A Project Report On

INVESTORS PERCEPTION TOWARDS DERIVATIVES MARKET

AT
INDIAIN FOLINE PVT. LTD., NOIDA

Submitted To
DEPARTMENT OF COMMERCE

YOGIVEMANAUNIVERSITY,KADAPA

For the partial fulfillment of

MASTER OF COMMERCE
2023-24
By
Raman Singh Shekhawat
Roll No:-
UNDER ESTEEMED GUIDANCE OF

Dr.S.RAGHUNATHAREDDY
(Professor)
1
 DECLARATION

Raman Singh Shekhawat hereby declare that the following project report titled”

INVESTORS PERCEPTION TOWARDS DERIVATIVES MARKET IN

INDIA is an authentic work done by me. The information and findings presented

In this report are genuine, comprehensive and reliable, based on the data collected

by me .The project was under taken as a part of the course curriculum of MBA

(MASTER IN BUSINESS ADMINISTRATION) full time program of ISBM

UNIVERSITY, CHHATTISGARH , for the fulfillment of the degree. The matter

presented in this report will not be used for any other Purpose and will be strictly

confidential.

Raman Singh Shekhawat

RollNO;

2
 ACKNOWLEDGEMENT

I express my sincere gratitude to my company guide Mr. ASIF PERWEZ

Assistant Vice-President Manager of IIFL (NOIDA), Extension for their able

guidance, continuous support and cooperation throughout my project, without

which the present work would not have been possible. Also, I am thankful to my

faculty guide prof. Dr. Swati Agarwal mam of my institute, for her continued

guidance and invaluable encouragement. Without her help and valuable guidance

my report would not have been a success. I would also like to thank my parents

for their encouragement and moral support. I would also like to thank all the

Respondents who gave their honest responses to the questionnaire of my survey.

Raman Singh Shekhawat

Roll No:-

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 PREFACE
Technical study is incomplete without the practical knowledge. No doubt theory
provides the fundamentals tone for the guidance of practice but practice examines
the element of truth lying in the theory. Therefore a stand co-ordination of theory
and practice is very essential to wake an MBA perfect. As a student of master in
business administration, I was required to undergo 6-8 weeks practical training in
any organization of reputeconnectedwithIndustry.Icompletedthispracticaltraining
at“INDIAINFOLINEPVT.LTD.,NOIDA”.Thisprojectreportof thework
consistsofgeneralstudyofthecompanyandtheresearchconductedon
“INVESTORSPERCEPTIONTOWARDSDERIVATIVESMARKETIN
INDIA” INDIA INFOLINE LIMITED,NOIDA.Full care has been taken to make
this report error free yet the responses collected throughrespondent cannot be
100% error free and I hope I shallbe excused for that. Last but not the least I hope
this research work willprove to be of some help and it would applicable to
IndiaInfolineLimited.

Raman Singh Shekhawat

Roll No:-

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 TABLE OF CONTENTS

S. no. Title Page no.

Part-1

1 COMPANYPROFILE 8-20

Part-2

2 INTRODUCTIONOFTOPIC 22-50

3 LITERATUREREVIEW 51-55

4 OBJECTIVESOFSTUDY 55-56

5 RESEARCHMETHODOLOGY 56-61

6 DATAANALYSIS&INTERPRETATION 62-74

7 CONCLUSION 75-76

8 SUGGGESTIONS 76-77

9 LIMITATIONSOFTHESTUDY 77-78

10 BIBLIOGRAPGHY 79-80

11 APPENDICES 81-83

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 LISTOFGRAPHS&CHATS:-

S.no. Title Pageno.

1 Gender 62

2 Age 63

3 Education 64

4 Occupation 65

5 Annualincome 66

6 ParticipationinDerivativeMarket 67

7 StrategyUsinginDerivativeMarket 68

8 Investor’sExpectedRateofReturn 69

9 SatisfactionLevelsinDerivativeMarket 70

10 InvestorPreferinderivativeMarket 71

11 ExperienceinDerivativeMarket 72

12 InvestorsTraininginNSE,BSEforDerivative 73

13 InvestorInvestinginDerivativeMarket 74

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 PART1
CompanyProfile
INDIAINFOLINEPVT.LTD.,
NOIDA

7
COMPANYPROFILE:-

THEINDIAINFOLINELIMITED

IIFL Holdings Limited (NSE: IIFL, BSE: IIFL) is the apex holding company of

the entire IIFL Group, promoted by first generation entrepreneurs. Our evolution

from an entrepreneurial start-up in 1995 to a leading financial services group in

India is a story of steady growth by adapting to the dynamic businessenvironment,

without losing focusonourcoredomainoffinancialservices. IIFL Holdings Ltd,

formerly known as India Infoline Limited, offers a gamut of services including

financing, wealth and asset management, broking, financial product distribution,

investment banking, institutional equities, realty

andpropertyadvisoryservicesthroughits various subsidiaries.

IIFL Holdings with a consolidated net-worth of Rs.25,577 million as of financial

year ended March 31, 2015, has global presence with offices in London, New

York, Houston, Geneva, Hong Kong, Dubai, Singapore and Mauritius. Our well-

entrenched network of close to 2,500 business locations spread over 850+ towns

and cities has givenus the abilityto expand and reachouttodifferentsegmentsof the

society. IIFL group has more than 2.9 million satisfied customers across various

business segments and is continuously building on its strengths to deliver

excellentservicetoits expandingcustomerbase

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 Vision

 Tobecomethemostrespectedcompanyinthefinancialservicesspacein India

Values

 ValuesareIIFLaresummarisedinoneacronym:GIFTS

 Growthwithfocusedteamofdynamicprofessionals

 Integrityinallaspectsofbusiness–nocompromiseinanysituation

 Transparencyinwhatwedo–andinhowandwhywedoit

 Serviceorientationisourcorevalue,imbibedbyallsalesaswellas support teams

 Fairness in allour dealings – employees, customers, vendors and

shareholders.

Businessstrategy

 Steadygrowthbyadaptingtothechangingenvironment,withoutlosing the

focus onour coredomainoffinancialservices

 De-risked business throughmultiple productsanddiversifiedrevenue

stream

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  Knowledgeisthekeytopowersuperiorfinancialdecisions

 Keepcostslowandcontinuouslystriveforinnovation

Customerstrategy

 Remainlargelyaretailfocusedorganisation,drivingstickinessthrough

knowledge and qualityservice

 Catertountappedareasinsemi-urbanandruralareas,whichisrelatively safe

from cut-throatcompetition

 Targetthemicro,smallandmediumenterprisesmushroomingacrossthe

countrythroughaclusterapproachfor lendingbusiness

 Usewidemulti-modalnetworkservingasone-stop shop tocustomers

Peoplestrategy

 Attractthe besttalentanddrivenpeople

 Ensureconducivemeritenvironment

 Liberalownership-sharing

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OURJOURNEY

A small group of professionals formed an Information Services

Company

The company was formed in October 1995 with a vision to producehigh

quality, unbiased, independent research on the Indian economy,

business,industriesand corporates.

The company was originally incorporated as Probity Research and

Services Pvt.Ltd. The name of the companywas later changed to India

InfolineLtd

In today’s world, brand is considered as the most valuable asset of anorganisation.

It serves as the medium that connects product as well as service offerings to

customers and is an intangible voice that speaks volumes about the company.

AtIIFL, we believe that a brand is the face of a company’s work culture. Think of

it as a something that introduces us to our customers and to the world. Our brand

is ouridentity;it narrates our storyofsuccess and serves as asign oftrust.

POSITIONING

The IIFL brand is associated with trust, knowledge and qualityservice. But more

importantly, the brand stands for timely assistance provided to the country’s

under-bankedcustomers.

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When we pioneered online trading in India with the launch ofour brand 5 paisa,

the tag line was “It’s allabout money, honey”. We thenrealigned our positioning

from “Knowledgeis theEdge” to“When it’s about Money”

THESIGNIFICANCEOFIIFLLOGO

IIFLlogo

The IIFL Logo comprises of the nine triangles which form the Sri Yantra. In

Hindu Mythology, the nine interlocked triangles that surround and radiate fromthe

centre (bindu) symbolize the highest, the invisible and elusive centre from

whichthe entirecosmos expands.

Our brand represents a cosmos in itself, where two worlds meet. One, where we

together strive to grow and expand and the other, where we strive to make

possibilities infinite for our customers. It is the confluence ofthese two thoughts,

represented by the age old symbolof convergingpowers thatstands as the face of

our brand.

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MANAGERIALDEPTH

Our promoters individually are first-generation Indian entrepreneurs with

meritorious

Academicbackgroundsandimpeccableprofessionalcareers. Nirmal Jain, Chairman,

is a rank holder Chartered Accountant, Cost Accountant and an MBA from IIM

Ahmedabad and Mr. R. Venkataraman, Managing Director, is an Electronics

Engineer from IIT Kharagpur and an MBA from IIM Bangalore.

