employee retention- challenges & stratagies

8/7/2019 Employee Retention- Challenges & Stratagies

http://slidepdf.com/reader/full/employee-retention-challenges-stratagies 1/84

A

Project Report On

Employee Retention- Challenges & Stratagies

PREPARED BY

Sunshree Jain

A Report submitted in partial fulfillment of the

requirements of MBA

(2009 – 2010)

Dept. of Commerce & Management

University of Kota, Kota

Under Supervision of:Prof, Ummed Singh Date: 07/06/2010 Submitted to:

Dept of Commerce &Mgmt University of Kota,

Kota (Raj.)

Page | 1



DECLARATION

I hereby declare that this training

program entitled “ A study on Equity

market in ANANDRATHI “

EQUITIES–Cash &Derivatives ” is my work, carried

out under the guidance of my guide

Mr. Rajkumar Jain, Mr. Vinod Pandey

& other employees of company. This

report neither full nor in part has ever

been submitted for award of any other

degree of either this university or any

other university.

(Surendra Singh)

Page | 2



CERTIFICATE

Page | 3



ACKNOWLEDGM

ENT

I gratefully acknowledge the expert

support and guidance extended to me by

ANANDRATHI and the guidance of Mr.

Rajkumar Jain AND Mr. Vinod pandey and

other employees of company as regards this

project and the subsequent report. There

impartial and enlightened guidance and the

sophisticated communication and the

commodities knowledge has been on

immense help and has been paramount in

this project and report maintaining and further

meeting the requisite standards and the deadlines.

.

Page | 4



(Surendra Singh)

Executive

Summary

In few years Share Market has emerged as a toolfor ensuring one’s financial well being. ShareMarkets have not only contributed to the Indiagrowth story but have also helped families tapinto the success of Indian Industry. Asinformation and awareness is rising more andmore people are enjoying the benefits of investing in Share Markets. once people are

aware of Share Market investment opportunities,the number who decide to invest in ShareMarkets increases to as many as one in everyfive people.

This Project gave me a great learningexperience and at the same time it gave meenough scope to implement my analytical ability.

Page | 5



The Project gives an insight about Share Marketand its various aspects, the Company Profile,Objective of the study, Research Methodology.One can have a brief knowledge about Share

market and its basics through the project. I hopethe research findings and conclusion will be of use.

ANAND RATHI SECURITIES: A

BRIEF PROFILE

Anand Rathi

(AR) is a leading full service securities firm

providing the entire gamut of financial services.

The firm, founded in 1994 by Mr. Anand Rathi,

today has a pan India presence with 450

Page | 6



locations as well as an international presence

through offices in Dubai and Bangkok. AR

provides a breadth of financial and advisory

services including wealth management,investment banking, corporate advisory,

brokerage & distribution of equities, commodities,

mutual funds and insurance, structured products -

all of which are supported by powerful research

teams.

The firm's philosophy is entirely client centric,

with a clear focus on providing long term value

addition to clients, while maintaining the highest

standards of excellence, ethics and

professionalism. The entire firm activities are

divided across distinct client groups: Individuals,

Private Clients, Corporate and Institutions and

was recently ranked by Asia Money 2006 poll

amongst South Asia's top 5 wealth managers for

the ultra-rich.

In year 2007 Citigroup Venture Capital

International joined the group as a financial

partner.

Page | 7



MILESTONES

• 1994: Started activities in consulting and

Institutional equity sales with staff of 14.

• 1995: Set up a research desk and

empanelled with major institutional

investors.

• 1997: Introduced investment banking

businesses Retail brokerage services

launched.

• 1999: Lead managed first IPO and

executed first M & A deal.

• 2001: Initiated Wealth Management

Services.

• 2002: Retail business expansion

recommences with ownership model.

• 2003: Wealth Management assets cross

Rs1500 crores

Insurance broking launched. Launch of

Wealth Management services in Dubai

Retail Branch network exceeds 50 .

Page | 8



• 2004: Commodities brokerage and real

estate services introduced

Wealth Management assets cross

Rs3000crores.Institutional equities business re launched

and senior research team put in place.

Retail Branch network expands across 100

locations within India.

• 2005: Real Estate Private Equity Fund

LaunchedRetail Branch network expands across 200

locations within India

• 2006: AR Middle East, WOS acquires

membership of Dubai Gold & Commodity

Exchange (DGCX) .

Ranked amongst South Asia's top 5 wealth

managers for the ultra-rich by Asia Money

2006 poll.

Ranked 6th in FY2006 for All India Broker

Performance in equity distribution in the

High Net worth Individuals (HNI) Category.

Ranked 9th in the Retail Category having

more than 5% market share. its presencein all States across the country with offices

at 300+ locations within India.

• 2007: Citigroup Venture Capital

International picks up 19.9% equity stake.

Page | 9



Retail customer base crosses 200

thousand.

Establishes presence in over 450 locations.

• 2009: Started with Currency Derivatives

which deals only in USD & INR.

MANAGEMENT TEAM

Our senior Management comprises a diverse talent pool that brings together rexperience from across industry as well as financial services.

Mr. Anand Rathi - Group ChairmanChartered AccountantPast President, BSEHeld several Senior Management positions with one of India's largest industria

Page | 10



groups

Mr. Pradeep Gupta - Vice Chairman

Plus 17 years of experience in Financial Services

Mr. Amit Rathi - Managing Director Chartered Accountant & MBAPlus 11 years of experience in Financial Service

Bombay Stock Exchange Limited (the Exchange

the oldest stock exchange in Asia with a rich heritage. Popularly known

"BSE", it was established as "The Native Share & Stock Brok

Association" in 1875. It is the first stock exchange in the country to obt

permanent recognition in 1956 from the Government of India under

Page | 11



Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal a

pre-eminent role in the development of the Indian capital market is wid

recognized and its index, SENSEX , is tracked worldwide

• India's oldest and first stock exchange: Mumbai (Bombay) Sto

Exchange. Established in 1875. More than 6,000 stocks listed.

• Total number of stock exchanges in India: 22

• They are in: Ahmedabad, Bangalore, Calcutta, Chennai, Delhi etc

• There is also a National Stock Exchange (NSE) which is located

Mumbai.

• There is also an Over the Counter Exchange of India (OTCE

which allows listing of small and medium sized companies.

• The regulatory agency which oversees the functioning of sto

markets is the Securities and Exchange Board of India (SEBI), which

also located in Bombay.

Today, BSE is the world's number 1 exchange in terms of th

number of listed companies and the world's 5th in transacti

numbers.

SERVICES

Page | 12



BSE also has a wide range of services to empower investors a

facilitate smooth transactions:

Investor Services: The Department of Investor Services redresgrievances of investors. BSE was the first exchange in the countryprovide an amount of Rs.1 million towards the investor protecfund; it is an amount higher than that of any exchange in the counBSE launched a nationwide investor awareness programme - 'SInvesting in the Stock Market' under which 264 programmes were hin more than 200 cities.

