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GAUHATI UNIVERSITY

A Training Report “A STUDY ON DERIVATIVE MARKET”

Submitted in partial fulfillment of the requirements for the award of

MASTER OF BUSINESS ADMINISTRATION

(Industry Integrated)

TO

GAUHATI UNIVERSITY

By

Ms.RADHIKA.K.P

Roll No.1001-0218

Under the Guidance of

Dr. SHOBHA KIRAN SRISTY Mr. N.SELVARAJ

ASSOCIATE PROFESSOR BRANCH HEAD

RAI BUSINESS SCHOOL, CHENNAI STANDARD CHARTERED SECURITIES

(INDIA) Ltd.

1



CERTIFICATE

‘

This is to certify that the Training Report has been submitted in

Partial fulfillment of requirements for degree of


(Industry Integrated)

TO

GAUHATI UNIVERSITY

By

Radhika.k.p

Roll.No.10010216

Under the supervision and guidance of Dr SHOBHA KIRAN SRISTY,

and that no part of this report has been submitted for the award of any

other degree/diploma/fellowship or similar title prizes and that the work

has not been published in any scientific and other magazines.

Dr. SHOBHA KIRAN SRISTY

ASSOCIATE PROFESSOR

2



CERTIFICATE OF THE FACULTY GUIDE

This is to certify that the training Report “A STUDY ON DERIVATIVE

MARKET at STANDARD CHARTERED SECURITIES (INDIA) Ltd “is

completed under my guidance and supervision. It is submitted in partial fulfillment

of the Master of Business Administration (Industry Integrated) to Gauhati

University by Ms.Radhika.k.p (Roll No 1001-0216) and this has not formed a basis

for the award of any degree, diploma or fellowship by any other institutes or

universities.

Dr. Shobha Kiran Sristy

3



STUDENTS DECLARATION

4



STUDENTS DECLARATION

I hereby declare that the Training report conducted at

“STANDARD CHARTERED SECURITIES”

Under the guidance

Of

Dr.SHOBHA KIRAN SRISTY

ASSOCIATE PROFESSOR

RAI BUSINESS SCHOOL, CHENNAI

Submitted in partial fulfillment of the requirements for the Degree of


TO

GAUHATI UNIVERSITY

Is my original work and the same has not been submitted for the award of any other

degree /diploma/fellowship or other similar titles or prizes.

Place: Chennai Ms.RADHIKA.K.P

Date: Roll No.1001-0218

5



CERTIFICATE OF THE ORGANIZATION

6



ACKNOWLEDGEMENT

ACKNOWLEDGEMENT

7



I take immense pleasure in thanking Lakshminarayanan, training officer,

NIAM for having permitted me to carry out this project work.

I wish to express my deep sense of gratitude to my Internal Guide, Dr.Shobha

kiran sristy for her able guidance and useful suggestions, which helped me in

completing the project work, in time.

Needless to mention that Mr. SELVARAJ, BRANCH HEAD,

Mr. RAVISANKAR, RELATIONSHIP MANAGER, STANDARDCHARTERED

SECURITIES (INDIA) Ltd who had been a source of inspiration and for his timely

guidance in the conduct of our project work.

Finally, yet importantly, I would like to express my heartfelt thanks to my

beloved parents for their blessings, my friends/classmates for their help and wishes

for the successful completion of this project.

8



CONTENTS

CONTENTS

TOPIC PAGE NO

CHAPTER 1 INTRODUCTION

1.1 SECURITIES 11-24

CHAPTER 2 INDUSTRY PROFILE

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1.1 ORIGIN 26-30

1.2 FUTURE 30-34

CHAPTER 3 COMPANY PROFILE

1.1 ORIGIN 35-36

1.2 GROWTH& PRESENT STATUS 37-48

CHAPTER 4 OBJECTIVES AND METHODOLOGY

1.1 SCOPE 49-51

1.2 METHODOLOGY 51-52

CHAPTER 5 DERIVATIVES MARKET

1.1 DERIVATIVES 53-89

1.2 DATA ANALYSIS &INTERPRETATION 90-99

CHAPTER 6 SWOT ANALYSIS OF COMPANY

1.1 SWOT 100-102

CHAPTER 7 CONCLUSION

1.1 CONCLUSION 103

1.2 BIBILIOGRAPHY 104

1. INTRODUCTION

1.1 a. SECURITIES:

Securities as per the securities contracts Regulation Act (SCRA) 1956, includes instruments

such as shares, bonds, scripts, stocks or other marketable securities of similar nature in or of any

incorporate company or body corporate, government securities, derivatives of securities units of

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collective investment scheme, interest and rights in securities, security receipt or any other

instruments so declared by the central government.

FUNCTIONS OF SECURITIES MARKET:

It is a place where buyers and sellers of securities can enter into transactions to purchase

and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporate,

entrepreneurs to raise resources for their companies and business ventures through public issues.

Transfer of resources from those having idle resources (investors) to others who have a need for

them (corporate) is most efficiently achieved through the securities market. Stated formally,

securities markets provide channels for reallocation savings to investments and entrepreneurship.

Savings are linked to investments by a variety of intermediaries, through a range of financial

products, called ’Securities’.

ONE CAN INVEST IN:

• Shares

• Government securities

• Derivative products

• Units of Mutual funds etc. are some of the securities investors in the securities

market can invest in.

SECURITIES MARKETS NEED REGULATORS:

The absence of conditions of perfect competition in the securities market makes the role of the

regulator extremely important. The regulator ensures that the market participants behave in a

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desired manner so that securities market continues to be a major source of finance for corporate

and government and the interest of investors are protected.

REGULATION OF SECURITIES MARKET:

The responsibility for regulating the securities market is shared by

• Department of Economic Affairs (DEA)

• Department of Company Affairs (DCA)

• Reserve Bank of India (RBI)

• Securities and Exchange Board of India (SEBI)

SEBI AND ITS ROLE:

The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established

under section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment with statutory

powers for

a) Protecting the interests of investors in securities

b) Promoting the development of the securities market and

c) Regulating the securities market.

Its regulatory jurisdiction extends over corporate in the issuance of capital and transfer of

securities, in addition to all intermediaries and persons associated with securities market. SEBI has

been obligated to perform the aforesaid functions by such measures as it thinks fit. in particular, it

has powers for:

• Regulating the business in stock exchanges and any other securities market

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• Registering and regulating the working of stock brokers, sub-brokers etc

• Promoting and regulating self-regulatory organizations

• Prohibiting fraudulent and unfair trade practices

• Calling for information from, undertaking inspection, conducting enquiries and audits of

the stock exchanges, intermediaries, self – Regulatory organizations, mutual funds and

other persons associated with the securities market.

PARTICIPANTS OF SECURITIES MARKET:

The securities market essentially has three categories of participants, namely, the issuers of

securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc.

SEGMENTS OF SECURITIES MARKET:

The securities market has two interdependent segments:

Primary (new issues) market and Secondary market.

The Primary market provides the channel for sale of new securities while

Secondary market deals in securities previously issued.

1.1 b. PRIMARY MARKET:

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The primary market provides the channel for sale of new securities. Primary market

provides opportunity to issuers of securities; Government as well as corporate, to raise resources to

meet their requirements of investment and/or discharge some obligation. They may issue the

securities at face value, or at a discount/premium and these securities may take a variety of forms

such as equity, debt etc. They may issue the securities in domestic market and/or international

market.

FACE VALUE OF SHARES/DEBENTURES:

The nominal or stated amount (in Rs.) assigned to a security by the issuer .For shares, it is

the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder

at maturity. Also, known as par value or simply par.

For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does

not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100

or Rs. 1000 or any other price.

For a debt security, face value is the amount repaid to the investor when the bond matures

(usually, Government securities and corporate bonds have a face value of Rs. 100).The price at

which the Security trades depend on the fluctuations in the interest rates in the economy.

PURPOSE OF ISSUING SHARES TO PUBLIC:

Most companies are usually started privately by their promoter(s). However, the promoters’

capital and the borrowings from banks and financial institutions may not be sufficient for setting up

or running the business over a long term. So companies invite the public to contribute towards the

equity and issue shares to individual investors. The way to invite share capital from the public is

through a ‘Public Issue’. Simply stated, a public issue is an offer to the public to subscribe to the

share capital of a company.

TYPES OF ISSSUES:

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Primarily, issues can be classified as a Public, Rights or Preferential issues (also known as

private placements). While public and rights issues involve a detailed procedure, private

placements or preferential issues are relatively simpler. The classification of issues is illustrated

below:

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities

or an offer for sale of its existing securities or both for the first time to the public. This paves way

for listing and trading of the issuer’s securities.

A follow on public offering (Further Issue) is when an already listed company makes either a fresh

issue of securities to the public or an offer for sale to the public, through an offer document.

Rights Issue is when a listed company which proposes to issue fresh securities to its existing

shareholders as on a record date. The rights are normally offered in a particular ratio to the number

of securities held prior to the issue. This route is best suited for companies who would like to raise

capital without diluting stake of its existing shareholders.

A Preferential issue is an issue of shares or of convertible securities by listed companies to a select

group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a

public issue. This is a faster way for a company to raise equity capital. The issuer company has to

comply with the Companies Act and the requirements contained in 19th Chapter pertaining to

preferential allotment in SEBI guidelines which include pricing, disclosures in notice etc.

ISSUE PRICE:

The price at which a company's shares are offered initially in the primary market is called

as the Issue price. When they begin to be traded, the market price may be above or below the issue

price.

MARKET CAPITALIZATION:

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The market value of a quoted company, which is calculated by multiplying

its current share price (market price) by the number of shares in issue is called as market

capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs.

100. The market capitalization of company A is Rs. 12000 million.

DIFFERENCE BETWEEN PUBLIC ISSUE AND PRIVATE PLACEMENT:

When an issue is not made to only a select set of people but is open to the general public

and any other investor at large, it is a public issue. But if the issue is made to a select set of people,

it is called private placement. As per Companies Act, 1956, an issue becomes public if it results in

allotment to 50 persons or more. This means an issue can be privately placed where an allotment is

made to less than 50 persons.

INITIAL PUBLIC OFFER (IPO):

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market.

It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its

existing securities or both for the first time to the public. This paves way for listing and trading of

the issuer’s securities. The sale of securities can be either through book building or through normal

public issue.

SEBI’S ROLE IN AN ISSUE:

Any company making a public issue or a listed company making a rights issue of value of

more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations. The

company can proceed further on the issue only after getting observations from SEBI. The validity

period of SEBI’s observation letter is three months only i.e. the company has to open its issue

within three months period.

Indian companies are permitted to raise foreign currency resources through two main sources: a)

issue of foreign currency convertible bonds more commonly known as ‘Euro’ issues and b) issue

of ordinary shares through depository receipts namely ‘Global Depository Receipts

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(GDRs)/American Depository Receipts (ADRs)’ to foreign investors i.e. to the institutional

investors or individual investors.

AMERICAN DEPOSITARY RECEIPT:

An American Depositary Receipt ("ADR") is a physical certificate evidencing ownership of

American Depositary Shares ("ADSs"). The term is often used to refer to the ADSs themselves.

ADS:

An American Depositary Share ("ADS") is a U.S. dollar denominated form of equity

ownership in a non-U.S. company. It represents the foreign shares of the company held on deposit

by a custodian bank in the company's home country and carries the corporate and economic rights

of the foreign shares, subject to the terms specified on the ADR certificate. One or several ADSs

can be represented by a physical ADR certificate. The terms ADR and ADS are often used

interchangeably. ADSs provide U.S. investors with a convenient way to invest in overseas

securities and to trade non-U.S. securities in the U.S. ADSs are issued by a depository bank, such

as JPMorgan Chase Bank. They are traded in the same manner as shares in U.S. companies, on the

New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX) or quoted on

NASDAQ and the over-the-counter (OTC) market. Although ADSs are U.S. dollar denominated

securities and pay dividends in U.S. dollars, they do not eliminate the currency risk associated with

an investment in a non-U.S. company.

GLOBAL DEPOSITARY RECEIPT:

Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows

an issuer to raise capital simultaneously in two or markets through a global offering. GDRs may be

used in public or private markets inside or outside US. GDR, a negotiable

certificate usually represents company’s traded equity/debt. The underlying shares

correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.

1.1 c. SECONDARY MARKET:

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

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

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

markets.

ROLE OF SECONDARY MARKET:

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

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

monitoring and control conduit—by facilitating value-enhancing control activities, enabling

implementation of incentive-based management contracts, and aggregating information (via price

discovery) that guides management decisions.

DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKET:

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

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

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

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

the dealer market.

ROLE OF STOCK EXCHANGE IN BUYING AND SELLING SHARES:

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

Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and

sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one

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

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

based trading facility provided by the trading members of NSE.

SCREEN BASED TRADING:

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

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

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

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provide efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully

automated screen based trading system (SBTS) where a member can punch into the computer the

quantities of a security and the price at which he would like to transact, and the transaction is

executed as soon as a matching sale or buy order from a counter party is found.

MAXIMUM BROKERAGE THAT A BROKER CAN CHARGE:

The maximum brokerage that can be charged by a broker from his clients as commission

cannot be more than 2.5% of the value mentioned in the respective purchase or sale note.

NEED TO TRADE ON A RECOGNIZED STOCK EXCHANGE:

An investor does not get any protection if he trades outside a stock exchange. Trading at the

exchange offers investors the best prices prevailing at the time in the market, lack of any counter-

party risk which is assumed by the clearing corporation, access to investor grievance and redressal

mechanism of stock exchanges, protection up to a prescribed limit, from the Investor Protection

Fund etc.

DO’S AND DONT’S FOR INVESTOR WHILE INVESTING IN STOCK MARKETS:

• Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.

• Enter into an agreement with your broker/sub-broker setting out terms and conditions

clearly.

• Ensure that you give all your details in the ‘Know Your Client’ form.