The Promoters have built the business from scratch, without pedigree of a large

family business or inherited wealth and steered it towards a market leading

positionbydintofhardworkandenterprise.IIFL Group has consistently attracted the

best of the talent from across the financial sector – private sector banks, foreign

banks, public sector banks and established NBFCs. The senior management team

have years of experience and backgrounds similar to promoters and leads

competent teams. IIFL has uninterrupted history of profits and dividends since

listing. Shareholders’ wealth has grown atover 32% perannumsince listingin

2005tillMarch 31,2015

PROFILEOFIIFLINVESTMENTSOLUTIONS

India Infoline has been founded with the aim of providing world class investing

experienceto hitherto underserved investorcommunity. India Infolineis currently

providing broking services on the NSE, BSE, derivative market and commodity

exchange.IndiaInfolineallowsindividualinvestorstooconveniently,

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comfortably and cost-efficiently place trades online and offline. While offeringthe

service theyalso give the added assurance of92branchoffices.Thecompany, created

to provide premium service with reasonable commissions, currently

maintainsmore than 25000individualaccounts.

WhatcompanyDo:-

Financing

Our NBFC is a diversified financing company, offering loans secured against

collaterals of home, property, gold, medical equipment, commercial vehicles,

shares and other securities

WealthManagement

OneofthelargestandfastestgrowingWealthManagementcompaniesin Indiawith

assets under advice, management and distribution of over Rs. 700 billion.

AssetManagement

OurAMCiswhollyownedsubsidiaryofIIFLWealthandistheInvestment

managerofIIFL MutualFund andrapidlygrowingAlternativeInvestmentFunds.

FinancialProductsDistribution

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IIFL is one of the largest distributors offinancialproducts suchas Life Insurance,

Mutual Funds, NCDs, Tax-free bonds, IPOs etc. through our wide distribution

network and business associates. Emerged as one of the largest broker for life

insurancein the country.

FinancialAdvisory&Broking

One of the leading broking house with extensive presence all over the country

providing financial planning and broking services in equity, commodities and

currencytrading.

InstitutionalEquities&InvestmentBanking

Premier broker for FIIs, DIIs, financialinstitution, privateequityfundsandbanks.

Investment Banking division leverages its distribution reach in capital markets

with strong institutional placement capabilities and a wide reach across investor

segments

HousingFinance

Thecompanyisfocussedonhomeloansandloansforresidentialproject.

Realty&PropertyAdvisoryServices

Real estate services provideradvising clients in transaction of commercial and

residentialproperties across the country. IIFLalso provides advisory andfunding services

to real estate developers.

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CORPORATEGOVERNANCE

BOARDOFTHEDIRECTORS:-

Mr.NirmalJain

Chairman,IIFLHoldingsLimited

Mr. Nirmal Jain is the founder and Chairman of IIFL Holdings Limited. He is a

PGDM (Post Graduate Diploma in Management) from IIM (Indian Institute of

Management) Ahmedabad, a Chartered Accountant and a rank-holder Cost

Accountant. His professional track record is equally outstanding. He started his

career in 1989 with Hindustan Lever Limited, the Indian armof Unilever. During

his stint with Hindustan Lever, he handled a variety of responsibilities, including

export and trading in agro-commodities. He contributed immensely towards the

rapid and profitable growth of Hindustan Lever's commodity export business,

whichwas then the nation'sas well as the

Company’stoppriority.

He founded Probity Research and Services Pvt. Ltd. (later re-christened India

Infoline) in 1995; perhaps the firstindependentequityresearchCompanyinIndia. His

work set new standards for equity research in India. Mr. Jain was one of the first

entrepreneurs in India to seize the internet opportunity, with the launch of

www.indiainfoline.com in 1999. Under his leadership, IIFL Holdings not only

steered through the dotcom bust and one of the worst stock market

downtrendsbutalso grew from strengthtostrength.

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Mr.R.Venkataraman

ManagingDirector,IIFLHoldingsLimited

Mr. R Venkataraman, Co-Promoter and Managing Director of IIFL Holdings

Limited, is a B.Tech (electronics and electrical communications engineering, IIT

Kharagpur) and an MBA (IIM Bangalore). He joined the IIFL Holdings Limited

Board in July 1999. He previously held senior managerial positions in ICICI

Limited, including ICICI Securities Limited, their investment banking joint

venture with J P Morgan ofUS, BZW and Taib CapitalCorporation Limited. He

was also the Assistant Vice President with G E CapitalServices India Limited in

their private equity division, possessinga varied experience ofmore than19 years

in the financialservicessector

Mr.ArunKumarPurwar

IndependentDirectorofIIFLHoldingsLimitedsinceMarch2008

Mr. Purwar was the Chairman of State Bank of India, the largest bank in the

countryfromNovember 2002 to May2006 and heldseveralimportantandcritical

positions like Managing Director of State Bank of Patiala, Chief ExecutiveOfficer

of the Tokyo branch, covering almost the entire range of commercial banking

operations in his illustrious career at the bank from1968 to 2006. He is currently

the Chairman of IndiaVenture Advisors Private Limited, the equityfund sponsored

by the Piramal Group and independent director in many listed companies in India

including Engineers India Limited, Reliance Communications Limited,among

others.

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MsGeetaMathur

IndependentDirectorofIIFLHoldings LimitedsinceSeptember2014

Geeta Mathur, a Chartered Accountant, specializes in the area of project,corporate

and structured finance, treasury, investor relations and strategic planning.

She started her career withICICI, where she worked for over 10 years inthe field

of project, corporate and structured finance as well represented ICICI on theBoard

of reputed companies such as Eicher Motors, Siel Limited etc. She then worked in

various capacities inlarge organizations suchas IBM and Emaar MGF across areas

of Corporate Finance, Treasury, Risk Management and Investor relations.

She is currentlyCFO ofHelpage India, one ofthe largestand oldestNPO inIndia

workingfor the cause ofthe elderly.

Mr.ChandranRatnaswami

NonExecutiveDirectorofIIFLHoldingsLimitedsinceMay2012

Mr. Chandran Ratnaswamiis a Managing Director of Hamblin Watsa Investment

Counsel Limited, a wholly-owned investment management company of Fairfax

Financial Holdings Limited, Canada. Mr. Ratnaswami serves on the Boards of

ICICI Lombard General Insurance Company Limited and Fairbridge Capital in

India, Ridley Inc. in the United States and Zoomermedia Limited in Toronto,

Canada. He is also the Chairman of the Board of Trustees of Lansing United

Church in Toronto, Canada.

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Productsandservices:

India Infoline customers have the advantage of trading in allthe marketsegments

together in the same window, as they understand the need of transactions to be

executed with high speed and reduced time. At the same time, they have the

advantage of having all kind of insurance and investment advisory services

forlifeinsurance,generalinsurance,mutualfunds,andIPO’salso.

Keyproductofferingsareasfollows:-

 Equitytrading

 CommoditytradingNRIservices

 MutualfundLifeinsurance

 GeneralinsuranceDepositoryservicesPortfoliotracker

 Backoffice.

ModeofOperation inCommoditiesatIIFL:-

On line tradingthroughthe existingmode ofconnectivityavailable inthebranch

orcanbe arranged immediatelyatclient’slocationaftertheMOU. To restorethe

connectivity an alternative arrangement is always provided to ensure ongoing

uninterruptedtrading.

All open contracts not intended for delivery and in non-deliverable positions are

automaticallysettledbytheexchangeonexpiry.

Allcontracts materializinginto deliveries would be settled intheelectronicmode in

a period of 2 to 7 days after the expiry or the exact settlement day/date as

specified by the exchange. Price quoted for the futures contracts would be ex-

warehouseand exclusiveofsales tax.

19
Margin as specified by the concerned exchange for each traded commodity is

required to be paid as per day-to-day outstanding position of the contract to

facilitatethe trading.

Metals:-

 Aluminum

 Ingot,

 ElectrolyticCopperCathode,

 Gold,

 MildSteelIngots,

 NickelCathode,

 Silver,

 SpongeIron

 ZincIngot.
20
PART-2

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INTRODUCTIONOFDERIVATIVES
A derivative security is a security whose value depends on the value of together

more basic underlying variable. These are also known as contingent claims.

Derivatives securities have been very successful in innovation in capital markets.

The emergence of the market for derivative products most notably forwards,

futures and options canbe traced back to the willingness ofrisk -averseeconomic

agents toguard themselves against uncertainties arising out of fluctuations inasset

prices. By their very nature, financial markets are markets by a very high degree

of volatility. Through the use of derivative products, it is possible to partiallyor

fullytransfer price risks bylocking– inassetprices. As instruments of risk

management these generallydon’tinfluence the fluctuations intheunderlying asset

prices. However, by locking-in asset prices, derivative products minimizethe

impact of fluctuations in asset prices on the profitability and cash-flow situation of

risk-averse investor. Derivatives are risk management instruments which derives

their value from an underlying asset. Underlying asset can be Bullion,Index,

Share, Currency,Bonds, Interest,etc.

SCOPEOFTHESTUDY:

Options in the Indian context and the IIFL have been taken as representative

sample for the study. The study cannot be said as totally perfect, any alteration

may come. The study has only made humble attempt at evaluating Derivatives

markets only in Indian context. The study is not based on the International

perspectiveofthe Derivativesmarkets.

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DERIVATIVES:

The emergence of the market for derivative products, most notably forwards,

futures and options, canbe traced back to the willingness ofrisk-averse economic

agents toguardthemselves against uncertainties arising out of fluctuations in asset

prices. Bytheir verynature, the financialmarkets are marked bya veryhigh degree

of volatility. Through the use of derivative products, it is possible to partiallyor

fully transfer price risks by locking –inassetprices. As instruments of risk

management, these generally do not influence the fluctuations underlying prices.