The BSE On-line Trading (BOLT): BSE On-line Trad

(BOLT) facilitates on-line screen based trading in securities. BOLTcurrently operating in 25,000 Trader Workstations located acrover 359 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the wor

first centralized exchange-based Internet trading systBSEWEBX.com. This initiative enables investors anywhere in

world to trade on the BSE platform.

Surveillance: BSE's On-Line Surveillance System (BOS

monitors on a real-time basis the price movements, volume positioand members' positions and real-time measurement of default rmarket reconstruction and generation of cross market alerts.

BSE Training Institute: BTI imparts capital market train

and certification, in collaboration with reputed management instituand universities. It offers over 40 courses on various aspects of capital market and financial sector. More than 20,000 people haattended the BTI programmes.

Page | 13



Awards

• The World Council of Corporate Governance has awarded the

Golden Peacock Global CSR Award for BSE's initiatives inCorporate Social Responsibility (CSR).

• The Annual Reports and Accounts of BSE for the year ended Mar31, 2006 and March 31 2007 have been awarded the ICAI awardsfor excellence in financial reporting.

• The Human Resource Management at BSE has won the Asia -Pacific HRM awards for its efforts in employer branding throughtalent management at work, health management at work andexcellence in HR through technology Drawing from its rich past aits equally robust performance in the recent times, BSE will continto remain an icon in the Indian capital market

Vision

"Emerge as the premier Indian stock exchange bestablishing global benchmarks"

The National Stock Exchange (NSE) is Ind

leading stock exchange covering various cities and towns across

country. NSE was set up by leading institutions to provide a modern, f

automated screen-based trading system with national reach. T

Page | 14



Exchange has brought about unparalleled transparency, speed

efficiency, safety and market integrity.

NSE has played a catalytic role in reform

the Indian securities market in terms of microstructure, market practi

and trading volumes. The market today uses state-of-art informa

technology to provide an efficient and transparent trading, clearing

settlement mechanism, and has witnessed several innovations in produ

& services viz. demutualisation of stock exchange governance, scr

based trading, compression of settlement cycles, dematerialisation

electronic transfer of securities, securities lending and borrow

professionalisation of trading members, fine-tuned risk managem

systems.

Securities and Exchange Board of India (SEBI):

The Securities and Exchan

Board of India (SEBI) is an autonomous body established by an ac

parliament in 1992. SEBI is controlled by a statutory board consisting

Page | 15



one chairman and six members. SEBI’s main objective is to protect

interest of investors, and to regulate all securities market particularly

share market. SEBI is a market regulator whose major functions inclu

regulation, superintendence and control of all securities markets in Ind

overseeing the functioning of stock exchanges, framing rules for trad

practices, attending to and removing investor grievances, framing rules

and regulating public issues, training and education of investors, and

matters pertaining to market intermediaries.TRADING

Trading on the BOLT System is conducted from

Monday to Friday between 9:55 a.m. and 3:30

p.m. The scrip’s traded on the Exchange have

been classified into 'A', 'B1', 'B2','T', ‘S', ‘TS'

'F' ,'G' and 'Z' groups.

The Exchange has for the guidance and benefit

of the investors have classified the scrip’s in the

Equity Segment into 'A', 'B1', 'B2','T', ‘S', ‘TS' and

'Z' groups on certain qualitative and quantitative

parameters which include number of trades,

value traded, etc.

The “F” Group represents the Fixed Income

Securities.

The “T” Group represents scrip's which are

settled on a trade to trade basis as a surveillance

measure.

The “S” Group represent scrip’s forming part of

the “ BSE-Indonext” segment . The “TS” Group

Page | 16



consist of scrip’s in the “ BSE-Indonext” segment

which are settled on a trade to trade basis as a

surveillance measure.

Trading in Govt. Securities for retail investors isdone under "G" group.

The 'Z' group was introduced by the Exchange in

July 1999 and includes the companies which

have failed to comply with the listing

requirements of the Exchange and/or have failed

to resolve investor complaints or have not made

the required arrangements with both the

Depositories, viz., Central Depository Services (I)

Ltd. (CDSL) and National Securities Depository

Ltd. (NSDL) for dematerialization of their

securities.

The Exchange also provides a facility to the

market participants for on-line trading of odd-lotsecurities in physical form in 'A', 'B1', 'B2' ‘T','S',

‘TS' and 'Z' groups and Rights renunciations in all

the groups of scrip’s in the Equity Segment.

With effect from December 31, 2001, trading in all

securities listed in equity segment of the

Exchange takes place in one market segment,viz., Compulsory Rolling Settlement Segment

(CRS).

The scrip’s of the companies which are in demat

can be traded in market lot of one but the

Page | 17



securities of companies which are still in the

physical form are traded on the Exchange in the

market lot of generally either 50 or 100. However,

the investors having quantities of securities lessthan the market lot are required to sell them as

"Odd Lots". The facility of trading in odd lots of

securities not only offers an exit route to investors

to dispose of their odd lots of securities but also

provides them an opportunity to consolidate their

securities into market lots.

This facility of selling physical shares in

compulsory demat scrips is called an Exit Route

Scheme. This facility can also be used by small

investors for selling upto 500 shares in physical

form in respect of scrips of companies where

trades are required to be compulsorily settled by

all investors in demat mode.

Listed Securities

The securities of companies which have signed

Listing Agreement with the Exchange are traded

at the Exchange as "Listed Securities". Baring a

few scrip’s, all scrip’s traded in the Equity

Segment at the Exchange fall in this category.

Permitted Securities

Page | 18



To facilitate the market participants to trade in

securities of the companies which are actively traded

at other Regional Stock Exchanges but are not listed

on the Exchange, the Exchange has in April 2002

decided to permit trading in such securities as

“Permitted Securities" provided they meet the

relevant norms specified by the Exchange.

Tick Size:

Tick size is the minimum differences in rates

between two orders on the same side i.e., buy or

sell, entered on the system for particular scrip.

Trading in scrip’s listed on the Exchange is done

with the tick size of 5 paise.

However, in order to increase theliquidity and enable the market participants to put

orders at finer rates, the Exchange has reduced

the tick size from 5 paise to 1 paise in case of

units of mutual funds, securities traded in "F"

group and equity shares having closing price upto

Rs. 15/- on the last trading day of the calendar

month. Accordingly, the tick size in various scrip’s

quoting upto Rs.15/- is revised to 1 paise on the

first trading day of month. The tick size so revised

on the first trading day of month remains

Page | 19



unchanged during the month even if the prices of

scrip’s undergo change.

Computation of closing price of scrip’s in

the Cash Segment:

The closing price of scrip's is computed by the

Exchange on the basis of weighted average price

of all trades executed during the last 30 minutes

of the continuous trading session. However, if

there is no trade recorded during the last 30

minutes, then the last traded price of scrip in the

continuous trading session is taken as the official

closing price.

Compulsory Rolling Settlement (CRS)

Segment:

As per the directive by SEBI, all transactions in all

groups of securities in the Equity Segment and

Fixed Income securities listed on the Exchange

are required to be settled on T+2 basis w.e.f.

from April 1, 2003. The settlement calendar,

which indicates the dates of the varioussettlement related activities, is drawn by the

Exchange in advance and is circulated among

the market participants.

