-Sharekhan 1

8/12/2019 -Sharekhan 1

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CHAPTER I

1. INTRODUCTION

1.1 INDUSTRY PROFILE

Stock market is a market where trading of company stocks, other securities and derivatives

takes place. Stock exchanges are corporations or mutual organizations, which are specialized in

trading stocks and securities. All sorts of company stocks are enrolled in the stock exchanges.

Some of the stock markets in India are listed below:

! "angalore Stock #xchange

! $umbai %"ombay& Stock #xchange

! 'alcutta Stock #xchange

! (elhi Stock #xchange

! $adras Stock #xchange

! )ational Stock #xchange

$umbai %"ombay& stock exchange is India*s first stock exchange. It was founded in +-

with total number of listed stocks being more than /,000. In India there are total 11 stock

exchanges operating across the country. 2he )ational Stock #xchange %)S#& is situated in

$umbai 2he small and medium sized companies can list their stocks in 3ver 2he 'ounter

#xchange of India %32'#I&.

2he Securities and #xchange "oard of India %S#"I& regulates the functioning of capital

market and protects the interests of the investors. It is situated in $umbai. Some functions of

S#"I are as follows:

! 4egulation of working in stock exchanges and other securities markets.

! 4egistration and regulation of the operation of collective investment plans, including

mutual funds.

! Inhibition of fallacious and unfair business practices in the securities markets.

! 'ontrolling accomplishment of shares and takeover of companies.

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.

+

2hese 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 corporate5

%ii& 6overnment securities5 and

%iii& 4ights or interest in securities.

History of stock market i I!ia

2he working of stock exchanges in India started in +-. "S# is the oldest stock market

in India. 2he history of Indian stock trading starts with 7+ persons taking membership in )ative

Share and Stock "rokers Association, which we now know by the name "ombay Stock

#xchange or "S# in short. In +8/, "S# got permanent recognition from the 6overnment of

India. )ational Stock #xchange comes second to "S# in terms of popularity. "S# and )S#

represent themselves as synonyms of Indian stock market. 2he history of Indian stock market is

almost the same as the history of "S#.

2here are 17 recognised stock exchanges in India "ombay Stock #xchange ,)ational

Stock #xchange, Ahmadabad Stock #xchange, "angalore Stock #xchange,

"hubaneswar Stock #xchange, 'alcutta Stock #xchange, (elhi Stock #xchange,

6uwahati Stock #xchange, 9yderabad Stock #xchange ,aipur Stock #xchange,

;udhiana Stock #xchange, 'ochin Stock #xchange, 'oimbatore Stock #xchange,

$adhya


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exchange, $umbai. It is a depository participant of the )S(; and '(S;. Its business includes

stock broking, depository services, portfolio management and derivatives.

2he company*s core specialty lies in its retail distribution with a large network of

branches i.e. +0 share shops %retail shops& in +-0 cities in India and subbrokersFauthorized

persons. Its strengths lies in its investment research capabilities. Its research division has several

analysts continuously monitoring global, national and regional political, economic and social

situations so as to assess their impact on the economy in general, the sectors so as to assess their

impact on the economy in general, the sectors and companies they research which helps them if

offering Buality research and advice to clients.

2he SS=I 6roup 'omprises of Institutional broking and 'orporate Einance. 2he

Institutional broking division caters to domestic and foreign institutional investors, while the

'orporate Einance (ivision focuses on niche areas such as infrastructure . 2elecom and media.

SS=I has been voted as the To' Domestic $rokera%e Ho&se in the research category by E&ro

#oey S&r+ey a! ,y Asia #oey S&r+ey.

Eor the derivates segment, to educate the potential investors towards the share market

they provide a study kit named the G(erivative (igest*. And for potential investors wanted to

start the trading in the share market also provided with the study kit GEirst Step to investing in the

share market*, gives them a general understanding about how the share market operates, and it

also gives an idea regarding the role of share brokers in the 'apital $arket.

2hese are the wideraging services offered by the share khan to its customers. And most

importantly. Share =han is blessed with welldedicated sales wings, who are looking after the

various needs of the customers in a committed manner and which provide the customers with

tremendous amount of satisfaction and happiness about their investment.

1.".". Nat&re of t(e $&siess Carrie!

Sharekhan is a broking company. 2he company offers a complete range of pre trade,

trade and post trade service on the "S# %"ombay Stock #xchange& and the )S# %)ational Stock

#xchange&. Dhether the client come in to the company*s conventionally located officers and


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trade in a dedicated ambience or issue instructions over the phone, our highly trained team and

sophisticated eBuipment ensure smooth transactions and prompt service.H

! Investment Advisory Service

! Eacilitation Services to 4etail Investors, 'orporate.

! (epository Services

! Investment options includes :

i. 3nline trading %Includes eBuity, derivatives&

ii. 'ommodit ies trading

iii. $utual Eunds

iv.


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2o educate and empower the individual investor to make better investment decisions through

Buality advice and superior service.

a& #ducate and empower

i. 4esearch backed advice, which is easy to understand, retail specific, and discipline.

ii. 2otal eBuity solutions for the entire investment process.

iii. 4elationship management

a& Superior service

i. Integrity

ii. 2ransparency

iii.


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! 3nline services

! 'ommodities trading

! (ialntrade

!


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CLASSIC ACCOUNT

2his is a product for the retail investor who is riskaverse and hence prefers to invest in

stocks selectively or who does not trade too freBuently. 2here is no volume commitment on the

part of the client. 2he features of the products are as follows:

2he registration charges are 4s. -0F that is a onetime payment. Dith the online

package defaults demat aFc. would be opened with SS=I. Eor the + year no demat charges havest

to be paid. It*s free.

