary cash
surplus to invest in short term securities. it is a market in which short
term instruments are traded by the traders which is called as money
market instruments. In this market investors invest for short term
gains. Some of the short term money market instruments are:

i. Commercial paper: commercial paper refers to unsecured short term

promissory notes issued by financial and non-financial corporations.
Commercial paper has maturities of up to 270 days. Standard and
poor's and Moody's provide ratings of commercial paper.

ii. Certificate of Deposits: these are the certificates issued by a

federally chartered bank against deposited funds that earn a specific
return. An individual or company lends the bank a certain amount of
money and in exchange of that bank agrees to pay the specified money
with some interest.

iii.Treasury Bills: these are the short term notes issued by the
U.S.Government. They come in three lengths of maturity 90, 180, and
360 days. It can be purchased directly through the auctions or
indirectly through the secondary market. These are the short term debt

obligations.

1.2 REGULATORY FRAMEWORK FOR DERIVATIVES IN

INDIA:

15
As discussed earlier, the regulatory framework in India is based on
L.C.Gupta committee report on derivatives and J.R.Verma

group reports on risk containment measures for derivative product.

The regulatory framework in India is mostly consistent with the
International Organization of security commission (IOSCO) principles
and regulatory framework for exchange traded derivatives. A global
survey on the common objective of regulation of derivative market
was conducted and the regulatory summaries of the practices are
contained in the (IOSCO) report on the international regulation of
derivatives market. Financial markets in India are regulated and
controlled by the SEBI securities and exchange board of India. Some
of the other derivatives like financial currencies, interest rates etc. are
controlled by the Reserve Bank of India (RBI).

1.2.1FACTORS DRIVING GROWTH OF DERIVATIVES:

Over the last three decades, the derivative market has seen a
phenomenal growth. A large variety of derivatives contracts have been
launched at exchange across the world. Some of the factors driving the
growth of financial derivatives are:

1. Increased volatility in asset prices in financial markets.

2. Increased integration of national financial markets with the
international markets.
3. Marked improvement in communication facilities and sharp decline
in their costs.

16
4. Development of more sophisticated risk management tools,
providing

economic agents a wider choice of risk management strategies. 5.

Innovations in the derivative markets, which optimally combine the
risks and returns over a large number of financial asset leading to
higher returns, reduced risk as well as transaction costs as compared to
individual financial assets.

6. Education and awareness programs to general public through

seminars and digital media.

1.3 Trading In Derivative Market:

Trading of derivative is governed by the provision contained in the

SEBI Act. The rules and regulations framed there under the bye-laws
of stock exchanges. SEBI has the main power which is to regulate the
interest of the investors by the fraudulent means by the brokers. As
discussed earlier, a derivative is an instrument whose value is derived
from the value of its underlying asset which can be stocks,
commodities, index prices etc. financial derivatives market in India
are regulated and controlled by SEBI. Some of the other financial
derivatives like currency options, futures and interest rate futures are
controlled by the Reserve Bank of India. Commodity futures markets
are regulated in India by forward market commission (FMC).

Investors invest in derivative for different purposes like individual

investor invests for speculation, hedging and yield enhancement.
Institutional investor invests for hedging asset allocation, yield
enhancement and to avail arbitrage opportunities. Corporation invests

17
to hedge currency risk and inventory risk. Dealers invest for hedging
position taking, exploiting inefficiencies and earning dealer spreads.
Investors can invest in any types of derivative contracts such as
forwards, futures, options and swaps as explained above.
1.3.1 How investors invest in derivative market:

1. Research: This is the step where investors research about the market
condition price trends according to their preferences or past market
trends in order to invest in proper contracts.

2. Margin Amount: it is an amount which every investor should kept

in account before trading. The amount is set by the exchange. To the
extent of this margin amount investors can start trading. It is
mandatory for every investor.

3. Selection Of Stocks: at this stage an investor select stocks. As

discussed earlier derivatives has derive its value from the underlying
asset that asset can be any commodity, stocks etc. so the investors
need to select that stocks wisely as per the margin amount.

4. Conduct trade: After completing the above four steps an investor

can conduct a lawful trade of the contracts.

1.4 APPLICATION OF FINANCIAL DERIVATIVES: Some of the

application of financial derivative can be enumerated as follows:
1. Management Of Risk:- this is the most important function of
derivatives. Risk management is not about the elimination of risk
rather it is about the management of risk. Financial derivatives provide
a powerful tool for limiting risk that individuals and organization faces

18
in the ordinary conduct of their business. Effective use can increase
returns for the organizations. derivati I can save cost

2. Efficiency In Trading:- financial derivative allows for free trading

of risk components and that leads to improving market efficiency
Traders can use a position in one or more financial derivatives a
substitute for a position in the underlying instruments. In many
instance trader find financial derivative to be a more attractive
instrument than the underlying securities. This is mainly because of
the greater amount of liquidity in the market offered by derivative as
well as the lower transaction cost associated with the trading od
financial derivative as compared to the cost of trading the underlying
in cash market.

3. Speculators:- financial derivatives are considered to be risky. If not

used properly, this can lead to financial destruction in an organization.
However this instruments act as a powerful instrument for
knowledgeable traders to expose themselves to calculate and well
understood risk in search of a reward that is profit.

4. Price Discover:- another important application of derivatives is the

price discovery which means revealing information about future cash
market prices through the futures market. Derivative market provide a
mechanism by which diverse and scattered opinions of future are
collected into one readily discernible number which provides a
consensus of knowledgeable thinking.

5. Price Stabilization function:- derivative market helps to keep a

stabilizing influence on spot prices by reducing the short term
fluctuations. In other words, derivative reduces both peak and depth

19
and leads to price stabilization effect in the cash market for underlying
asset.

1.5 POLICY ISSUES OF INDIAN DERIVATIVE MARKET

An important step towards introduction of derivatives trading in India

was the promulgation of the securities laws (amendment) ordinance,
1995 which lifted the prohibition in securities 2001. SEBI also set a
group under the chairmanship of prof J.R.Verma in 1998 to
recommended risk containment measures for derivative trading. The
government decided that a legislative amendment in the security laws
was necessary to provide legal framework for derivative trading in
India. Consequently the securities contracts regulation amendment bill
in 1998 was introduced.

1.5.1 Benefits of trading in derivatives:

1. Risk Management: futures and option contract can be used for

altering the risk investing in spot market. By purchasing different
contracts one can hedges with the risk. When an investor performs
option contract he has option as call and put. When the prices are
decreasing in the market one should perform call (buy) option. And
vice-versa.

2. Price Discovery: it refers to the market's ability to determine the

equilibrium price. Futures prices are believed to contain information
about future spot prices and helps in determining such information.
As, we have seen, futures market provide a low cost trading
mechanism. Thus information pertaining to supply and demand easily
percolates into such markets.

20
3. Operational Advantages: as opposed to spot market, derivative
market involve lower transaction cost. Secondly, they offer greater
liquidity. Large spot transaction can often lead to significant price
changes. However, future market lead to be more liquid than spot
market. Because herein, you can take large position by depositing
small margin. Consequently, a large position in derivative market is
relatively easier to take and has less of at price impact.

4. Market Efficiency: the availability of derivatives makes markets

more efficient. Spot futures and options markets are linked. Since it is
easier and cheaper to trade in derivatives. It is possible to exploit
arbitrage opportunities quickly.

