mba survey project

8/12/2019 mba survey project

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INTRODUCTION

The past decade has witnessed the multiple growths in the volume of

international trade and business due to the wave of globalization all over the world.As a result the demand for the international money and financial instruments

increased significantly at the global level. In this respect, changes in the interest rates,

exchange rates and stock market prices at the different financial markets have

increased the financial risk to the corporate world. Adverse changes have even

threatened the have increased the financial risks to the corporate world. Adverse

changes have even threatened the very survival of the business world. It is therefore

to manage such risks; the new financial instruments have been developed in the

financial markets, which are also popularly known as financial erivatives.

The basic purpose of these instruments is to provide commitments to prices for

futures dates for giving protection against adverse movements in future prices, in

order to reduce the extent to financial risks. !ot only this, they also provide

opportunities to earn profit for those persons who are ready to go for higher risks. In

other words, these instruments, indeed, facilitate to transfer the risk from those who

wish to avoid it to those who are willing to accept the same.

Today, the financial derivatives have become increasingly popular and most

commonly used in the world of finance. This has grown with so phenomenal speed

all over the world that now it is called as the derivatives revolution.

The term "erivative# indicates that it has no independent value; its value is

entirely derived from the value of the underlying assets. The underlying asset can be

securities, commodities, bullion, currency livestock or anything else. In other worlds,

derivative means forward, futures, option or any other hybrid contract of

predetermined fixed duration, linked for the purpose of contract fulfillment to the

value of a specified real or financial asset or to an index of securities.

The $ecurities contracts %&egulation' Act ()*+ defines "derivative# as under

"erivatives# includes

1. $ecurity derived from a debt instrument, share, loan whether secured or

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

security.

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2. A contract which derives its values from the prices. r index of prices of

underlying securities.

-inancial derivatives is a financial instrument whose value is derived from the

value of an underlying asset, hence the name derivative/ came into existence.There are a variety of such instruments which are extensively trade in the financial

markets all over the world, such as forward contracts, futures contracts, call and

put options, swaps, etc. A more detailed discussion of the properties of these

contracts will be given late part of this lesson. $ince each financial derivative has

its own uni0ue features.

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Derivatives market in India

erivatives products initially emerged as hedging devices against

fluctuations in underlying asset. In recent years the market for financial derivatives

has grown tremendously in terms of variety of instruments available and it marks by a

very high volatility. -utures and options on stock indices have gained more popularity

than on individual stocks. Through the use of derivatives products it is possible to

partially %or' fully transfer price risks by locking in asset prices.

STOCK EXCHANGES IN INDIA:

The project is also to study the activities and prospects of stock markets with

regarding the !O" The past decade has #een a golden age for stock e$change in

India" It is poised to dominant the future of corporate finance in India% thanks to

reforms in stock market" &arlier in the initial days of secondary market% trading on

'tock &$changes in India used to take place through open outcry without use ofinformation technology for immediate matching or recording of trades" (ith the

advent of technology% the trading in securities is done on)line with the help of

*'+T terminals" 'ince ,--.% trading in securities is screen #ased /on)line0 trading

which eliminated the need for trading floor" 'ince 1222% internet)#ased trading has

also made an appearance in India"

The secondary market consists of 13 stock e$changes including the National

'tock &$change and the Over)the)Counter &$change of India /OTC&I0 and inters

Connected 'tock &$change of India 4td" The secondary market provides a trading

place for the securities that already issued to #e #ought and sold" It also provides

li5uidity to the initial #uyers in the primary market to re)offer the securities to any

interested #uyer at any price% if mutually accepted" +n active secondary market

actually promotes the growth of the primary market and capital formation #ecause

investors in the primary market are assured of a continuous market and they can

li5uidate their investments in the stock e$change"(ith the emergence of on)line

trading in India stock &$changes% the volume of the securities traded% the market

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capitali6ation% the si6e of market and the market turnover has increased" The scope

of study in on)line trading is very vast"

It is important to ensure a smooth workin o! this market" as it is the

arena where the p#a$ers in the e%onomi% rowth o! a %ountr$ intera%t& 'arious

#aws have (een passed !rom time to time to meet this o()e%tive& The !inan%ia#

market in India was hih#$ semented unti# the initiation o! re!orms in *++,-+.

on a%%ount o! a variet$ o! reu#ations and administered pri%es in%#udin (arriers

to entr$& The re!orm pro%ess was initiated with the esta(#ishment o! Se%urities

and E/%hane 0oard o! India 1SE0I2&

+t present in India 13 stock e$changes duly recogni6ed are given#elow in the order of year of their esta#lishment"

1. 1ombay $tock 2xchange 3 (45*

2. Ahmadabad share and stock brokers association limited 3 ()*5.

3. 6alcutta $tock 2xchange association limited 3 ()*5.