2he client gets exposure of up to time of the deposit amount. Eor example if the client

has 4s. 000F in hisFher account heFshe can get the exposure up to 4s. 10,000F

2he brokerage applicable is 0.0K on delivery and 0.+ for intra day trading.

2his account comes with the following features:

a. 3nline trading account for investing in #Buities and (erivatives

b. Eree trading through


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d. Instant cash transfer facility against purchase M sale of shares.

e. I


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4s. )I; first year 4s. 700FN p.a. from secondA&a2 #aiteace C(ar%es

calendar year onward

SERICE PROFILE

a. Tra!i% Faci2ities5

Sharekhan as a member of )S# M "S# provides both offline and online trading facilities

nationwide for trading the securities in secondary market to its clients. 2he 'ompany*s

wide network of outlets spread across the country facilities to executive the orders in

secondary market.

,. Deri+ati+es5 6F&t&res a! O'tios7

2he company also facilitates the trading system for trading in secondary market under

future and options segment of )S# and "S#. 2he eBuity dealers in the company will be

eager to give insights into the new sets introduction in the Indian 'apital market futures

and options.

c. De'ositor Ser+ices5

Sharekhan is a (epository participant of )ational Securities (epository ;imited and

'entral (epository and securities ;imited. Sharekhan will open (emat accounts, which

will investors to convert physical certificates of shares into electronic balances in an

account maintained.

d. #ar%i Fiaci% :

In the present rolling settlement scenario, Sharekhan understand investor need for

additional capital availability for dai ly purchaser shares. It offers uniBue facility avail

finance, for purchasing shares at very competitive interest rates.

e. IPO8s a! #&t&a2 F&!s5

Sharekhan offers the change of investing in the potentially lucrative I


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f. Stock 2e!i% a! $orro*i%5

3ne can place an order of shares with Sharekhan. It is approved intermediary of the

security or lending scheme. 2hese would be sent out the borrowers, these earnings fees

for all investor*s idle shares. 2hus Sharekhan fulfils the investor need for borrowing and

lending of shares.

g. E9&ity Researc( :

Sharekhan has a highly rated research using involved in macroeconomic studies, industry

and company specific eBuity research. 2he research team*s inputs will be available as

daily trading calls, Buarterly investment picks and long term investment picks, based on

the fundamentals of particular company and the industry as whole.

(. Iteret Tra!i%5

Investors can also trade their securities through this facility by logging into company*s

website. 2he virtual world that Sharekhan offers online trading services through.

i. Portfo2io #aa%emet Ser+ices5

Sharekhan securities are a registered portfolio manager with S#"I to manage portfolios

on behalf of clients with discretionary and anon discretionary rights this service is a

provision for those who may not have the right time to manage their stocks investment or

reBuire the service of company*s highly specialized professional team.

3. O2ie Tra!i%5

Share =han was amongst the pioneers of online trading in India and has launched

Sharekhan.com in Eebruary 1000. Since then, they have been at the forefront in

understanding customer needs, analyzing trends and brining innovation in their offerings.

2hey have online trading products that are customized to the habits and preferences of

investors as well as traders.

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Feat&res of O2ie Tra!i% Pro!&cts5

i. ;ive streaming Buotes

ii. Instant order execution and conformation

iii. SA)( "A)=! I("I "A)= ! '#)2>4I3) "A)=

! ACIS "A)= ! @#S "A)=

1.".;. Areas of o'eratio5

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Sharekhan provides a wide range of services nationwide to a substantial and diversified

client base that includes retail clients, high net worth individuals, corporates and financial

institutions.

It has presence in more than 10 cities through its network of longstanding franchisees

and sub brokers.

It has its presence globally i.e in >A# also.

1.".


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S(arek(a is one of the maor player in on line 2rading. In $umbai the main

competitors of Sharekhan are I'I'I (irect, India bulls, =otak Securities, 9(E' Securities,

Anand 4athi, $otilal 3swal, 4eligare securities and reliance securities.

Re2i%are Sec&rities5

4eligare is a global financial services group with a presence across Asia, Africa,

$iddle #ast, #urope and the Americas. In India, 4eligare*s largest market, the group offers a

wide array of products and services ranging from insurance, asset management, broking and

lending solutions to investment banking and wealth management. 2he group has also

pioneered the concept of investments in alternative asset classes such as arts and films .Dith

+0,000 plus employees across multiple geographies, 4eligare serves over a million clients,

including corporates and institutions, high net worth families and individuals, and retail

investors.

4eligare #nterprises ;imited is part of a family of companies that fall under the

broader 4eligare brand, which includes other global businesses such as diagnostics, aviation

and travel, wellness retail, and I2 products and solutions. A diversified financial services

group 4eligare #nterprises ;imited %4#;& offers a comprehensive suite of customer focused

financial products and services targeted at retail investors, high net worth individuals and

corporate and institutional clients.

4#;, along with its oint venture partners, offers a range of products and services in

India, including asset management, life insurance, wealth management, eBuity and

commodity broking, investment banking, lending services, private eBuity and venture capital.

4eligare has also ventured into the alternative investments sphere through its holistic arts

initiative and film fund.

>otak Sec&rities5

=otak $ahindra is one of IndiaPs leading financial conglomerates, offering complete

financial solutions that encompass every sphere of li fe. Erom commercial banking, to stock

+


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feel of the offices across India proects a consistent branch image for the company. 2he features

that enable a uniBue facility for retailing financial services include among others:

#asily visible branches set up in the commercial spaces of potential investment zones ranging

between -0 sft to +000 sft.

$ost branches are located in the ground floor sporting huge glass frontage promoting

easy accessibility and reflecting our attitude of complete transparency.

