a projecr report on derivatives at india infoline liimited

7/31/2019 a projecr report on derivatives at india infoline liimited

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INTRODUCTION

Derivatives are products whose value is derived from one or more variables called

bases. These bases can be underling asset such as foreign currency, stock or commodity,

bases or reference rates such as LIBOR or US treasury rate etc. Example, an Indian

exporter in anticipation of the riceipt of dollar denominated export proceeds may wish to

sell dollars at a future date to eliminate the risk of exchange rate volatility by the data.

Such transactions are called derivatives, with the spot price of dollar being the underling

asset.

Derivatives thus have no value of their own but derive it from the asset that is

being dealt with under the derivative contract. A financial manager can hedge himself

from the risk of a loss in the price of a commodity or stock by buying a derivative

contract. Thus derivative contracts acquire their value from the spot price of the asset that

is covered by the contract.

The primary purposes of a derivative contract is to transfer risk from one party

to another i.e. risk in a financial sense is transfer from a party that is willing to take it on.

Here, the risk that is being dealt with is that of price risk. The transfer of such a risk can

therefore be speculative in nature or act as a hedge against price movement in a current or

anticipated physical position.

Derivatives or derivative securities are contracts which are written between two

parties (counterparties) and whose value is derived from the value of underlying widely-

held and easily marketable assets such as agricultural and other physical (tangible)

commodities or currencies or short term and long-term and long term financial

instruments or intangible things like commodities price index (inflation rate), equity price


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index or bond piece index. The counterparties to such contracts are those other than the

original issuer (holder) of the underlying asset.

Derivatives are also known as deferred delivery or deferred payment instruments.

In a sense, they are similar to securitized assets, but unlike the latter, they are not the

obligations which are backed by the original issuer of the underlying asset or security. It

is easier to take a short position in derivatives than in other possible to combine them to

match specific requirements, i.e., they are more easily amenable to financial engineering.

The values of derivatives and those of their underlying assets are closely related.

Usually, in trading derivatives, the taking or making of delivery of underlying assets is

not involved; the transactions are mostly settled by taking offsetting positions in the

derivatives themselves. There is, therefore, no effective limit on the quantity of claims

which can be traded in respect of underlying assets. Derivatives are off balance sheet

instruments, a fact that is said to obscure the leverage and financial might they give to the

party. They are mostly secondary market instruments and have little usefulness in

mobilizing fresh capital by the companies (warrants, convertibles being the exceptions).

Although the standardized, general, exchange-traded derivatives are being contracts

which are in vogue and which expose the users to operational risk, counterparty risk,

liquidity risk, and legal risk. There is also an uncertainty about the regulatory status of

such derivatives.

There are bewilderingly complex varieties of derivatives already in existence, and

the markets are innovating newer and newer ones continuously: plain, simple or

straightforward, composite, joint or hybrid, synthetic, leveraged, mildly leveraged,

customized or OTC-traded, standardized or organized-exchange traded. Although we are

not going to discuss all of them, the names of certain derivatives may be noted here:

futures, options, range forward and ratio range forward options, swaps, warrants,


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convertible bonds, credit derivatives, captions, swaptions, futures options, the ratio swaps,

periodic floors, spread lock one and two, treasury-linked swaps, wedding bands three and

six, inverse floaters, index amortizing swaps, and so on; because of their complexity,

derivatives have become a continuing pain for the accounting person and a true mind-

bender for anyone trying to value them.

The turnover of the stock exchanges has been tremendously increasing from last

10 years. The number of trades and the number of investors, who are participating, have

increased. The investors are willing to reduce their risk, so they are seeking for the risk

management tools. Mutual funds, FIIs and other investors who are deprived of hedging

(i.e. risk reducing) opportunities will now have a derivatives market to bank on.

While derivatives markets flourished in the developed world, Indian markets

remain deprived of financial derivatives to the beginning of this millennium. While the

rest of the world progressed by leaps and bounds on the derivatives front, Indian market

lagged behind. Having emerged in the markets of the developed nations in the 1970s,

derivatives markets grew from strength to strength. The trading volumes nearly doubled

in every three years making it a trillion-dollar business. They became so ubiquitous that,

now, one cannot think of the existence of financial markets without derivatives.

Two broad approaches of SEBI is to integrate the securities market at the national

level, and to diversify the trading products, so the more number of traders including

banks, financial institutions, insurance companies, mutual funds, primary dealers etc.,

choose to transact through the exchanges. In this context the introduction of derivatives

trading through Indian Stock Exchanges permitted by SEBI exchange in the year 2000 is

a real landmark.

Prior to SEBI abolishing the BADLA system, the investors had this system as a

source of reducing the risk, as it has many problems like no strong margining system,


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unclear expiration date and generating counter party risk. In view of this problem SEBI

abolished the BADLA system.

After the abolition of the BADLA system, the investors are seeking for a hedging

system, which could reduce their portfolio risk. SEBI thought the introduction of the

derivatives trading, as a first step it has set up a 24 member committee under the

chairmanship of Dr.L.C.Gupta to develop the appropriate regulatory framework for

derivative trading in India, SEBI accepted the recommendations of the committee on May

11, 1998 and approved the phased introduction of the derivatives trading beginning with

stock index futures. The Board also approved the suggestive bye-laws recommended

for regulation and control of trading and settlement of derivatives contracts.

However the securities contracts (regulation) act, 1956 (SCRA) needed

amendment to include derivatives in the definition of securities to enable SEBI to

introduce trading in derivatives. The government in the year 1999 carried out the

necessary amendment. The securities Laws (Amendment) bill 1999 was introduced to

bring about the much needed changes. In December 1999 the new framework has been

approved derivatives have been accorded the status of securities. The ban imposed on

trading in derivatives way back in 1999 under a notification issued by the central

Government has been revoked. Thereafter SEBI formulated the necessary

regulations/bye-laws and started in India at NSE in the same year and BSE started in the

year 2001. In this module we are covering the different types of derivatives products and

their features, which are traded in the stock exchanges in India.


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NATURE OF THE PROBLEM:

The turnover of the stock exchanges has been tremendously increasing

from last 10 years. The number of trades and the number of investors, who are

participating, have increased. The investors are willing to reduce their risk, so they are

seeking for the risk management tools.

Prior to SEBI abolishing the BADLA system, the investors had this system

as a source of reducing the risk, as it has many problems like no strong margining system,

unclear expiration date and generating counter party risk. In view of this problem SEBI

abolished the BADLA system.

After the abolition of the BADLA system, the investors are seeking for a

hedging system, which could reduce their portfolio risk. SEBI thought the introduction of

the derivatives trading, as a first step it has set up a 24 member committee under the

chairmanship of Dr.L.C.Gupta to develop the appropriate regulatory framework for

derivative trading in India, SEBI accepted the recommendations of the committee on May

11, 1998 and approved the phased introduction of the derivatives trading beginning with

stock index futures.

There are many investors who are willing to trade in the derivative

segment, because of its advantages like limited loss and unlimited profit by paying the

small premiums.


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NEED FOR THE STUDY

The emergence of derivatives market in the late 20 th century is the most notable

development in the realm of financial markets. The derivative products serve as instruments

of risk management for risk-averse investors by locking-in the asset prices to hedge against

uncertainty.

This study on financial derivatives is an attempt to bring out the pricing principles and

practices followed in the derivatives market of India which introduced derivatives barely 7

years ago. The study majorly focuses on the option contracts which are most commonly used

risk management instruments. The study is focused mainly on the various factors influencing

the options premium and also to study the practical implication of Black-Scholes model of

options pricing. It is also an attempt to know the investors perception towards derivatives

markets.

The study is also to focus on how the traders insure themselves using the derivatives.

At the same time, to how in reality an investor uses it as a tool for speculation.

Derivatives it act as a risk hedging tool for the investors. The objective is to help the investor

in selecting the appropriate derivatives instrument to attain the maximum return and to

construct the portfolio in such a manner to meet the investor needs and to decide how best to

reach the goals from the securities available.