4. elhi $tock 2xchange 3 ()*5

5. 7adras $tock 2xchange 8()*5

6. Indore $tock brokers association 3 ()*4

7. 1angalore $tock 2xchange 3 ()+9

8. :yderabad $tock 2xchange8 ()+9

9. 6ochin $tock 2xchange8 ()54

10. une $tock 2xchange 3 ()4udhiana $tock 2xchange

7adhya radesh $tock 2xchange

7adras $tock 2xchange

7agadha.tock ;xchange

angalore .tock ;xchange

eerut .tock ;xchange

0T@ ;xchange 0f 4ndia

une .tock ;xchange

.aurashtra utch .tock ;xchange

+ttar radesh .tock ;xchange

Cadodara .tock ;xchange

S;OT ana#$sis of Industry:

.trength' eakness' 0pportunity' and Threats (.0T) of 4ndian

stock market is gi#en below!

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StrenthD1! the first and for most thing of strength of 4ndian stock market is its

ability to pro#ide high return!

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CO8AN6 4O3I9E

N7 INDIA IN'EST 'T9TD

Introduction

oing the GrightG thing is a virtue most desirable. The difference between success and

failure is often, not dictated by knowledge or expertise, but by its actual application

and perseverance. Ehen it comes to successful wealth creation for customers, it is

something that we believe in practice. -or us it is more than a mission; it is what

defines our lives and our actions at !? IndiaInvest.

Eith this passion, we continue to evolve and make the right product accessions andservice innovations in our offerings. To the advisors, we offer a 9+CJ comprehensive

business platform with unmatched IT solutions, empowering them to set the best

practice standards and deliver real value to their customers. ver the years, our

passion has seen us grow from strength to strength and expand rapidly, setting new

benchmarks in the process. 1ut to us, what really matters the most is the number of

lives we have managed to transform and we still have a long way to go...

Today !? IndiaInvest vt. >td. is one of the leading advisors and distributors of

financial products and services in India. 2stablished in year ()), !? has over a

decade of rich exposure in financial investments space and portfolio advisory

services. -rom a humble beginning, !?, over the years has evolved out to be aprofessionally managed, 0uality conscious and customer focussed financial K

investment advisory distribution firm.

Ee are head0uartered in $urat, India, and have more than I!& (C,CCC 6rore plus of

mutual fund assets under advice, with a wide presence at over (C locations in ac plus customer base with over (CCCL Advisors.

!? prides in being a professionally managed, 0uality focused and customer centric

organisation. The strength of !? lies in the strong domain knowledge in investment

consultancy and the delivery of sustainable value to clients with support from cutting8

edge technology platform, developed in8house by !?.

At !?, we believe in..

:aving single window, multiple solutions that are integrated for simplicity and

sapience

7aking innovations, accessions, value8additions, a constant process

roviding customers with solutions for tomorrow which will keep them above

the curve, today

Technology has traditionally been !?Gs key strength. ur offering on the

technological front is unmatched, vibrant, and comprehensive in nature. ur focus

commitment on technology can be gauged from the fact that we have set8up distinctentity with a very strong, talented work8force for the sole purpose of providing the

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best to !? in terms of technology and support. -inlogic Technologies %India' vt. >td.

does all the development support work in8house on a continuous basis. It has

successfully developed implemented a powerful support system for the mutual fund

distribution business at !? with a provision for integrating the same with other

investment products as well as the financial accounting system. Today -inlogic

Technologies has more than (CC employees for its IT developement.

Our Divisions

N7 3und< Network

!? -undz !etwork has been playing a pioneering role in India in providing

independent advisors K advisory firms with integrated, comprehensive and practical

business solutions for ensuring continuous growth continuity of business. It

provides the financial advisors and the institutions that serve them with insights,

strategies and tools to help them significantly grow their businesses. :ow do we do

itM Thats because we understand how financial wealth management businesses

work and what is needed to manage, monitor and grow the practice...

Eith the 9+CJ Advisory platform, !? has managed to successfully transform the

business of many advisory K distribution houses, bringing them on e0ual footing or

even better than the toughest competitors in the industry in the concerned domain.

Eith a vast experience strong delivery mechanism, we at !? -undz !etwork, help

ensure transformation and the exploitation of the opportunities available.

servi%es

This is an integrated service model offering solutions for meeting the diverse real8

estate needs of corporates retail customers in transacting properties.

-inding the right property at the right value and the best buyer for a property is the

crux of any realty solution. At !? India&ealty we value this critical element of

retailing and aim to provide the customer with an integrated service model that not

only focuses on him meeting his desired needs but also on enhancing the overall

experience of the transaction.

The scope of properties embraces both commercial residential proFects K properties.

The integrated value8added services ensure that the solutions are feasible, authentic,

secure profitable.

