karvy_report2 nikhal

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Jaypee Business School

A constituent of Jaypee Institute of Information Technology University

A-10, Sector 62, Noida (UP) India 201 307

www.jbs.ac.in

Managing Risk through hedging

In futures and options

Corporate Internship Report

Internship Report submitted as a partial requirement for the award of the two year

Master of Business Administration Programme

MBA 2010-12

Name: NIKHIL DANG

Telephone: +91-9910483832

E-mail: [email protected]

Karvy Stock Broking Limited

Corporate Internship Supervisor

Name: Mr. VAIBHAV DUA

Contact details: +91-9711555137

Mailing Address: [email protected]

JBS-Faculty Supervisor: Mrs JHUMUR SENGUPTA

Start Date for Internship: 29h APRIL 2011

End Date for Internship: 18th JUNE 2011

Report Date: 1st JULY 2010
http://www.jbs.ac.in/http://www.jbs.ac.in/


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Self Certification by the Intern

I hereby certify that I, NIKHIL DANG have successfully completed my internship with

Karvy Stock Broking Limited in the month of June 2010 from 29th APRIL 2011 to 18th

JUNE 2011. This is also to certify that this report is an original product and no unfair

means like copying etc have been used for its completion.

Name: NIKHIL DANG

Signature:

Date: 1st JULY 2011


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Certification from the Organization


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ACKNOWLEDGEMENT

It gives me great pleasure in acknowledging the invaluable assistance expended to me byvarious personalities in the successful completion of this report. I wish to express mygratitude to all the people involved in the completion of the report. They have been aconstant source of support for me.

I would like to thank the team ofKarvy Stock Broking Limited who accepted me inspite of my inexperience in the field and gave me the opportunity to work with them.

I would like to express my deep sense of gratitude towards my corporate internshipsupervisorMr. Jitendra Rai Singhania (Regional Head- Karvy Fortune) for his ideas,encouragement and guidance in all phases of my internship. He not only showed me theright direction but also tried to provide me with all the necessary resources. I am highlygrateful for all the time and effort he has put in for discussions and reviews.

I would also like to show my gratitude to my faculty supervisor Prof JHUMUR SENGUPTA for giving me directions and guidelines at the time when most needed and forhelping me in my internship in every suitable manner.

Last but not least I wish to avail this opportunity to express a sense of gratitude and love

to my friends and my beloved parents for their support, strength and help.

Signature of the Student:Name of the Student: NIKHIL DANG

10609158

Date: 1st JULY 2011


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TABLE OF CONTENTS

S.no Contents Page No.1. Executive Summary 7

2. Objectives of the study 8

3. Company Profile 9

4. Industry Analysis 23

5. Financial Analysis 52

6. Introduction to derivatives 66

7. Hedging 758. Conclusion 86

9. Recommendation 86

10. Key Learnings 87

11. Annexure87

12. Reference 92


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EXECUTIVE SUMMARY

India is a large and growing economy with rapidly expanding financial services sector.

The sector has witnessed a transformation over the last decade because of the economic

liberalization, which started in 1991. The Indian capital markets have undergone a

substantial change over the last decade. India is now placed among the mature markets of

the world. With over 20 million shareholders, India has the third largest investor base in

the world after USA and Japan.

Karvy is Indias leading Financial Services Company having over 800 branches &

business associates in all over India. Karvy serves the financial needs of more than

12,50,000 customers with its wide range of financial services and products from

securities, derivatives trading, depositary services, research & advisory services,

registration & transfer services, loan against shares and mortgage & housing finance.

My Internship consisted of the Training on Dealing with futures and option, Hedging

methodologies in combination with futures and options and online trading. The best

learning experience was that I started from the very basics of stock market, which helped

me understand things easily at every point of time. I also worked on the UID project

launched by the GOVT. OF INDIA which has been bagged by Karvy. Under this I

approached some potential trustworthy facilitators who can help the company in

expanding this project.


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OBJECTIVES OF THE STUDY

To analyze the growth of derivative market in India.

To study the strategies of future and options trading.

To understand the effectiveness of hedging.

SCOPE OF THE STUDY

The scope of the study is clearly seen as it helps in understanding the various derivativesmarkets. It helps to evaluate the effectiveness of hedging in the derivative trading. Thestudy reveals some vital information regarding reduction of market risk and maximizingprofit before applying investment strategies.


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COMPANY PROFILE

Karvy was established as Karvy and company by five Chartered Accountants during the

year 1979-80, and then its work was confined to audit and taxation only. The birth ofKarvy was on a modest scale in 1981. It began with the vision and enterprise of a small

group of practicing Chartered Accountants who founded the flagship company Karvy

Consultants Limited. Karvy Consultants Limited was established in 1982 at Hydrabad. At

initial stage it was very small in size and started with a capital of Rs.1,50,000.

Karvy became a known name during the year 1985-86 when it forayed into capital

market as registrar.

All along, Karvys strong work ethics and professional background leveraged withInformation Technology enabled it to deliver quality to the individual. A decade of

commitment, professional integrity and vision helped Karvy achieving a leadership

position in its field when it handled largest number of corporate and retail that proved to

be a sound business synergy.

Karvy has been a customer centric company since its inception. It offers a single platform

servicing multiple financial instruments in its bid to offer complete financial solutions to

the varying needs of both corporate and retail investors, where an extensive range of

services are provided with great volume-management capability.

Today, Karvy has access to millions of Indian shareholders, besides companies, banks,

financial institutions and regulatory agencies. Over the past one and half decades, Karvy

has evolved as a veritable link between industry, finance and people.

KARVY, is a premier integrated financial services provider, and ranked among the top

five in the country in all its business segments, services over 16 million individualinvestors in various capacities, and provides investor services to over 300 corporates,

comprising the who is who of Corporate India.


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ORGANIZATION

Now Karvy group consists of 8 highly renowned entities which are as follow:

1. : The first securities registry to receive ISO 9002 certification in

India. Registered with SEBI as Category I Registrar, is Number 1 Registrar in the

Country. The award of being Most Admired Registrar is one among many of the

acknowledgements we received for our customer friendly and competent services.

2. : Karvy Stock Broking Ltd. consists of five units namely stock

broking servics, depository participant, advisory services, distribution of financial

products, advisory services and private client goups.


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3. : It is registered with SEBI as a category 1 merchant banker. Its

clientele includesinclude leading corporate, State Governments, foreign institutional

investors, public and private sector companies and banks, in Indian and global markets.

4. : Karvy insurance broking ltd is also a part of karvy stock broking

ltd. At Karvy Insurance Broking Limited both life and non-life insurance products are

provided to retail individuals, high net-worth clients and corporates.

5. : The company provides investment, advisory and brokerage

services in Indian Commodities Markets. And most importantly, it offer a wide reach

through our branch network of over 225 branches located across 180 cities.

6. : Karvy Global is a leading business and knowledge process

outsourcing Services Company offering creative business solutions to clients globally. It

operates in banking and financial services, inurance, healthcare and pharmaceuticals,

media , telecom and technology. It has its sales and business development office in NewYork, USA and the offshore global delivery center in Hyderabad, India

7. : Karvy Realty (India) Limited is engaged in the business of real

estate and property services offering:

Buying/ selling/ renting of properties

Identifying valuable investments opportunities in the real estate sector

Facilitating financial support for real estate and investments in properties

Real estate portfolio advisory services


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8. : It is a joint venture between Computershare, Australia and Karvy

Consultants Limited, India in the registry management services industry.

Why should investors choose for Karvy?

Experience

KARVY group has more than two decades of trust and credibility in the Indian stock

market. Karvy Stock Brokers Limited, member of National Stock Exchange of India and

the Bombay Stock Exchange, ranks among the top 5 stock brokers in India. With over

6,00,000 active accounts, it ranks among the top 5 Depositary Participant in India,

registered with NSDL and CDSL.

