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F&o Markets
F&o Markets
F&o Markets
A REPORT
submitted by
BACHELOR OF TECHNOLOGY
in
CIVIL ENGINEERING
under the supervision of
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CERTIFICATE
This is to certify that the project report on F&O MARKETS submitted by ADITYA BHARADWAJ
(U21CE002), PRAYUSH SHAH (U21CE011), HARRY RANA (U21CE020), YASHVARDHAN
JAIN (U21CE038), DHRUV BANSAL (U21CE045) to the Sardar Vallabhbhai National Institute of
Technology Surat, in the partial fulfilment of the requirements for the award of the degree of Bachelor of
Technology in Civil Engineering is a bona fide record of work carried out by the student under my
supervision. The contents of this report, in full or in parts have not been submitted to any other Institute or
University for the award of any degree or diploma.
Surat
Date: 9/10/2023
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TABLE OF CONTENTS
ACKNOWLEDGEMENTS I
ABSTRACT II
1. INTRODUCTION 7
1.3 Methodology
5. COMPARATIVE ANALYSIS 18
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5.2 Market Size and Growth
9. CONCLUSION 29
REFERENCES 30
10.1 Books
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ACKNOWLEDGEMENTS
We would like to take this opportunity to express our gratitude and appreciation to all those who
have contributed to the successful completion of this report on F&O (Futures and Options)
Markets.
We are deeply thankful to our mentor Ms. Ruchita Lodaliya, whose guidance, and invaluable
insights played a pivotal role in shaping this report, continuous support and encouragement
throughout the research process, and their mentorship have been instrumental in enhancing our
understanding of the F&O markets.
Author
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ABSTRACT
This study highlights the Global F&O market environment while providing a thorough review of
Indian Futures and options (F&O) markets. Beginning with the principles of F&O, insights into
the worldwide market, and regulatory frameworks, it covers important subjects like Global and
Indian F&O markets, noting variations in market size, growth, liquidity, and regulatory
intricacies. This study also examines worldwide crises, economic, political, and technological
issues that have an impact on F&O markets. Popular trading tactics and practical risk
management methods are presented, with the help of case studies of profitable traders. In order
to provide industry participants with useful information, challenges faced by the F&O markets
are discussed together with anticipated future trends and possibilities. The report finishes with
significant conclusions, repercussions for traders and investors, and closing remarks.
KEYWORDS: Futures and Options (F&O), Indian F&O market, Comparative analysis, Trading
strategies, Regulatory framework.
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INTRODUCTION
A. Background: The Futures and Options (F&O) market, also known as the derivatives
market, has evolved over decades as a critical component of the global financial system.
It originated as a means for farmers and producers to hedge against price fluctuations in
agricultural commodities. Over time, it expanded to include various financial instruments
and has become a complex, highly liquid marketplace.
1. Risk Management: It offers participants a way to mitigate and manage risk associated
with price fluctuations in various assets, such as stocks, commodities, and currencies.
2. Price Discovery: It plays a pivotal role in determining future price expectations for
underlying assets, contributing to transparency and efficient price formation.
3. Speculation: It provides a platform for traders and investors to engage in speculative
activities, aiming to profit from price movements without owning the underlying assets.
The scope of this study encompasses the following key aspects of the F&O market:
● Types of Derivatives: This study will explore and explain the various types of derivatives
traded in the market, including futures contracts and options contracts.
● Market Participants: It will examine the diverse range of participants involved, including
individual traders, institutional investors, corporations, hedgers, and speculators.
● Market Dynamics: This study will delve into the market's liquidity, volatility, and the
factors influencing prices.
● Regulatory Environment: It will touch upon the regulatory framework governing the
F&O market, ensuring fair and orderly trading.
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● Global Perspective: The study will consider the global nature of the market, highlighting
major derivatives exchanges worldwide.
1.3 METHODOLOGY
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UNDERSTANDING FUTURES AND OPTIONS (F&O)
● Futures and Options (F&O) are financial derivatives contracts that derive their value from
an underlying asset, such as stocks, commodities, or indices. They enable traders to
speculate on the future price movements of these assets without owning them outright.