5. Ease Of Speculation: derivative market provide speculators with a

cheaper alternative to engaging in spot transactions. Also, the amount
of capital required to take a comparable position in less in this case.
This is important because facilitation of speculation is critical for
ensuring free and fair markets.

1.6 Risk involved in trading derivatives:

1. Liquidity Risk it applies to investors who plan to close out a

derivative trader prior to maturity Such investors need to consider if it
is difficult to close out the trade if existing bid-ask spreads are so large
as to represents a significant cost.

2. Market Risk:- it refers to the general risk in any investment.

Investors make decisions and take position based on assumptions,
technical analysis or other factors that lead them to certain conclusions

21
about how an investment is likely to perform. An important part of
investment analysis is determining the probability of an investment
being profitable and assessing the risk/reward ratio of potential losses
against potential gains.

3. Counterparty Risk: it arises if one of the parties involved in a

derivatives trade, such as the buyer, seller or dealer, defaults on the
contract. This risk. is higher in over the counter, or OTC market which
are much less regulated than ordinary trading exchanges. A regular
trading exchange helps facilitate contract performances by requiring
margin deposit that are adjusted daily through mark to market process.

4. Interconnection Risk:- it refers to how the interconnection between

various derivative instruments and dealers might affect an investor's
particular derivative trade. Some analysts express concern over the
possibility that problems with just one party in the derivative market.

5. Price Risk: derivatives being traded on the securities exchange are a

relatively new phenomenon. Hence all participants including the most
seasoned ones are clueless as to what should the pricing of these
derivative be. The market is functioning in terms of superior
knowledge relative to peers. Hence there is always a risk that the
majority of the market may be mispricing these derivatives and may
cause large scale default.

6. Agency Risk: a very less talked about problem pertaining to

derivatives market is that of agency risk. It simply means that if there
is a principal and an agent, the agent may not act in the best interest of
the principal because their objectives are different from that of the
principal. It means if a derivative trader is acting on behalf of a
multinational corporation the interest of the organization and that of
22
the individual employee who is authorized to make decision may be
different.

1.7 SEBI ADVISORY COMMITTEE ON DERIVATIVES: The SEBI

board in its meeting on June,24 2002 considered some important
issues relating to the derivative markets including:

• Physical settlement of stock options and stock futures contract.

. Review the eligibility criteria of stocks on which derivative products

are permitted.
Use of sub-broker in the derivative market and
. Norms for use of derivatives by mutual funds.
The advisory committee recommended on derivative on some of these
issues were also placed before the SEBI board. The board desired that
these issues be reconsidered by the advisory committee. The
committee believes that regulation should be designed to achieve
specific well defined goals. It is inclined towards positive regulation
designed to encourage healthy activity and behavior.

1.8 Investor Protection for Derivatives:

i.Fairness and transparency: the trading rules should ensure that

trading is considered in a fair and transparent manner. Experience in
other countries shows that in many cases, derivative broker/dealers
failed to disclose potential risk to clients. In this context sales practices
adopted by dealers for derivative would require specific regulation. In
some of the most widely reported mishaps in the derivative market
elsewhere, the underlying reason was inadequate internal control

23
system at the user firm itself so that overall exposure was not
controlled and the use of derivative speculation rather than for risk
hedging.

ii.

Safeguard For Client's Money: moneys and securities deposited by

clients with the trading members should not only kept in a separate
clients account but should also not be attached for meeting the broker's
own debt. It should be ensured that trading by dealers on own account
its totally segregated from that for clients.

Competent And Honest Service: the eligibility criteria for trading

members should design to encourage competent and qualified
personnel so that investor are served well. This makes it necessary to
prescribe qualification for derivative brokers/dealers and the sales
persons appointed by them in terms of knowledge base.

iv.

Market Integrity: the trading system should ensure that the market's
integrity is safeguarded by minimizing the possibility of defaults. This
require framing appropriate rules about capital adequacy, margins.
clearing corporation, etc.

Financial Integrity Regulation:

1. Capital based qualification for financial intermediaries.

24
2. Adequate clearing and payment facilities.

3. Partially margin requirements and regulatory oversight over levels

of margin.

4. Use of credit with some credit restriction. 5. Monitoring of financial

compliance by regulator.

6. Protection of customer fund including segregation of customer

funds from those of the firms and performance guarantee.

7. Compensation type funds.

8. Clearing guarantee which permits multilateral netting by novation.
9. Maintenance and retention of financial records. 10. Contingency
planning.

1.8.1 Customer protection/ fairness regulation:

I International regulatory and Indian regulatory practices framework

authorization based on fitness requirements relating to qualification
and good standing.

2. Fair order execution requirements 'customer first rule' in dual

capacity trading.

25
3. Sales practice standards including required disclosures, prohibition
on misrepresentation and unauthorized trading.

4. Monitoring of compliance with sales practices. 5. Creation and

maintenance of records on transaction including executed

confirmations and information to customers.

1.8.2 Recent SEBI Guidelines for Derivatives:

SEBI has laid the eligibility conditions for Derivative

Exchange/segment and its Clearing Corporation /house to ensure that
Derivative Exchange and Clearing Corporation provide a transparent
trading environment, safety, integrity and provide facilities for
redressal of investor's grievances. Some of the important eligibility
conditions are:

1. Derivative has to take place through an online screen based trading

system.

2. The Derivative exchange shall have online surveillance capability to

monitor position, prices, and volumes on a real time basis so as to
deter market manipulation.

3. The Derivative Exchange should have arrangements for

dissemination of information about trades, quantities and quotes on a
real time basis through at least two information vending networks,
which are easily accessible to investors across the country.

26
4. The derivative exchange should have arbitration and investor
disputes redressal mechanism operative from all four areas of the
country.

5. The derivative exchange should have satisfactory system of

monitoring

investor complaint and preventing irregularities in trading.

6. The derivative segment of the exchanges would have a separate

investor protection fund.

7. The clearing corporation house shall perform full novation i.e. the
clearing corporation/ house shall interpose itself between both legs of
every trade, becoming the legal counterparty to both alternatively
should provide an unconditional guarantee for settlements of all
trades.

8. The clearing corporation/house shall have the capacity to monitor

the overall position of members across both derivatives market and the
underlying securities market for those members who are participating
in both.

9. The level of initial margin of index futures contracts shall be related

to the risk of loss on the position. The concept of value at risk shall be
used in calculating required level of initial margins. The initial margin
should be large enough to cover the one day loss that can be
encountered on the position on 99 per cent of the days.

27
10. The clearing corporation/house shall establish facilities for
electronic fund transfer for swift movement of margin payments.
11. In the event of a member defaulting in meeting its liability the
clearing corporation shall transfer client position and assets to another
solvent member or close out all open position.

12. The clearing corporation should have capabilities to segregate

initial margins deposited by clearing members for trades on their own
account and on account of his client. The clearing corporation shall
hold the client's margin money in trust for the client purposes only and
should not allow its diversion for any other purposes.

13. The clearing corporation shall have a separate trade guarantee fund
for the trades executed on derivative exchange segment.

14. Investor's money has to be kept separate at all levels and is

permitted to be used only against the liability of the investor.

15. The trading member is required to provide every investor with a

risk

disclosure document which will disclose the risk associated with the

derivatives trading so that investor can take a conscious decision to

trade

in derivatives.