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OBJECTIVES OF THE STUDY:

To analyze the derivatives market in India. To analyze the operations of futures and options. To find out the profit/loss position of the option writer and option holder. To study about risk management with the help of derivatives. To analyze & evaluate the causes for fluctuations in the futures and options stocks. To evaluate how futures and options contracts are used to speculate or hedge based on

anticipated prices of stocks.

demonstrate a knowledge of the regulatory framework for financial derivatives; demonstrate a knowledge of the operations of derivatives exchanges, and be able to compare and contrast Exchange Traded and Over The Counter (OTC) instruments; demonstrate a detailed knowledge of the different types of forwards, futures, swaps, options and other financial derivatives, the principal differences between them, and

where and how they are traded.

demonstrate a detailed understanding of the variables (inputs) which influence thevalue of such derivatives, and the relationship of financial derivatives to their

underlying assets;

present the alternative derivatives strategies that would be appropriate for differentmarket circumstances, and describe the advantages and disadvantages of each;

demonstrate the uses of all financial derivatives, either alone, or in conjunction withunderlying assets, to realise investment, hedging and trading objectives;


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SCOPE OF THE STUDY:

The study is limited to Derivatives with special reference to futures and options

in the Indian context and the Hyderabad stock exchange has been taken as a

representative sample for the study. The study cant be said as totally perfect. Any

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

derivatives market only in Indian context. The study is not based on the international

perspective of derivatives markets, which exists in NASDAQ, NYSE etc.


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LIMITATIONS OF THE STUDY:

The following are the limitations of this study:

The scrip chosen for analysis is ONGC and the contract taken is August andSeptember 2005.

The data collected is completely restricted to the ONGC of August and September2005.

Hence this analysis cannot be taken as universal. The analysis of options is limited to call options. The study is limited only to the Indian derivatives market segment in NIFTY The legalities in the entire process are difficult to analyze because of the time of work.

In this study limited to all companys in sector wise


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Classification of derivatives:

Forwards (currencies, stocks, swaps etc.,)Forward contract is different from a spot transaction, where payment of price and delivery

of commodity take place immediately the transaction is settled. In a forward contract the

sale/purchase transaction of an asset is settled including the price payable not for

deliver/settlement at spot, but at a specified future date. India has a strong dollar-rupee

forward market with contracts being traded for one, two, Six-month expiration. Daily

trading volume on this forward market is around $500 million a day. Indian users of

hedging services are also allowed to buy derivatives involving other currencies on foreign

markets.

Futures (Currencies, Stocks, Indices, Commodities):A future contract has been defined as a standardized exchange-traded agreement

specifying a quantity and price of a particular type of commodity (soyabeans, gold, oil

etc.,) to be purchased or sold at a pre-determined date in the future. On contract date,

delivery and physical possession take place unless the contract has been closed out.

Futures are also available on various financial products and indices today. A future

contract is thus a forward contract, which trades on an exchange. S&P CNX Nifty futures

are traded on National Stock Exchange. This provides them transparency, liquidity,

anonymity of trades and also eliminates the counter party risks due to the guarantee

provided by national securities clearing corporation Ltd.

Options (Currencies, Stocks, Indexes etc):Options are the standardized financial contracts that allow the buyer (holder) of the

options, i.e., the right at the cost of option premium not the obligation, to buy (call


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options) or sell (put options) a specified asset at a set price on or before a specified date

through exchanges under stringent financial security against default.

Risk management in derivatives:

Derivatives are high-risk instruments and hence the exchanges have put a lot of

measures to control this risk. The most critical aspect of risk management is the daily

monitoring of price and position and the margining of those positions.

NSE used the SPAN (Standard Portfolio Analysis of Risk). SPAN is a system that

has origins at the Chicago mercantile exchange, one of the oldest derivative exchanges in

the world.

The objective of SPAN is to monitor the positions and determine the maximum loss

that a stock can incur in a single day. This loss is covered by the exchange by imposing

mark to market margins.

SPAN evaluates risk scenarios, which are nothing but market conditions. The

specific set of market conditions evaluated, are called the risk scenarios, and these are

defined in terms of;

a) How much the price of the underlying instrument is expected to change overone trading day, and

b)How much the volatility of that underlying price is expected to change overone trading day.

Based on the SPAN measurement, margins are imposed and risk covered.

Apart from this, the exchange will have a minimum base capital of Rs.50 lakhs and

brokers need to pay additional base capital if they need margins about the permissible

limits


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TYPES OF DERIVATIVES:

Derivative products initially emerged as hedging devices against fluctuations in

commodity prices, and commodity-linked derivatives remained the sole form of such

products for almost three hundred years. Financial derivatives came into spotlight in the

post-1970 period due to growing instability in the financial markets. However, since their

emergence, these products have become very popular and by 1990s, they accounted for

about two-thirds of total transactions in derivative products, in recent years, the market

for financial derives has grown tremendously in terms of variety of instruments

depending on their complexity and also turnover. In this class of equity derivatives the

world over, futures and options on stock indices have gained more popularity than on

individual stocks, especially among institutional investors, who are maor users of index-

linked derivatives. Even small investors find these useful due to high correlation of the

popular indices with various portfolios and ease of use. The lower costs associated with

index derivatives vis--vis derivative products based on individual securities is another

reason for their growing use.

FORWARDS:

A forward contract is a customized contract between two entities, where

settlement takes place on a specific date in the future at todays pre-agreed price.

FUTURES:

A futures contract is an agreement between two parties to buy or sell an asset 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 exchanged-traded contracts.


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OPTIONS:

Options are of two types - calls and puts. Calls give the buyer the right but not 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 sell a given

quantity of the underlying asset at a given price on or before a given date.

WARRANTS:

Options generally have lives of up to one year; the majority of options traded on

options exchanges having a maximum maturity of nine months. Longer-dated options are

called warrants and are generally traded over-the-counter.

LEAPS:

The acronym LEAPS means Long-Term Equity Anticipation Securities. These are

options having a maturity of up to three years.

BASKETS:

Basket options are options on portfolios of underlying assets. The underlying asset

is usually a moving average of a basket of assets. Equity index options are a form of

basket options.

SWAPS:

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

future according to a prearranged formula. They can be regarded as portfolios of forward

contracts.


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RESEARCH METHOLOLGY:-

Research design : Analytical research.

Data sources : Secondary data.

Secondary data : It is collected from the company

records, company brouchers &

Financial tools : Strike price model.


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DESCRIPTION OF THE METHOD

SELECTION OF THE SCRIPS

The scrips are selected on a random basis and from five different sectors. The

profitability position of the futures and options is studied. The scrips taken for the study

for both futures and options are GMR Infrastructure Ltd, Hindustan Unilever Ltd,

Ranbaxy Laboratories Ltd, Reliance Communications Ltd and Tata Motors Ltd.


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DATA COLLECTION

The mode of data collection is secondary. The data is collected from the business

newspapers and internet.

Two types of data are used in this research namely secondary and the primary

data. The secondary data includes historical data of stock prices and the futures andoption

prices for a period of 45 months was collected from the site of National Stock Exchange

of India (www.nseindia.com).
http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/http://www.nseindia.com/


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THE GROWTH OF DERIVATIVES MARKET

Over the last three decades, the derivatives markets have seen a phenomenal growth.

A large variety of derivative contracts have been launched at exchanges across the world.

Some of the factors driving the growth of financial derivatives are:

Increased volatility in asset prices in financial markets, Increased integration of national financial markets with the international markets,

Marked improvement in communication facilities and sharp decline in their costs,

Development of more sophisticated risk management tools, providing economicagents a wider choice of risk management strategies, and

Innovations in the derivatives markets, which optimally combine the risks andreturns over a large number of financial assets leading to higher returns, reduced

risk as well as transactions costs as compared to individual financial assets.


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DEFINITION:

Derivative is a product whose value is derived from the value of an underlying asset in a

contractual manner. The underlying asset can be equity, forex, commodity or any other

asset.

Securities Contracts (Regulation) Act, 1956 (SC(R) A) defines derivative to include:-

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

unsecured, risk instrument or contract for differences or any other form of

security.

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

underlying securities.

The above definition conveys:

i. That derivative is financial products and derives its value from the underlyingassets.

ii. Derivative is derived from another financial instrument/contract called theunderlying. In this case of nifty index is the underlying.