However, by locking –in asset prices, derivative products minimizes the impact

offluctuations in asset prices onthe profitabilityand cashflowsituationof risk–

averseinvestors.

DEFINITION:-

Understanding the word itself, Derivatives is a key to mastery of the topic. The

word originates in mathematics and refers to a variable, which has been derived

from another variable. For example, a measure of weight in pound could be

derivedfrom ameasureofweightinkilogramsbymultiplyingbytwo.

Infinancialsense, these are contracts that derivetheirvaluefromsomeunderlying

asset. Without the underlying product and market it would have no independent

existence. Underlying asset can be a Stock, Bond, Currency, Index or a

Commodity. Someone may take an interest in the derivative products without

havinganinterestinthe underlyingproductmarket, butthe two are alwaysrelated and

may thereforeinteractwitheachother.

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The term Derivative has been defined in Securities Contracts (Regulation) Act

1956, as:

A security derived from a debt instrument, share, loan whether secured or

unsecured, risk instrument or contract for differences or any other form ofsecurity.

A contract, which derives its value from the prices, or index of prices, of

underlyingsecurities.

IMPORTANCEOFDERIVATIVES:

Derivatives are becoming increasingly important in world markets as a tool for

risk management. Derivatives instruments can be used to minimize risk.

Derivatives are used to separate risks and transfer themto parties willing to bear

these risks. The kind of hedging that can be obtained by using derivatives is

cheaper and more convenient than what could be obtained by using cash

instruments. It is so because, whenweusederivativesforhedging, actualdelivery

ofthe underlyingassetis not atall essentialfor settlementpurposes.

Moreover, derivatives would not create any risk. They simply manipulate therisks

and transferto those who arewillingtobearthese risks.

Forexample,

Mr. A owns a bike If he does not take insurance, he runs a bigrisk. Suppose he

buys insurance [a derivative instrument on the bike] he reduces his risk. Thus,

having an insurance policy reduces the risk of owing a bike. Similarly, hedging

through derivatives reduces the risk of owing a specified asset, which may be a

share and currencyetc.

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RATIONALE BEHIND THE DEVELOPMENT OF

DERIVATIVEMARKET:-

Holding portfolio of securities is associated with the risk of the possibility that the

investor may realize his returns, which would be muchlesser thanwhat he expected to

get.There arevariousinfluences,whichaffectthereturns.

1. Priceordividend(interest).

2. Sumareinternaltothefirm

like:Industrypolicy

Management capabilities

Consumer’s preference

Laborstrike,etc.

These forces are to a large extent controllable and are termed as “Non-systematic

Risks”. An investor can easily manage such non- systematic risks by having a well-

diversified portfolio spread across the companies, industries and groups so thata loss in

one may easilybecompensatedwith againin other.

There are other types ofinfluences, whichare externalto the firm, cannotbecontrolled,

and they aretermedas“systematicrisks”.Those are

• Economic

• Political

• SociologicalchangesaresourcesofSystematicRisk

25
Theireffectistocausethepricesofnearlyallindividualstockstomovetogetherin

the same manner. We therefore quite oftenfind stock prices fallingfromtime to time in

spite of company’s earnings risingand vice –versa.Rationalbehind the development of

derivatives market is to manage this systematic risk, liquidity. Liquidity means, being

able to buy & sell relatively large amounts quickly wi In debt market, a much larger

portion of the total risk of securities is systematic. Debt instruments are also finite life

securities with limited marketability due to their small size relative to many common

stocks.These factorsfavorforthe purposeofbothportfoliohedgingandspeculation.

India has vibrant securities market with strong retailparticipation that has evolved over

the years. It was until recently a cash market withfacilityto carryforward positions in

actively traded “A” group scripts fromone settlement to another bypayingthe required

margins and borrowing money and securities in a separate carry forward sessions held

for this purpose. However, a need was felt to introduce financial products like other

financialmarketsin the world.

CHARACTERISTICSOFDERIVATIVES:-

1. Theirvalueisderivedfromanunderlyinginstrumentsuchasstockindex, currency,etc.

2. Theyarevehiclesfortransferringrisk.

3. Theyareleveragedinstruments.

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MAJORPLAYERSIN DERIVATIVEMARKET:-

Therearethreemajorplayersinthederivativestrading.

1. Hedgers

2. Speculators

3. Arbitrageurs

Hedgers: The party, whichmanages the risk, is knownas “Hedger”. Hedgers seekto

protect themselvesagainst pricechangesin acommodity in which they have an interest.

Speculators: They are traders with a view and objective of making profits. They are

willingtotakerisks andtheybetuponwhetherthemarkets would gouporcome down.

Arbitrageurs:Risk less profit makingis the prime goalofarbitrageurs. Theycould be

making money even with out putting their own money in, and such opportunities often

come up in the market but last for very short time frames. They are specialized in

making purchases and sales in different markets at the same time and profits by the

difference in prices between the two centers

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TYPESOFDERIVATIVES:-

Mostcommonlyusedderivativecontractsare:-

Forwards: A forward contract is a customized contract between two entities where

settlement takes place on a specific date in the futures at today’s pre-agreed price.

Forward contracts offer tremendous flexibility to the party’s to design the contract in

terms ofthe price, quantity, quality, delivery, time and place. Liquidityand defaultrisk

are very high.

Futures: A futures contract is an agreement between two parties to buyor sellanasset at

a certain time in the future at a certain price. Futures contracts are special types of

forward contracts in the sense, that the former are standardized exchange traded

contracts.

Options: Options are two types - Calls and Puts. Callsgivethebuyerthe rightbutnot the

obligation to buy a given quantity of the underlying asset at a given price on or before a

given future date. Puts give the buyer the right but not the obligation to sella

givenquantityofthe underlyingassetatagivenprice onorbefore agivendate.

Warrants:Longer–datedoptionsarecalledwarrantsandaregenerallytradedover–

the – counter. Options generallyhave life up to one year, the majorityofoptionstraded

onoptionsexchangeshavingamaximummaturityofninemonths.

LEAPS:The acronymLEAPS means LongTermEquityAnticipationSecurities.These are

optionshavingamaturityofup tothreeyears.

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Baskets: Basket options are options onportfolios ofunderlyingassets. The underlying

assetisusuallyamovingaverage ofabasketofassets.Equityindex options areaform of

basket options

Swaps: Swaps are private agreements between two parties to exchange cash flows in

the future according to a pre-arranged formula. They can be regarded as portfolios of

forwardcontracts. The two commonlyused swaps are: -

Interest rare swaps: These entail swapping only the interest related cash flows

between the partiesin the same currency.

Currency swaps: These entail swapping both the principal and interest between the

parties, with the cash flows in one direction being in a different currencythanthose in

opposite direction.

RISKSINVOLVEDINDERIVATIVES:-

Derivatives are used to separate risks from traditional instruments and transfer these

risks to parties willingto bear these risks. The fundamental risks involved inderivative

businessinclude

A. Credit Risk: This is the risk offailure ofa counterpart to performitsobligation as

per the contract. Also known as default or counterparty risk, it differs with

differentinstruments.

B. Market Risk: Market risk is a risk of financial loss as a result of adverse

movementsofprices oftheunderlyingasset/instrument.

C. Liquidity Risk: The inability of a firm to arrange a transaction at prevailing

market prices is termed as liquidity risk. A firm faces two types of liquidityrisks:

29
 D. LegalRisk:Derivativescutacrossjudicialboundaries,thereforethe legal

Aspects associated withthedealshouldbelookedinto carefully.

DERIVATIVESININDIA:-
Indian capital markets hope derivatives will boost the nation’s economic prospects.

Fifty years ago, around the time India became independentmeninMumbaigambled on

the price of cotton in New York. They bet on the last one or two digits of the closing

priceon the New York cotton exchange. If they guessed the lastnumber, they got Rs.7/-

for every Rupee layout. If they matched the last two digits they got Rs.72/- Gamblers

preferred usingtheNewYorkcottonpricebecausethecottonmarketathome wasless

liquidandcouldeasilybemanipulated.

Now, India is about to acquire ownmarket for risk. The country, emergingfromalong

history of stock market and foreign exchange controls, is one of the vast major

economies in Asia, to refashion its capital market to attract western investment. A

hybrid over the counter, derivatives market is expected to develop alongside. Over the

last couple of years the National Stock Exchange has pushed derivatives trading, by

using fully automated screen based exchange, which was established by India's leading

institutional investors in 1994 in the wake of numerous financial & stock market

scandals.

30
ContractPeriods:-

At any point of time there will be always be available nearly3months contract periods

in IndianMarkets.

Thesewere

1) NearMonth

2) Next Month

3) FarMonth

For example in the month of September 2007 one can enter into September

futures contract or October futures contract or November futures contract. The last

Thursday of the monthspecified inthe contract shallbe the finalsettlement date for the

contractatboth NSEaswellasBSE; it is alsoknownasExpiryDate.

Settlement:-

The settlement ofallderivative contracts is incashmode. There is dailyas wellas final

settlement. Outstanding positions of a contract canremainopentillthe last Thursdayof

that month. As long as the position is open, the same will be marked to market at the

daily settlement price, the difference will be credited or debited accordingly and the

position shall be brought forward to the next day at the daily settlement price. Any

position which remains open at the end of the final settlement day (i.e. last Thursday)

shall be closed out by the exchange at the final settlement price which will be the

closingspot valueofthe underlyingasset.

