Ludhiana Stock Exchange Ltd.

Seminar
On
Derivatives

Submitted. To:- Submitted by:-

Ms. Neetu Goyal Monika
Roll no.27
LUDHIANA STOCK EXCHANGE
LTD.
Sh. S.P. Oswal and Sh. B.M. Munjal leading Industrialists to fulfill a vital need of having a stock exchange in this region established Ludhiana
Stock Exchange (LSE) in 1981 A.D.. Since its inception Ludhiana Stock Exchange (LSE). Has grown phenomenally switched from manual
trading to screen based trading on 18 th November 1996.
LSE has played an important role in generating for the companies in the
states of Punjab, Haryana, Himachal Pradesh and J&K.
The daily trading volumes on BSE, NSE (Capital Market) and NSE (F&O)
have been Rs. 18 crore, Rs. 38 crore and Rs 140 crore respectively.
Total numbers of listed companies are 437 in which 286 are regional and
151 non-regional. The numbers of members have now increased to 293 out
of which 205 are individual and 88 are corporate.
 
LSE also have:
AUTHORISED SHARE CAPITAL: The authorized share capital of LSE is Rs. 5,00,00,000 (5 crore).
IT HAS ITS OWN INDEX: 1993 as base year, Price allocation 100 points to it on index. LSE has also build up its own index of price movement
of scrip's. The index is based on prices as on 1 st April.
IT HAS ITS BULLET IN: LSE is continuously published LSE Bulletin at the interval of quarter. It is also publishing LSE annual report provides
information to the various with the stock exchange.
OWN BUILDING: LSE has its own six stories ultra modern building at Feroze Gandhi market at Ldh. It started its operation on 16 th August 1981.
GOVERNING BODY: The LSE is administered through a governing body comprising and nominated members.
 
 
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Functions of stock exchange
Stock Exchange Performs The Following Functions:
 The stock exchange provides appropriate conditions where by
purchase and sale of securities takes place at reasonable and fair
prices.
 People having surplus funds invest in the securities and these funds
used for industrialization and economic development of country that
leads to capital formation.
 The stock exchange provides a ready market for the conversion of
existing securities into cash and vice-versa.
 The stock exchange acts as the center of providing business
information relating to enterprise whose securities are traded as the
listed companies are to present their financial and other statements to
it.
 Stock exchange protects the interest of the investors through strict

enforcement of rules and regulations with respect to dealings.

 Objectives of the project
The main objectives of my final project report are
as follows:-
• To study the various trends that comes in the way of
Derivatives market
•To find out that what would be the future and market
potential of derivative market in india.
•To know the awareness & familiarity investors,
dealers and brokers hold regarding derivatives market.
•To know the experience of dealers, investors and
brokers with derivatives till date.
•To get knowledge about shortcomings in indian
derivative market.
 INTRODUCTION TO DERIVATIVES

A derivative is a financial instrument - or more simply, an agreement

between two people or two parties - that has a value determined by
the price of something else (called the underlying). . When the price
of the underlying changes, the value of the derivative also changes.
The underlying assets can be:
 
 Any type of agriculture product of grain (not prevailing in India)
 Price of precious and metals gold
 Foreign exchange rates
 Short term as well as long-term bond of securities of different type
issued by govt. and companies etc.
CHARACTERISTICS OF DERIVATIVE
A derivative is defined in this project as a financial instrument or other
contract with all three of the following characteristics:
Settlement factors. It has (1) or more reference rates and (2) one or more
national amounts or payment provisions or both. Those terms determine the
amount of the settlement or settlements and, in some cases, whether or not a
settlement is required.
Leverage. It requires no initial net investment or an initial net investment that
is smaller than would be required for other types of contracts that would be
expected to have a similar response to changes in market factors.
Net settlement. Its terms require or permit net settlement, it can readily be
settled net by a means outside the contract, or it provides for delivery of an
asset that puts the recipient in a position not substantially different from net
settlement. 
INSTRUMENTS OF DERIVATIVE
TRADING
Forward contract
Future contract
Option contract
 
What is a forward contract?

In a forward contract, two parties agree to do a trade at some

future date, at a stated price and quantity. No money changes
hands at the time the deal is signed. The two parties are:
•Who takes a long position – agreeing to buy
•Who takes a short position—agreeing to sell
The mutually agreed price is known as "delivery price" or
"forward price". The delivery price is chosen in such a way
that the value of contract for both parties is zero at the time
of entering the contract, but the contract takes a positive or
negative value for parties as the price of underlying asset
moves. It removes the future price risk.
What is a futures contract?