● Futures contracts obligate the buyer to purchase and the seller to sell the underlying asset
at a predetermined price and date in the future.
● Options contracts give the buyer the right, but not the obligation, to buy (call option) or
sell (put option) the underlying asset at a specified price before or on a specified date.
● Leverage: F&O contracts offer significant leverage, allowing traders to control a large
asset position with a relatively small amount of capital.
● Speculation and Hedging: Traders use F&O for both speculation, to profit from price
movements, and hedging, to protect against adverse price movements.
● Standardisation: F&O contracts have standardised terms, including contract size,
expiration dates, and settlement procedures, making them easily tradable.
● Margin Requirements: Traders must maintain margin accounts to cover potential losses,
reducing the risk of default.
● Market Liquidity: F&O markets are often highly liquid, facilitating easy entry and exit
for traders.
Futures and Options play a crucial role in global financial markets for several reasons:
● Price Discovery: F&O markets provide valuable information about future asset prices,
aiding in price discovery for various financial instruments.
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● Risk Management: Businesses and investors use F&O contracts to manage risk
associated with price fluctuations, ensuring stability in their financial positions.
● Liquidity Enhancement: These markets enhance overall liquidity by offering a platform
for speculative and hedging activities, attracting diverse participants.
● Investment Opportunities: F&O markets offer opportunities for investors and traders to
diversify their portfolios and access various asset classes.
● Economic Indicators: F&O data can serve as economic indicators, reflecting market
sentiment and economic conditions.
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WORLDWIDE F&O MARKETS
Over the past two decades, the financial market has experienced significant growth and
innovation, to which derivatives have contributed significantly. The primary pillar of the global
financial system enables businesses to effectively mitigate risks and invest. Derivatives
contribute to economic growth and employment in this manner. The global derivatives market
has become more complex and interconnected due to its size and volume. This, together with
gaps in the regulatory and supervisory framework as well as higher leverage, has placed some of
its segments at risk. The financial crisis of 2007–2009, which resulted in the failure or rescue of
a number of banks and other financial institutions (many of which were also active in the
derivatives market), sheds light on a number of shortcomings, particularly in the
over-the-counter (OTC) segment, where the existing market structure lacks adequate means to
mitigate and manage risks. Presently, regulators and administrators are debating safety measures
for the derivatives market.
Futures and options (F&O) are derivative financial instruments whose value is derived from an
underlying asset, such as equities, commodities, currencies, or indices. These contracts permit
investors to speculate on the price movements of the underlying asset in the future.
● F&O markets are subject to regulatory oversight in most countries. Regulators aim to
ensure fair and transparent trading, protect investors, and maintain market stability.
● F&O contracts are primarily traded on organised exchanges, such as: Chicago
Mercantile Exchange (CME) in the United States, Eurex in Europe, National Stock
Exchange (NSE) and Bombay Stock Exchange (BSE) in India, Shanghai Futures
Exchange (SHFE) in China,Tokyo Commodity Exchange (TOCOM) in Japan.
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3.2 MARKET TRENDS AND DEVELOPMENTS
The Global Futures and Options (F&O) market has witnessed several notable trends and
developments. The Market has experienced heightened volatility, driven by events such as the
COVID-19 pandemic and economic uncertainties, presenting both opportunities and risks for
traders. The rise of cryptocurrency derivatives, especially Bitcoin and Ethereum futures and
options, has also been a significant development, with traditional financial institutions offering
these product, leading to the integration of environmental, social, and governance factors into
F&O trading strategies. Regulatory changes, technological advancements like algorithmic
trading, and the globalisation of F&O trading have further shaped the landscape.
● The F&O market has seen a surge in retail investor participation, driven by easy access to
online trading platforms and the democratisation of financial markets. Retail traders are
increasingly active in stock index futures, commodity futures, and options.
● Advanced technology, including Algorithmic trading and high-frequency trading
(HFT), continues to shape the F&O landscape. Market participants are investing in
sophisticated trading strategies and infrastructure.
● Cross-border trading has increased, with more international exchanges offering F&O
products. This globalisation has led to greater market integration and increased
opportunities for arbitrage.
