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A

PROJECT REPORT

ON

RISK MANAGEMENT THROUGH DERIVATIVES IN EQUITY SEGMENT

OF

NETWORTH STCOK BROKING LTD

HYDERABAD

Project Report Submitted in

Partial fulfillment for the award of

MASTER OF BUSINESS ADMINISTRATION

SUBMITTED BY

G.DURGA REDDY

HT No: 214309672103

UNDER THE GUIDENCE OF

Mr.LAXMAN PRASAD

OLIVE P.G COLLEGE FOR MANAGEMENT

(Affiliated to OU)

CHINTA PALLY GUDA, IBRAHIMPATNAM

RANGA REDDY

(2009 11)

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DECLARATION

I, G.DURGA REDDY,pursing MBA (2009-11) from OLIVE PG COLLEGE FOR

MANAGEMENT, CHINTAPALLYGUDA, IBP. bearing HT NO:-214309672103, declare that the

project titled RISK MANAGEMENT THROUGH DERIVATIVES IN EQUITY

SEGMENT is an original work of my own and submitted to Regional College Management

Autonomous for partial fulfillment of MBA program.

This project report has not been submitted to any other institute/university for the award of

any degree or diploma.

Date:

Place: G.DURGA REDDY

VILL:RAJIPETDI&MO:MEDAK

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ABSTRACT

The emergence of the market for derivative products, most notably forwards, futures and options, can

be traced back to the willingness of risk-averse economic agents to guard themselves against

uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are

marked by a very high degree of volatility. Through the use of derivative products, it is possible to

partially or fully transfer price risks by locking-in asset prices. As instruments of risk management,

these generally do not influence the fluctuations in the underlying asset prices. However, by locking

in asset prices, derivative products minimize the impact of fluctuations in asset prices on the

profitability and cash flow situation of risk-averse investors. The past decade has witnessed a massive

growth in the use of financial derivatives by a wide range of corporate and financial institutions. This

growth has run in parallel with the increasing direct reliance of companies on the capital market as the

major source of long term funding. In this respect, derivatives have a vital role to play in enhancing

shareholder value by ensuring minimum risk of investment.

During this project I got to know different ways or different strategies by using which investor can

minimize the loss. An individual always faces the problem as to which strategy he should use in

different market condition. During this course of Internship I had gathered a good knowledge of cash

and derivative market. This knowledge was helpful in my project to achieve the objective.

I had worked out on 14 strategies by applying which in appropriate market condition an investor can

minimize his risk/loss and even earn profit by only taking positions.

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ACKNOWLEDGEMENT

I express my sincere gratitude to the following dignitaries for helping me and providing necessary

information during various stages of project thereby making it successful.

I would like to thank my external guide Mr. PRAVEEN KUMARfor giving me the opportunity to

work in their esteemed organization under his guidance, and helping me to complete the project in a

successful manner. I am also thankful to all the staff members of Networth Stcok Broking Ltd.

Hyderabad who extended their hands and cooperation directly or indirectly for successful

completion of the training program.

I am obliged to my Faculty guide Prof. LAXMAN PRASAD for providing time, effort and most of

all his patience in helping me for preparing this project report. I am also thankful to all the faulty

members of our college for their kind cooperation with me to write this report.

Last but not least I am thankful to my family members and friends for providing me moral support to

do this project successfully.

Date:

Place: G.DURGA REDDY

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CORPORATE GUIDE CERTIFICATE

This is to certify that the project entitled RISK MANAGEMENT

THROUGH DERIVATIVES IN EQUITY SEGMENT is done by G.DURGA REDDY

student ofOLIVE PG COLLEGE FOR MANAGEMENT (second year) under my guidance

and supervision for partial fulfillment of MBA curriculum of OLIVE PG COLLEGE FOR

MANAGEMENT, CHINTAPALLYGUDA,IBP.

To the best of my knowledge and belief the report:

1. Is an original work done by the candidate himself

2. Has been duly completed.

3. Is up to the standard both in respect to the content and language for being referred to the

examiner.

Mr. PRAVEEN KUMAR

Manager, Equity

NETWORTH STOCK BROKING LTD.

HYDERABAD

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FACULTY GUIDE CERTIFICATE

This is to certify that the project entitled RISK MANAGEMENT THROUGH DERIVATIVES

IN EQUITY SEGMENT is done by G.DURGA REDDY, student ofMBA (second year) under

the guidance and supervision for partial fulfillment ofMBA curriculum ofOLIVE PG COLLEGE

FOR MANAGEMENT.

To the best of my knowledge and belief the report:

1. Is an original work done by the candidate himself

2. Has been duly completed.

3. Is up to the standard both in respect to the content and language for being referred to the

examiner.

Prof. LAXMAN PRASAD

H.O.D. Finance

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EXECUTIVE SUMMARY

This is the report submitted by G.Durgareddy studying at OLIVE P.G COLLEGE FOR

MANAGEMENT, CHINTAPALLY GUDA, IBRAHIMPATNAM, in the partial fulfillment of the

requirement of MBA Program, carried at NETWORTH STCOK BROKING LTD

Networth Stock Broking ltd is engaged in providing financial services all across the country and is

one of the most renowned broking houses in India.

The project is on RISK MANAGEMENT THROUGH DERIVATIVES IN EQUITY SEGMENT

and the objective of the project is to identify, understand and analyze the strategy which helps to

minimize the Risk in the Indian Equity Derivative Market. Using the findings depicted at the end of

the project will helpful for the investor by indicating whether to invest in the option and future or not.

Equity market reforms are a major constituent of the overall economic reforms in India and

considering the growing surge in the broking firm, the objective of the project is such set so that it

will enable the investors as well as the RMs to formulate strategies as per market trend and investors

risk appetite.

To achieve the objectives of the project, training was undergone to gain practical knowledge and learn

about derivatives and its applications and also to know the behaviors of investor during trading hours.

The training enabled to learn the concepts of secondary market, the derivatives and the importance of

various tools that were used to undergo the activities to invest in equity market.

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CONTENTS

Page No:

ChapterI: Introduction

a. Need of the study

b. Objectives of the study

c. Methodology used

d. Scope of the study

ChapterII: Literature review

a. Topic over view

b. Industry profile

ChapterIII: company profile

ChapterIV&V: data analysis&interpretation

ChapterVI: summary&concluston

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List of table

s.no Particulers page.no

1 DISTINCTION BETWEEN FUTURES AND FORWARDSCONTRACTS

2 BUY PUT

3 SELL PUT

4BUY STRADDLE (LONG STRADDLE)

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List of figure

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s.no Particulers page.no

1TYPES OF DERIVATIVES MARKET

2

FUTURE CONTRACT with growth percentege

3 Payoff for a buyer of index futures

4 PAY OFF FROM BUY CALL (RELIANCE CAPITAL)

5 Buy put Strategy Implementation

6 PAY OFF FROM BULL SPREAD (SIEMENS) WITH CALL

7 PAY OFF FROM BULL SPREAD (AXIS BANK) WITH PUT

8 PAY OFF FROM BEAR SPREAD (PATNI) WITH CALL

9 PAY OFF FROM BEAR SPREAD (BPCL) WITH PUT

10 BUY STRADDLE (LONG STRADDLE)

11 PAYOFF FROM SHORT STRADDLE (JP ASSOCIATE)

12 PAY OFF FROM BUY STRANGLE (TATA STEEL)

13 PAY OFF FROM SELL STRANGLE (SUZLON)

14 PAYOFF OF BUTTERFLY SPREAD (UNITECH)

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CHAPTER-I

INTRODUCTION

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INTRODUCTION

The origin of derivatives can be traced back to the need of farmers to protect themselves

against fluctuations in the price of their crop. From the time it was sown to the time it was

ready for harvest, farmers would face price uncertainty. Through the use of simple derivative

products, it was possible for the farmer to partially or fully transfer price risks by locking-in

asset prices. These were simple contracts developed to meet the needs of farmers and

were basically a means of reducing risk.