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PARTICIPANTS/USES OF DERIVATIVES:

Figure:1.1

1. Hedgers use for protecting (risk-covering) against adverse movement.Hedging is a mechanism to reduce price risk inherent in open positions. Derivatives are

widely used for hedging. A hedge can help lock in existing profits. Its purpose is to

reduce the volatility of a portfolio, by reducing the risk.

2. Speculators to make quick fortune by anticipating/forecasting future marketmovements. Speculators wish to bet on future movements in the price of an asset.

Futures and options contracts can give them an extra leverage; that is, they can increase

both the potential gains and potential losses in a speculative venture. Speculators on the

other hand arte those classes of investors who willingly take price risks to profit from

price changes in the underlying.


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3. Arbitrageurs to earn risk-free profits by exploiting market imperfections.Arbitrageurs profit from price differential existing in two markets by simultaneously

operating in the two different markets. Arbitrageurs are in business to take advantage of a

discrepancy between prices in two different markets.

FUNCTIONS OF DERIVATIVES MARKET:

The following are the various functions that are performed by the derivatives markets.

They are:

Prices in an organized derivatives market reflect the perception of market participantsabout the future and lead the prices of underlying to the perceived future level.

Derivatives market helps to transfer risks from those who have them but may not likethem to those who have an appetite for them.

The two commonly used swaps are:

Interest rate swaps:

Currency swaps:

REGULATORY FRAMEWORK

The trading of derivatives is governed by the provisions contained in the SCRA, the SEBI

Act, the rules and regulations framed there under and the rules and bye-laws of stock

exchanges.

Regulations for derivatives trading

SEBI set up a 24-member committee under the chairmanship of Dr.L.C.Gupta to

develop the appropriate regulatory framework for derivatives trading in India. The

committee submitted its report in March 1998. On May 11, 1998 SEBI accepted the


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recommendations of the committee and approved the phased introduction of derivatives

trading in India beginning with tock index futures. SEBI also approved the suggestive

bye-laws recommended by the committee for regulation and suggestive bye -laws

recommended by the committee for regulation and control of trading and settlement of

derivatives contracts.

1. The provisions in the SC(R)A and regulatory framework developed there undergovern trading in securities.

2. The amendment of the SC(R)A to include derivatives within the ambit ofsecurities in the securities in the SC(R)A made trading in derivatives possible

within the framework of that Act.

3. Any Exchange fulfilling the eligibility criteria as prescribed in the L.C. Guptacommittee report may apply to SEBI for grant of recognition under section 4 of

the SC(R) A, 1956 to start trading derivatives. The derivatives

exchange/segment should huge a separate governing council and representation

of trading/clearing members shall be limited to maximum of 40% of the total

members of the governing council. The exchange shall regulate the sales

practice of its members and will obtain prior approval of SEBI before start of

trading in any derivative contact.

4. The Exchange shall have minimum 50 members.5. The members of an existing segment of the exchange will not automatically

become the members of the derivative segment need to fulfill the eligibility

conditions as laid down by the L.C.Gupta committee.

6. The clearing and settlement of derivatives trades shall be through a SEBIapproved clearing corporation/house. Clearing corporations/houses complying


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with the eligibility conditions a s laid down by the committee have to apply

SEBI for grant of approval.

7. Derivative brokers/dealers and clearing members are required to seekregistration from SEBI. This is in addition to their registration a brokers of

existing stock exchanges. The minimum net worth for clearing members of the

derivatives clearing corporation/house shall be Rs.300 lakhs. The net worth of

the member shall be computed as follows:

Capital+Free reserves

Less non-allowable assets viz,

(a)Fixed assets(b)Pledged securities(c)Members card(d)Non-allowable securities (unlisted securities)(e)Bad deliveries(f)Doubtful debts and advances(g)Prepaid expenses(h)Intangible assets(i)30% marketable securities

The trading members are required to have qualified approved user and sales person who

have passed a certification programme approved by SEBI.

Product specifications BSE-30 Sensex Futures

Contract Size -Rs.50 times the Index Tick size0.1 points or Rs.5

Expiry daylast Thursday of the month


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Settlement basiscash settled Contract cycle3 months Active contracts3 nearest months

Product Specifications S&P CNX Nifty Futures

Contract SizeRs.200 times the Index Tick Size0.05 points or Rs.10 Expiry daylast Thursday of the month Settlement basiscash settled Contract cycle - 3 month Active contracts3 nearest months

Membership CriteriaNational Stock Exchange (NSE)

Clearing Member (CM)

Net worth Rs.300 lakhs Interest-Free Security DepositsRs.25 lakhs Collateral Security DepositRs.25 lakhs

In addition for every TM he wishes to clear for the CM has to deposit Rs.10 lakhs.

Trading Member (TM)

Net worthRs.100 lakhs Interest-Free Security DepositRs.8 lakhs Annual Subscription feesRs.1 lakh


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Membership CriteriaMumbai Stock Exchange (BSE)

Clearing Member (CM)

Net worth300 lakhs Interest-Free Security DepositRs.25lakhs Collateral Security DepositRs.25 lakhs Non-refundable DepositRs.5 lakhs Annual Subscription FeesRs.50,000.

In addition for every TM he wishes to clear for the CM has to deposit Rs.10 lakhs

with the following break-up.

i. CashRs.25 lakhsii. Cash EquivalentsRs.25 lakhsiii. Collateral Security DepositRs.5 lakhs

Trading Member (TM)

Net worthRs.50 lakhs Non-refundable depositRs.3 lakhs Annual Subscription FeesRs.25 thousant The Non-refundabel fee paid by the members is exclusive and will be a total

of Rs.8 lakhs if the member has both clearing and trading rights.

Trading systems

NSEs trading system for its futures and options segment is called NEATF&O. It is bsed on the NEAT system for the cash segment.


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BSEs trading system for its derivatives segment is called DTs. It is built on aplatform different from the BOLT system though most of the features are

common.

FORWARD CONTRACTS

A forward contract is an agreement to buy or sell an asset on a specified date for

a specified price. One of the parties to the contract assumes along position agrees to buy

the underlying asset on a certain specified future date for a certain specified price. The

other party assumes a short position and agrees to sell the asset on the same date for the

same rice. Other contract details like delivery date, the parties to the contract negotiate

price and quantity bilaterally. The forward contracts are normally traded outside the

exchanges.

The salient features of forward contracts are:

They are bilateral contracts and hence exposed to counter-party risk. Each contract is custom-designed, and hence is unique in terms of contract

size, expiration date and the asset type and quality.

The contract price is generally not available in public domain. On the expiration date, the contract has to be settled by delivery of the asset. If the party wishes to reverse the contract, it has to compulsorily go to the

same counter-party, which often results in high prices being charged.


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stocks and options, customers can pace market, limit and stop orders. Further more once

an order is transmitted to an exchange floor, it must be taken to a destined spot for

execution by a member of exchange, just as it is done for stocks and options. This spot is

known as pit because of its shape, which is circular with a set of interior descending steps

on which members stand.

In futures market, there are floor brokers. They execute customers orders. In

doing so they, (or their phone clerks) each keep a file of any stop or limit orders that

cannot be executed, alternatively, members can be floor traders (those with very short

holding periods, of less than a day, are known as locals or scalpers), they execute orders

for their own personal accounts in an attempt to make profits by buying low and selling

high.

SETTLEMENT OF FUTURES

Mark to market settlement

There is a daily settlement for mark to market. The profits/losses are computed as

the difference between the trade price (or the previous days settlement price, as the case

may be) and the current days settlement price. The party who have suffered a loss are

required to pay the mark to market loss amount to exchange which is in turn passed on to

the party who has made a profit/. This is known as daily mark to market settlement.

Theoretical daily settlement price for unexpired futures contracts, which are not traded

during the last half an hour on a day, is currently the price computed as per the formula

detailed below:

F = S*RT

Where:


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F=theoretical futures price

S=value of the underlying index/stock

R=rate of interest (MIBORMumbai I Inter Offer Rate)

T=time to expiration

Rate of interest may be the relevant MIBOR rate or such other rate as may be specified.

After daily settlement, all the open positions are reset to the daily settlement price. the

pay-in and payout of the mark-to-market settlement is on T+1 days (T = Trade day).