● Exchanges are introducing new F&O products, such as Single-Stock Futures,
environmental derivatives, and micro contracts, to cater to evolving investor needs and
preferences.
● Chicago Mercantile Exchange (CME Group) is one of the largest and most influential
F&O exchanges globally. It offers a wide range of derivative products, including interest
rate, equity, and commodity futures and options.
● Intercontinental Exchange (ICE) operates several exchanges, including ICE Futures U.S.
and ICE Futures Europe, which are known for energy, commodity, and financial
derivatives.
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● Eurex Exchange based in Europe is a major derivatives exchange known for its diverse
product offerings, including equity index futures and options.
● Hong Kong Exchanges and Clearing (HKEX) is a prominent exchange in Asia, offering
derivatives such as Hang Seng Index futures and options.
● Singapore Exchange (SGX) is another key Asian exchange, known for its derivatives
market, including Nifty 50 futures and options.
● Firms like Citadel Securities, Optiver, and Virtu Financial are significant market makers
in the F&O space, providing liquidity and facilitating trading.
● Brokerage firms like Goldman Sachs, J.P. Morgan, and Morgan Stanley are key players
in F&O markets, offering trading services, research, and risk management solutions to
institutional clients.
● Asset managers like BlackRock, Vanguard, and State Street Global Advisors use F&O
instruments for hedging and risk management in their portfolios.
● Hedge funds such as Bridgewater Associates, Renaissance Technologies, and Two
Sigma employ F&O strategies to generate alpha and manage risk in their investment
portfolios.
● Technology companies like FIS Global, Trading Technologies, and CQG provide trading
platforms and software solutions to market participants, facilitating electronic trading and
algorithmic strategies.
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F&O MARKET IN INDIA
4.1 INTRODUCTION
The Futures and Options (F&O) market in India is a dynamic and integral part of the country's
financial system. Established to facilitate risk management and price discovery, the Indian F&O
market permits market participants to trade derivatives contracts based on diverse underlying
assets, such as equities, commodities, and indices. With the establishment of the National Stock
Exchange (NSE) in 1992 and the introduction of index futures and stock options, the market
garnered prominence. It has evolved considerably over the years, offering a vast array of
derivative products to meet the diverse needs of investors and hedgers. The Indian F&O market
has become an important platform for investors, speculators, and hedgers equally, contributing to
the vitality and depth of India's financial markets. It enables market participants to profit from
rising and declining markets while effectively managing risk. Innovations such as stock futures,
index options, and currency derivatives have expanded the universe of tradable instruments and
contributed to the expansion of the market.
● The origins of the Indian F&O market can be traced back to 1875, when the
Bombay Cotton Trade Association was founded and cotton futures trading began.
In time, additional commodities such as oilseeds, jute, and bullion were added to
the derivatives market.
● With the establishment of the Forward Markets Commission (FMC) in 1953,
India's derivatives trading regulatory framework began to take shape. It was
responsible for overseeing and regulating commodity futures markets.
● In the early 2000s, the Indian F&O market began transforming into a financial
derivatives market. In June of 2000, the National Stock Exchange (NSE)
introduced index futures and stock options, which allowed investors to hedge
against market volatility.
● Significant market reforms were instituted in 2003, allowing foreign institutional
investors (FIIs) to engage in derivatives trading. This allowed for a rise in foreign
investment and liquidity.
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● The introduction of currency futures in 2008 allowed participants to mitigate
against fluctuations in foreign exchange rates. This represented a new milestone
in the growth of the Indian F&O market.
● The Forward Markets Commission (FMC) and the Securities and Exchange Board
of India (SEBI) amalgamated in 2015, bringing commodity and equity derivatives
under a single regulatory authority. This integration enhanced market oversight
and streamlined regulation.
● The Indian F&O market has acquired global recognition and been incorporated
into the global derivatives ecosystem. It has also contributed to India's economic
development by providing businesses and individuals with essential risk
management tools and investment opportunities.
● The Indian F&O market has continued to grow as new products, such as
commodity options and interest rate futures, have been introduced. Additionally,
the market has witnessed the emergence of numerous volatility indices and novel
derivative products.