>everaging upon the strengths of the parent company !?, !? India&ealty aims to offer

attractive options and operational guidance to satisfactorily realise the customers

realty dreams.Today !? &ealty $ervices has tied up with over C developers with over (*C proFects

across India.

N7 Guruku#

7aking people benefit from the growing economy is possible by attracting them to

participate in 20uity for long term, to make their money work for itself and create

wealth. -or this to happen, a huge force of effective -inancial Advisors is needed.

Disualizing this need and with a view to bridge the gap, !? IndiaInvest vt. >td. has

set up !? @urukul to offer different training programs at moderate costs.

!? @urukul works to conceive, craft, design, develop and execute effective trainingmodules to energize people with right inputs through different training programmes at

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modest cost. owered by !?Gs experience of over ( years as leaders in financial

advisory services, !? @urukul has emerged successful in conducting sizeable number

of trainings since inception in April


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8anaement

7r. !eeraF 6hoksi ?t 7anaging irector

7r. ?ignesh esai ?t 7anaging irector

Sa#es Team:

7r. 7isbah 1axamusa !ational :ead

7r. 7anish @adhvi Qonal $ales :ead

7r. rashant Bakkad Qonal $ales :ead

7r. $arfaraz atel Qonal $ales :ead7r. Tushar 1haFantri Qonal $ales :ead

7r. :usaini Banchwala roduct :ead 3 Investments

7r. ?igesh esai roduct :ead 3 &ealty

E/e%utive Team:

!ame -unction :ead7r. ?anak atel Audit

7r. 7ohammadali $aiyed -inance

7r. haval esai :uman &esources

7r. &akesh Tokarkar >egal 6ompliance

7r. $amanvay 7aniar 7arketing

7r. Dinayak &aFput perations

7r. Diral $hah &esearch

7r. $hirish atel Information Technology

7r. Abhishek ubey $trategic 1usiness evelopment =nit

N7 'a#ues

Ehile we constantly look for new ideas and changes that cause positive difference to

our clients, we remain true to the values upon which !? India Invest was foundP

Hih-#eve# o! e/pertise:

1eing a growing organisation, we strive to constanlty evolve by providing the highest

level of expertise to our client, continuously,

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Interit$ = Transparen%$:

Ee believe in doing business with a high standard of honesty integrity. 6reating

long term GtrustworthyG relationships with our clients is at the core of our business

model. Ee strive to maintain the highest level of transparency and are open to

discussions when serving our advsors and investors.

er!orman%e:

ur drive for performance is distinguished by consistent and meaningful

measurement. At !?, we are passionate about our customerGs wealth creation. The

enitre !? team exudes confidence and spreads positive vibes around. Team !? is well

inclined towards its roles responsibilities and is eager to learn to serve the customer

better. Ee believe in continuous enhancement and growth of our human capital and

people at !? start each day afresh with an eagerness to learn and a passion to win.

Stron re#ationships

$trong relationships grounded in trust and mutual respect over the long8term allow usto successfully serve clients through the various phases of their lives.

Comprehensive" a%%urate %ommuni%ations usin #eadin-ede te%hno#oies

Ee employ new technologies to set industry standards in reporting and client

communications.

ro!essiona# ethi%s

ur top priority is meeting the needs of our clients, and we une0uivocally take full

responsibility for the work we do. At !?, we follow a strong process oriented

approach in everything we do. Ee are firm believers of "-ollow the process, &esults

will 6ome# mantra. Ee have detailed processes related to sales, administration and

client servicing, which help us evaluate our performance better and improve upon the

shortcomings identified in the system.

Strivin E/%e##en%e in Servi%in:

There is no substitute to 0uality service and advice. Ee accept this fact at !? through

our commitment to 0uality client servicing. Ee work on the latest technologies,

solutions and products for our clients to ensure they stay ahead of the competetion and

make their business run in 0uick, efficient and the best way.

hi#osoph$

At !?, our $ervice and Investing philosophy inspire and shape the thoughts, beliefs,attitude, actions and decisions of our employees. ur philosophy is the spirit which

drives our body called !?.

Servi%e hi#osoph$:

ur primary measure of success is customer satisfaction . Ee are committed to

provide our customers with continuous, long8term improvements and value8additions,

to meet the needs in an exceptional way. In our efforts to consistently deliver the best

service possible to our customers, all employees of !? make every effort toP

Think of the customer first, take responsibility, and make prompt service to the

customer a priority.

eliver upon the commitments promises made, on time.

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Anticipate, visualize, understand, meet and exceed our customerGs needs.

1ring energy, passion excellence in everything we do.

1e honest and ethical, in action attitude, and keep the customer/s interest.

.

Investin hi#osoph$:Ee aim to provide need8based solutions for long8term wealth creation Ee aim to

provide all the customers of !?, directly or indirectly, with true, unbiased, need8based

solutions and advice that best meet their stated un8stated needs. In our efforts to

provide 0uality financial investment advice, we believe that .