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Margin

Therearetwotypesof margins collected on the open position, viz., initial margin which is

collected upfront which is named as “SPAN MARGIN” and mark to market

margin,whichis tobepaid onnextday.AsperSEBI guidelinesit ismandatory

forclientstogivemargins,failinginwhichtheoutstandingpositionsarerequiredtobe

closed out.

Forwards

Forwards are the simplest and basic formofderivative contracts. These are instruments

are basically used by traders/investors in order to hedge their future risks. It is an

agreement to buy/sell an asset at certain in future for a certain price. They are private

agreements mainly between the financial institutions or between the financial

institutionsand corporate clients.

One of the parties in a forward contract assumes a long position i.e. agrees to buy the

underlying asset on a specified future date at a specified future price. The other party

assumes short position i.e. agrees to sell the asset on the same date at the same price.

This specified price referred to as the delivery price. This delivery price is choosenso

that the value of the forward contract is equal to zero for both the parties. In other

words, it costs nothing to the either party to hold the long/short position.A forward

contract is settled at maturity. The holder ofthe short position delivers the asset to the

holder of the long position in return for cash at the agreed upon rate. Therefore, a key

determinate of the value of the contract is the market price of the underlying asset. A

forward contract can therefore, assume a positive/negative value depending on the

movementsofthe price ofthe asset.Forexample,if the price oftheasset rises sharply

32
after the two parties entered into the contract, the partyholdingthe longpositionstands to

benefit, that is the value of the contract is positive for him. Converselythe value of

thecontract becomes negativefor the partyholdingthe short position.

Theconceptofforwardpriceisalsoimportant.Theforwardpriceforacertaincontract

MEANIGOFFORWARDS

is defined as that delivery price which would make the value of the contract zero. To

explain further, the forward price and the delivery price are equal on the day that the

contract is entered into. Over the duration ofthe contract, the forward price is liable to

changewhilethedeliveryprice remainsthesame.

EssentialfeaturesofForwardContracts:

 AforwardcontractisaBi-partycontract,tobeperformedinthefuture,withthe

termsdecided today

 Forwardcontractsoffertremendousflexibilitytothepartiestodesignthecontract

intermsofthe price, quantity,quality,deliverytimeandplace

 Forwardcontractssufferfrompoorliquidityanddefaultrisk

 Contract priceisgenerallynotavailableinpublicdomain

 Ontheexpirationdatethecontractwillsettlebydeliveryoftheasset

 Ifthepartywishestoreversethecontract,itiscompulsorilytogotothesame counterparty,

whichoften resultshighprices
ForwardTradinginSecurities:

The Securities Contract (amendment) Act of1999 has allowed the tradinginderivative

products in India. As a further step to widen and deepen the securities market the

government has notified that with effect from March 1 st2000 the ban on forward

tradinginsharesandsecuritiesisliftedtofacilitatetradinginforwardsandfutures.

It may be recalled that the ban on forward trading in securities was imposed in1986 to

curb certain unhealthy trade practices and trends in the securities market. During the

past few years, thanks to the economic and financial reforms, there have been many

healthydevelopmentsinthe securitiesmarkets.

Theliftingofbanonforwarddeals insecuritieswillhelptodevelopindexfuturesand

othertypesofderivativesandfuturesonstocks.Thisis astepinthe rightdirectionto promotethe

sophisticatedmarketsegmentsasinthe western countries.

34
Meaning ofFutures

FUTURES
The future contract is an agreement between two parties to buy or sell an asset at a
certain specified time in future for certain specified price. In this, it is similar to a
forward contract. A futures contract is a more organized form of a forward contract;
these are traded on organized exchanges. However, there are a number of differences
between forwards and futures. These relate to the contractual futures, the way the
markets are organized, profiles of gains and losses, kind of participants in the markets
and the ways they use the two instruments.
Futures contracts in physical commodities such as wheat,cotton, gold, silver, cattle,etc.
have existed for a long time. Futures in financial assets, currencies, and interest bearing
instruments like treasury bills and bonds and other innovations like futures
contractsinstockindexesarerelativelynew developments.
The futures market described as continuous auction markets and exchanges providing
the latest information about supplyand demand withrespect to individualcommodities,
financial instruments and currencies, etc. Futures exchanges are where buyers and
sellers of an expanding list of commodities; financial instruments and currencies come
together to trade. Trading has also been initiated in options on futures contracts. Thus,
option buyers participate in futures markets with different risk. The option buyer knows
the exact risk, whichis unknownto the futurestrader.

FEATURESOFFUTURESCONTRACTS:

Theprincipalfeaturesofthecontractareasfollows.

Organized Exchanges: Unlike forward contracts which are traded in an over- the-

counter market, futures are traded on organized exchanges with a designated physical

location where trading takes place. This provides a ready, liquid market which futures

canbeboughtand soldatany timelikein astock market.

Standardization:Inthecaseofforwardcontractstheamountofcommoditiestobe

35
delivered and the maturity date are negotiated between the buyer and seller and can be

Tailor made to buyer’s requirement. Ina futures contract boththesearestandardizedby the

exchangeonwhichthe contract is traded.

ClearingHouse:Theexchangeactsaclearinghousetoallcontractsstruckonthe

tradingfloor.Forinstanceacontractisstruckbetween capitalAandB.Upon entering

intotherecordsoftheexchange,thisisimmediatelyreplacedbytwocontracts,one

betweenAandtheclearinghouseandanotherbetweenBandtheclearinghouse.In

otherwordstheexchangeinterposesitselfineverycontractanddeal,whereitisa buyer

toseller,andsellertobuyer. The advantageofthisisthat AandBdonothave to

undertakeanyexercisetoinvestigateeachother’screditworthiness.Italsoguarantees

financialintegrityofthemarket.Thisenforcesthedeliveryforthedeliveryof contracts

heldforuntilmaturityandprotectsitselffromdefaultriskbyimposingmargin

requirementsontradersandenforcingthisthroughasystemcalledmarking–to– market.

Actualdeliveryisrare:

In most of theforwardcontracts,thecommodityisactuallydelivered bythe seller and is

acceptedby the buyer. Forward contracts are entered into for acquiring or disposing of a

commodity in the future for a gain at a price known today. In contrast to this, in most

futures markets, actual delivery takes place in less than one percent of

thecontractstraded.Futuresareusedasadevicetohedgeagainst price risk and as a way of

betting against price movements rather than a means of physical acquisition of the

underlying asset. To achieve this most of the contracts entered into are nullified bythe

matchingcontract in theopposite directionbefore maturityofthefirst.

36
Margins:

In order to avoid unhealthy competition amongclearingmembers in reducingmargins to

attract customers, a mandatory minimummargins are obtained bythe members from the

customers. Such a stop insures the market against serious liquiditycrisis arisingout

ofpossibledefaultsbythe clearingmembers.The members

Collect margins from their clients as may be stipulated by the stock exchanges from

time to time and pass the margins to the clearing house on the net basis i.e. at a

stipulatedpercentageofthenet purchaseandsale position.

Thestockexchangeimposesmarginsasfollows:

 Initialmarginsonboththe buyeraswellastheseller.

 Theaccountsofbuyerandselleraremarkedtothe market daily.

The concept of margin here is same as that of any other trade, i.e. to introduce a

financial stake of the client, to ensure performance of the contract and to cover day to

dayadverse fluctuationsinthe prices ofthe securities.

Themarginforfuturecontractshastwocomponents:

 Initialmargin

 Markingtomarket

Initial margin: In futures contract both the buyer and seller are required to perform

the contract. Accordingly, both the buyers and the sellers are required to put in the

initial margins. The initial margin is also known as the “performance margin” and

usually 5% to 15% of the purchase price ofthe contract. The marginis set bythe stock

exchangekeepingin viewthevolumeofbusinessandsizeoftransactionsaswellas
37
Operativerisksofthemarketingeneral.

The concept being used by NSE to compute initial marginon the futures transactions is

called “value- at –Risk” (VAR) where as the options market had SPAN based margin

system”.

Marking-to-Market:Markingtomarketmeans,debitingorcreditingtheclient’s

equityaccountswiththe losses/profitsoftheday, basedonwhichmarginsaresought.

Itisimportanttonotethatthroughmarkingtomarketprocess,theclearinghouse

substituteseachexistingfuturescontractwith anewcontractthathas thesettlement

priceorthebaseprice.Basepriceshallbethepreviousday’sclosingNiftyvalue.

Settlementpriceisthepurchasepriceinthenewcontractforthenexttradingday.

38
FUTURESTERMINOLOGY:
Spotprice:

Thepriceatwhichanassetistradedinspotmarket.

Futuresprice:

Thepriceatwhichthefuturescontractistradedinthefuturesmarket.

ExpiryDate:

Itisthedatespecifiedin thefuturescontract.Thisisthelastdayonwhichthecontract

willbetraded, atthe end ofwhichit willceaseto exist.

ContractSize:

Theamountofassetthathastobedeliveredunderonecontract.Forinstancecontract

sizeonNSEfuturesmarket is 100Nifties.

