hari project Derivative.docx

7/25/2019 hari project Derivative.docx

1/70

CHAPTER-1

INTRODUCTION

INTRODUCTION

As Indian securities markets continue to evolve, market participants, investors and

regulators are looking at different ways in which the risk management may be efficiently met

through the introduction of Derivative markets.

Through the use of derivative products, it is possible to partially or fully transfer price risks

by locking in asset prices. As instruments of risk management, these generally do not influence

the fluctuations in the underlying asset prices.

Derivatives are risk management instruments, which derive their value from an underlying

asset. The underlying asset can be bullion, index, share, bonds, currency, interest etc. banks,

securities firms, companies and investors to hedge risks, to gain access to cheaper money and to

make profit, uses derivatives. Derivatives are likely to grow even at a faster rate in future.

However, the advent of modern day derivative contracts is attributed to the need for

farmers to protect themselves from any decline in the price of their crops due to delayedmonsoon, or overproduction. The first futures! contracts can be traced to the "odoya rice market

in #saka, $apan around %&'(. These were evidently standardi)ed contracts, which made them

much like today!s futures.

The *hicago +oard of trade *+#T-, the largest derivative exchange in the world, was

established in %/ where forward contracts on various commodities were standardi)ed around

%&'. 0rom then on, futures contracts have remained more or less in the same form, as we know

them today.


2/70

1.1.1 OVERVIEW

Derivatives:

Derivatives are defined as financial instruments whose value derived from the prices of

one or more other assets such as e1uity securities, fixed2income securities, foreign currencies, or

commodities. Derivative is also a kind of contract between two counter parties to exchange

payments linked to the prices of underlying assets.

Definition:

In the Indian context the 3ecurities *ontracts 4egulation- Act, %5'& 3*4-A- defines

6derivative7 to include2

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

risk instrument or contract for differences or any other from of security.

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

securities

The above definition conveys that

Derivatives are financial products and derive its value from the underlying assets.

Derivatives are derived from a matter financial contract called the underlying.


3/70

1.3 NEED OF THE TUD!

The present study on Derivative futures is very much appreciable on the grounds that

it gives deep insights about the stock futures market. It would be essential for the perfect way of

trading in stock futures. The study elucidates the role of derivative futures in Indian financial

markets.

3tudies of this type are more useful to academicians and scholars to make further

insights into the various aspects of derivative futures in similar organi)ations.

An investor can choose the right underlying for investment, which is risk free. The

study included the changes in daily price movement and buying and selling signals to the

selected stocks. These helps the investor to take right decisions regarding trading in derivative

stock futures.

1." I#NIFICACNC OF TUD!

1.".1 REERCH PRO$%E&

The 9ethodology of the study consists of

3ource of data collection

3tatistical tool

Data Analysis

o'r(e of )ata (o**e(tion:

The data had been collected through :rimary and 3econdary sources.

Pri+ar, so'r(es:

The data had been collected through pro;ect guide and staff of the *ompany.

e(on)ar, so'r(es:

The data had been collected through +ooks, $ournals and


4/70

tatisti(a* too*:

The data collected from the above sources have been analy)ed through &ovin Averae

&eto)/0 which is one of the popular statistical tool in technical analysis is considered for the

study. To examine the underlying trend by smoothing of the data and to provide the +uy and 3ell

signals to the selected stocks this method serves the best.

9oving averages are used along with the price of the scrip. The stock price

may intersect the moving average at a particular point. Downward penetration of

the r i s ing average indicates the poss ibi l ity of a further fal l and gives sel l !

signal. =pward penetrat ion of the fal l ing average would indicate the possibil i ty

of the further rise and give s the buy! signal.

1.". REAERCH #OA%

The limitations of the study are>

1. The study is confined to only two weeks trading of $A? month contract.

. The study is limited by time and cost factors.

3. The sample si)e chosen is limited to stock futures of ten underlying scrip!s.

". The limited period of study may not be detailed and full2fledged in all aspects.

1.2 O$ECTIVE OF THE TUD!

The following are the ma;or o b;ectives of the study.

%. To present a theoretical framework relating to derivative market in India.

8. To observe the daily price movement of selected stock futures.

@. To identify the buying and selling signals to the selected scripts.

/. To observe the daily price movement of ?ifty Index 0utures.

'. To offer suggestions based on the findings to the study.


5/70

1.4 COPE OF TUD!:

The present study is designed to make an effort to understand the Derivatives market.


6/70

1.< A&P%E DEI#N

a+*e Desin: This paper is focused on the determinants of derivative structure in Tata

*apital and has a case study approach. The companies considered for study in the paper are Tata

*apitals.

1.18 DATA CO%%ECTION

1.18.1

The data had been collected through :rimary and 3econdary sources.

Pri+ar, so'r(es:

The data had been collected through pro;ect guide and staff of the *ompany.

1.18.

e(on)ar, so'r(es:

The data had been collected through +ooks, $ournals and

1. The study is confined to only two weeks trading of $A? month contract.

. The study is limited by time and cost factors.

3. The sample si)e chosen is limited to stock futures of ten underlying scrip!s.The limited period of study may not be detailed and full2fledged in all aspects


7/70

1.1. INDUTR! OVERVIEW

As capital market operations is a complex activity which re1uire an in depth knowledge

of stock market and about the company performance, security analysis of the stock. A full time

practicing firmCperson is needed to advise for our investment in fact a broker can also invest his

own money to make profit out of stock market operations.

A stockbroker invests in the stock market for individuals or corporations so whenever

individuals or corporations want to buy or sell stocks they must go through a brokerage house.

3tockbrokers often advise and counsel their clients on appropriate investments. +rokers explain

the workings of the stock exchange to their clients and gather information from them about their

needs and financial ability, and then determine the best investments for them. The broker then

sends the order out to the floor of the securities exchange by computer or by phone.


8/70

+rokerage clerks in the operations areas of securities firms perform many duties to

facilitate the sale and purchase of stocks, bonds, commodities, and other kinds of investments.