Final settlement:

On the expiry of the futures contracts, exchange marks all positions to the final

settlement price and the resulting profit / loss is settled in cash. The final settlement of

the futures contracts is similar to the daily settlement process except for the method of

computation of final settlement price. The final settlement profit/loss is computed as the

difference between trade price (or the previous days settlement price, as the case may

be), and the final settlement price of the relevant futures contract.

Final settlement loss/profit amount is debited/credited to the relevant brokers clearing

bank account on T+1 day (T = expiry day). This is then passed on the client from the

broker. Open positions in futures contracts cease to exist after their expiration day.

DISTINCTION BETWEEN FUTURES AND FORWARDS

Forward contracts are often confused with futures contracts. The confusion is

primarily because both serve essentially the same economic functions of the allocating

risk in the presence of future price uncertainty. However futures are a significant

improvement over the forward contracts as they eliminate counter party risk and offer

more liquidity.


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TERMS USED IN FUTURES CONTRACT:

Spot price: the price at which an asset trades in the spot market.

Futures price: the price at which the futures contract trades in the futures market.

Contract cycle: the period over which a contract trades. The index futures contracts on

the NSE have one-month, tow-months ad three-month expiry cycle, which expires on the

last Thursday of the month. Thus a January expiration contract expires on the last

Thursday of January and a February expiration contract ceases trading on the last

Thursday of February. On the Friday following the last Thursday, a new contract having

a three-month expiry is introduced for trading.

Expiry date: it is the date specified in the futures contract. This is the last day on which

the contract will be traded, at the end of which it will cease to exist.

Contract size: the amount of asset that has to be delivered less than one contract. For

instance, the contract size on NSEs futures market is 200 Nifties.

Cost of carry: the relationship between futures prices and spot prices can be summarized

in terms of what is known as the cost of carry. This measures the storage cost plus the

interest that is paid to finance the asset less the income earned on the asset.

OPTIONS:

INTRODUCTION

Options on stocks were first traded on an organized stock exchange in 1973. Since

then there has been extensive work on these instruments and manifold growth in the field

has taken the world markets by storm. This financial innovation is present in cases of

stocks, stock indices, foreign currencies, debt instruments, commodities, and futures

contracts.

An option is a type of contract between two people where one grants the other

party the right to buy a specific asset at specific priced within a specific time period.


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Alternatively, the contract may grant the other person the right to sell a specific asset at a

specific price within a specific period of time.

The person who has received the right, and thus has a decision to make, is known

as the option buyer because he or she must pay for this right.

The person who has sold the right, and thus must respond to the buyers decision

is known as the option writer.

TYPES OF OPTION CONTRACT

The two most basic types of option contracts are call option and put option.

Currently such options are traded on many exchanges around the world. Furthermore,

many of these contracts are created privately (that is off exchange or over the

counter), typically involving institutions banking firms and their clients.

CALL OPTION:

The most prominent type of option contract is call option for stocks. It gives the

buyer the right to buy (call away) a specific number of shares of a specific company

from the option writer at a specific purchase price at any time up to and including a

specific date.

An investor buys a call options when he seems that the stock price moves upwards. A

call option gives the holder of the option the right but not the obligation to buy an asset by

a certain date for a certain price.

PUT OPTION:

A second type of option for stocks is the put option. It gives the buyer the right to

sell (put away) a specific number of shares of a specific company to the option writer at

a specific selling price at any time up to and including a specific date. An investor buys a

put option when he seems that the stock price moves downwards. A put option gives the


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holder of the option right but not the obligation to sell an asset by a certain date for a

certain price.

Options clearing house:

The Options Clearing House (OCC), a company that is jointly owned by several

exchanges, generally facilitates trading in these options. It does so by maintaining a

computer system that keeps track of all those options by recording the position of all

those investors in each one. Although the mechanics are complex, the principles are

simple. As soon as a buyer and a writer decide to trade a particular option contract and

the buyer pass the agreed upon premium the OCC steps in becoming the effective writer

as buyer is concerned the effective buyer as far as the seller is concerned. Thus at this

time all directs links between original buyer and seller is served.

TRADING ON EXCHANGES:

There are two types of exchanged-based mechanisms for trading options contracts.

The focal point for trading either involves specialists or market makers.

COMMISSIONS:

A commission must be paid to stockbroker whenever an option is either written,

bought, sold. The size of the commission has been reduced substantially since the options

began trading on organize exchanges in 1973. Furthermore this typically smaller than the

commission that would be paid if the underlying stock had been purchased instead of

option. This is probably because that clearing and settlement are easier with the options

than stock. However, the investor should be aware that exercise an option will typically

result in the buyers having to pay commission equivalent to the commission that would

be incurred if the stock itself were being bought or sold.


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PARTIES IN AN OPTION CONTRACT:

1. Buyer of the Option:The buyer of an option is one who by paying option premium buys the

right but not the obligation to exercise his option on seller/writer.

Writer/Seller of the Option:

The writer of a call/put options is the one who receives the option

premium and is there by obligated to sell/buy the asset if the buyer exercises the option on

him.

OPTION VALUATION USING BLACK AND SCHOLES:

The Black and Scholes Option Pricing Model didnt appear overnight, in fact,

Fisher Black started out working to create a valuation model for stock warrants. This

work involved calculating a derivative to measure the discount rate of a warrant varies

with time and stock price. The result of this calculation held a striking resemblance to a

well known the transfer equation. Soon after this discovery, Myron Scholes joined Black

and the result of their work is a startling accurate option-pricing model. Black and

Scholes cant take all credit for their work; in fact their model is actually an improved

version of a previous model developed by A.James Boness in Ph.D dissertation at the

University of Chicago. Black and Scholes improvement son the Boness model come in

the form of a proof that the risk-free interest rate is the correct discount factor and with

the absence of assumptions regarding investors risk preferences.

THE MODEL:

C=SN (d1)-Ke(-r t) N (d2)

C=theoretical call premium


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S=current stock price

T=time until option expiration

K=option striking price

R=risk free interest rate

N=cumulative standard normal distribution

E=exponentil terms (2.1783)

d1=in(s/k) + (r + s2/2) T

D2=d1St

In order to understand the model itself, we divide it into two parts. The first part

SN (d1) derives the expected benefit from acquiring a stock outright. This is found by

multiplying stock price(s) by the change in the call premium with respect to a change in

the underlined stock price [N (d1)]. The second part of the model, ke(-r t) N (d2), gives the

resent value of paying the exercise price on the expiration day. The fair market value of

the call option is then calculated by taking the difference between these two parts.

SOME TERMS USED IN OPTIONS CONTRACT

Index options:

These options have the index as the underlined. Some options are European while

others are American. Like index, futures contracts, index options. Contracts are also

cash settled.

Stock options:

Stock options are options on individual stocks. Options currently trade on over 500

stocks in the United States. A contract gives the holder the right to buy or sell shares

at the specified price.


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American options:

American options are options that can be exercised any time up to the expiration date.

Most exchange traded options are American.

European options:

European options are options that can be exercised only on the expiration date itself.

European options are easier to analyze that American option are frequently deduced

from those of its European counterpart.

In-the-money options:

An in-the-money option is an option that would lead to a positive cash flow to the

holder if it were exercised immediately. A call option on the index is said to be in the

money when the current index stands at a level higher than the strike price. If the

index is much higher than the strike price the call is said to be deep in the money.

At-the-money option:

An at-the-money option is an option that would lead to zero cash flow if it were

exercised immediately. An option in the index is at the money when the current index

equal that strike price (i.e. spot price=strike price)

Out-of-the-money option:

An out-of-the-money option is an option that would lead to a negative cash flow. A

call option on the index is out of the money when the current index stands at a level,

which is less than the strike price (i.e. spot price-strike price).