• Ensure that you read carefully and understand the contents of the ‘Risk Disclosure

Document’ and then acknowledge it.

• Insist on a contract note issued by your broker only, for trades done each day.

• Ensure that you receive the contract note from your broker within 24 hours of the

transaction.

• Ensure that the contract note contains details such as the broker’s name, trade time and

number, transaction price, brokerage, service tax, securities transaction tax etc. and is

signed by the Authorized Signatory of the broker.

• To cross check genuineness of the transactions, log in to the NSE website

(www.nseindia.com) and go to the ‘trade verification’ facility extended by NSE. Issue

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account payee cheques/demand drafts in the name of your broker only, as it appears on the

contract note/SEBI registration certificate of the broker.

• While delivering shares to your broker to meet your obligations ensure that the delivery

instructions are made only to the designated account of your broker only.

• Insist on periodical statement of accounts of funds and securities from your broker. Cross

check and reconcile your accounts promptly and in case of any discrepancies bring it to the

attention of your broker immediately.

• Please ensure that you receive payments/deliveries from your broker, for the transactions

entered by you, within one working day of the payout date.

• Ensure that you do not undertake deals on behalf of others or trade on your own name and

then issue cheques from a family members’/ friends’ bank accounts.

• Similarly, the Demat delivery instruction slip should be from your own Demat account, not

from any other family members’/friends’ accounts.

• Do not sign blank delivery instruction slip(s) while meeting security pay in obligation.

• No intermediary in the market can accept deposit assuring fixed returns. Hence do not give

your money as deposit against assurances of returns.

• ‘Portfolio Management Services’ could be offered only by intermediaries having specific

approval of SEBI for PMS. Hence, do not part your funds to unauthorized persons for

Portfolio Management.

• Delivery Instruction Slip is a very valuable document. Do not leave signed blank delivery

instruction slip with anyone. While meeting pay in obligation make sure that correct ID of

authorized intermediary is filled in the Delivery Instruction Form.

• Be cautious while taking funding form authorized intermediaries as these transactions are

not covered under Settlement Guarantee mechanisms of the exchange.

• Insist on execution of all orders under unique client code allotted to you. Do not accept

trades executed under some other client code to your account.

• When you are authorizing someone through ‘Power of Attorney’ for operation of your DP

account, make sure that:

1. Your authorization is in favor of registered intermediary only.

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2. Authorization is only for limited purpose of debits and credits arising

out of valid transactions executed through that intermediary only.

3. You verify DP statement periodically say every month/ fortnight to ensure

that no unauthorized transactions have taken place in your account.

4. Authorization given by you has been properly used for the purpose for

which authorization has been given.

5. In case you find wrong entries please report in writing to the authorized

intermediary.

• Don’t accept unsigned/duplicate contract note.

• Don’t accept contract note signed by any unauthorized person.

• Don’t delay payment/deliveries of securities to broker.

• In the event of any discrepancies/disputes, please bring them to the notice of the broker

immediately in writing (acknowledged by the broker) and ensure their prompt rectification.

• In case of sub-broker disputes, inform the main broker in writing about the dispute at the

earliest. If your broker/sub-broker does not resolve your complaints within a reasonable

period please bring it to the attention of the ‘Investor Services Cell’ of the NSE.

• While lodging a complaint with the ‘Investor Grievances Cell’ of the NSE, it is very

important that you submit copies of all relevant documents like contract notes, proof of

payments/delivery of shares etc. along with the complaint. Remember, in the absence of

sufficient documents, resolution of complaints becomes difficult.

• Familiarize yourself with the rules, regulations and circulars issued by stock

exchanges/SEBI before carrying out any transaction.

PRODUCTS IN SECONDARY MARKETS:

Following are the main financial products/instruments dealt in the Secondary market which

may be divided broadly into Shares and Bonds:

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SHARES:

Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of

fractional ownership in a business venture.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those

already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive

2 shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the

number of shares the shareholder owns.

Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend

calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share.

They also enjoy priority over the equity shareholders in payment of surplus. But in the event of

liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture

holders.

Cumulative Preference Shares: A type of preference shares on which dividend accumulates if

remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on

equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the dividend

payable on the same accumulates, if not paid. After a specified date, these shares will be converted

into equity capital of the company.

Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security

is generally issued by a company, municipality or government agency. A bond investor lends

money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified

maturity date. The issuer usually pays the bond holder periodic interest payments over the life of

the loan. The various types of Bonds are as follows:

Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is

paid. The difference between the issue price and redemption price represents the return to the

holder. The buyer of these bonds receives only one payment, at the maturity of the bond.

22



Convertible Bond : A bond giving the investor the option to convert the bond into equity at a fixed

conversion price.

Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a

means of financing their cash requirements.

EQUITY INVESTMENT:

If we take the Nifty index returns for the past fifteen years, Indian stock market has

returned about 16% to investors on an average in terms of increase in share prices or capital

appreciation annually. Besides that on average stocks have paid 1.5% dividend annually. Dividend

is a percentage of the face value of a share that a company returns to its shareholders from its

annual profits. Compared to most other forms of investments, investing in equity shares offers the

highest rate of return, if invested over a longer duration.

FACTORS INFLUENCING PRICE OF A STOCK:

Broadly there are two factors: (1) stock specific and (2) market specific.

The stock-specific factor is related to people’s expectations about the company,

its future earnings capacity, financial health and management, level of technology and marketing

skills.

The market specific factor is influenced by the investor’s sentiment towards the stock

market as a whole. This factor depends on the environment rather Than the performance of any

particular company. Events favorable to an Economy, political or regulatory environment like high

economic growth, Friendly budget, stable government etc. can fuel euphoria in the investors.

PORTFOLIO:

A Portfolio is a combination of different investment assets mixed and matched for the

purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio can

include any asset you own-from shares, debentures, bonds, mutual fund units to items such as

23



gold, art and even real estate etc. However, for most investors a portfolio has come to

signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund

units.

DIVERSIFICATION:

It is a risk management technique that mixes a wide variety of investments within a

portfolio. It is designed to minimize the impact of any one security on overall portfolio

performance. Diversification is possibly the best way to reduce the risk in a portfolio.

DEBT INSTRUMENT:

Debt instrument represents a contract whereby one party lends money to another on pre-

determined terms with regards to rate and periodicity of interest, repayment of principal amount by

the borrower to the lender. In Indian securities markets, the term ‘bond ’ is used for debt

instruments issued by the Central and State governments and public sector organizations and the

term ‘debenture’ is used for instruments issued by private corporate sector.

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INDUSTRY PROFILE

25



ORIGIN AND DEVELOPMENT OF

THE INDUSTRY – INDUSTRY

PROFILE

1.2 a. ORIGIN AND DEVELOPMENT OF THE INDUSTRY

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The origin of the stock market in India goes back to the end of the eighteenth century when

long-term negotiable securities were first issued. However, for all practical purposes, the real

beginning occurred in the middle of the nineteenth century after the enactment of the companies

Act in 1850, which introduced the features of limited liability and generated investor interest in

corporate securities.

An important early event in the development of the stock market in India was the formation

of the native share and stock brokers 'Association at Bombay in 1875, the precursor of the present

day Bombay Stock Exchange. This was followed by the formation of associations/exchanges in

Ahmadabad (1894), Calcutta (1908), and Madras (1937). In addition, a large number of ephemeral

exchanges emerged mainly in buoyant periods to recede into oblivion during depressing times

subsequently.

Stock exchanges are intricacy inter-woven in the fabric of a nation's economic life. Without

a stock exchange, the saving of the community- the sinews of economic progress and productive

efficiency- would remain underutilized. The task of mobilization and allocation of savings could be

attempted in the old days by a much less specialized institution than the stock exchanges. But as

business and industry expanded and the economy assumed more complex nature, the need for

'permanent finance' arose. Entrepreneurs needed money for long term whereas investors demanded

liquidity – the facility to convert their investment into cash at any given time. The answer was a

ready market for investments and this was how the stock exchange came into being.

Stock exchange means any body of individuals, whether incorporated or not, constituted for

the purpose of regulating or controlling the business of buying, selling or dealing in securities.

These securities include:

(i) Shares, scrip, stocks, bonds, debentures stock or other marketable securities of a like nature in

or of any incorporated company or other body corporate;

(ii) Government securities

(iii) Rights or interest in securities.

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

are the two primary exchanges in India. In addition, there are 22 Regional Stock Exchanges.

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

for about 80 per cent of the equity volume traded in India. The NSE and BSE are equal in size in

terms of daily traded volume. The average daily turnover at the exchanges has increased from Rs

851 crore in 1997-98 to Rs 1,284 crore in 1998-99 and further to Rs 2,273 crore in 1999-2000

(April - August 1999). NSE has around 1500 shares listed with a total market capitalization of

around Rs 9, 21,500 crore.

The BSE has over 6000 stocks listed and has a market capitalization of around Rs

9, 68,000 crore. Most key stocks are traded on both the exchanges and hence the investor could

buy them on either exchange. Both exchanges have a different settlement cycle, which allows

investors to shift their positions on the bourses. The primary index of BSE is BSE Sensex

comprising 30 stocks. NSE has the S&P NSE 50 Index (Nifty) which consists of fifty stocks. The

BSE Sensex is the older and more widely followed index.

Both these indices are calculated on the basis of market capitalization and contain the

heavily traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the

exchanges have switched over from the open outcry trading system to a fully automated

computerized mode of trading known as BOLT (BSE on Line Trading) and NEAT (National

Exchange Automated Trading) System.

The stock exchange facilitates more efficient processing, automatic order matching, faster

execution of trades and transparency; the scrip's traded on the BSE have been classified into 'A',

'B1', 'B2', 'C', 'F' and 'Z' groups. The 'A' group shares represent those, which are in the carry

forward system (Badla). The 'F' group represents the debt market (fixed income securities)

segment. The 'Z' group scrip's are the blacklisted companies. The 'C' group covers the odd lot

securities in 'A', 'B1' & 'B2' groups and Rights renunciations. The key regulator governing Stock

Exchanges, Brokers, Depositories, Depository participants, Mutual Funds, FIIs and other

participants in Indian secondary and primary market is the Securities and Exchange Board of India

(SEBI) Ltd.

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The securities markets in India have witnessed several policy initiatives, which has refined

the market micro-structure, modernized operations and broadened investment choices for the

investors. The irregularities in the securities transactions in the last quarter of 2000-01, hastened

the introduction and implementation of several reforms. While a Joint Parliamentary Committee

was constituted to go into the irregularities and manipulations in all their ramifications in all

transactions relating to securities, decisions were taken to complete the process of demutualization

and corporatization of stock exchanges to separate ownership, management and trading rights on

stock exchanges and to effect legislative changes for investor protection, and to enhance the

effectiveness of SEBI as the capital market regulator. Rolling settlement on T+5 basis was

introduced in respect of most active 251 securities from July 2, 2001 and in respect of balance

securities from 31st December 2001. Rolling settlement on T+3 basis commenced for all listed

securities from April 1, 2002 and subsequently on T+2 basis from April 1, 2003.

The derivatives trading on the NSE commenced with the 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 November

9, 2001. Due to rapid changes in volatility in the securities market from time to time, there was a

need felt for a measure of market volatility in the form of an index that would help the market

participants. NSE launched the India VIX, a volatility index based on the S&P CNX Nifty Index

Option prices.

Volatility Index is a measure of market’s expectation of volatility over the near term. The

Indian stock market regulator, Securities & Exchange Board of India (SEBI) allowed the direct

market access (DMA) facility to investors in India on April 3, 2008. To begin with, DMA was

extended to the institutional investors. In addition to the DMA facility, SEBI also decided to permit

all classes of investors to short sell and the facility for securities lending and borrowing scheme

was operationalised on April 21, 2008.

The Debt markets in India have also witnessed a series of reforms, beginning in the year

2001-02 which was quite eventful for debt markets in India, with implementation of several

important decisions like setting up of a clearing corporation for government securities, a negotiated

dealing system to facilitate transparent electronic bidding in auctions and secondary market

transactions on a real time basis and dematerialization of debt instruments. Further, there was

29



adoption of modified Delivery-versus-Payment mode of settlement (DvP III in March 2004). The

settlement system for transaction in government securities was standardized to 12 T+1 cycle on

May 11, 2005. To provide banks and other institutions with a more advanced and more efficient

trading platform, an anonymous order matching trading platform (NDSOM) was introduced in

August 2005.

Short sale was permitted in G-secs in 2006 to provide an opportunity to market participants

to manage their interest rate risk more effectively and to improve liquidity in the market. ‘When

issued’ (WI) trading in Central Government Securities was introduced in 2006. As a result of the

gradual reform process undertaken over the years, the Indian G-Sec market has become

increasingly broad-based and characterized by an efficient auction process, an active secondary

market, electronic trading and settlement technology that ensure safe settlement with Straight

through Processing (STP). This chapter, however, takes a review of the stock market developments

since 1990. These developments in the securities market, which support corporate initiatives,

finance the exploitation of new ideas and facilitate management of financial risks, hold out

necessary impetus for growth, development and strength of the emerging market economy of India.

1.2 b. GROWTH AND PRESENT STATUS OF THE INDUSTRY

The main concern for the emerging market economies (including India) may not be the

direct exposure to global financial institutions, but more about access to credit and the slowdown it

is causing in America and other European economies.

30



Economists point out that the extent of the effect will be decided by the nature of the US

recession. If it is shallow (and the US comes out of it quickly), India may not suffer much of an

impact. But if it is long and deep, India’s exports will be hit.

The Indian stock market is definitely not in one direction, and building positions on both

buy and short sides is not a fairly good idea to make money in such a tight market. Analysts

believe that the market is definitely going to see some action as soon some breaking news come

out, but the effect of such news on the Indian stock market would not be lasting long, and there

could be a major pull back leading the market to touch the 13000 levels.