These clerks produce the necessary records of all transactions that occur in their area of the

business. $ob titles for many of them depend upon the type of work that they perform.

:urchase2and2sale clerks, for example, match orders to buy with orders to sell. They balance and

verify trades of stock by comparing the records of the selling firm with those of the buying firm.

Dividend clerks ensure timely payments of stock or cash dividends to clients of a particular

brokerage firm. Transfer clerks execute customer re1uests for changes to security registration

and examine stock certificates to make sure that they adhere to banking regulations. 4eceive2

and2deliver clerks facilitate the receipt and delivery of securities among firms and institutions.

9argin clerk!s record and monitor activity in customer!s accounts to ensure that clients make

payments and stay within legal boundaries concerning their purchases of stock.

Technology is changing the nature of many of these ;obs. A significant and growing

number of brokerage clerks use custom2designed software programs to process transactions more

1uickly. #nly a few customi)ed accounts are still handled manually. 0urthermore, the rapid

expansion of online trading reduces the amount of paperwork because brokerage clerks are able

to make trades electronically.

to(=>ro=er an) te investor:

The stockbroker should provide ade1uate information regarding the stocks. He should

be capable of giving short term and long2term investment suggestions to the investor and able to

confirm the purchase and sale of securities 1uickly. He should have ade1uate experience in the

market to take correct decision. He should have contact with other stock exchanges to execute

the orders profitably and also offer incidental service like arranging for financing the client!s

transaction.


9/70

T,es of sto(=>ro=ers

The stock brokers the key players in secondary market. There are various categories

of brokers as stated below.

F*oor $ro=ers> They are representatives of the brokers, who enter the trading floor and

execute orders for their clients of for members.

Co++ission $ro=er> A commission broker is a broker who buys and sells securities on

behalf of his clients for a commission. He does not purchase or sell his own name. A

broker act for the large number of his clients, and therefore, he deals in a large variety of

securities.

o>>ers> A ;obber is an independent broker who deals in securities as a owner, keeps

them for a very short period and sells them for profit known as the 6;obbers turn7.

Thus a ;obber does not work for commission but works for profits. A ;obber

transacts in the market for 1uick returns. In the Eondon 3tock Bxchange even member

has to act as a broker or as a ;obber. In India, there is no such rigid classification.

$a)*a Finan(iers?$a)*i@a**as> +adliwallas are the intermediaries who finance the

forward deals in specified securities in return for interest. This interest is called 6+adla

rate7.

Ar>itraers> They are brokers who buy securities in one market and sell them in another

market to take the advantages of the price differences prevailing in different markets for

same scripts.

Wo*ves> They are clever speculators. They perceive the changing trends in the market

and trade fast and make a fast duck.

$',in an) se**in of sares>

To buy and sell the script the investor has to locate register broker or a sub broker who

render prompt and efficient services to him. The order to buy of sell specified number of

scrip of the company of investor!s choice ate laced with the broker, the order may be of any of

the below mentions type after receiving the order the broker tries to execute the order in his


10/70

computer terminal. #nce matching order is found, the order is executed. The broker delivers

the contract note.

To the investor, it gives the details regarding the name of the company,

number of scripts bought, price, brokerage, and the date of delivery of share. In the physicaltrading form, once the broker gets the script certificate through the clearing houses the stock

broker delivers the share certificate along with transfer deed to the investor. The investor has

to fill the transfer deed and stamp it. The stamp duty is one of the percentage consideration,

the investor should lodge the share certificate and transfer deed to the register or transfer

agent of the company if it is bought in the demit form the broker has to give a matching

instruction to his depository participant to transfer shares bought to the investor account. The

investor should be account holder in any of depository participant. In the case of sell of

shares on receiving payment from the purchasing broker, the broker effects the payment to the

investor

Or)ers>

+uy and sell orders placed with members of the stock exchange by the investor. The

broker is responsible for getting the best price for his customer at the time the order is placed.

On*ine Tra)in:

The ?et is used as a medium of trading in Internet trading. #rders are communicated to

the stock exchange through website. Internet trading started in India on % stApril 8((( with F5

members seeking permission for online trading. The 3B+I committees on Internet based

securities trading services trading services has allowed the net to be used as an #rder 4outing

3ystem #43- through registered stock brokers on behalf of their clients for execution of

transaction.

The user should have the user id and password to enter into the electronic ring. He

should also have a demat account and bank account. The system permits only a registered client

to log in using user ID and password. #rder can be placed using place order window of the

website.


11/70

The client has to enter stock code and other parameters such as 1uantity and price of the

scrip on the place order window.

The client can review the order placed by clicking the review option. He can also reset to

clear the values

3atisfactory orders are sent by clicking the send option.

The client receives an order confirmation message with order number and value of the

order.

If the order is re;ected by the broker or stock exchange of r certain reasons such as invalid

price limit, a related message appears at the bottom of the screen. The time taken to

execute the order is %( seconds.


12/70

IG. :romoting and regulating self2regulating organi)ations.

G. :rohibiting insides trading in securities.

GI. 4egulation substantial ac1uisition of share and take over of companies.

GII. :erforming such functions and exercising such powers under the provisions of capital

issues control- act, %5/F and the securities to it by the central government.

3ecurities and Bxchange +oard of India 3tock +rokers And 3ub2+rokers-

4egulations, %558,

Ne@ &e+>ersi -C& an) FBO se+ent

E*ii>i*it,

The following persons are eligible to seek membership of the Bxchange as Trading

9embers +rokers->

a. Individuals

b. :artnership 0irms registered under the Indian :artnership Act, %5@8.

c. *orporations, *ompanies or institutions or subsidiaries of such *orporations, *ompanies

or institutions set up for providing financial services.

d. 3uch other persons or entities as may be permitted from time to time by 4+IC3B+I under

the securities *ontracts 4egulations- 4ules, %5'F.