The Securities and Exchange Board of India (SEBI), the country's securities market regulator, is
predominantly responsible for regulating the Futures and Options (F&O) market in India. SEBI
is responsible for formulating F&O market rules and regulations, assuring market integrity, and
safeguarding investor interests.
● India's securities market regulator, the Securities and Exchange Board of India (SEBI), is
primarily responsible for regulating the Futures and Options (F&O) market. SEBI is
responsible for the formulation of F&O market rules and regulations, the maintenance of
market integrity, and the protection of investor interests.
● In India, F&O contracts are transacted primarily on the National Stock Exchange (NSE)
and the Bombay Stock Exchange (BSE). These exchanges play an essential role in
assuring orderly trading, SEBI compliance, and market surveillance.
● F&O contracts are cleared and settled by clearing corporations, such as the National
Securities Clearing Corporation (NSCCL) for NSE and the Indian Clearing Corporation
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Limited (ICCL) for BSE. Through margining and settlement procedures, they ensure that
transactions are efficiently settled and counterparty risk is mitigated.
● For F&O trading, SEBI mandates stringent risk management measures. This consists of
margin requirements, position limits, and circuit breakers to control market volatility and
prevent excessive speculation. Utilising the risk profile of individual positions, risk-based
margining is used to calculate margins.
● To detect market manipulation, fraud, and other irregularities, SEBI and the stock
exchanges conduct surveillance and inspection of F&O market activities. This contributes
to market stability and investor confidence.
● Individual investors, institutional investors, foreign institutional investors (FIIs), and
proprietary trading firms are among the entities whose participation in the F&O market is
regulated by SEBI. For each category of participants, eligibility criteria, disclosure
requirements, and compliance standards are established.
● SEBI must approve any new derivative products or contracts before they can be
introduced to the market. This ensures that new products adhere to regulatory guidelines
and do not expose investors to excessive risk.
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● Market events, economic data releases, and corporate earnings announcements
may have an impact on your positions.
● Create a trading strategy with clearly defined entry and exit locations. Adhere to
your strategy and avoid making emotional, rash decisions.
● Be aware of F&O contract expiration dates. In the case of futures contracts, roll
over or square off positions in a timely manner to avoid delivery obligations.
● Invest in contracts with sufficient liquidity so that you can enter and exit positions
with minimal slippage.
● Comply with all regulatory and tax requirements associated with F&O trading.
Observe changes in market regulations, trading rules, and macroeconomic
conditions.
● Avoid excessive investment in a single asset or industry. Diversify your F&O
investment portfolio to reduce risk. Before risking real capital, you should
consider exercising your trading strategies in a simulated or paper trading
environment.
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COMPARATIVE ANALYSIS
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.
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5.3 TRADING VOLUME AND LIQUIDITY
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FACTORS INFLUENCING F&O MARKETS
The given factors can be divided for futures and options separately. The reason for doing so is
the short range nature of options and the long range nature of the future. Furthermore an option
can be exercised as a right giving one higher freedom and flexibility whereas a future may be
treated more as a binding contract in nature. After a preliminary analysis one can say that options
will be affected more by the volatile factors and the futures may be affected with all long
standing policies affecting factors whose range of effects lies towards longer time periods.
Factors influencing the Futures and Options (F&O) markets are diverse and can have a
significant impact on market dynamics. Here's a closer look at each of the factors you
mentioned:
● Interest Rates: Changes in central bank interest rates can affect the cost of borrowing and
influence investment decisions.
● Economic Indicators: Economic data such as GDP growth, inflation rates, and
employment figures can impact market sentiment and trading strategies.
● Corporate Earnings: The financial performance of companies, especially those in major
stock indices, can drive market movements.
● Currency Exchange Rates: Exchange rate fluctuations can affect the prices of
commodities and the competitiveness of multinational corporations.
● Monetary Policy: The policies and actions of central banks, including quantitative easing
and tightening, can impact liquidity and market conditions.
● Economic Policies: Government policies related to taxation, trade, and fiscal spending
can influence market expectations.
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6.2 POLITICAL FACTORS
● High-Frequency Trading (HFT): The rise of HFT algorithms and technology has
transformed the speed and liquidity of F&O markets.