Technology

With their online trading account one can buy and sell shares in an instant from any PC

with an internet connection. Customers get access to the powerful online trading tools

that will help them to take complete control over their investment in shares.

Accessibility

Karvy provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for

investors. These services are accessible through many centers across the country (Over

375 locations in 150 cities), over the Internet (through the website

www.karvyonline.com) as well as over the Voice Tool.

VISION STATEMENT:

Karvys aspiration of establishing itself as an integrated financial services co is propelled

by a vision that is shared by the entire work force. Towards this end

Karvy is dedicated itself to:


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Having a single minded focus on investor services.

Establish as a house hold name for financial services.

Set industrial standards.

Stock Broking

10% + share in cash markets

F & O double the cash volumes (around 6%)

Activate BSE so as to reach 5% share

MISSION:

Our mission is to be a leading, preferred, services provider to our customer and we aim to

achieve this leadership position by an innovative, enterprising and technology driven

Organization, which will set the highest standards of service and business ethics.

Spectrum of services offered by Karvy:

Karvy being the top registrar and transfer agent, functions as registrar in most of theissues in the country. Talking about the mutual fund services offered by karvy, we can

get the products of 33 AMCs over here. it deals in both closed ended funds as well as

open ended too. Now one must be thinking why to get the mutual funds from karvy

instead of getting it directly from AMCs???we have great reasons for it: the first one

being ; if we avail the services ofkarvy then we can get the information about all the

AMCs and their products at a single place along with expert recommendations whereas at

an AMC we can get information about the products of that specific AMC only. And the

second being wide network ofkarvy.nowadays we can find karvy offices at remote

areas too.

KARVY STOCK BROKING LIMITED


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Karvy Stock Broking Limited, one of the cornerstones of the Karvy edifice, flows freely

towards attaining diverse goals of the customer through varied services. Here, growth

knows no limits and success recognizes no boundaries. Helping the customer create

waves in his portfolio and empowering the investor completely is the ultimate goal. We

offer services that are beyond just a medium for buying and selling stocks and shares.

Instead we provide services which are multi dimensional and multi-focused in their

scope. The company help for customers to create effect on portfolio and achieve the final

goal by provide a monthly magazine which gives up-dated market information on market

trends, investment options.

SERVICES

Stock broking service

Karvy offer services that are beyond just a medium for buying and selling stocks and

shares. Instead we provide services which are multi dimensional and multi-focused in

their scope. There are several advantages in utilizing our Stock Broking services, which

are the reasons why it is one of the best in the country. It offers trading on a vast

platform. The in-depth research and highly skilled research team, comprising of technical

analysts as well as fundamental specialists gives information on market trends, market

analysis.

Depository Participant

The onset of the technology revolution in financial services Industry saw the emergence

of Karvy as an electronic custodian registered with National Securities Depository Ltd

(NSDL) and Central Securities Depository Ltd (CSDL) in 1998.

Financial product distribution

With the wide portfolio offerings, Karvy also occupy all segments in the retail financial

services industry. A 1600 team of highly qualified and dedicated professionals drawn

from the best of academic and professional backgrounds are committed to maintaining

high levels of client service delivery. udicious planning that is customized to meet the


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future needs of the customer deliver a service that is exemplary. The market-savvy and

the ignorant investors, both find this service very satisfactory.

Advisory Services

Under the retail brand Karvy the Finapolis', it deliver advisory services to a cross-

section of customers. The service is backed by a team of dedicated and expert

professionals with varied experience and background in handling investment portfolios.

They are continually engaged in designing the right investment portfolio for each

customer according to individual needs and budget considerations with a comprehensive

support system that focuses on trading customers' portfolios and providing valuable

inputs, monitoring and managing the portfolio through varied technological initiatives.

This is made possible by the expertise we have gained in the business over the years.

Private Client Group

This specialized division was set up to cater to the high net worth individuals and

institutional clients keeping in mind that they require a different kind of financial

planning and management that will augment not just existing finances but their life-styleas well. Here we follow a hard-nosed business approach with the soft touch of dedicated

customer care and personalized attention. For this purpose we offer a comprehensive and

personalized service that encompasses planning and protection of finances, planning of

business needs and retirement needs and a host of other services, all provided on a one-

to-one basis.

Products:

MUTUAL FUNDS:

A Mutual Fund is a trust that pools the savings of a number of investors who share a

common financial goal. The money thus collected is then invested in capital market


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instruments such as shares, debentures and other securities. The income earned through

these investments and the capital appreciation realized is shared by its unit holders in

proportion to the number of units owned by them.

INSURANCE:

It is a system to make large financial losses more affordable by pooling the risks of many

individuals and business entities and transferring them to an insurance company or other

large group in return for a premium.

At KARVY, the company has tie-ups with many insurance companies nsurance are of

two types:

a) Life Insurance

b) General Insurance

EQUITIES:

Equity participation of clients is the daily earning of the company. People

participate in intraday trades, Short, Medium and Long term investing to plan for their

financial goals. The company is listed member of National Stock Exchange (NSE). It has

terminals at all outlets and helps it customers participate in the stock market trades.

DERIVATIVES

A derivative is a product whose value is derived from the value of an underlying

asset, index or reference rate. The underlying asset can be equity, forex, commodity or

any other asset. For example, if the settlement price of a derivative is based on the stock

price of a stock for e.g. Infosys, which frequently changes on a daily basis, then the

derivative risks are also changing on a daily basis. Very often, the variables underlying

the derivative securities are the prices of traded securities

Achivements:


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Among the top 5 stock brokers in India (4% of NSE volumes)

India's No. 1 Registrar & Securities Transfer Agents

Among the top 3 Depository Participants

Largest Network of Branches & Business Associates ISO 9002 certified operations by DNV

Among top 10 Investment bankers

Largest Distributor of Financial Products

Adjudged as one of the top 50 IT uses in India by MIS Asia

Full Fledged IT driven operations

LEADERSHIP POSITIONS:

Leading stock broker

Largest retail broker (Over 160,000 trades per day representing over 5.5% of NSE

trades) over 700 terminals

Around 4.5% share of daily NSE Cash market volumes and 2% of F&O volumes Over Rs. 6.5Bn turnover per day

Strong research team and emerging as a leading research house

Over 250,000 customers

Leading depository participant

Servicing through 380+ branches

Over 740,000 active DP customers

Amongst the largest DP in the country

Over Rs. 250 Bn. in custody

Technology driven online service at branch level


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Leading IPO distributor

Largest retail distributor for IPOs (over 17% share of retail volumes in 2003 to

2005)

Extensive use of Karvys broking network for IPO book building process

Over 8,000 active business associates in addition to 300+ branch network

Over 1,600 executives in sales and customer service

SWOT ANALYSIS:

Strength:

Good research team.

Dedicated employees.

Strong customer relationship.

Strong brand name.

Wide spread branches and brokers network..

Weakness:

Technology need to be upgraded.

Not enough advertisement.

Opportunity:

Growing IPO issues.

Positive outlook of people towards financial products.

Growing consumer awareness about equity related product.


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Threat:

Market uncertainty.

Galloping competition.

Broad economic factors like inflation, etc.

International disruptions.

PRODUCT RANGE OF KARVY STOCK BROKING

This is a User Friendly Product which allows the client to trade through website

www.karvyonline.com and is suitable for the retail investors who is risk-averse.

I-zone account

Features

Online trading account for investing in Equity and Derivatives via

www.karvyonline.com

Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE.

Integration of On-line trading, Saving Bank and Demat Account.

Instant cash transfer facility against purchase & sale of shares.

Competitive transaction charges.

Instant order and trade confirmation by E-mail.