A farmer who sowed his crop in June faced uncertainty over the price he would

receive for his harvest in September. In years of scarcity, he would probably obtain attractive

prices. However, during times of oversupply, he would have to dispose off his harvest at a

very low price. Clearly this meant that the farmer and his family were exposed to a high risk

of price uncertainty.

On the other hand, a merchant with an ongoing requirement of grains too would face

a price risk that of having to pay exorbitant prices during dearth, although favourable prices

could be obtained during periods of oversupply. Under such circumstances, it clearly madesense for the farmer and the merchant to come together and enter into contract whereby the

price of the grain to be delivered in September could be decided earlier. What they would

then negotiate happened to be futures-type contract, which would enable both parties to

eliminate the price risk.

In 1848, the Chicago Board Of Trade, or CBOT, was established to bring farmers and

merchants together. A group of traders got together and created the to-arrive contract thatpermitted farmers to lock into price upfront and deliver the grain later. These to-arrive

contracts proved useful as a device for hedging and speculation on price charges. These

were eventually standardized, and in 1925 the first futures clearing house came into

existence.

Today derivatives contracts exist on variety of commodities such as corn, pepper,

cotton, wheat, silver etc. Besides commodities, derivatives contracts also exist on a lot of

financial underlying like stocks, interest rate, exchange rate, etc.

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2. DERIVATIVE DEFINED

A derivative is a product whose value is derived from the value of one or more underlying

variables or assets in a contractual manner. The underlying asset can be equity, forex,

commodity or any other asset. In our earlier discussion, we saw that wheat farmers may

wish to sell their harvest at a future date to eliminate the risk of change in price by that date.

Such a transaction is an example of a derivative. The price of this derivative is driven by the

spot price of wheat which is the underlying in this case.

The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures

contracts in commodities all over India. As per this the Forward Markets Commission (FMC)

continues to have jurisdiction over commodity futures contracts. However when derivatives

trading in securities was introduced in 2001, the term security in the Securities Contracts

(Regulation) Act, 1956 (SCRA), was amended to include derivative contracts in securities.

Consequently, regulation of derivatives came under the purview of Securities Exchange

Board of India (SEBI). We thus have separate regulatory authorities for securities and

commodity derivative markets.

Derivatives are securities under the SCRA and hence the trading of derivatives is

governed by the regulatory framework under the SCRA. The Securities Contracts

(Regulation) Act, 1956 defines derivative to include-

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

instrument or contract differences or any other form of security.

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

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3. TYPES OF DERIVATIVES MARKET

Exchange Traded Derivatives over the Counter Derivatives

National Stock Bombay Stock National Commodity &Exchange Exchange Derivative Exchange

Index Future Index option Stock option Stockfuture

Figure.1 Types of Derivatives Market

4. TYPES OF DERIVATIVES

Figure.2 Types of Derivatives

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(i) 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 a long position and 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 price. Other contract details like delivery date, price and

quantity are negotiated bilaterally by the parties to the contract. The forward contracts

are normally traded outside the exchanges.

BASIC FEATURES OF FORWARD CONTRACT

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, wh ich often results in high prices being charged.

However forward contracts in certain markets have become very

standardized, as in the case of foreign exchange, thereby reducing transaction

costs and increasing transactions volume. This process of standardization reaches itslimit in the organized futures market. Forward contracts are often confused with futures

contracts. The confusion is primarily because both serve essentially the same

economic fun ct ion s of allocating risk in the presence of future price uncertainty.

However futures are a significant improvement over the forward contracts as they

eliminate counterparty risk and offer more liquidity.

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(ii) FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures exchange, tobuy or sell a certain underlying instrument at a certain date in the future, at a pre-set price.

The future date is called the delivery date or final settlement date. The pre-set price is called

the futures price. The price of the underlying asset on the delivery date is called the

settlement price. The settlement price, normally, converges towards the futures price on the

delivery date.

A futures contract gives the holder the right and the obligation to buy or sell, which differs

from an options contract, which gives the buyer the right, but not the obligation, and the

option writer (seller) the obligation, but not the right. To exit the commitment, the holder of a

futures position has to sell his long position or buy back his short position, effectively closing

out the futures position and its contract obligations. Futures contracts are exchange traded

derivatives. The exchange acts as counterparty on all contracts, sets margin requirements,

etc.

BASIC FEATURES OF FUTURE CONTRACT

1. Standardization:Futures contracts ensure their liquidity by being highly standardized, usually by specifying:

The underlying. This can be anything from a barrel of sweet crude oil to a short term

interest rate.

The type of settlement, either cash settlement or physical settlement.

The amountand units of the underlying asset per contract. This can be the notional

amount of bonds, a fixed number of barrels of oil, units of foreign currency, the

notional amount of the deposit over which the short term interest rate is traded, etc.

The currency in which the futures contract is quoted.

The grade of the deliverable. In case of bonds, this specifies which bonds can be

delivered. In case of physical commodities, this specifies not only the quality of the

underlying goods but also the manner and location of delivery. The delivery month.

The last trading date.

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Other details such as the tick, the minimum permissible price fluctuation.

2. Margin:Although the value of a contract at time of trading should be zero, its price constantly

fluctuates. This renders the owner liable to adverse changes in value, and creates a credit

risk to the exchange, who always acts as counterparty. To minimize this risk, the exchange

demands that contract owners post a form of collateral, commonly known as Margin

requirements are waived or reduced in some cases for hedgers who have physical

ownership of the covered commodity or spread traders who have offsetting contracts

balancing the position.

Initial Margin: is paid by both buyer and seller. It represents the loss on that contract, as

determined by historical price changes, which is not likely to be exceeded on a usual day'strading. It may be 5% or 10% of total contract price.

Mark to market Margin: Because a series of adverse price changes may exhaust the initial

margin, a further margin, usually called variation or maintenance margin, is required by the

exchange. This is calculated by the futures contract, i.e. agreeing on a price at the end of

each day, called the "settlement" or mark-to-market price of the contract.

To understand the original practice, consider that a futures trader, when taking a position,

deposits money with the exchange, called a "margin". This is intended to protect the

exchange against loss. At the end of every trading day, the contract is marked to its present

market value. If the trader is on the winning side of a deal, his contract has increased in

value that day, and the exchange pays this profit into his account. On the other hand, if he is

on the losing side, the exchange will debit his account. If he cannot pay, then the margin is

used as the collateral from which the loss is paid.

3. Settleme ntSettlement is the act of consummating the contract, and can be done in one of two ways, as

specified per type of futures contract:

Physical delivery - the amount specified of the underlying asset of the contract is

delivered by the seller of the contract to the exchange, and by the exchange to the

buyers of the contract. In practice, it occurs only on a minority of contracts. Most are

cancelled out by purchasing a covering position - that is, buying a contract to cancel out

an earlier sale (covering a short), or selling a contract to liquidate an earlier purchase

(covering a long).

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Cash settlement - a cash payment is made based on the underlying reference rate,

such as a short term interest rate index such as Euribor, or the closing value of a stock

market index. A futures contract might also opt to settle against an index based on trade

in a related spot market.

Expiry is the time when the final prices of the future are determined. For many equity index

and interest rate futures contracts, this happens on the Last Thursday of certain trading

month. On this day the t+2 futures contract becomes the t forward contract.

PRICING OF FUTURE CONTRACTIn a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward

price) must be the same as the cost (including interest) of buying and storing the asset. In

other words, the rational forward price represents the expected future value of the

underlying discounted at the risk free rate. Thus, for a simple, non-dividend paying asset,

the value of the future/forward, , will be found by discounting the present value at

time to maturity by the rate of risk-free return .

This relationship may be modified for storage costs, dividends, dividend yields, and

convenience yields. Any deviation from this equality allows for arbitrage as follows.

In the case where the forward price is higher:

1. The arbitrageur sells the futures contract and buys the underlying today (on the spot

market) with borrowed money.

2. On the delivery date, the arbitrageur hands over the underlying, and receives the

agreed forward price.

3. He then repays the lender the borrowed amount plus interest.

4. The difference between the two amounts is the arbitrage profit.

In the case where the forward price is lower:

1. The arbitrageur buys the futures contract and sells the underlying today (on the spot

market); he invests the proceeds.