6lients want need8based solutions, which fits them.

>ong8term wealth creation is simple and straight.

Asset8Allocation is the ideal the best way for long8term wealth creation.

2ducating and disclosing all the important facets, which the customer needs to

be aware of, is important.

The solutions must be unbiased, feasible, practical, executable, measurable

and flexible.

6onstant monitoring and proper after8sales service is critical to complete the

on8going process.

At !?, our aim is to earn the trust and respect of the employees, customers, partners,

regulators, industry members and the community at large, by following our service

and investing philosophy with commitment.

Our servi%e %ommitment

The service commitments are to guide the actions of the people at !?. 6learly

stated 6ustomers can freely communicate any such action Kevents wherein they

feel that any f the commitments have been breachedK compromised . At !? we

desire to honor ur commitments all points of the time and to all our customers

without any bias.To provide customer8focused need8based valued services.

To provide reliable, accurate and timely information.

To maintain all records in privacy.

To optimize servicesKbenefits at least Fustifiable cost.

To develop and grow the customers business.

To provide constructive after sales service.

To honor our service commitments.

As !? Eealth Advisor/s @lobal rivate 6lient, you get comprehensive set

of services that ensure you stay informed, insightful, in command, of your investments

at all times.

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N) on#ine ;ea#th A%%ount %overs a#most a## the investment avenues that $ou ma$

have:

7utual -unds 3 All A76s, All $chemes

irect 20uity

>ife Insurance

hysical Assets 3 @old and roperty

rivate 20uity 3 1usiness

ebt roducts

1ank eposits and 6ompany eposits

&1I K Infrastructure 1onds

ostal $avings 3 BD, 7I$, !$6

ebentures

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$mall $avings 3 -, !$$

Sa#es = Deve#opment Support

$ales and development support form an integral part at !?.2ach !?-undz !etwork

artner has a dedicated relationship executive and Kor a relationship 7anager.

!ormally the team at !? would help you with N

?oint 6alls to your clients.

resentations at your 6lient 7eets.

rganising $ales 7eets, -airs and Eorkshops.

1usiness sales planning and helping you achieve your

personal business targets.

The active support from the sales team from N7 has helped transform the

businesses of many artners working with us.

TECHNO9OG6 S5O4T

Technology is the biggest differentiator.

Technology has been and is our ke$ strenth. Ehat we offer on the technological

front is uni0ue and comprehensive. ur focus can be gauged from the fact that we

have a separate sister concern started for the sole purpose of providing the best

support to !? in terms of technology. :igh infrastructural spending is done to

improve strengthen our deliverables on this technological front. 3in#oi%

Te%hno#oies 1India2 vt& 9td&does all the development work in8house on a

continuous basis through its team of talented professionals. All the tools, services,

products, etc offered by N7 hasbeen deve#oped in-houseaccording to what we feel.

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1ut technology by itself cannot make a difference. nly when technology is

combined with strong domain knowledge and understanding of customer needs, can it

truly help make a significant difference. And this is what N7 has achieved and

aims to continue doing so.

Rour Total Technology $olution

Eebsite creation and 7anagement.

n8line Automatic Investment Accounts to all clients.

6entralised nline Automatic Advisor Account %artners esk'

for 7anagement, 7I$, ortfolio Access, etc .

7arketing, $ales and other support through application of

technology.

CO885NICATIONS:

ngoing communications play a very important part in keeping in touch with

you clients, having a goodwill and loyalty or simply as part of your service

offering.

!? -undz truly realizes the importance of such communications. The &esearch and

the 7arketing teams at !? offer many communications of use to you.

=nder !? Bnowledge 2dge seriesN

bFectiveP To keep everyone updated and well informed

aily 7arket =pdate 3 A roundup of market, forex, economic

news.

aily 7utual -und Tracker 3 A daily ebt performance review

of 7- schemes.

Eeekly erformance &eport 3 A weekly review of all the 7-

schemes as per sub8types.

7onthly -und -act $heet 3 A monthly publication ,

=pdates, etc of important changes, events.

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=nder !? I8@urukul seriesNbFectiveP To make the difference between information

wisdom.

Articles on InvestmentsK2conomyK-inance, etc

Training to employees and associates and also to investors

.&egular market analysis, stories

N7 Advantae

An Advisor working as !? -undz !etwork artner enFoys many privileges and

6heck list that differentiates !? -undz !etwork artner from the crowd.