GOTX

GOTX is an internet-based software application that enables you to buy and sell in an

instant. It is ideal for active traders and jobbers who transact frequently during days

session to capitalize on intra-day price movement.

Features

Instant order Execution and Confirmation.

Single screen trading terminal for NSE Cash, NSE F&O & BSE.

Technical Studies.


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Multiple Charting.

IPO ON-LINE

Customers can apply to all the forthcoming IPOs online. This is quite hassle-free,paperless and time saving. Simply allocate fund to IPO Account, Apply for the IPO andSit Back & Relax.CHARGE STRUCTURE

Charge Demat + I-zone Account Gotx Account I-zone AccountAccount Opening Rs. 650 NIL Rs.650Annual Maintenance charges Rs.375 - Rs.400Brokerage Intra-day 0.03 %

Delivery - 0.30 %

Intra-day - 0.03%

Delivery - 0.30%

Intra-day-0.03%

Delivery - 0.30%* Taxes as per govt.

Documents required for opening Demat + I-zone account:-

Copy of PAN Card Copy of address proof Last 3 months bank statement Electronic Confirmation No. Slip Cancelled Cheque

FEES TO BE PAID FOR FRANCHISEE,REMISER AND AUTHORIZED

PERSON

Registration fee Security deposit Brokerage ShareFranchisee Rs.27500 Rs.1.5 lacs 60%-Franchisee

40%-KarvyRemiser Rs.27500 Rs.50,000 40%-Remiser

60%-KarvyAuthorized person Rs.10000 - 20%-Authorized person

80%-Karvy

INDUSTRY ANALYSIS

Companies in the industry-1. Karvy Stock Broking Ltd.-


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Karvy Stock Broking Ltd. is a member of NSE and BSE. It is one of the leading

Depository Participants in India which is registered with NSDL and CDSL. KSBL offerstrading on a vast platform; National Stock Exchange and Bombay Stock Exchange. It

makes trading safe to the maximum possible extent, by accounting for several risk factors

and planning accordingly. It is assisted in this task by its in-depth research, constant

feedback and sound advisory facilities.

2. Sharekhan Stock Trading / Sharekhan Demat / SharekhanBrokerage-

Sharekhan is online stock trading company of SSKI Group, provider of India-based

investment banking and corporate finance service. ShareKhan is one of the largest stockbroking houses in the country. S.S. Kantilal Ishwarlal Securities Limited (SSKI) has been

among Indias leading broking houses for more than a century.

3. Indiabulls Stock Trading / Indiabulls Demat / Indiabulls

Brokerage-


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Indiabulls is India's leading Financial Services and Real Estate Company having presence

over 414 locations in more than 124 cities. Indiabulls Financial Services Ltd is listed on

the National Stock Exchange, Bombay Stock Exchange, Luxembourg Stock Exchange

and London Stock Exchange.

4. Motilal Oswal Securities Stock Trading / Motilal Oswal Securities

Motilal Oswal Securities Ltd is a well diversified financial services firm offering a range

of financial products and services such as Wealth Management, Broking & Distribution,

Commodity Broking, Portfolio Management Services, Institutional Equities, Private

Equity, Investment Banking Services and Principal Strategies.

5. ICICIDirect Stock Trading / ICICIDirect Demat /

ICICIDirect Brokerage-

ICICIDirect (or ICICIDirect.com) is stock trading company of ICICI Bank. Along

with stock trading and trading in derivatives in BSE and NSE, it also provides

facility to invest in IPOs, Mutual Funds and Bonds. Trading is available in BSE and

NSE.

Comparion on the basis of Brokerage fees charged

Broker Brokerage for delivery Brokerage for Intraday

trading


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Karvy Stock Broking 0.30% 0.03%

Motilal Oswal

0.30% - 0.50% 0.03% - 0.15%

Sharekhan

0.03% - 0.50%

0.03% - 0.10%

5 paisa

0.25% - 0.85% 0.07%

Angel Broking

0.50% 0.02% - 0.03%

ICICI direct

0.75% 0.15%

Indiabulls 0.25% - 0.50% 0.05% - 0.10%


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HDFC Securities 0.50% 0.15%

Religare

0.20% - 0.30% 0.02% - 0.03%

Indiainfoline

0.50% 0.10%

Reliance Money

0.01% 0.01%

ICICI Direct charges the maximum brokerage of 0.75% for delivery mode trading. For intraday trading, ICICI Direct and HDFC

Securities charge the maximum brokerage of 0.15%

Comparative Analysis of Competitors

CHARGE SCHEDULE

PARAMETER ICICIDIRECT

SHAREKHAN INDIABULLS RELIANCEMONEY

KARVY

First year 750 0 500+700 for

software

500 650

Demat AMC 750 450 550 Lifetime free 425


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Delivery

Brokerage

40 to 85 bps 50 bps 20 bps 30 to 55 bps

Intraday/Futures 20 to 42.5

bps

10 bps 2 bps 3 to 5 bps

Options

Margin Trade 10 to 15 bps

Demat Included in

brokerage

Charged

separately

Charged

separately

Charged

separately

Included in

brokerageUpfront

Brokerage

Payment

BrokerageNegotiable

.

Market Size

The Indian broking industry is reasonably large and fragmented with 9,000 odd brokersin the cash segment and around 24,000 sub-brokers.

Growth Trends and Performance

It was another good year for global capitalism.The US turned in stronger returns than the

rest of the globe.US stocks clocked in a total return of 17.9 percent, as measured by the

Wilshire 5000 index, the broadest measure of US stocks. By contrast, the S&P 500 total

return was only 15.1 percent. The S&P 500 comprises about 75 percent of the US stock

market.Returns across the globe, a combination of US and international stocks, returned

14.9 percent as measured by the MSCI All World Investable Market Index.


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While the global financial crisis continues to be devastating to world economies, world

stock markets seem to have nearly recovered.

The BSE Sensex jumped 3,044.28 points or 17.43% in calender 2010. The S&P CNX

Nifty surged 933.45 points or 17.94% in 2010, as foreign funds made record purchases of

Indian stocks.Foreign funds bought shares worth a massive Rs 2352.70 crore on

Thursday, 30 December 2010. The inflow reached Rs 2049.60 crore in December 2010

and Rs 133266 crore in calendar 2010.

10 major Global Stock Exchanges (market capitalization as on August

2009)

Stock Exchange Capitalization (US$ mn)

Johannesburg Securities Exchange 690,797.5NASDAQ 2,847,535.2So Paulo Stock Exchange 1,032,518.4Toronto Stock Exchange 1,432,877.0New York Stock Exchange 10,842,001.9

Australian Securities Exchange 1,066,513.2Bombay Stock Exchange 1,082,572.0Hong Kong Stock Exchange 1,945,517.7Korea Exchange 727,125.3National Stock Exchange of India 1,019,109.0

Foreign Trade Policy

Foreign companies are now permitted to have a majority stake in their Indian affiliates

except in a few restricted industries. In certain specific industries, foreigners can even

have holding up to 100 per cent.


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Foreign Institutional Investors (FII) upon registration with the Securities and Exchange

Board of India (SEBI) and the Reserve Bank of India (RBI) are allowed to operate in

Indian stock exchanges subject to the guidelines issued for the purpose by SEBI.

Legal/Regulatory Issues

Capital Issues (Control) Act, 1947

The Act had its origin during the war in 1943 when the objective was to channel

resources to support the war effort. It was retained with some modifications as a means of

controlling the raising of capital by companies and to ensure that national resources were

channeled into proper lines, i.e., for desirable purposes to serve goals and priorities of the

government, and to protect the interests of investors. Under the Act, any firm wishing to

issue securities had to obtain approval from the Central Government, which also

determined the amount, type and price of the issue. As a part of the liberalization process,the Act was repealed in 1992 paving way for market determined allocation of resources.