28
16. The order should be executed and accepted only with the customer
ID.
1.8.3 Clearing mechanisms:

The National securities clearing corporation limited (NSCCL) a

wholly owned

subsidiary company was incorporated in august 1995 and commenced

clearing

operations in April 1996.National securities clearing corporation

limited

undertakes clearing and settlement of all trade executed on the futures

and

options. Settlement is a two way process which involves transfer of

funds and

securities on the settlement date. Clearing is the process of

determination of

obligations, after which the obligation are discharged by settlement.

NSCCL has two category of clearing members: trading clearing
member and custodian. Where trading members trade on behalf on
their clients. Trade which are for settlement by custodian are indicated

29
with a custodian participant's code and the same is subject to confirm
settlement of these trades on T+1 day by the cut-off time 1 p.m.

1.8.4 Clearing members:

Trading member clearing member (TM-CM):- a clearing member who

is also a TM. Such CM may clear and settle their own proprietary
trades, their clients' trade as well as trade of other member.

Professional clearing member (PCM):-a CM who is not a TM. They

only clear the

contracts and not trade for their members. Clearing Banks: funds
settlement takes place through clearing banks. NSCCL has

emplaned 13 clearing banks namely Axis Bank, Bank Of India,

Canara Bank etc.

1.9 Investor awareness measures by SEBI:

Investor protection legislation is implemented under section 11(2) of

the SEBI act.

The measures are as follows:

30
Stock exchange and other securities market business regulation.
Registering and regulating the intermediaries of the business like
brokers,

transfer agents, investment consultant etc. Recording and monitoring

the work of custodian, depositor, participant,

foreign investor, credit rating agencies etc.

Registering investment scheme like mutual fund and regulating their

functioning. Promotion and controlling of self-regulatory companies.

Keeping a check on frauds and unfair trading methods relating to

securities. • Observing and regulating major transaction and takeover
of companies.

Train the intermediaries of the business.

Assessment of fees and other charges.

Investor Awareness Programme:

Investor protection measure by SEBI follows the slogan An informed

investor is safe investor SEBI has thus launched the securities market
awareness campaign in Jan. 2003. Such Programme are now regularly
organized by SEBI to educate and create awareness among the

31
investors. The Programme covers major subjects like portfolio
management, mutual funds, tax provision, and investor's grievance
redressel system.

It also conducts workshops on derivative, stock exchange trade,

Sensex etc. SEBI has now conducted over 2000 workshops in more
than 500 cities across the country SEBI has marketed the investor's
awareness Programme across all formats like print media, radio,
television, and the internet.

1.9.1 The functions of SEBI relating to investor's awareness:

a. Regulation of stock exchange: in order to regulate the business in

the stock exchange and prohibit the fraudulent and unfair trade
practices in the capital market, SEBI perform some functions. It calls
for information regarding finances of the company, undertake
inspection, conduct enquiries and audit among stock exchanges.

b. Regulation of stock brokers: working of stock brokers, sub-broker,

share transfer agents, portfolio manager, etc. are also regulated and
registered under the SEBI act in order to inhabit fraudulent brokers
from taking advantage of investors.

c. Protection of investors: as already discussed in the previous

measures SEBI empowers its investors, especially retail investors
educating and training programs.

d. Registration of intermediaries:it is mandatory for the regulators to

compulsorily register with SEBI as per their rules and guidelines. The

32
rules are first applied during the application and registration process
along with the fees. SEBI has the right to reject the proposal from the
intermediaries or suspend or cancel the registration at any given time
if any discrepancy in the operation of intermediary is observed.
However, if the intermediary is not satisfied with the order of SEBI,
then they can appeal to the government of India.

e. Make rules and regulation with changing times: the rules under the
SEBI act are framed by the government of India. The rules are
generally related to functions performed by SEBI, constitution of
Securities Appellate Tribunal (SAT), maintenance of its accounts,
manner of inquiry, penalties. SEBI however, is empowered to make
regulations which are approved by the government before being
passed.

1.9.2 Investor's assistance and Education

In order for the investor to enjoy investing in high risk market, the
investor should know how to invest, they should have full knowledge
of the market, they should be aware of the fact that market is safe and
free form fraudulent, also in case they face any grievance while
investing in the market, then they should be aware that there is an
arrangement for redressal of their grievances. The main importance of
investor protection is to build confidence among the investors. In
Order to promote investor education and assistance SEBI has laid
down protection strategies which has four elements.

These are as follows:

33
1. The First element is to build a capacity of investors through their
education. and awareness so that the investor can make an informed
investment decision. Investment according to the guidelines is a three
step procedure, wherein the investor first learns the nuances of
investing collects information required for investing and evaluates
various investment options and then makes investment. Also the
investor should know how to deal with the intermediaries and how to
seek help in case of grievance.

2. Secondly, SEBI makes sure that all the information regarding the
intermediaries and stock market is available to the investor in a public
domain. SEBI operates with disclosure based regulatory regime
wherein the issuers and intermediaries disclose are bound to disclose
relevant details about themselves.

3. Thirdly, SEBI has ensured that the market is operated under the
systems which are safe. The steps taken by SEBI in this direction
include dematerialization of securities. T+ 2 rolling systems, screen
based trading system and it has framed various regulations for smooth
operation.

4. Finally, SEBI deals with resolving the grievances investors, SEBI

has a

comprehensive mechanism to facilitate the redressal of investor

grievances.

Also an investment protection fund has been established which is used

to

34
compensate investors when broker is declared a defaulter (SEBI
investor

official website, n.d.).

There are lots of campaigns and seminars have been initiated by SEBI
for investor education and assistance. The main intention of this
campaign was to give out important messages with respect to latest
development in the derivatives market for investor's assistance and
education. SEBI aim was to make investors aware with respect to;
schemes which promise unrealistic returns, product and opportunities
like mutual funds, etc. The aim is not to promote any specific product
however, to make the people aware of the opportunities which
derivative market holds for the investors.

This Campaign is being carried out across the country in 13 different.

languages including English and Hindi so the awareness is reached to
maximum number of people. Another aim of the campaign was to
make the people. Another aim of the campaign was to make the
people aware about the Grievance Redressal System. With the
awareness regarding the redressal system, investors would feel
confident and aware about investing in derivatives market.

1.9.3 Investor Awareness Programs and Workshops

SEBI has conducted many different awareness and education

programs with the help of different government bodies like;
Exchanges. Depositories AMFI, etc. Some of the awareness and
education programs initiated by SEBI are given below:
1. Regional Seminars:

35
This initiative was initiated in FY 2011-12 and primarily concentrated
on increasing the awareness in Tier II and Tier III cities of the country.
As of the end of fourth quarter of FY 2012-13, a total of 91 (47 in FY
2011-12 and 44 FY 2012-13) regional seminars have been conducted
in different cities.

2. Dedicated Investor Website: SEBI maintains a dedicated website

which has been designed for educational purposes of investors. Since
the time of inception, a number of changes have been made in the
website in order to make it user-friendly Also the website is updated
regularly with latest information. The schedule for various educative
programs is easily available on the website which can be referred by
the investor. Recently a study was conducted by IOSCO on regulatory
bodies of India in order to evaluate their investor education program.
As per the results, SEBI scored 4 out of 5 points which was excellent
score.

3. Educative Material for Investor Education and Awareness: SEBI

makes an effort to update the educative material available to the
investor's covers wide range of topics. Also, the officials have
uploaded videos related to how one can lodge a complaint when they
face any grievance.