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LOT SIZES OF DIFFERENT COMPANIES

CODE LOT SIZE COMPANY NAME

ACC 1500 ASSOCIATES CEMENT COS LTD

ANDHRA BANK 4600 ANDHRA BANK

ARVIND MILLS 4300 ARVIND MILLS LTD

BAJAJ AUTO 400 BAJAJ AUTOMOBILES LTD

BANKBARODA 1400 BANK OF BARODA

BANKINDIA 3800 BANK OF INDIA

BEL 550 BHARAT ELECTRICALS LTD

BHEL 600 BHARAT HEAVY ELECTRICALS LTD

BPCL 550 BHARAT PETROL CORPORATION LTD

CANBK 1600 CANARA BANK

CIPLA 200 CIPLA LTD

CNXIT 10 IT INDEX

DIGITALEQUIP 400 DIGITAL GLOBAL LTD

DRREDDY 200 DR. REDDYS LABORATORIES LTD

GAIL 1500 GAS AUTHOURITY OF INDIA

GRASIM 350 GRASIM INDUSTRIES LTD

GUJAMBCEMENT 110 GUJARAT AMBUJA CEMENT LTD

HCL TECH 1300 HINDUSTAN CORPORATION LTD

HDFC 600 HOUSING DEDVELOPMENT FINANCE

CORPORATION

HDFC BANK 800 HDFC BANK

HEROHONDA 400 HERO HONDA MOTORS LTD


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HINDALCO 300 HINDUSTAN ALUMINIUM COMPANY

HINDLEVER 2000 HINDUSTAN LEVER LTD

HINDPETROL 650 HINDUSTAN PETROLEUM CORPORATION

I-FLEX 300 I-FLEX

ICICIBANK 1400 ICICI BANKING CORPORATION LTD

INFOSYSTECH 50 INFOSYS TECHNOLOGIES LTD

IOC 600 INDIAN OIL CORPORATION

IPCL 1100 INDIAN PETROLEUM CHEMICALS LTD

ITC 300 INDIAN TOBACCO COMPANY

L&T 500 LARSEN AND TURBO

M&M 625 MAHENDRA AND MAHENDRA LTD

MARUTI 400 MARUTI UDYOG LTD

MASTEK 1600 MASTEK

MTNL 1600 MAHANAGAR TELECOM NIGAM LTD

NATIONALALAM 1150 NATIONAL ALUMINIUM COMPANY

NIFTY 200 NATIONAL INDEX FOR FIFTY STOCKS

NIIT 1500 NATIONAL INSTITUTE OF INFORMATION

TECHNOLOGY

ONGC 300 OIL AND NATURAL GAS CORPORATION

ORIENT BANK 1200 ORIENTAL BANK

PNB 1200 PUNJAB NATIONAL BANK

POLARIS 1400 POLARIS SOFTWARE COMPANY LTD.

RANBAXY 400 RANBAXY LABORATORIES LTD


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RELIANCE 550 RELIANCE INDUSTRIES LTD

REL 600 RELIANCE COMPUTERS SERVICES LTD

SATYAMCOMPU 1200 SATYAM COMPUTERS LTD

SBI 500 STATE BANK OF INDIA

SCI 1600 SHIPPPING CORPORATION OF INDIA

SYNDIBANK 7600 SYNDICATE BANK

TATAMOTORS 825 TATA MOTORS

TATAPOWER 50 TATA POWER COMPANY LTD

TATA TEA 900 TATA TEA LTD

TISCO 4200 TATA IRON&STEEL COMPANY LTD

UNION BANK 200 UNION BANK OF INDIA

WIPRO 800 WESTERN INDIA-VEG PRODUCTS LTD

Table:1.1


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COMPANY PROFILE

About IIFL

The IIFL (India Infoline) group, comprising the holding company, India Infoline Ltd

(NSE: INDIAINFO, BSE: 532636) and its subsidiaries, is one of the leading players in

the Indian financial services space. IIFL offers advice and execution platform for the

entire range of financial services covering products ranging from Equities and derivatives,

Commodities, Wealth management, Asset management, Insurance, Fixed deposits, Loans,

Investment Banking, Gold bonds and other small savings instruments. IIFL recently

received an in-principle approval for Securities Trading and Clearing memberships from

Singapore Exchange (SGX) paving the way for IIFL to become the first Indian brokerage

to get a membership of the SGX. IIFL also received membership of the Colombo Stock

Exchange becoming the first foreign broker to enter Sri Lanka. IIFL owns and manages

the website, www.indiainfoline.com, which is one of Indias leading online destinations

for personal finance, stock markets, economy and business.

IIFL has been awarded the Best Broker, India by FinanceAsia and the Most improved

brokerage, India in the AsiaMoney polls. India Infoline was also adjudged as Fastest

Growing Equity Broking House - Large firms by Dun & Bradstreet. A forerunner in the

field of equity research, IIFLs research is acknowledged by none other than Forbes as

Best of the Web and a must read for investors in Asia. Our research is available not

just over the Internet but also on international wire services like Bloomberg, Thomson

First Call and Internet Securities where it is amongst one of the most read Indian brokers.

A network of over 2,500 business locations spread over more than 500 cities and towns

across India facilitates the smooth acquisition and servicing of a large customer base. All


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39

our offices are connected with the corporate office in Mumbai with cutting edge

networking technology. The group caters to a customer base of about a million customers,

over a variety of mediums viz. online, over the phone and at our branches.

History & Milestones

1995

Commenced operations as an Equity Research firm

1997

Launched research products of leading Indian companies, key sectors and the

economy Client included leading FIIs, banks and companies.

1999

Launchedwww.indiainfoline.com

2000

Launched online trading throughwww.5paisa.comStarted distribution of life insurance

and mutual fund

2003

Launched proprietary trading platform Trader Terminal for retail customers

2004

Acquired commodities broking license Launched Portfolio Management Service

2005

Maiden IPO and listed on NSE, BSE

2006

Acquired membership of DGCX Commenced the lending business

2007

Commenced institutional equities business under IIFL formed Singapore subsidiary, IIFL

(Asia) Pte Ltd
http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.indiainfoline.com/http://www.5paisa.com/http://www.5paisa.com/http://www.5paisa.com/http://www.5paisa.com/http://www.indiainfoline.com/


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2008

Launched IIFL Wealth Transitioned to insurance broking model

2009

Acquired registration for Housing Finance SEBI in-principle approval for Mutual

Fund Obtained Venture Capital license

2010

Received in-principle approval for membership of the Singapore Stock Exchange

Received membership of the Colombo Stock Exchange.

Board of directors

Mr. Nirmal Jain

Chairman, India Infoline Ltd

Mr. Nirmal Jain is the founder and Chairman of India Infoline Ltd. He is a PGDM (Post

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

Ahmadabad, 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 arm of 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 Levers

commodity export business, which was then the nations as well as the Companys top

priority.

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

1995; perhaps the first independent equity research Company in India. His work set new

standards for equity research in India. Mr. Jain was one of the first entrepreneurs in India


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41

to seize the internet opportunity, with the launch of www.indiainfoline.com in 1999.

Under his leadership, India Infoline not only steered through the dotcom bust and one of

the worst stock market downtrends but also grew from strength to strength.

Mr. R. Venkataraman

Managing Director, India Infoline Ltd.

Mr. R Venkataraman, Co-Promoter and Managing Director of India Infoline Ltd, is a

B.Tech (electronics and electrical communications engineering, IIT Kharagpur) and an

MBA (IIM Bangalore). He joined the India Infoline 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 of US, BZW and Taib Capital

Corporation Limited. He was also the Assistant Vice President with G E Capital Services

India Limited in their private equity division, possessing a varied experience of more than

19 years in the financial services sector

Mr. Nilesh Vikamsey

Independent Director, India Infoline Ltd.

Mr. Nilesh Vikamsey Board Member since February 2005 - is a practicing Chartered

Accountant for 25 years and Senior Partner at M/s Khimji Kunverji & Co., Chartered

Accountants, a member firm of HLB International, a world-wide organisation of

professional accounting firms and business advisers, ranked amongst the top 12

accounting groups in the world. Mr. Vikamsey headed the audit department till 1990 and

thereafter also handled financial services, consultancy, investigations, mergers and

acquisitions, valuations and due diligence, among others. He is elected member of the

Central Council of Institute of Chartered Accountant of India (ICAI), the Apex decision

making body of the second largest accounting body in the world, 20102013.