13/70

#enera* E*ii>i*it, Con)itions:

*riteria Individuals 0irms *orporate

AB 9inimum age>

8% years

9aximum age>

&( years

9inimum age>

8% years applicable

for partners-

9inimum age>

8% years applicable

for directors-

3TAT=3 Indian *iti)en 4egistered

partnership firm

under Indian

partnership Act,

%5@8

*orporate

registered under The

*ompanies Act,

%5'& Indian-

1.1.3 CO&PAN! OVERVIEW

Overvie@

Tata *apital Eimited is a subsidiary of Tata 3ons Eimited. The *ompany is registered

with the 4eserve +ank of India as a 3ystemically Important ?on Deposit Accepting ?on

+anking 0inancial *ompany ?+0*- and offers fund and fee2based financial services to its

customers.

A trusted and customer2centric, one2stop financial services provider, Tata *apital Eimited caters

to the diverse needs of retail, corporate and institutional customers, directly or indirectly, through

its subsidiaries across various areas of business namely the *ommercial 0inance, Investment

+anking, :rivate B1uity, Infrastructure 0inance, 3ecurities,


14/70

The Tata!s are amongst the most respected business houses in the world. Tata *apital aims to

bring the trust and expertise of the Tata!s to an economically and socially relevant sector like

financial services.

The essence of brand Tata *apital is encapsulated in our brand proposition


15/70

ethical and ambitious work cultureL If you possess pride, passion and drive together, you possess

the D?A of a Tata *apital employeeM Bach position is designed with the ultimate mission at its core


16/70

&I%E TONE

Asia assin+ents f'e* reiona* eansion. Diversifi(ation of assets in aan ives *i+se of

te f't're

*apital 3ervicing *o., Etd. established in %55 to service a ma;or =3 investment bankJs

$apan?:E :ortfolios

=tili)ing the resources and personnel of =3 asset management firms and experienced

local personnel, *apital provides an immediate foundation and a platform for future

growth

*apital 3erving *o., Etd. obtained servicer license no.8@ for commercial loan servicing

from the $apanese 9inistry of $ustice in 3eptember %555

+egan commercial operations in December %555

Eocali)ing the *apital 3ervicing *o., Etd. model the *apital 3ervices roup opens

offices in Thailand and Taiwan in 8(((

*apital begins to manage structured loans in 8((%

+eginning of the conduit programs with the first 9+3 loans coming under management

in 8((8

887-8811

Invest+ents 'n)er +anae+ent s're. Caita* e+eres as a *ea)in in)een)ent

servi(er an) rea* estate asset +anae+ent se(ia*ist in Asia

Industry leading proprietary asset management system 3*#4B- developed and rolled

out in 8((@

*apital emerges as a leading $apan and regional servicer. 9ultiple rating agency upgrades

Dramatic growth in structured loans, conduit and *9+3 products under management


17/70

*apital 3ervices roup opens offices in 3ingapore and the :hilippines in 8(('

*ommercial licensing of 3*#4B commences

4atings upgraded. 3tandard :oorJs issues its highest possible servicer rating of

N3trongN to *apitalJs $apan special servicing operation in 8((&

81-812

Caita* affir+e) @it tan)ar) B Poors an) Fit(s iest servi(er ratins

*apital is issued the highest 0itch rating of any special servicer in $apan in 8((F.

3tandard :oorJs assigns *apital high ratings as a primary servicer

*apitalJs Thailand operation becomes the first loan servicer to be rated in Thailand by

0itch or any other agency in 8((F

3*#4BJs +usiness Intelligence tool 3*#4B +.I.- added allowing integration with

external systems

*apital 3ervices roup establishes office in 9alaysia

*apital enters $oint Genture with =K based Invested 4eal Bstate Asset 9anagement to

assist in creation of their Asia real estate platform in 8((

4eaffirmations for all 0itch and 3tandard :oorJs servicer ratings through 8(%(

814-Present

Caita* (ontin'es eansion into ne@ +ar=ets

*apital :ortfolio 3ervices EE* established in 9iami, 0lorida

*apital partners with I0* and Tata *apital to establish servicing operations in India


18/70

1. REVIEW OF %ITERATURE

1..1 Tet >oo= *iterat're

The study is organi)ed as under.

In the first chapter theoretical aspects relating to 6Technical analysis of Derivative stock

futures7 is presented.

In the second chapter profile of the industry and company is incorporated.

In the third chapter ob;ectives and methodology are presented.

In the fourth chapter study on 6Technical Analysis of Derivative stock futures7 analy)ed.

In the fifth chapter findings and suggestions of the study are given.

T!PE OF DERIVATIVE:

The following are the most common types of derivatives. They are

FORWARD:

A forward contract is a customi)ed contract between two entities, where settlement takes

place on a specific date in the future at today!s pre2agreed price.


19/70

FUTURE:

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. 0utures contracts are special types of forward contracts in the

sense that the former are standardi)ed exchange2traded contracts. These are one of the most

popular and widely used derivative instruments.

OPTION:

#ptions are of tow types calls and puts.

Ca**sgive the buyer the right but not the obligation to buy a given 1uantity of the

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

P'ts give the buyer the right, but not the obligation to sell a given 1uantity of the

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

WARRANT:

#ptions generally have lives of up to one year, the ma;ority of options traded on options

exchanges having a maximum maturity of nine months. Eonger2dated options are called warrants

and are generally traded over2the2counter.

%EAP:

The acronym EBA:3 means Eong2Term B1uity Anticipation 3ecurities. These are

options having a maturity of up to three years.


20/70

$AET:

+asket options are options on portfolios of underlying assets. The underlying asset is

usually a moving average of a basket of assets. B1uity index options are a form of basket

options.

WAP:

3waps are private agreements between two parties to exchange cash flows in the future

according to a prearranged formula. They can be regarded as portfolios of forward contracts. The

two commonly used swaps are>

INTERET RATE WAP:

These entail swapping only the interest related cash flows between the parties in the swap

currency.

CURRENCY SWAPS:

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

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

WAPTION:


21/70

3waptions 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. 4ather 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.