2he maor portion of the branch area dedicated for customer use. 2he furniture is in '=(

formats to add flexibility in using the branch for investor*s purposes.

'onnectivity to )S# for trading facilities.

2? and other electronic mediums to facilitate real time update and dissemination of

information to our customers.

#ach branch comprises of trained and Bualified investment advisors to take care of the needs of

the customers.

1.".@. Ac(ie+emets of S(arek(a

+. 4ated among the top 10 wired companies along with 4eliance, 9>l, Infosys, etc by

G"usiness 2oday*, anuary 100 edition.

1. Awarded G2op (omestic "rokerage 9ouse* four times by #uro money and Asia

money.

7.


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approach to building a customized strategy designed to meet customer*s individual financial

goals and tolerance for risk.

1.".11. F&t&re P2as a! 'ros'ect&s5

i. 1, 00,000 plus retail customers being serviced through centralized call centres F

web solutions.

ii. "ranches F Semi branches servicing affluent F aggressive traders through high skill

financial advisor.iii. 10 independent investment managersF franchisee servicing 0,000 highly valued

clients

iv. )ew initiatives isey = s frame*ork *it( s'ecia2 referece to or%aisatio &!er st&!y.

2he -S model is better known as $c=insey -S model. 2his is because the two persons

who developed this model, 2om


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organizationQ %+80& and in their books O2he art of apanese managementQ %+8+& and OIn search

of excellenceQ %+81&.

2he model starts on the premise that an organization is not ust structure, but consists of

seven elements:

STRATE)Y :

2he direction and scope of the company over the long term.

STRUCTURE :

2he basic organization of the company, its departments, reporting lines, areas of expertise and

responsibility.

SYSTE#S :

Eormal and Informal procedures that govern everyday activity, covering everything from

management information systems, through to the systems at the point of contact with the

customer %retail systems, call centre, systems, online systems, etc&.

S>ILL:

2he capabilities and competencies that exist within the company. Dhat it does best.

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SHARED ALUES :

2he values and beliefs of the company. >ltimately they guide employees towards Gvalued*

behaviour.

STAFF :

2he company*s people resources and how they are developed, trained and motivated.

STYLE :

2he leadership approach of top management and the company*s overall operating approach.

THE =S #ODEL BITH REFERENCE TO SHARE>HAN5

STRATE)Y5

Sets out the vision, mission, obective and maor action plans and policies of the

organization. 2hese set out the picture of the organization in the future typically spelling out the

overall corporate strategy, the Strategic business unit strategy and functional Strategies. It can

also be defined as the choice of direction and action that the company adopts to achieve its

obective in a competitive situation. It is the first step that the company has to take in leading its

organization to ladder of success. 2he maor areas of Strategic 6oals of Sharekhan are:

$aor (escription

a. $arket Standing (esired share of present and new markets, including areas

in which new products are needed and service goals aimed

at building customer loyalty.

b. Innovation Innovation in productsF services as well as innovation in

skill and activities reBuired to supply them.

c. 9uman 4esources Supply, development and performance of manager*s

employee attitudes.

d. Einancial 4esources Sources of capital supply and how it will be utilized.

e.


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f.


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onal 9eads4egional 9eads

4egional


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! 2here is a good cordial relation between the management and the employees which

shows a participatory leadership style is observed.

! STAFF5

2he staffing procedure mainly includes how the organization has to look into its

people, their backgrounds, and competencies. Staff also includes the organization

approaches to recruitment, selection and specialization. 9ow people developed, how

recruits are trained, socialized and integrated and how their careers are managedR

! At Sharekhan, there are around 700 employees working across India.

! At Sharekhan, 'hintamani branch there are about +0 employees.

! 2he candidates are recruited from diverse fields of commerce like ". 'om*s,

$"A*s, I'DA*s, 'A*s and 'EA*s great opportunity for fresher*s and post

graduates are available.

! 2hey are involved in all the reBuired meetings and activities.

! 2he Staff are given freedom to use their innovation and creative skills.

! 6et together are held for staff members to socialize.

! Staff grievances are given a listening in a year.

S>ILLS5

Include distinctive competencies that reside in the organization. 2hese can be distinctive

competencies people, management practices, systems and technology. Dhat new capabilities the

organization needs to develop, which one does it need to unlearn to compete in future. 2his can

be learnt through a SD32 Analysis.

2he competent skills of the people include good communication and presentation skills,

strong academic record, consistent in the performance levels etc.

SHARED ALUES5

4efers to coreF fundamental values that are widely shared in the organization and serve as

guiding principles that are important. 2hese values have great meaning because they focus

attention and provide a broader sense and purpose. 2hey also give a strong basis for stabilities to

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the organization, in a rapidly changing environment by providing a basic meaning to people

working in the organization.

! (o people have a shared understanding of why a company exitsR

! (o people have a shared understanding of the vision of the companyR

! 9ow do people describe the ways in which the company is distinctiveR

At Sharekhan, which is primarily a client or investor oriented organization has embedded this

Buality among all its member employees. 2he member*s work today towards the growth and

success of the unit. 2he employees share responsibility and protect the company*s name and

integrity. 2here is no sharing of confidentialF important information with the outsiders. 2here is

collective responsibility and accountability on the part of its members. 2his can be said as theshared values of the employees of the organization.

CHAPTER III

SBOT ANALYSIS5

1


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$ultiple products under one roof.

'ompany with well diversified portfolio.

Beakess

$any competitors.

)o direct marketing strategy.

p gradation of the latest technology to give better and faster service to its clients

T(reats

6lobal economic slowdown.

2he Indian capital market is fluctuating.