Basis/Spread:

In the context of financial futures basis can be defined as the futures price minus the

spot price. There will be a different basis for each deliverymonth for each contract. In

formal market, basis will be positive. This reflects that futures prices normallyexceed

spot prices.

CostofCarry:

The relationship between futures prices and spot prices can be summarized interms of

what is known as the cost ofcarry. This measures the storage costplus the interestthat is

paidto financetheassetless the incomeearned ontheasset.

Multiplier:

Itisapre-determinedvalue,usedtoarrive atthe contractsize. Itisthe priceperindex point.

39
TickSize:

Itistheminimumpricedifferencebetweentwoquotesofsimilarnature.

OpenInterest:

Total outstanding long/short positions in the market in any specific point of time. As

total long positions for market would be equalto totalshort positions for calculationof

openInterest,onlyone side of the contractis counted.

Longposition:

Outstanding/Unsettledpurchasepositionatanypointoftime.

Shortposition:

Outstanding/unsettledsalepositionatanytimepointoftime.

IndexFutures:

Stock Index futures are most popular financial futures, which have beenused to hedge

or manage systematic risk bythe investors ofthestockmarket.Theyarecalledhedgers, who

own portfolio of securities and are exposed to systematic risk. Stock index is the apt

hedgingasset since, the rise or falldue to systematic risk is accuratelyshowninthe stock

index. Stock index futures contract is an agreement to buy or sell a specified amount of

an underlying stock traded on a regulated futures exchange for a specified price

ataspecifiedtimein future.

Stock index futures will require lower capital adequacy and margin requirement as

compared to margins on carry forward of individual scrip’s. The brokerage cost on

index futures will be much lower. Savings in cost is possible through reduced bid-ask

spreadswhere stocksaretradedinpackaged forms.The impactcostwillbemuchlower

40
in case ofstock index futures as opposed to dealingin individual scraps. The market is

conditionedtothinkin terms of the index and therefore, would refer trade in stock

indexfutures.Further,the chances ofmanipulationaremuch lesser.

The stock index futures are expected to be extremely liquid, given the speculativenature

of our markets and overwhelming retailparticipation expected to be fairlyhigh. In the

near future stock index futures willdefinitelysee incredible volumes in India. It will be a

blockbuster product and is pitched to become the most liquid contract in the world in

terms of contracts traded. The advantage to the equityor cashmarketis inthe fact that

they would become less volatile as mostofthe speculative activitywould shift

tostockindexfutures.The stockindexfuturesmarket should

ideallyhavemoredepth,volumesandactasastabilizingfactorforthecashmarket.

However,itistooearlytobaseanyconclusionsonthevolumeortoformanyfirm

trend.Thedifferencebetweenstockindexfuturesandmostotherfinancialfutures

contractsisthat settlementis made atthe valueoftheindexatmaturityofthe contract Stock

Futures

With the purchase of futures on a security, the holder essentially makes a legally

binding promise or obligation to buythe underlying securityat same pointinthe future

(the expiration date of the contract). Security futures do not represent ownership in a

corporationandtheholderis thereforenotregarded asashareholder.

A futures contract represents a promise to transact at same point in the future. In this

light, a promise to sell security is just as easy to make as a promise to buy security.

Selling security futures without previously owing them simply obligates the trader to

sell a certain amount of the underlying security at same point in the future. It can be

donejustaseasilyasbuyingfutures,whichobligatesthe tradertobuyacertain amount

41
oftheunderlyingsecurityatsomepointinfuture.

OPTIONS

An optionis a derivative instrument sinceitsvalueisderivedfromtheunderlyingasset.

Itisessentially aright,butnotan obligation to buy or sell an asset. Options can be a

calloption(right to buy) or a put option(right to sell). Anoptionisvaluableifandonly if the

pricesarevarying.

An option by definition hasafixedperiodof life,usually threetosix months. An option isa

wasting asset in the sense that the value ofan option diminishes as the date

ofmaturityapproaches and onthe date ofmaturityit is equal tozero.

An investor in options has four choices before him. Firstly, he can buy a call option

meaning arighttobuy an assetafter a certain period of time. Secondly, he can buy a put

option meaninga right to sellan asset after a certain period oftime. Thirdly, hecan write

a call option meaning he can sell the right to buy an asset to another investor. Lastly, he

can write a put option meaning he can sella right to sellto another investor. Out of the

above four cases in the first two cases the investor has to pay an option premiumwhilein

thelasttwocasesthe investorsreceivesanoption premium.

DEFINITION:-

Anoptionis a derivative i.e. its value is derived fromsomethingelse. In thecaseofthe

stock option its value is based on the underlying stock (equity). In thecaseoftheindex

option,its valueisbasedontheunderlyingindex.

42
Optionsclearingcorporation

The Options Clearing Corporation (OCC) is guarantor of all exchange-traded options

once an option transaction has been completed. Once a seller has written anoptionanda

buyer has purchased that option, the OCC takes over it. It is the responsibility ofthe

OCC who over sees the obligations to fulfillthe exercises. IfIwantto exerciseanACC

November 100-call option, I notify my broker. My broker notifies the OCC, the OCC

then randomlyselectsabrokerage firm,whichis short of

One ACC stock. That brokerage firm then notifies one of its customers who have

written one ACC November 100 call option and exercises it. The brokerage firm

customer can be chosen in two ways. He can be chosen at random or FIFO basis.

Because, OCC has a certain risk that the seller of the option can’t fulfill the contract,

strict margin requirement are imposed on sellers. This margin requirements acts as a

performanceBond.Itassuresthat OCCwill get its money.

Europeanoptions:

Europeanoptions are the options that canbe exercisedonlyontheexpirationdateitself.

European options are easier to analyze than the American options and properties ofan

Americanoption arefrequentlydeduced from those ofits European counterpart.

In-the-money option:

An in-the-money option (ITM) is an option that wouldlead to a positive cash flow to the

holder if it were exercisedimmediately.A call option in the index is said to be in the

money when the current index stands at higher level that the strike price (i.e. spot

price>strike price). Ifthe index is much higher than the strike pricethe callis said to be

deep in the money. Inthe case ofa put option, the put is inthe moneyifthe indexis below

the strike price.

43
At-the-moneyoption:

An At-the-money option (ATM) is an option that would lead to zero cash flow if it

exercised immediately. An option on the index is at the money whenthe current index

equalsthe strikeprice (I.e. spotprice =strikeprice).

Out-of-the-moneyoption:

An out ofthe money (OTM) optionis anoptionthatwould lead to a negative cashflow if it

were exercised immediately. A call option on the index is out ofthe moneywhen the

current index stands at a level, which is less than the strike price (i.e. spot price < strike

price). If the index is much lower than the strike price the call is said to be deep OTM.

Inthe case ofaput, the put is OTMif the indexis above the strike price.

Intrinsicvalueofanoption:

It is one of the components of option premium. The intrinsic value of a call is the

amount the option is in the money, ifit is in the money.Ifthe callis out ofthe money,

itsintrinsic value is Zero. For example X, takethatABCNovember-calloption.IfABC is

trading at 102 and the call option is priced at 2, the intrinsic value is 2. If ABC

November-100put is trading at 97 the intrinsic value of the put option is 3. If ABC

stock was trading at 99 an ABC November call would have no intrinsic value and

conversely if ABC stock was trading at 101 an ABC November-100 put option would

have nointrinsicvalue.Anoption mustbein themoneytohave intrinsicvalue.

44
Timevalueofanoption:

Thevalueofanoption is thedifferencebetweenits premiumanditsintrinsicvalue.

Bothcallsand putshave timevalue.Anoption that is OTMorATMhas only time

value.Usually,themaximumtimevalueexistswhentheoption isATM.Thelongerthe

timetoexpiration,thegreaterisanoptionstimevalue.Atexpirationanoption should have no

timevalue.

CHARACTERISTICSOFOPTIONS:

The followingarethemaincharacteristicsofoptions:

1. Optionsholdersdonotreceiveanydividendorinterest.

2. Optionsholdersreceiveonlycapitalgains.

3. Optionsholdercanenjoyatax advantage.

4. OptionsaretradedatO.T.Candinall recognizedstockexchanges.

5. Optionsholderscancontroltheirrightsontheunderlyingasset.

6. Optionscreatethepossibilityofgainingawindfallprofit.

7. Optionsholderscanenjoyamuchwiderrisk-returncombinations.

8. Optionscanreducethetotalportfoliotransactioncosts.

9. Optionsenabletheinvestorstogainabetterreturnwithalimitedamountof investment.

45
CallOption:

An option that grants the buyer the right to purchase a desired instrument is called a

calloption. A calloptionis contract that gives its owner the right but not theobligation,

tobuya specifiedassetatspecifiedprices onorbefore aspecifieddate.

An American call option can be exercised on or before the specified date. But, a

European option canbeexercisedonthe specifieddateonly.

The writer ofthe calloption may not own the shares for which the callis written. Ifhe

owns the shares it is a ‘Covered Call’ and ifhe des not owns the shares it is a ‘Naked

call’.

Strategies:

The following are the strategies adopted by the parties of a call option. Assumingthat

brokerage,commission,margins,premium,transactioncostsandtaxesareignored.

Acalloptionbuyer’sprofit/losscanbedefinedasfollows:

• Atallpointswherespotprice<exerciseprice,therewillbealoss.