Superior C#ient Servi%e

n line personal investment Account to 6lients Res

Ouality 6omprehensive, insightful &eports to clients Res

Automatic 6apturing of 7- Transaction Res

n line Ouery management module for 0ueries Res

$uperior and 6omprehensive product offerings

6omprehensive 2mail $ubscriptions

E!!e%tive 8arketin and Sa#es Support

Eeb 1rand presence with your #own website# Res

6omplete access to clients/ accounts Res6omprehensive 7arketing $upport Res

6omprehensive $ales $upport Res

&egular 2vents, $eminars and meets Res

Administration and 0a%k O!!i%e Support

Rour own online 1usiness Accounts on partner desk Res

Automatically =pdated nline 7I$ &eport ResInsightful reports on business and clients Res

Transaction processingKacceptance at !? service centres. Res

n going Training and ersonal @rowth !? partner 8 !on8!? Advisor

6omprehensive training modules under I8@urukul Res

&egular interaction with industry experts Res

&egular ersonal 7eetings and @roup 7eetings Res

$upport and help on an on8going day to day basis Res

0usiness #annin and Strate$

1usiness strategy and planning assistance from expert Res

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n8going planning and management guidance Res

N73EAT54ES

5ni>ue

This product is uni0ue, one of its kind, in the industry combining all different

investment assets and products into a single automatic on8line account. The scope

of assets covered, structure and the extent K 0uality of reports makes it a winner

throughout.

Assets Covered

The Assets covered areP All 7utual -und $chemes %routed through you', irect20uity and -ixed Income Instruments with include 8 1ank eposits, 6ompany -ixed

eposits, 1onds, ebentures, -, ebentures, !$$, ostal $avings, etc

On-#ine Automati%

The account is available online 8 any time anywhere to your clients. Eealth nest

reflects the Greal valueG of your investments, especially mutual funds and direct

e0uities, where the values are updated on a daily basis. -urther all mutual fund

transactions of your clients routed through you will only be automatically

displayed, creating a preference for your service and a barrier for your competitors to

break.

Comprehensive

The offering is comprehensive and complete given the contents and from utility

point of view. All maFor investment avenues that a normal investor has is been

covered under Eealth !est. The service offers 0uality, insightful reports to

your clients on their investments.

INCENTI'E SCHE8E 1 45N SCHE8E2

S *CC &uns 3 A.6K&efrigeratorKEashing 7achine

(CCC &uns 3 esktop 6omputerK$ony :andicamS (+CC &uns 3 :onda ActivaKubai Tour for couple ays 9 !ights

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aptop

S 9CCC &uns 3 >aptop and %esktop 6omputer or $ony :andicam'.

S CCC &uns 3 # $amsung TD or 6ouple tour to $ingapore 7alaysia.

S +CCC &uns 3 6ouple tour to $ingapore 7alaysia and >aptop.

4CCC &uns 3 6ouple tour to $witzerland for ) days 4 nights.

(CCCC &uns 3 7aruti mni

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7inimizes the impact of fluctuations in asset prices on the profitability and cash flow

situation of risk$a#erse in#estors!

-eri#ati#es are risk management instruments' which deri#e their

#alue from an underlying asset! The underlying asset can be bullion' index' share' bonds'

currency' interest' etc!!! Banks' .ecurities firms' companies and in#estors to hedge risks' to

gain access to cheaper money and to make profit' use deri#ati#es! -eri#ati#es are likely to

grow e#en at a faster rate in future!

DE3INITION

-eri#ati#e is a product whose #alue is deri#ed from the #alue of an underlying

asset in a contractual manner! The underlying asset can be eFuity' forex' commodity or any

other asset!

(' .ecurities @ontracts (>egulation) Act' 1952 (.@> Act) defines


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HEDGE4S:

:edgers face risk associated with the price of an asset. They use futures or options

markets to reduce or eliminate this risk.

SEC59ATO4S:

$peculators wish to bet on future movements in the price of an asset. -utures and

options contracts can give them an extra leverage; that is, they can increase both the

potential gains and potential losses in a speculative venture.

A40IT4AGE4S:

Arbitrageurs are in business to take of a discrepancy between prices in two different

markets, if, for, example, they see the futures price of an asset getting out of line with the

cash price, they will take offsetting position in the two markets to lock in a profit.

35NCTIONS O3 DE4I'ATI'E 8A4KETS:

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

They areP

rices in an organized derivatives market reflect the perception of

market participants about the future and lead the price of underlying to the perceived future

level.

erivatives market helps to transfer risks from those who have them but

may not like them to those who have an appetite for them.

erivatives trading acts as a catalyst for new entrepreneurial activity.

erivatives markets help increase saving and investment in long run.

T6ES O3 DE4I'ATI'ES

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The following are the various types of derivatives. They areP

3O4;A4DS:

A forward contract is a customi"ed contract between two entities' where settlement takes

place on a specific date in the future at todays pre$agreed price!

35T54ES:

A futures contract is an agreement between two parties to buy or sell an asset in a certain

time at a certain price; they are standardized and traded on exchange.