CHRONO%O#! OF DERIVATIVE &ARET IN INDIA:

DATE PARTICU%AR

%/ DB* %55& ?3B asked 3B+I for permission to trade Index 0utures.

% ?#G %55& 0ormed E.*.upta *ommittee to design framework for

Index 0utures.

F $=E" %555 4+I gave permission of #T* 0orward 4ate

Agreements and Interest 4ate 3waps.

8/ 9A" 8((( 3I9BO chose ?I0T" for trading futures and options

on India Index.

8' 9A" 8((( 3B+I gave permission to ?3B to do Index 0utures

trading.

5 $=? 8((( Trading of +3B 0utures.

88 $=? 8((( Trading of ?3B 0utures and Index #ptions market.

$=E" 8((% 3tock #ptions introduced.

?#G 8((% 3tock 0utures.


22/70

@ #*T 8((@ *ommodity 0utures.

RE#U%ATOR! FRA&EWOR>

The trading of derivatives is governed by the provisions contained in the 3* 4- A, the

3B+I Act and the regulations framed there under the rules and byelaws of stock exchanges.

RE#U%ATION FOR DERIVATIVE TRADIN#>

3B+I set up a 8/ member committed under *hairmanship of Dr. E. *. upta develop the

appropriate regulatory frame work for derivative trading in India. The committee submitted itsreport in 9arch %55. #n 9ay %%, %55 3B+I accepted the recommendations of the committee

and approved the phased introduction of Derivatives trading in India beginning with 3tock Index

0utures. 3B+I also approved he 3uggestive bye2laws! recommended by the committee for

regulation and control of trading and settlement of Derivatives contracts.

The provision in the 3* 4- A governs the trading in the securities. The amendment of the

3*4- A to include DB4IGATIGB3! within the ambit of 3ecurities! in the 3* 4- A 9ade

trading in Derivatives possible within the frame work of the Act.


23/70

%. Bligibility criteria as prescribed in the E.*. upta committee report may apply to 3B+I

for grant of recognition under 3ection / of the 3*4-A %5'& to start Derivatives Trading.

The derivatives exchangeCsegment should have a separate governing council and

representation of tradingC clearing members shall be limited to maximum of /(P of the

total members of the governing council. The exchange shall regulate the sales practices of

its members and will obtain approval of 3B+I before start of Trading in any derivative

contract.

8. The exchange shall have minimum '( members.

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

members of the derivative segment. The members of the derivative segment need to

fulfill the eligibility conditions as lay down by the E. *. upta *ommittee.

/. The clearing and settlement of derivates trades shall be through a 3B+I approved

*learing *orporation C *learing house. *learing *orporation C *learing House complying

with the eligibility conditions as lay down +y the committee have to apply to 3B+I for

grant of approval.

'. Derivatives broker C dealers and *learing members are re1uired to seek registration from

3B+I.

&. The minimum contract value shall not be less than 4s.8Eakh. Bxchanges should also

submit details of the futures contract they purpose to introduce.

F. The trading members are re1uired to have 1ualified approved user and sales person who

have passed a certification programme approved by 3B+I

THE ECONO&IC RO%E OF DERIVATIVE

Derivative markets provide three essential economic functions>

4isk management

:rice discovery


24/70

Transactional efficiency

Ris= +anae+ent:

The principal benefit of the Derivative market is that it provides the opportunity for risk

management through Hedging.

Ris=s invo*ve) in )erivatives:

4isk can be defined as 6The possibility or probability of loss7. Derivatives are used to

separate risks from traditional instruments and transfer these risks. The fundamental risks

involved in derivatives business includes following>

Cre)it ris=:

This is the risk of a counterpart to perform its obligations as per the contract. Also known

as default or counterpart risk, it differs with different instruments.

&ar=et ris=:

9arket risk is a risk of financial loss as a result of adverse movements of prices of the

underlying asset.

%i'i)it, ris=:

The inability of a firm to arrange a transaction at prevailing market prices is termed asli1uidity risk.

4elated to li1uidity of separate products.

4elated to the funding of activities of the firm including derivatives.


25/70

%ea* ris=:

Derivatives cut a cross ;udicial boundaries therefore the legal aspects Associated with the

deal should be looked into carefully.

Ris= +anae+ent?He)instrategies can be broadly grouped into three categories>

%. Inventory hedgingto protect the value of existing portfolio of assets.

8. Anticipatory hedging to sellCbuy derivatives especially forwards and futures instead of

the anticipated inflows assets-C outflows liabilities-. A classic example is that of

exporters and importers who sellsCbuys currency futuresCoptions.

3. Return enhancementhedge using derivatives to create synthetic securities, which manic

cash assets.

Pri(e )is(over,:

The second ma;or function of derivative market is price discovery. This is a process of

providing e1uilibrium prices that reflect current and prospective demands on current and

prospective supplies, and making these prices visible to all.

Transa(tiona* effi(ien(,:

Derivative markets allow institution to transact more efficiently than otherwise. They

reduce the direct cost of transacting in cashCfinancial markets are also provided, through clearing

houses, an efficient mechanism to deal with counter party risk.

Tata Revie@: Ari* - 'ne 814

Tata Review, the Tata group!s 1uarterly maga)ine, has been in print for over six decades. The

maga)ine features latest best practices and innovation at Tata companies, and views from senior

leadership on industry trends and contemporary businesses. 4ead by a premium audience that includes

corporate leaders, government officials and opinion makers, Tata 4eview seeks to enhance the Tata

groupJs position as a corporate and thought leader.


26/70

1.11 FUTURE COPE OF TUD!:

A 0utures contract is an agreement between two parties to buy or sell an asset at a certaintime in the future at a certain price. 0uture markets were designed to solve the problems that

exist in forward markets. +ut unlike forward contracts, the futures contracts ate standardi)ed and

exchange traded. To facilitate li1uidity in the futures contracts, the exchange specifies certain

standard features of the contract. It is a standardi)ed contract with standard underlying

instrument, a standard 1uantity and 1uality of the underlying instrument that can be delivered, or

which can be used for reference purposes in settlement- and a standard timing of such settlement.