Having said that, economists believe that the inflation would inch down to 10% in the

coming quarter that would become visible in retail and consumer durable products soon, which

would in turn boost consumer confidence. This would definitely push the markets to bounce back

from the 13000 levels, and we might see some fresh buying, and both sensex and nifty might

witness some rally.

These levels could be of great importance for those domestic as well as NRI clients who

did not get a chance to make investments into top Indian mutual funds when the market was

trading at 18000 levels. A prudent idea would be to invest 25% of your savings at these levels, and

when the market drops down 20% from here, another 40% of the savings can be invested.

Current market conditions are as such that it’s very hard to predict the direction of the

market, thus it is vital important for both resident as well as non resident investors to act wisely and

invest with a proper game plan. The whole idea is to do investing wisely and with common sense,

and not forcing one self into rush and landing into unnecessarily diversification of funds into some

unwanted financial instruments. For more ideas as to how to go about drafting a portfolio, one

should consult a good investment adviser and leave the job of asset allocation to professionals.

1.2 c. FUTURE OF THE INDUSTRY

India just keeps getting better and better. The economy is growing rapidly surpassing some

of Asia’s biggest economies. India is now becoming the third largest country in Asia economically.

It has grown so much and is expected to continue to grow like this for a long time. The Indian

Government is doing everything it can do to propel the growth rates in the Indian Industry,

31

http://www.nriinvestindia.com/

http://www.nriinvestindia.com/free_nri_investment_advice.html



http://www.nriinvestindia.com/



primarily in: India Stock Market, Indian Companies, India’s manufacturing index, India Business

Sector, India’s Company sector and other India investment industries.

The yearly salaries are rising and the command to buy is under the command to spend. The

Investment GDP ratio is at a high. It is now over 30 percent and between the years 1990 and 2004

the average was only 25 percent. It has been said that, once it reaches 30 percent, it is going to takeoff rapidly. So India is expected to move rapidly.

The down side to India’s big movement is that there is a limit to how high it can

go. India has grown so much, making the costs of everything go up so frequently. It can turn into

the most expensive country in the world. The companies are now working above their finest

ability.

A lot of people try to People undervalue India‘s accomplishment in growth. The growth

rates are very good and it wouldn’t be wrong for people to overvalue it. India has created the best

growth story that happen over a long time. Although India is growing, there can still be corrections

in the market. No matter how well a country is doing, there is always something that can be fixed.

Some say that they would like to wait until the market is fixed to invest. It is said that the Reserve

Bank of India come up with a way that the domestic credit cycle can last for an extensive time.

This credit cycle and the investment cycle, of course, will keep India in the bull market for a long

time. They stopped/slowed the growth of the bank credit. The bank is taking control of the credit

and loans very well so that India stays on the right track. The Indian share market has been in a bull

run since April 2011 and thus corrections are part and parcel for any market. The share markets

will see ups and downs but there will be steady growth. There is a good atmosphere for

investments in India and the share markets will thrive under the circumstances. Firms which deal

with securities will make good business as more and more people will enter the share markets to

make investments. In the long run all securities firms have a bright future.

32



PROFILE OF THE

ORGANISATION STANDERD CHARTERD

SECURITIES

2.1 ORIGIN OF THE ORGANIZATION:

STANDARD CHARTERED SECURITIES (INDIA) LIMITED:

33



Standard Chartered Securities (India) Limited is a leading broking company that helps

retail and institutional investors with their capital market investment requirements.

At Standard Chartered Securities, the aim is to offer simplified investment solutions that

provide long-term value to the customers. For institutional clients, they offer products such as

equity capital markets, equity and derivative broking. Retail division caters to online as well as

offline customers, offering products such as equity and derivative broking, depository services,

mutual funds, fixed income instruments and company fixed deposits.

They have a dedicated team of research analysts who work independently to provide

investment and trading recommendation to our institutional and retail customers. A network of

relationship managers and customer care executives offer efficient execution backed by in depth

research and expertise to customers across the country. SCSI has a large network with pan India

presence in 112 locations through 34 branches and 97 authorized centers.

Standard Chartered Securities is registered as a trading and clearing member with Bombay

Stock Exchange Limited (BSE), National Stock Exchange of India Limited (NSE) and MCX Stock

Exchange Limited (MCX). The Company is also registered as Depository Participant with Central

Depository Services (India) Limited (CDSL) as well as National Securities Depository Limited

(NSDL).

Standard Chartered Securities is part of the Standard Chartered Group, an international

financial services group that offers a variety of financial services including Consumer Banking,

Wholesale Banking, Corporate Advisory, Capital Market Services, SME Banking, and Private

Banking. Standard Chartered PLC, listed on the London, Hong Kong and Mumbai stock

exchanges, ranks among the top 20 companies in the FTSE-100 by market capitalization. The

London-headquartered Group has operated for over 150 years in some of the world's most dynamic

markets, leading the way in Asia, Africa and the Middle East.

The Standard Chartered Group in India is also represented by Standard Chartered Bank,

India's largest international Bank with 94 branches across 37 cities. To know more about Standard

34



Chartered Bank, India, click on www.standardchartered.co.in. To know about Standard Chartered

plc, click on www.standardchartered.com

History of Standard Chartered Securities (India) Limited:

Standard Chartered Securities (India) Limited is a wholly-owned subsidiary of Standard

Chartered Bank (Mauritius) Limited (SCBM), which acquired the company from Securities

Trading Corporation of India (STCI) over 2008-2010. Prior to the acquisition, Standard Chartered

Securities was known as UTI Securities Limited (UTISEL).

On August 23, 2007, SCBM agreed to acquire UTISEL from STCI in three tranches. As a

part of first branch, SCBM acquired 49% stake in UTISEL on January 11, 2008, after which, the

name of the Company was changed from UTISEL to Standard Chartered-STCI Capital Markets

Limited i.e. January 17, 2008.

SCBM acquired further 25.9% stake in the Company on December 12, 2008, as a part of

second leg of the transaction and increase its total stake from 49% to 74.9% in the Company.

As a last part of the acquisition, SCBM increased its stake to 100% in the Company by

acquiring the residual stake of 25.1% from STCI on October 08, 2010. Consequently the Company

became the wholly owned subsidiary of SCBM and was re-named Standard Chartered Securities

(India) Limited.

2.2 GROWTH AND DEVELOPMENT OF THE ORGANIZATION:

35

http://www.standardchartered.co.in/

http://www.standardchartered.com/


http://www.standardchartered.co.in/




Standard Chartered Bank in India is the country’s largest international bank with 90

branches in 33 cities and India is one of the Group’s key markets worldwide. Employing about

19,000 people, Standard Chartered Bank has played a significant role in the history of the banking

industry in India since opening its first branch in Kolkata, 150 years ago, on 12 April 1858.

Standard Chartered Bank considers India to be one of the prime economic opportunities of

the 21st century and is proud to be so strongly positioned here. SCSI have ambitious plans to

transform business in the country and to further expand our operations in India.

On 11 January 2008, Standard Chartered Bank (Mauritius) Limited acquired 49% stake of

erstwhile UTI Securities Limited from Securities Trading Corporation of India (STCI).

Accordingly, the name of the Company was changed from ‘UTI Securities Limited’ to ‘Standard

Chartered – STCI Capital Markets Limited’ with effect from 17 January 17 2008. Subsequently,

on 12 December 2008, SCBM acquired further 25.9% stake in Standard Chartered – STCI Capital

Markets Limited to increase its total stake in Standard Chartered – STCI Capital Markets Limited

from 49% to 74.9%.

The institutional division of Standard Chartered Securities (India) Limited has been

catering to the ever growing needs of the institution and corporate customers for over 15 years by

providing a wide range of financial intermediation services.

SCSI has provided consistent service has made them the financial intermediary of choice to

over 800 institutional clients which bear testimony to our continuous effort of reaching out to

customers requirements.

Pan India presence ensures tailor made services for customers at their point of presence

ensuring seamless execution of their requirements. Further, parentage with Standard Chartered

Bank helps them to provide global transactional capability, to our customers.

SERVICES OFFERED BY STANDARD CHARTERED SECURITIES (INDIA) LIMITED:

36

1.Equity Capital Markets 2.Institutional Equities 3.Fixed Income Group

Creation and execution of

capitalization strategy

Consistent, quality services,

with utmost confidentialityand competitive edge

Complete solution in the

debt segment

http://standardcharteredsecurities.co.in/LinkClick.aspx?link=58&tabid=55





1. EQUITY CAPITAL MARKETS:

The Equity Capital Markets division at Standard Chartered Securities (India) Limited aims

to offer entrepreneurs, companies and investors, independent financial advice and transaction

execution of the highest standard. The endeavor is to provide value to growing and mature

companies by helping them in the creation and execution of the best possible capitalization

strategy.

Capital Markets

The experienced professionals of Standard Chartered Securities (India) Limited offer a

wide range of services such as:

• Initial public offer (IPO)

• Rights issue

• Follow on offerings (FPO)

• Qualified Institutions placement (QIP) / preferential allotments

• Open offers

• Equity buyback programs

• Private equity placements in listed companies (PIPE)

Private Equity

SCSI provides advisory solutions to companies on their capitalization/ re-capitalization strategies.

The services provided include

• Advice on business plan

• Advice on optimum capital structure

• Due diligence and preparation of information memorandum

• Identifying and screening of investors

• Assistance in valuation and most effective financial structure

37



• Negotiating the terms of the deal with investors and assisting in drafting of necessary legal

documentation for closure

• Post closure servicing for company and fund

2. INSTITUTIONAL EQUITIES:

• The institutional equities division at Standard Chartered Securities (India) Limited caters to

the investment needs of corporate and institutional clients. Our endeavor is to provide

consistent quality services, enabling our clients to derive maximum benefits out of the

markets.

• Innovative approach, incisive research, responsive sales teams, and intensive execution

method have enabled SCSI to uncompromisingly service our clients in unique and different

ways.

• SCS have a strong sales team, comprising of top equity professional, which translates the

research findings into actionable advice for clients, based on their specific needs. The team

services more than 110 institutional clients which include leading domestic mutual funds,

insurance companies, domestic financial institutions, banks and FIIs.

3. RETAIL:

• Standard Chartered Securities (India) Limited are a leading broking company with 15 years

of experience catering to the financial needs of our ever increasing customer base. The aim

is to help investors achieve their financial goals by providing high quality investment

services, in a simple, direct and cost-effective manner.

• SCSI has a large retail network with pan India presence in 112 locations through 34

branches and over 97 authorized centers caters to both online and offline customers.

38



• The experienced team of retail research analysts backed by in depth research, knowledge

and expertise guides customers with appropriate solutions

• In addition to offline trading through the branches and authorized centers, they also offer

comprehensive trading solutions through our online trading portal which is fully equipped

to cater to your multiple trading needs.

• Standard Chartered Securities (India) Limited 3-in-1 account facility provides seamless

integration of bank, demat and trading accounts.

39



PRESENT STATUS OF THE

ORGANISATION

2.3 PRESENT STATUS OF THE ORGANIZATION:

Standard Chartered Securities (India) Limited is a wholly-owned subsidiary of Standard

Chartered Bank (Mauritius) Limited (SCBM), which acquired the company from Securities

Trading Corporation of India (STCI) over 2008-2010. Prior to the acquisition, Standard Chartered

Securities was known as UTI Securities Limited (UTISEL).

On August 23, 2007, SCBM agreed to acquire UTISEL from STCI in three tranches. As a

part of first branch, SCBM acquired 49% stake in UTISEL on January 11, 2008, after which, the

40



name of the Company was changed from UTISEL to Standard Chartered-STCI Capital Markets

Limited i.e. January 17, 2008.

SCBM acquired further 25.9% stake in the Company on December 12, 2008, as a part of

second leg of the transaction and increase its total stake from 49% to 74.9% in the Company.

As a last part of the acquisition, SCBM increased its stake to 100% in the Company by

acquiring the residual stake of 25.1% from STCI on October 08, 2010. Consequently the Company

became the wholly owned subsidiary of SCBM and was re-named Standard Chartered Securities

(India) Limited.

Standard Chartered Bank has completed the acquisition of an additional 25.9 per cent stake

in Standard Chartered-STCI Capital Markets Limited (formerly UTI Securities Limited) to take its

total holding in the company to 74.9 per cent. The company currently offers its services under the

brand ‘Standard Chartered Wealth Managers’.

Standard Chartered bought 49 per cent of UTI Securities Limited from Securities Trading

Corporation of India Limited (STCI) in January 2008 following, receipt of regulatory approvals for

the transaction.

This move by Standard Chartered to increase its existing stake is in line with its original

intent reflected in the contract, under which both parties provided for the stake to be increased in

stages to 100 per cent by 2010. Regulatory approvals have been received for the additional stake

and change in the controlling interest in Standard Chartered-STCI Capital Markets Limited.

Neeraj Swaroop, Regional CEO – India and South Asia, Standard Chartered Bank, said: “This

strategic initiative is a reflection of our long term commitment to the Indian market, despite the

current economic slowdown. I am delighted that we have been successful in combining thestrengths of Standard Chartered with UTI Securities, a recognized leader in the financial services

spectrum.”

41



He further commented, “We are extremely confident that with this partnership, we will

continue to offer our customers both competitive investment avenues and remain a provider of

choice in this challenging environment.”

Somasundaram PR, Managing Director, Standard Chartered Capital Markets also said,

“This has been a challenging year for the business but the acquisition of an additional stake at this

time reflects the underlying confidence of Standard Chartered Bank in the Indian economy as a

whole and in the Indian equity capital markets specifically. We have tested our plans in both the

institutional and retail segments of this business in the last year and we are convinced we have a

significant opportunity here and a global strategic fit.” The company currently offers its services

under a global brand – ‘Standard Chartered Wealth Managers’. Standard Chartered will also invest

additional capital of US $4.5 million in line with the FDI guidelines with the increase in stake.