4. Education in Finance:

The education in finance is compulsory for everyone who are in the

derivate market and accordingly SEBI has brought various educational
programmers for giving financial literacy to the investors.

36
5. Programs in Schools: In order to promote investment among the
school going children, SEBI introduced a program named Pocket
Money for school students. The program was a joint venture between
National Institute of Securities markets and SEBI and was launched in
FY 2008-09. The students studying in class 8th and 9th were targeted
in his program. The main of this program was to increase financial
literacy among the school students. Initially the orientation and
training programs were conducted for the school principals and
teachers who then imparted the education to their participants.

In the last FY, nearly 25 such programs were conducted which

benefitted a total of 150 schools, 1,180 teachers, and 5,072 students.

1.9.4 Investor Protection Fund:

IPF is set by inter-connected stock exchange in accordance with

guidelines. issued by the ministry of finance for investor protection, in
order to compensate the claims of investor against the member of
exchanges (brokers) who have defaulted or failed to pay. The investor
can ask for the compensation if a member (broker) of the NSE or BSE
or any other stock exchanges fails to pay the due money for the
investment made. The stock exchanges have put certain limits on the
level of compensation paid to the investor. The limitation has been put
according to the discussion with IPF trust. The limits allow that the
money to paid as a compensation for a single claim shall not be less
than INR 1 lakh- for the case of major stock exchange like BSE and
NSE- and it should not be less than INR 50000 in case of other
exchanges.

To rationalize and strengthen the framework of the derivative market,

SEBI has introduce some investor awareness which are as follows:

37
1. Physical settlement for all stock derivatives which shall be
implemented in

phased manner.

2. The criteria for introduction of new stocks to derivative segment

shall be tightened.

3. Individual investor shall take position in cash & derivatives up to a

computed exposure based on their income tax return.

in class 8th and 9th were targeted in his program. The main of
this program was to increase financial literacy among the school
students. Initially the orientation and training programs were
conducted for the school principals and teachers who then imparted
the education to their participants.

In the last FY, nearly 25 such programs were conducted which

benefitted a total of 150 schools, 1,180 teachers, and 5,072 students.

1.9.4 Investor Protection Fund:

IPF is set by inter-connected stock exchange in accordance with

guidelines. issued by the ministry of finance for investor protection, in
order to compensate the claims of investor against the member of
exchanges (brokers) who have defaulted or failed to pay. The investor
can ask for the compensation if a member (broker) of the NSE or BSE

38
or any other stock exchanges fails to pay the due money for the
investment made. The stock exchanges have put certain limits on the
level of compensation paid to the investor. The limitation has been put
according to the discussion with IPF trust. The limits allow that the
money to paid as a compensation for a single claim shall not be less
than INR 1 lakh- for the case of major stock exchange like BSE and
NSE- and it should not be less than INR 50000 in case of other
exchanges.

To rationalize and strengthen the framework of the derivative market,

SEBI has introduce some investor awareness which are as follows:

1. Physical settlement for all stock derivatives which shall be

implemented in

phased manner.

2. The criteria for introduction of new stocks to derivative segment

shall be tightened.

3. Individual investor shall take position in cash & derivatives up to a

computed exposure based on their income tax return.

***

39
 2.REVIEW LITRATURE

JAMBODEKAR(1996)

He conducted a study to assess the awareness of MFs among investors

to identify the information the buying decision and the factors
influencing the choice of a particular investment type. The study reveals
among other thing the income schemes and open ended scheme are
more preferred than growth schemes investor look for safety, liquidity,
and capital appreciation principles for the investment. Newspapers,
magazines are the first source of information through which investor
get to know about the schemes.

Sivanesan S (1997)

He revealed that his analysis has brought out various results arising
from different tools of analysis. All relevant factors have been
considered to bring out the relationsheep awareness. The investor's
invest for a considerable long period they tend to acquire more
awareness.

NOEL CAPON:
40
In his study affluent investor and mutual fund phrases stated that there
are many evidences that supports that in spite of risk and return other
factor also effect on mutual fund selection. E.g. a consumer survey on
1990 on mutual fund it was founded that past performance and level of
risk are two aggregate important factors but other factor also effect like
management fee, amount of sales charges. recommendation from
magazines and newsletters and clarity in accounting statement.

GARDON J. ALEXENDER, JONATHAN D.JONES AND PETER

J.NIGRO(1997)

They analyzed the various characteristics and investment knowledge of

investor and found that the investors are knowledgeable about the cost,
risk and returns associated with mutual funds.

RAJA RAJAN (1998)

He highlighted segmentation of investors on the basis of features,

investment size and the relationship between stage in the life cycle of
the investment and their investment pattern.

41
SIKIDAR AND SINGH (1996)

He carried out a survey with an objective to understand the behavioral

aspect of

investor in the north east region towards equity and MFs investment
portfolio. The survey revealed that the salaried and self employed
formed the major investors in MF primarily due to tax concessions.

GUPTA L.C. (1991)

He argues that designing portfolio for client is much more than merely
picking up securities for investment. the portfolio manager needs to
understand the psyche of his client while designing the portfolio.
According to gupta investor in India regards equity, debentures and
company deposits as being in more or less the same risk category and
consider including more mutual funds, including all equity funds almost
as safe as bank deposits.

SIKIN AND PABLA (1992)

42
Defined risk awareness as risk assessment in uncertainty and it depends
on the familiarity with organizational and management system. The
authors also developed a model of determinants of risk behavior and
identified personal risk preference and past experiences are the
important risk factor and social influence also effect individual
perception.

WOERHEIDE (1982)

He conducted a study on investors response to suggested criteria for

mutual funds in which he tested the effect of different factors. It was
proves that factors like size of fund, effectiveness of marketing
programme has strong impact.

DE BONDT AND THALER (1985)

While investigating the possible psychological basis for investor

behavior, argue that mean reversion in stock prices as an evidence of
investor over reaction where investors overemphasis recent firm
performance in forming future expectations.

SYAMA SUNDER (1998)

43
He conducted a survey to get the inside into the MF operation of private
institution with special reference to Kothari pioneer. The survey
revealed that the awareness about MF concept was poor during the time
in small cities. Agents play a vital role in spreading the MF culture,
open ended scheme were much preferred than age and income are two
important determinants in the selection of fund scheme brand image and
return are their prime consideration.

INVESTOR BEHAVIOR TOWARDS DERIVATIVE MARKET IN

INDIAN CONTEXT

DR.RISHI MANRAI.

The behavior of retail investors is changing towards derivative market

in India. For the last few years and with the introduction of behavioral
finance the researcher would like to capture that. The concept of
behavior finance is booming in the capital market, there is hardly any
place where its concepts are not being applied. There is a need to grab
more attention of the investors towards derivative market and draw
inferences from investors behavior so that the derivative market can
benefit and understand investors preference better and unravel the
factors that influence the risk tolerance level of the investors.
44
Barents Group LLC (1997) in his report on Capital Market
Developments: Next step for India, reviewed overall goal of any capital
market development effort. There maining part is then organised in four
pieces: increasing investor participation india's capital market,
supporting the growth of financial intermediaries ,increasing the
effectiveness of the SEBI, and supporting the development of India's
debt market.

He argued that India's capital markets are taptitli restog to an

sophistication.

However, like any "emerging" marker and like mans "matures" markah
fak market do not fully meet the idealised requirement. India's market
fase ter

kev

constraints to continued growth and maturity.