Securities Contracts (Regulation) Act, 1956

It provides for direct and indirect control of virtually all aspects of securities trading and

the running of stock exchanges and aims to prevent undesirable transactions in securities.

It gives Central Government regulatory jurisdiction over (a) stock exchanges through aprocess of recognition and continued supervision, (b) contracts in securities, and (c)

listing of securities on stock exchanges. As a condition of recognition, a stock exchange

complies with conditions prescribed by Central Government.


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SEBI Act, 1992

The SEBI Act, 1992 was enacted to empower SEBI with statutory powers for (a)

protecting the interests of investors in securities, (b) promoting the development of the

securities market, and (c) regulating the securities market. Its regulatory jurisdiction

extends over corporates in the issuance of capital and transfer of securities, in addition to

all intermediaries and persons associated with securities market. It can conduct enquiries,

audits and inspection of all concerned and adjudicate offences under the Act. It has

powers to register and regulate all market intermediaries and also to penalize them in case

of violations of the provisions of the Act, Rules and Regulations made thereunder. SEBI

has full autonomy and authority to regulate and develop an orderly securities market.

Technology

Technology has been the backbone of the Exchange. Providing the services to the

investing community and the market participants using technology at the cheapest

possible cost has beenits main thrust. NSE chose to harness technology in creating a new

market design. It believes that technology provides the necessary impetus for the

organization to retain its competitive edge and ensure timeliness and satisfaction in

customer service. The exchange operates and manages a nationwide network. This

network includes 9 POPs (Points of Presence) setup across the country and catering to

3070+ leased lines.

What is Stock Market???

The stock market system is an avenue of how to trade stock for listed corporations. As a

corporation is formed, its initial shareholders are able to acquire shares of stockfrom the

point of subscription when a company is created. When a company starts to be traded to


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the public, the primary market comes in where those who subscribe to the initial public

offering (IPO) takes on the shares of stock sold from point of IPO. When those who

bought into a company at IPO point of view decides to sell their shares of stock to other

people, they can do so by going to the stock market.

The stock market is a secondary market for securities trading wherein original or

secondary holders of a companys shares of stock can sell their stocks to other individuals

within the frame work of the stock market system.

PRIMARY & SECONDARY MARKET

There are two ways for investors to get shares from the primary and secondary

markets. In primary markets, securities are bought by way of public issue directly from

the company. In Secondary market share are traded between two investors.

Primary Market: Market for new issues of securities, as distinguished from the

Secondary Market, where previously issued securities are bought and sold.

Secondary Market: The market where securities are traded after they are initially

offered in the primary market. Most trading is done in the secondary market.

Stock Market of India

In earlier times, buyers and sellers used to assemble at stock exchanges to make a

transaction but now with the dawn of IT, most of the operations are done

electronically and the stock markets have become almost paperless. Now investors

dont have to gather at the Exchanges, and can trade freely from their home or office

over the phone or through Internet.

One of the oldest stock markets in Asia, the Indian Stock Markets have a 200 years

old history


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Trading Pattern of the Indian Stock Market

Indian Stock Exchanges allow trading of securities of only those public limited

companies that are listed on the Exchange(s). They are divided into two categories:

Types of Transactions

The flowchart below describes the types of transactions that can be carried out on the Indian

stock exchanges:


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Indian stock exchange allows a member broker to perform following activities:

1. Act as an agent,

2. Buy and sell securities for his clients and charge commission for the same,

3. Act as a trader or dealer as a principal,

4. Buy and sell securities on his own account and risk.

Over The Counter Exchange of India (OTCEI)

Traditionally, trading in Stock Exchanges in India followed a conventional style where

people used to gather at the Exchange and bids and offers were made by open outcry.

This age-old trading mechanism in the Indian stock markets used to create many

functional inefficiencies. Lack of liquidity and transparency, long settlement periods and

benami transactions are a few examples that adversely affected investors. In order to

overcome these inefficiencies, OTCEI was incorporated in 1990 under the Companies

Act 1956. OTCEI is the first screen based nationwide stock exchange in India created by

Unit Trust of India, Industrial Credit and Investment Corporation of India, Industrial

Development Bank of India, SBI Capital Markets, Industrial Finance Corporation of


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India, General Insurance Corporation and its subsidiaries and CanBank Financial

Services.

MAIN PLAYERS IN THE INDIA STOCK MARKET

National Stock Exchange

In order to lift the Indian stock market trading system on par with the international

standards. On the basis of the recommendations of high powered Pherwani Committee,

the National Stock Exchange was incorporated in 1992 by Industrial Development Bank

of India, Industrial Credit and Investment Corporation of India, Industrial Finance

Corporation of India, all Insurance Corporations, selected commercial banks and others.

NSE provides exposure to investors in two types of markets, namely:

1. Wholesale debt market

2. Capital market

Wholesale Debt Market - Similar to money market operations, debt market operations

involve institutional investors and corporate bodies entering into transactions of high

value in financial instrumets like treasury bills, government securities, commercial papers

etc.

Trading at NSE

1. Fully automated screen-based trading mechanism

2. Strictly follows the principle of an order-driven market

3. Trading members are linked through a communication network

4. This network allows them to execute trade from their offices

5. The prices at which the buyer and seller are willing to transact will appear on the

screen

Bombay Stock Exchange (BSE)


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The Bombay Stock Exchange (BSE) and the National Stock Exchange of India Limited

(NSE) are the two primary exchanges in India. In addition, there are 22 Regional Stock

exchanges. However, the BSE and NSE have established themselves as the two leading

exchanges and account for about 80% of the equity volume traded in India. The NSE and

BSE are equal in size in terms of daily traded volume.

Most key stocks are traded on both the exchanges and hence the investor could

buy on either of the exchanges. Both exchanges have a different settlement cycle,

which allows investors to shift their position on the bourses. The primary index of

BSE in BSE Sensex comprises 30 stocks. NSE has the S&P NSE 50 Index

(Nifty), which consists of fifty stocks.

Stock Market Index

Its ironical that something as huge as a stock market which should be stable as it

represents the economy of a nation, is actually extremely volatile since it is driven more

by the sentiments of the people Stock Market is a place where the stocks of a listed

company are traded. A single figure that sums up the overall performance of the market

on a daily basis is the Stock Index. A good Stock Index captures the movement of the

well diversified and highly liquid stocks. For a lay man it is the pulse rate of the

economy. Index movements reflect the changing expectations of the stock market about

future dividends of the corporate sector. The index is calculated by finding the weighted

average of the prices of the most actively traded companies in the market, where the

weights are generally in proportion to the market capitalization of the company.

Types of Indexes available:-


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Broad-Market Index: This consists of all the large, liquid stocks of the

country and becomes the benchmark for the entire capital market of the country.

An example for this is the S&P CNX 500.

Specialized Index:We can either have Industry or Sector specific Index for

any particular sector of the economy which then serves as the benchmark for that

particular industry or we can have an index for the highly liquid stocks. Taking

an example for an industry specific index we have the S&P Banking Index which

is a capitalization-weighted index of 26 domestic equities traded on the New

York Stock Exchange and NASDAQ,

Determinants of a Stock Index

Following parameters should be taken into picture before one constructs a stock index:

Liquidity Liquidity of stocks as measured by the impact cost criterion which

determines the cost faced when actually trading the index. For example if the current

market price of a stock is Rs 200 and a trader purchases it at Rs 202 (due to involved

transaction costs) then the market impact cost is 1% and the stock is considered

highly liquid for lower impact cost.

Diversification Diversification, by putting stocks of various sectors that reflect the

economy, is used to cancel out stock noise which is essentially the individual stock

fluctuations and to reduce investors risks. An index must thus have a balanced

representation of all sectors.

