Project on Derivative With Fundamental & Technichal Analysis

PROJECT ON DERIVATIVE MARKET

A

“PROJECT ON DERIVATIVE MARKET

WITH

FUNDAMENTAL & TECHNICAL ANALYSIS”

MASTER OF BUSINESS ECONOMICS

[M.B.E]

Presented by:

Abhitej K Patel

Roll No. :- 31

SEMESTER-IV

Presented to:- Dr. Subadra Ragothaman

DEPARTMENT OF ECONOMICS

MASTER OF BUSINESS ECONOMICS

VEER NARMAD SOUTH GUJARAT UNIVERSITY

SURAT.

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ACKNOWLEDGEMENT

I have a great feeling of satisfaction when I am thanking those persons without whom this project might not be completed. The people who helped me, guided me and encouraged me to successfully complete my project, those who have helped and supported me in every aspects of my life.

First of all, I express my gratitude towards Dr. Dinesh Dhankani & Pro. Sejal Shah who has given his precious time for my project and shown faith in me and helped me in my project. And I am also thankful to Head of the department Dr. Subhadra Ragothaman who has given me permission to take training in her department and also give her precious time for my project, and to all the staff members of the Department who helped directly or indirectly in my project.

Now I want to show my gratitude towards my friends who are always been supported me for the entire work I have done. And at last I want to thank my parents for giving me such a wonderful opportunity and helped and supported me throughout my life. They have been good inspiration for my life and I am blessed that I got them as my parents.

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CERTIFICATE

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DECLARATION

I declare that “PROJECT ON DERIVATIVE MARKET WITH FUNDAMENTAL & TECHNICAL ANALYSIS ” submitted for the partial fulfillment of the Master of Business Economics; semester- IV is my original work and carried it out at Department of Economics, Veer Narmad South Gujarat University- surat. The project or any part of it has been not previously submitted for any degree.

Date: 05/07/2010 Signature of the Student

Place: Surat Abhitej K Patel

Department Of Economics

Surat.

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R Wadiwala Securities

Foundation of R. Wadiwala Group was laid in the year 1943 by Mr. Bachoobhai Wadiwala, who

happened to be the starter of equity trading in Surat. Same business was carried on by the third

generation of the family in the name of R. Wadiwala & Co., a partnership firm operating as a

sub-broker.

R. Wadiwala Securities Pvt. Ltd. (RWSPL) was promoted in the year 2004 by the partners of R.

Wadiwala & Co. The Company acquired NSE - BSE membership and became depository

participant with CDSL in the year 2005 and 2006 respectively.

R. Wadiwala group is highly respected and well known for investment advisory, financial

integrity and prompt services in the whole of South Gujarat. Our clientele includes retail, HNIs,

corporates and trusts. The company has been able to achieve massive growth due to increased

penetration by appointing franchisee and opening number of branches.

The efficient use of information technology and strong risk management system has played

important role in expanding the operations of the company. The complete risk management

software is now web enabled and allows all branches/sub-brokers to monitor and control their

risk

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TABLE OF CONTENTS

NO. PARTICULERS PAGE NO.

1 General Introduction 07

2 Review of literature 10

3 Derivative market in India 16

4 Types of traders in derivatives market 27

5 Fundamental analysis 29

6 Technical analysis 55

7 Derivatives strategeis 85

8 Findings & suggestions 99

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General introduction

The liberalization of the Indian economy has ushered in an era of opportunities for the Indian corporate sector. however, these opportunities are accomplished by challenges. The corporate are now required to operate at global capacities to be able to reap the benefits of economies of scale and be competitive. To operate at global capacities, huge investments are called for and the main source of fund in the public at large. Therefore, the corporate now started tapping the capital market in a big way. The response is also encouraging.