Page | 20



Under

rolling settlements, the trades done on a

particular day are settled after a given number of

business days. A T+2 settlement cycle meansthat the final settlement of transactions done on

T, i.e., trade day by exchange of monies and

securities between the buyers and sellers

respectively takes place on second business day

(excluding Saturdays, Sundays, bank and

Exchange trading holidays) after the trade day.

The transactions in securities of companies which

have made arrangements for dematerialization of

their securities are settled only in demat mode on

T+2 on net basis, i.e., buy and sell positions of a

member-broker in the same scrip are netted and

the net quantity and value is required to be

settled. However, transactions in securities of companies, which are in "Z" group or have been

placed under "trade to trade" by the Exchange as

a surveillance measure (“T” and “TS” group) , are

settled only on a gross basis and the facility of

netting of buy and sell transactions in such scrip’s

is not available.

The Exchange has introduced a new segment

named “BSE Indonext” w.e.f. January 7, 2005.

“S” group consists of scrips from “B1” & “B2”

group on BSE and companies exclusively listed

Page | 21



on regional stock exchanges having capital of 3

crores to 30 crores. All trades in this segment are

done through BOLT system under S group.

The transactions in 'F' group securities

representing "Fixed Income Securities" and " G"

group representing Govt. Securities for retail

investors are also settled at the Exchange on T+2

basis.

In case of Rolling Settlements, pay-in and pay-

out of both funds and securities is completed on

the same day.

The

members are required to make payment for

securities sold and/ or deliver securities

purchased to their clients within one working day

(excluding Saturday, Sunday, bank & Exchange

trading holidays) after the pay-out of the funds

and securities for the concerned settlement is

completed by the Exchange. This is the

timeframe permitted to the members of the

Exchange to settle their funds/ securities

obligations with their clients as per the Byelaws of

the Exchange.

The following table summarizes the steps in the

Page | 22



trading and settlement cycle for scrip’s under

CRS

T:

• Trading on BOLT and daily downloading of

statements showing details of

transactions and margins at the end of

each trading day.

• Downloading of provisional securities and

funds obligation statements by member-

brokers.

• 6A/7A* entry by the member-brokers/

confirmation by the custodians.

T+1: Confirmation of 6A/7A data by the

Custodians upto 11:00 a.m. Downloading of final

securities and funds obligation statements by

members.

T+2: Confirmation of 6A/7A data by the

Custodians upto 11:00 a.m.

Downloading of final securities and funds

obligation statements by members .

T+3: Auction on BOLT at 11.00 a.m.

T+4: Auction pay-in and pay-out of funds and

securities by 12:00 noon and 1:30 p.m.

respectively.

Page | 23



Thus, the pay-in and

pay-out of funds and securities takes places on

the second business day (i.e., excluding

Saturday, Sundays and bank & Exchange tradingholidays) of the day of the execution of the trade.

* 6A/7A :

A mechanism whereby the obligation of settling

the transactions done by a member-broker on

behalf of a client is passed on to a custodian

based on confirmation of latter. The custodian

can confirm the trades done by the members on-

line and upto 11 a.m. on the next trading day.

The late confirmation of transactions by the

custodian after 11:00 a.m. upto 12:15 p.m., on

the next trading day is, however, permittedsubject to payment of charges for late

confirmation @ 0.01% of the value of trades

confirmed or Rs. 10,000/-, whichever is less.

The settlement of the trades (money and

securities) done by a member-broker on his own

account or on behalf of his individual, corporate

or institutional clients may be either through the

member-broker himself or through a SEBI

registered custodian appointed by him/client. In

case the delivery/payment in respect of a

Page | 24



transaction executed by a member-broker is to be

given or taken by a registered custodian, then the

latter has to confirm the trade done by a member-

broker on the BOLT System through 6A-7A entry.For this purpose, the custodians have been given

connectivity to BOLT System and have also been

admitted as clearing member of the Clearing

House. In case a transaction done by a member-

broker is not confirmed by a registered custodian

within the time permitted, the liability for pay-in of

funds or securities in respect of the same

devolves on the concerned member-broker.

The following statements can be downloaded by

the members in their back offices on a daily

basis.

a. Statements giving details of the daily

transactions entered into by the members.

b. Statements giving details of margins

payable by the member-brokers in respect

of the trades executed by them.

c. Statements of securities and fund

obligation.

d. Delivery/Receive orders for delivery

/receipt of securities.

The Exchange

generates Delivery and Receive Orders for

Page | 25



transactions done by the members in A, B1, B2,

S and F and G group scrip’s after netting

purchase and sale transactions in each scrip

whereas Delivery and Receive Orders for “T”,“TS”,"C" & "Z" group scrip’s and scrip’s which are

traded on the Exchange on "trade to trade" basis

are generated on gross basis, i.e., without netting

of purchase and sell transactions in a scrip.

However, the funds obligations for the members

are netted for transactions across all groups of

securities.

The Delivery Order/Receive

Order provides information like the scrip and

quantity of securities to be delivered/received by

the members through the Clearing House. The

Money Statement provides scrip wise/item wise

details of payments/receipts of monies by the

members in the settlement. The Delivery/Receive

Orders and Money Statement, as stated earlier,

can be downloaded by the members in their back

office.

Settlement

Pay-in and Pay-out for 'A', 'B1', 'B2', ‘T’, ‘S’, ‘TS’,

'C', "F", "G" & 'Z' group of securities.

Page | 26



The trades done on BOLT/Exchange by the

members in all the securities in CRS are now

settled on the Exchange by payment of monies

and delivery of securities on T+2 basis. Alldeliveries of securities are required to be routed

through the Clearing House,

The Pay-in /Pay-out of funds based on the money

statement and that of securities based on

Delivery Order/ Receive Order issued by the

Exchange are settled on T+2 day.

Demat Pay-in:

The members can effect pay-in of dematsecurities to the Clearing House through either of

the Depositories i.e. the National Securities

Depository Ltd. (NSDL) or Central Depository

Services (I) Ltd. (CDSL). The members are

required to give instructions to their respective

Depository Participants (DPs) specifying details

such as settlement no., effective pay-in date,

quantity etc.

Members may also effect pay-in directly from the

clients' beneficiary accounts through CDSL. For

Page | 27



this, the clients are required to mention the

settlement details and clearing member ID

through whom they have sold the securities.

Thus, in such cases the Clearing Members arenot required to give any delivery instructions from

their accounts.

In case, if a member-broker fails to deliver the

securities, then the value of shares delivered

short is recovered from him at the

standard/closing rate of the scrip’s on the trading

day.

Auto delivery facility :

Instead of issuing Delivery instructions for their

securities delivery obligations in demat mode invarious scrip’s in a settlement /auction, a facility

has been made available to the members of

automatically generating Delivery instructions on

their behalf from their CM Pool accounts

maintained with NSDL and CM Principal

Accounts maintained with CDSL. This auto

delivery facility is available for CRS (Normal &

Auction) and for trade to trade settlements. This

facility is, however, not available for delivery of

non-pari passu shares and shares having

multiple ISINs. The members wishing to avail of

Page | 28



this facility have to submit an authority letter to

the Clearing House. This auto delivery facility is

currently available for Clearing Member (CM)

Pool accounts and Principal accounts maintainedby the members with the respective depositories .