2he ever increasing and challenging necktoneck competition specially with those

established and existing reputed stock broking companies.

>ncertainty of the market and volatility and fluctuations in the stock prices.

'hange in customer needs, preferences and taste.

2hreat from new entrants into the field of stock broking.

CHAPTER I

Aa2ysis of ,a2ace s(eet.

2he eBuity share capital has remained more or less the same. 2here is +/./ percentage increases

in 4 eserves and surplus in 1008 over the previous year. Investments increased by 0 percentage.

CHAPTER

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Leari% e'eriece.

2he opportunity of undergoing an in plant training for one month duration is being capitalized by

me by increasing my knowledge base by working at Sharekhan.

I am privileged to highlight some of the learning experience got from this training.

! It helped to link the theories, techniBues and practices of management with

different activities of the organization in trading operations

! It increased my conceptual understanding of the entire subect financial

derivatives.

! "asically stock market investments are considered to be very risky, but if thescrip*s selected by the investor is favorable according to the market conditionsthan the investor will be able to generate high profit within a short time span.

CHAPTER I

INTRODUCTION TO THE CONCEPT

O(erivative is a product whose value is derived from the value of one or more basic

variables called bases %underlying asset, index or reference rate& in a contractual mannerQ.

2hrough the use of derivative products, it is possible to partially or fully transfer price

risks by lockingin asset prices.

As instruments of risk management, these generally do not influence the fluctuations in

the underlying asset prices. 9owever by lockingin asset prices, derivative products minimize the

impact of fluctuations in the asset prices on the probability and cash flow situation of riskaverse

investors.

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2he wide array of risks that a business firm is exposed to may be classified into five categories:

Tec(o2o%ica2 risk: arises mostly in the 4M( and operations stages of the value chain.

Ecoomic risk: stem from fluctuations in revenues and production costs.

Fiacia2 risk: arises from the volatility of interest rates, currency rates, commodity prices, and

stock prices.

Performace risk: arises when the contracting counterparties do not fulfill their obligations.

Le%a2 a! re%&2atory risk: arises from changes in laws and regulations.

BHY TOTAL RIS> #ATTERS

$odern finance theory regards hedging activities aimed at reducing total corporate as

irrelevant. >nder certain plausible condition, the 'A


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! Innovations in the derivatives markets.

DERIATIE PRODUCTS

For*ar!s5 A forward contract is an agreement between two parties to exchange an asset for

cash at a predetermined future date called the settlement date for a price that is specified today.

F&t&res5 A futures contract is a standardized forward contract which can be traded on organized

exchanges. In fact, a future is a standardized form of forward contract. A future is a contract or

an agreement between two parties to exchange an assets F currency or commodity at a certain

future date at an agreed price. 2he trader who promises to buy is said to be in G long position G

and the party who promises to sell said be in Gshort position*.

O'tios5 Inboard sense, an option is a claim without any liability. $ore specifically, an option is

a contract that gives the holder a right, without any obligation, to buy or sell an asset at an agreed

price on or before a specified period of time.

Barrats5 ;onger dated options which have expiry date up to one year are called warrants.

Lea's5 ;ong 2erm #Buity Anticipation Securities %;#A


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#ach contract is custom designed and hence is uniBue in terms of contract size, expiration

date and the asset type and Buality.

2he contract price is generally not available in public domain.

3n the expiration date, the contract has to be settled by the 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.

Eorward contracts are generally used in real estate, commodities, gold, foreign currency

exchange etc.

$. INTRODUCTION TO FUTURES5

A futures contract is a standardized forward contract which can be traded on organized

exchanges. It is similar to the forward contract in all the respect. In fact, a future is a

standardized form of forward contract. A future is a contract or an agreement between two

parties to exchange an assets F currency or commodity at a certain future date at an agreed price.

2he trader who promises to buy is said to be in G long position G and the party who promises to

sell said be in Gshort position* . Dhen a futures contract is first listed for trading by an exchange,

interested parties take long or short positions on the contract. Dhen one trader takes a long

position on the contract for a particular price and another trader takes a short position on the

contract at the same price, it generates a trading volume of one contract. At this point there is one

contract which remains to be performed or settled through delivery of the asset in the future.

2hus, there is one open contract. 2his is also referred to as open interest, which is the

terminology used to describe the number of open contracts or contracts remaining to be settled in

future on any particular day.

Eutures contracts are contracts specifying a standard volume of a particular currency to

be exchanged on a specific settlement date. A future contract is an agreement between a buyer

and a seller. Such a contract confers on the buyer an obligation to buy from the seller, and the

seller an obligation to sell to the buyer a specified Buantity of an underlying asset at a fixed price

on or before a fixed day in future. Such a contract can be for delivery of an underlying asset.

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2o eliminate counter party risk and guarantee traders, futures markets use a clearing

house which employs initia l margin, daily market to market margin5 exposures limits etc. to

ensure contract compliance and guarantee settlement. Standardized futures contracts generate

liBuidity, greater transparency, fairness and efficiency. (ue to these inherent advantages, futures

markets have been enormously successful in comparison with forward markets all over the

world.

"roadly there are two types of futures:

'ommodity futures

%'ocoa, 'otton, Aluminum, 6old, 'rude oil, Soya bean etc&

Einancial futures

%Index futures, stock futures, debt instruments, foreign currencies, monetary

metals etc&

Feat&res5

2raded on an organized exchange with )otation.

Standardized contract terms are defined by exchange.

4eBuires margin payment.

2hey are markedtomarket.


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?ariation margin

2he difference between forward contract and future is that future is a standardized

contract in terms of Buantity, date and delivery. It is traded on organized exchanges, so it has

secondary markets. Euture contract is always settled daily, irrespective of the maturity date

which is called marking to the market.