Optimum size - More stocks lead to greater diversification but the limiting factor is

the size of the index. Increasing number of stocks in an index from 10 to say 30 gives

a sharp reduction in risks but increasing the number beyond a point does very little in

risk reduction. Further it might lead to addition of illiquid stocks. For example, the

optimal size for BSE Sensex is 30.


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Market Capitalization: The index should include primarily the stocks of companies

that have significant market capitalization with respect to the index such that any

major change in the price of the stock is reflected in the index. For example in BSE

30 Index, the scrip must have a minimum of 0.5% of the market capitalization of the

Index.

SCOPE OF INDIAN MARKET

Times are really quite exciting; an ever increasing plethora of events followed the

global financial crisis. With globalization and innovation in the financial markets at

its peak - it is very essential to study the market risks and requirements. Over the

years, the India stock market has undergone major changes to remain at par with theglobal peers. With global trade and finance getting more dynamic day by day, the

India stock market is not far behind to experience these developments. This has

helped the financial structure of India get more innovative

RATIO ANALYSIS

LIQUIDITY RATIOS-

Liquidity refers to the ability of a firm to meet its obligations in short run, usually oneyear. Liquidity ratios are generally based on the relationship between current assets (thesource for meeting short term obligations) and current liabilities.

CURRENT RATIO The ratio is mainly used to give an idea of the company's abilityto pay back its short-term liabilities (debt and payables) with its short-term assets (cash,inventory, receivables). The higher the current ratio, the more capable the company is of

paying its obligations.

CURRENT RATIO = CURRENT ASSETS

CURRENT LIABILITIES


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Current ratio for Motilal Oswal Financial Services has been very high in theprevious year 200. Though in 2009, it has reduced from 12.91 to 11.42, it stillremains a very high figure. This indicates that the company has greater shortterm solvency.

Indiabulls Securities possesses current assets that are almost twice its currentliabilities. But current assets with Motilal Oswals are far greater than itscurrent liabilities.

Both the companies maintain more than the satisfactory margin of currentassets over current liabilities. Short term creditors of the company areprimarily interested in knowing the companys ability to pay its shortterm creditors as and when they become due.

CASH RATIO - The cash ratio is the most stringent and conservative of the threeshort-term liquidity ratios (current, quick and cash). It only looks at the most liquidshort-term assets of the company, which are those that can be most easily used to payoff current obligations.

CASH RATIO = CASH & BANK BALANCE + CURRENTINVESTMENTS

CURRENT LIABILITIES

CURRENT RATIO

Mar' 2008 Mar'2009 Mar' 2010

NDIABULLS SECURITIES 1.16 1.22 0.93

MOTILAL OSWAL FINANCIAL SERVICES 12.91 11.42 7.37
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CASH RATIO

Mar' 2008 Mar'2009 Mar' 2010

INDIABULLS SECURITIES 1.41 2.6 1.78MOTILAL OSWAL FINANCIAL SERVICES 1.97 0.048 5.21

The cash ratio for Indiabulls decrease in 2010 after increasing in 2009. Thecompany possesses enough cash to meet its short term obligations.

The cash ratio for Motilal Oswals significantly increased in the year 2010 ascompared to year 2008-09. But this ratio also suffered a fall in 2009 as against theyear 2008. Motilal Oswals also have enough ready cash to meet its short termobligations. Moreover the company also has an opportunity to invest this readycash into revenue generating purposes.

PROFITABILITY RATIOS-

Profitability reflects the final result of business operations. There are two types ofprofitability ratios:

Profit margin ratios show the relationship between profit and sales.

Rate of return ratios reflect the relationship between profit and investment.

NET PROFIT RATIO- This ratio measures the rate of net profit earned on sales.It reflects efficiency with which a firm produces its products as well as pricing. It is

better to have high net profit ratio for a company because it indicates higherprofitability for the company.

NET OPERATING PROFITNET PROFIT RATIO =

NET SALES


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NET PROFIT RATIO

Mar' 2008 Mar'2009 Mar' 2010

INDIABULLS SECURITIES 67.86% 8.01% 37.51%MOTILAL OSWAL FINANCIAL SERVICES 79.27% 92.99% 91.97%

Net profit ratio for Indiabulls has increase considerably as compared to theprevious year 2008-09 when it increased. This increase is due to gain in operatingprofit and sales while operating profit increased by greater proportion. Thisdecrease in operating profit may be due to increase in cost of sales or due todecrease in sales revenue owing to fall in selling price while expenses increased.

For Motilal Oswals, the ratio has increased annually for the three consecutive

years. It measures the overall efficiency of management. But this may not be atrue picture and the increased ratio may be due to increase in sales without acorresponding increase in cost of goods sold.

Return on Equity ratio- is perhaps the most important of all thefinancial ratios to investors in the company. It measures the return on the moneythe investors have put into the company. This is the ratio potential investors lookat when deciding whether or not to invest in the company

RETURN ON EQUITY

Mar' 2008 Mar'2009 Mar' 2010

INDIABULLS SECURITIES 69.10% -4.65% 27.76%MOTILAL OSWAL FINANCIAL

SERVICES 4.32% 10.45% 8.95%

It had a poorReturn on Equity of 4.32 % in 2008 but it increased gradually to 10.45 in2009 and then to 27.76% in 2010 which shows that the companys ability to generateprofit from its investors money has improved a lot in this period.


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ForIndiabulls, Return on Equity from 69.10% in 2008 to -4.65% in 2009 which showsthat the companys ability to generate profit from its assets had improved in this 1 year.However, it got up to 27.76% in 2010 which means the company lost its ability togenerate profit from its assets quite a lot

LEVERAGE RATIOS-

Financial Leverage refers to the use of debt finance. Leverage Ratios help in assessingthe risk arising from the use of debt capital.

DEBT EQUITY RATIO- The debt equity ratio shows the relative contributions ofcreditors and owners. The lower the debt equity ratio, the higher the degree of protectionenjoyed by the creditors.

DEBTDEBT EQUITY RATIO =

EQUITY DEBT EQUITY RATIO

Mar' 2008 Mar'2009 Mar' 2010

INDIABULLS SECURITIES 1.07 0.41 1.45

MOTILAL OSWAL FINANCIAL SERVICES 0.13

Debt equity ratio for Indiabulls increased in the year 2010 as compared to the year 2009.This ratio increased due to greater proportionate increase in debt as against a minimalincrease in equity. In 2010, the ratio increase from 0.41 to 1.45 this increase was due toincrease in debt as well as the equity but the increase in 2010 was lower than increase in2009.

There is no debt in Motilal Oswal during 2008 to 2009. It is a company financed whollyfrom its internal equity but in 2010 ratio is 0.13.

DEBT RATIO- A ratio that indicates what proportion of debt a company hasrelative to its assets. The measure gives an idea to the leverage of the companyalong with the potential risks the company faces in terms of its debt-load.


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DEBT RATIO = TOTAL DEBT

TOTAL ASSET

DEBT RATIO

Mar' 2008 Mar'2009 Mar' 2010


MOTILAL OSWAL FINANCIAL SERVICES 0.111

Debt ratio in 2010 increased when compared to the same in 2008-09 but experienced anincrease in 2008. This decrease is because the amount of borrowings with the company in2009 decreased against the borrowings in 2008. Also the total assets possessed decreasedi.e. the proportion of debt relative to its assets reduced by approximately 50% of what itwas in 2008.Motilal Oswal is a self sustained company and possesses no borrowings. It is a companywholly financed from its internal equity.

ACTIVITY RATIO-

Activity ratios help investors evaluate a firms ability to effectively and efficientlymanage its operations and assets. These ratios are based on the relationship between thelevel of activity, represented by sales or cost of goods sold, and the levels of variousassets.

CAPITAL TURNOVER RATIO- Capitalturnoveris used to calculatetherateofreturn on common equity, and is ameasureof how wellacompanyusesits stockholders'equityto generaterevenue. The higher theratiois, the more efficiently a company is using its capital.