● Electronic Trading Platforms: Online trading platforms and mobile apps have made it
easier for retail investors to access F&O markets.
● Data Analytics: Advanced data analytics and machine learning are used to develop
trading strategies and risk management models.
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6.4 GLOBAL EVENTS AND CRISES
● Financial Crises: Events like the 2008 financial crisis or the COVID-19 pandemic can
lead to market volatility and significant price movements.
● Natural Disasters: Natural disasters can disrupt supply chains and impact commodities
markets, especially for agricultural and energy products.
● Global Health Crises: Health crises can have far-reaching economic implications,
affecting various industries and asset classes.
● Regulatory Changes: Changes in financial regulations, both at the domestic and
international levels, can impact trading practices and market structure.
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TRADING STRATEGIES AND RISK MANAGEMENT
● Arbitrage Trading: Traders exploit price discrepancies between related assets or markets
to make risk-free profits. Examples include index arbitrage and calendar spreads.
● Trend Following: Traders use technical analysis to identify and capitalize on market
trends. Trend-following strategies can be implemented through futures and options.
● Options Strategies: Various options strategies are employed, including covered calls,
straddles, strangles, and iron condors, to generate income or hedge positions.
● Volatility Trading: Volatility traders use options to profit from changes in implied
volatility. Strategies like the volatility skew, VIX trading, and delta hedging are common.
● Statistical Arbitrage: Quantitative strategies involve statistical analysis of price
relationships and correlations among different assets to identify trading opportunities.
● Index-Based Strategies: Traders use Nifty and Bank Nifty options to implement strategies
like straddle, strangle, and iron condor to capitalize on expected volatility.
● Stock-Specific Strategies: Individual stock futures and options are popular for hedging
and directional bets on specific companies.
● Calendar Spreads: Traders use calendar spreads to profit from differences in volatility
between near-term and longer-term options contracts.
● Option Writing: Selling options (covered call, put writing) is a strategy to generate
income and manage risk.
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7.2 RISK MANAGEMENT IN F&O MARKETS
Risk Identification
● Traders identify various risks, including market risk (price fluctuations), liquidity risk
(inability to enter or exit positions), and counterparty risk (default of a trading partner).
Position Sizing
● Proper position sizing is essential to control risk. Traders determine the size of their
positions based on their risk tolerance and account size.
● Stop loss orders are used to limit potential losses. Traders set predetermined price levels
at which they exit losing positions.
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Hedging
● Hedging involves taking offsetting positions to mitigate risk. For instance, a stock
investor may use index futures to hedge against market downturns.
Diversification
● Diversifying across asset classes and strategies can help spread risk. Avoiding
overconcentration in a single position or asset is crucial.
Risk-Reward Ratio
● Traders assess the potential reward relative to the risk in each trade. Favorable
risk-reward ratios are a cornerstone of risk management.
● Warren Buffett: While primarily known for his stock investments, Warren Buffett has
utilized options for strategic purposes, such as selling put options to acquire stocks at a
discount.
● Paul Tudor Jones: A successful hedge fund manager, Paul Tudor Jones has employed
various macroeconomic and trend-following strategies in F&O markets.
● Jim Simons: Founder of Renaissance Technologies, Jim Simons and his team have
employed quantitative strategies involving complex mathematical models and
high-frequency trading in F&O markets.
● Rakesh Jhunjhunwala: Often referred to as the "Big Bull" of India, Rakesh Jhunjhunwala
has made significant profits through stock and index options trading.
● Nithin Kamath: The founder of Zerodha, one of India's largest retail brokerage firms,
Nithin Kamath has revolutionized online brokerage services for F&O traders.
● Ashish Chugh: Ashish Chugh is known for his value investing strategies but has also
effectively utilized options for risk management in the Indian market.
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CHALLENGES AND FUTURE OUTLOOK
Increased market volatility can lead to higher risks and make it challenging for market
participants to predict price movements accurately.
Frequent changes in financial regulations can create uncertainty and necessitate adjustments in
trading strategies and compliance procedures.