OTIONS:ptions are of two types8calls and puts. 6alls give the buyer the right but not the obligation

to buy a given 0uantity of the underlying asset, at a given price on or before a given future

date. uts give the buyer the right, but not the obligation to sell a given 0uantity of the

underlying asset at a given price on or before a given date.

;A44ANTS:

ptions generally have lives of up to one year; the maFority of options traded on options

exchanges having a maximum maturity of nine months. >onger8dated options are called

warrants and are generally traded over8the counter.

9EAS:

The acronym >2A$ means long8term 20uity Anticipation securities. These are options

having a maturity of up to three years.

0ASKETSD

Basket options are options on portfolios of underlying assets! The underlying asset is

usually a mo#ing a#erage of a basket of assets! ;Fuity index options are a form of basket

options!

S;AS:

$waps are private agreements between two parties to exchange cash flows in the future

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

contracts! The two commonly used .waps areD

a2 Interest rate Swaps:

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These entail swapping only the related cash flows between the parties in the same currency.

(2 Curren%$ Swaps:

These entail swapping both principal and interest between the parties, with the cash flows

in on direction being in a different currency than those in the opposite direction.

S;ATION:

.waptions are options to buy or sell a swap that will become operati#e at the expiry of

the options! Thus a swaption is an option on a forward swap!

4ATIONA9E 0EHIND THE DE'E9O8ENT O3 DE4I'ATI'ES:

Eolding portfolios of securities is associated with the risk of the possibility that the

in#estor may reali"e his returns' which would be much lesser than what he expected to get!

There are #arious factors' which affect the returnsD

(. rice or di#idend (interest)

aborstrike' etc!

These forces are to a large extent controllable and are termed as non systematic risks! An

in#estor can easily manage such non$systematic by ha#ing a well$di#ersified portfolio

spread across the companies' industries and groups so that a loss in one may easily be

compensated with a gain in other!

There are yet other of influence which are external to the firm' cannot be controlled and

affect large number of securities! They are termed as systematic risk! They areD

1! ;conomic

*! olitical

,! .ociological changes are sources of systematic risk!

6or instance' inflation' interest rate' etc! their effect is to cause prices of nearly all$

indi#idual stocks to mo#e together in the same manner! e therefore Fuite often find stock

prices falling from time to time in spite of companys earnings rising and #ice #ersa!

&ational 1ehind the development of derivatives market is to manage this systematic

risk'liFuidity in the sense of being able to buy and sell relati#ely large amounts

Fuicklywithout substantial price concession!

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4n debt market' a large position of the total risk of securities is systematic! -ebt instruments

mare also finite life securities with limited marketability due to their small si"e relati#e to

many common stocks! Those factors fa#or for the purpose of both portfolio hedging and

speculation' the introduction of deri#ati#es securities that is on some broader market rather

than an indi#idual security!

4EG59ATO46 34A8E;O4K:

The trading of derivatives is governed by the provisions contained in the $6 & A, the $21I

Act, and the regulations framed there under the rules and byelaws of stock exchanges.

&egulation for erivative TradingP

$21I set up a . 6. @upta develop the

appropriate regulatory framework for derivative trading in India. The committee submitted

its report in 7arch ())4. n 7ay ((, ())4 $21I accepted the recommendations of the

committee and approved the phased introduction of derivatives trading in India beginning

with stock index -utures. $21I also approved he "suggestive bye8laws# recommended by

the committee for regulation and control of trading and settlement of erivative contract.

The provision in the $6& Act governs the trading in the securities. The amendment of the

$6& Act to include "2&IDATID2$# within the ambit of securities in the $6& Act made

trading in erivatives possible withinthe framework of the Act!

;ligibility criteria as prescribed in the ! @! /upta committee report may apply to

.;B4 for grant of recognition under section of the .@> Act' 1952 to start

-eri#ati#es Trading! The deri#ati#e exchange:segment should ha#e a separate

go#erning council and representation of trading:clearing member shall be limited

to maximum &? of the total members of the go#erning council! The exchange shall

regulate the sales practices of its members and will obtain appro#al of .;B4 before

start of Trading in any deri#ati#e contract!

The exchange shall ha#e minimum 5& members!

The members of an existing segment of the exchange will not automatically become

the members of the deri#ati#es segment! The members of the deri#ati#es segment

need to fulfill the eligibility conditions as lay down by the ! @! /upta committee

.The clearing and settlement of derivatives trades shall be through a $21I approved

clearing corporationKclearing house. 6learing 6orporationK6learing :ouse

complying with the eligibility conditions as lay down by the committee ha#e to

apply to .;B4 for grant of appro#al!

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-eri#ati#es broker:dealers and @learing members are reFuired to seek registration

from .;B4!

The inimum contract #alue shall not be less than >s!* akh! ;xchange should

also submit details of the futures contract they purpose to introduce!