CAPITAL TURNOVER RATIO = COST OF SALES
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CAPITAL EMPLOYED

Capital turnover ratio for Indiabulls declined in 2009 as against 2008. Though theratio improved in the previous year 2010 but it still remained lower than what thecompany realized in 2008. However it has been comparatively successful inmaking efficient use of financial resources at its disposal.

Whereas Capital turnover ratio for Motilal Oswals stands out to be very low.Moreover it declined in 2010 by a significant value.

NET WORKING CAPITAL TURNOVER RATIO A Company usesworking capital (current assets - current liabilities) to fund operations and

purchase inventory. These operations and inventory are then converted into salesrevenue for the company. The working capital turnover ratio is used to analyzethe relationship between the money used to fund operations and the salesgenerated from these operations..

NET WORKING CAPITAL TURNOVER RATIO= COST OFSALES/ NET WORKING CAPITAL

NET WORKING CAPITAL TURNOVER RATIO

Mar' 2008 Mar'2009 Mar' 20010


Mar' 2008 Mar'2009 Mar' 2010




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Net working capital turnover for Indiabulls increase in 2010 as compared to thesame in 2008. Both the net sales and the net working capital gain in 2010.

Even though it declined internally, it still remained a high ratio in comparison tothe ratio realized by Motilal Oswals whose ratio stands at significantly lowerlevels. A higher ratio here indicates efficient use of working capital and quickturnover of current assets. While lower ratio indicates low turnover of theseassets.

INTRODUCTION TO DERIVATIVESA derivative is a product whose value is derived from the value of one or more basic

variables called bases (underlying assets index) in a contractual manner. The underlying

assets can be equity, forex, commodity, bullion or any other assets. The emergence of the

market for derivative products, most notably forwards, future & option can be traced

back to the willingness of risk adverse economic agent to guard themselves against

uncertainties arising out of fluctuations in assetprices. By their very nature, the

financial markets are marked by a very high degreeof volatility. Through the use of

derivatives products, it is possible to partially orfully transfer price risks by locking

in asset price.

The emergence of the market for derivative products can be traced back to the

willingness of risk averse economic agent 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 derivatives products, it is

possible to partially or fully transfer price risks by locking in asset price.

The financial derivatives came into spotlight in post- 1970 period due to growing

instability in the financial markets. However, since their emergence, these products have


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become very popular and by 1990s, they accounted for about two third of total

transactions in the derivatives products.

For example, wheat farmers may wish to sell their harvest at a future date to

eliminate the risk of a change in prices by that date. Such a transaction is an example of

derivative. The price of this derivative is driven by the spot price of wheat, which is the

underlying.

In recent years, the market for financial derivatives has grown tremendously both in terms

of variety of instruments available, their complexity and also turnover. The factorsgenerally attributed as the major driving force behind growth of financial derivatives are:

a) Increased volatility in asset prices in financial markets.

b) Increased integration of national financial markets with the international markets.

c) Marked improvement in communication facilities and sharp decline in their costs.

d) Development of more sophisticated risk management tools, providing economic agents

a wider choice of risk management strategies.

The need for a derivatives market:

The derivatives market performs a number of economic functions:

They help in transferring risks from risk a verse people to risk oriented people.

They help in the discovery of future as well as current prices.

They catalyze entrepreneurial activity. They increase the volume traded in markets because of participation of risk

adverse people in greater numbers.

They increase savings and investment in the long run.

Participants: - The following three broad categories of participants: hedgers, speculatorsand arbitrageurs trade in the derivatives market.


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Hedgers- face risk associated with the price of an asset. They use futures and optionsmarket to reduce or eliminate this risk associated with price of an asset.

Speculators wish to bet on future movements in the price of an asset. Future and

Option contracts can give them an extra leverage. They can increase both the potentialgains and potential losses in a speculative venture.

Arbitrageurs are in business to take advantage of a discrepancy between prices in twodifferent markets. If, for instance they see the future price of an asset getting out of linewith the cash price, they will take offsetting positions in the two markets to lock in aprofit.

Types of derivatives:-

1) Forwards:- A forward contract is a customized contract between two entities,

where settlement takes place on a specified date in the future at todays pre-agreed

price.

2) Futures: - A future contract is an agreement between two parties to buy or sell an

asset at a certain time in the future at a certain price. Future contracts are specialtypes forward contracts in the sense that the former are standardized exchange

traded contracts.

3) Options are of two types- Calls and Puts.

Call gives the buyer the right but not the obligation to buy a given quantity

of the underlying assets, at a given price on or before a given future date.

Put gives the buyer the right but not the obligation to sell a given quantity of

the underlying assets at a given price on or before a given date.


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4) Warrants: - Option generally has lives of up to one year; the majority of options traded

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

called warrants and are generally traded over the counter.

5) Leaps: The acronyms LEAPS means long term equity anticipation securities. These are

options having a maturity of up to three years.

6) Baskets: Baskets options are option on portfolios of underlying assets. The underlying

asset is usually a moving average or a basket of assets.

7) Swaps: - Swaps are private agreement between two parties to exchange cash flows in

the future according to a prearranged formula. They can be regarded as portfolios offorward contracts. The two commonly used swaps are;-

Forwards

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 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.

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 been settled by delivery of the assets

If the party wishers to reverse the contract, he has to compulsory go to the same

counterparty, which often results in high prices being charged.


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Future: Future as per the stock market definition it is a contract between the buyer and

seller to settle or execute a trade in some future date at a pre agreed price.

For example If you bought 100 shares of Tatasteel at 575 with the condition that the

trade will be settled 3 months from now then it is called a future contract. Once the

contract is formed then both the parties need to obligate the contract till the end of the

contract period in daily basis by the process of Mark to Market Margin procedure. Refer

the previous example of Tatasteel if Tatasteel fall by Rs10 today then for 100 shares you

need to pay 100X10=Rs1000 to the seller . This amount Rs1000 is called the mark to

market margin. one most important thing is this trade is going to happen in some future

date so both you and the seller need to pay some initial margin on the trade value to the

person who regulated this trading activity. In our case the stock exchange and the broker

is regulating the trade hence you need to pay the margin to your stock broker.

Futures terminology:

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

2) Futures price: The price at which the futures contract trades in the futures

market.

3) Contract cycle: The period over which contract trades. The index future contract

on the NSE have one month, two month and three month expire cycles Which

expires on the last Thursday of the month.

4) Expiry date: It is the date specified in the futures contract. Thus is the last date

on which the contract will be traded at the end or which it will cease to exist.


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5) Contract size: The amount of asset that has to be delivered less than one contract.

6) Basis: In the context of financial futures, basis can be defined on the future price

minus the spot price. There is a different basis for each delivery month for each

contact. In a normal market basis is positive.

7) Cost of carry: the relationship between futures price and spot price can be

summarized in terms of what is known as the cost of carry.

Major Advantages of Futures Trading over Stock Trading

Margin is available: In future trading you get margin to buy (but can hold only up to

maximum of 3 months), while in stock trading you must have that much of amount in

your account to buy.

For example - If you plan to buy stock XYZ at Rs. 100 and quantity 1000 shares then you

have to pay 1 lakh rupees (RS 100 x1000 qty). But if you plan to buy XYZ future

contract and that contract lot size has 1000 quantity of shares then instead of paying 1

lakh rupees you have to pay just 20% to 30% of whole amount which comes to 20thousand to 30 thousand rupees.

In short in future trading you have to pay just 20% to 30% of the whole amount what you

pay if you buy stock of that price. But limitation for this is your expiry period. Means if

you bought future of one month expiry then you have to square off within that one month

likewise you can buy maximum of three months expiry.