2. On the delivery date, he cashes in the matured investment, which has appreciated at

the risk free rate.

3. He then receives the underlying and pays the agreed forward price using the matured

investment. [If he was short the underlying, he returns it now.]

4. The difference between the two amounts is the arbitrage profit.

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TABLE 1-

DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS

FEATURE FORWARD CONTRACT FUTURE CONTRACT

OperationalMechanism

Traded directly betweentwo parties (not traded on

the exchanges).

Traded on the exchanges.

Contract

Specifications

Differ from trade to trade. Contracts are standardized

contracts.

Counter-party

risk

Exists. Exists. However, assumed by the

clearing corp., which becomes thecounter party to all the trades or

unconditionally guarantees their

settlement.

Liquidation

Profile

Low, as contracts are

tailor made contracts

catering to the needs ofthe needs of the parties.

High, as contracts are standardized

exchange traded contracts.

Price discovery Not efficient, as markets

are scattered.

Efficient, as markets are centralized

and all buyers and sellers come to a

common platform to discover the

price.

Examples Currency market in India. Commodities, futures, Index Futures

and Individual stock Futures in India.

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OPTIONS -

A derivative transaction that gives the option holder the right but not the obligation to buy or

sell the underlying asset at a price, called the strike price, during a period or on a specific

date in exchange for payment of a premium is known as option. Underlying asset refers to

any asset that is traded. The price at which the underlying is traded is called the strike

price.

There are two types of options i.e., CALL OPTION & PUT OPTION.

CALL OPTION:

A contract that gives its owner the right but not the obligation to buy an underlying asset-

stock or any financial asset, at a specified price on or before a specified date is known as a

Call option. The owner makes a profit provided he sells at a higher current price and buys

at a lower future price.

PUT OPTION:

A contract that gives its owner the right but not the obligation to sell an underlying asset-

stock or any financial asset, at a specified price on or before a specified date is known as a

Put option. The owner makes a profit provided he buys at a lower current price and sells at

a higher future price. Hence, no option will be exercised if the future price does not increase.

Put and calls are almost always written on equities, although occasionally preference

shares, bonds and warrants become the subject of options.

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NEED OF THE STUDY

The study has been done to know the different types of derivatives and also to know the derivative

market in India. This study also covers how risk minimizes through derivatives with the help of

options in equity segment, as a financial advisor able to understand risk minimization with

examples.

Through this study I came to know the trading done in derivatives and their use in the stock

markets.

OBJECTIVE OF THE PROJECT

To learn the basics of secondary market, it includes learning various terminologies used for day-to-

day trading.

To give an insight into derivatives and their application in Indian context.

To gain an insight into derivative trading at a broking firm

To identify, understand and analyze the strategies which help to minimize the Risk in the Indian

Equity Derivative Market in different market conditions.

To implement strategies on investors portfolio and measures the profit or loss as a result of

implementing the strategies.

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METHODOLOGY USED

The information used for this study was collected through secondary sources which are available for

public

Secondary sources:-

It is the data which has already been collected by some one or an organization for some other

purpose or research study .The data for study has been collected from tiv

Books

Magazines

Internet sources

SCOPE OF THE PROJECT

The project covers the derivatives market and its instruments. For better understanding various

strategies with different situations and actions have been given. It includes the data collected in

the recent years and also the market in the derivatives in the recent years. This study extends to

the trading of derivatives done in the National Stock Markets.

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CHAPTER-IILITERATURE REVIEW

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Topic over view

INVESTMENT

Investment in a general way is defined as any use of resources intended to increase future production

output or income.

In finance investment refers to the purchase or acquisition of an asset or item with a hope to get return

from it in the future. The return may be in terms of regular income or value appreciation.

In an economy, people indulge in economic activity to support their consumption requirements.

Savings arise from deferred consumption, to be invested, in anticipation of future returns. Investments

could be made into financial assets, like stocks, bonds, and similar instruments or into real assets, like

houses, land, or commodities.

The main idea behind investment is to utilize the saved idle money to earn a return on it. The money

you earn is partly spent and the rest is saved for meeting future expenses. Instead of keeping the

savings idle it is a general psychology of people to earn some return by utilizing the savings which

form the investment.

Common investment objectives are:-

To earn return on your idle resources

To generate specified sum of money for a specific goal in life

Make a provision for an uncertain future

One of the important reasons why one needs to invest wisely is to meet the cost ofInflation. Inflation

is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the

goods and services you need to live. Inflation causes money to lose value. For example, if there willbe a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years.

This is why it is important to consider inflation as a factor in any long-term investment strategy.

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SECURITIES MARKET

A securities market is a market for securities (debt or equity), where business enterprises

(companies) and governments can raise funds. The definition of Securities as per the SecuritiesContracts regulation Act (SCRA), 1956, includes instruments such as shares, bonds, scrips, stocks or

other marketable securities of similar nature in or of any incorporate company or body corporate,

government securities, derivatives of securities, units of collective investment scheme, interest and

rights in securities, security receipt or any other instruments so declared by the Central Government.

Securities market can be Money marketorCapital market. Capital market is defined as a market in

which money is provided for periods longer than a year, as the raising of short-term funds takes place

on the money markets. The capital market includes the stock market (equity securities) and the bond

market (debt). A capital market is simply any market where a government or a company can raise

money (capital) to fund their operations and long term investments.

In financial terms capital market is a market where financial instruments are issued and traded.

Capital market denotes the securities market where the stocks, bonds and several other derivatives are

traded. This market provides necessary fund to different companies and governments also. Both long

and short terms debts are are raised from this market. At the same time, the capital market provides

the investors with the opportunity to make regular income from the market.

The capital market channelizes funds from surplus sources to the needy areas and here a balance is

sought to be achieved among diverse market participants. It impels enterprises to focus on

performance.

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EQUITY INVESTMENT

When you buy a share of a company you become a shareholder in that company. Shares are also

known as Equities. Shares are issued for the first time through Initial Public Offer(IPO) or Follow on

Public Offer (FPO) and subsequently traded in the secondary markets that are the stock exchanges.

Equities have the potential to increase in value over time. It also provides your portfolio with the

growth necessary to reach your long term investment goals. Research studies have proved that the

equities have outperformed most other forms of investments in the long term. This may be illustrated

with the help of following examples:

Factors influencing price of a stock

Broadly there are two factors which influence the value of a stock

(1) Stock specific and

(2) Market specific.

The stock-specific factor is related to peoples expectations about the company, its future earnings

capacity, financial health and management, level of technology and marketing skills. The market

specific factor is influenced by the investors sentiment towards the stock market as a whole. This

factor depends on the environment rather than the performance of any particular company. Events

favorable to an economy, political or regulatory environment like high economic growth, friendly

budget, stable government etc. can fuel euphoria in the investors, resulting in a boom in the market.

On the other hand, unfavorable events like war, economic crisis, communal riots, minority

government etc. depress the market irrespective of certain companies performing well. However, the

effect of market-specific factor is generally short-term

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SECONDARY MARKET

Secondary market refers to a market where securities are traded after being initially offered to the

public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in

the secondary market. Secondary market comprises of equity markets and the debt markets.

Role of the Secondary Market

For the general investor, the secondary market provides an efficient platform for trading of his

securities. For the management of the company, Secondary equity markets serve as a monitoring and

control conduitby facilitating value-enhancing control activities, enabling implementation of

incentive-based management contracts, and aggregating information (via price discovery) that guides

management decisions

Difference between the Primary Market and the Secondary Market

In the primary market, securities are offered to public for subscription for the purpose of raising

capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued

securities are traded among investors. Secondary market could be either auction or dealer market.

While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer

market.

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DERIVATIVES

INTRODUCTION

Financial market have been innovating and acquiring new shapes and dimensions. There are two core

factors which directs the financial market, they are increasing returns and reducing risks in

investment. There have been continuous innovations and developments in the financial markets on

these two factors.