As the Indian nation integrates with world economy era, small tremors in the world market starts affecting the Indian economy. As an example, interest rates have been south bound in the world and the same has happened in the Indian market too. fixed income rates have fallen drastically due to fall in the real income of people. To overcome this fall , investors have been continuously seek to increase the yield of their of their investments. But, it is a time-tested fact that, the yields on investment in equity shares are maximum, the accompanying risks are also maximum. Therefore, it is absolutely essential that efforts should be made to reduce this factor. The reduction of risk can be achieved through the process of ‘hedging’ using ‘derivatives’ financial instrument. A hedge is any act that reduced the price risk of an existing or anticipated position in the cash market. Basically, there are two type of hedging with futures :long hedge and short hedge.

Financial derivatives are a kind of risk management instrument. A derivative's value depends on the price changes in some more fundamental underlying assets. Many forms of financial derivatives instruments exist in the financial markets. Among them, the three most fundamental financial derivatives instruments are: forward contracts, futures, and options. If the underlying assets are stocks, bonds, foreign exchange rates and commodities etc., then the corresponding risk management instruments are: stock futures (options), bond futures (options), currency futures (options) and commodity futures (options) etc. In risk management of the underlying assets using financial derivatives, the basic strategy is hedging, i.e., the trader holds two positions of equal amounts but opposite directions, one in the underlying markets, and theother in the derivatives markets, simultaneously. This risk management strategy is based on the following reasoning: it is believed that under normal circumstances, prices of underlying assets and their derivatives change roughly in the same direction with basically the same magnitude; hence losses in the underlying assets (derivatives) markets can be offset by gains in the derivatives (underlying assets) markets; therefore losses can be prevented or reduced bycombining the risks due to the price changes. The subject of this book is pricing of financialderivatives and risk management by hedging.

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SCOPE OF THE STUDY

Introduction of derivatives in the Indian capital market is the beginning of a new era , which is truly exciting. Derivatives, worldwide are recognized risk management products. These products have a long history in India, in the unorganized sector , especially in currency and commodity markets. The availability of these products on organized exchanges ha provided the market participants with broad based risk management tools.

This study mainly covers the area of hedging and speculation. The main aim of the study is to prove how risks in investing in equity shares can be reduced and how to make maximum return to the other investment.

IMPORTANCE OF THE STUDY

· It helps the researcher to construct a diversified portfolio.

· Provide an insight on return and risk analysis.

· It helps to make a general study on derivatives.

· It helps to identify and reduce by using hedging strategies and speculation.

OBJECTIVE OF THE STUDY

Primary Objectives· To construct portfolio and analyses the risk return relationship.

· To hedge the most profitable portfolio.

· To construct a diversified portfolio and risk reduction by using index futures.

Secondary objective· To find out extant to which loss can be reduced by applying hedging strategies.

· To determine whether the hedger enjoys better returns from the use of hedgers.

· To identify how much reduction in risk is possible.

· To find out the extend of loss due to misjudgment on index movements .

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LIMITATION OF THE STUDY

A) While applying the strategies , transaction cost and impact cost are not taken into consideration.so,it will reflect in the profit calculation on each month of the study.

B) data were collected only on the basis of NSE trading

C) Hedging strategy is applied on historical data. so the direction of each trend in the stockmarket is known before hand for the period selected. As a result, some bias could have been done for the application of hedging.

METHODOLOGY

TYPE OF RESEARCHThe type of research is selected on the basis of problems identified. Here the research type used is descriptive research. Descriptive research includes fact-findings and enquiries of different kinds. The major purpose of descriptive research is a description of the state of affairs, as it exists in the present system. In this dissertation an attempt has been made to discover various issues related to derivatives in the Indian market and how they help the hedge the risk.

ACTUAL COLLECTION OF DATA

Data Collection from secondary SourcesSecondary data were gathered from numerous sources. While preparation of this project report, the secondary data have been collected through:

Data was generated from general library research sources, textbooks, trade journals, articles from newspaper, treasury management, brochures, interviews with different brokers of Bangalore stock Exchange and Internet web sitewww.nseindia.comwww.sherkhan.comwww.icfai.orgwww.google.comwww.commodityindia.com

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REVIEW OF LITURATURELITERATURE REVIEW

