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Increased volatility

in asset prices

Integration ofNational &

International Market

Low TransactionCost of Trading

Development ofRisk Management

Tools

2

Why Derivatives in India

G.Venkatachalam, M.Com,MBA,M.Phil,(Ph.D)/AP/DMS

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Origin

1. First introduced in Chicago Board of

Trade in 1848 for forward contract inCommodities

2. Derivative Introduce in Indian Stock

Exchanges in June 2000

3G.Venkatachalam, M.Com,MBA,M.Phil,(Ph.D)/AP/DMS

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Index

Futures

Index

Options

StockFutures StockOptions

4

Derivatives Trading on Exchanges


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Business Growth of F&O Segment in

India


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Types of Market

Spot Market

Derivative

Market


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Spot Market

Assets Class Delivery

Equity Shares

Commodity Physical

Currency Physical

ImmediateDelivery

ImmediatePayment


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Derivative Market

Forward Segment

Future Segment

Options Segment


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Forwards

ContactTwo Private

PartiesTransactionat Expiry

Date

(Forward

Price)Physical /

CashSettlement


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Participants in Forward Contract

Money

Delivery of Asset

Buyer(Who takes along position)

Seller

(Who takes ashort position )


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Future

Contract Between Two PartiesTraded in Recognized Stock

ExchangeFuture Date

Price Agreed Upon Today11G.Venkatachalam, M.Com,

MBA,M.Phil,(Ph.D)/AP/DMS

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Participants in Futures Contract

Future Buyer Future Seller

Payment Sell Contract

Buy Contract Payment

ClearingCorporation


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Positions in a Futures Contract

When a person buy a

futures contract

Long

When a person sell afutures contract

Short


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Difference Between Future & Forward

Forward Future

Nature of Contracts Customized Standardized

Counterparty Any Party Clearing Corporation

Credit Risk Exist No RiskLiquidity Very Low Very High

Margins Not Required Received / Paid onDaily Basis

Valuation Not Done Daily BasisDelivery Physical / Cash No Delivery 14G.Venkatachalam, M.Com,MBA,M.Phil,(Ph.D)/AP/DMS

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A contract between two parties

Where Buyer of the option hasthe right and not obligation tofulfill the contract

Seller is under obligation tofulfill the Contract

Options


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Options

Call Option

Put Option

16

Types of Options


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Right to Buy

Call Options


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Right to Sell

Put Options


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UnderlyingPrice Strike Price

Time toExpiration

Risk Free Rate Volatility


Factors impacting Option Prices

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Derivative Terminology

Lot Size Expiry Date Contract Size

Spot Price Strike Price Initial Margin

Mark toMarketMargin

OptionPremium

Closing Price


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Contact Specification

S. no Terminology Remark Index Future(Nifty)

Index Option(Nifty)

1 Lot Size Minimum Quantity traded

in a lot decided by the

exchanges

50 50

2 Spot Price Price prevailing indelivery market

5500 5500

3 Future/Strike

Price

Price Prevailing in future

market/price for which call

or put option exercise

5550 5550

4 Option Premium Amount decided by the

exchange on the basis of

strike price and spot price

100

5 Expiry Date Last Thursday of a month Last Thursday Last Thursday

6 Contract Next Three Month Feb, March, April Feb, March, April


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Contact Specification

S. no Terminology Remark Index Future

(Nifty)

Index Option

(Nifty)7 Initial Margin Minimum amount

required to make position

(Suppose 25% of contract

Size)

Rs 69,375

(25% of

2,77,500)

Option Premium * Lot

Size

Rs 5,000

(100*50)

8 Closing Price Closing Price at the end of

day

5500

9 Mark to Market

Margin

Difference between Trade

price & closing Price(Daily Settled )

MTM=(Trade price

closing price)* Lot Size

Pay Rs 2,500

(5550-5500)*50

No MTM as we

pay wholeamount

Our Expectation is that index rise


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Participant

Insuring an investmentagainst risk.Hedgers

Who bets on derivativesmarketsSpeculators

Attempt to profit frompricing inefficienciesArbitrageurs


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24

Play Grounds


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www.nseindia.com

www.bseindia.com


Important Website
http://www.nseindia.com/http://www.bseindia.com/http://www.bseindia.com/http://www.nseindia.com/

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G.Venkatachalam, M.Com,

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i

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Particulars Income /Loss fromDerivatives

Head

Income from Business &

Profession

Taxed According to the tax slab

Loss from Derivatives Adjusted under all Five Head Profit

& Carry Forward to Next Year

29

Taxation



Cost of Trading in Derivative

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Sr. Taxes Rates Futures Options

Buy 1 Lot of Nifty at 6000 ,Contract Size

( 50shares* 6000) / Buy 6000 call option at 60 Rs

premium(50shares*60)

3,00,000 3,000

1

Brokerage 0.03 % On Contract

Size/2.5% on Option

Premium (Both Side)

90 Rs (0.03% on 3,00,000) 75 Rs (2.5% on 3,000)

2

Service Tax 10.36% on Brokerage

Amount

(Both Side)

9.32

(10.36% on 90 Rs)

7.77

(10.36% on 75 Rs)

3

Securities

Transaction

Tax(STT)

0.017% on Contract Size

(Only on Selling Side)

25.50

(0.0085% on 3,00,000 Rs)

2.55

(0.0085% on 3000Rs)

4

Stamp Duty 0.004% on Contract

Size(Both Side)

12(0.004% on 3,00,000 Rs) 1.2(0.004% *3,000Rs)

5 Education Cess 2% on Tax Amount 0.93(2% on 9.32+25.50+12) 0.23(2% * 7.77+2.55

+1.2)

6 Higher Edu Cess 1% on Education Cess 0.014 (1% on 0.93) 0.0028 (1% on 0.23)

Total Cost 137.76 86.75

30

Cost of Trading in Derivative



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How does One Make Money in A

Futures Contract?

Trade according to the trends

Complete knowledge of Derivatives

Discipline Approach

Keep Stop loss on every trade

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32G.Venkatachalam, M.Com,

MBA M Phil (Ph D)/AP/DMS

Documents

GV-DM