One of the most significant developments in these two factors in the securities markets has been the

development and expansion of financial derivatives. The term derivatives is used to refer tofinancial instruments which derive their value from some underlying assets. The underlying assets

could be equities (shares), debt (bonds, T-bills, and notes), currencies, and even indices of these

various assets, such as the Nifty 50 Index. Derivatives derive their names from their respective

underlying asset. Thus if a derivatives underlying asset is equity, it is called equity derivative and so

on.

Origin of derivativesWhile trading in derivatives products has grown tremendously in recent times, the earliest evidence of

these types of instruments can be traced back to ancient Greece. Even though derivatives have been in

existence in some form or the other since ancient times, the advent of modern day derivatives

contracts is attributed to farmers need to protect themselves against a decline in crop prices due to

various economic and environmental factors. Thus, derivatives contracts initially developed in

commodities. The first futures contracts can be traced to the Yodoya rice market in Osaka, Japan

around 1650. The farmers were afraid of rice prices falling in the future at the time of harvesting. To

lock in a price (that is, to sell the rice at a predetermined fixed price in the future), the farmers entered

into contracts with the buyers. These were evidently standardized contracts, much like todays futures

contracts. In 1848, the Chicago Board of Trade (CBOT) was established to facilitate trading of

forward contracts on various commodities. From then

on, futures contracts on commodities have remained more or less in the same form, as we know them

today.

Derivatives in India

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In India, derivatives markets have been functioning since the nineteenth century, with

organized trading in cotton through the establishment of the Cotton Trade Association in 1875.

Derivatives, as exchange traded financial instruments were introduced in India in June 2000.

The National Stock Exchange (NSE) is the largest exchange in India in derivatives, trading in various

derivatives contracts. The first contract to be launched on NSE was the Nifty 50 index futures

contract. In a span of one and a half years after the introduction of index futures, index options, stock

options and stock futures were also introduced in the derivatives segment for trading. NSEs equity

derivatives segment is called the Futures & Options Segment or F&O Segment. NSE also trades in

Currency and Interest Rate Futures contracts under a separate segment.

A series of reforms in the financial markets paved way for the development of exchange-traded equity

derivatives markets in India. In 1993, the NSE was established as an electronic, national exchange

and it started operations in 1994. It improved the efficiency and transparency of the stock markets by

offering a fully automated screen-based trading system with real-time price dissemination. A report

on exchange traded derivatives, by the L.C. Gupta Committee, set up by the Securities and Exchange

Board of India (SEBI), recommended a phased introduction of derivatives instruments with bi-level

regulation (i.e., self-regulation by exchanges, with SEBI providing the overall regulatory and

supervisory role). Another report, by the J.R. Varma Committee in 1998, worked out the various

operational details such as margining and risk management systems for these instruments. In 1999,

the Securities Contracts (Regulation) Act of 1956, or SC(R)A, was amended so that derivatives couldbe declared as securities. This allowed the regulatory

Framework for trading securities, to be extended to derivatives. The Act considers derivatives on

equities to be legal and valid, but only if they are traded on exchanges.

The Securities Contracts (Regulation) Act, 1956 defines "derivatives" 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.

At present, the equity derivatives market is the most active derivatives market in India. Trading

volumes in equity derivatives are, on an average, more than three and a half times the trading volumes

in the cash equity markets.

Milestones in the development of Indian derivative market

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November 18, 1996 - L.C. Gupta Committee set up to draft a policy framework for introducing

derivatives

May 11, 1998 - L.C. Gupta committee submits its report on the policy framework

May 25, 2000 - SEBI allows exchanges to trade in index futures

June 12, 2000 - Trading on Nifty futures commences on the NSE

June 4, 2001 - Trading for Nifty options commences o n the NSE

July 2, 2001 - Trading on Stock options commences on the NSE

November 9, 2001 - Trading on Stock futures commences on the NSE

August 29, 2008 - Currency derivatives trading commences on the NSE

August 31, 2009 - Interest rate derivatives trading commences on the NSE

Average Daily Turnover in derivative segment(Rs.

cr.)

11410

1752

838810107

1922029543

52153.3

45310.6372392.07

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

Average Daily

Turnover (Rs. cr.)

The basic purpose of derivatives is to transfer the price risk (inherent in fluctuations of the asset

prices) from one party to another; they facilitate the allocation of risk to those who are willing to takeit. In so doing, derivatives help mitigate the risk arising from the future uncertainty of prices. For

example, on November 1, 2009 a rice farmer may wish to sell his harvest at a future date (say January

1, 2010) for a pre-determined fixed price to eliminate the risk of change in prices by that date. Such a

transaction is an example of a derivatives contract. The price of this derivative is driven by the spot

price of rice which is the "underlying asset".

The main use of derivatives is to either remove risk or take on risk depending if one were a hedger or

a speculator. The diverse range of potential underlying assets and payoff alternatives leads to a huge

range of derivatives contracts available to be traded in the market. The main types of derivatives are

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1. Future Contracts

2. Forward Contracts

3. Option Contracts and

4. Swaps

FORWARD CONTRACT

A forward contract is an agreement between two parties to buy or sell an asset (which can be of any

kind) at a pre-agreed future point in time. Therefore, the trade date and delivery date are separated. It

is used to control and hedge risk, for example currency exposure risk (e.g. forward contracts on USD

or EUR) or commodity prices (e.g. forward contracts on oil).

One party agrees to sell, the other to buy, for a forward price agreed in advance. In a forward

transaction, no actual cash changes hands. The forward price of such a contract is commonly

contrasted with the spot price, which is the price at which the asset changes hands (on the spot date,

usually two business days). The difference between the spot and the forward price is the forward

premium or forward discount. For example, Jewelry manufacturer Gold buyer agrees to buy gold at

Rs. 600 (the forward or delivery date) from gold mining concern Gold seller. No money changes

hands between Gold buyer and Gold seller at the time the forward contract is created. Rather, Gold

buyers payoff depends on the spot price at the time of delivery. Suppose that the spot price reaches

Rs. 610 at the delivery date. Then Gold buyer gains Rs. 10 on his forward position (i.e. the difference

between the spot and forward prices) by taking delivery of the gold at Rs. 600. Risk

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FUTURE CONTRACT

In finance, a futures contract is a standardized contract, traded on a futures exchange, to buy or sell a

certain underlying instrument at a certain date in the future, at a specified price. The future date is

called the delivery date or final settlement date. The pre-set price is called the futures price. The price

of the underlying asset on the delivery date is called the settlement price.

A futures contract gives the holder the obligation to buy or sell, which differs from an options

contract, which gives the holder the right, but not the obligation. In other words, the owner of an

options contract may exercise the contract. Both parties of a "futures contract" must fulfill the

contract on the settlement date. The seller delivers the commodity to the buyer, or, if it is a cash-

settled future, then cash is transferred from the futures trader who sustained a loss to the one who

made a profit. To exit the commitment prior to the settlement date, the holder of a futures position has

to offset his position by either selling a long position or buying back a short position, effectively

closing out the futures position and its contract obligations.

Future urnover with growth percentage

0

2000000

4000000

6000000

8000000

10000000

12000000

Year

-100%

0%

100%

200%

300%

400%

500%

National Turnover(Rs cr.) Growth(%)

National Turnover(Rs cr.) 72998 330485 1860385 2256203 4305452 6370541 11369230.5 7049753.52 9129635.31

Growth(%) 0% 352.73% 462.93% 21.28% 90.83% 47.96% 78.47% -37.99% 29.50%

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

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FUTURES TERMINOLOGY

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

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

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

NSE have one- month, two-month and three-month expiry cycles which expire 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.

o 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.

o Contract size: The amount of asset that has to be delivered under one contract called lot size.

o Basis: 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 delivery month for each contract. In a

normal market, basis will be positive. This reflects that futures prices normally exceed spot

prices.

o 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.

o Initial margin: The amount that must be deposited in the margin account at the time a futures

contract is first entered into is known as initial margin.

o Marking-to-market: In the futures market, at the end of each trading day, the margin account

is adjusted to reflect the investor's gain or loss depending upon the futures closing price. This

is called marking-to-market.

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o Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure

that the balance in the margin account never becomes negative. If the balance in the margin

account falls below the maintenance margin, the investor receives a margin call and is

expected to top up the margin account to the initial margin level before trading commences

on the next day.