'It is an agreement between buyer and seller for the purchase and sale of a
particular assets at a specific future date; specific size, date of delivery,
place and alternative asset. It takes obligation on both parties to fulfill the
contract.
Futures markets are exactly like forward markets in terms of basic
economics. However, contracts are standardised and trading is
centralised, so that futures markets are highly liquid. There is no
counterparty risk (thanks to the institution of a clearinghouse which
becomes counterparty to both sides of each transaction and guarantees
the trade). In futures markets, unlike in forward markets, increasing the
time to expiration does not increase the counterparty risk.
 
 
What is an option?

An option is a contract which gives the right, but not the
obligation, to buy or sell the underlying at a stated date and at a
stated price. A call option gives the right to buy and a put option
gives the right to sell. Options are fundamentally different
from forward and futures. An option gives the holder/buyers
of the option the right to do something. The holder does not
have committed himself to doing something. In contrast, in
a forward or futures contract, the two parties have
committed them self to doing something. Whereas it
nothing (expect margin requirement) to enter in to a futures
he purchases of an option require an up front payment.
 TYPES OF OPTIONS

Thus the options are of two types: CALL OPTION AND

PUT OPTION.  
CALL OPTION: It gives an owner the right to buy a
specified quantity of the underling assets at a
predetermined price i.e. the exercise price, or the specific
date i.e. is the date of maturity.  
PUT OPTION: It gives the holder the right to sell a
specific quantity of underlying assets at an agreed price on
date of maturity he gets the right to sell.
Development and Regulation of Derivative Markets in India
1 Background
The SEBI Board in its meeting on June 24, 2002 considered some important
issues relating to the derivative markets including:
Physical settlement of stock options and stock futures contracts.
Review of the eligibility criteria of stocks on which derivative products are
permitted.
Use of sub-brokers in the derivative markets.
Norms for use of derivatives by mutual funds
The recommendations of the Advisory Committee on Derivatives on some
of these issues were also placed before the SEBI Board. The Board desired
that these issues be reconsidered by the Advisory Committee on Derivatives
(ACD) and requested a detailed report on the aforesaid issues for the
consideration of the Board.
2 Regulatory Objectives
"The Committee believes that regulation should be designed to
achieve specific, well-defined goals. It is inclined towards
positive regulation designed to encourage healthy activity and
behaviour. It has been guided by the following objectives:
(a) Investor Protection: Attention needs to be given to the
following four aspects:
(i) Fairness and Transparency:
(ii) Safeguard for clients’ money:
 (iii) Competent and honest service:
(iv) Market integrity:
(b) Quality of markets:
(c) Innovation:
 
PARTICIPANTS IN DERIVATIVE MARKET
The following three categories of Participants-Hedgers, Speculators,
and Arbitrageurs.
(1)HEDGER : Hedgers face risk associated with the price of an asset. They use futures or
options markets to reduce the risk. Thus, they are operation who want to eliminate the
risk composing of their portfolio.
(2)SPECULATORS: They wish to be on future movements in the price of an asset. A
speculator may buy securities in anticipation of rise in price. If this expectation comes
true he sells the securities at a higher price and makes a profit. Usually the speculator
does not take delivery of securities sold by him. He only receives and pays the
difference between the purchase and sale prices.
(3)ARBITRAGEURS: They are in business to take advantage of discrepancy between
price in two different markets. If for example, they see the future price of an asset
getting out of line with the cash price, they will take off setting positions in two
markets to lock in profit.
Cash Vs. Derivatives
The basis differences between these two may be noted as follows.
In cash market tangible asset are traded whereas in derivatives market contract
based on tangible assets or intangible like index or rates are traded.
The value of derivative contract is always based on and linked to the underlying
asset. Though, this linkage may not be on point-to point basis.
Cash market contracts are settled by delivery and payment or through an offsetting
contract. the derivative contracts on tangible may be settled through payment and
delivery, offsetting contract or cash settlement, whereas derivative contracts on
intangibles are necessarily settled in cash or through offsetting contracts.
The cash markets always has a net long position, whereas the net position in
derivative market is always zero.
Cash asset may be meant for consumption or investment. Derivatives are used for
hedging, arbitration or speculation.
Derivative markets are highly leveraged and therefore could be much more riskier.
Economic functions of derivative markets
THE DERIVATIVE MARKETS PERFORM A NUMBER OF
ECONOMIC FUNCTIONS:
 