The standardi)ed items in a futures contract are>

o Quantity of the underlying

o Quality of the underlying

o Date and 9onth of Delivery

o The units of :rice 1uotations and 9inimum price changes

o Eocation of settlement

T!PE OF FUTURE>

#n the basis of the underlying asset they derive, the futures are divided into following types.

TOC FUTURE

The stock futures are the futures that have the underlying asset as the individual securities.

The settlement of the stock futures is of cash settlement and the settlement price of the future

is the closing price of the underlying security.

INDEG FUTURE


27/70

P

ROFIT

LOSS

Index futures are the futures, which have the underlying asset as an Index. The Index

futures are also cash settled. The settlement price of the Index futures shall be the closing

value of the underlying index on the expiry date of the contract.

CO&&ODIT! FUTURE

In this case, the underlying asset is a commodity. It can be an agricultural commodity like

wheat corn, or even a precious asset like gold, silver etc.

FINANCIA% FUTURE

In this case, the underlying assets are financial instruments like money market paper,

Treasury +ills, notes, bonds etc.

CURRENC! FUTURE

*urrency futures are those in which the underlying assets are ma;or convertible

currencies like the =.3. dollar, the :ound 3terling, the Buro and the "en etc.

PARTIE IN THE FUTURE CONTRACT>

There are two parties in a future contract, the +uyer and the 3eller.

Te >',erof the futures contract is one who is E#? on the futures contract and

Te se**erof the futures contract is one who is 3H#4T on the futures contract.

The pay off for the buyer and the seller of the futures contract are as follows.

PA!OFF FOR A $U!ER OF FUTURE:


28/70

PROFIT

LOSS

P

E

F E1

%

CAE 1:

The buyer bought the future contract at 0- if the futures price goes to B% then the buyer

gets the profit of 0:-.

CAE :

The buyer gets loss when the future price goes less then 0-, if the futures price goes to

B8 then the +uyer gets the loss of 0E-.

PA!OFF FOR A E%%ER OF FUTURE:


29/70

:

B8

B% 0

F-FUTURE PRICE

E10 E-ETT%E&ENT PRICE

CAE 1:

The 3eller sold the future contract at f- if the futures price goes to B% then the 3eller

gets the profit of 0:-.

CAE :

The 3eller gets loss when the future price goes grater than 0-, if the futures price goes to

B8 then the 3eller gets the loss of 0E-.

&AR#IN>


30/70

9argins are the deposits, which reduce counter party risk, arise in a futures contract.

These margins are collected in order to eliminate the counter party risk. There are three types of

margin.

INITIAL AR!INS:

The fair value of the futures contract is derived from a model known as the *ost of *arry

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

Cost of Carr, &o)e*>


31/70

F 91r-; t

Were

F J F't'res Pri(e

J ot ri(e of te Un)er*,in

R J Cost of Finan(in

J Ee(te) Divi)en) !ie*)

t J Ho*)in Perio).

FUTURE TER&INO%O#!:

POT PRICE:

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

FUTURE PRICE>

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

CONTRACTC!C%E:

It is the period over which a contract trades. The index futures contracts on the ?3B

have near month one2month-, middle month two2months- and far month three2months- expiry


32/70

cycles, which expire on the last Thursday of the month. Thus a $anuary expiration contract

expires on the last Thursday of $anuary and a 0ebruary expiration contract ceases trading on the

last Thursday of 0ebruary. #n the 0riday following the last Thursday, a new contract having a

three2month expiry is introduced for trading.

EGA&P%E J 1:

DEC 31T AN 5TH FE$ "TH &AR 31T

EGA&P%E J :

AN 7TH FE$ "TH &AR 31T


33/70

EGPIR! DATE>

It is the date specified in the futures contract. This is the last day on which the correct will

be traded, at the end of which it will cease to exist.

CONTRACT IKE>

The amount of asset that has to be delivered less than one contract, 0or instance,

the contract si)e on ?3B! s futures market is '( ?iftiest.

$AI:

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

price. There will be a different basis for each delivery reflects that futures prices normally exceed

spot prices.

COT OF CARR!>

The relationship between futures process and spot prices can be summari)ed in terms of

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

finance the asset less the income earned on the asset.

OPEN INTERET:


34/70

#pen Interest means the Total outstanding long or short positions in the market at any

specific time!. As total long positions for market would be e1ual to short positions, for

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

CHOICE OF FUTURE:

*hoice of futures consists of @ decisions. They are


35/70


36/70


37/70

1.1 TOO%E B TECHNICA% OF THE TUD!:

Technical analysis is a process of identifying trend reversals at an earlier

stage to formulate the buying and selling strategy with the help of several indicators.

The technical analysis mainly focuses the attention on the past history of

prices. enerally technical analysts choose to study two basic market data2price and volume.

They mainly predict short2term price movement rather than long2term movement.

Histor, of Te(ni(a* Ana*,sis:

The technical analysis is based on the doctrine given by *harles H. Dow in

%5/, in the


38/70

Dow gave special emphasis on volume. Golume expands along with the bull market and narrows

down in the market. If the volume falls with rise in price or vice2versa, it is a matter of concern

for the investor and the trend may not persist for a longer time.

ort se**in:

3hort selling is a technical indicator known as short interest. 3hort sales refer to the selling of

shares that are not owned. The bears are the short sellers who sell now in the hope of purchasing

at a lower price in the future to make profits.

&ovin Averae:

The market indices do not rise or fall in straight line. The upward and downward movements are

interrupted by counter moves. The underlying trend can be studied by smoothening of the data.

To smooth the data moving average techni1ue is used. If it is five day moving average, on the

sixth day the body of the data moves to include the sixth day observation eliminating the first

day!s observation. Eikewise continues. 0or this calculation, closing price of the stock is used.

Os(i**ators:

#scillator shows the share price movement across a reference point from one extreme to another.

The momentum indicates>

#verbought and oversold conditions of the scrip or the market.