FUTURES PAYOFFS

Futures contracts have linear payoffs. In simple words, it means that the losses as well as profits for

the buyer and the seller of a futures contract are unlimited. These linear payoffs are fascinating as

they can be combined with options and the underlying to generate various complex payoffs.

Payoff for buyer of futures: Long futures

The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an

asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case

of a speculator who buys a two month Nifty index futures contract when the Nifty stands at 5220. The

underlying asset in this case is the Nifty portfolio. When the index moves up, the long futures position

starts making profits, and when the index moves down it starts making losses. Figure 4.1 shows the

payoff diagram for the buyer of a futures contract.

Payoff for a buyer of index futures

The figure shows the profits/losses for a long futures position. The investor bought futures when the

index was at 5200. If the index goes above 5200, his futures position starts making profit. If the index

falls, his futures position starts showing losses.

profit

Loss

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Payoff for seller of futures: Short futures

The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts n

asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case

of a speculator who sells a two-month Nifty index futures contract when the Nifty stands at 5200. The

underlying asset in this case is the Nifty portfolio. When the index moves down, the short futures

position starts making profits, and when the index moves up, it starts making losses. Figure 4.2 shows

the payoff diagram for the seller of a futures contract.

Payoff for a seller of index futures

The figure shows the profits/losses for a short futures position. The investor sold futures when the

index was at 5200. If the index goes down, his futures position starts making profit. If the index rises,

his futures position starts showing losses.

Difference between futures contract and a forwards contract

A Futures contract is similar to a Forwardcontract, with some exceptions. Futures contracts are

traded on exchange markets, whereas forward contracts typically trade on OTC (over-the-counter)

markets. Also, futures contracts are settled daily (marked-to-market), whereas forwards are settled

only at expiration.

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INDUSTRYPROFILE

INTRODUCTION TO THE STOCK EXCHANGE

The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities

and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet

to transact in securities. The trading platforms provided by NSE & BSE are electronic based and there

is no need for buyers and sellers to meet at a physical location to trade. They can trade through the

computerized trading screens available with the NSE trading members or the internet based trading

facility provided by the trading members of NSE.

A stock exchange is the place where securities, shares, debentures and bonds of joint stock

companies, central & state govt., semi govt. organizations, local bodies and foreign govt. are bought

and sold. A stock exchange is the nerve center of capital market. Changes in the capital market are

brought about by a complex set of factors, all operating on the market simultaneously. Such changes

are subject to secular trends set by the economic progress of the nation, and governed by the factors

like general economic situation, financial and monetary policies, tax changes, political environment,

international economic and financial development etc. A stock exchange provides necessary mobility

to capital and directs the flow of capital into profitable and successful enterprises.

Role of stock exchange

Raising capital for businesses

Mobilizing savings for investment

Facilitate company growth

Redistribution of wealth

Gain in stock prices leading to increase in wealth of investors.

Corporate governance

Ensures corporate governance (i.e segregating the ownership & management) of listed

companies.

Creates investment opportunities for small investors

Government raises capital for development projects

Barometer of the economy

Rise/fall of stock markets act as an indicator of economic growth/slowdown.

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Evolution and development of Stock Exchanges

18th Century - Beginning of the capital market in India (East India Company).

Securities trading unorganized until end of the 19th century. (Bombay and Calcutta).

Bombay was the chief trading centre wherein bank shares were the major trading stock.

During American Civil War (1860-61) - Indian stock market witnessed the first boom, lasting

half a decade.

1875- Stockbrokers in Bombay organized an informal association Native Shares and Stock

Brokers Association.

1894 - Ahmedabad Stock Exchange founded.

1908 Calcutta Stock Exchange founded.

In the post-independence period also, the size of the capital market remained small.

1st & 2nd 5-year plans Govt. emphasis was to develop PSUs, but their shares were not listed

on the stock exchanges.

The Controller of Capital Issues (CCI) closely supervised and controlled the timing,

composition, interest rates, pricing, allotment, and floatation costs of new issues. These strict

regulations demotivated many companies from going public for almost four and a half

decades.

In 1950s - Century Textiles, Tata Steel, Bombay Dyeing, National Rayon, and Kohinoor Mills

were the favorite scrips of speculators. As speculation became rampant, the stock market

came to be known as 'Satta Bazaar'. Despite speculation, non-payment or defaults were not

very frequent.

In 1956 Govt. enacted Securities Contracts (Regulation) Act, which was characterized by

the establishment of a network for the development of financial institutions and state financial

corporations.

In 1960s - Characterized by wars and droughts in the country which led to bearish trends.

Trends were aggravated by ban in 1969 on forward trading and 'badla.

In 1964 - The Unit Trust of India (UTI), first mutual fund of India came into existence. FIs

such as LIC and GIC helped to revive the sentiment by emerging as the most important group

of investors.

In 1970s - Badla trading was resumed. This revived the market.

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On July 6, 1974 Govt. enforced Dividend Restriction Ordinance, restricting the payment of

dividend by companies to 12 per cent of the face value or one-third of the profits of the

companies (that can be distributed as computed under section 369 of the Companies Act),

whichever was lower. This led to a slump in market capitalization at the BSE by about 20 per

cent overnight and the stock market did not open for nearly a fortnight.

1973- Introduction of Foreign Exchange Regulation Act (FERA).

As a result, 123 MNCs offered shares, which were lower than their intrinsic worth. For the

first time, many investors got an opportunity to invest in the stocks of such MNCs as Colgate,

and Hindustan Liver Limited.

In 1977 - Dhirubhai Ambani, tapped the capital market with Reliance Textiles, the base of

todays entire Reliance empire.

In 1980s - Witnessed an explosive growth of the securities market in India, Major events:

- Participation by small investors, speculation, defaults, ban on badla, and

- Resumption of badla continued.

- Convertible debentures emerged as a popular instrument of resource mobilization

in the primary market.

- The introduction of public sector bonds and the successful mega issues of Reliance

Petrochemicals and Larsen and Toubro gave a new lease of life to the primary market.

- The decade of the 1980s was characterized by an increase in the number of stock

exchanges,

Listed companies, paid up-capital, and market capitalization.

In1990s - Liberalization and globalization of Indian economy opening new doors for

investment.

In 1992 - The Capital Issues (Control) Act, 1947 was cancelled. Emergence of new industrial

policy & SEBI as a regulator of capital market.

The securities scam of March 1992 involving Harshad Mehta, a broker as well as bankers was

on of the biggest scams in the history of the capital market. which drove away small investors

from the market.

In 1995 - The M S Shoes case, one such scam which took place, put a break on new issue

activity.

In1990s - Securities scam revealed the inadequacies of and inefficiencies in the financial

system. It was the scam, which prompted a reform of the equity market. The Indian stock

market witnessed a sea change in terms of technology and market prices because of all such

scams.

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Technology brought radical changes in the trading mechanism.

National Stock Exchange, set up in 1994, and Over the Counter Exchange of India, set up in

1992.

The National Securities Clearing Corporation (NSCCL) and National Securities Depository

Limited (NSDL) were set up in April 1995 and November 1996 respectively. These

institutions improved clearing and settlement and brought about dematerialized trading.

In 1995-96 - The Securities Contracts (Regulation) Act, 1956 was amended for introduction of

- Options trading.

Rolling settlement was introduced in January 1998 for the dematerialized segment of all

companies.

The Indian capital market entered the twenty-first century with the Ketan Parekh scam. As a

result of this scam, badla was discontinued from July 2001 and rolling settlement was

introduced in all scrips.

Trading of futures commenced from June 2000, and Internet trading was permitted in

February 2000.

On July 2, 2001, the Unit Trust of India announced suspension of the sale and repurchase of

its flagship US-64 scheme due to heavy redemption leading to panic on the bourses.

Then, the government's decision to privatize oil PSUs in 2003 fuelled stock prices. One big

divestment of international telephony major VSNL took place in early February 2002.