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He is on the ICAI study group member for the introduction of the Accounting Standard

30 on financial instruments recognition and management. Convener of the Study

group Formed by ASB of ICAI to formulate comments on various Exposure Drafts,

Discussion Papers and other matters pertaining to IFRS originating from IASB,

Representative of the Institute of Chartered Accountants of India on the Committee for

Improvement in Transparency, Accountability and Governance(ITAG) of South Asian

Federation of Accountants (SAFA), Member of Executive Committee & IFRS

Implementation Committee of WIRC of Institute of Chartered Accountant of India

(ICAI), Accounting and Auditing Committee of Bombay Chartered Accountant Society

(BCAS) and also on its Core Group, member of Review, Reforms & Rationalisation

Committee, IPR Committee of Bombay Chamber of Commerce and Industry (BCCI),

Member of Legal Affairs Committee of Bombay Chamber of Commerce and

Industry(BCCI), Corporate Members Committee of The Chamber of Tax Consultants

(CTC), Regular Contributor to WIRC Annual Referencer on Bank Branch Audit,

Study/ Sub Group formed by ICAI for Considering Developments on Fair Value

Accounting (AS 30) post Sub Prime crisis, Sub Group formed by ICAI for approaching

the Government and Regulatory Authorities for Convergence with IFRS.

He is also a Vice Chairman of Financial Reporting Review Board Accounting Standard

Board and Member of Accounting Standard Board and various other Standing and Non

Standing Committees. Mr. Vikamsey is also a Director of Miloni Consultants Private

Limited, HLB Offices and Services Private Limited, Trunil Properties Private Limited,

BarKat Properties Private Limited and India Infoline Investment Services Limit

DATA ANALYSIS & INTERPRETATION


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DESCRIPTION OF THE METHOD:

The following are the steps involved in the study.

1. Selection of the scrip:

The scrip selection is done on a random basis and the scrip selected is

ONGC. The lot size of the scrip is 500. Profitability position of the option holder and

option writer is studied.

2. Data collection:

The data of the ONGChas been collected from the The Economic Times and

the Internet. The data consists of the August contract and the period of data collection is

from 3rd August 2011 to 3rd September 2011.

3. Analysis:

The analysis consists of the tabulation of the data assessing the profitability

positions of the option holder and the option writer, representing the data with graphs and

making the interpretations using the data.

LOT SIZES OF SELECTED COMPANIES FOR ANALYSIS


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CODE LOT SIZE COMPANY NAME

ACC 188

Associates Cement Co. Ltd.

INFOSYS 200

Infosys Technologies Ltd.

HLL 1000

Hindustan UniLever Ltd.

RANBAXY 800

Ranbaxy laboratories Ltd.

SATYAM 600

Satyam Computer services

Ltd.

Table:4.1

The following tables explain about the trades that took place in futures and options

between 01/05/2009 and 13/05/2009. The table has various columns, which explains

various factors involves in derivatives trading.

Datethe day on which trading took place

Closing premiumpremium for the day

Open interestNo. of Options that did not get exercised


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Traded quantityNo. of futures and options traded on that day

N.O.CNo. of contacts traded on that day

Closing pricethe price of the futures at the end of the trading day

FUTURES OF ACC CEMENTS


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Date

dd/mm/yyy

Open.

Rs

High

Rs.

Low

Rs.

Close

Rs

Open Int

(000)

N.O.C

20/04/2011 795.95 809.40 791.35 794.5 3452 7502

19/04/2011 809.00 819.00 783.10 790.15 3943 15759

18/04/2011 815.00 827.45 815.00 818.00 3810 7738

17/04/2011 791.00 816.70 785.00 809.95 4600 17265

16/04/2011 756.00 793.95 756.00 789.15 4385 10335

Table:4.2

Figure:4.1

INTERPRETATION

720

730

740

750

760

770

780790

800

810

820

830

20/04/2011 19/04/2011 18/04/2011 17/04/2011 16/04/2011

Open. Rs

Close Rs


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The price gradually rose from 789.15 on first day to 18 th April, where it stood at818.00 as high. As the players in the market with an intention to short or correct the

market, the players showed a bearish attitude for the next day where the price fell to

790.15. Later the players become a bullish.

At 809.95 the open interest stood at peak position of 4600000, but later the next dayplayers sold their futures as to gain. The total contracts traded at this price stood

17265 which is higher than the week days

By the end of the trading week most of the players closed up their contracts to makeloss. As the price was high, the open interest was high and the no. of contracts trades

rose to 7502.

There always exit an impact of price movements on open interest and contractstraded. The futures market also influenced by cash market, Nifty index futures, and

news related to the underlying asset or sector (industry), FIIs involvement, national

and international affairs etc.

FUTURES OF INFOSYS


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Date

dd/mm/yyy

Open

Rs.

High

Rs.

Low

Rs.

Close

Rs

Open. int

(000)

N.O.C

20/04/2011 2061.00 2082.00 2055.50 2061.75 3335 10842

19/04/2011 2046.50 2060.50 2021.25 2045.95 3397 13041

18/04/2011 2076.00 2090.00 2062.15 2070.30 3625 11886

17/04/2011 2102.65 2110.00 2055.50 2073.90 4215 26534

16/04/2011 2100.00 2125.00 2095.00 2118.80 3698 17017

Table:4.3

Figure:4.2

2000

2020

2040

2060

2080

2100

2120

2140

20/04/2011 19/04/2011 18/04/2011 17/04/2011 16/04/2011

Open Rs.

Close Rs


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INTERPRETAION

After the market quite relived by the fall in the discount on the Nifty in the futuresand the options segment, which was used by the players to short the market shown

appositive upward movement in futures and options segment and cash market during

the first day of the week.

The futures of INFOSYS shown a bullish way till 17 th of the April whose impactshown on the open interest at 4215 with 26534 contracts traded. The players at this

point did not sell or close up their contracts as a hope of increase or go up in the

market for a next day. Even the cash market was down on this day for this underlying

at Rs. 2076.00.

The market for INFOSYS for last day of the trading week shown a decline in theopening price Rs. 15.05 when compare with the week high price. The open interest

closed at 3335000 with lowest 10842 contracts traded on the last trading day of the

week.


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FUTURES OF THE HLL

Date

dd/mm/yyy

Open.

Rs.

High

Rs.

Low

Rs.

Close

Rs

Open. int

(000)

N.O.C

20/04/2011 205.10 209.80 204.25 206.20 8742 2568

19/04/2011 203.55 205.50 201.10 204.15 9112 2740

18/04/2011 208.10 211.80 205.25 206.00 9143 2020

17/04/2011 211.50 212.85 208.35 208.75 9205 2454

16/04/2011 205.70 211.45 204.70 211.10 9232 3765

Table:4.4

Figure:4.3

198

200

202

204

206

208

210

212

214

20/04/2011 19/04/2011 18/04/2011 17/04/2011 16/04/2011

Open. Rs.

Close Rs


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INTERPRETATION

HLL contracts traded in the futures stood at peak for the week i.e. 3765. There was agood buying in both the futures and options and cash market for this stock.

The last trading day of the week showed a high strike price or exercising price for theHLL futures i.e. Rs. 206.20 because of the huge correction done by the FII flows.


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FUTURES OF RANBAXY

Date

dd/mm/yyy

Open

Rs

High

Rs.

Low

Rs.

Close

Rs

Open. int

(000)

N.O.C

20/04/2011 345.00 345.50 342.05 344.10 5698 1366

19/04/2011 336.00 344.75 335.10 342.45 6578 305.4

18/04/2011 339.50 344.80 339.00 341.40 6731 3008

17/04/2011 341.80 342.00 337.25 338.00 6770 1679

16/04/2011 337.00 342.25 337.00 339.30 6731 2370

Table:4.5

Figure:4.4

330

332

334

336

338

340

342

344

346

20/04/2011 19/04/2011 18/04/2011 17/04/2011 16/04/2011

Open Rs

Close Rs


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INTERPRETATION

The week showed a buy for RANBAXY stock futures. Since beginning of the tradingday of the week the figures has been representing a continuous bullish market for

RANBAXY. The pharmacy sector is considered to be one of the eye watches for

investors for investing.