Study also argued that India's household savings and foreign investors
are bey sources of this capital and can and will be increasingly attracted
to more efficient safe and transparent market. Retail investors in India

45
are mostly short-ter traders, and day trading is not uncommon. This type
of trading is not conduce to capital formation because it does not entail
a reallocation of savings from other investment vehicles e.g. gold and
real estate to capital market instrumente provide a long term capital to
private enterprise. To the extent that bayiny publicly traded equities is
perceived as a risky and speculative short-term activity, many potential
investors will simply avoid capital market instruments altogether in
deciding to allocate savings.

R. Dixon and R. K. Bhandari (1997) in their article said that in the

capital markets segment, the practice of financial derivative has an
unforeseen upsurge. Subsequently, on financially organization, retail
participators as well as domestic frugalities, the derivatives gadgets can
have a momentous influence. Which is comparatively alteration on the
position to derivative has to call for rules. To use the derivative for
hedging counter to risks brings to itself fresh risks were fetched. How
legislature can encounter these concerned are issue in present
discussion among the financial diligence and the regulatory bodies
which is the major worries of regulatory bodies. In the capital market,
some of the main players have framed recommendations and reviewed.
And which is the perfect call for global harmonization and its
appreciation through mutually participators as well as regulatory
bodies. The Fresh global forum has been established for ensuring the
derivative markets, outstanding the dynamic device for risks

46
controlling, transmit least risks to participators, organizations as well as
domestic/worldwide economy and the call has been raised for the same.
To review how the derivatives work and proceed to examine regulation.
To considers, change in interest rate by the banks and securities houses
and influence their existence to derivative segment might ensure to the
instability in a market.

Patrick Me Allister and J.R.Mansfield (1998), their study analysed a

participation as well as function of finance derivative investments
properties folio managements. They also focused that derivatives have
a mounting and provocative characteristics of a financial segments
subsequently last two decades. Extensive series of producers as well as
other participators are using derivatives for managing the risks. Key
elements as well as kinds of the derivative have been analyzed with
explanation and boundaries and difficulties to straight outlays towards
properties involved in commerce has been talk over. Difficulties related
to straight properties outlays which are mitigating through prospects of
derivative segment have been scrutinized.

Yoon Je Cho (1998) showed in his study on Indian capital market

development and policy issues that an increase number of investors in
various segment of the nation are spread a country's market structure.
This raises productivity and assistance fast market incorporation. He

47
argued based on increasing turnover figures in the Indian stock
exchanges from 1994-95 to 1996-97, implying that it is conquered by
speculative investments and not uncommon in developing markets.
However, in India, the trading volumes are greater with compare to
those in other developing capital markets. The extension of NSE's
trading network, the primary attribute may be the considerable growth
in turnover. This is reflecting the fact that stock market is dominated by
speculative investments for short-term capital gains, rather than long
term investment in India.

He also argued based on study from 1964 to 1997 on increasing

resource mobilization by mutual funds that the confidence level is
increasing for investment in mutual funds in investors and which is
being the most preferred investment vehicles for the unprofessional
investor. This credit goes to somewhat to market circumstances, which
have affected the opinion and preference of investors. In the reframed
SEBI (Mutual Fund) Regulations of 1996, the wide flexibility has been
given to operate the schemes. As an outcome of this reform, for
attracting the investors, the advanced products are introduced by mutual
funds. This reframe guideline also presented superior transparency and
accountability, which is anticipated to boost investor confidence.

48
Anna A. Merikas et.al. (1999) conducted the research of the factors
frequently influence retail investor' behavior in the Stock Exchange of
Greek. The outcomes exposed from 150 investors that shows the
relation correlation within an elements of

behavioral finance as well as former experiential indication identifying

impacting

elements in average equity investors, as well as a single behavioural

aspect of

dynamic participators in the financial platform of Athens.

Abdulla Yameen (2001) highlighted of seminar on capital market

development and shows in emerging nations, every governments have
the primary goal is the developments in financial segments. And for
taking complete advantages of the globalization of world financial
segments, they are deciding to commence foremost restructurings of the
economic segments. He delivered the message to the business
community that this is essential they should have to take part as a
primary character for this segment because growth of capital segment
as equal as growth of private segment.

49
An essentiality of widen owner-ship as well as creating the wider
stockholder base

for

development of capital market and this massage also has been delivered
to investors

by him. Investors get the benefit of investors Education and Awareness

Campaign platform that is providing through financial markets segment
for familiarizing the risk-return tradeoff to invest in the instruments of
financial segment and must be watchful of any fresh informations with
concerned to changes or developments in the

financial market.

Speech was also focused on creating the fresh new class of mediators
on financial market who can trade with the help of platform provided
on behalf of the investors.

50
The financial mediators should professionally touch along sound
updated relevant informations of the financial market, able to operate
the available platforms, familiar

with ways and vehicles, aware about the norms and regulations as well
as fundaments. Before entering into financial market, participators are
depending upon some

degree

of professionally advisory which is providing by them. Moreover, the

primary factors. behind financial segment growth are reliability and
trustworthiness which create

in

the minds of participators through professionalism by the financial

market mediators.

Makbul Rahim (2001) argued in his speech at conference on

developments of the financial segment that for the progress and

51
expansion of the financial segment, the factual surroundings might be
provided by the structures framed through regulators. Involvement by
associated like issuing authorities, mediators of financial market,
traders and other participators are required for attaining such an
empowering situation. To grasp eminent hike, extraordinary principles
of integrity as well as proficient manner must retained. If these
principles will be diluted and settlement within the principles, not
another way the market even it is minor or giant would functionally
work. Healthy assurance and honesty are much significant. Disclosing
and rendering the correct informations can help to the investor for
taking right decision for investments.

P. M. Deleep Kumar and G. Raju (2001) argued that despite all-round

growth in fund mobilization size in the basket of primary segment,
mutual funds segment and upturn at trade size, progress to mobile in
investment of stocks and bonds do not enhanced yet. The study from
1993-94 to 1999-00, and showed that normal participators are not able
tracking the drive and path of the financial segment due to this segment
is fetching more and more risk and being multifarious in terms of
nature. So, those participators want to take the advantage of financial
market and who are not able to understand this market properly or who
do not want to take risk for them mutual fund are becoming the best
investment avenue. This is providing the alternate avenue for
participators who desire to enter in financial market.

52
The study revealed that maximum portion of investments of developed
nations are going to equity and maybe of this reason behind much
volatility in the financial market of India other than developed nations.

They also argued that the progress of financial market of India is

influencing to numbers of participators of the nation. The realistic
explanation of participators scattering and change in path in this
concerned has been provided through geographic scattering of
participators surrounded by numbers of locations in the nation. Only
five metros of India contribute more than half of retail stockholders in
the country. In India, only five states contributed 74.7% of the nation's
stockholder ship as well as 71.7% as per to total values of retail
stockholders which is shown by seattering of stock holder ship by states
and union territories. These five states are Maharashtra, Gujarat, West
Bengal, Delhi and Tamil Nadu, in which Maharashtra leads as on top
with following the rank respectively.

Requirement of large economic means and for that it is essential to

mobilize the

local saving for financial progress in the nation. Savings from domestic
segment create the
53
big section in the accumulated savings. Higher than 67 per cent gross
national savings.

are contributing by this segment only.