Pay-in of securities in physical

form:

In case of delivery of securities in physical form,

the members have to deliver the securities to the

Clearing Hose in special closed pouches along

with the relevant details like distinctive numbers,

scrip code, quantity, etc., on a floppy. The data

submitted by the members on floppies is matched

against the master file data on the Clearing

House computer systems. If there is no

discrepancy, then the securities are accepted

Funds Pay-in:

The bank accounts of members maintained withthe clearing banks, viz., Bank of India, HDFC

Bank Ltd., Oriental Bank of Commerce., Standard

Chartered Bank, Centurion Bank Ltd., UTI Bank

Ltd., ICICI Bank, Indusind Bank Ltd., Union Bank

Page | 29



of India and Hongkong Shanghai Banking

Corporation Ltd. are directly debited through

computerized posting for their funds settlement

obligations.

In case of those members, whose funds pay-in

obligations are not cleared at the scheduled time,

action such as levy of penalty and/or deactivation

of BOLT TWSs, is initiated as per penalty norms

prescribed .

Securities Pay-out:

In case of demat securities, the same are

credited by the Clearing House in the

Pool/Principal Accounts of the member-brokers.

The Exchange has also provided a facility to themember-brokers for transfer of pay-out securities

directly to the clients' beneficiary owner accounts

without routing the same through their

Pool/Principal accounts in NSDL/ CDSL. For this,

the concerned member-brokers are required to

give a client wise break up file which is uploaded

by the member-brokers from their offices to the

Clearing House. Based on the break up given by

the member-brokers, the Clearing House

instructs depositories, viz., CDSL & NSDL to

credit the securities to the Beneficiary Owners

Page | 30

http://www.bseindia.com/about/tradnset.asp#pn%23pn






(BO) Accounts of the clients. In case delivery of

securities received from one depository is to be

credited to an account in the other depository, the

Clearing House does an inter depository transfer to give effect to such transfers.

In case of physical securities, the

Receiving Members are required to collect the

same from the Clearing House on the pay-out

day.

Funds Payout:

The bank accounts of the members having pay-

out of funds are credited by the Clearing House

with the Clearing Banks on the pay-in day itself

In case, if a member-broker fails to deliver the

securities, then the value of shares delivered

short is recovered from him at the

standard/closing rate of the scrips on the trading

day.

Dematerialization of shares:

Dematerialization as the name suggests, is

a term used for conversion of shares from

Page | 31



their physical form to electronic form. This

conversion is done by NSDL and CDSL. The

CDSL acts as a depository for BSE, whereas

the NSDL acts as a depository for NSE. After

dematerialization, shares cease to exist in

their physical form.

Merits of dematerialization:

No risk of being fake or stolen shares.

No stamp duty while transfer of shares.

Free from tedious paperwork as it was in

the physical form.

Stock exchanges have now discarded the

concept of marketable lots, small lots and

odd lots.

Rematerialization:

Rematerialization is the reverse of

dematerialization. It means to convert the

electronically held shares back into physical form.

You have the complete freedom of conversion

Page | 32



from electronic form to physical form whenever

you want to do so.

OPEN INTEREST IN

DERIVATIVE MARKET

Open interest means the total number of

open contracts on a security, that is, the number

of future contracts or options contracts that havenot been exercised, expired or full filled by

delivery. Hence we can say that the open interest

position at the end of each day represents the net

increase or decrease in the number of contracts

for that day. However, it is to be noted that open

interest is not the same as trading volume.

Trading volume represents the total number of

contracts that are traded during a day, inclusive

of both squared –off (closed) positions and new

positions. Thus, for any day, the trading volume

will always be higher than the open interest.

What is open interest?

Every trade in the exchange would have an

impact on the open interest for that day. Say, for

example, “A” buys one contract of Nifty on

Page | 33



Monday while “B” buys two on the same day.

Open interest at the end of the day will be three.

On Tuesday, while “A” sells his one contract to

“C”, “B” buys another Nifty contract. The openinterest at the end of the day is now four. In other

words, if both parties to the trade initiate a new

position, it increases the open interest by one

contract.

But if the traders square

off their existing positions, Open interest will

decrease by the same number of contracts.

However, if one of the parties to the

transaction squares off his position while the

other creates one open interest will remain

unchanged. Open interest, thus, mirrors the flow

of money into the derivatives market, which

makes it a vital indicator of market direction. Here

is how you interpret open interest.

RISING MARKET AND

INCREASING OPEN INTEREST

If the markets are on an uptrend and open

interest is also increasing, it it’s a bullish signal. It

implies the entry of new players into the market,

Page | 34



who are creating fresh long positions and

suggests the flow of extra money into the market.

RISING MARKET AND

DECREASING OPEN INTEREST

If despite a rise in market, the open interest

decreases, it can be interpreted as a precursor to

a trend reversal. The lack of additions to open

interest shows that the markets are rising on theback of short-sellers covering their existing

positions. This also implies that money is flowing

out of the market, given that open interest is

decreasing.

FALLING MARKET AND

INCREASING OPEN INTEREST

When open interest records an increase in

value amidst falling market, it could be a bearish

signal. Though a rise in open interest means that

new money is probably being used for creatingfresh short positions, which will lead to a further

downtrend.

Page | 35



FALLING MARKET AND

DECREASING OPEN INTEREST

If open interest decreases in a falling

market, it can be attributed to the forced

squaring- off of long – positions by traders. It,

thus, represents a trend reversal, since the

downtrend in the market is likely to reverse after

the long positions have been squared off. Thus,

in a falling market, a declining open interest can

be considered a signal indicating the

strengthening of the market.

SIDEWAYS MARKET AND

INCRESING OPEN INTEREST

If the open

interest decreases in a sideways market, we can

say that flat market trends will continue for some

more time. A decrease in open interest only

represents the squaring-off of old positions and

lack of any new positions might result in a

sideways or weak trends in the market.

Though open interest is a good barometer

of where the markets are heading; it is only an

Page | 36



indicator that helps us trade intelligently it cannot

be considered foolproof.

THE INDEX NUMBER

An index is a number which

measures the change in a set of values over a

period of time. A stock index represents the

change in value of a set of stocks which

constitute the index. More specifically, a stock

index number is the current relative value of a

weighted average of the prices of a pre-defined

group of equities. It is a relative value to the

weighted average of prices at some arbitrarily

chosen starting date or base period. The starting

value or base of the index is usually set to anumber such as 100 or 1000. for example the

base value of the Nifty was set to 1000 on the

start date of November 3, 1994.

A good stock market index is on which

captures the behavior of the overall equity

market. It should represent the market, it should

be well diversified and yet highly liquid.

Movements of the index should represent the

returns obtained by “typical” portfolios in the

country.