Major Stock Exchanges In INDIA

Bombay Stock Exchange (BSE)

National stock Exchange (NSE)

Apart from these 2 there are 21 regional stock exchanges in India. These are:

- Ahmedabad Stock Exchange - Madhya Pradesh Stock Exchange

- Bangalore Stock Exchange - Madras Stock Exchange

- Bhubaneshwar Stock Exchange - Magadh Stock Exchange

- Calcutta Stock Exchange - Mangalore Stock Exchange

- Cochin Stock Exchange - Meerut Stock Exchange

- Coimbatore Stock Exchange - OTC Exchange Of India

- Delhi Stock Exchange - Pune Stock Exchange

- Guwahati Stock Exchange - Saurashtra Kutch Stock Exchange

- Hyderabad Stock Exchange - Uttar Pradesh Stock Exchange

- Jaipur Stock Exchange - Vadodara Stock Exchange

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- Ludhiana Stock Exchange

Bombay Stock Exchange

BSE, earlier known as "The Native Share & Stock Brokers' Association" is the oldest stock

exchange in Asia with a rich heritage, now spanning three centuries in its 134 years of

existence.

1st stock exchange in the country to obtain permanent recognition (in 1956) from the

Government of India under the Securities Contracts (Regulation) Act 1956.

It migrated from the open outcry system to an online screen-based order driven trading

system in 1995 (BOLT).

Earlier an Association of Persons (AOP), BSE is now a corporatized and demutualised entity

incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE

(Corporatization and Demutualization) Scheme, 2005 notified by the Securities and Exchange

Board of India (SEBI).

With demutualization, BSE has two of world's best exchanges, Deutsche Brose and Singapore

Exchange, as its strategic partners.

Today, BSE is the world's number 1 exchange in terms of the number of listed companies and

the world's 5th in transaction numbers.

An investor can choose from more than 4,700 listed companies, which for easy reference, are

classified into A, B, S, T and Z groups.

The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic stature, and

is tracked worldwide. It is an index of 30 stocks representing 12 major sectors, and is sensitive

to market sentiments and market realities.

Apart from the SENSEX, BSE offers 21 indices, including 12 sectoral indices.

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Emergence of NSE

The NSE has genesis in the report of the High Powered Study Group on Establishment of

New Stock Exchanges. Based on the recommendations, NSE was promoted by leading

Financial Institutions at the behest of the Government of India and was incorporated in

November 1992 as a tax-paying company unlike other stock exchanges in the country.

NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994.

The Capital Market (Equities) segment commenced operations in November 1994 and

operations in Derivatives segment commenced in June 2000.

The following years witnessed rapid development of Indian capital market with introduction

of internet trading, Exchange traded funds (ETF), stock derivatives and the first volatility

index India VIX in April 2008.

August 2008 - introduction of Currency derivatives in India with the launch of Currency

Futures in USD-INR by NSE. Interest Rate Futures was introduced for the first time in India

by NSE on 31st August 2009, exactly after one year of the launch of Currency Futures.

STOCK TRADING

Screen Based Trading

The trading on stock exchanges in India used to take place through open outcry without use of

information technology for immediate matching or recording of trades. This was time consuming and

inefficient. This imposed limits on trading volumes and efficiency. In order to provide efficiency,

liquidity and transparency, NSE introduced a nationwide, on-line, fully automated screen based

trading system (SBTS) where a member can punch into the computer the quantities of a security and

the price at which he would like to transact, and the transaction is executed as soon as a matching sale

or buy order from a counter party is found.

What is NEAT?

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NSE is the first exchange in the world to use satellite communication technology for trading. Its

trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client

server based application. At the server end all trading information is stored in an in memory database

to achieve minimum response time and maximum system availability for users. It has uptime record

of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one

second.

CHAPTER-IIICOMPANY PROFILE

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COMPANY PROFILE OF NETWORTH STOCKBROKING LTD.

Incorporated in 1993, Net worth Stock Broking Limited (NSBL) has been a listed company at

Bombay Stock Exchange (BSE), Mumbai since 1995.

A Member, at the National Stock Exchange of India (NSE) and Bombay Stock Exchange, Mumbai

(BSE) on the Capital Market and Derivatives (Futures & Options) segment, NSBL has been

traditionally servicing Institutional clients and in the recent past has forayed into retail broking,

establishing branches across the country. Presence is being marked in the Middle East, Europe and

the United States too, as part of our attempts to cater to global markets. We are a Depository

participant at Central Depository Services India (CDSL) with plans to become one at National

Securities Depository (NSDL) by the end of this quarter. We have our customers participating in the

booming commodities markets with our membership at the Multi Commodity Exchange of India

(MCX) and National Commodity & Derivatives Exchange (NCDEX), through Networth Stock.Com

Ltd. With its strong support and business units of research, distribution & advisory, NSBL aims to

become a one-stop solution to the broking and investment needs of its clients, globally.

Strong team of professionals experienced and qualified pool of human resources drawn from

top financial service & broking houses form the backbone of our sizeable infrastructure. Highly

technology oriented, the companys scalability of operations and the highest level of service standards

has ensured rapid growth in the number of locations & the clients serviced in a very short span of

time. Networthians, as each one of our 400 plus and ever growing team members are addressed, is a

dedicated team motivated to continuously progress by imbibing the best of global practices, Indian

sing

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such practices, and to constantly evolve a comprehensive suite of products &

services trying to meet every financial / investment need of the clients.

NSE CM and Derivatives Segment SEBI Regn. 1NB230638639 & 1NF230638639

BSE CM and Derivatives Segment SEBI Regn. 1NB010638634 &

PMS SEBI Regn. 1NP000001371 CDSL DP SEBI Regn. IN-DP-CDSL

251-2004

Commodities Trading: MCX -10585 and NCDEX - 00011 (through Networth Stock.Com Ltd.)

Hyderabad (Somajiguda)

401, Dega Towers, 4th Floor, Raj Bhavan Road, Somajiguda Hyderabad - 500 082

Andhra Pradesh.

Phone Nos.: 040-66560708, 66562256, and 30994985

Mumbai (MF Division)

49, Au Chambers, 4th Floor, Tamarind Lane, Fort

Mumbai - 400 001

Maharashtra.

Phone Nos.: 022- 22650253

Mumbai (Registered Office)

5, Church gate House, 2nd Floor, 32/ 34 Veer Narirnan Road, Fort

Mumbai - 400 001

Maharashtra.

Phone No. 022-22850428

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The Networth connectivity with 227 branches and growing

1 0 7 b r a n c h1 0 7 b r a n c h

Products and services portfolio

Retail and institutional broking

Research for institutional and retail clients

Distribution of financial products

PMS

Corporate finance

Net trading

Depository services

Commodities Broking

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Infrastructure

A corporate office and 3 divisional offices in CBD of Mumbai which houses state-of-the-art

dealing room, research wing & management and back offices.

All of 227 branches and franchisees are fully wired and connected to hub at Corporate office

at Mumbai. Add on branches also will be wired and connected to central hub

Web enabled connectivity and software in place for net trading.

60 operative IDs for dealing room

In house technology back up team to ensure un-interrupted connectivity.

1993: Networth Started with 300 Sq.ft. of office space & 10 employees

2006: Spread over 42 cities (around 70,000 Sq.ft of office space) with over 107 branches & employee

strength over 1400

2010: spread over more 35 cities and 230 plus branches and with strength of 4000

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Market & research

Focusing on your needs

Every investor has different needs, different preferences, and different viewpoints. Whether investor

prefers to make own investment decisions or desire more in-depth assistance, company committed to

providing the advice and research to help you succeed.

Networth providing following services to their customers,

Daily Morning Notes

Market Musing

Company Reports

Theme Based Reports

Weekly Notes

IPOs

Sector Reports

Stock Stance

Pre-quarter/Updates

Bullion Tracker

F&O Tracker

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QUALITY POLICY

To achieve and retain leadership, Networth shall aim for complete customer satisfaction, by

combining its human and technological resources, to provide superior quality financial services. In

the process, Networth will strive to exceed Customers expectations.

As per the quality policy, Networth will:

Build in house processes that will ensure transparent and harmonious relationships with its

clients and investors to provide high quality of services.