Standard securities have a good standing in the market and the sale of securities and trading

is on the upswing. The future securities as an industry are good and have a bright future.

2.4 FUNCTIONAL DEPARTMENTS OF THE ORGANIZATION:

42



1.Online Broking 2.Offline Broking 3.Distribution of financial

products

Online trading portal is a

single gateway for your

multiple investment needs.

Investing in equities with

SCSI truly empowers you to

meet your financial needs

Wide range of services to

meet ever increasing

financial objectives

1. ONLINE BROKING:

Customer convenience is our top-most priority. Keeping this in mind, Standard Chartered

Securities (India) Limited brings ‘The power of 3 at the convenience of 1'. With the 3in-1 account,

SCSI offers seamless integration of bank, trading and demat accounts. The bank account offered is

Standard Chartered Bank account while the broking and demat accounts will be with Standard

Chartered Securities (India) Limited.

The easy to use features of 3in1 account include:

• Single login facility

this feature enables direct access to details of all 3 accounts with a single log-in - no need to

remember multiple user names and passwords.

• Hassle-free and convenient trading

No need to write cheques or issue TIFD (DIS) slips.

Instant update on status of purchase/sale orders.

Automated pay-in of shares and pay-out of funds/shares to and from your DP/bank account.

• Access to multiple products

Invest/trade online in multiple products - equity and derivatives trading, IPO, GOI bonds

and mutual funds.

You can place orders online or through the Phone-2-Trade facility.

43






TRADING PLATFORM:

EASY TRADE:

Easy Trade

Customers can trade on website that is easy to navigate with advanced stock trading features.

They can manage your account and trade on exchanges.

Benefits of EASY Trade:

• Trading on NSE & BSE

• Integrated Bank, Demat and Trading Account

• Get Current Order Status

• Monitor your orders

• Updated buying power

• Any where access

• Access to back end reports

ADVANCE TRADE:

44



Customers can trade on website with live streaming quotes. They can create multiple watch

lists to track market movements.

Benefits of ADVANCED Trade:

•

Streaming quotes• Market Depth Window

• Trading on NSE & BSE

• Create Multiple Watch lists

• Equity and Derivatives orders in single window

• Hot Key Navigation

• Access to back end reports

Super Trade

Customers can trade from their desktop with live streaming quotes and advanced technical

tools.

Benefits of SUPER Trade

• Personalized Stock Quote Lists

• Fully Customizable display

• Streaming Intraday, Daily and Weekly Charts

• Streaming Quotes

•Alert capabilities

• Track your orders real time

• Real time position updates

• Lock terminal option

2. OFFLINE BROKING

45



Standard Chartered Securities (India) Limited, offers the convenience of trading in equity,

derivatives and currency derivatives through our network of 34 branches and over 97 authorized

centers.

Equity

Investing in equities with Standard Chartered Securities (India) Limited truly empowers

customers to meet your financial needs. Different investors foray into equities for different reasons.

SCSI understands the expectations of customers and accordingly offers a wide range of products

and services.

To serve the varied customers, SCSI offer both delivery and intra-day trading. The

extensive network of dealers provides prompt and efficient service, helping customers to take

quick and right decisions, to maximize your gains. SCSI provides both market and limit orders,

offering customers a choice to take time-based or price-based decisions as they deem fit. SCSI

are member of Bombay Stock Exchange Limited (BSE) and National Stock Exchange (NSE).

Derivatives

If customers are looking at hedging your investments, or wish to gain through your

estimates about the movement of the Index or stocks, SCSI offers derivatives trading on Future and

Options segment of the NSE (National Stock Exchange).

Currency Derivatives

A new investment opportunity from Standard Chartered Securities (India) Limited for all

Resident Indians. Currency Derivatives are standardized foreign exchange contracts traded on an

exchange to buy or sell one currency against another on a specified future date. The contracts will

be traded online through the order-driven market mechanism, quite similar to equity derivatives.

3. DISTRIBUTION OF FINANCIAL PRODUCTS:

The financial products that are being offered in the markets today provide an opportunity to

the investor to participate in the stock market with a small investment size.

46



Standard Chartered Securities (India) Limited has a large retail network with pan India

presence in 112 locations through 34 branches, saver 97 business associates caters to the

investment needs of both offline and online clients. SCSI representatives who have been trained

and facilitated with the best tools, enables them to offer customers with the best services and deals.

SCSI brings a wide array of products such as IPOs, fixed income bonds and different

schemes from leading mutual funds to help you diversify investments.

IPO

Initial Public Offer (IPO) offers an excellent opportunity to be part of a company’s growth

story right from its foray into markets. All that is required is the “Buying Power” and we take care

of the rest for you.

Mutualfund

Mutual funds are today an integral part of an investor’s portfolio. SCSI offers a wide

variety of Mutual Funds schemes ranging from plain vanilla funds to exchange traded funds. SCSI

network offers customers with products from leading asset management companies (AMCs)

operating in the market. With online platform, mutual fund investment is just at the click of a

button.

47



OBJECTIVES & METHODODLOGY

SCOPE O F T H E PR O J E C T :

Approach customers.

Reactivate the existing inactive customers.

48



Enroll non-existing customers to increase activation rate.

Interaction with existing customers for feedback.

DATA COLLECTION METHOD

Types of Data and Data Collection:

Data that I have received for making the project is a combination of both primary

and secondary data.

Primary Data

The data collected through

1) Daily analysis of share market

2) Derivatives market.

3) Portfolio analysis.

These analyses are done by watching the trade terminal in standard chartered

securities.

Secondary Data

Secondary data collection is from various sites like money control site,

nseindia.com, and from magazines like capital market and Dallal Street

49



Sampling plan

The sample size for non traders was 307 and that of customers is 71 ready to start

the trade again. Remaining is not ready. In ST without DP balance 205 customers

out of which 23 are interested and others are not interested.

STUDENT’S WORK PROFILE:

JOB PROFILE:

Name: RADHIKA. K.P

50



Designation: winter Intern Trainee

Department: Finance department

Process Handled: online trading & customer relationship management

ROLES & RESPONSIBILITIES:

• Called corporate clients and enquired about their present status in trading.

• I have done accurate follow up of interested clients for continuous trading.

• Called and explained the benefits and use of 3 in 1 account to customers for the easiness of

their trading.

• Watched market daily, and understood the reasons behind the flexuations in the market.

• Created portfolio for the amount of Rs 500000/- and watched and traded that for 10 days

found out the profit on the last day.

• Took seminar on different topics given by the relationship manager.

• Noted down high and low rate of nifty index, top gainers and losers of the the day.

• Did trading of futures and options

• Did hedging of futures and options as per the condition of market.

51



DERIVATIVES

1.1 DERIVATIVES:

52



DERIVATIVES DEFINED

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

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

or any other asset. In our earlier discussion, we saw that wheat farmers may wish to sell their

harvest at a future date to eliminate the risk of change in price by that date. Such a transaction is anexample of a derivative. The price of this derivative is driven by the spot price of wheat which is

the “underlying” in this case.

TYPES OF DERIVATIVES:

Forwards: A forward contract is a customized contract between two entities, where settlement

takes place on a specific date in the future at today’s pre-agreed price.

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

time in the future at a certain price. Futures contracts are special types of forward contracts in the

sense that the former are standardized exchange-traded contracts, such as futures of the Nifty

index.

Options: An Option is a contract which gives the right, but not an obligation, to buy or sell the

underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option

premium and therefore obliged to sell/buy the asset if the buyer exercises it on him. Options are of

two types - Calls and Puts options:

‘Calls’ give the buyer the right but not the obligations to buy a given quantity of the underlying

asset, at a given price on or before a given future date.

53



‘ Puts’ give the buyer the right, but not the obligation to sell a given quantity of underlying asset at

a given price on or before a given future date. Presently, at NSE futures and options are traded on

the Nifty, CNX IT, BANK Nifty and 116 single stocks.

Warrants: Options generally have lives of up to one year. The majority of options traded on

exchanges have maximum maturity of nine months. Longer dated options are called Warrants and

are generally traded over-the counter.

COMMODITY:

FCRA Forward Contracts (Regulation) Act, 1952 defines “goods” as “every kind of

movable property other than actionable claims, money and securities”. Futures’ trading is

organized in such goods or commodities as are permitted by the Central Government. At present,

all goods and products of agricultural (including plantation), mineral and fossil origin are allowed

for futures trading under the auspices of the commodity exchanges recognized under the FCRA.

COMMODITY DERIVATIVES MARKET:

Commodity derivatives market trade contracts for which the underlying asset is

commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or

precious metals like gold, silver, etc.

DIFFERENCE IN COMMODITY AND FINANCIAL DERIVATIVES:

The basic concept of a derivative contract remains the same whether the underlying

happens to be a commodity or a financial asset. However there are some features which are very

peculiar to commodity derivative markets. In the case of financial derivatives, most of these

contracts are cash settled. Even in the case of physical settlement, financial assets are not bulky and

do not need special facility for storage. Due to the bulky nature of the underlying assets, physical

settlement in commodity derivatives creates the need for warehousing. Similarly, the concept of

varying quality of asset does not really exist as far as financial underlying are concerned. However

in the case of commodities, the quality of the asset underlying a contract can vary at times.

ORIGIN OF DERIVATIVES

54



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

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

harvest, farmers would face price uncertainty. Through the use of simple derivative products, it

was possible for the farmer to partially or fully transfer price risks by locking-in asset prices. These

were simple contracts developed to meet the needs of farmers and were basically a means of

reducing risk.

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

harvest in September. In years of scarcity, he would probably obtain attractive prices. However,

during times of oversupply, he would have to dispose off his harvest at a very low price. Clearly

this meant that the farmer and his family were exposed to a high risk of price uncertainty.

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

that of having to pay exorbitant prices during dearth, although favorable prices could be obtainedduring periods of oversupply. Under such circumstances, it clearly made sense for the farmer and

the merchant to come together and enter into contract whereby the price of the grain to be delivered

in September could be decided earlier. What they would then negotiate happened to be futures-type

contract, which would enable both parties to eliminate the price risk.

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

merchants together. A group of traders got together and created the ‘to-arrive’ contract that

permitted farmers to lock into price upfront and deliver the grain later. These to-arrive contracts

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

standardized, and in 1925 the first futures clearing house came into existence.

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

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

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

3.1 . The Forwards Contracts (Regulation) Act, 1952, regulates the forward/futures contracts in

commodities all over India. As per this the Forward Markets Commission (FMC) continues to have

jurisdiction over commodity futures contracts. However when derivatives trading in securities was

55



introduced in 2001, the term “security” in the Securities Contracts (Regulation) Act, 1956 (SCRA),

was amended to include derivative contracts in securities. Consequently, regulation of derivatives

came under the purview of Securities Exchange Board of India (SEBI). We thus have separate

regulatory authorities for securities and commodity derivative markets.

Derivatives are securities under the SCRA and hence the trading of derivatives is governed bythe regulatory framework under the SCRA. The Securities Contracts (Regulation) Act, 1956

defines “derivative” to include-

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

instrument or contract differences or any other form of security.

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

Figure.1 Types of Derivatives Market

3.2 TYPES OF DERIVATIVES MARKET

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Derivative

s

Future Option Forward Swaps

Exchange Traded Derivatives Over The Counter Derivatives

National Stock Exchange Bombay Stock ExchangeNational Commodity & Derivative exchange

Index Future Index option Stock option Stock future Interest rate

Futures

3.3 TYPES OF DERIVATIVES

FORWARD CONTRACTS

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

price. One of the parties to the contract assumes a long position and agrees to buy the

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

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

price. Other contract details like delivery date, price and quantity are negotiated bilaterally by

the parties to the contract. The forward contracts are n o r ma l l y traded outside the

exchanges.

The salient features of forward contracts are:

• They are bilateral contracts and hence exposed to counter-party risk.

• Each contract is custom designed, and hence is unique in terms of contract size,expiration date and the asset type and quality.

• The contract price is generally not available in public domain.

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

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

party, which often results in high prices being charged.

However forward contracts in certain markets have become very standardized, as in

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

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

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

primarily because both serve essential ly the same economic functions of allocating risk

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

over the forward contracts as they eliminate counterparty risk and offer more liquidity.

FUTURE CONTRACT

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

a certain underlying instrument at a certain date in the future, at a pre-set price. The future date is

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

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

price, normally, converges towards the futures price on the delivery date.

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

options contract, which gives the buyer the right, but not the obligation, and the option writer

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

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

position and its contract obligations. Futures contracts are exchange traded derivatives. The

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

BASIC FEATURES OF FUTURE CONTRACT

1. Standardization:

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

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

interest rate.

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

• The amount and units of the underlying asset per contract. This can be the notional amount

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

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

• The currency in which the futures contract is quoted.

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

In case of physical commodities, this specifies not only the quality of the underlying goods

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

• The last trading date.

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

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2. Margin:

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

This renders the owner liable to adverse changes in value, and creates a credit risk to the exchange,

who always acts as counterparty. To minimize this risk, the exchange demands that contract

owners post a form of collateral, commonly known as Margin requirements are waived or reduced

in some cases for hedgers who have physical ownership of the covered commodity or spread

traders who have offsetting contracts balancing the position.

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

by historical price changes, which is not likely to be exceeded on a usual day's trading. It may be

5% or 10% of total contract price.

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

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

is calculated by the futures contract, i.e. agreeing on a price at the end of each day, called the

"settlement" or mark-to-market price of the contract.

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

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

At the end of every trading day, the contract is marked to its present market value. If the trader is

on the winning side of a deal, his contract has increased in value that day, and the exchange pays

this profit into his account. On the other hand, if he is on the losing side, the exchange will debit

his account. If he cannot pay, then the margin is used as the collateral from which the loss is paid.