(1) Prices in organized derivative markets reflect the perception of market participants
about the future and lead the prices of underlying to perceived future level. The prices
of derivatives converge with the prices of the underlying at the expiration of the
derivative contract. Thus derivatives help in discovery of future as well current prices.
(2) Derivatives due to their inherent nature are linked to the underlying cash markets.
With the introduction of derivative, the underlying market, witness higher trading
volumes because of participation by more players who would not otherwise participate
for lack of an arrangement to transfer risk.
(3) Derivatives have a history of attracting many bright, creative, well- educated people
with an entrepreneurial attitude. They often energize others to create new business,
new products and new employment opportunities, the benefits of which are immense.
REASON FOR STARTING DERIVATIVES
1.Counter party risk on the part of broker, in case it ask money from us but
 before giving delivery of shares goes bankrupt.
 2.Liquidity risk in the form that the particular scrip might not be traded on
exchange.
3.Unsystematic risk in the form that the price of scrip may go up or down
due to “Company Specific Reasons”.
 4.Mutual funds may find it difficult to invest the funds raised by them properly
as the scrip in which they want to invest might not be available at the right
price.
5.Systematic risk in the form that the price of scrip may go up or down due to
reason affecting the sentiment of whole market.
What
 
are the benefits of derivatives to India?
India's financial market system will strongly benefit from smoothly functioning index
derivatives markets.
Internationally, the launch of derivatives has been associated with substantial improvements
in market quality on the underlying equity market. Liquidity and market efficiency on India's
equity market will improve once the derivatives commence trading.
Many risks in the financial markets can be eliminated by diversification. Index derivatives are
special insofar as they can be used by investors to protect themselves from the one risk in the
equity market that cannot be diversified away, i.e., a fall in the market index. Once investors
use index derivatives, they will suffer less when fluctuations in the market index take place.
Foreign investors coming into India would be more comfortable if the hedging vehicles
routinely used by them worldwide are available to them.
The launch of derivatives is a logical next step in the development of human capital in India.
Skills in the financial sector have grown tremendously in the last few years, thanks to the
structural changes in the market, and the economy is now ripe for derivatives as the next area
for addition of skills.
 RESULTS / FINDINGS
 

1 . Brokers not dealing in derivatives at present are also not going to

adopt it in near futures.
2. Hedging & Risk Mgt. Is the most important feature of derivatives.
3. It is not for small investors.
4. It has increased brokers turnovers as well as helpful in aggregate
investment.
5. Brokers haven't adequate knowledge about options, so most by them
are dealing in futures only.
6. There is a risk factor in derivative also.
7. Most of investors are not investing in derivatives.
8.People are not aware of derivatives, even people who have invested in it, hasn’t adequate
knowledge about it. These people are interested to take it in their future portfolio also. They
consider it as a tool of risk management.
9.They normally invest in future contracts.
10.They are investing in future contract, because futures have up to home
extent similar quality as Badla.
 
 
LIMITATIONS OF THE STUDY
No study is complete in itself, however good it may and every study
has some limitations:
Time is the main constraint of my study.
Availability of information was not sufficient because of less
awareness among investors/brokers
Sample size is not enough to have a clear opinion.
 Possible large losses: The use of derivatives can result in large losses
because of the use of leverage, or borrowing. Derivatives allow
investors to earn large returns from small movements in the
underlying asset's price. However, investors could lose large amounts
if the price of the underlying moves against them significantly. There
have been several instances of massive losses in derivative markets
 SUGGESTIONS

1.LOT SIZE : Lot size should be reduced so that the major segment of an India
society i.e. small saving class can come under F & O trading. There is strong need
for revision of lot sizes as the lot sizes of some of the individual scrip's that were
worth of Rs. 200000 in starting, now same lot size amount to a much larger value.
2. SUB BROKER: Sub-broker concept should be added and the actual brokers
should give all rights of brokers in F & O segment also.
3.SCRIPS: More scrip's of reputed companies etc. should be introduced in "F & O
segment".
4.TRADING PERIOD: Trading period should be increased.
5.TRAINING CLASSES OR SEMINARS: There should be proper classes on
derivatives for investors, traders, brokers, students and employees of stock
exchanges. Because lack of knowledge is the main reason of its less development.
The first step towards it should be seminars provide to brokers & LSE employees
and secondly seminar to students.
Conclusion
THANKS