C. INTRODUCTION TO OPTIONS5

Inboard sense, an option is a claim without any liability. $ore specifically, an option is a

contract that gives the holder a right, without any obligation, to buy or sell an asset at an agreed

price on or before a specified period of time.

Ty'es of o'tios5

+& Ca22 o'tio : 6ives the buyer the right, but not the obligation to buy a specific futures

contract at a predetermined price within a limited period of time.

A call option is a contract, which gives the owner the right to buy an asset for a

certain price on or before a specified date. Eor example, if you buy a call option on a certain

share of C@ 'ompany, you have the right to purchase +00 shares %assuming of course, that the

option involves +00 shares&.

Suppose current share price %S& of 4eliance Industries is 4s18+F. @ou expect that price

in a three months period will go up 4s700F. "ut you also fear that the price may also fall below

4s18+F. 2o reduce the chance of risk and at the same time to have the opportunity of making

profit, instead of buying the share, you can buy a 7month call option on 4eliance Industries at

an agreed exercise price %#& of, say, 4S10F. Ignoring the option premium, taxes, transaction

costs and the time value of money, the decision to exercise your option depends upon the share

price after three months. @ou will exercise option when the share price after three months is

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%#&, say, 4s. 18. If the price actually falls to %S & 4s. 10 after three months, you will exerciset

your option. @ou will buy the share for 4s. 10 from the market and deliver it to the putoption

writer to receive 4s. 18. @our gain is 4s.+ ignoring the put option premium, transaction cost

and taxes. @ou will not exercise if the share price rises above exercise price5 the put option is

worthless and its value is zero.

2hus, exercise the put option when

#xercise price UShare price at expiration N # U St

(o not exercise put option when

#xercise price VNShare price at expiration N #VSt

2he value of put option at expiration will be

?alue of put option at expirationN $aximum W%#xercise price JShare price&, 0X


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2he put option buyer*s gain is the seller*s loss. 2he potential loss of the put option is

limited to the exercise price. Since the buyer has to pay a premium to the seller for purchasing a

put option, the potential profit of the buyer and the potential loss of the seller will reduce by the

amount of premium. 2he figure +. shows the payoff for a put option seller.

0 3utofmoney in themoney

value of share

#xercise price

;imited loss

;oss

Eig. +.


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Briter G se22er of a o'tio5 2he writer F seller of a callFput option is the one who receives the

option premium and is thereby obliged to sellFbuy the asset if the buyer exercises on him.

Ca22 o'tio5 A call option gives the holder the right but not the obligation to buy an asset by a

certain date for a certain price.

P&t o'tio5 A put option gives the holder the right but not the obligation to sell an asset by a

certain date for a certain price.

O'tio 'riceG'remi&m5 3ption price is the price which the option buyer pays to the option

seller. It is also referred to as the option premium.

E'iratio !ate5 2he date specified in the options contract is known as the expiration date,

the exercise date, the strike date or the maturity.

Strike 'rice5 2he price specified in the options contract is known as the strike price or the

exercise price.

I:t(e: moey o'tio : An inthemoney %I2$& option is an option that would lead to a!

positive cashflow to the holder if it were exercised immediately. A call option on the

index is said to be inthemoney when the current index stands at a level higher than the

strike price %i.e. spot price U strike price&. If the index is much higher than the strike

price, the call is said to be deep I2$. In the case of a put, the put is I2$ if the index isbelow the strike price.

At:t(e:moey o'tio : An atthemoney %A2$& option is an option that would lead to!

zero cash flow if it were exercised immediately. An option on the index is atthemoney

when the current index eBuals the strike price %i.e. spot price N strike price&.

O&t:of:t(e:moey o'tio : An out ofthemoney %32$& option is an option that would!

lead to a negative cash flow if it were exercised immediately. A call option on the index

is outofthemoney when the current index stands at a level which is less than the strike

price %i.e. spot price V strike price&. If the index is much lower than the strike price, the

7


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call is said to be deep 32$. In the case of a put, the put is 32$ if the index is above the

strike price.

Itrisic +a2&e of a o'tio: 2he option premium can be broken down into two!

components intrinsic value and time value. 2he intrinsic value of a call is the amount

the option is I2$, if it is I2$. If the call is 32$, its intrinsic value is zero.


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1000 --1+- +0/ +1+87 +/7/ 1/81 +0+0-

10070 / +70878 1+/ 1+-10- 1+70/+0 7

100107 781 1/77 81/ +00+7+ 78/1 +-1100+01 1+7 ++ 7-/ 1+/7 +0+81/ +0

10000+ 17/ 17/ ++

Source: www.nseindia.com

TA$LE "5

Deri+ati+e istr&mets a+ai2a,2e for tra!e i I!ia 6NSE75

PRODUCT INDE STOC> INDE STOC>

SPECIFICATIONS FUTURES FUTURES OPTIONS OPTIONS

U!er2yi% istr&met SM< ')C )ifty Individual securities SM< ')C )ifty Individual securities

Sec&rity !escri'tor ) E>2I(C )IE2@ ) E>2S2= ) 3


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cash settled on 2L+ cash settled on 2L+ on 2L7 "asis.

"asis "asis

Sett2emet 'rice 'losing price for 'losing pr ice for


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! 2o analyse and recommend whether to buy stock at a reasonable price and position

yourself for a big market move.

! 2o suggest investors in the arena of financial derivatives market for managing risk

especially in the current recession period.


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2he study analyses the financial instruments that can be used by the traders and investors

for hedging the risk involved in buying, holding and selling various kinds of financial assets in

derivatives market with special focus on options.