Possible to do short selling :You can short sell futures- You can sell futures without

buying them which is called short selling and later buy within your expiry period, to

cover up your positions. This is not possible in stocks. You cant sell stocks before

buying them in delivery (you can do in intraday). You can short sell futures and can

cover off within your expiry period.


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For example - If expiry period of your future contract is of 1 month then you have time

frame of one month to cover off your order like wise if your future expiry period is of

two months then you have time frame of two months and this continues till three months

and not more then three months.

In short selling of futures also you get margin as you get in buying of futures

Disadvantages of Future Trading over Stock Trading

Limitation on holding: If you buy or sell a future contract then you have limitation of

time frame to square off your position before expiry date.

For example - If you buy or sell future contract of one month expiry period then

you have to square off your position before your expiry date of that month, so in this

example you got one month period. So likewise if you go for two month expiry period

then you get 2 months and if you go for three month expiry then you will get 3 month

expiry period to square off your position.

Level of Risk: Due to margin facility in future trading you may earn huge profit by

investing fewer amounts but at the contrary side if your trade goes wrong then you may

have to suffer huge loss.

Options

Option is a legal contract in which the writer of the option grants to the buyer, the right to

purchase from or sell to the writer a designated instrument or a scrip at a specified pricewithin a specified period of time.

Parties involved1. buyer of the asset2. exchange3. seller of the asset


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Options are of two types-

1. Call Option

2. Put Option1. Call option - A call option gives the option holder a right to buy an asset at a certain

price within a specified period of time. A call option buyer is said to have a long

position.

2. Put option - A put option gives the option holder a right to sell an asset at a certainprice within a specified period of time. A put option holder is said to have a shortpositions.

Options terminologies;

Index option: these options have the index as the underlying. Some options areEuropean, American. E.g. index futures contracts, index options contracts arealso settled.

Stock option: stock options are options on individual stock. Options currentlytrade on over 500 stocks in the US.

Buyer of an option: the buyer of an option is the one who by paying the optionpremium buys the right but not the obligation to exercise his option on theseller\writer.

Writer of an option: the writer of a call\put is the one who receives the optionpremium and is thereby obliged to sell \buy the asset if the buyer wishes toexercise his option.

Option price: it is the price which the option buyer pays to the option seller. It isalso referred as the option premium.

Expiration date: the date specified in the options contract is known as expirationdate, the exercise date, the striker date or the maturity.Strike price: the price specified in the options contract

Options strategies


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1. Long Call: A long call can be an ideal tool for investors who wish to participate from

an upward price movement in the underlying stock.

2. Long Put: A long put can be an ideal tool for an investor who wishes to participateprofitably from a downward price move in the underlying stock.

3. Married Put: An investor purchasing a put while at the same time purchasing an

equivalent number of shares of the underlying stock is establishing a married put

position- a hedging strategy with a name from an old IRS ruling.

4. Protective Put: An investor who purchases a put option while holding shares of theunderlying stock from a previous purchase is employing a protective put.

5. Covered Call: The covered call is a strategy in which an investor writes a call option

contract while at the same time owning an equivalent number of shares of the

underlying stock. If this stock is purchased simultaneously with writing the call

contract the strategy is commonly referred to as a buy-write. If the shares are already

held from a previous purchase it is commonly referred to an overwrite.

6. Cash Secured Put: According to the terms of a put contract, a put writer is obligated

to purchase an equivalent number of underlying shares at the puts strike price if

assigned an exercise notice on the written contract. Many investors write puts because

they are willing to be assigned and acquire shares of the underlying stock in exchange

for the premium received from the puts sales. For this discussion, a put writers

position will be considered as cash-secured if he has on deposit with his brokerage

firm a cash amount sufficient to cover such a purchase of all option contracts.

Advantages of Options:

i) The option holders loss is limited to the extent of premium paid at the time of entering

Into the options contract.


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ii) The holder/writer of the options has many strategies available before them to be

chosen upon.

iii) Forwards / futures contracts impose an obligation to perform whereas the option do

not impose such obligations

iv) No margins required for many kinds of strategies.

v) The options have certain favorable characteristics. They limit the downside risk

without limiting the upside. It is quiet obvious that there is a price which has to be paid

for this any way, which is known as the option premium.

Disadvantages of Options:

i) Options premium can be quiet high during volatile market condition.

ii) There is more liquidity in futures contract than most of the options contract. Entry and

exit of some markets are difficult.

iii) There are more complex factors affecting premium prices for options. Volatility and

time to expiration are often more important than price movement.

iv) Many options contract expire weeks before the underlying futures. This can be often

occur close to the final trading day of futures.

HEDGING

Hedging

Hedging is nothing but a mechanism to reduce or control risks involved in capital market.

Various risk involved in capital market:-

a) Price risk

b) Liquidity risk

c) Operational riskHedging plays an important role to combat these risks.

In a simple example, a miller may buy wheat that is to be converted into flour. At the

same time, the miller will contract to sell an equal amount of wheat, which the miller

does not presently own, to another trader. The miller agrees to deliver the second lot of

wheat at the time flour is ready for market and at the price current at the time of the


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agreement. If the price of the wheat declines during the period between the millers

purchase of the grain and the flours entrance onto the market, there will also be a

resulting drop in the price of the flour. That loss must be sustained by the miller.

However, since the miller has a contract to sell the wheat at the older, higher price, the

miller makes up for this loss on the flour sale by the gain on the wheat sales.

Terms in Hedging

Long Hedge:

Long hedge is the transaction when we hedge our position in cash market by going long

in derivatives market.

For example, let us assume that we are going to receive funds in the near future

and we want to invest it into the capital market. Also we expect the market to go up in the

near future, which is not desirable for us as we would have to invest more money. The

risk can be hedged by making use of derivatives such as F & O.

Short Hedge:

Short hedge is the hedge accomplished by going short in the derivatives market.

For example, we have a portfolio which we want to liquidate in the near future.Meanwhile prices of the scrip may go down, which is not favorable for us. Thus to

protect our portfolio value we can go short in the derivative market.

HEDGING WITH FUTURES

Buy futures for a month and sell futures in the same scrip for anothermonth, i.e. hedging within a month.

Example: Buy futures of June and sell futures of July. Buy delivery and sell futures for same quantity, i.e. hedging for one

month.

MECHANICS OF HEDGING THROUGH OPTIONS


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Hedging through options is a simple process.

Deciding on Call or Put options (i.e. whether to buy or sell a currency)

Determining number of contracts.

Selecting an acceptable exercise price, pay premium and conclude the contract. On maturity,

if market rate is less favorable, exercise option under contract and

if market rate is favorable, ignore the contract and buy or sell in the market.

HEDGING WITH OPTIONS

Buying both a call and a put option. Selling both call and put option.

Buy a call option for one strike price and sell another call option for somedifferent strike price.

ANALYSIS AND INTERPRETATION

CASE IMr. Bhandari bought 675 shares of Tisco few days before the budget @Rs. 350/- per

share, as general expectation from the budget was that it will be an infrastructure ofdevelopment focused budget. He was also bullish on Tisco.However Mr. Bhandari wanted to hedge against any downward movement of Tisco in themarket.

SOLUTION

There are following alternatives for Mr. Bhandari to hedge his position:i. Long put strategy

ii. Protection put strategy

iii. Bear put spread strategy

Since Mr. Bhandari has to protect his 675 shares of Tisco so in this case, to hedge againstany downward movement of Tisco, Mr. Bhandari will opt protective put strategy. So heshould buy 1 lot of put option of Rs.350/- strike price @ Rs.10/- premium at the sametime.Now the total cost of Bhandari is:-


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Bought Tisco @Rs.350/- share = 2,36,250/-Cost of 1 lot of Tisco put option @Rs.10/- = 6,750

2,43,000/-

ANALYSIS

S.NO. STOCK

PRICE

STOCK

VALUE

PUT

VALUE

COST OF

PREMIUM

RETURN

1 320 2,16,000 20,250 6,750 (6,750)2 330 2,22,750 13,500 6,750 (6,750)3 340 2,29,500 6,750 6,750 (6,750)4 350 2,36,250 0 6,750 (6,750)5 360 2,43,000 0 6,750 Nil6 370 2,49,750 0 6,750 6,7507 380 2,56,500 0 6,750 135008 390 2,63,250 0 6,750 20,2509 400 2,70,000 0 6,750 27,000

INTERPRETATION

1) The stock value is arrived at as (stock value x 675 shares).