3. Settlement

Settlement is the act of consummating the contract, and can be done in one of two ways, as

specified per type of futures contract:

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

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

contract. In practice, it occurs only on a minority of contracts. Most are cancelled out by

purchasing a covering position - that is, buying a contract to cancel out an earlier sale

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

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

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

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A futures contract might also opt to settle against an index based on trade in a related spot

market.

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

interest rate futures contracts, this happens on the Last Thursday of certain trading month. On this

day the t+2 futures contract becomes the t forward contract.

Pricing of future contract

In a futures contract, for no arbitrage to be possible, the price paid on delivery (the forward price)

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

rational forward price represents the expected future value of the underlying discounted at the risk

free rate. Thus, for a simple, non-dividend paying asset, the value of the future/forward, ,

will be found by discounting the present value at time to maturity by the rate of risk-free

return .

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

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

In the case where the forward price is higher:

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

market) with borrowed money.

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

forward price.

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

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

In the case where the forward price is lower:

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

market); he invests the proceeds.

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

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

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

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

TABLE 1-

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DISTINCTION BETWEEN FUTURES AND FORWARDS CONTRACTS

FEATURES FORWARD CONTRACT FUTURE CONTRACT

Operational

Mechanism

Traded directly between two

parties (not traded on the

exchanges).

Traded on the exchanges.

Contract

Specifications

Differ from trade to trade. Contracts are standardized contracts.

Counter-party

risk

Exists. Exists. However, assumed by the clearing

corp., which becomes the counter party to

all the trades or unconditionally guarantees

their settlement.

Liquidation

Profile

Low, as contracts are tailor

made contracts catering to the

needs of the needs of the

parties.

High, as contracts are standardized

exchange traded contracts.

Price discovery Not efficient, as markets are

scattered.

Efficient, as markets are centralized and all

buyers and sellers come to a common

platform to discover the price.

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

Individual stock Futures in India.

OPTIONS

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

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

exchange for payment of a premium is known as ‘option’. Underlying asset refers to any asset that

is traded. The price at which the underlying is traded is called the ‘strike price’.

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

a. CALL OPTION :

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

any financial asset, at a specified price on or before a specified date is known as a ‘Call option’.

The owner makes a profit provided he sells at a higher current price and buys at a lower future

price.

b. PUT OPTION:

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

any financial asset, at a specified price on or before a specified date is known as a ‘Put option’. The

owner makes a profit provided he buys at a lower current price and sells at a higher future price.

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

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

and warrants become the subject of options.

4. SWAPS

Swaps are transactions which obligates the two parties to the contract to exchange a series of cash

flows at specified intervals known as payment or settlement dates. They can be regarded as

portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap)

payments, based on some notional principle amount is called as a ‘SWAP’. In case of swap, only

the payment flows are exchanged and not the principle amount. The two commonly used swaps

are:

INTEREST RATE SWAPS:

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Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed rate

interest payments to a party in exchange for his variable rate interest payments. The fixed rate

payer takes a short position in the forward contract whereas the floating rate payer takes a long

position in the forward contract.

CURRENCY SWAPS:

Currency swaps is an arrangement in which both the principle amount and the interest on loan in

one currency are swapped for the principle and the interest payments on loan in another currency.

The parties to the swap contract of currency generally hail from two different countries. This

arrangement allows the counter parties to borrow easily and cheaply in their home currencies.

Under a currency swap, cash flows to be exchanged are determined at the spot rate at a time when

swap is done. Such cash flows are supposed to remain unaffected by subsequent changes in the

exchange rates.

FINANCIAL SWAP:

Financial swaps constitute a funding technique which permit a borrower to access one market and

then exchange the liability for another type of liability. It also allows the investors to exchange one

type of asset for another type of asset with a preferred income stream.The other kind of derivatives,

which are not, much popular are as follows:

5. BASKETS

Baskets options are option on portfolio of underlying asset. Equity Index Options are most popular

form of baskets.

6. LEAPS

Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce

option contracts with a maturity period of 2-3 years. These long-term option contracts are

popularly known as Leaps or Long term Equity Anticipation Securities.

7. WARRANTS

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

having a maximum maturity of nine months. Longer-dated options are called warrants and are

generally traded over-the-counter.

8. SWAPTIONS

Swaptions are options to buy or sell a swap that will become operative at the expiry of the options.

Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions

market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive

fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

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3.1 HISTORY OF DERIVATIVES:

The history of derivatives is quite colourful and surprisingly a lot longer than most people think.Forward delivery contracts, stating what is to be delivered for a fixed price at a specified place on a

specified date, existed in ancient Greece and Rome. Roman emperors entered forward contracts to

provide the masses with their supply of Egyptian grain. These contracts were also undertaken

between farmers and merchants to eliminate risk arising out of uncertain future prices of grains.

Thus, forward contracts have existed for centuries for hedging price risk.

The first organized commodity exchange came into existence in the early

1700’s in Japan. The first formal commodities exchange, the Chicago Board of Trade (CBOT), wasformed in 1848 in the US to deal with the problem of ‘credit risk’ and to provide centralized

location to negotiate forward contracts. From ‘forward’ trading in commodities emerged the

commodity ‘futures’. The first type of futures contract was called ‘to arrive at’. Trading in futures

began on the CBOT in the 1860’s. In 1865, CBOT listed the first ‘exchange traded’ derivatives

contract, known as the futures contracts. Futures trading grew out of the need for hedging the price

risk involved in many commercial operations. The Chicago Mercantile Exchange (CME), a spin-

off of CBOT, was formed in 1919, though it did exist before in 1874 under the names of ‘Chicago

Produce Exchange’ (CPE) and ‘Chicago Egg and Butter Board’ (CEBB). The first financial futures

to emerge were the currency in 1972 in the US. The first foreign currency futures were traded on

May 16, 1972, on International Monetary Market (IMM), a division of CME. The currency futures

traded on the IMM are the British Pound, the Canadian Dollar, the Japanese Yen, the Swiss Franc,

the German Mark, the Australian Dollar, and the Euro dollar. Currency futures were followed soon

by interest rate futures. Interest rate futures contracts were traded for the first time on the CBOT on

October 20, 1975. Stock index futures and options emerged in 1982. The first stock index futures

contracts were traded on Kansas City Board of Trade on February 24, 1982.The first of the several

networks, which offered a trading link between two exchanges, was formed between the Singapore

International Monetary Exchange (SIMEX) and the CME on September 7, 1984.

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Options are as old as futures. Their history also dates back to ancient Greece and Rome. Options

are very popular with speculators in the tulip craze of seventeenth century Holland. Tulips, the

brightly coloured flowers, were a symbol of affluence; owing to a high demand, tulip bulb prices

shot up. Dutch growers and dealers traded in tulip bulb options. There was so much speculation

that people even mortgaged their homes and businesses. These speculators were wiped out when

the tulip craze collapsed in 1637 as there was no mechanism to guarantee the performance of the

option terms.

The first call and put options were invented by an American financier, Russell

Sage, in 1872. These options were traded over the counter. Agricultural commodities options were

traded in the nineteenth century in England and the US. Options on shares were available in the US

on the over the counter (OTC) market only until 1973 without much knowledge of valuation. A

group of firms known as Put and Call brokers and Dealer’s Association was set up in early 1900’s

to provide a mechanism for bringing buyers and sellers together.

On April 26, 1973, the Chicago Board options Exchange (CBOE) was set up at

CBOT for the purpose of trading stock options. It was in 1973 again that black, Merton, and

Scholes invented the famous Black-Scholes Option Formula. This model helped in assessing the

fair price of an option which led to an increased interest in trading of options. With the options

markets becoming increasingly popular, the American Stock Exchange (AMEX) and the

Philadelphia Stock Exchange (PHLX) began trading in options in 1975.

The market for futures and options grew at a rapid pace in the eighties and nineties. The collapse of

the Bretton Woods regime of fixed parties and the introduction of floating rates for currencies in

the international financial markets paved the way for development of a number of financial

derivatives which served as effective risk management tools to cope with market uncertainties.

The CBOT and the CME are two largest financial exchanges in the world on which futures

contracts are traded. The CBOT now offers 48 futures and option contracts (with the annual

volume at more than 211 million in 2001).The CBOE is the largest exchange for trading stock

options. The CBOE trades options on the S&P 100 and the S&P 500 stock indices. The

Philadelphia Stock Exchange is the premier exchange for trading foreign options.

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The most traded stock indices include S&P 500, the Dow Jones Industrial Average, the

Nasdaq 100, and the Nikkei 225. The US indices and the Nikkei 225 trade almost round the clock.

The N225 is also traded on the Chicago Mercantile Exchange.

3.5 INDIAN DERIVATIVES MARKET

Starting from a controlled economy, India has moved towards a world where prices fluctuate every

day. The introduction of risk management instruments in India gained momentum in the last few

years due to liberalisation process and Reserve Bank of India’s (RBI) efforts in creating currency

forward market. Derivatives are an integral part of liberalisation process to manage risk. NSE

gauging the market requirements initiated the process of setting up derivative markets in India. In

July 1999, derivatives trading commenced in India

Chronology of instruments

1991 Liberalization process initiated

14 December 1995 NSE asked SEBI for permission to trade index futures.

18 November 1996 SEBI setup L.C.Gupta Committee to draft a policy framework for

index futures.

11 May 1998 L.C.Gupta Committee submitted report.

7 July 1999 RBI gave permission for OTC forward rate agreements (FRAs) and

interest rate swaps.

24 May 2000 SIMEX chose Nifty for trading futures and options on an Indian

index.

25 May 2000 SEBI gave permission to NSE and BSE to do index futures trading.

9 June 2000 Trading of BSE Sensex futures commenced at BSE.

12 June 2000 Trading of Nifty futures commenced at NSE.

25 September 2000 Nifty futures trading commenced at SGX.

2 June 2001 Individual Stock Options & Derivatives

3.6 Need for derivatives in India today

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In less than three decades of their coming into vogue, derivatives markets have become the

most important markets in the world. Today, derivatives have become part and parcel of the day-

to-day life for ordinary people in major part of the world.

Until the advent of NSE, the Indian capital market had no access to the latest trading methods and

was using traditional out-dated methods of trading. There was a huge gap between the investors’

aspirations of the markets and the available means of trading. The opening of Indian economy has

precipitated the process of integration of India’s financial markets with the international financial

markets. Introduction of risk management instruments in India has gained momentum in last few

years thanks to Reserve Bank of India’s efforts in allowing forward contracts, cross currency

options etc. which have developed into a very large market.

3.7 Myths and realities about derivatives

In less than three decades of their coming into vogue, derivatives markets have become the most

important markets in the world. Financial derivatives came into the spotlight along with the rise in

uncertainty of post-1970, when US announced an end to the Bretton Woods System of fixed

exchange rates leading to introduction of currency derivatives followed by other innovations

including stock index futures. Today, derivatives have become part and parcel of the day-to-day

life for ordinary people in major parts of the world. While this is true for many countries, there are

still apprehensions about the introduction of derivatives. There are many myths about derivatives

but the realities that are different especially for Exchange traded derivatives, which are well

regulated with all the safety mechanisms in place.

What are these myths behind derivatives?

• Derivatives increase speculation and do not serve any economic purpose

• Indian Market is not ready for derivative trading

• Disasters prove that derivatives are very risky and highly leveraged instruments

• Derivatives are complex and exotic instruments that Indian investors will find difficulty in

understanding

• Is the existing capital market safer than Derivatives?

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Derivatives increase speculation and do not serve any economic purpose

Numerous studies of derivatives activity have led to a broad consensus, both in the private and

public sectors that derivatives provide numerous and substantial benefits to the users. Derivatives

are a low-cost, effective method for users to hedge and manage their exposures to interest rates,

commodity

Prices or exchange rates. The need for derivatives as hedging tool was felt first in the

commodities market. Agricultural futures and options helped farmers and processors hedge against

commodity price risk. After the fallout of Bretton wood agreement, the financial markets in the

world started undergoing radical changes. This period is marked by remarkable innovations in the

financial markets such as introduction of floating rates for the currencies, increased trading in

variety of derivatives instruments, on-line trading in the capital markets, etc. As the complexity of

instruments increased many folds, the accompanying risk factors grew in gigantic proportions. Thissituation led to development derivatives as effective risk management tools for the market

participants.

Looking at the equity market, derivatives allow corporations and institutional

investors to effectively manage their portfolios of assets and liabilities through instruments like

stock index futures and options. An equity fund, for example, can reduce its exposure to the stock

market quickly and at a relatively low cost without selling off part of its equity assets by using

stock index futures or index options.

By providing investors and issuers with a wider array of tools for managing risks and

raising capital, derivatives improve the allocation of credit and the sharing of risk in the global

economy, lowering the cost of capital formation and stimulating economic growth. Now that world

markets for trade and finance have become more integrated, derivatives have strengthened these

important linkages between global markets increasing market liquidity and efficiency and

facilitating the flow of trade and finance.

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Indian Market is not ready for derivative trading

Often the argument put forth against derivatives trading is that the Indian capital market is not

ready for derivatives trading. Here, we look into the pre-requisites, which are needed for the

introduction of derivatives, and how Indian market fares:

PRE-REQUISITES INDIAN SCENARIO

Large market Capitalization India is one of the largest market-capitalized countries in Asia

with a market capitalization of more than Rs.765000 crores.

High Liquidity in the underlying The daily average traded volume in Indian capital market today

is around 7500 crores. Which means on an average every month

14% of the country’s Market capitalization gets traded. These are

clear indicators of high liquidity in the underlying.

Trade guarantee The first clearing corporation guaranteeing trades has become

fully functional from July 1996 in the form of National Securities

Clearing Corporation (NSCCL). NSCCL is responsible for

guaranteeing all open positions on the National Stock Exchange

(NSE) for which it does the clearing.