It has been found through trend reviews and analysis that, in the mid
time of 1990s, the financial markets developments with
dematerialization,

automated

dealing system, etc. and which has made entries in financial markets
very simpler, safe as well as translucent. Even though, according to the
views of participators,

the financial market is skepticism. Disappointed experiences as

stockholders. investors are avoiding the investments in stocks as a long
term investors. Numbers of participators are intent to minimize the
investment in stocks in unconditional

54
terms

instead of increasing it.

Probably, dissatisfaction and worst experience of the participators in the

financial market in both primary as well as secondary segments are the
cause behind this. This

is the participators hardcore earnings are invested in the financial

markets which should be minded to the Government as well as other
associated corporates and organizations. The Participators' innocence
of least awareness about the financial market is the weakness of the
market rather than strong point. If regulators and government want to
divert the flow idle money and other field's investment to the capital
market then the authorized body and other organizations must to
enhance the

awareness about the market through educating and guiding proper to

the

prospects

55
investors.

In the midpoint of the study also argued that for hedging the risks of
unfavorable trends in the invested capital, the derivative
commencement is on initial stage. And through this least lower
operation charge as well as provides profundity and fluidity in the
segment.

P.Carr and Dilip Madan (2001) considered a single period economy for
the study

in

which agents are investing for maximizing expectable usefulness of

fatal capital. Presence of three classes of assets such as risk-free (debt),
risky (equity) as well as derivative was assumed by them.

In study they disclosed that derivatives instruments do not consider as

a potential investment vehicle usually. Generally, derivatives are
considered and watched by

56
Way of tactical instruments for efficient reallocation of assets in various
asset classes

like cash, static earnings, stocks as well as alternate investment. An

optimum

derivative sites for user when users are not dealing constantly have been
defined the basic

purpose in their study. Derivative encompass a significant, exciting as

well as

distinct

asset class, poorly associated with other comprehensive asset classes

which have

been shown as per rational circumstances of the market.

57
They observed that the behavior is quite different between zero and
positive

cautiousness investors. Zero cautiousness investors invest in best

tailored asset as

per

own risks acceptance as well as placing total capital at risk-free class.

When, positive

cautiousness investors invest in risk-free funds as well as putting entire

capital at

the tailored derivatives instruments. They found that investor's optimum

settlement

is

enhancing along equity prices under up trend, and is decreasing under

down
58
trend.

However, they also found that during projected rewards are as per
riskless percentage then in-difference mark within longer to shorter.
Accordingly, the increasing payoff at expected return is above the risk-
free rate, but below that required for the risk accepted.

They argued that under similar philosophies, the demand can be made
by all

segment of investors for derivatives when dissimilarities at threat hatred

from corner to

corner

users. In the case of similar philosophies, on the financial ground, users

are not holding the position in derivative which is indicting through
two-fold outcome

59
form undeviating risks acceptance as well as undistinguishable caution.
In further side. investor beliefs that differ from investor optimally hold
derivatives then the risks acceptance weighting averages according to
specific opinions. The optimum As and

when derivative products are not kept at the baskets of financial

investment instruments and participators only putting their funds in to
equity as well as

debentures then an optimum derivative contribution to be zero. Peter

McKenzie (2001) at conference on developments of financial segment

debated

on the question when people have some saving then what they can do
of their

savings

and hot to convert from savings to investments. That can be put at risk-
free rate in the secure investment instruments or to be hold in a jar of

60
rice. But investors may have the right way for funds save, even if
substantial amount of companies are associated at imperative sectors of
the financial ground of the nation when the stock market is recognized.
The investors are having the prospect in the economic developments of
the country with sharing in the developments various industries and
segments of established and emerging companies. There are prospects
for balancing the folio of investments through swapping the
investments in various companies on the available platform provides by
stock exchange to number of investor. There is a wide opportunities for
investing the funds in numbers of companies rather than putting all eggs
in to the single basket and taking risk from one side means investor can
diversified their investments where finding the potential growth and
profit. Where to and how to invest the saving? such kind of questions
can be removed from the mind of retail and single investor and who can
take own decision for the investment. And if retail or single investor
cannot take decision own-selves then this can be possible through
investment in mutual funds where experts are taking the decision for
investment on behalf of investors i according to the objectives of
investors. These investments are being scattered with scattering the
risks in various segments of the industries.

He also focused with giving example. New Zealand that the financial
sector does not perform good due to the giant portion of the funds are
putting out of country's

61
economy. On the other hand, if the financial platform did not available,
the big portion offers was wanted to put in offshore. The financial
platform within the nation the investors to invest the saving for growing
inside the own economy as well as

inside in own nation.

Hong Kong Exchanges and Clearing Ltd. (2002) surveyed on

derivatives retail investors, and study conducts on 269 derivatives retail
investors from November

2001

to March 2002 who investing in HKEx derivative products as well as

behavioral

s, assertiveness and views of derivative investor.

aspects, a

A study analysed trading pattern by different investment characteristics:

62
The argued first based on empirical evidence that there is a wide dealing
practice as well as common trade volume of have a positive correlation.
There is a wider dealing quantity due to hardcore lengthy practice of
investors in the financial

segment. Second, Male investors traded to trade more frequently than

female investors. Third, the common trade volume by investor along
high and bigger Individual income traded. Fourth majority of
respondents are inspired through

the

dealing practices for starting to trade in derivative instruments. Fifth,

trading for profit is the key reason for derivatives trading other than
high rate of return. hedging, etc. Sixth, the most significant motivating
factors are more liquid market and more

transparent market. Seventh, majority of traders are infrequent in trade-

3 times or less in a month and Index futures is the most popular product
to trade most frequently. Ninth, a large proportion of the investors

63
invest in exchange cash products than derivatives or investment
avenues.

The study also showed that in comparison from users who are not
associated with automated electronic dealing; users of electronic
trading system have more amounts from male and younger person with
lower income. The elements involved behind inspiration of users and
non-users of electronic trading system are dissimilar For users of
electronic trading system are giving higher importance to least
brokerage structure, higher well-timed implementation as well as
automated accessibility The

non-electronic system users are giving more importance to safety of

capital as well trustworthiness of intermediary's electronic platform if
they are to deal with

electronic system.

Through empirical evidence form investor's opinion, study argued that

excluding the future contracts, the liquidness involve in derivatives
instruments are lower High transaction costs or margin requirement is
the barrier for active participation in derivatives market. But also shows

64
that more active traders do not have much complaint towards
transaction costs and margin requirement.

***

65
 3.RESEARCH METHODOLOGY

Research methodology is the specific procedures or techniques used to

identify. select process and analyze information about topic. In a
research paper, the methodology section allows the reader to critically
evaluate a study's overall validity and reliability. The methodology
section answers two main question how was the data collected or
generated? How was it analyzed.

Meaning of research:

Research in common pattern refers to a search for knowledge. One can

also define research as scientific and systematic search for proper
information on a specific topic.

Types of research

The research activity can be classified into several groups. Some of

these important research types are as follows:

66
1. Fundamental Research: fundamental or basic research is primarily
intended to find out certain basic principles. This research is directed
towards the increase of knowledge. The primarily in greater knowledge
of understanding of subject under study.

2. Applied Research it is the application of all available scientific

method in

social science research which helps to modify or alter, contradict any

existing theory or theories and helps to formulate policies.

3. Imperial Research: imperial research relies on experience or

observation alone, often without due regard for system and theory. It is
data based research coming up with conclusion which are capable of
being verified with observation and experiment It may also be reffered
as an experimental types of research. In such research it is necessary to
get facts at first hand at their face and actively to go about certain things
to stimulate the production of desired information. In such research
researcher must provide himself with a working hypothesis or guess as
to probable result.