Page | 37



A market index is very important for its use

As a barometer for market behavior,

As a benchmark portfolio performance,

As an underlying in derivative instruments

like index futures,

In passive fund management by index funds

Also acts a barometer for lot of elements

such as liquidity in the market, the growth of

the economy, the investor’s confidence,

government policies etc.

DESIRABLE ATTRIBUTE OF AN

INDEX

A good market index should have the following

attributes:

It should capture the behavior of a large

variety of different portfolios in the market.

The stocks included in the index should be

highly liquid.

It should be professionally maintained.

Capturing Behavior Of

Portfolios

Page | 38



A good market index should accurately

reflect the behavior of the overall market as well

as of different portfolios. This is achieved bydiversification in such a manner that a portfolio is

not vulnerable to any individual stock or industry

risk. A well diversified index is more

representative of the market. However there is

diminishing returns form diversification, there is

very little gain by diversifying beyond a point; the

more serious problem lies in the stocks that are

included in the index when it is diversified. We

end up including illiquid stocks, which actually

worsen the index. Since an illiquid stock does not

reflect the current price behavior of the market, its

inclusion in index results in an index, which

reflects, delayed or stale price behavior rather

than current price behavior of the market.

Including Liquid Stocks

Liquidity is much more than trading

frequency, it is about ability to transact at a price,

which is very close to the current market price.For example, a stock is considered liquid if one

can buy some shares at around Rs.120.05 and

sell at around Rs.119.95, when the market price

Page | 39



to have market impact cost of below 0.75% when

doing Nifty trades of half a crores rupees. The

market impact cost on a trade of Rs.3 million of

the full Nifty works out to be about 0.05%. Thismeans that if Nifty is at 4000, a buy order goes

through at 4002, i.e. 4000+ (4000*0.0005) and a

sell order gets 3998 i.e. 4000-(4000*0.0005)

FUTURES AND OPTIONS

An option is different form futures in several

ways. At practical level, the option buyer faces an

interesting situation. He pays for the options in

full at the time it is purchased. After this, he only

has an upside. There is no possibility of the

options position generating any further losses to

him. This is different form futures, which is free to

enter into, but can generate very large losses.

This characteristic makes options attractive to

many occasional market participants, who cannot

put in the time to closely monitor their futures

positions.

Buying put options is buying insurance. To

buy a put option on Nifty is to buy insurance

Page | 41



To trade securities, a customer must open

a security trading account with a securities broker

and a demat account with a securities depository.

Buying security involves putting up all the moneyupfront. With the purchase of shares of a

company, the holder becomes a part owner of the

company. The shareholder typically receives the

rights and privileges associated with the security,

which may include the receipt of dividends,

invitation to the annual shareholders meeting and

the power to vote.

Selling securities involves buying the

security before selling it. Even in cases where

short selling is permitted, it is assumed that the

securities broker owns the security and then

“lends” it to the trader so that he can sell it,

besides, even if permitted, short sales on security

can only be executed on an up tick.

To trade futures, a customer must open a

futures trading account with a derivatives broker.

Buying futures simply involves putting in the

margin money. They enable the futures traders to

take a position in the underlying security without

having to open an account with a securities

broker. With the purchase of futures on a

security, the holder essentially makes a legally

binding promise or obligation to buy the

underlying security at some point in the future.

Page | 43



Security futures do not represent ownership in a

corporation and the holder is therefore not

regarded as a shareholder.

DERIVATIVE MARKET AT NSE

The derivatives trading on the NSE

commenced with S&P CNX Nifty Index futures on

June 12, 2000. The trading in index options

commenced on June 4, 2001 and trading in

options on individual securities commenced on

July 2, 2001. Single stock futures were launched

on November9, 2001. Today, both in terms of

volume and turnover, The mini derivative Futures

& Options contract on S&P CNX Nifty was

introduced for trading on January 1, 2008 while

the long term option contracts on S&P CNX Nifty

were introduced for trading on March 3 2008

NSE is the largest derivatives exchange in

India.

Currently, the

derivatives contracts have a maximum of 3-

month expiration cycles. Three contracts are

available for trading, with 1 month, 2 months and3 months expiry.

A new contract is introduced on the next

trading day following the expiry of the near month

contract.

Page | 44



INDEX DERIVATIVES

Index derivatives are derivative contracts

which have the index as the underlying. The most

popular index derivatives contract the world over

is index futures and index options. NSE’s market

index, the S&P CNX Nifty was scientifically

designed to enable the launch of index- based

products like index derivatives and index funds.

The first derivative contract to be traded on

NSE’s market was the index futures contract with

the Nifty as the underlying. This was followed by

Nifty options and thereafter by sectoral indexes,

CNX IT and BANK Nifty contracts.

FUTURES TERMINOLOGY

SPOT PRICE: The price at which an asset

trades in the spot market

FUTURES PRICE: The price at which the

futures contract trades in the futures market.

CONTRACT CYCLE: The period over

which a contract trades. The index futures

contracts on the NSE have one month, two

Page | 45



months and three months expiry cycles which

expire on the last Thursday of the month. Thus a

January expiration contract expires on the last

Thursday of January.

EXPIRY DATE: It is the date specified in

the futures contract. This is the last day on which

the contract will be traded, at the end of which it

will cease to exist.

CONTRACT SIZE: The amount of asset

that has to be delivered under one contract. For

instance, the contract size on NSE’s futures

market is 200 Nifties.

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.

COST OF CARRY : the relationshipbetween 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

Page | 46



interest that is paid to finance the asset less the

income earned on the asset.

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.

MARKET 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.

MAINTENANCE MARGIN: This is

somewhat lower than the initial margin. This isset 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.

A futures contract is different from the underlying

stock in the following ways:

Page | 47



When we buy a stock, we pay the full value

of the transaction (i.e. the number of

shares multiplied by market price of eachshare) whereas in futures we pay only the

margin which is a fraction of the total

transaction value.

There is no time limit of settlement in cash

market but in case of futures contracts,

they are dated. An Indian futures

settlement currently takes place on the last

Thursday of every month. So the current

month’s futures expire on the month’s last

Thursday. If a trader has to carry his

position to the next month, he has to shift

his position to the next month’s future.

One can only go long in the spot market.

We cannot short sell unless we borrow the

stock, something which is neither cheaper

nor convenient whereas one can go long or

short on the futures depending on his short

term view of the markets.

The cash market has a lot of none, i.e. a

person can buy any stock in the multiple of

one unit where as a futures contract is the

Page | 48



smallest unit which one can trade in the

futures market.

There is no way of taking a position on theindex through the cash market whereas

futures facilitate trading of index futures.

A futures contract price is

the sum of cash price and the monthly cost of

carry. The cost of carry should always be positive

because a futures trade is really a carried forward

product similar to the erstwhile badla. But just as

badla rates sometimes become negative when

the market sentiment is bearish, the cost of carry

can also similarly be negative when the sentiment

is poor.