A Strong Depository National Securities Depositories Limited (NSDL) which started

functioning in the year 1997 has revolutionalised the security

settlement in our country.

A Good legal guardian In the Institution of SEBI (Securities and Exchange Board of

India) today the Indian capital market enjoys a strong,

independent, and innovative legal guardian who is helping the

market to evolve to a healthier place for trade practices.

What kind of people will use derivatives?

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Derivatives will find use for the following set of people:

• Speculators: People who buy or sell in the market to make profits. For example, if you will the

stock price of Reliance is expected to go upto Rs.400 in 1 month, one can buy a 1 month future of

Reliance at Rs 350 and make profits

• Hedgers: People who buy or sell to minimize their losses. For example, an importer has to pay

US $ to buy goods and rupee is expected to fall to Rs 50 /$ from Rs 48/$, then the importer can

minimize his losses by buying a currency future at Rs 49/$

• Arbitrageurs: People who buy or sell to make money on price differentials in different markets.

For example, a futures price is simply the current price plus the interest cost. If there is any change

in the interest, it presents an arbitrage opportunity. We will examine this in detail when we look at

futures in a separate chapter. Basically, every investor assumes one or more of the above roles and

derivatives are a very good option for him.

3.8 Comparison of New System with Existing System

Many people and brokers in India think that the new system of Futures & Options and banning of

Badla is disadvantageous and introduced early, but I feel that this new system is very useful

especially to retail investors. It increases the no of options investors for investment. In fact it

should have been introduced much before and NSE had approved it but was not active because of

politicization in SEBI.

The figure 3.3a –3.3d shows how advantages of new system (implemented from June 20001) v/s

the old system i.e. before June 2001

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New System Vs Existing System for Market Players

Figure 3.3a

Speculators

Existing SYSTEM New

Approach Peril &Prize Approach Peril &Prize

1) Deliver based 1) Both profit & 1)Buy &Sell stocks 1)Maximum

Trading, margin loss to extent of on delivery basis loss possible

trading& carry price change. 2) Buy Call &Put to premium

forward transactions. by paying paid

2) Buy Index Futures premium

hold till expiry.

Advantages

• Greater Leverage as to pay only the premium.

• Greater variety of strike price options at a given time.

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Figure 3.3b

Arbitrageurs

Existing SYSTEM New


1) Buying Stocks in 1) Make money 1) B Group more 1) Risk free

one and selling in whichever way the promising as still game.

another exchange. Market moves. in weekly settlement

forward transactions. 2) Cash &Carry

2) If Future Contract arbitrage continues

more or less than Fair price

74



• Price = Cash Price + Cost of Carry.

Figure 3.3c

Hedgers

Existing SYSTEM New


1) Difficult to 1) No Leverage 1)Fix price today to buy 1) Additional

offload holding available risk latter by paying premium. cost is only

during adverse reward dependant 2)For Long, buy ATM Put premium.

market conditions on market prices Option. If market goes up,

as circuit filters long position benefit else

limit to curtail losses. exercise the option.

3)Sell deep OTM call option

with underlying shares, earn

premium + profit with increase prcie

75



Advantages

• Availability of Leverage

Figure 3.3d

Small Investors

Existing SYSTEM New


1) If Bullish buy 1) Plain Buy/Sell 1) Buy Call/Put options 1) Downside

stocks else sell it. implies unlimited based on market outlook remains

profit/loss. 2) Hedge position if protected &

holding underlying upside

stock unlimited.

Advantages

• Losses Protected.

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Exchange-traded vs. OTC derivatives markets

The OTC derivatives markets have witnessed rather sharp growth over the last few years, which

has accompanied the modernization of commercial and investment banking and globalisation of

financial activities. The recent developments in information technology have contributed to a great

extent to these developments. While both exchange-traded and OTC derivative contracts offer

many benefits, the former have rigid structures compared to the latter. It has been widely discussed

that the highly leveraged institutions and their OTC derivative positions were the main cause of

turbulence in financial markets in 1998. These episodes of turbulence revealed the risks posed to

market stability originating in features of OTC derivative instruments and markets.

The OTC derivatives markets have the following features compared to exchange-traded

derivatives:

1. The management of counter-party (credit) risk is decentralized and located within

individual institutions,

2. There are no formal centralized limits on individual positions, leverage, or margining,

3. There are no formal rules for risk and burden-sharing,

4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for

safeguarding the collective interests of market participants, and

5. The OTC contracts are generally not regulated by a regulatory authority and the exchange’s

self-regulatory organization, although they are affected indirectly by national legal systems,

banking supervision and market surveillance.

Some of the features of OTC derivatives markets embody risks to financial market stability.

The following features of OTC derivatives markets can give rise to instability in institutions,

markets, and the international financial system: (i) the dynamic nature of gross credit exposures;

77



(ii) information asymmetries; (iii) the effects of OTC derivative activities on available aggregate

credit; (iv) the high concentration of OTC derivative activities in major institutions; and (v) the

central role of OTC derivatives markets in the global financial system. Instability arises when

shocks, such as counter-party credit events and sharp movements in asset prices that underlie

derivative contracts, occur which significantly alter the perceptions of current and potential future

credit exposures. When asset prices change rapidly, the size and configuration of counter-party

exposures can become unsustainably large and provoke a rapid unwinding of positions.

There has been some progress in addressing these risks and perceptions. However, the progress has

been limited in implementing reforms in risk management, including counter-party, liquidity and

operational risks, and OTC derivatives markets continue to pose a threat to international financial

stability. The problem is more acute as heavy reliance on OTC derivatives creates the possibility of

systemic financial events, which fall outside the more formal clearing house structures. Moreover,

those who provide OTC derivative products, hedge their risks through the use of exchange traded

derivatives. In view of the inherent risks associated with OTC derivatives, and their dependence on

exchange traded derivatives, Indian law considers them illegal.

3.9 FACTORS CONTRIBUTING TO THE GROWTH OF DERIVATIVES:

Factors contributing to the explosive growth of derivatives are price volatility, globalisation of the

markets, technological developments and advances in the financial theories.

A. PRICE VOLATILITY

A price is what one pays to acquire or use something of value. The objects having value maybe

commodities, local currency or foreign currencies. The concept of price is clear to almost

everybody when we discuss commodities. There is a price to be paid for the purchase of food

grain, oil, petrol, metal, etc. the price one pays for use of a unit of another persons money is called

interest rate. And the price one pays in one’s own currency for a unit of another currency is called

as an exchange rate.

Prices are generally determined by market forces. In a market, consumers have ‘demand’ and

producers or suppliers have ‘supply’, and the collective interaction of demand and supply in the

market determines the price. These factors are constantly interacting in the market causing changes

78



in the price over a short period of time. Such changes in the price are known as ‘price volatility’.

This has three factors: the speed of price changes, the frequency of price changes and the

magnitude of price changes.

The changes in demand and supply influencing factors culminate in market adjustments through

price changes. These price changes expose individuals, producing firms and governments tosignificant risks. The break down of the BRETTON WOODS agreement brought and end to the

stabilizing role of fixed exchange rates and the gold convertibility of the dollars. The globalization

of the markets and rapid industrialization of many underdeveloped countries brought a new scale

and dimension to the markets. Nations that were poor suddenly became a major source of supply of

goods. The Mexican crisis in the south east-Asian currency crisis of 1990’s has also brought the

price volatility factor on the surface. The advent of telecommunication and data processing bought

information very quickly to the markets. Information which would have taken months to impact the

market earlier can now be obtained in matter of moments. Even equity holders are exposed to price

risk of corporate share fluctuates rapidly.

These price volatility risks pushed the use of derivatives like futures and options increasingly as

these instruments can be used as hedge to protect against adverse price changes in commodity,

foreign exchange, equity shares and bonds.

B. GLOBALISATION OF MARKETS

Earlier, managers had to deal with domestic economic concerns; what happened in other part of the

world was mostly irrelevant. Now globalization has increased the size of markets and as greatly

enhanced competition .it has benefited consumers who cannot obtain better quality goods at a

lower cost. It has also exposed the modern business to significant risks and, in many cases, led to

cut profit margins

In Indian context, south East Asian currencies crisis of 1997 had affected the competitiveness of

our products vis-à-vis depreciated currencies. Export of certain goods from India declined because

of this crisis. Steel industry in 1998 suffered its worst set back due to cheap import of steel from

south East Asian countries. Suddenly blue chip companies had turned in to red. The fear of china

devaluing its currency created instability in Indian exports. Thus, it is evident that globalization of

industrial and financial activities necessitates use of derivatives to guard against future losses. This

factor alone has contributed to the growth of derivatives to a significant extent.

79



C. TECHNOLOGICAL ADVANCES

A significant growth of derivative instruments has been driven by technological break through.

Advances in this area include the development of high speed processors, network systems and

enhanced method of data entry. Closely related to advances in computer technology are advances

in telecommunications. Improvement in communications allow for instantaneous world wideconferencing, Data transmission by satellite. At the same time there were significant advances in

software programmes without which computer and telecommunication advances would be

meaningless. These facilitated the more rapid movement of information and consequently its

instantaneous impact on market price.

Although price sensitivity to market forces is beneficial to the economy as a whole resources are

rapidly relocated to more productive use and better rationed overtime the greater price volatility

exposes producers and consumers to greater price risk. The effect of this risk can easily destroy a business which is otherwise well managed. Derivatives can help a firm manage the price risk

inherent in a market economy. To the extent the technological developments increase volatility,

derivatives and risk management products become that much more important.

D ADVANCES IN FINANCIAL THEORIES

Advances in financial theories gave birth to derivatives. Initially forward contracts in its traditional

form, was the only hedging tool available. Option pricing models developed by Black and Scholes

in 1973 were used to determine prices of call and put options. In late 1970’s, work of Lewis

Edeington extended the early work of Johnson and started the hedging of financial price risks with

financial futures. The work of economic theorists gave rise to new products for risk management

which led to the growth of derivatives in financial markets.

The above factors in combination of lot many factors led to growth of derivatives instruments

80



3.10 BENEFITS OF DERIVATIVES

Derivative markets help investors in many different ways:

1. RISK MANAGEMENT –

Futures and options contract can be used for altering the risk of investing in spot market. For

instance, consider an investor who owns an asset. He will always be worried that the price may fall

before he can sell the asset. He can protect himself by selling a futures contract, or by buying a Put

option. If the spot price falls, the short hedgers will gain in the futures market, as you will see later.

This will help offset their losses in the spot market. Similarly, if the spot price falls below the

exercise price, the put option can always be exercised.

2. PRICE DISCOVERY –

Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices are

believed to contain information about future spot prices and help in disseminating such

information. As we have seen, futures markets provide a low cost trading mechanism. Thus

information pertaining to supply and demand easily percolates into such markets. Accurate prices

are essential for ensuring the correct allocation of resources in a free market economy. Options

markets provide information about the volatility or risk of the underlying asset.

3. OPERATIONAL ADVANTAGES –

As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they

offer greater liquidity. Large spot transactions can often lead to significant price changes.

However, futures markets tend to be more liquid than spot markets, because herein you can take

large positions by depositing relatively small margins. Consequently, a large position in derivatives

markets is relatively easier to take and has less of a price impact as opposed to a transaction of the

same magnitude in the spot market. Finally, it is easier to take a short position in derivatives

markets than it is to sell short in spot markets.

4. MARKET EFFICIENCY –

The availability of derivatives makes markets more efficient; spot, futures and options markets are

inextricably linked. Since it is easier and cheaper to trade in derivatives, it is possible to exploit

arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help to ensure

that prices reflect true values.

5. EASE OF SPECULATION –

81



Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions.

Also, the amount of capital required to take a comparable position is less in this case. This is

important because facilitation of speculation is critical for ensuring free and fair markets.

Speculators always take calculated risks. A speculator will accept a level of risk only if he is

convinced that the associated expected return is commensurate with the risk that he is taking.

The derivative market performs a number of economic functions.

• The prices of derivatives converge with the prices of the underlying at the expiration of

derivative contract. Thus derivatives help in discovery of future as well as current prices.

• An important incidental benefit that flows from derivatives trading is that it acts as a

catalyst for new entrepreneurial activity.

• Derivatives markets help increase savings and investment in the long run. Transfer of risk

enables market participants to expand their volume of activity.

82



4.1 DEVELOPMENT OF DERIVATIVES MARKET IN INDIA

The first step towards introduction of derivatives trading in India was the promulgation of the

Securities Laws (Amendment) Ordinance, 1995, which withdrew the prohibition on options in

securities. The market for derivatives, however, did not take off, as there was no regulatory

framework to govern trading of derivatives. SEBI set up a 24–member committee under the

Chairmanship of Dr.L.C.Gupta on November 18, 1996 to develop appropriate regulatory

framework for derivatives trading in India. The committee submitted its report on March 17, 1998

prescribing necessary pre–conditions for introduction of derivatives trading in India. The

committee recommended that derivatives should be declared as ‘securities’ so that regulatory

framework applicable to trading of ‘securities’ could also govern trading of securities. SEBI also

set up a group in June 1998 under the Chairmanship of Prof.J.R.Varma, to recommend measuresfor risk containment in derivatives market in India. The report, which was submitted in October

1998, worked out the operational details of margining system, methodology for charging initial

margins, broker net worth, deposit requirement and real–time monitoring requirements. The

Securities Contract Regulation Act (SCRA) was amended in December 1999 to include derivatives

within the ambit of ‘securities’ and the regulatory framework were developed for governing

derivatives trading. The act also made it clear that derivatives shall be legal and valid only if such

contracts are traded on a recognized stock exchange, thus precluding OTC derivatives. The

government also rescinded in March 2000, the three decade old notification, which prohibited

forward trading in securities. Derivatives trading commenced in India in June 2000 after SEBI

granted the final approval to this effect in May 2001. SEBI permitted the derivative segments of

two stock exchanges, NSE and BSE, and their clearing house/corporation to commence trading and

settlement in approved derivatives contracts. To begin with, SEBI approved trading in index

futures contracts based on S&P CNX Nifty and BSE–30 (Sense) index. This was followed by

approval for trading in options based on these two indexes and options on individual securities.