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CHAPTER II

=.1DATA ANALYSIS AND INTERPRETATION5

=.1.1. RIS> #ANA)E#ENT BITH FORBARD CONTRACTS5

Eorward contracts are perhaps the oldest and simplest tools for managing financial risk. A

forward contract represents an agreement between two parties to exchange an asset for cash at a

predetermined future date called the settlement date for a price that is specified today.

Illustration with current example:

2he depreciation of the Indian rupee and a strong upward movement in international gold

prices pushed the yellow metal to a record high of 4s+,170F per +0 grams as on Eeb. + 1008.

As investors are increasingly parking their money in gold because of a melting stock market and

erosion in the value of other financial asset classes, the market price of the gold tend to rise

further. So investor can enter in to forward contract to buy gold at a price close to current market

price say 4s+,-F per +0 grams to buy on $ar 1 1008. )ow according to this agreement,

investor have bought forward gold or in long forward gold. Dhereas the gold dealer has sold

forward gold or in short forward gold. )o money or gold changes hand when the deal is signed.

2he forward contract only specifies the terms of a transaction that will occur in future.

3n $ar 1 1008, the contract will be settled so that investor gets the gold at a price of 4s

+,-F per +0 grams. If market price of the gold is higher than the contract price, the investor

gets the profit of the difference between the market and contract price or else undergoes loss if


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the price is lower than market price. "y entering into forward contract the investor can avoid the

downside risk.

Suppose if the market price of the gold touches 4s+,//F as proected then investor

gets a profit of 4s8+0F per +0 grams.

Risk maa%emet *it( for*ar! cotracts5

=.1.". RIS> #ANA)E#ENT BITH FUTURE CONTRACTS5

Dhen you buy a security, you have a choice. @ou can buy it in the spot market and get

immediate delivery or you can buy it in the futures market and obtain deferred delivery on

specified future payment.

2hese differences between purchases in the spot market and futures market suggest the following

relationship between the spot and futures prices.


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Eutures price

. N spot price


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2he future contracts are markettomarket %$2$& process.

Illustration with 'urrent example:

'ontract sizeN+0 grams

6old futures contract price Eeb1008 4s+7/F

?alue of contractN +7/ x +0 N +7/0F

Initial margin N +0K %+7/0& N +7/F

$aintenance marginN - K% +7/& N +01/F

Suppose if the margin balance is 4s700F and variation margin is 4s+70F

2hen5


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=.1.-.RIS> #ANA)E#ENT BITH OPTION CONTRACTS5

DATE NIFTY SPOT RATE

+/(#' 18+

+-(#' 70+

+(#' 18

+8(#' 70/0

10(#' 70--

17(#' 7078

1(#' 18/

1(#' 18+/

1(#' 1-

70(#' 1811

7+(#' 18-8

0+A) 188

01A) 7077

07A) 70/

0/A) 7+1+

0-A) 7++1

0A) 1810

+0A) 1-7

+7A) 1--7

+A) 17

+/A) 1-7/

+-A) 11

8


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1+A) 1-8/

11A) 1-0/

17A) 1-+7

1A) 1--+

18A) 18

70A) 117

2able: )ifty Spot 4ate for the period of (ec 100an 1008

2he following strategies are analyzed for current market condition and hence forth proper

guidance is given for the investor for managing the risk.

17 LON) CALL5

Dhere the investor expects the price of the underlying stock to rise, the bought call can

provide leveraged exposure to the price rise. "uying a call also locks in a maximum purchase

price for the life ofDhen to use the long call

the option.$arket outlook "ullish

?olatility

outlook 4ising

Profits a! 2osses

2he maximum loss the investor can suffer is the premium paid for the option, which will

occur if the share price at expiry is below the strike price. 2he investor breaks even if at expiry

the share price is eBual to the strike price of the option plus the premium paid. As the share pricerises beyond this point, the potential profits of the bought call are unlimited.

C&rret Eam'2e5

3n 1 (ec 100, )ifty is Buoting at 4s18/F and the anuary 180F %strike price& callth

costs 4s0F %premium&. "uy )ifty call at 0F )et outlay is 4s000F. If the )ifty index does

go up you can close your position either by selling the option back to the market or exercising

your right to buy the underlying shares at the exercise price.

0


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Ot(er cosi!eratios

Time !ecay5 2ime decay works against the buyer of the call. If the expected share price rise

does not take place soon after entering the position, time decay will start to erode the value of the

option.

Strike 'rice5 2he investor will usually have a choice of strike prices, and must balance the cost

of the option against the rise in share price reBuired for the strategy to be successful. 2he outof

the money option will be the cheapest, but also reBuires the largest rise in share price. $any

investors regard the atthemoney option as offering the best balance of risk and reward.

E'iry mot(5 A longerterm option allows more time for a rise in the share price to take place,

but will be more expensive than a shorterterm option. 2he investor needs to form a view of thetime frame over which the share price movement is expected to take place.

Fo22o*:&' actio

If the share price rise takes place as expected, the call option taker must decide whether

to close out at a profit, or maintain the position in the hope of a further increase in price. 2he

longer the option position is left open, the greater the effect of time decay.

If the share price does not rise as expected, it is often advisable to close out the position

in order to recover some time value from the position.

If at expiry the option is inthemoney, the investor must choose whether to sell the

option or exercise it. 2he choice will be determined by whether the investor wants to own the

underlying shares.

"7 LON) PUT5

Dhere the investor expects the price of the underlying stock to fall, the bought put

provides leveraged exposure to the price fall. "uying a put option is one of the few ways

1


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investors can speculate on a falling share price.