Business growth of futures and optionsmarket: Turnover (Rs.crore)

Month Indexfutures Indexoptions Stockoptions Stockfutures Jun-00 35 0 0

Jun-01 590 195 0

Jun-02 2,123 389 4,642 16

Jun-03 9,348 1,942 15,042 46

Jun-04 64,017 8,473 7,424 78

Page | 49



Jun-05 77,218 16,133 14,799 1,63

Jun-06 2,43,572 57,969 11,306 2,43

Jun-07 2,40,797 92,503 21,928 4,51

Jun-08 3,77,939 3,08,709 21,430 3,75

Source: NCFM Derivative Module Work Book

ELIGIBILITY FOR ANY STOCK

TO ENTER IN DERIVATIVE

MARKET

Non promoter holding (free float

capitalization) should not be less than

Rs.750 crores for the last 6 months.

Daily Average Trading value should not be

less than 5 crores in last 6 months

It must be traded least 90% of Trading

days in last 6 months.

Non Promoter Holding must at least be

30%

BETA should not be more than 4 (for

previous 6 months)

TRADING MECHANISM

Page | 50



The futures and options trading system of

NSE, called NEAT-F&O trading system, provides

a fully automated screen-based trading for Nifty

futures & options and stock futures & options ona nation wide basis and an online monitoring and

surveillance mechanism. It supports an

anonymous order driven market which provides

complete transparency of trading operations and

operates on strict price-time priority. It is similar to

that of trading of equities in the cash market

segment. The NEAT-F&O trading system is

accessed by two types of users. The trading

members have access to functions such as order

entry, order matching, order and trade

management. It provides tremendous flexibility to

users in terms of kinds of orders that can be

placed on the system. various conditions like

Immediate or Cancel, Limit/Market price, Stop

loss, etc. can be built into an order. The clearing

members use the trader workstation for the

purpose of monitoring the trading members for

whom they clear the trades. Additionally, they can

enter and set limits to positions, which a trading

member can take.

Page | 51



VOLUMES

The trading volumes on NSE’s derivatives

market have seen a steady increase since the

launch of the first derivatives contract, i.e. index

futures in June 2000. The average daily turnover

at NSE now exceeds Rs.35000 crores. A total of

216,883,573 contracts with a total turnover of Rs.

7,356,271 crores were traded during 2006-2007.

INDEX DERIVATIVES FOR

HEDGING

To understand the use and functioning of

the index derivatives markets, it is necessary to

understand the underlying index. By looking at an

index, we know how the market is faring. Index

derivatives allow people to cheaply alter their risk

exposure to an index (hedging) and to implement

forecasts about index movements (speculation).

Hedging using index derivatives has become a

central part of risk management in the modern

economy.

Page | 52



Pricing the Futures

A futures price can be simply

derived by applying the cost of carry logic, by

which the fair value of a futures contract can be

determined. Every time the observed price

deviates form the fair value, arbitragers would

enter into trades to capture the arbitrage profit.

This in turn would push the futures price back to

its fair value. The cost of carry model used for

pricing futures is as follows:

F=SerT

Where:

r= cost of financing continuously compounded

interest rate

T= Time till expiration in years

e= 2.71828

Example:

Security XYZ ltd trades in the spot market at

Rs. 1150. Money can be invested at 11% p.a.

Page | 53



The fair value of a one month futures contract

on XYZ is calculated as follows:

F = SerT

=1150*e0.11*1/12

=1160

INITIAL MARGIN

At the inception of a contract every client is

required to pay initial margin. This margin

is must to every trading member.

Initial margins are charged on Trade by

Trade basis

Initial margins are charged by NSCCL

Initial margins are charged for the purpose

of recovery and safe guard against the

fluctuation in the market.

A future value is calculated on cost of carry

model.

Page | 54



INITIAL MARGINS CHARGED ON

F&O MARKET

Index futures: 5%

Index options: 3%

Stock options: 7.5%

CONVERGENCE OF FUTURES

PRICE TO SPOT PRICE

As the delivery month of a futures contract

is approached, the futures price converges to the

spot price of the underlying asset. When the

delivery period is reached, the futures price

equals or is very close to the spot price.

To see why this so, we first suppose that the

futures price is above the spot price during the

delivery period. Traders then have a clear

arbitrage opportunity:

Short a futures contract

Buy the asset

Make the delivery

Page | 55



These steps are certain

to lead to a profit equal to the amount by which

the futures price exceeds the spot price. As

traders exploit this arbitrage opportunity, thefutures price will fall. Suppose next that the

futures price is below the spot price during the

delivery period. Companies interested in

acquiring the asset will find it attractive to enter

into a long futures contract and then wait for

delivery to be made. As they do so, the futures

price will tend to rise.

The result is that

the futures price is very close to the spot price

during the delivery period.

The convergence of the futures price to the

spot price when future price is above the spot

price can be pictorially represented as follow:

Page | 56



Figure: A

The convergence of the futures price to the spot

price when future price is below the spot price

can be pictorially represented as follows:

Page | 57



Figure: B

MARK TO MARKET (MTM)

MARGINS

MTM margins is charged on continuous

Basis t the end of each day on Daily basis

of cumulative net out standing open

position.

Page | 58



CM (clearing member) is responsible to

collect and settle the daily MTM Margins

(Profits/loss) from their trading members

according to their open positions.

TM (Trading Member) are responsible to

collect and settle the daily MTM margins for

pay in/ pay out of their clients according to

the clients open position.

For calculating MTM margin future last ½

hour average price is takes, if it is not

traded on that day or last half hour MTM is

calculated on theoretical price model.

MTM margin balance at he year end shown

in current asset account.

OPEN INTEREST CALCULATION

Open interest means out standing orders of (long

position + short position)

Contracts in a particular point of time.

OPEN INTEREST CALCULATION

(EXAMPLE)

Page | 59



200(Total buy)-400(total sell) = 200 short (net

position)

Client Open Position

Client A 400(Total buy) - 200(total sell) =

200 long net position

Client B 200(total buy) - 400(total sell) =

200 short net position

Client C 500(total buy) - 400(total sell) =

100 long net position

= 500 long + short

Trading Member Total Open Position = 700

long+ short

Clearing member open position: All trading

member open position and custodial

participants

open positions

OPTIONS

Page | 60



An option is a contract, or a provision of a

contract, that gives one party (the option holder)

the right, but not the obligation, to perform aspecified transaction with another party (the

option issuer or option writer) according at

specified terms. The owner of a property might

sell another party an option to purchase the

property any time during the next three months at

a specified price. For every buyer of an option

there must be a seller. The seller is often referredto a s the writer. As with futures, options are

brought into existence by being traded, if none is

traded, none exists; conversely, there is no limit

to the number of option contracts that can be in

existence at any time. As with futures, the

process of closing out options positions will cause

contracts to cease to exist, diminishing the total

number.

Thus an option is the right to buy or sell a

specified amount of a financial instrument at a

pre- arranged price on, or before, a particular

date.

There are two options which can be exercised:

Page | 61



Call option, a right to buy is referred to as a

call option.

Put option, the right to sell is referred as aput option.