On the last but one, trading day the RANBAXY stock futures has rose to peak levelwhere the price stood at 451.35 an increase of 11.73% over the first trading day price

403.95. The open interest rose 52.16% to 9512000 and the contract traded, 19314

from 7645 of weeks beginning.

At the end of the week the price of the RANBAXY has rose to Rs.458.90 this is alltime record of that week at this stage open interest has also gone up to 9512000, this

was great boom in pharmacy sector, because FIIs were interested to invest in this

sector.


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FUTURES OF SATYAM COMPUTERS

Date

dd/mm/yyy

Open

Rs

High

Rs.

Low

Rs.

Close

Rs

Open. int

(000)

N.O.C

20/04/2011 463.00 477.00 461.35 474.75 6226 16486

19/04/2011 450.00 462.00 445.55 449.50 8991 11286

18/04/2011 462.00 468.80 460.10 462.95 11072 11984

17/04/2011 474.55 483.00 456.00 457.95 13645 15747

16/04/2011 487.90 494.50 476.90 480.95 13043 11543

Table:4.6

Figure:4.5

INTERPRETATION

430

440

450

460

470

480

490

500

20/04/2011 19/04/2011 18/04/2011 17/04/2011 16/04/2011

Open Rs

Close Rs


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The above table indicates decrease in the price from the 3 rd day about 23 Rs.

Call and Put Options of ACC Cements

Date/

Option

s

16/04/2011 17/04/2011 18/04/2011 19/04/2011

C.P. O.I.

*

N.C

.

C.P. O.I.

*

N.C

.

C.P. O.I.

*

N.C

.

C.P. O.I.

*

N.

C

CA

700

89.8

0

17 7

CA

720

66.3

5

17 21 91.3

5

17 12

CA

740

45.9

0

44 87 71.8

0

37 91

CA

760

35.4

0

64 161 50.5

0

57 88 59.0

0

58 11 34.0

0

56 23

CA

780

22.9

5

25 69 39.0

0

17 63 47.0

0

15 16 20.1

0

28 60

CA

800

13.6

5

38 114 22.8

5

49 177 27.5

0

42 52 10.9

5

79 241

CA

820

7.50 2 7 14.1

0

29 136 15.1

0

45 151 6.35 83 204

CA

840

8.50 6 21 7.30 15 49 4.05 23 61


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Date/

Option

s

16/04/2011 17/04/2011 18/04/2011 19/04/2011

C.P. O.I.

*

N.C

.

C.P. O.I.

*

N.C

.

C.P. O.I.

*

N.C

.

C.P. O.I.

*

N.

C

PA

720

2.05 13 10 1.00 14 7

PA740 3.35 17 24 2.85 17 15

PA

760

7.50 13 45 7.50 14 31 2.45 18 6 4.35 26 33

PA

780

16.2

0

7 20 13.2

5

24 95 6.85 14 11 11.2

0

23 63

PA

800

8.40 26 36 21.5

5

33 107

PA

820

17.4

5

26 98 39.0

0

26 47

Table:4.7

C.P. = Close premium

O.I = Open interest

N.C. = No. of contracts

The following table of net payoff explains the profit/loss of option holder/writer of ACC

for the week 16/04/2011-20/04/2011.


57/78

Derivatives

57

Profit/loss position of Call option buyer/writer of ACC

Spot Price Strike Price Premium Whether

Exercised

Buyer

Gain/Loss

Writers

Gain/Loss

788 700 89.80 NO -562.5 562.5

788 720 66.35 YES 618.75 -618.75

788 740 45.90 YES 787.5 -787.5

788 760 35.40 NO -2775 2775

788 780 22.95 NO -8598.5 8598.5

788 800 13.65 NO -9618.75 9618.75

788 820 7.50 NO -14812.5 14812.5

Table:4.8


58/78

Derivatives

58

Profit/Loss position of Put option buyer/writer of ACC

Spot Price Strike Price Premium Whether

Exercised

Buyer

Gain/Loss

Writers

Gain/Loss

788 720 2.05 YES 24731.25 -24731.25

788 740 3.35 YES 16743.75 -16743.75

788 760 7.50 YES 7687.5 -7687.5

788 780 16.20 NO -3075 3075

Table:4.9

INTERPRETATION

The Call Options 700, 760,780,800 and 820 were out-of-the-money option and theremaining 720 and 740 were in the money option.

The Put Options 720,740 and 760 were in-the-money option and the remaining i.e.780was out-of-the-money option.

Profit of the holder = (spot price strike price)premium * 375 (lot size) in case ofCall Option

Profit of the holder = (spot price strike price)premium * 375 (lot size) in case ofPut Option

If it is a profit for the holder than obviously it is loss for the holder and vice-versa.


59/78


60/78

Derivatives

60

Opti

ons

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

PA

1830

3.1

5

80 25 3.1

0

79 15 2.9

0

77 37

PA

1890

3.4

0

51 34 3.6

0

50 10 2.8

0

47 27 1.

25

46 11

PA

1920

5.2

0

14

1

11

6

4.5

5

13

7

89 4.3

0

13

4

41 4.9

0

12

5

11

3

2.

25

12

3

24

PA

1950

5.6

5

75 34 7.0

0

73 46 5.8

5

72 13 7.7

0

67 82 3.

25

64 38

PA

1980

6.7

5

94 12

6

9.0

5

91 48 7.8

5

87 80 12.

75

81 12

3

3.

30

74 90

PA

2010

10.

40

21

8

35

1

14.

15

20

0

33

6

12.

15

19

3

24

9

19.

60

16

9

43

3

8.

35

17

1

11

3

PA

2040

14.

45

69 21

1

25.

40

67 16

8

20.

60

65 77 28.

50

55 31

3

17

.0

55 67

PA

2070

19.

70

24 12

8

36.

90

23 11

7

34.

05

24 50 42.

25

19 96 33

.6

19 41

PA

2100

30.

45

44 29

7

52.

20

31 28

5

52.

60

28 72 65.

75

27 76 45

.0

26 12


61/78

Derivatives

61

The following pay-off for explain the profit/loss of option holder/writer ofINFOSYS

for the week 16/04/2011-20/04/2011..

Profit/Loss position of Call Option Buyer/Writer of INFOSYS

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYER

GAIN/LOSS

WRITER

GAIN/LOSS

2040 1950 176.50 NO -8650 8650

2040 1980 145.95 NO -8595 8595

2040 2010 117.95 NO -8795 8795

2040 2040 90.55 NO -9055 9055

2040 2070 65.10 NO -9510 9510

2040 2100 45.40 NO -10540 10540

2040 2130 29.25 NO -11925 11925

2040 2160 19.35 NO -13935 13935

2040 2190 12.30 NO -16230 16230

2040 2220 9.00 NO -18900 18900

2040 2250 6.20 NO -21620 21620

Table:4.11


62/78

Derivatives

62

Profit/Loss position of Put Option Buyer/writer of INFOSYS

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYER

GAIN/LOSS

WRITER

GAIN/LOSS

2040 1830 3.15 YES 20685 -20685

2040 1890 3.40 YES 14660 -14660

2040 1920 5.20 YES 11480 -11480

2040 1950 5.65 YES 8435 -8435

2040 1980 6.75 YES 5325 -5325

2040 2010 10.40 YES 1960 -1960

2040 2040 14.45 NO -1445 1445

2040 2070 19.70 NO -4970 4970

2040 2100 30.45 NO -9045 9045

Table:4.12

Findings:

The Call options all were in out-of-money option. The Put option1830, 1890,1920,1950,1980 and 2010 were in-the-money options and

the remaining 2040, 2070 and 2100 were out of option.

Profit of the holder = (spot price strike price)premium*100 (lot size) in case calloption

Profit of the holder = (spot price-spot price)-premium*100 (lot Size) in case of putoption.

If it is profit for the holder than obviously it will be loss for the holder and vice-versa.


63/78

Derivatives

63

Call and Put Option of HLL

Date

/

Opti

ons

16/04/2011 17/04/2011 18/04/2011 19/04/2011 20/04/2011

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

CA

200

13.

80

23

8

12

0

11.

55

23

1

45 8.

50

14

8

67 6.

95

17

3

10

7

7.

45

10

8

57

CA

205

9.2

0

10

8

65 6.2

5

10

5

34 4.