Establish a partner relationship with in its investor service agents and vendors that will help in

keeping up its commitments to the customers.

Provide high quality of work life for all its employees and equip them with adequate

knowledge & skill so as to respond to customers needs.

Continue to uphold the values of honesty & integrity and strive to establish unparalleled

standards in business ethics.

Use state-of-the art information technology in developing new and innovative financial

products and services to meet the changing needs of investors and clients.

Strive to be a reliable source of value-added financial products and services and constantly guide the

individuals and institutions in making a judicious choice of it.

Strive to keep all stake-holders (share holders, clients, investors, employees, suppliers and regulatory

authorities) proud and satisfied.

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Key Personnel:

Mr. S P Jain CMD Networth Stock Broking Ltd.

A qualified Chartered Accountant with over 15 years of experience in the capital markets.

Mr. Deepak Mehta Head PMS

Over 12 years of experience in the capital markets and has the prior work experience of

serving on the Equity desk of Reliance.

Mr.Viral Doshi Equity Strategist

A qualified Chartered Accountant with experience of over a decade in technical analysis with

respect to equity markets.

Mr. Vinesh Jain Asst. Fund Manager

A qualified MBA graduate specializing in finance and over two years of experience in the

capital markets.

Research and the Back office.

We have sought to provide premium financial services and information, so that the power of

investment is vested with the client. We equip those who invest with us to make intelligent

investment decisions, providing them with the flexibility to either tap into our extensive knowledge

and expertise, or make their own decisions. We made our debut into the financial world by servicing

Institutional clients, and proved its high scalability of operations by growing exponentially over a

short period of time. Now, powered by a top-notch research team and a network of experts, we

provide an array of financial products & services spanning entire India.Our strong support,

technology-driven operations and business units of research, distribution, advisory, wide array of

products & services coalesce to provide you with a one-stop solution to cater to all your investment

needs. Our single minded objective is to help you grow your Networth.

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OUR GROUP COMPANIES

Networth Stock Broking Ltd. [NSBL]

NSBL is a member of the National Stock Exchange of India Ltd (NSE) and the Bombay Stock

Exchange Ltd (BSE) in the Capital Market and Derivatives (Futures & Options) segment. NSBL has

also acquired membership of the currency derivatives segment with NSE, BSE & MCX-SX. It is

Depository participants with Central Depository Services India (CDSL) and National Securities

Depository (India) Limited (NSDL). With a client base of over 1L loyal customers, NSBL is spread

across the country though its over 230+ branches. NSBL is listed on the BSE since 1994.

Networth Wealth Solutions Ltd. [NWSL]

NWSL is into the business of delivery of Financial Planning & Advice. Its vision is to Advice &

Execute money related solutions to/for our customers in the most Convenient & Consolidated

manner, while making sure that their experience with us is always pleasant & memorable resulting in

positive advocacy. The product & Services include Financial Planning, Life Insurance, On-line

Trading Account, Mutual Funds, Debentures/Bonds, General Insurance, Loans and Depository

Services.

NetworthStock.ComLtd.[NSCL]

NSCL is the commodities arm of NSBL. It is a member at the Multi Commodity Exchange of India

(MCX) and National Commodity & Derivatives Exchange (NCDEX) and is backed by solid research

& analytics in Commodities.

NetworthSoftTechLtd.[NSL]

NSL is an ISO 9001:2000 Certified Company. It is into Application Development & maintenance.

Building & Implementation of packaged software across various functions within the Financial

Services Industry is at its core. It also provides data center services which include hosting of websites,

applications & related services. It combines a unique delivery model infused by a distinct culture of

customer satisfaction.

Ravisha Financial Services Pvt. Ltd. [RFSL]

RFSL is a RBI registered NBFC engaged in financing, primarily it provides loan against securities

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Principles & Values

At Net worth Stock Broking Ltd. success is built on teamwork, partnership and the diversity

of the people.

At the heart of our values lie diversity and inclusion. They are a fundamental part of our

culture, and constitute a long-term priority in our aim to become the world's best

international bank.

Values

Responsive

Trustworthy Creative

Courageous

Approach

Participation:- Focusing on attractive, growing markets where we can leverage our

relationships and expertise

Competitive positioning:- Combining global capability, deep local knowledge and

creativity to outperform our competitors

Management Discipline:- Continuously improving the way we work, balancing the

pursuit of growth with firm control of costs and risks Commitment to stakeholders

Customers:- Passionate about our customers' success, delighting them with the

quality of our service

Our People:- Helping our people to grow, enabling individuals to make a difference

and teams to win

Communities:- Trusted and caring, dedicated to making a difference

Investors:- A distinctive investment delivering outstanding performance and superior

returns

Regulators: - Exemplary governance and ethics wherever we are.

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CHAPTER-IV&V

DATA ANALYSIS

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OPTION STRATEGIES

BUY CALL

Strategy View Investor thinks that the market will rise significantly in the short-term.

Strategy Implementation Call options are bought with a strike price of a. The more bullish the

investor is, the higher the strike price should be. By this strategy, the downside risk is avoided

PAY OFF FROM BUY CALL (RELIANCE CAPITAL)

Price of Rel Cap on 1st June 2010 Rs 652.56.

The stock is expected to increase up to Rs 765 in

Short term.So buy a call option of Rel cap with a strike price

Of Rs 720 of the maturity 24 June.

Premium paid for the option Rs 37.50

Exercise the option on 21 June 2010 as on 21 June, the price of the scrip touched Rs 766.05

Payoff = 766.05-(720+37.50)

Rs 8.55(profit)

This strategy has an unlimited profit potential as the diagram depicts but the loss is limited

upto the premium amount paid. The strategy works in a bullish market.

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a

Profit

Loss

Stock Price

Buy call

Profit/Loss

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BUY PUT

Strategy View - Investor thinks that the market will fall significantly in the short-term. .

Strategy Implementation - Put option is bought with a strike price of E. The more bearish the

investor is, the lower the strike price should be.

EXAMPLE

Option premium to be paid Rs7.50*100 = Rs750

Amount to be received for selling shares = Rs110*100 = Rs11000

If market value of the underlying share will be Rs100 then

Profit/Loss = 11000-(10000+750) = 250(profit)

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E Stock price

Profit

Loss

Buy Put

Profit/loss

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This strategy gives increaing profit with decrease in price. As the diagram depicts the loss is

limited upto the premium amount paid. The strategy works in a bearish market.

SELL CALL

Strategy View Investor is certain that the market will not rise and is unsure/ unconcerned whether it

will fall.

Strategy Implementation Call option is sold with a strike price of E. If the investor is very certain of

his view then at-the-money options should be sold, if less certain, then out-of-the-money ones should

be sold.

EXAMPLE

Option premium to be received Rs10.00*100 = Rs1000

Amount to be received for selling shares = Rs150*100 = Rs15000

If market value of the underlyned share will be Rs140, then the buyer will not exercise the contract.

Hence Profit/Loss will be the premium received = 100*10 = 1000(profit)

Exercise Price 150

Size of the contract 100 shares

Price of the share on the date of contract 144

Price of option on the date of contract 10

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This strategy has a limited profit potential upto the amount of premium received as thediagram depicts but the loss is unlimited with the increase in stock price. The strategy works

when the investor is not bullish.

SELL PUT

Strategy View Investor is certain that the market will not go down, but unsure/unconcerned about

whether it will rise.

Strategy Implementation Put options are sold with a strike price E. If an investor is very bullish,

then in-the-money puts would be sold.

EXAMPLE

Exercise price Rs110

Size of the contract 100 shares

Price of the put option on the date of the contract Rs7.5

Option premium to be received Rs7.50*100 = Rs750.Amount to be paid for buying shares = Rs110*100 = Rs11000

If market value of the underlined share will be Rs100, then the buyer will exercise the contract.

Hence Profit/Loss will be the premium received = (100*100)+750-11000 = 250(loss)

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EStock price

Profit

Loss

Sell Call

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Possible prices of the share Investor Position

80 -2250

90 -1250

100 -250

110 750

120 750

130 750

140 750

This strategy has a limited profit potential as the diagram depicts but the loss is unlimited upto

the amount increase in stock cash market price. The strategy works when the investor is not

bearish.