83



The trading in BSE Sensex options commenced on June 4, 2001 and the trading in options on

individual securities commenced in July 2001. Futures contracts on individual stocks were

launched in November 2001. The derivatives trading on 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 November 9, 2001. The index futures and options contract on NSE are based on S&P

CNX Trading and settlement in derivative contracts is done in accordance with the rules, byelaws,

and regulations of the respective exchanges and their clearing house/corporation duly approved by

SEBI and notified in the official gazette. Foreign Institutional Investors (FIIs) are permitted to

trade in all Exchange traded derivative products.

The following are some observations based on the trading statistics provided in the NSE report on

the futures and options (F&O):

• Single-stock futures continue to account for a sizable proportion of the F&O segment. It

constituted 70 per cent of the total turnover during June 2002. A primary reason attributed to this

phenomenon is that traders are comfortable with single-stock futures than equity options, as the

former closely resembles the erstwhile badla system.

• On relative terms, volumes in the index options segment continue to remain poor. This may

be due to the low volatility of the spot index. Typically, options are considered more valuable

when the volatility of the underlying (in this case, the index) is high. A related issue is that brokers

do not earn high commissions by recommending index options to their clients, because low

volatility leads to higher waiting time for round-trips.

• Put volumes in the index options and equity options segment have increased since January

2002. The call-put volumes in index options have decreased from 2.86 in January 2002 to 1.32 in

June. The fall in call-put volumes ratio suggests that the traders are increasingly becoming

pessimistic on the market.

• Farther month futures contracts are still not actively traded. Trading in equity options on

most stocks for even the next month was non-existent.

84



• Daily option price variations suggest that traders use the F&O segment as a less risky

alternative (read substitute) to generate profits from the stock price movements. The fact that the

option premiums tail intra-day stock prices is evidence to this. If calls and puts are not looked as

just substitutes for spot trading, the intra-day stock price variations should not have a one-to-one

impact on the option premiums.

•The spot foreign exchange market remains the most important segment but the

derivative segment has also grown. In the derivative market foreign exchange

swaps account for the largest share of the total turnover of derivatives in India

followed by forwards and options. Significant milestones in the development of

derivatives market have been (i) permission to banks to undertake cross currency

derivative transactions subject to certain conditions (1996) (ii) allowing corporates

to undertake long term foreign currency swaps that contributed to the

development of the term currency swap market (1997) (iii) allowing dollar rupee

options (2003) and (iv) introduction of currency futures (2008). I would like to

emphasise that currency swaps allowed companies with ECBs to swap their foreign

currency liabilities into rupees. However, since banks could not carry open

positions the risk was allowed to be transferred to any other resident corporate.

Normally such risks should be taken by corporates who have natural hedge or have

potential foreign exchange earnings. But often corporate assume these risks due to

interest rate differentials and views on currencies.

This period has also witnessed several relaxations in regulations relating to forex markets

and also greater liberalisation in capital account regulations leading to greater integration

with the global economy.

•Cash settled exchange traded currency futures have made foreign currency a separate

asset class that can be traded without any underlying need or exposure a n d on a

leveraged basis on the recognized stock exchanges with credit risks being assumed

by the central counterparty

Since the commencement of trading of currency futures in all the three exchanges, the value of

the trades has gone up steadily from Rs 17, 429 crores in October 2008 to Rs 45, 803 crores in

December 2008. The average daily turnover in all the exchanges has also increased from

Rs871 crores to Rs 2,181 crores during the same period. The turnover in the currency futures

85



market is in line with the international scenario, where I understand the share of futures

market ranges between 2 – 3 per cent.

5. National Exchanges

In enhancing the institutional capabilities for futures trading the idea of setting up

of National Commodity Exchange(s) has been pursued since 1999. Three such Exchanges, viz, National Multi-Commodity Exchange of India Ltd., (NMCE), Ahmedabad, National Commodity

& Derivatives Exchange (NCDEX), Mumbai, and Multi Commodity Exchange (MCX), Mumbai

have become operational. “National Status” implies that these exchanges would be automatically

permitted to conduct futures trading in all commodities subject to clearance of byelaws and

contract specifications by the FMC. While the NMCE, Ahmedabad commenced futures trading in

November 2002, MCX and NCDEX, Mumbai commenced operations in October/ December 2003

respectively.

M CX

MCX (Multi Commodity Exchange of India Ltd.) an independent and de-mutulised multi

commodity exchange has permanent recognition from Government of India for facilitating online

trading, clearing and settlement operations for commodity futures markets across the country. Key

shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, HDFC Bank,

State Bank of Indore, State Bank of Hyderabad, State Bank of Saurashtra, SBI Life Insurance Co.

Ltd., Union Bank of India, Bank of India, Bank of Baroda CaneraBank,CorporationBank.

Headquartered in Mumbai, MCX is led by an expert management team with deep domain

knowledge of the commodity futures markets. Today MCX is offering spectacular growth

opportunities and advantages to a large cross section of the participants including Producers /

Processors, Traders, Corporate, Regional Trading Canters, Importers, Exporters, Cooperatives,

Industry Associations, amongst others MCX being nation-wide commodity exchange, offering

multiple commodities for trading with wide reach and penetration and robust infrastructure. MCX,

having a permanent recognition from the Government of India, is an independent and demutualised

multi commodity Exchange. MCX, a state-of-the-art nationwide, digital Exchange, facilitates

online trading, clearing and settlement operations for a commodities futures trading.

86



NMCE

National Multi Commodity Exchange of India Ltd. (NMCE) was promoted by Central

Warehousing Corporation (CWC), National Agricultural Cooperative Marketing Federation of

India (NAFED), Gujarat Agro-Industries Corporation Limited (GAICL), Gujarat State Agricultural

Marketing Board (GSAMB), National Institute of Agricultural Marketing (NIAM), and NeptuneOverseas Limited (NOL). While various integral aspects of commodity economy, viz.,

warehousing, cooperatives, private and public sector marketing of agricultural commodities,

research and training were adequately addressed in structuring the Exchange, finance was still a

vital missing link. Punjab National Bank (PNB) took equity of the Exchange to establish that

linkage. Even today, NMCE is the only Exchange in India to have such investment and technical

support from the commodity relevant institutions.

NMCE facilitates electronic derivatives trading through robust and tested trading platform,Derivative Trading Settlement System (DTSS), provided by CMC. It has robust delivery

mechanism making it the most suitable for the participants in the physical commodity markets. It

has also established fair and transparent rule-based procedures and demonstrated total commitment

towards eliminating any conflicts of interest. It is the only Commodity Exchange in the world to

have received ISO 9001:2000 certification from British Standard Institutions (BSI). NMCE was the

first commodity exchange to provide trading facility through internet, through Virtual Private

Network (VPN).

NMCE follows best international risk management practices. The contracts are marked to

market on daily basis. The system of upfront margining based on Value at Risk is followed to

ensure financial security of the market. In the event of high volatility in the prices, special intra-day

clearing and settlement is held. NMCE was the first to initiate process of dematerialization and

electronic transfer of warehoused commodity stocks. The unique strength of NMCE is its

settlements via a Delivery Backed System, an imperative in the commodity trading business. These

deliveries are executed through a sound and reliable Warehouse Receipt System, leading to

guaranteed clearing and settlement.

87



NCDEX

National Commodity and Derivatives Exchange Ltd (NCDEX) is a technology driven

commodity exchange. It is a public limited company registered under the Companies Act,

1956 with the Registrar of Companies, Maharashtra in Mumbai on April 23,2003. It has an

independent Board of Directors and professionals not having any vested interest in

commodity markets. It has been launched to provide a world-class commodity exchange

platform for market participants to trade in a wide spectrum of commodity derivatives driven

by best global practices, professionalism and transparency.

Forward Markets Commission regulates NCDEX in respect of futures trading in

commodities. Besides, NCDEX is subjected to various laws of the land like the Companies Act,

Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations,

which impinge on its working. It is located in Mumbai and offers facilities to its members in more

than 390 centres throughout India. The reach will gradually be expanded to more centers. NCDEX

currently facilitates trading of thirty six commodities - Cashew, Castor Seed, Chana, Chili, Coffee,

Cotton, Cotton Seed Oilcake, Crude Palm Oil, Expeller Mustard Oil, Gold, Guar gum, Guar Seeds,

Gur, Jeera, Jute sacking bags, Mild Steel Ingot, Mulberry Green Cocoons, Pepper, Rapeseed -

Mustard Seed ,Raw Jute, RBD Palmolein, Refined Soy Oil, Rice, Rubber, Sesame Seeds, Silk,

Silver, Soy Bean, Sugar, Tur, Turmeric, Urad (Black Matpe), Wheat, Yellow Peas, Yellow RedMaize & Yellow soya bean meal.

88



DATA ANALYSIS

&

INTERPRETATION

(OPTION TRADING OF

TATA CONSULTANCYSERVICES

FOR NOVEMBER AND DECEMBER)

89



NOVEMBER CALL OPTION 2011 (STRIKE PRICE 1100)

Symb

ol

Date Expiry Ope

n

High Low Clos

e

LTP Settle

Price

No. of

contrac

ts

Turnov

er

in La

cs

TCS 28-

Oct-

2011

24-

Nov-

2011

45.0

0

76.7

5

41.9

5

48.3

5

50.3

0

48.35 161 462.60

TCS 31-

Oct-

2011

24-

Nov-

2011

42.8

5

54.0

0

42.8

5

44.4

5

45.0

0

44.45 72 206.44

TCS 01-

Nov-

2011

24-

Nov-

2011

45.0

0

47.0

0

33.3

0

39.7

0

39.7

5

39.70 78 222.00

TCS 02-

Nov-

2011

24-

Nov-

2011

39.0

0

46.0

0

35.0

0

37.1

5

35.0

0

37.15 73 208.33

TCS 03-

Nov-

2011

24-

Nov-

2011

35.0

0

37.0

0

27.0

0

35.0

0

33.3

5

35.00 138 390.08

TCS 04-

Nov-

2011

24-

Nov-

2011

39.0

5

40.2

0

27.0

0

31.2

0

32.0

0

31.20 111 314.16

TCS 08-

Nov-

2011

24-

Nov-

2011

29.0

0

36.3

5

29.0

0

31.4

0

31.2

5

31.40 140 396.88

TCS 09-

Nov-

2011

24-

Nov-

2011

32.0

0

55.0

0

31.5

0

39.4

5

42.8

5

39.45 263 750.55

TCS 11-

Nov-

2011

24-

Nov-

2011

39.5

0

52.0

0

31.7

0

43.0

5

46.9

0

43.05 106 303.23

TCS 14-

Nov-

2011

24-

Nov-

2011

50.5

5

59.9

0

39.9

0

41.7

5

44.8

5

41.75 44 126.59

TCS 15-

Nov-

2011

24-

Nov-

2011

38.2

5

47.5

0

35.0

0

35.8

0

35.0

0

35.80 40 113.98

TCS 16-

Nov-

2011

24-

Nov-

2011

40.7

0

40.7

5

22.8

0

30.3

0

32.3

5

30.30 136 384.28

90



TCS 17-

Nov-

2011

24-

Nov-

2011

27.0

0

33.5

0

23.9

0

25.6

0

27.0

0

25.60 96 270.93

TCS 18-

Nov-

2011

24-

Nov-

2011

23.8

0

23.8

5

9.25 11.2

5

11.9

0

11.25 437 1,217.9

2

TCS 21-

Nov-

2011

24-

Nov-

2011

8.60 9.35 2.80 3.50 4.75 3.50 359 991.88

TCS 22-

Nov-

2011

24-

Nov-

2011

2.00 11.0

0

2.00 5.40 5.15 5.40 570 1,577.9

2

TCS 23-

Nov-

2011

24-

Nov-

2011

2.25 3.50 0.65 1.20 1.00 1.20 238 655.63

TCS 24-

Nov-

2011

24-

Nov-

2011

1.00 1.00 0.05 0.50 0.30 0.00 84 231.09

INTERPRETATION:

Buyers Pay OFF:

As bought 1 Lot of TCS that is 250 those who buy for1100 paid 45 Premium Per

Share.

Settlement Price is 1043.

Spot price 1043

Strike price 1100

Amount -57

Premium Paid (-) 45

Net loss -12*250=-3000

Buyer loss = Rs 3000 (Net Amount)

Because it is negative it is OUT THE MONEY contract, so the buyer who is going for call

option will get loss.

91



SELLERS PAY OFF:

It is out the money for buyer ,so for the seller it is in the money and will get profit .

Strike price 1100

Spot price 1043

Amount 57

Premium Received 45

Profit = 12*250= 3000

Seller profit = Rs 3000(profit)

Because it is positive it is IN THE MONEY, so the seller who is going for call option

will get profit.

DECEMBER CALL OPTION 2011(strike price 1100)

92



Symbol Date Expiry Open High Low Close LTP Settle

Price

No. of

contract

s

Turnover

in Lacs

TCS 25-Nov-

2011

29-Dec-

2011

28.0

0

32.5

0

23.1

0

25.4

0

24.1

0

25.40 291 820.47

TCS 28-Nov-

2011

29-Dec-

2011

29.0

0

37.0

0

28.7

5

34.4

5

34.1

0

34.45 332 940.52

TCS 29-Nov-

2011

29-Dec-

2011

31.0

0

39.0

0

29.2

0

33.5

5

33.5

5

33.55 347 983.87

TCS 30-Nov-2011

29-Dec-2011

31.00

45.75

29.00

43.45

43.55

43.45 902 2,564.19

TCS 01-Dec-

2011

29-Dec-

2011

54.5

0

66.4

0

53.0

0

58.6

0

58.9

5

58.60 167 483.70

TCS 02-Dec-

2011

29-Dec-

2011

59.9

5

92.0

0

59.2

5

89.0

0

91.0

0

89.00 92 269.38

TCS 05-Dec-

2011

29-Dec-

2011

87.6

0

92.0

0

81.0

0

92.0

0

92.0

0

92.00 5 14.82

TCS 07-Dec-

2011

29-Dec-

2011

105.