3ignaling the possible trend reversal.

4ise or decline in the momentum.

$ar Carts:

In bar charts, two dots are entered to represent the highest and lowest price at which the stock is

traded. A line is drawn to connect both the points a hori)ontal nub is drawn to mark the closing

prices.

CHART PATTERN:

These are used as a supplement to other information and confirmation of signals provided by

trend lines. 3ome of the chart patterns are discussed her%& ' $ormation:


39/70

The name itself indicates that in the 6G7 formation there is a long sharp decline and a fast

reversal. The 6G7 pattern occurs mostly in popular stocks where the market interest changes

1uickly from hope to fear and vice2versa. In the case of inverted 6R7 the rise occurs first and

declines. These changes are shown in the following diagram.

Price

(ay)

*& (ou+,e Top and -ottom:

This type of formation signals the end of one trend and the beginning of another. The double top

pattern resembles the letter 9!. The double top may indicate the onset of the +ear 9arket.

In a double bottom, the price of the falls to a certain level and increase with diminishing activity.

Then it falls again to the same or to lower price and turns up to a higher level. The double bottom

resembles the letter

patterns are shown in the following charts.

Pri(e Pri(e

Da,s Da,s


40/70

.& /ead and Shou,der):

In the head and shoulder pattern there are three rallies resembling the left shoulder, a head and a

right shoulder. A neckline is drawn connecting lows of the tops.


41/70

CHAPTER-

DATA ANA%!I

AND INTERPRETATION


42/70

DATA ANA%!I

The data had been analy)ed using Tables and *harts.

%IT OF CRIP :

The following are the %( scripts selected for analysis.

%. 4BEIA?*B I?D

8. HI?DAE*#

@. +A$A$A=T#/. I?0#3"3

'. 9A4=TI

&. +HBE

F. 9T?E

. A**

5. 4A?+AO"

%(. TI3*#


43/70

TUD! ON TECHNICA% ANA%!IOF

DERIVATIVE TOC FUTURE

Ta>*e ".1:

Ta>*e so@in C*osin ri(e an) &ovin Averae of RE%IANCE

IND:

DATE TOC PRICE &OVIN# AVERA#E

'TH$A? 58'./'

&TH$A? 5(F.('

FTH$A? [email protected]( 5/.@

TH$A? 8/.'( .F

5TH$A? 58%.8( F.F(

%8TH$A? 5F.5( F%.5%

%@TH$A? '&.8' &.FF

%/TH$A? '5.F( &.F&

%'TH$A? 5.(

%&TH$A? 58%.%'


44/70


45/70

Table /.8

Ta>*e so@in C*osin ri(e an) &ovin Averae of

HINDA%CO:

DATE TOC

PRICE&OVIN# AVERA#E

'TH$A? %F(.5(

&TH$A? %&%.''

FTH$A? %'/.&' %'5.F@

TH$A? %'%.'' %'&

5TH$A? %&(.(( %'@./@

%8TH$A? %'8.8' %'%.@

%@TH$A? %/.F( %'%.'

%/TH$A? %//.(( %'(.5

%'TH$A? %'8.5'

%&TH$A? %'F.((

Cart ".:


46/70


47/70

Ta>*e so@in C*osin ri(e an) &ovin Averae of

$AA AUTO:


'TH$A? 8&8'.F(

&TH$A? 8'&.F(

FTH$A? 8'(@.(( 8/&.&%

TH$A? 8@%@.%' 8/%F.&@

5TH$A? 8/88.'( 8@@@.5%

%8TH$A? 88(.( [email protected]/

%@TH$A? 8%'(.%( 8@(/.%/

%/TH$A? 88(@.%' 8@@.FF

%'TH$A? 8/&/.%'

%&TH$A? 8'5'.&'


48/70

Cart ".3:

Cart so@in Dai*, ri(e +ove+ent an) &ovin averaes of $AA AUTO.

1 2 3 4 5 6 7 8 9 10

2000

2100

2200

2300

2400

2500

2600

2700

STOCK PRICE MOVING AVERAGE

DAYS

STOCK PRICE

Interretation:

0rom the above chart it is observed that,

The stock price curve shows a decreasing trend during first four days. It formed

as 6G7 pattern on the fourth day and inverted 6R7 on the fifth day of the study. The

price of stock!s falls and rises that makes the Inverted head and shoulders!.

*onnecting the tops of the inverted head and shoulders gives the ?eckline.


49/70

Ta>*e ".":

Ta>*e so@in C*osin ri(e an) &ovin Averae

of INFO!:


'TH$A? 8(.(

&TH$A? 8F&.8'

FTH$A? 8F'8./( 8F&%.'/

TH$A? 8&5.( 8F/F.%

5TH$A? 8F./' 8F8%.%

%8TH$A? 8F/(.%' 8&&5.F%

%@TH$A? 8&@.8' 8&F'.'

%/TH$A? 8/5%.5( 8&F&.8

%'TH$A? 8F%5.%'

%&TH$A? 8F5/.&'


50/70

Cart ".":

Cart so@in Dai*, ri(e +ove+ent an) &ovin averaes of INFO!.

1 2 3 4 5 6 7 8 9 10

2400

2500

2600

2700

2800

2900

3000


DAYS

STOCK PRICE

Interretation:

0rom the above chart it is observed that,


as 6G7 pattern on $A? thand again on $A? %/thdue to a long sharp decline and a

fast reversal in the stock price and it formed as inverted 6R7 pattern on $A? 5 thand

finally it settled at a price of 8F5/.&', with a loss of %/.%'8(.(28F5/.&'-

points on $A? %&th.

The moving average moves along with the stock price. Downward penetration of

the moving average indicates the further fall. Hence 3ell signal is generated on


51/70

$A? th. =pward penetration of moving average would indicate the possibility of

further rise and gives the +uy signal on $A? %8 th.