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Analysis of 'urrent #xample:

(ate 0/F+F1008 +7F+F1008 +F+F1008

Spot


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At expiry, the holder of an inthemoney put option would usually close out the position,

rather than exercising %unless they own the underlying shares&. If the put has been bought to

protect a shareholding, the investor must decide whether they want continue holding the stock, in

which case the put would be sold, or sell the shares, in which case the option would be exercised.

-7 SHORT CALL 5

Sellers expect a gradual fall in the market and lower volatility. 2he optimal strike

%exercise price to sell& is dependent on onePs expectation for the stock. 2he more bearish the

lower the

strike or When to use the short call

exercise $arket outlook )eutral to mildly bearishprice should

?olatility outlook Eallingbe in order

to maximize premium income.

Profits a! 2osses

@our maximum profit depends on the under lying stock closing at or below the strike

price of the option. 2he potential for loss is unlimited which means it is dependant on how far

the stock is above the exercise price at expiry. In practical terms the seller of the call may not be

able to carry the position until expiry if they have insufficient margin to carry the unrealized loss

in which case the clientPs broker will close the position early.

Eam'2e5 Situation: 2he )ifty stock index are currently trading at 1- on 1 (ec.th

Action: on / anuary Sell )ifty anuary 10 at 4s0Fth


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If the investor is buying a put to protect a shareholding, the cost of the option must be

weighed up against the protection reBuired. 2he inthemoney option locks in the highest sale

price for the underlying shares, but also is the most expensive option.

Fo22o*:&' actio

If the share price fall takes place as expected, the put option taker must decide whether to

close out at a profit, or maintain the position in the hope of a further increase in price. 2he longer

the option position is left open, the greater the effect of time decay.

If the share price does not fall as expected, it is often advisable to close out the position in

order to recover some time value from the position.

At expiry, the holder of an inthemoney put option would usually close out the position,

rather than exercising %unless they own the underlying shares&. If the put has been bought to

protect a shareholding, the investor must decide whether they want continue holding the stock, in

which case the put would be sold, or sell the shares, in which case the option would be exercised.

47 SHORT PUT5

2he written put can provide the investor with extra income in flat to rising markets. It can

also be used as a way to buy stock cheaply. 2his strategy is generally used when the investor

expects the share price to remain steady or increase slightly over the life of the option.

Dhen to use the short put

$arket outlook )eutral to mildly bullish

?olatility outlook Ealling

Profits a! 2osses

2he maximum profit the investor can make is the premium received for writing the

option, which will occur if the share price at expiry is above the strike price. 2he investor breaks

even if at expiry the share price is eBual to the strike price of the option less the premium paid.

As the share price falls beyond this point, the potential losses of the sold put are limited only by a

fall in the share price to zero. If the investor does not close out an inthemoney put before

expiry, the option will be exercised and the investor will be reBuired to buy the underlying stock

at the strike price of the option.

-


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Eam'2e5 Situation: 2he )ifty stock index are currently trading at 1-7/ on +/ anuaryth

Action: on +/ anuary Sell )ifty an 1-0 put at 4s80Fth


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Ot(er cosi!eratios

C(ea' stock5 $any investors write put options as a way of buying stock cheaply. If the share

price falls and the option is exercised, the purchase price is effectively the strike price of the

option less the premium received which is less then the price of the stock at the time of writing

the option. If the share price at expiry is above the strike price, the option will expire worthless.

2he investor does not get to buy the stock, but has benefited from the receipt of the premium.

Time !ecay5 2ime decay works in favor of the put writer. If the stock price stays steady, the at

themoney option will deliver the most profit to the put writer, as this is the option with the most

time value.

Eercise5 2he put writer must be wary of early exercise. A put option is generally more likely

than a call option to be exercised early.

Fo22o*:&' actio

If at expiry the stock is trading below the strike price5 the put writer will be exercised

unless the position has been closed out. As expiry approaches, the investor should consider

buying back the put if they do not want to own the stock.

Alternatively, the investor could roll the option position to a later month and possibly a

different strike price.

;7 $ULL SPREAD5

If the investor is not bullish enough to buy a call outright but expects the share price to

rise moderately, the bull spread is a lower cost way to gain exposure to such a market movement.

2he strategy consists of the purchase of a call option and the sale of a call option with a higher

strike price.

When to use the bull spread

$arket outlook moderately bullish

?olatility outlook steady to increasing

8


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a. $&22 ca22 s'rea!

Eam'2e5

Situation: 3n 1 anuary, the spot price of )ifty is 7077. "uy + )ifty anuary 7000 call option atnd

4s70F and sell + anuary 700 call at 4s0F. 2otal outlay and maximum loss is 10. "reak

even is 4s7+70F %7000L+70&. $aximum profit is %70070001& [ 0 N+10F.


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Erom 2able + it is observed that after 1 anuary market behaved as per our expectation. Innd

order to $aximize the profit it is better to exercise the option on - anuary, which will result inth

profit of %70070001& [ 0 N 4s.+10

Iter'retatio5

Action + If you the excise the option - anuary your profit will be +10th

,. $&22 P&t S'rea!

2he bull spread can be constructed using puts instead of calls. As with the call spread, the

investor buys the lower strike option and sells the higher strike option.

2he investor may decide to construct the spread in this way if the options are perceived to

be overpriced. Since entering the put spread involves selling volatility, the higher option

premiums will benefit the trader. In contrast, they make the call spread more expensive to enter.

2he bull put spread can also be viewed as writing a put with protection in place against a

collapse in the market. In this case, the written put may be close to being atthemoney, with the

taken put outofthemoney

2he maximum profit from the bull put spread is the premium received when the spread is

established. 2he maximum loss is the difference between the strike prices less the premium

received.