BULL SPREAD (CALL)

Strategy View Investor thinks that the market will not fall. It is a Conservative strategy for one who

thinks that the market is more likely to rise than fall.

Stock price Payoff from short put Total pay off Net profit=

Payoff + premium

S1>110 0(Not exercised) 0 Rs7.50

S1=102.50 102.50 110 - 7.50 -7.50+7.50=0

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Strategy Implementation It involves having two calls on the same stock with same expiry date but

with different exercise prices. Call option is bought with a strike price below the stock price and

another call option sold with a strike price above the stock price.

PAY OFF FROM BULL SPREAD (SIEMENS) WITH CALL

Price of Siemens on 1st June 2010 Rs 684.

The stock is expected to increase up to Rs 735 in Short term.

So buy a call option of 24 June with a strike price of Rs 680 premium paid Rs 104.90

& sell a call option with same maturity date with a strike price of 700 premium received Rs 29.00.

Initial outlay = 29 104.90 = -76.10

Exercise the option on 23 June 2010 as on 23 June, the price of the scrip touched Rs 738.

Payoff from bought call = 738 -680 = 58

Payoff from sold call = 700-738 = -38

Total payoff = 58 - (76.10+38) = Rs 56.10(loss)

This strategy minimizes the loss up to the amount of initial outlay due to difference in premium

paid amount and received amount. The profit is also limited.

BULL SPREAD (PUT)Strategy View Investor thinks that the market will not fall, but wants to minimize the risk. It is a

conservative strategy for one who thinks that the market is more likely to rise than fall.

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a

Stock price

Profit

Loss

Bull Spread (Call)

b

Profit/loss

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Strategy Implementation It involves writing put b at a higher strike price and buying a put a with a

lower strike price.

PAY OFF FROM BULL SPREAD (AXIS BANK) WITH PUT

Price of Axis Bank stock on 1st June 2010 Rs 1180.

The stock is expected to increase up to Rs 1250 in Short term.

So buy a put option with maturity 29 July with a strike price of Rs 1100 premium paid Rs 18.05

& sell a put option with same maturity date with a strike price of 1250 premium received Rs 41.00.

Initial payoff = 41.00 18.05 = 22.95

Exercise the option on 29 July 2010 as on 23 June, the price of the scrip touched Rs 738.

Payoff from bought call = 0

Payoff from sold call = 0

Total payoff = 22.95(loss)

This strategy gives protection from downside risk as loss of sold put gets adjusted with profits

from bought put and the strategy gives usually an initial inflow of premium which is a clear

profit in an increasing market.

BEAR SPREAD (CALL)

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a

Stock price

Profit

Loss

Bull Spread (Put)

b

Profit/loss

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Strategy View Investor thinks that the market will not rise, but wants to minimize the risk. It is a

conservative strategy for one who thinks that the market is more likely to fall than rise.

Strategy Implementation Call option is sold with a lower strike price of aand another call option

is bought with a higher strike of b

PAY OFF FROM BEAR SPREAD (PATNI) WITH CALL

Price of Patni stock on 2nd June 2010 = Rs 577.

The stock is expected to be bearish in Short term.

1. Buy a call option with maturity 29 July with a strike price of Rs 600 premium paid Rs 03.50

2. Sell a call option with same maturity date with a strike price of Rs 540 premium received Rs

09.75.

Initial payoff = 09.75 03.50 = 06.25

Exercise the option on 24th June 2010. Stock price on 24th june = Rs 505

Payoff from bought call = 0 (as the option will not be exercised)

Payoff from sold call = 0 (as the option will not be exercised)

Total payoff = 06.25 (profit)

This strategy involves very less risk in a bearish outlook. In this strategy both profit and loss

gets limited thus provides a hedge against risk.

BEAR SPREAD (PUT)

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a

Stock price

Profit

Loss

Bear Spread (Call)

b

Profit/loss

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Strategy View Investor thinks that the market will not rise, but wants to minimize the risk.

Conservative strategy for one who thinks that the market is more likely to fall than rise.

Strategy Implementation Put option is sold with a lower strike price ofa and another put option is

bought with a strike ofb

PAY OFF FROM BEAR SPREAD (BPCL) WITH PUT

Price of BPCL stock on 1st June 2010 = Rs 583.

The stock is expected to be bearish in Short term.

1. Option 1 - Sell a put option with maturity of 24th June with an exercise price of Rs 580

premium received Rs 79.50.

2. Option 2 - Buy a put option with same maturity date with an exercise price price of Rs 600

premium paid Rs 95.60.

Initial payoff = 79.50 95.60 = (-16.10)

Exercise the option on 24th June 2010. Stock price on 24th june = Rs 550.05

Payoff from put-1 = 550.05-580 = (-29.95)

Payoff from Put-2 = 600-550.05 = 49.95

Net payoff = 49.95- (16.10+29.95)

Rs 03.90(profit)

.

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a

Stock price

Profit

Loss

Buy Straddle

Profit/loss

BUY STRADDLE (LONG STRADDLE)

Strategy view Where the Investor expects a sharp movement in the share price, but unsure of

direction, it is an appropriate strategy.

Strategy implementation long straddle involves buying a Call & a Put at the same exercise price and

for the same tenure. A buyer of the Straddle buys both call & the put.

EXAMPLEASSUMPTION -- STRIKE = Rs 100

CALL PREMIUM = Rs 5

Put premium = Rs 4

Initial investment = Rs 9

IF END STOCK IS CALL PAYOFF PUT PAYOFF NET PAYOFF

95 0 5 -4

96 0 4 -5

97 0 3 -698 0 2 -7

99 0 1 -8

100 0 0 -9

101 1 0 -8

102 2 0 -7

103 3 0 -6

104 4 0 -5

105 5 0 -4

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In this strategy maximum loss can be the amount of total premium paid for the call and put

where as the amount of profit can be unlimited as the diagram indicates.

SHORT STRADDLE

Strategy view: Investor thinks that the market will be not be very volatile in the short-term. It is a

strategy for relatively stable stock. A short straddle works whenever the price remains within theband.

Strategy implementation: A short straddle involves selling both the call and the put.

PAY OFF FROM SHORT STRADDLE (JP ASSOCIATE)

Price of BPCL stock on 1st June 2010 = Rs 117.6.

The stock is a relatively less volatile one.

1. Option 1 - Sell a call option with maturity of 29 th July with an exercise price of Rs 130

premium received Rs 06.00.

2. Option 2 - Sell a put option with same maturity date and exercise price premium paid Rs

05.55.

Initial payoff = 06.00 + 05.55 = Rs 11.55

Exercise the option on 22nd July 2010. Stock price on 22nd July Rs 131.50

Payoff from option-1 = 130.00-131.50 = (-01.50)

Payoff from option-2 = 0 option will not be exercised.

Net payoff = 11.55-01.50

Rs 10.05(profit)

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a

Stock price

Profit

Loss

Sell Straddle

Profit/loss

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This strategy gives a limited profit of total premium received for both the option sold but the

loss can be unlimited. So this strategy is risky and maximum precaution should be taken while

adopting this strategy.

BUY STRANGLE

Strategy view: Investor thinks that the market will be very volatile in the short-term.

Strategy implementation: This is identical to the straddle except that the call has an exercise price

above the stock price and the put has an exercise price below the stock price and the premium paid is

less.

PAY OFF FROM BUY STRANGLE (TATA STEEL)

Price of Tata Steel stock on 1

st

June 2010 = Rs 493.17.The stock shows a high volatility in the short term.

1. Option 1 - Buy a call option with maturity of 24th June with an exercise price of Rs 480.00

premium paid Rs 14.25.

2. Option 2 Buy a put option with same maturity date and exercise price of Rs 500.00

premium paid Rs 01.05.

Initial outlay = -(14.25 + 01.05) = -15.30

Exercise the option on 24th June 2010. Stock price on 24th June Rs 501.12

Payoff from option-1 = 50