67
4. Exploratory Research it is defined as a research used to investigate a
problem which is not clearly defined. It is conducted to have a better
understanding of the existing problem, but will not provide conclusive
result. For such a research, a researcher starts with a general idea and
uses this research as medium to identify issues, that can be the focus of
future research. An important aspect here is that the researcher should
be willing to change his or her direction subject to the revelation of new
data.it is often referred to as grounded theory approach.

5. Descriptive Research it is defined as a research method that describes

the characteristics of population that is being studied. This methodology
focuses more on the what of the research subject matter rather than the
why of the subject matter. In other words, descriptive research primarily
focuses on describing the nature of demographic segment, without
focusing on why a certain phenomenon occurs. In other words it
describes the subject of the research, without covering why it happens.

3.1 STATEMENT OF PROBLEM:

The study analysis investors awareness in Indian financial market and

derivative market.

68
3.2 HYPOTHESIS:

The investors are very much aware about the investment types available
in capital market and also about the money market instruments and the
different derivative contracts are available.

3.3 Objective of this research study:

• This research study has the following objectives,

• To study the financial markets of India and its various
classification.
• To study the derivative market of India and its origin.
• To study the process of investment in derivatives
• To study the types of derivative contract that are available.
• To study the participants in derivative market. To study the
investor's awareness related to the financial market of India,
• To study the types of investment that are made by the investors in
• capital market of India. To study how much investors are aware
about the investment in
• financial market in India. To study how settlement, trading, and
clearing takes place in derivatives.
• To study the different SEBI guidelines and measures to protect the

69
 • interest of investors in financial market.

3.4 Importance of the study:

1. This study helps to know about the financial market of India and its
different classification available in which investors are trading in order
to gain returns.

2. In this study the investment types in different financial market and

why investors prefer to invest in, has been discussed in detail.

3. Evolution of derivative market in India and different contract in

market

has been explained in this project.

4. Who are the participants are involved in the derivative market and
the nature of them are discussed in this study.

5. How the investors are investing in financial market although

there is risk, it has explained.

6. Risk involved in derivative trading has been discussed in this study.

7. This study gives clear information about the regulatory authorities of

Indian financial market.

8. This study helps to know the recent area of derivative explained by

the security and exchange board of India.

70
9. This study helps to know the Indian capital market and money market
and its different classifications and instruments.

10.Investors' awareness measures and different protection taken by the

SEBI has been explained in detail this study.

3.5 Methods of data collection:

Primary Method:- primary data is the data which are collected a fresh
and for the first time. In primary data the original characteristics of
sample has been frame. It can be collected through experiments or
survey. If the researcher performs an experiments he observes some
quantitative measurement. This will help him or her to examine the
validity of the hypothesis. There are various methods to collect primary
data. They are as follows:

1. Observation Method.

2. Structured Observation.

3. Survey Methods.

4. Interview methods.

5. Questionnaire Method. Etc.

71
Secondary Method : It refers to data which is collected by someone
other than user. It has second hand data collected by someone else.
Secondary data analysis can save time that would otherwise be spent
collecting data and particularly in the case of quantitative data, it can
provide larger and higher quality databases that would be unfeasible for
any individual researcher to collect on their own.

Internet, historical documents, reports, published journals, books,

magazines, statistics, online websites, newspaper, periodicals,
published diaries, letters etc.

3.6 LIMITATIONS OF THE STUDY:

1. Due to the lack of awareness about the derivative market many

investors may not be responded properly.

2. This study is not focused on professional investors who have

expertise and invests big amount in financial market. Because these
investors are less in number and they are not easily accessible.

3. The data is based on the responses given by the investors which are
purely biased.

4. Respondents has given answers as per their personal experience while

investing.

72
5. The data is limited to few investors. So, the research study is extent
to the limited number of investors.

73
 4.FINDINGS,DATA ANALYSIS AND INTERPRETATION:

Through these data I can say that people (investors) are more aware
about the stock market i.e. capital market investments. In derivative
market also investors are ready to invest but less as compared to
derivatives and in money market investors who don't want to take any
type of risk and wants to generate stable return like persons with age
groups of above forty years are ready to invest in money market. In
money market also treasury funds and other government issued funds
are there which offers stable return with low risk. And it involve short
term borrowing lending and selling of securities with a minimum
maturity of one year These money market instruments are generally

74
purchased by the companies to meet their short requirement these
instruments are issued at discount and redeemed at face value. In these
data 8 investors are investing in certificate of deposits which are
issued by the bank and redeemed at their maturity date. They are
transferable as we can sell it to anyone else. As according to these
primary data stock market investors are more. It means more people
are there who ready to invest in stock market, as answers given by the
respondents stock market offers more returns as compared to
derivatives. And in stock market more options are available as shares,
debentures, bonds etc. they offers returns as per their nature of risk
bearing ability investors can go for investing in capital market
investments. While derivatives offers more risk as forward and swaps
contracts are exchange traded and futures and options are over the
counter traded, which involves more risk of counterparty default and
derivatives investors are more educated investors between the age
group of 25-30. Only they are aware about the investment in
derivative while capital market i.e. share trading is done by the people
age group starting from 22-40. All are aware about the stock market
trading. As more options are available investors can pick any
investment as per his choice and stock trading are more standardized
as compared to derivative because it is traded on exchanges. And
certain types of derivatives contracts are over the counter traded.
Which is not standardized.

75
 TYPES OF CONTRACTS NO. OF RESPONDENTS

FORWARDS 3

FUTURES 6

OPTIONS 5

SWAPS 2

76
Derivative investments is done by the people who are well educated
and have knowledge about derivatives market. So, derivative
instruments investments are confound by the literate people. Hence,
awareness among the investors of derivative contract less as compared
to capital market trading. No doubt derivatives are profitable for the
investors those who invest in it they gave positive response. But the
trading in derivative is more risky as it depends on predictable nature.
And the hedger's speculators and arbitrageurs they are the traders of
derivative market they charge high commission of their services as
compared to share market brokers. Hence, derivative trading is done
by the limited people having more knowledge about it. In derivative
market investors which are investing are more prefer to invest in
futures and options as these are the contracts are exchange traded and
provides more safety of trading, while in forwards and swaps no
exchanges are there. So, it takes place over the counter basis which
has high risk of counterparty default, hence people are less preferring
to invest in forward and swaps. Although swaps are used by very less
number of people as compared to other contracts and then to the
people who are investing to invest in swaps they prefer currency
swaps.

77
As shown in above diagram derivative has more turnover as compared
to the equity. Equity capital investment are more risky as they are the
ownership capital of the organization. When the company has more
profits then the returns. on the equity will be more and vice-versa.
While derivative contracts provides more returns as compared to
equity. Because the price fluctuation in the contracts provide more
opportunity for hedgers and speculators to generate returns. It is not
possible in equity. Therefore as compared to equity, derivatives are
more preferred by the investors.

After analyzing all the datas which is gathered for this project I also
found that

78
i) There are different types of financial markets in India. And they have
different instruments which are traded by the investors.
ii) I found that if an individual who don't want to take risk and wants
togenerate moderate returns can go for investment in money market.