Profit a! Losses

Dhile the short call reduces the risk inherent in taking an outright call it also limits the

profits that can be made. 2he maximum profit obtainable is the difference between the strike

prices of the two options, less the cost of the spread. $aximum profit will occur if, at expiry, the

share price is at, or above, the strike price of the sold option. If the stock rises Buickly to this

level, the spread will often be unwound early in order to avoid the risk of early exercise on the

short leg. 2he higher delta of the long call means that the spread will increase in value as the

share price rises. 2he maximum loss possible is the cost of the spread and will be incurred when

the share price is at or below the strike price of the bought option at expiry.

/+


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Ot(er cosi!eratios

Limite! riskG2imite! re*ar!5 2he bull spread is a cheaper strategy than simply buying a call

option. As a result, the profit potential is also reduced.

Cost of strate%y5 2he investor must be satisfied that the cost of the spread is worth the potential

reward. 'ommission costs on entering and exiting will be greater for this strategy than when

buying a call outright.

Fo22o*:&' actio

If the stock unexpectedly rises sharply, it may be advisable to exit the strategy once the

upper strike price is reached. Although time value is helpful around the strike price of the short

leg, unwinding the strategy early removes the risk of exercise on the short call. If the stock price

falls suddenly, the spread may be unwound before the taken call loses too much time value.


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spread early, in order to avoid the possibility of excise on the short leg.

2he maximum potential loss is the cost of the spread. 2his will occur if, at expiry, the

share price is above the exercise price of the bought option.


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Spot


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If the stock unexpectedly falls sharply, it may be advisable to exit the strategy once the

lower strike price is reached. 2ime decay will benefit the spread around the lower strike price5

however the trader will usually be more concerned with avoiding exercise on the short leg.

If the stock price rises suddenly, the spread may be unwound before the taken put loses

too much time value.

CHAPTER III

SU##ARY OF FINDIN)S5

2hough forwards are not traded in the organized exchange, they are used as risk

management tools in an unorganized market especially in the commodities market without any

formal procedure.

2he futures are used as an effective risk management tools in the organized stock markets

as well as commodities market. 2he strategy is that for managing risk of the portfolio with a

higher volatility than the market index, more futures contracts would be reBuired to bring about a

perfect hedge.

FOR OPTIONS STRATE )IES5

/


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In Lo% Ca22 , the maximum loss the investor can suffer is the premium paid for the

option, which will occur if the share price at expiry is below the strike price. 2he investor

breaks even if at expiry the share price is eBual to the strike price of the option plus the

premium paid. As the share price rises beyond this point, the potential profits of the

bought call are unlimited.

In Lo% P&t , the maximum loss the investor can suffer is the premium paid for the

option, which will occur if the share price at expiry is above the strike price. 2he investor

breaks even if at expiry the share price is eBual to the strike price of the option less the

premium paid. As the share price falls beyond this point.

In S(ort Ca22/ the maximum profit depends on the underlying stock closing at or belowthe strike price of the option and will be limited premium received. 2he potential for loss

is unlimited which means it is dependant on how far the stock is above the exercise price

at expiry.

In S(ort '&t , the maximum profit the investor can make is the premium received for

writing the option, which will occur if the share price at expiry is above the strike price.

2he investor breaks even if at expiry the share price is eBual to the strike price of the

option less the premium paid. As the share price falls beyond this point, the potential

losses of the sold put are unlimited.

In $&22 S'rea! , the maximum profit obtainable is the difference between the strike prices

of the two options, less the cost of the spread. 2he maximum loss possible is the cost of

the spread and will be incurred when the share price is at or below the strike price of the

bought option at expiry.

In $ear S'rea! , the maximum profit to be earned is the difference between the strike

prices of the two options, less the cost of the spread. If, at expiry, the share price has

fallen to the strike price of the sold option, the maximum profit will be earned. 2he

maximum potential loss is the cost of the spread. 2his will occur if, at expiry, the share

price is above the exercise price of the bought option.

//


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SU))ESTIONS5

In today*s world , managing risk is a daunting task. In coping with this challenge the

following interrelated suggestions need to be borne in mind.

Align risk management with strategy.


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As a shareholder, it is not practical to have protection in place +1 months of the year.

2his ;ong


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Since of the potential for unlimited losses, be sure that the premium received is worthy of

the risk taken.

>se the short strangle over the short straddle if you have any doubts about the marketPs

neutrality.

CONCLUSIONS

"y analyzing all these strategies we can conclude that during bullish market outlook

;ong 'all, Short


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the economic benefits associated to the derivative trading activity remains on the efficient

.riskFreturn frontier.

ANNEURE

$ALANCE SHEET

#ar @ #ar ? #ar =

#Buity Share 'apital //.18 //.0 .0

Share Application $oney +,00.+/ 0.00 0.00


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;ess : Accumulated (epreciation 0.7/ 0.0 0.00

)et "lock 7.7- 0.+ 0.0+

'apital Dorkinprogress 0.0+ 0.0- 0.00

Investments /00.17 00.1 17.+

'urrent Assets, ;oans M .+ 1+.1 -.7

Advances

;ess : 'urrent ;iabilities M 8. +0.- ./


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$I$LIO)RAPHY

+. (onald 4 'ooper M


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8. www.wikipedia.com

List of a,,re+iatios &se!.

+. )S(; )A2I3)A; S#'>4I2I#S (#23$A2#( 24A(I)6

-. ;#AI2@ A)2I'I2>4# S23'=S

++. ) E>2I(C )IE2@ )S# E>2>4# I)(#C 0

+1. ) 34I2I#S #C'9A)6# "3A4( 3E I)(IA

-7


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