OPTION TERMINOLOGY

INDEX OPTIONS: these options have the

index as the underlying. Some options areEuropean while others are American. European

style options can be exercised only on the

maturity date of the option, which is known as the

expiry date. An American style option can be

exercised at any time up to, and including, the

expiry date. It is to be noted that the distinction

has nothing to do with geography. Both type of

the option are traded through out the world

STOCK OPTIONS: Stock options are

options on individual stocks. A contract gives the

holder the right to buy or sell shares at the

specified price.

BUYER OF AN OPTION: the buyer of

an option is the one who by paying the option

Page | 62



premium buys the right but not the obligation to

exercise his options on the seller/writer.

WRITER OF AN OPTION: The writer

of a call/put option is the one who receives the

option premium and is thereby obliged to sell/buy

the asset if the buyer exercised on him.

STRIKE PRICE: the price specified in the

options contract is known as the strike price or

the exercise price.

IN THE MONEY OPTION: An in the

money option is an option that would lead to a

positive cash flow to the holder if it were

exercised immediately. A call option on the index

is said to be in-the-money (ITM) when the current

index stands at a level higher than the strike price

(i.e. spot price> strike price). If the index is much

higher than the strike price, the call is said to be

deep ITM.. In the case of a put, the put is ITM if

the index is below the strike price.

AT THE MONEY OPTION: An at the

money option is an option that would lead to zero

cash flow if it were exercised immediately. An

Page | 63



option on the index is at the money when the

current index equals the strike price(i.e. spot

price = strike price).

OUT OF THE MONEY OPTION: An

out of the money (OTM) option is an option that

would lead to a negative cash flow if it were

exercised immediately. A call option on the index

is out of the money when the current index

stands at a level which is less than the strike

price(i.e. spot price < strike price). If the index is

much lower than the strike price, the call is said

to be deep OTM. In the case of a put, the put is

OTM if the index is above the strike price.

INTRINSIC VALUE OF AN

OPTION: The option premium can be broken

down into two components- intrinsic value and

time value. The intrinsic value of a call is the

amount the option is ITM, if it is ITM. If the call is

OTM, its intrinsic value is zero.

TIME VALUE OF AN OPTION: The

time value of an option is the difference between

its premium and its intrinsic value. Usually, the

maximum time value exists when the option is

ATM. The longer the time to expiration, the

Page | 64



greater is an option’s time value, or else equal. At

expiration, an option should have no time value.

STRATEGIES IN FUTURES

AND OPTIONS

The following are the four basic strategies

in options market which can be further designed

in combination of one or more of the basic

strategies, but all the complex strategies are

based on the following 4 basic kind of strategies,

so the understanding of these 4 strategies is very

essential before we go any further:

BUYING A CALL OPTION

A buyer of the option paying a premium

(price) for the option to buy a specified quantity at

a specified price any time prior to the maturity of

the option.

We can consider the live example of taking

a call option of GMR Infrastructure at a strike

price of Rs.500, a call can be taken upto a

duration of 3 months form now. Here we have

Page | 65



taken a call at the strike price of Rs.500, at a

premium of Rs. 25 on 01-06-2009.

The following is the tabulation of the payoffs at

expiration.

STOCK PRICE ON

EXPIRY

GROSS PAYOFF ON

OPTION

NET PAYOFF

OPTION

400 0 -25

450 0 -25

500 0 -25

550 50 25600 100 75

650 150 125

700 200 175

750 250 225

Table: A

The following is the graphical representation of

the above strategy:

Page | 66



CALL OPTION PAYOFF

-50

0

50

100

150

200

250

300

PRICE

P A

Y O F F

GROSS PAYOFF

NET PAYOFF

400 450 500 550 600 650 700 750

Figure: CIn the above example when GMR falls to a

price of Rs.400, the buyer of the option can

purchase the share form the market at Rs.400

with out exercising the right to buy the stock at

Rs.500. However, on that he incurs a loss of

Rs.25 as the premium being paid for the option

remaining unexercised. But suppose that the

share prices rise to Rs.750 then the holder of the

option has the right to purchase that share at a

price of Rs.500 form the seller of the option. In

this case any price level above Rs.525 (500+25),

which is the breakeven point, results in a profit for

the buyer of the option. Investment in the above

option is Rs.25*1000=Rs.25000.

In the above diagram we can notice that

the payoffs are one to one after the price of the

underlying security rises above the exercise

Page | 67



price. When the security price is less than the

exercise price, the option is referred to as out of

the money.

Form the above figure it can be seen thatthe investor who is already long i.e. holds a stock

bears a loss only to the extent of Rs.25 because

no matter if the share price fall below Rs.500 the

investor is not holding any stock. Once the

investor is either long or short the stock he can

adopt any of these strategies to hedge his risk.

The above strategy was applied in the

month of June

The following are the updates

DATE STRIKE

PRICE

OPEN HIGH LOW

01-06-2009 500 27 27 23

15-06-2009 500 54 64.75 52.4521-06-2009 500 99 104.50 99

27-06-2009 500 200.90 249 200.90

Table: B

As it can be seen from the above table that

the call option price of the stock has given a

fantastic return of over 900% on investment of

Rs.25000 only. Here the risk of the above

investment was limited only to Rs.25000

BUYING A PUT Option

Page | 68



The second strategy is the put strategy where the

buyer of the put option has to pay a

premium(price) for the option to sell a specified

quantity at a specified price any time prior to thematurity of the option. Here we take the example

of buying a put option on the stock of AIR

DECCAN. The exercise price was Rs.140. The

premium paid on the above option was Rs.4.10

on 04-06-2009. investment in the above strategy

is Rs.4.10*2500=Rs.10,250.

The pay off form a put can be illustrated. Notice

that the payoffs are one to one when the price of

the security is less than the exercise price.

PRICE GROSS PAYOFF NET PAYOFF

110 30 24.9

120 20 14.9130 10 4.9

140 0 -4.1

150 0 -4.1

160 0 -4.1

170 0 -4.1

Table: C

Following are the update of the above option

Page | 69



DATE STRIKEPRICE

OPEN HIGH LOW

04-06-2009 140 4.40 4.40 4.40

07-06-2009 140 4.00 4.00 4.00

08-06-2009 140 4.90 8.75 4.9027-06-2009 140 6.75 6.75 6.75

Table: D


the above strategy:

PUT OPTION PAYOFF

-10

-5

0

5

10

15

20

25

30

35

PRICE

P A Y O F F

GROSS PAYOFF

NET PAYOFF

110 120 130 140 150 160 170

Figure: D

A put option is a contact giving its owner

the right to sell a fixed amount of a specified

underlying asset at a price at any time on or

before a fixed date. On the expiration date, the

value of the put on a per share basis will be the

Page | 70



larger of the exercise price minus the stock price

or zero.

In the above diagram we can notice howthe down side risk is minimized if the stock is

volatile and the share prices may fall.

Here an investor will get profits only if the stock

falls below Rs.134.9

In this option the investor has gained 64.6% with

in a month.