79
 5.SUGGESTIONS:

Suggestions for the Derivative Investors

1 Derivative investors should perceive the market trend, market

reforms, government policies and market regulation. Increased
perception on derivative investment can help the investors to make
prudent investment decision at the right time.

2. Derivative investors ought to consider the motivating factors i.c..

factors influencing derivative investment in India such as
expectations. comfort ability, low brokerage, worldwide demand for
derivative instruments, less volatility, investors' participation,
earnings, index & sensex, profitability, demand of scraps, economic
condition of the country, government policies, market efficiency and
trends in foreign market while Investing in derivative instruments.

3. The investors of the derivative instrument should seek more

information on products and market to analyse the risk and return and
to identify the good investment opportunities while investing in
derivative products.

80
 4. While making investment decision, investors should gather proper

knowledge about the different financial markets which are available.

5. The investors of the derivative investment have to understand the

risk - return concept, risk-return strategy and risk hedging mechanism
to improve investment.

6. It is suggested that in order to improve the risk management

investment appropriate contracts should be choosen.

81
 6.CONCLUSION

Now a days investors know about the financial market, so they are
aware as investment in this market offers more returns. In India there
are financial market grows rapidly day by day. As discussed financial
markets offers end number of financial instruments traded in the
market. Investors are keep on trading in the market based on their
wants to generate returns. In financial market there are classifications
available as capital and money market. Capital market is suitable for
long term and medium term investments for the investors. While in
money market investors go for short term investment. Derivative
market is a market which involves investment in its underlying asset.
That asset can be in form of commodities, stocks, ornaments etc.
players of the derivative market are hedgers, speculators, arbitrageurs.
There are also mechanisms given for the clearing and trading of the
derivative markets. In the financial markets investors gets exploited by
the brokers. So, for that SEBI has taken measures for protection and
education of investors also training programme for educating
investors. Capital formation and investment culture among the people
of a country with faster economic growth is a necessary prerequisite.
Investment culture, attitudes, perceptions, and putting their savings in
various financial assets, more popularly known as securities
mentioned in the will of individuals and organizations. Investors'
perceptions and preferences of the study, thus, the development and

82
regulation of security markets in general, and the protection and, in
particular, for designing policies to encourage small investors and
house-hold will assume greater importance. The Indian capital market
is more dynamic and modern capital market has undergone dramatic
changes in the last several years. SEBI effort was the Indian Capital
Market, effective, efficient, transparent and investor-friendly Sebi
initiatives equity investment income derived from the number of new
products, reducing the settlement cycle, dematerialization, and bear
testimony of compulsory rolling settlement with the script in recent
years. Derivatives led to greater market liquidity, price discovery,
enhance, broaden the

Range of participants, and to reduce volatility. Widespread use of

derivative

Instruments is considered to be a major cause of the 2008 financial

crisis.

However, The flagged the use of derivative instruments. Failure of

internal control systems

of

83
Many of these traders are rough supervise adequately, perhaps because
of that exploit. Due to some deficiencies in the design of strategies for
catastrophic coverage were others, however, simply be a high-risk high-
return strategies for aggressive investors get the result. The results of
this research are to study the derivatives market that investors do not
have to deal with the proper knowledge can be inferred from the use of
derivative instruments, but they still want to continue using this product.
However, cash is preferred over the derivatives segment of the
investment. But most of the existing investors in the user form be afraid
to enter into a derivative of the segment; there's a misconception about
the speculation is that it is a part. I was in charge, the regulatory body
should be more concentrated use of rough and remember to remove the
misconception investors. Derivatives bring greater liquidity to the
market, improve price discovery, broaden the range of participants, and
reduce volatility. The widespread use of derivative instruments is
considered to be one of the main causes of the 2008 financial crisis.
However, the use of derivative instruments has not flagged. Many of
these were because of rough traders who exploited the failure of internal
control systems to supervise them adequately. Some disasters were due
to deficiencies in the design of the hedging strategies while others were
simply the result of aggressive investors pursuing high-risk high-return
strategies. From the results of this research the study can conclude that
the investors who are dealing With the derivatives market they don't
have proper knowledge of the usage of derivative instrument but still

84
they want to continue with this product. However, the cash segment
investment is more preferred than derivative. But form the existing
users' point of view the most of the investors have fear to enter in the
derivative segment; there is a misconception in their mind that it is a
part of speculation. In concerned with this, the regulatory body should
have to more concentrate to erase the rough usage and misconception
in the mind of the investors.

85
 7. BIBLIOGRAPHY:

www.nse india.com

www.bse India.com

www.SEBI.gov.in

https//on Wikipedia. Org/wiki stock market

www.derivatives india.com

commodity and derivative market text book(B.M.S. SEM-V)

innovative financial services text book (B.M.S. SEM-VI)

www.academia.com

www.wikipedia/ derivative markets/ participants.

www.wikipedia/information of different financial markets.

http// finance.indiamart.com/financial market.

86
QUESTIONNAIRE:

1) NAME OF THE INVESTOR?

________________________________________________________

2) ARE YOU AWARE OF THE FOLLOWING INVESTMENT

AVENUES?

CAPITAL MARKET INVESTMENTS:

EQUITY SHARES-

PREFERENCE SHARES-

DEBENTURES-

BONDS-

MONEY MARKET INVESTMENTS:

TREASURY BILLS -

CERTIFICATE OF DEPOSITS-

COMMERCIAL PAPER-

OTHERS-

3) WHICH ONE OF ABOVE INVESTMENT AVENUES YOU

PREFER TO INVEST?

87
4) ARE YOU AWARE ABOUT THE DERIVATIVE MARKET?

YES-

NO-

5) IN DERIVATIVE MARKET WHICH INSTRUMENTS YOU

PREFER RO INVEST ?

FORWARD-

FUTURES-

SWAPS-

OPTIONS-

6) IN THE PAST YOU HAVE INVESTED MOSTLY IN WHICH

MARKET?

CAPITAL MARKET-

DERIVATIVE MARKET-

OTHERS-

7) WHAT ARE THE IMPORTANT FACTORS YOU CONSIDER IN

YOU INVESTMENT ?

RISK-

RETURNS -

88
DIVERSIFICATION-

PAY BACK PERIOD-

8) WHAT IS THE PURPOSE BEHIND YOUR INVESTMENT?

WEALTH CREATION-

TAX SAVING-

EARN RETURNS -

OTHERS-

9) ACCORDING TO YOU WHICH MARKET OFFERS MORE

RETURNS?

CAPITAL MARKET-

DERIVATIVE MARKET-

OTHERS-

10) WHAT IS THE TIME PERIOD FOR WHICH YOU PREFER TO

INVEST?

SHORT TERM (0-10yrs)-

LONG TERM (5yrs & above)-

11) WHAT PERCENTAGE OF INCOME DO YOU INVEST?

15-30%-

30-60%-

89
12) WHAT IS YOUR SOURCE OF INVESTMENT ADVICE ?

NEWSPAPER-

BOOKS-

INTERNET-

FAMILY OR FRIENDS-

13) ACCORDING TO YOU WHICH MARKET IS BEST FOR

INVESTMENTS ?

STOCK MARKET-

DERIVATIVE MARKET-

OTHERS-

14) AT WHICH RATE YOU WANT YOUR INVESTMENT TO

GROW?

STEADILY-

AT AN AVERAGE-

FAST-

15) HOW OFTEN DO YOU MONITOR YOUR INVESTMENT?

DAILY-

MONTHLY-

YEARLY-

90