00

105.

00

94.0

0

94.0

0

94.0

0

94.00 5 14.99

TCS 08-Dec-

2011

29-Dec-

2011

90.0

0

92.0

5

85.0

0

85.0

0

85.0

0

85.00 19 56.39

TCS 09-Dec-

2011

29-Dec-

2011

82.0

0

90.0

0

79.5

0

81.1

5

80.0

0

81.15 45 133.29

TCS 12-Dec-

2011

29-Dec-

2011

79.9

0

84.5

0

68.1

0

84.5

0

84.5

0

84.50 13 38.41

TCS 13-Dec-

2011

29-Dec-

2011

92.0

5

95.5

5

85.0

0

85.0

0

85.0

0

85.00 5 14.90

TCS 14-Dec-2011 29-Dec-2011 90.00 90.00 89.10 89.10 89.10 89.10 10 29.75

TCS 15-Dec-

2011

29-Dec-

2011

69.0

0

94.0

0

69.0

0

91.5

0

91.0

0

91.50 27 79.80

TCS 16-Dec-

2011

29-Dec-

2011

66.0

0

66.0

0

58.0

0

58.0

0

58.0

0

58.00 16 46.43

TCS 19-Dec-

2011

29-Dec-

2011

40.0

5

60.0

0

39.0

0

59.5

0

58.0

0

59.50 141 402.79

TCS 20-Dec-

2011

29-Dec-

2011

60.0

0

60.0

0

47.0

0

47.0

0

47.0

0

47.00 11 31.78

TCS 21-Dec-

2011

29-Dec-

2011

52.1

0

59.0

0

47.0

0

59.0

0

59.0

0

59.00 25 71.99

TCS 22-Dec-

2011

29-Dec-

2011

52.8

5

60.0

0

50.0

0

60.0

0

60.0

0

60.00 22 63.36

TCS 23-Dec-

2011

29-Dec-

2011

57.0

0

58.1

5

53.0

0

53.1

0

53.1

0

53.10 8 23.13

TCS 26-Dec-

2011

29-Dec-

2011

69.3

5

92.0

0

69.3

5

90.7

5

91.1

5

90.75 48 142.01

TCS 27-Dec-

2011

29-Dec-

2011

0.00 0.00 0.00 90.7

5

91.1

5

80.05 0 0.00

- - - -



INTERPRETATION:

Buyers Pay OFF:


Share.


Spot price 1152

Strike price 1100

Amount 52

Premium Paid (-) 28

Net loss 24*250= 6000

Buyer profit = Rs 6000 (Net Amount)

Because it is positive it is IN THE MONEY contract, so the buyer who is going for call option

will get profit.

SELLERS PAY OFF:

It is in the money for buyer, so for the seller it is out the money and will get loss .

Strike price 1100

Spot price 1152

Amount -52

Premium Received (-) 28

Profit = -24*250= -6000

94



Seller loss = Rs -6000(loss)

Because it is negative it is OUT THE MONEY, so the seller who is going for call


NOVEMBER PUT OPTION 2011(strike price 1100)

Symbol Date Expiry Open High Low Close LTP Settle Price No. of contracts Turnover

in Lacs

TCS 28-Oct-2011 24-Nov-2011 35.00 35.00 15.00 23.50 22.70 23.50 373 1,047.49

TCS 31-Oct-2011 24-Nov-2011 19.00 27.00 18.25 25.65 25.00 25.65 187 525.38

TCS 01-Nov-2011 24-Nov-2011 23.80 33.95 21.30 26.80 26.30 26.80 388 1,094.50

TCS 02-Nov-2011 24-Nov-2011 28.00 31.50 20.65 27.45 28.90 27.45 277 779.22

TCS 03-Nov-2011 24-Nov-2011 28.50 36.00 26.00 26.50 27.35 26.50 150 424.66

TCS 04-Nov-2011 24-Nov-2011 21.25 31.80 18.75 24.75 25.50 24.75 136 382.69

TCS 08-Nov-2011 24-Nov-2011 20.50 23.40 18.90 21.20 22.50 21.20 135 378.25

TCS 09-Nov-2011 24-Nov-2011 20.00 20.00 9.00 14.05 14.00 14.05 636 1,769.30

TCS 11-Nov-2011 24-Nov-2011 13.00 17.40 10.65 13.25 12.60 13.25 585 1,626.98

TCS 14-Nov-2011 24-Nov-2011 9.00 13.00 6.35 12.10 13.00 12.10 547 1,517.81

TCS 15-Nov-2011 24-Nov-2011 12.80 13.25 7.95 11.10 11.05 11.10 378 1,049.24

TCS 16-Nov-2011 24-Nov-2011 11.10 16.80 9.05 12.95 10.25 12.95 848 2,360.46

TCS 17-Nov-2011 24-Nov-2011 12.10 15.80 10.20 14.25 14.40 14.25 576 1,603.80

TCS 18-Nov-2011 24-Nov-2011 17.00 28.55 14.00 20.45 20.00 20.45 680 1,904.69

TCS 21-Nov-2011 24-Nov-2011 24.00 43.45 24.00 40.80 34.00 40.80 204 578.61

TCS 22-Nov-2011 24-Nov-2011 34.00 42.00 17.00 24.50 23.00 24.50 80 225.23

TCS 23-Nov-2011 24-Nov-2011 32.50 57.00 29.00 39.40 36.60 39.40 106 302.65

TCS 24-Nov-2011 24-Nov-2011 45.00 54.00 7.00 11.00 7.00 0.00 30 85.58

INTERPRETATION:

Buyers Pay OFF:


Share.

95




Strike price 1100

Spot price 1008

Amount 92

Premium Paid (-) 35

Net profit 57*250= 14250

Buyer profit = Rs 14250 (Net Amount)

Because it is positive it is IN THE MONEY contract, so the buyer who is going for put option

will get profit.

SELLERS PAY OFF:

It is in the money for buyer, so for the seller it is out the money and will get loss .

Spot price 1008

Strike price 1100

Amount -92


Profit = -57*250= -14250

Seller loss = Rs -14250(loss)

Because it is negative it is OUT THE MONEY, so the seller who is going for put


DECEMBER PUT OPTION FOR 2011(strike price 1000)

Symb

ol

Date Expiry Ope

n

Hig

h

Low Clos

e

LTP Settle

Price

No. of

contracts

Turnov

er

in La

cs

96



TCS 25-Nov-

2011

29-Dec-

2011

17.0

0

21.1

0

16.6

0

19.5

0

21.0

0

19.50 177 450.64

TCS 28-Nov-

2011

29-Dec-

2011

14.0

0

14.4

0

10.5

5

11.0

5

11.0

0

11.05 121 306.22

TCS 29-Nov-

2011

29-Dec-

2011

11.0

0

11.3

5

8.40 9.70 9.50 9.70 149 376.23

TCS 30-Nov-2011

29-Dec-2011

10.20

11.50

7.30 7.80 7.75 7.80 143 360.62

TCS 01-Dec-

2011

29-Dec-

2011

4.50 5.70 4.10 4.35 4.50 4.35 173 434.53

TCS 02-Dec-

2011

29-Dec-

2011

4.00 4.80 2.90 3.15 2.90 3.15 193 484.32

TCS 05-Dec-

2011

29-Dec-

2011

3.00 3.45 2.65 2.80 2.70 2.80 61 152.96

TCS 07-Dec-

2011

29-Dec-

2011

2.45 2.75 2.45 2.55 2.55 2.55 12 30.08

TCS 08-Dec-

2011

29-Dec-

2011

2.35 3.70 2.35 3.40 3.30 3.40 41 102.81

TCS 09-Dec-

2011

29-Dec-

2011

5.50 5.50 2.70 3.45 3.50 3.45 23 57.69

TCS 12-Dec-

2011

29-Dec-

2011

2.80 3.45 2.45 2.85 3.00 2.85 49 122.83

TCS 13-Dec-

2011

29-Dec-

2011

2.25 2.45 1.90 2.10 2.00 2.10 35 87.69

TCS 14-Dec-2011

29-Dec-2011

2.00 2.50 2.00 2.15 2.15 2.15 23 57.62

TCS 15-Dec-

2011

29-Dec-

2011

2.30 2.85 2.20 2.25 2.25 2.25 43 107.76

TCS 16-Dec-

2011

29-Dec-

2011

2.15 3.10 2.00 2.75 2.60 2.75 33 82.70

TCS 19-Dec-

2011

29-Dec-

2011

3.00 4.95 1.20 2.55 2.45 2.55 140 351.15

TCS 20-Dec-

2011

29-Dec-

2011

2.55 2.55 1.70 2.35 2.50 2.35 41 102.72

TCS 21-Dec-

2011

29-Dec-

2011

1.25 2.35 1.00 1.30 1.50 1.30 50 125.16

TCS 22-Dec-

2011

29-Dec-

2011

1.30 1.65 1.00 1.20 1.20 1.20 34 85.11

TCS 23-Dec-

2011

29-Dec-

2011

1.00 1.00 0.75 0.80 0.75 0.80 10 25.02

97



TCS 26-Dec-

2011

29-Dec-

2011

0.10 0.40 0.10 0.25 0.20 0.25 32 80.03

TCS 27-Dec-

2011

29-Dec-

2011

0.30 0.30 0.20 0.20 0.20 0.20 10 25.01

TCS 28-Dec-

2011

29-Dec-

2011

0.15 0.25 0.10 0.15 0.15 0.15 9 22.50

TCS 29-Dec-2011

29-Dec-2011

0.05 0.10 0.05 0.05 0.05 0.00 69 172.51

INTERPRETATION:

Buyers Pay OFF:

As bought 1 Lot of TCS that is 250 those who buy for1000 paid 17 Premium Per Share.


Spot price 923

Strike price 1000

Amount -77

Premium Paid (-) 17

Net loss -60*250= -15000

Buyer loss = Rs 15000 (Net Amount)

Because it is negative it is OUT THE MONEY contract, so the buyer who is going for put option

will get loss.

SELLERS PAY OFF:

It is out the money for buyer ,so for the seller it is in the money and will get profit .

Strike price 1000

Spot price 923

98



Amount 77


Profit = 60*250= 15000

Seller profit = Rs 15000(profit)

Because it is positive it is IN THE MONEY, so the seller who is going for put option

will get profit.

99



SWOT ANALYSIS OF THE COMPANY

AND

INDIVIDUAL LEARNING CURVE

4.1 SWOT ANALYSIS OF COMPANY:

SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses,

Opportunities, and Threats involved in a project or in a business venture. It involves specifying the

objective of the business venture or project and identifying the internal and external factors that are

favorable and unfavorable to achieve that objective.

100



A SWOT analysis must first start with defining a desired end state or objective. A SWOT

analysis may be incorporated into the strategic planning model. Strategic Planning has been the

subject of much research.

Strengths: characteristics of the business or team that give it an advantage over

others in the industry.

Weaknesses: are characteristics that place the firm at a disadvantage relative to

others.

Opportunities: external chances to make greater sales or profits in the environment.

Threats: external elements in the environment that could cause trouble for the

business.

In this internship project, we were asked to find the SWOT analysis of the company. They

are as follows.

Strength:

• Standard charterd securities having strong privilege clients.

• More importance for maintaining a good customer relationship.

• Offers for customer retaining.

• Accurate achievement of targets.

• Good work culture and supportive managers.

Weaknesses:

• No team for the accurate follow up of inactive clients.

Opportunities:

101



• I learned more details about security market and portfolio anaysis.

• Got opportunity to interact with customers.

Threats:

• Less brokerage and more attractive offers of competitors.

• Lack of accurate follow up of customers.

102



CONCLUSION

After doing this project I understood that, In terms of the growth of derivatives markets, and the variety of

derivatives users, the Indian market has equaled or exceeded many other regional markets. While the

growth is being spear headed mainly by retail investors, private sector institutions and large corporations

smaller companies and state-owned institutions are gradually getting into the act. Foreign brokers such as

JP Morgan Chase are boosting their presence in India in reaction to the growth in derivatives. The variety

of derivatives instruments available for trading is also expanding.

There remain major areas of concern for Indian derivatives users. Large gaps exist in the range of

derivatives products that are traded actively. In equity derivatives, NSE figures show that almost 90% of

activity is due to stock futures or index futures, whereas trading in options is limited to a few stocks, partly

because they are settled in cash and not the underlying stocks. Liquidity and transparency are importan

properties of any developed market. Liquid markets require market makers who are willing to buy and sell

and be patient while doing so. A lack of market liquidity may be responsible for inadequate trading in

some markets. Transparency is achieved partly through financial disclosure. As Indian derivatives market

grow more sophisticated, greater investor awareness will become essential. NSE has programmes to

inform and educate brokers, dealers, traders, and market personnel. In addition, institutions will need to

devote more resources to develop the business processes and technology necessary for derivatives trading.

BIBILIOGRAPHY

103



1. Websites

www.nseindia.com

www.yourmoneysite.com

www.moneycontrol.com

www.bseindia.com

www.rediffmoney.com

2. Magazines

Capital market

Dallal market

http://www.nseindia.com/

http://www.yourmoneysite.com/

http://www.moneycontrol.com/

http://www.bseindia.com/

http://www.rediffmoney.com/

http://www.nseindia.com/

http://www.yourmoneysite.com/

http://www.moneycontrol.com/

http://www.bseindia.com/

http://www.rediffmoney.com/

original project 2

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