Illiquid markets can result in wider bid-ask spreads, making it difficult for traders to execute
orders at desired prices.
Dependency on technology exposes the market to risks such as system failures, cyber threats,
and disruptions, impacting trading activities.
The risk that the other party in a trade may default can pose significant challenges, especially in
the case of complex derivatives.
Economic uncertainties, trade tensions, and geopolitical events can contribute to market
instability and impact F&O markets.
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8.2 FUTURE TRENDS AND OPPORTUNITIES
The integration of digital assets and cryptocurrencies into traditional financial markets, offering
new investment opportunities and hedging options.
Continued adoption of artificial intelligence and machine learning for algorithmic trading, risk
management, and market analysis, enhancing trading strategies and efficiency.
Development and introduction of new derivative products, catering to evolving investor needs
and providing additional hedging opportunities.
Increasing reliance on advanced technologies like blockchain and further automation of trading
processes, potentially reducing settlement times and enhancing transparency.
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8.3.2 Regulatory Adaptations
Growth in the demand for derivatives linked to sustainable and ESG-focused assets as investors
increasingly consider ethical and environmental factors in their investment decisions.
Continued convergence and integration of traditional financial markets with the rapidly evolving
cryptocurrency space, with more cryptocurrency derivatives being offered on established
exchanges.
Increased emphasis on robust risk management practices to navigate uncertainties, with a focus
on stress testing, scenario analysis, and improved risk modeling.
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9. CONCLUSIONS
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REFERENCES
1. BOOKS
a) Fundamentals of Futures and Options Markets, 9/e by C.Hull John
b) Options & Futures: An Indian Perspective by D.C. Patwari and Anshul Bhargava
c) Options as a Strategic Investment by Lawrence G. McMillan
d) Futures and Options Markets: An Introduction by Colin A. Carter and Neil A.
Kane
e) The Complete Guide to Option Selling by James Cordier and Michael Gross
f) The Option Trader's Hedge Fund: A Business Framework for Trading Equity and
Index Options by Dennis A. Chen and Mark Sebastian
g) Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive
Profits by Dan Passarelli
h) Option Volatility and Pricing: Advanced Trading Strategies and Techniques by
Sheldon Natenberg
i) The Bible of Options Strategies: The Definitive Guide for Practical Trading
Strategies by Guy Cohen
j) Market Wizards: Interviews with Top Traders by Jack D. Schwager
k) The Volatility Surface: A Practitioner's Guide by Jim Gatheral
l) Options Trading: QuickStart Guide by ClydeBank Finance
1.
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2. JOURNALS AND RESEARCH PAPERS
a) Hull, J., Treepongkaruna, S., Colwell, D., Heaney, R., & Pitt, D. (2013).
Fundamentals of futures and options markets. Pearson Higher Education AU.
b) Fortenbery, T. R., & Sumner, D. A. (1990). The effects of USDA reports in
futures and options markets.
c) Rastogi, S., & Athaley, C. (2019). Volatility integration in spot, futures and
options markets: A regulatory perspective. Journal of Risk and Financial
Management, 12(2), 98.
d) Chiang, R., & Fong, W. M. (2001). Relative informational efficiency of cash,
futures, and options markets: The case of an emerging market. Journal of Banking
& Finance, 25(2), 355-375.
i) Ahn, K., Bi, Y., & Sohn, S. (2019). Price discovery among SSE 50 Index‐based
spot, futures, and options markets. Journal of Futures Markets, 39(2), 238-259.
j) Ederington, L. H. (1980). Living with Inflation: A Proposal for New Futures and
Options Markets. Financial Analysts Journal, 36(1), 42-48.
1. A
2. A
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3. ONLINE SOURCES
a) CME Group (Chicago Mercantile Exchange Group)
b) Chicago Board Options Exchange (CBOE)
c) Investopedia
d) Options Industry Council (OIC)
e) Futures Industry Association (FIA)
f) Barchart
g) Options Clearing Corporation (OCC)
h) Interactive Brokers' Traders' Insight
i) Bloomberg
j) TheStreet
k) Deutsche-Boerse
l) MoneyControl
m) JPMorgan
n) IndiaInfoline
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