WRITING THE CALL OPTIONS

A call option gives the buyer the right to

buy the underlying asset at the strike price

specified in the option. For selling the option, the

writer of the option charges a premium. The

profit/loss that the buyer makes on the option

depends on the spot price of the underlying.

Whatever is the buyer’s profit is the seller’s loss.

If upon expiration, the spot price exceeds the

strike price, the buyer will exercise the option on

the writer. Hence as the spot price increases thewriter of the option starts making losses. Higher

the spot price more is the loss he makes, if upon

expiration the spot price of the underlying is less

than the strike price, the buyer lets his option

Page | 71



expire unexercised and the writer gets to keep

the premium.

As the options are always costly at the beginningof the month we have written a call option on

CAIRN INDIA LIMITED ON 1st of June at a strike

price of Rs.140 with a premium of Rs.8.5,

Following is the payoff chart for the above

option:


110 0 8.5

120 0 8.5

130 0 8.5

140 0 8.5150 -10 -1.5

160 -20 -11.5

170 -30 -21.5

Table: E

Following are the updates of the option rates in

the market:

Page | 72



DATE STRIKEPRICE

OPEN HIGH LOW

01-Jun-2009 140.00 8.5 8.5 8.5

12-Jun-2009 140.00 2.4 4.2 2.1

20-Jun-2009 140 4.35 4.85 2.3528-Jun-2009 140 4.30 4.90 4.2

Table: F


the above strategy:

CALL WRITTING PAYOFF CHART

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

PRICE

P A Y O F F

GROSS PAYOFF

NET PAYOFF

110 120 130 140 150 160 170

Figure: E

Page | 73



From the above we can notice that the

liability is potentially unlimited when a investor

are writing options.

Here we can see that the investment in this

option is nil, as the call writer will get the premium

at which he is writing. The net return on this

option at the expiry period was Rs.10,624.

WRITING OF PUT OPTIONS

A put option gives the buyer the right to sell

the underlying asset at the strike price specified

in the option. For selling the option, the writer of

the option charges a premium, the profit/loss that

the buyer makes on the option depends on thespot price of the underlying. Whatever is the

buyer’s profit is the seller’s loss. If upon

expiration, the spot price of the underlying

happens to be below the strike price, the buyer

will exercise the option on the writer. If upon the

expiration the spot price of the underlying is more

than the strike price, the buyer lets his option

expire un-exercised and the writer gets to keep

the premium.

The put writer will first get a premium of amountRs.9375

Page | 74



Following is the payoff chart of writing the put

option


650 -150 -125

700 -100 -75

750 -50 -25

800 0 25

850 0 25

900 0 25

Table: G


the above strategy:

Page | 75



WRITING PUT OPTION PAYOFF

-200

-150

-100

-50

0

50

PRICE

P A Y O F F

GROSS PAYOFF

NET PAYOFF

650 700 750 800 850 900

Figure: F

As with the written call, the upside is limited to the

premium of the option (the initial price). The

downside is limited to the minimum asset price-

which is zero. We can clearly see from these

diagrams that the investor, depending upon his

risk appetite and the outlook about the market

conditions, can minimize his losses.

The net return on this option at the expiry

period was Rs.8, 212.5

Page | 76



Conclusions according to mystudy

Volatile markets are characterized by

wide price fluctuations and heavy

trading.

Investors get time to pay money is

clearing of cheque will be on monday.

Settlement day or closing day of

week.

In my study its

says that to invest on Thursday and

withdraw on firday . stock broker says

Monday as black monday

Page | 77



CONCLUSIONS

1) Derivatives in equity specially are more

suited to provide for hedging and more

cost effective. It has less risky and

more profitable.

2) As the stock Index Futures and Options

are available, the FII’s buying /selling

operations can be performed at greater speed and less cost and without adding

too much to market volatility.

3) Most of investors are trading not only in

derivatives for hedging, but also for

other purposes.

4) Derivatives do not create any new risk.

They simply manipulate risks and

Page | 78



transfer them to those who are willing to

bear these risks.

5) Hedging through derivatives reduces

the risk of owning a specified asset,

which may be share currency etc.

6) All derivative instruments are very

simple to operate. Treasury managers

and portfolio managers can hedge allrisks without going through the tedious

process of hedging each day and

amount/share separately.

7) Derivatives also offer high liquidity. Just

as derivatives can be contracted easily,

it is also possible for companies to get

out of positions in case that market

reacts otherwise. This also does not

involve much cost.

8) Derivatives are not only desirable but

also necessary to hedge the complex

exposure and volatility that the financial

companies generally face in the capital

markets today.

Page | 79



9) All derivative products are low cost

products. Companies can hedge a

substantial portion of their balance

sheet exposure, with a low margin

requirement.

There is

no assured route for success. This is a fact

which is universally applicable and so in

case of investment. There is no short cut

formula which could be applied instantly

and make money out of it instantly in the

stock market. Therefore, a good

investment takes time, patience, hard work

and perseverance to achieve success.

Over the next ten – twenty years, Indian

capital market and stock market may offer

some of the best and lucrative

opportunities to make big money as

compared to other investment avenues.

Page | 80



SUGGESTIONS

1. There is a need to educate the investor in

futures and options market, due to its

complex nature an investor fails to

understand the risk reward of a particular

strategy, which may result into losses for the

investor.

2. An investor must also be thought as to

which strategy must be applied at what

situation, as application of appropriate

strategy at appropriate situation will results

into profitable transactions

3. An investor must also be suggested to write

certain derivative exams conducted by

leading financial organization in the country

for proper understanding of the derivative

market.

4. The research reports must be made more

explanatory which must show the risk

covered in a particular strategy and the

Page | 81



return which the investor can expect, it must

be accompanied by payoff chart along with

the line graph of the strategy suggested.

5. Anand Rathi Securities can conduct certain

investor education camps in collaboration

with leading media channels, which will

serve both the purpose which are brand

advertisement and investor awareness.

6. There is a need to start derivative trading at

all stock exchanges in all over India. As of

now it’s limited to BSE and NSE.

7. A formal mechanism should be established

for co-ordination between SEBI and RBI in

respect of all financial derivatives

8. Administrative machinery of existing stock

exchanges should be strengthened wherever

necessary. Tight supervision is essential for

successful derivative trading.

9. SEBI has to implement more powerful rules

and regulations and implement certain

measures for taking strict action against all

illegal transactions.

Page | 82



BIBLIOGRAPHY

1. BOOKS & MAGZINES: -

a) India Today

b) Business World

2. NEWSPAPER : -

a) The Times of India

b) The Hindu

WEBSITES: -

a) www.rathi.com

Page | 83

http://www.rathi.com/

http://www.rathi.com/



b) www.sebi.gov.in

c) www.thehindubusinessonline.com

d) www.capitalmarket.com

e) www.theeconomicstimes.com

http://www.sebi.gov.in/

http://www.thehindubusinessonline.com/

http://www.capitalmarket.com/

http://www.theeconomicstimes.com/

http://www.sebi.gov.in/

http://www.thehindubusinessonline.com/

http://www.capitalmarket.com/

http://www.theeconomicstimes.com/

employee retention- challenges & stratagies

Documents