Ta>*e ".2:

Ta>*e so@in C*osin ri(e an) &ovin Averae

of&ARUTI:


'TH$A? F@/.@'

&TH$A? F8&.8'

FTH$A? F%/.( F8F.&

TH$A? F(.5' F8.8

5TH$A? F'/.5' F88.&@

%8TH$A? F@&.(' F%'.'/

%@TH$A? &5./( F%F.(8

%/TH$A? &F5.@' F%%./5

%'TH$A? F%&.@'

%&TH$A? F8F.@(


52/70

Chart 0&1:

Chart )ho2ing (ai,y price movement and oving average)

of &ARUTI.

1 2 3 4 5 6 7 8 9 10

670

680

690

700

710

720

730

740

750

760


DAYS

STOCK PRICE

Interretation:

+y observing the above chart,


as an inverted 6R7 pattern on $A? 5thand a 6G7 pattern on $A? %/ thand finally

settled at a price of F8F.@( on $A? %&th.






53/70

Ta>*e ".4:

Ta>*e so@in C*osin ri(e an) &ovin Averae of $HE%:


'TH$A? %58F.%(

&TH$A? %'%.&(

FTH$A? %8(.F( %@'.@

TH$A? %F8&.%( %F58.'%

5TH$A? %'@.&' %F/%.8%

%8TH$A? %F%(.'( %&5'.&

%@TH$A? %'5'.%( %F%@.&@

%/TH$A? %'5@.(' %F%'.8@

%'TH$A? %%'.'

%&TH$A? %&%.&'

Cart ".4:

Cart so@in Dai*, ri(e +ove+ent an) &ovin averaes

of $HE%.


54/70

1 2 3 4 5 6 7 8 9 10

1500

1600

1700

1800

1900

2000


DAYS

STOCK PRICE

Interretation:



as 6G7 pattern on $A? thand an inverted 6R7 pattern on $A? 5 th and finally

settled at a price of %&%.&' on $A? %&th.






55/70

Ta>*e ".5:

Ta>*e so@in C*osin ri(e an) &ovin Averae of &TN%:


'TH$A? %'%./(

&TH$A? %/.F'

FTH$A? %/@.'( %/.8'

TH$A? %/@.5( %/F./

5TH$A? %'@.F( %/'.%

%8TH$A? %/F.'' %/@.'@

%@TH$A? %@&.' %/'.88

%/TH$A? %@'.&' %/@.5F

%'TH$A? %'8.@'

%&TH$A? %/F./'


56/70

Cart ".5:


of &TN%.

1 2 3 4 5 6 7 8 9 10

130

135

140

145

150

155


DAYS

STOCK PRICE

Interretation:



as 6G7 pattern on $A? 5thand an inverted 6R7 pattern on $A? %' thand finally

settled at a price of %/F./' on $A? %&th.






57/70

Ta>*e ".7:

Ta>*e so@in C*osin ri(e an) &ovin Averae of ACC:


'TH$A? F/8.&'

&TH$A? F8.F(

FTH$A? F%(.&( F8F.'F

TH$A? F((.@' F88./

5TH$A? F''.'' F%F.(F

%8TH$A? F%&.( F%/.8@

%@TH$A? F(8.(' F88.(&

%/TH$A? &5&./( F%F.F@

%'TH$A? F@5.''

%&TH$A? F@@.'


58/70

Cart ".7:

Cart so@in Dai*, ri(e +ove+ent an) &ovin averaes of ACC.

1 2 3 4 5 6 7 8 9 10

690

700

710

720

730

740

750

760


DAYS

STOCK PRICE

Interretation:


The price of the A** stock falls to a certain level and increase with a diminishing

activity. Then it falls again to the same or to a lower price and turns up to a higher

level. It resembles a Double +ottom, which looks like the letter

bottom is a sign for +ull market.






59/70

Ta>*e ".*e so@in C*osin ri(e an) &ovin Averae of

RAN$AG!:


'TH$A? /(&.%'

&TH$A? @'.8(

FTH$A? @&(.&( @&5.5%

TH$A? @@.8( @'5.&

5TH$A? @'5./( @'@

%8TH$A? @''.5( @/5.F/

%@TH$A? @'(.&' @'/.&

%/TH$A? @//.'' @'F.%5

%'TH$A? @&@.(

%&TH$A? @F%.('


60/70

Cart ".


61/70

Ta>*e ".18:

Ta>*e so@in C*osin ri(e an) &ovin Averae of TICO:


'TH$A? /5(.&(

&TH$A? /F5.8'

FTH$A? /&(.(( /&8.%%

TH$A? /[email protected]' //.8F

5TH$A? /'&.F' /85.''

%8TH$A? /8%./( /%/.'&

%@TH$A? @'.&' /%8.F5

%/TH$A? @'.(' /%8.8&

%'TH$A? /%'.%(

%&TH$A? /'/.%(

Cart ".18:


ofTICO.


62/70

1 2 3 4 5 6 7 8 9 10

350

370

390

410

430

450

470

490


DAYS

STOCK PRICES

Interretation:


The stock price curve shows a decreasing trend during first four days. It formedas 6G7 pattern on $A? thand an inverted 6R7 pattern on $A? 5 th and finally

settled at a price of /'/.%( on $A? %&thwith a loss of @&.'(/5(.&(2/'/.%(- points.






63/70

Ta>*e ".11:

Ta>*e o@in Dai*, Pri(e &ove+ent of Nift, In)e F't're:

DATENIFT! INDEG FUTURE

'TH$A? 85'5.((

&TH$A? 8&.F(

FTH$A? 8/8.((

TH$A? 8&5%.((

5TH$A? 88'.''

%8TH$A? 8&5(.((

%@TH$A? 8&%5./'

%/TH

$A? 8&/.((

%'TH$A? 8F5@.((

%&TH$A? 8/&.8(


64/70

Cart ".11:

Cart o@in Dai*, Pri(e &ove+ent of Nift, In)e F't're.

5TH JAN6TH JAN7TH JAN8TH JAN9TH JAN12TH JAN13TH JAN14TH JAN15TH JAN16TH JAN

2400

2500

2600

2700

2800

2900

3000

Interretation:


The ?ifty Index 0uture shows a downtrend during the study period. It settled at

the price of 8/&.8( with a loss of %%8.(85'5.((28/&.8- points on $an %& th.