2) If the stock price is below Rs.350/- in the spot market, the put option will beexecuted. Thus put value is arrived as : ( strike price stock price ) x 675

3) If the stock price goes below from Rs.360/- loss is limit to the extent of itspremium amount (Rs.10/-), or Rs.6750/-.

4) If the stock price goes up from Rs.360/- it can fetch unlimited profit as stock pricekeeps going up.

CASE IIMr. Bhalgat was mildly bullish on Bank of India. He already got 1900 shares of Bank ofIndia @Rs.110/- shares few days back. Though Mr. Bhagat, bullish on Bank of India,wanted to hedge against any downside movement of Bank of India due to budget relatedvolatility.

SOLUTION

That time Bank of India was trading around Rs.120-30 range.Thereare following alternatives for Mr. Bhalgat to hedge his position

i. Long put strategy

ii. Protection put strategy

iii. Bear call spread strategy


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Since Mr. Bhalgat is mildly bullish on BOI, he will opt Bull call spread strategy as thebest strategy, following things might be suggested-

a) Buy a July call option of BOI for I lot of strike price Rs.120/- shares, at apremium of Rs.12/-share.

b) Sell a July call option for 1 lot of BOI Rs.140/- strike price at a premium of Rs.2/-shares.

COSTS

Buying lot of call option of BOI(1900 x 12) = 22,800/-( - ) selling 1 lot of call option of BOI(1900 x 2) = 3,800/-

19,000/-

ANALYSIS

S.NO. STOCK

PRICE

STOCK

VALUE

BOUGHT

CALL

VALUE

SOLD

CALL

VALUE

COST

OF

PREMIUM

RETURN

1 90 1,71,000 0 0 19,000 (19,000)2 100 1,90,000 0 0 19,000 (19,000)

3 110 2,09,000 0 0 19,000 (19,000)4 120 2,28,000 0 0 19,000 Nil5 130 2,47,000 19,000 0 19,000 19,0006 140 2,66,000 38,000 0 19,000 38,0007 150 2,85,000 57,000 19,000 19,000 38,0008 160 3,04,000 76,000 38,000 19,000 38,000

INTERPRETATION

1) Stock price is arrived at as (stock price x 1900.

2) At any price above Rs.120/- shares bought call value is arrived at as {(stock price 120) x 1900}.

3) At any price above Rs.140/- share), sold call value is arrived at as {(stock price 140) x 1900}.

4) Return is maximum loss Rs.19,000 and maximum profit Rs.38,000.


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CASE IIIMr. Sonagra is a regular mid to long term investor. In the beginning of the month of theJuly he had not enough money in hand to invest in shares. He was supposed to get moneyat the end of the month.

However he is bearish on Titan. He want to buy Titan but not after few days as it couldlead to a loss of thousands.

SOLUTION

Since Mr. Sonagra has not sufficient amount to invest in shares, he will adopt only Longcall strategy to hedge his position.In such circumstance Mr. Sonagra will buy 1 lot (800 shares) of call option at a premiumof Rs.10/- per share the strike price of which is Rs.510/-.

Cost for 1 lot of Titan in call option will be800 x 10 = Rs.8,000/-

ANALYSIS

S.NO. STOCK

PRICE

STOCK

VALUE

COST OF

PREMIUM

VALUE OF

CALL

OPTION

1 480 3,84,000 8,000 02 490 3,92,000 8,000 03 500 4,00,000 8,000 04 510 4,08,000 8,000 05 520 4,16,000 8,000 106 530 4,24,000 8,000 207 540 4,32,000 8,000 308 550 4,40,000 8,000

INTERPRETATION

1) Though Mr. Sonagra bought a call option of a strike price of Rs.150/-, he expectsthat stock price will go up.

2) No matter how much stock price goes up more he can fetch profit more, becamehe can purchase at a fix stock price of Rs.510/-.


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3) If the stock price goes down, call option will not be executed, because purchasinga lot in Rs.510/- in downward movement does not sound reasonable.

4) In downward movement his loss will be limit to the extent of premium amount(Rs.8,000).

5) While in upward movement his profit will be unlimited as the price goes updeducting (premium+ stock price).

FINDINGSCASE I1) As the stock price go down value of put option increases.

2) Breakeven point (B.E.P.) for Mr. Bhandari in Rs. 360/- share or Rs. 2,43,000/-

3) Loss in limit to the extent of its premium

4) As the stock price goes up value of put option loses its significance

5) If the put option is not executed till its expiration period it will automatically

repudiate.

CASE II1) As the value of stock price goes up from strike price the bought call value and

sold call value increases.

2) Rs.120/- share or Rs.2,28,000/- is the breakeven point for Mr.Bhagat.

3) Mr.Bhagat made limit his profit and loss by buying and selling 1 lot of call option

simultaneously.

4) As the stock price goes down from its strike price the value of call option loses itssignificance.

CASE III


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1) Mr. Sonagra should be quite sure that the value of stock price will increase incoming future.

2) He will fetch profit when market will be at bullish by purchasing the shares @Rs.510/- share and selling it in more that Rs.520/- in spot market.

3) Mr. Sonagra has been given right but not obligation to buy shares @ Rs.510/- inlieu of Rs.10/- per share as premium whatever market condition may be.

4) The value of call option become insignificant if stock price goes below fromRs.510/-.

SUGGESTION

CASE II. Mr. Bhandari should be very conscious about premium rate and expiration period

before opting put option.

II. If the stock price starts to decline he should not execute his put optionimmediately because in a any of the lower cases he will lose Rs.6750/- while hemay fetch profit in going up of stock price after downward movement.

CASE III. Mr. Bhagat should adopt this strategy only in that case, when he is quite sure that

profit is not possible after a certain extent.

CASE IIII. Mr. Sonagra should buy September call option instead of July call option, because

during this gap stock price must go up.

II. When stock price reaches up to its highest level he should execute his call option.

KEY LEARNINGS


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Learned how to trade via Karvys online trading platform GOTX.

Role of major indexes i.e. NSE and BSE in Indian stock market.

Franchisee and remisership business plans and their documentation required.

How to open I-zone account, formalities and documents required. Learned few of the hedging strategies commonly used by investors.

Gained basic knowledge about the derivatives market.

References

http://www.the-finapolis.com/

http://www.karvy.com

http://www.mutualfundsindia.com/

http://www.valuresearchonline.com/

http://www.moneycontrol.com/

http://www.morningstar.com/

http://finance.yahoo.com/

http://economictimes.indiatimes.com/

http://money.rediff.com/

http://www.bseindia.com/

http://www.nseindia.com/
http://www.the-finapolis.com/http://www.karvy.com/http://www.mutualfundsindia.com/http://www.valuresearchonline.com/http://www.moneycontrol.com/http://www.morningstar.com/http://finance.yahoo.com/http://economictimes.indiatimes.com/http://money.rediff.com/http://www.bseindia.com/http://www.nseindia.com/http://www.the-finapolis.com/http://www.karvy.com/http://www.mutualfundsindia.com/http://www.valuresearchonline.com/http://www.moneycontrol.com/http://www.morningstar.com/http://finance.yahoo.com/http://economictimes.indiatimes.com/http://money.rediff.com/http://www.bseindia.com/http://www.nseindia.com/

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