The trading members are reFuired to ha#e Fualified appro#ed user and sales

persons who ha#e passed a certification programme appro#ed by .;B4

INT4OD5CTION TO 35T54ES AND OTIONS

4n recent years' deri#ati#es ha#e become increasingly important in the

field of finance! hile futures and options are now acti#ely traded on many

exchanges' forward contracts are popular on the 0T@ market! 4n this chapter we

shall study in detail these three deri#ati#e contracts!3orward %ontra%ts:

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

for a specified price. ne of the parties to the contract assumes a long position and

agrees to buy the underlying asset on a certain specified future date for a certain

specified price. The other party assumes a short position and agrees to sell the asset on

the same date for the same price. ther contract details like delivery date, price and

0uantity are negotiated bilaterally by the parties to the contract. The forward contracts

are normally traded outside the exchanges. The salient features of forward contracts

areP

They are bilateral contracts and hence exposed to counter3party risk.

2ach contract is custom designed, and hence is uni0ue in terms of contract size,

expiration date and the asset type and 0uality.

The contract price is generally not available in public domain.

n the expiration date, the contract has to be settled by delivery of the asset.

If the party wishes to reverse the contract, it has to compulsorily go to the same

counterparty, which often results in high prices being charged.

:owever forward contracts in certain markets have become very standardized, as in

the case of foreign exchange, thereby reducing transaction costs and increasing

transactions volume. This process of standardization reaches its limit in the organized

futures market.

-orward contracts are very useful in hedging and speculation. The classic hedging

application would be that of an exporter who expects to receive payment in dollars

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three months later. :e is exposed to the risk of exchange rate fluctuations. 1y using

the currency forward market to sell dollars forward, he can lock on to a rate today and

reduce his uncertainty. $imilarly an importer who is re0uired to make a payment in

dollars two months hence can reduce his exposure to exchange rate fluctuations by

buying dollars forward.

If a speculator has information or analysis, which forecasts an upturn in a price, then

he can go long on the forward market instead of the cash market. The speculator

would go long on the forward, wait for the price to raise' and then take a re#ersing

transaction to book profits! .peculators may well be reFuired to deposit a margin

upfront! Eowe#er' this is generally a relati#ely small proportion of the #alue of the

assets underlying the forward contract! The use of forward markets here supplies

le#erage to the speculator!

9imitations o! !orward markets:

-orward markets world8wide are afflicted by several problemsP

>ack of centralization of trading,

Illi0uidity, and

6ounterparty risk

In the first two of these, the basic problem is that of too much flexibility andgenerality. The forward market is like a real estate market in that any two consenting

adults can form contracts against each other. This often makes them design terms of

the deal which are very convenient in that specific situation, but makes the contracts

non8tradable.

6ounterparty risk arises from the possibility of default by any one party to the transaction.

Ehen one of the two sides to the transaction declares bankruptcy, the other suffers. 2ven

when forward markets trade standardized contracts, and hence avoid the problem of

illi0uidity, still the counterparty risk remains a very serious

INT4OD5CTION TO 35T54ES:

6utures markets were designed to sol#e the problems that exist in forwardmarkets! A futures contract is an agreement between two parties to buy or sell an

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asset at a certain time in the future at a certain price! But unlike forward contracts'

the futures contracts are standardi"ed and exchange traded! To facilitate liFuidity in

the futures contracts' the exchange specifies certain standard features of the contract!

4t is a standardi"ed contract with standard underlying instrument' a standard Fuantity

and Fuality of the underlying instrument that can be deli#ered' (or which can be used

for reference purposes in settlement) and a standard timing of such settlement! A

futures contract may be offset prior to maturity by entering into an eFual and

opposite transaction! ore than 99? of futures transactions are offset this way!

istinction between futures and forwards

-orward contracts are often confused with futures contracts. The confusion is primarily

because both serve essentially the same economic functions of allocating risk in the

presence of future price uncertainty. :owever futures are a significant improvement over

the forward contracts as they eliminate counterparty risk and offer more li0uidity as they

are exchange traded. Above table lists the distinction between the two

DE3INITIOND A 6utures contract is an agreement between two parties to buy or sell an

asset a certain time in the future at a certain price! To facilitate liFuidity in the futures

contract' the exchange specifies certain standard features of the contract! The

standardi"ed items on a futures contract areD

Huantity of the underlying

Huality of the underlying

The date and the month of deli#ery

The units of price Fuotations and minimum price change

ocation of settlement

3EAT54ES O3 35T54ES:

-utures are highly standardized.

The contracting parties need to pay only margin money.

:edging of price risks.

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They have secondary markets to.

T6ES O3 35T54ES:

0n the basis of the underlying asset they deri#e' the financial futures are di#ided into

two typesD

.tock futures

4ndex futures

arties in the !utures %ontra%t:

There are two parties in a future contract, the buyer and the seller. The buyer of the futures

contract is one who is >!@ on the futures contract and the seller of the futures contract is

who is $:&T on the futures contract.