65/70

CHAPTER-3

FINDIN#0

U##ETIONBCONC%UION


66/70

FINDIN#:

The following are the ma;or findings of the study.

%. The stock price of 4BEIA?*B I?D decline from 58'./' to 58%.%' during the

study period. It shows the 6G7 and inverted 6R7 patterns which are the signs of

fluctuations in the price of the stock. The intersection of stock price and moving

average curves gives a sell signal on $anuary 5thand a buy signal on $anuary %@th.

8. There is a downtrend observed in the stock price of HI?DAE*# during the study

period. The stock price curve shows the 6G7 and inverted 6R7 patterns which are

the signs of fluctuations in the price of the stock. The intersection of stock price

and moving average curves gives a sell signal on $anuary th and a buy signal on

$anuary %8th

@. The daily price movement of +A$A$ A=T# scrip included the 6G7 and inverted

6R7 patterns which are the signs of fluctuations in the stock price. The price of

stock!s falls and rises that makes the Inverted head and shoulders! that is an

indication of the end of bear market and the beginning of the bull market. The

intersection of stock price and moving average curves gives a sell signal on$anuary thand a buy signal on $anuary %8th.

/. The stock price curve of I?0#3"3 shows a decreasing trend during the study

period. It falls down from 8(. to 8F5/.&'. The formation of 6G7 and inverted

6R7 patterns of the stock price shows the changes in the market interest 1uickly

from hope to fear and vice2versa. The intersection of stock price and moving

average curves gives a sell signal on $anuary thand a buy signal on $anuary%8th.

'. The daily price movement of 9A4=TI scrip also shows a decreasing trend like

the other scripts including some fluctuations due to changes in the market interest

which is indicated through the formation of the 6G7 and inverted 6R7 patterns. The

intersection of stock price and moving average curves gives a sell signal on

$anuary thand a buy signal on $anuary %8th.


67/70

&. The same downtrend is observed in the stock price of +HBE like other scripts. The

formation of the 6G7 and inverted 6R7 patterns shows the fluctuations in the stock

price. Though it settled with a loss, it indicates an increasing trend from $anuary

%/

th

. The intersection of stock price and moving average curves gives a sell signalon $anuary thand a buy signal on $anuary%8th.

F. There is a downtrend observed in the stock price of 9T?E during the study



and moving average curves gives a sell signal on $anuary thand a buy signal on

$anuary %8th.

. The price of A** scrip resembles a Double +ottom form during the study period,

which indicates the sign for bull market. The intersection of stock price and

moving average curves gives a sell signal on $anuary th and a buy signal on

$anuary %8th.

5. The stock price curve of 4A?+AO" shows a decreasing trend during the study

period. It formed as 6G7 pattern on $anuary thdue to a long sharp decline and a

fast reversal. The intersection of stock price and moving average curves gives a

sell signal on $anuary 5thand a buy signal on $anuary %8th.

%(.There is a downtrend observed in the stock price of TI3*# during the study



and moving average curves gives a sell signal on $anuary thand a buy signal on

$anuary %8th.

%%. The ?ifty Index 0uture shows a downtrend during the study period. It settled with

a loss of %%8.( points on $anuary %&th.


68/70

U##ETION:

The following are the suggestions of the study.

%. The findings of the study reveals the buying and selling signals relating to4BEIA?*B stock future it is suggested to sell the scrip on $anuary 5thand buy the

scrip on $anuary %@th.

8. The downtrend observed in the stock price of HI?DAE*# indicates that it is the

right time to buy the stock as it may rise in future. It is suggested to sell the stock

future on $anuary thand buy the scrip on $anuary %8th.

@. It is suggested to sell the +A$A$ A=T# stock future on $anuary thand buy the

scrip on $anuary %8th

.

/. It is suggested to sell the I?0#3"3 stock future on $anuary thand buy the scrip

on $anuary %8th.

'. It is suggested to sell the 9A4=TI stock future on $anuary thand buy the scrip on

$anuary %8th.

&. It is suggested to sell the +HBE stock future on $anuary thand buy the scrip on

$anuary %8th.

F. As study reveals that the intersection of the stock price and the moving average

curves gives a sell signal on $anuary thand a buy signal on $anuary %8 th. It is

suggested to follow these signals.

. The price of A** scrip resembles a Double +ottom form during the study period,

which indicates the sign for bull market. The intersection of the stock price and the

moving average curves gives a sell signal on $anuary th and a buy signal on

$anuary %8th. It is suggested to follow these signals.

5. The intersection of stock price and moving average curves of 4A?+AO" scrip

gives a sell signal on $anuary 5thand a buy signal on $anuary %8th. It is suggested to

follow these signals.

%(. It is suggested to sell the TI3*# stock future on $anuary thand a buy signal on

$anuary %8th.


69/70

CONC%UION:

+y using the tools and techni1ues helps us to assess and evaluate the company!s financial

position and also its share value and moving averages. In this study I used statistical tool of moving

averages which indicates on which date to buy or sell the shares in respected companies.

0or example 3ell signal is generated on $A? 5 th. =pward penetration of moving

average would indicate the possibility of further rise and gives the +uy signal on $A?

%@thfor reliance ltd.

+I+EI#4A:H"

.NO $OO NA&E?PU$%IHER AUTHOR

1

FINANCIA% &ANA#E&ENT Prasanna Can)ra

e('rit, Ana*,sis an)

Portfo*io &anae+ent P'nitavati an)ian

3

Derivatives Core &o)'*e NCF& &ateria*

$#=4?AE3

+usiness line


70/70

Bconomic Times

WE$ITE

@@@.)erivativesin)ia.(o+

@@@.nsein)ia.(o+

@@@.2aisa.(o+

@@@.>sein)ia.(o+

@@@.in)iainfo*ine.(o+

Documents

hari project Derivative.docx