• Atallpointswherespotprices>exerciseprice,there willbeaprofit.

• CallOptionbuyer’slossesarelimitedandprofitsareunlimited.

Conversely, thecalloption writer’s profits/loss will be asfollows:

• Atallpointswherespotprices<exerciseprice,there willbeaprofit

• Atallpointswherespotprices>exerciseprice,there willbealoss

• CallOptionwriter’sprofitsarelimitedandlossesareunlimited.

46
Followingisthetable,whichexplainsInthe-money,Out-of-the-moneyandAt-the-

moneypositionfor aCall option.

Exercisecalloption Spotprice>Exerciseprice In-The-Money

Donotexercise Spotprice<Exerciseprice Out-ofthe-Money

Exercise/Donotexercise Spotprice=Exerciseprice At-The-Money

Payoffforbuyerofcalloption:Longcall

Theprofit/lossthatthebuyermakesontheoptiondependsonthespotpriceofthe

underlyingasset.Ifupon expiration,thespotpriceexceedsthestrikeprice,hemakesa

profit.Higherthespotpricemoreistheprofithemakes.Ifthespotpriceofthe underlyingassetis

less than thestrikeprice, helets hisoption un-exercise.His loss in Payoff for writer of

put option: Short put

The figure below shows the profit/losses for the seller/writer of a three-month put

option. As the spot Nifty falls, the put option is In-The-Money and the writer starts

making losses. If upon expiration, Nifty closes below the strike of 4850, the buyer

would exercise his option on writer who would suffer losses to the extent of the

differencebetweenthe strike price andNifty-close.

47
Meaningofswap:-

SWAPS
Financialswaps are a fundingtechnique, whichpermit a borrower to access onemarket

and then exchange the liability for another type of liability. Global financial markets

present borrowers and investors with a variety of financing and investment vehicles in

terms of currency and type of coupon – fixed or floating.It must be noted that the swaps

by themselves are not a funding instrument: They are devices to obtain the desired form

of financing indirectly. The borrower might otherwise as found this too

expensiveoreveninaccessible.

Acommonexplanationfor the popularityofswaps concerns the concept ofcomparative

advantage. The basis principle is that some companies have a comparative advantage

when borrowingin fixed markets while other companies have a comparative advantage

in floating markets. Swaps are used to transform the fixed rate loaninto a floatingrate

loan.

Typesofswaps:-

AllSwapsinvolvesexchangeofaseriesofpaymentsbetweentwoparties.Aswap

transactionusuallyinvolvesanintermediarywhoisalargeinternationalfinancial

Institution.Thetwopaymentstreamsestimatedtohaveidenticalpresentvaluesatthe outsetwhen

discountedattherespectivecostoffundsinthe relevantmarkets.

Themostwidelyprevalentswapsare

1. Interestrateswaps.

2. Currencyswaps.

48
Interestrateswaps

Interest rate swaps, as a name suggest involves an exchange of different payment

streams, which are fixed and floating in nature. Such an exchange is referred to as an

exchangeof borrowings.

For example, ‘B’ to pay the other party ‘A’ cash flows equal to interest at a pre-

determined fixed rate on a notional principal for a number of years. At the same time,

party ‘A’ agrees topay ‘B’ cashflowsequal to

interest at a floatingrate onthe same notionalprincipalfor thesameperiodoftime.The

currencies of the two sets of interest cash flows are the same. The life of the swap can

rangefrom two years to fiftyyears.

Usuallytwonon-financialcompaniesdonotgetintouchwitheachothertodirectly

arrangeaswap.Theyeachdealwithafinancialintermediarysuchasabank.

At any given point oftime, the swaps spreads are determined bysupplyand demand. If

no participants in the swaps market want to receive fixed rather than floating, Swap

spreads tend to fall. If the reverse is true, the swaps spread tend to rise. Inreallife, itis

difficult to envisage a situationwhere two companies contact a financialinstitutionat a

exactlysame withaproposaltotake opposite positionsin the same swap

CurrencySwaps

Currency swaps involves exchangingprincipaland fixed interest payments on a loan in

one currency for principal and fixed interest payments on an approximatelyequivalent

loan in anothercurrency.

Example:

Supposethatacompany‘A’andcompany‘B’areofferedthefixedfiveyearsratesof

49
interest in US $ and Sterling. Also suppose that sterlingrates are higher thanthe dollar

rates.Also, company‘A’abetter credit worthinessthencompany‘B’asit isoffered

Better rates on both dollar and sterling. What is important to the trader who structures

the swap deal is that the difference in the rates offered to the companies on both

currencies is not same. Therefore, though company ‘A’ has a better deal. In both the

currency markets, company ‘B’ does enjoya comparative lower disadvantage inone of

the markets. This creates an ideal situation for a currency swap. The deal could be

structured such that the company ‘B’ borrows in the market in which it has a lower

disadvantage and company ‘A’ in which it has a higher advantage. They swap to

achievethedesiredcurrencytothe benefitofall concerned.

Apoint to noteis that the principalmustbespecifiedatthe outset for eachofthe

currencies.Theprincipalamountsareusuallyexchangedatthebeginningandthe end

of thelifeof theswap.They arechosen suchthat theyare equalat the exchange rate at the

beginningofthe lifeofthe swap.

Likeinterestswaps,currencyswapsarefrequentlywarehousedbyfinancialinstitutions

thatcarefullymonitortheirexposureinvariouscurrenciessothatthey canhedge currencyrisk.

50
LiteratureReview

O.P Gupta(2004) study suggest that the overall volatility of the stock market has

declined after the introduction of the index futures for both Nifty and

Sensexindices,Howeverthere is noconclusiveevidence.

Mayhew (2000) made a more focused, though quite detailed, review oftheoretical

and empirical work on the effect of introduction of derivative on the underlyingcash

market, includingPD. He points outthata simplewayto analyzePDisto look at the led-

lagrelationship betweenspot and derivative market ofanasset. Kawaller, Koch, and

Koch (1987) took one-minute-intervalspotand futures data for S&P-500 index for

1984-85 and found that the futures leads the spot market 14 by 20-45 minutes, with

longer lead in the more active nearer term contracts, but the spot market leads only

by a maximum of two minutes. Realizing that asynchronous trading could be

showing the spot-market as lagging, manyauthors tryto overcome the problem.

Harris (1989) examined the S&P-500 spot and futures data in five- minute-intervals

ten days around the US stock-market crashof1987 and concluded that, though the

extreme movements in the cashfutures basis was caused due to infrequent-trading,

evenafter correctingfor that, thefuturesmarket stillledthecash (or spot) market. Also

using five-minute-interval data from April 1982 to March 1987, Stolland Whaley

(1990) overcame the infrequent-tradingproblembymaking the spot returnpas

throughanARMA filter; theyalso found that the futures market leads by5-

10minutesandsometimescashmarket also leads, but theincidenceof

51
the latter effect is diminishing over time. Chan (1992) looked at the 20-share MMI

index, which is less subject to infrequent trading, and both MMI and S&P-500

futures contracts. He also found strong support for futures leading spot and weak

support for the reverse. In fact, he also observed that the index-futures led eventhe

most-active component-stocks that are a part of the index. He also highlighted that

the lead-lag relationship is not affected whether good or bad news is received or

whether market activity is high or low. In an insightful paper, Wahab and Lashgari

(1993) pointed out that earlier empirical works were misspecified, because they

failedtorecognizethatthe spotandderivativepriceswerecointegrated.

Kamara, Miller, and Siegel (1992) have found no increase in spot-market-

volatility due to introduction of S&P-500 futures, Antoniou and Holmes (1995)have

argued that the introduction of stock-index futures increased spot-market volatility

in the short run, but not in the long run. Frino, Walter, and West (2000) used high-

frequency data for Share-Price-Index futures contract 15 on Sydney Futures

Exchange from August 1995 to December 1996 and analyzed the effect of release of

macroeconomic and stock-specific information on the PD process in the spot and

futures market. They found that the lead ofthe futures market strengthens

significantly around the time of release of macroeconomic information, which is

consistent with a scenario where investors with superior information on the broad

market are more likely to trade in the index futures. There was also some evidence

that the lead ofthe future market weakens and that ofthe equity-market strengthens

around the release ofinformationspecifictoindividualstocks,consistentwith a

52
scenario where investors with stock-specific knowledge prefer to trade

inunderlyingshares.

Smidt (1971) argued that, in addition to what Demsez (1968) had modelled, the

market-maker,in her quest to constantly bring her inventory up or down to adesired

level, would influence price, thus making it depart, during the course of a day or

sometimes even over a longer period, fromthe true value. But, it is Garman (1976)

who formally modelled the relation between dealer’s quote (or bid-ask spread) and

the inventory level. One of the model’s implications is that a dealer having

asizeablelong position in inventory would not go for addition unless there is a

drastic price reduction. Models by Stoll (1978) and Amihud and Mendelson

(1980)reflecttheintuitionoftheGarmanmodel.