65

98 18 3.

90

11

6

44 3.

80

11

2

33

CA

210

4.8

0

39

6

26

3

3.7

0

38

5

21

3

2.

65

41

7

15

2

1.

75

47

5

10

9

1.

80

47

0

11

3

CA

215

2.6

5

78 62 2.1

5

10

8

68 1.

40

12

6

44 1.

00

12

9

13 0.

55

12

2

19

CA

220

1.6

0

25

5

97 1.2

5

28

4

66 0.

75

28

7

31 0.

60

28

6

11 0.

40

27

8

13

CA

225

0.7

5

32 25 0.8

0

37 7 .5

0

40 8 2.

10

86 30 1.

05

88 17

Date/ 16/04/2011 17/04/2011 18/04/2011 19/04/2011 20/04/2011


64/78

Derivatives

64

Opti

ons

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

PA

200

1.3

5

85 34 1.3

5

90 16 1.8

0

90 18 2.1

0

86 30 1.0

5

88 17

PA

205

2.7

0

11 11 2.2

0

16 9 3.2

0

18 10 4.0

0

17 14 2.7

0

32 29

PA

210

4.5

0

9 12 5.0

5

17 26 8.5

5

14 5 5.9

0

26 13

Table:4.13

The following table of net payoff explains the profit/loss of option holder/writer of

HLL for the week 16/04/2011-20/04/2011...

Profit/Loss position of Call Option Buyer/Writer of HLL


65/78

Derivatives

65

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYER

GAIN/LOSS

WRITER

GAIN/LOSS

207 200 13.80 NO -6800 6800

207 205 9.20 NO -7200 7200

207 210 4.80 NO -7800 7800

207 215 2.65 NO -10650 10650

207 220 1.60 NO -14600 14600

207 225 0.75 NO -18750 18750

Table:4.14


66/78

Derivatives

66

Profit/Loss position of Put Option Buyer/Writer of HLL

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYER

GAIN/LOSS

WRITER

GAIN/LOSS

207 200 1.35 YES 5650 -5650

207 205 2.70 NO -700 700

Table:4.15

INTERPRETATION

The Call Options all were out-of-the-money options

The Put Options200 was in-the-money option and 205was out-of-the-money option.

Profit of the holder = (spot price-strike piece)-premium*1000(lot size) in case of Calloption.

Profit of the holder = (strike price-spot price) - premium*1000(lot size) in case of Putoption.

If it is profit for the holder then obviously it will be loss for the holder and vice-versa.

Call and Put Options of RANBAXY


67/78

Derivatives

67

Date

/

Opti

ons

16/04/2011 17/04/2011 18/04/2011 19/04/2011 20/04/2011

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

CA

330

. 15.

00

28 8 16.

65

26 8

CA

340

8.

90

10

2

63 8.

45

12

2

54 8.7

5

12

4

61 8.3

5

12

4

32 8.

40

11

8

29

CA

350

5.

65

11

5

51 4.

80

12

3

22 4.7

0

13

0

42 4.1

0

13

3

23 3.

60

12

9

15

CA

360

3.

35

10

3

11 3.

00

10

5

5 2.4

5

10

6

16 2.2

0

10

2

9 1.

75

10

3

8

CA

370

1.

25

44 9 1.7

0

42 9

CA

400

0.

60

22 6

Table:4.16

The following tables of net payoff explain the following Profit/Loss of option

holder/writer ofRANBAXY for the week 16/04/2011-20/04/2011...

Profit/Loss position of Call Buyer/Writer of RANBAXY


68/78

Derivatives

68

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYER

GAIN/LOSS

WRITER

GAIN/LOSS

340 340 8.90 NO -7120 7120

340 350 5.65 NO -12520 12520

340 360 3.35 NO -18680 18680

340 400 0.60 NO -48480 48480

Table:4.17


69/78

Derivatives

69

Profit/Loss position of Put option Buyer/Writer of RANBAXY

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYER

GAIN/LOSS

WRITER

GAIN/LOSS

340 330 4.60 NO -4320 4320

Table:4.18

INTERPRETATION

The Call options all were in the out-of-the-money options.

The Put option also was in the out-of-the-money options..

Profit of the holder = (spot price- strike price) premium* 800 (lot size) in case ofcall option.

Profit for the holder = (strike price-spot price)premium* 800(lot size) in case of Putoption.

If it is a profit of the holder then obviously it will be loss for the holder and vice-versa.


70/78

Derivatives

70

Call and Put Option of the SATYAM COMPUTERS

Da

te/

Op

ti

16/04/2011 17/04/2011 18/04/2011 19/04/2011 20/04/2011

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

C.

P.

O.I

.*

N.

C.

CA

44

0

18.

35

50 21 32.

25

44 18

CA

45

0

35.

00

44 26 18.

10

51 63 21.

65

61 36 12.

85

15

2

28

2

26.

50

91 26

3

CA

46

0

28.

05

88 35 13.

40

12

0

25

8

15.

20

13

3

11

3

7.5

5

30

2

56

9

18.

25

18

5

70

1

CA

47

0

22.

20

11

5

72 8.8

5

18

5

30

6

10.

45

20

5

12

3

4.2

5

32

5

33

4

12.

10

26

6

97

1

CA

48

0

15.

75

16

1

31

0

6.3

5

29

2

43

5

7.1

5

32

9

17

1

2.8

0

44

6

35

3

6.3

5

41

8

85

5

CA 11. 55 10 4.0 96 11 4.2 13 66 2.0 14 61 2.9 17 13


71/78

Derivatives

71

49

0

40 1 0 2 5 0 5 3 0 5 6

CA

50

0

7.8

5

19

4

30

0

2.9

5

32

6

31

0

2.9

5

35

8

12

0

1.4

0

43

0

18

6

1.6

5

44

2

32

8

CA

51

0

5.0

0

31 58 2.0

5

34 12 1.9

0

37 17 1.0

0

33 13 0.8

0

36 22

CA

52

0

3.0

0

26 44 1.5

0

39 29 1.3

0

41 6 9.6

0

4 8 0.2

5

40 11

Table:4.19


72/78

Derivatives

72

Date

Opt

16/04/2011 17/04/2011 18/04/2011 19/04/2011

C.P. O.I.* N.C. C.P. O.I.* N.C. C.P. O.I.* N.C. C.P. O.I.* N.C.

PA

420

2.25 10 6 4.10 14 11

PA

430

6.30 13 12

PA

440

3.75 38 13 6.55 44 38 6.00 48 17 8.30 64 80

PA

450

5.15 60 73 10.10 58 82 8.05 58 30 13.30 56 77

PA

460

6.85 104 78 15.10 92 183 12.65 100 57 18.45 97 159

PA

470

10.50 36 42 19.55 22 45 20.15 21 9

PA

480

14.85 35 189 28.40 28 41

PA

490

17.05 11 25

PA

500

24.90 9 13


73/78

Derivatives

73

The following table of net payoff explains profit/loss of option holder/writer of

SATYAM COMPUTERS for the week 16/04/2011-20/04/2011...

Profit/Loss position of Call Option Buyer/Writer of SATYAM COMPUTERS

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYER

GAIN/LOSS

WRITER

GAIN/LOSS

448 450 35.00 NO -22200 22200

448 460 28.05 NO -24030 24030

448 470 22.20 NO -26520 26520

448 480 15.75 NO -28650 28650

448 490 11.40 NO -32040 32040

448 500 7.85 NO -35910 35910

448 510 5.00 NO -40200 40200

448 520 3.00 NO -22200 22200

Table:4.20


74/78

Derivatives

74

Profit/Loss position of Put Option Buyer/Writer of TATA CONSULTANCY

SERVICES

SPOT

PRICE

STRIKE

PRICE

PREMIUM WHETHER

EXERCISED

BUYER

GAIN/LOSS

WRITER

GAIN/LOSS

448 440 3.75 YES 2550 -2550

448 450 5.15 NO -4290 4290

448 460 6.85 NO -11310 11310

448 470 10.50 NO -19500 19500

448 480 14.85 NO -28110 28110

448 490 17.05 NO -35430 35430

448 500 24.90 NO -46140 46140

Ta

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