The pay off for the buyer and the seller of the futures of the contracts are as followsP

A6-O33 3O4 A 056E4 O3 35T54ES:

rofit

-

-

C $< $(

->

>oss

CASE *P8The buyer bought the futures contract at %-'; if the future price goes to $(

then the buyer gets the profit of %-'.

CASE ,:-The buyer gets loss when the future price goes less then %-', if the future price

goes to $< then the buyer gets the loss of %->'.

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initial margin, then the investor receives a call for an additional deposit of cash known as

maintenance margin to bring the e0uity up to the initial margin.

4ICING THE 35T54ES:

The -air value of the futures contract is derived from a model knows as the cost of carry

model. This model gives the fair value of the contract.

Cost o! Carr$:

-$ %(Lr80' t

Ehere

-8 -utures price

$8 $pot price of the underlying

r8 6ost of financing

08 2xpected ividend yield

t 8 :olding eriod.

35T54ES TE48INO9OG6:

Spot pri%eP

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

3utures pri%e:

The price at which the futures contract trades in the futures market.

Contra%t %$%#e:

6ontract cycle is the period over which contract trades. The index futures contracts on the

!$2 have one8 month, two 3month and three8month expiry cycle which expire on the last

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

?anuary and a -ebruary expiration contract ceases trading on the last Thursday of -ebruary.

n the -riday following the last Thursday, a new contract having a three8month expiry is

introduced for trading.

E/pir$ date:

It is the date specifies 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.

Contra%t si


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In the context of financial futures, basis can be defined as the futures price minus the spot

price. The 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 o! %arr$P

The relationship between futures prices and spot prices can be summarized in terms of what

is known as the cost of carry. This measures the storage cost plus the interest that is paid to

finance the asset less the income earned on the asset.

Open Interest:

pen Interest is the total outstanding long or short position in the market at any specific

time. As total long positions in the market would be e0ual to short positions, for

calculation of open interest, only one side of the contract is counter.

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INT4OD5CTION TO OTIONS

DE3INITIONP

ption is a type of contract between two persons where one grants the other the

right to buy a specific asset at a specific price within a specific time period. Alternatively the

contract may grant the other person the right to sell a specific asset at a specific price within a

specific time period. In order to have this right. The option buyer has to pay the seller of the

option premium.

The assets on which option can be derived are stocks, commodities, indexes etc. If the

underlying asset is the financial asset, then the option are financial option like stock options,currency options, index options etc, and if options like commodity option.

4OE4TIES O3 OTION:

ptions have several uni0ue properties that set them apart from other securities. The

following are the properties of optionP

>imited >oss

:igh leverages potential

>imited >ife

A4TIES IN AN OTION CONT4ACT:

(. 1uyer of the optionP

The buyer of an option is one who by paying option premium buys the right but not the

obligation to exercise his option on sellerKwriter.


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A stock option gives the buyer of the option the right to buyKsell stock at a specified price.

$tock option are options on the individual stocks, there are currently more than (*C stocks,

there are currently more than (*C stocks are trading in the segment.

II. On the (asis o! the market movements:

n the basis of the market movements the option are divided into two types. They areP

CA99 OTION:

A call option is bought by an investor when he seems that the stock price moves upwards.

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

a certain date for a certain price.

5T OTION:

A put option is bought by an investor when he seems that the stock price moves downwards.A put options gives the holder of the option right but not the obligation to sell an asset by a

certain date for a certain price.

III&On the (asis o! e/er%ise o! option:

n the basis of the exercising of the option, the options are classified into two categories.

A8E4ICAN OTION:

American options are options that can be exercised at any time up to the expiration date, all

stock options at !$2 are American. E5O4OEAN OTION:

2uropean options are options that can be exercised only on the expiration date itself.

2uropean options are easier to analyze than American options. All index options at !$2 are

2uropean.

A6-O33 4O3I9E 3O4 056E4 O3 A CA99 OTION:

The pay8off of a buyer options depends on a spot price of an underlying asset. The following

graph shows the pay8off of buyer of a call option.

rofit

IT7

$&

C 2< $ 2(

$ T7 AT7

>oss

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$ 8 $trike price T7 8 ut of the money

$ 8 remiumK >oss AT7 8 At the money

2( 8 $pot price ( IT7 8 In the money

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CASE *:%$pot price V $trike price'

As the spot price %2(' of the underlying is less than strike price %$'. The seller gets the profit

of %$', if the price decreases less than 2( then also profit of the seller does not exceed %$'.

CASE ,:%$pot price U $trike price'

As the spot price %2oss

$ 8 $trike price IT7 8 In the money

$ 8 remium Kprofit T7 8 ut of the money

2( 8 $pot price ( AT7 8 At the money

2< 8 $pot price

mba survey project

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