Kenourgios (2004) analyzes the relative movements in Greece’s FTSE/ASE-20

index and the three-month futures on it and finds two-way causality. A survey by

Lien and Zhang (2008) argues that, while there is clear evidence for the PD role of

futures market in emerging markets, its price-stabilizing role cannot be established

unequivocally. Schlusche (2009) analyzes the German blue-chip index, DAX, and,

usingSchwarzand Szakmary(1994) procedure, concludes that futures market is the

most significant contributor to the PD process; he also highlights that, instead of

liquidity,it is volatilitythat isthe keyfor thePDleadership

53
Tsetsekos andVarangis (2000)conductedasurveyamongalmostallthe

derivativeexchangesthatwereinoperationin1996:75inall.Theymadesome

importantobservations.Asagainstthe traditionalapproachofstartingwith

derivativesonagriculturalcommodities,emergingmarketshavebeguntheirinnings

withindex-basedandinterest-rate-basedderivatives.Theyalsofindthatemerging markets

introduce index derivatives more quickly than do their industrial

counterparts.Mostexchangesreportedusingtheopen-outcrysystem,thoughthere

isadiscernibleshifttowardselectronic-trading,whichisthechoiceforthemore

recententrants.Two-thirdsoftheexchangeshadtheirownin-houseclearing

facility,butarecenttendencyhasbeentowardsacommon clearing foragroup of

exchanges;besides,mostwereself-regulatingbodiesownedbytheirmembers.

Using“changesinconsumerprices,primeinterestrates,governmentbondyields,

industrialproduction,growthinrealgrossnationalproduct(GNP),thelevelof

GNP,andtheshareofinvestmentsinGNP”aseconomicproxiesand“stock-

marketturnoverandcapitalization,thevarianceinstock-marketcapitalization,the

valueofstockstraded,thevolatilityinvaluetraded,andthenumberoflisted

companies17inthestockexchange”ascapital-market-conditionproxies,theydid

notfindanystatisticallysignificantvariableamongthesetomakeacountryor market

‘derivative-exchange-ready’.

Treviño (2005) analyzed 1999-2005 data for 83 derivative exchanges in 58

emerging-markets and, based on volume ofcontracts, inferred fromthe Hirschman-

Herfindahl Indexthat the smaller exchanges have increased their market-share from

9%to 37%duringthisperiod. They also observed that mostofthe new-born

54
derivative exchanges have focused on financial derivatives with or without

commodityderivatives while the older one started with the lattertype; this is partly

because financials attract higher liquidity than commodities. They also point out

that, in order to separate trading-rights from membership-rights, so s to allow

outside ownership of bourses, derivative exchanges have undergone

demutualization. They also discovered that interest-rate derivatives commanded the

highest dollar-volume in both exchanges and over the counter (OTC) market,

followed by equity-linked ones in the exchanges and foreign-exchange-based ones

in the OTC.

55
OBJECTIVESOFTHESTUDY

 TounderstandtheconceptoftheFinancialDerivativessuchasForwards,

Futures,Optionsand Swaps

 ToknowtheparticipationofInvestorsinFinancialDerivative

Markets

 ToknowtheStrategyusedbyInvestorsWhileTradingin

derivativesmarket

 ToknowtheExpectedreturnbyInvestorsinFinancialDerivativesMarket

 TostudytheInvestorsPreferenceforselectingtypesofDerivatives for

Investment

 ToknowtheInvestmentExperienceofInvestorsinDerivativeMarket

 To knowtheInvestorshavinganyTraininginDerivativesMarketfrom

NSE,BSE orany Brokingfirmbefore trading

 ToknowtheInvestorspreferenceofinterestinkindsofDerivativesfor Investment
56
RESEARCHMETHODOLOGY

Achievingaccuracyinanyresearchrequires a deep studyregardingthe subject. The

prime objective of this research is to know the awareness regarding mutual fund

amongearningpeople.

RSEARCHDESIGN:-

DESCRIPTIVERESEARCH&CAUSALRESEARCHDESIGN

DescriptiveResearch:-

Descriptive research is a study designed to depict the participants in an accurate

way. More simply put, descriptive research is allabout describingpeople who take

part in the study.

There are three ways a researcher can go about doing a descriptive research

project, and they are:

 Observational, defined as a method ofviewingand recordingthe

participants

 Casestudy,definedasanin-depthstudyofanindividualorgroupof individuals

 Survey,definedasabrief interviewordiscussion with an individual abouta

specifictopic
57
CausalResearchDesign:-

Causal research, as the name specifies, tried to determine the cause underlying a

given behaviour. It finds the cause and effect relationship between variables. Itseeks

to determine how the dependent variable changes with variations in the

independentvariable.

For example, a marketer may want to determine the cause ofdip insales. He would

test the sales against various parameters like selling price, competition, geography

etc.

The results obtained maynot be verystraight forward because, more oftenthannot,

the variability will be a factor of more than one variable. Therefore , while varying

one variable, the other variables need to be held constant. This typeofresearchcan

take two forms:

Experimental – The research performs structured experimentsto varyone variable

andfindtheeffectonthebehaviour/endresult

Simulation based – This uses mathematical formulae to simulate real lifescenarios.

58
SAMPLING:- Conveniencesampling

Convenience sampling, as the name implies is a specific type of non-

probability sampling method that relies on data collection from

population members who are conveniently available to participate in

study.

Convenience sampling is a type of sampling where the first available

primary data source will be used for the research without additional

requirements. In other words, this sampling method involves getting

participants wherever you can find them and typically wherever is

convenient. In convenience sampling no inclusion criteria identified

prior to selectionof subjects.Allsubjects areinvitedto participate

SAMPLESIZE:- “50UNIT”

Sample size is an important concept in statistics, and refers to the

number of individual pieces of data collected in a survey. A survey or

statistic's sample size is important in determining the accuracy and

reliabilityof a survey's findings.

In50RespondentareInvestorinIIFLClientsinNoida

59
DATACOLLECTIONMETHOD

 Primarydata

 Secondarydata

PRIMARYDATA:-

Datausedinresearchoriginallyobtainedthrough thedirecteffortsof theresearcher

throughsurveys,interviewsand directobservation.

SECONDARYDATA:-

Secondarydata is the data that have been alreadycollected byand readilyavailable

from other sources. Such data are cheaper and more quickly obtainable than the

primary data andalsomay beavailable when primary data can not be obtained at all.
60
TOOLSOFTHECOLLECTIONOFDATA

 Primary data was collected through Questionnaire where

Respondent give there valuablesuggestions and feedback

 SecondarydatawascollectedthroughinternetwebsiteofIIFL

Company and other relevantwebsites.

 Journals and Magazines oftheCompanywhichareissued

Weekly, Fortnight and Monthly.

61
DATAANALYSIS&INTERPRETATION

Gender

Gender

Male
Female

41

INTERPRETATION

AbovePieChart Showsthat:-

 82%Respondentsaremale

 18%Respondentsare female
62
 Age

Age

20 20-30
10
30-40
40-50
50above

15

INTERPRETATION

AbovePieChart Showsthat:-

 40%Investorsare20-30Agegroups

 30%Investorsare30-40Agegroups

 20%Investorsare40-50Agegroups

 10%Investorsare50andaboveAgegroups
63
Q.3Education

EDUCATION
0

10th
22
12th
Graduation
PG&Above
22

INTERPRETATION

AbovePieChart Showsthat:-

 0%Investorsare10thQualified

 20%Investorsare12thQualified

 44%InvestorsareGraduatesQualified

 44%InvestorsarePG&AboveQualified

64
Q.4Occupation

OCCUPATION

7
9

Service
Business
Profession
AnyOther
18
16

INTERPRETATION

AbovePieChart Showsthat:-

 7%InvestorsarebelongstoserviceSector.

 36%InvestorsarebelongstoBusinessSector.

 32%Investorsarebelongsto ProfessionSector.

 18%InvestorsarebelongstoAnyOtherSector.
65
Q.5AnnualIncome.

AnnualIncome

15
Upto3lacs
3-6lacs
11
6-8lacs
8above

17

INTERPRETATION

AbovePieChart Showsthat:-

 30%Investors Annual Income isUpto3Lakhs

 34%Investors Annual Income is3-6Lakhs

 22%Investors Annual Income is6-8Lakhs

 14%Investors Annual Income is8&AboveLakhs

66
 ParticipationinDerivativemarket as:-

ParticipationinDerivativemaketas

14 14

Hedger
Speculator
Arbitrageur
Others
6

16

INTERPRETATION

AbovePieChart Showsthat:-

 28%InvestorsareParticipatesasHedger

 32%InvestorsareParticipatesasSpeculator

 12%InvestorsareParticipatesasArbitrageur

 28%InvestorsareParticipatesasOther
67
 UsingStrategyinDerivativemarket:-

UsingstrategyinDerivativemarket

24 Yes

26 No

INTERPRETATION

AbovePieChart Showsthat:-

 48%InvestorsareusingStrategyinDerivativeMarket

 52%InvestorsarenotusingStrategyinDerivativeMarket
68
 Investor’sexpectedrateofreturninderivativemarket:-

ExpectedInvestor'srateofreturnin
derivative market

12

Don'ttrade
22
Lessthan5%
5-10%

8 Morethan10%

INTERPRETATION

AbovePieChart Showsthat:-

 24%InvestorsareDon’tTrade

 16%InvestorsareExpectedrateofreturnlessthan5%

 16%InvestorsareExpectedrateofreturnlessthan5-10%

 44%InvestorsareExpectedrateofreturnmorethan10%
69
 SatisfactionlevelinDerivativemarket:-

Satisfactionlevelinderivativemarket

19 Donottrade
Agree
Disagree
Neutral
19

INTERPRETATION

Above PieChartShowsthat:-

 12%InvestorsDon’tSatisfyinDerivativeMarket.

 38%InvestorsSatisfactionlevelinDerivativeMarketasAgree.

 12% Investors Satisfaction level in Derivative Market as

Disagree.

 38%InvestorsSatisfactionlevelinDerivativeMarketasNeutral.
70
 InvestorspreferinvestmentinDerivativemarket

InvestorspreferinDerivative

10 12
Forward

Future
Option
12
Swap
16

INTERPRETATION

AbovePieChart Showsthat:-

 24%InvestorsprefersinvestmentinForwards.

 32%InvestorsprefersinvestmentinFutures.

 24%InvestorsprefersinvestmentinOption.

 20%InvestorsprefersinvestmentinSwap
71
 ExperienceinDerivativemarket

ExperienceinDerivativemaket

6 4

0to1
1to3
3to6
12 Morethan6
18

INTERPRETATION

AbovePieChart Showsthat:-

 8%InvestorshaveExperienceinDerivativemarketapprox0-1 year.

 36%%Investorshave Experience inDerivativemarketapprox1- 3

years.

 24%%Investorshave Experience inDerivativemarketapprox3- 6

years.

 12%%InvestorshaveExperienceinDerivativemarketapprox more

than years.

72
 TraininginNSE,BSEforDerivativeMarket:-

TraininginNSE, BSEforDerivativeMarket

23
Yes
No
27

INTERPRETATION

AbovePieChart Showsthat:-

 46%Investors gotTraininginNSE,BSEforDerivativeMarket.

 54%InvestorsgotTraininginNSE,BSEforDerivativeMarket.
73
 InvestorsinvestinginDerivativeMarket:-

InvestorInvestinginDerivativeMarket

7 Equity
Currency
Commodity

AnyOther
6 31

INTERPRETATION

AbovePieChart Showsthat:-

 62%InvestorsininvestEquityMarketinDerivative.

 12%InvestorsinvestinCurrencyMarketin Derivative.

 14%InvestorsinvestinCommodityMarketinDerivative.

 12%InvestorsinvestinAnyOtherMarket inDerivative.
74
CONCLUSION

 Derivatives have existed and evolved over a long time, with roots in

commodities market. In the recent years advances in financial markets and

the technologyhave made derivativeseasyfor theinvestors.

 Derivatives market inIndia is growingrapidlyunlikeequitymarkets.

Trading in derivatives require more than average understanding of finance.

Being new to markets maximum number of investors have not yet

understood the full implications of the trading in derivatives. SEBI should

takeactionstocreate awareness in investorsaboutthe derivativemarket.

 Introduction of derivatives implies better risk management. These markets

can give greater depth, stability and liquidity to Indian capital markets.

Successful risk management with derivatives requires a thorough

understandingofprinciplesthatgovernthepricingoffinancialderivatives.

 Inorder to increase the derivatives market inIndia SEBIshould revisesome of

their regulation like contract size, participation of FII in the derivative

market. Contract size should be minimized because small investor cannot

affordthismuchofhugepremiums.

 In cash market the profit/loss is limited but where in F& O an investor can

enjoy unlimitedprofits/loss.
75
 AtpresentscenariotheDerivativesmarketisincreasedtoagreatposition.

Itsdailyturnoverteachestotheequalstageofcashmarket.

 Thederivativesaremainlyusedforhedgingpurpose.

 In cash market the investor has to paythe totalmoney, butinderivativesthe

investor has to pay premiums or margins, which are some percentage oftotal

one.

 In derivative segment the profit/loss of the option holder/option writer is

purelydepended onthe fluctuationsofthe underlyingasset.

76
RECOMMENDATIONSTOINVESTORS
 The investors can minimize risk by investing in derivatives. The use of

derivative equips the investor to face the risk, which is uncertain. Though theuse

ofderivatives does not completelyeliminate the risk, butitcertainlylessens the

risk.

 It is advisable to the investor to invest inthe derivatives market because ofthe

greater amount of liquidity offered by the financial derivatives and the lower

transactionscostsassociatedwiththetradingoffinancialderivatives.

 Thederivativesproductsgivetheinvestoranoptionorchoicewhetherto

exercise the contract or not. Options give the choice to the investor to either

exercise his right or not. If on expiry date the investor finds that the underlying

asset in the option contract is traded at a less price inthe stock market then, he

has the full liberty to get out of the option contract and go ahead and buy the

asset from the stock market. So in case of high uncertainty the investor can go

for options.

 However, these instruments act as a powerful instrument for knowledgeable

traders to expose them to the properly calculated and well understood risks in

pursuitof reward i.e. profit.

77
LIMITATIONS:-

 ThestudydoesnottakeanyNiftyIndex FuturesandOptionsandInternational Markets

intothe consideration.

 Thisisastudyconductedwithinaperiodof45days.

 Duringthislimitedperiodofstudy,thestudymaynotbeadetailed,Full– fledgedand

utilitarianone in all aspects.

 The studycontainssomeassumptionsbasedonthedemandsoftheanalysis.

 Thestudydoesnotprovideanypredictionsorforecastoftheselectedscripts.

 ThestudywasconductedinNoidaonly.

 Asthetimewaslimited,study wasconfinedtoconceptualunderstandingof

Derivativesmarket in India
78
BIBLIOGRAPGHY:-

WEBSITES:-

 www.indiaifoline.com

 www.nseindia.org

 www.moneycontrol.com

 www.bseindia.com

 www.unicon.com

 www.sebi.gov.in

ARTICLES:-

 Gupta, OP (2002): “Effect of Introduction of Index Futures on Stock Market

Volatility: The Indian Evidence”, Paper Presented at the Sixth Capital Market

ConferenceofUTI InstituteofCapitalMarkets,Mumbai,India.

 Kamara, A, T Miller, and A Siegel(1992), “TheEffectsofFuturesTradingonthe

Stabilityof the S&P500Returns”,Journalof FuturesMarkets, Vol. 12,

 Kenourgios, Dimitris F (2004), “Price Discovery in the Athens Derivatives

Exchange: Evidence for the FTSE/ASE-20 Futures Market”, Economic and

BusinessReview,Vol. 6,

 Mayhew,Stewart(2000):“TheImpactofDerivativesonCashMarkets:What

HaveWeLearned?”,UniversityofGeorgiaWorkingPaper,27October1999, Revised

3 February 2000
79
 (http://media.terry.uga.edu/documents/finance/impact.pdf, Accessed 28 July

2013)

 Smidt,S(1971):“WhichRoadtoan EfficientStockMarket:FreeCompetitionor

RegulatedMonopoly?”FinancialAnalystsJournal,Vol27-18-20

 Treviño, Lourdes (2005):“Development andVolumeGrowthofOrganized

DerivativesTrade in EmergingMarkets”, Ensayos,Vol24-2

 Tsetsekos, George and Panos Varangis (2000): “Lessons in Structuring

DerivativesExchanges”,World Bank Research Observer, Vol15-1:85-98.

80
APPENDICES:-

-:QUESTINNAIREFORSTUDYONDERIVATIVES:-

DearRespondents,

This is study for investor’s preferences on Derivatives in IIFL.We request you to kindly

fill the information and the information provided by you will be used only for the study

purpose.

NameoftheInvestor.(Pleaseenteryourname)

1. Gender. Male() Female()

2. Age(inyears)

(i)20-30( ) (ii)30-40() (iii)40-50()

(iv) Above50()

3. HighestEducation.s(Please√appropriatebox)

(i)10th() (ii)12th() (iii)Graduation()

(iv) PG&above()

4. PleaseentertheOccupationdetails.

(i)Service() (ii)Business() (iii)Professional()

(iv) AnyOther()

5. WhatisyourIncome?(PerAnnum)

(i)Upto3lakhs() (ii)3-6lakhs() (iii)6-8lakhs()

(iv) Above8lakhs( )

81
6. YouliketoparticipateinDerivativemarketas.

(i) Hedger ( ) (ii) Speculator ( ) (iii) Arbitrageur ( )

(iv)Others( )

7. DoyouuseanystrategieswhiletradinginDerivatives?

(i)Yes() (ii)No()

8. What is the rate ofreturnexpectedbyyoufromderivative market?

(i)Don’ttrade()ii)Lessthan5%( ) (i)5%-10% () (iv)Morethan 10%()

9. Whatkind ofDerivativesinvestmentwouldyoulikein?

(i)Forwards() (ii)Futures() (iii)Options()

(iv) Swaps()

10. ExperienceinDerivativesMarket(pleaseselectonlyonewhichisapplicable)

(i)0-1Year( ) (ii)1-3Years( ) (iii)3-6Years()

(iv)Above6Years ()

11. HaveyouundergoneanytraininginderivativesfromNSE,BSEorBroking

Firmsbefore startingtradinginDerivatives Market?

(i)Yes( ) (ii)No( )

12. WhichDerivativesMarketsyouliketoinvestin?(Pleasetickallapplicable below)

(i)Equity( ) (ii)Currency( ) (iii)Commodity() (iv)Anyother()

82
Anycomments,suggestionsandfeedbackwithregardtoderivativessegmentin India and

for its improvementfurther.

83