Financial derivatives are so effective in reducing risk because they enable financial Institutions to hedge that is, engage in a financial transaction that reduces or eliminates risk. When a financial institution has bought an asset, it is said to have taken a long position, and this exposes the institution to risk if the returns on the asset are uncertain. Conversely, if it has sold an asset that it has agreed to deliver to another party at a Future date, it is said to have taken a short position, and this can also expose the Institution to risk. Financial derivatives can be used to reduce risk by invoking the following basic principle of hedging :Hedging risk involves engaging in a financial transaction that offsets a long position by taking an additional short position, or offsets a short position by taking an additional long position. In other words, if a financial institution has bought a security and has therefore taken a long position, it conducts a hedge by contracting to sell that security (take a short position) at some future date. Alternatively, if it has taken a short position by selling a security that it needs to deliver at a future date, then it conducts a hedge by contracting to buy that security (take a long position)at a future date. We look at how this principle can be applied using forward and futures

PARTICIPANTS OF DERIVATIVE

There are three broad categories of participants –hedgers, speculators and arbitrageurs. hedgers face risk associated with the price of an assets. They use futures or options markets to reduce or eliminate this risk. Speculates wish to bet on future movement in the price of an asset. features and options contracts cangue them an extra leverage;they can increase both the potential gains and losses in a speculative venture. Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets.

Derivative products initially emerged, as hedging devices against fluctuation in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. In recent years, the market for financial derivative has grown tremendously in terms of variety of instruments available. The emergence of the market for derivative products, most notable forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices.

Though the use of derivative products, it is possible to partially or fully transfer price risks by locking in asset prices. as instrument of risk management , these generally do not influence the fluctuations in the underlying asset prices.

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DEFINATIONS

According to JOHN C. HUL “ A derivatives can be defined as a financial instrument whosevalue depends on (or derives from) the values of other, more basic underlying variables.”

According to ROBERT L. MCDONALD “A derivative is simply a financial instrument (or evenmore simply an agreement between two people) which has a value determined by the price ofsomething else.

With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in thedefinition of Securities. The term Derivative has been defined in Securities Contracts(Regulations) Act, as:-

A Derivative includes: -a. a security derived from a debt instrument, share, loan, whether secured or unsecured, riskinstrument or contract for differences or any other form of security; b. contract which derives its value from the prices, or index of prices, of underlying securities.Derivatives were developed primarily to manage, offset or hedge against risk but some weredeveloped primarily to provide the potential for high returns.

FACTERS AFFECTING GROWTH OF DERIVATIVE

Growth of derivative is affected by a number of factors, some of the important factors arestarted below.

1. Increased volatility in asset prices in financial markets

2. Increased integration of national financial markets with the international markets.

3. Marked improvement in communication facilities and sharp decline in their costs.

4. Development of more sophisticated risk management tools, providing economic agents,a wider choice of risk management strategies.

5. Innovation in the derivative markets, which optimally combine the risk and returns,reduced risk as well as transaction costs as compared to individual financial assets.

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TYPE OF DERIVATIVES

One of classifying derivatives is as,

COMMODITY DERIVATIVE

These deals with commodities like suger, gold, wheat, pepper etc..thus, futures or optionson gold, suger,pepper, jute etc are commodity derivatives.

FINANCIAL DERIVATIVE

Futures or options or swaps on currencies, gift edged securities, stocks and shares, stock market indices, cost of living indices etc are financial derivatives.Another way of classifying derivatives.

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Derivatives

Commodity Financial


BASIC DERIVATIVESThey are forward /futures contracts and option contracts.

COMPLEX DERIVATIVEOther derivative, such as swaps are complex

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Derivatives

Basic Complex

Derivative

Future

Option

Forwards

swaps


A) OPTIONS:

The concept of options is not new one. In Fact, options have been in use for centuries. The idea of an option existed in ancient Greece and Rome. The Romans wrote options on the cargo that were transported by their ship. In the 17th century, there was an active option markets in Holland. In fact, options were used in a large measure in the .tulip bulb mania . of that century. However, in the absence of mechanism to guarantee the performance of the contract, the refusal of many put option writers to take delivery of the tulip bulb and pay the high prices of the bulb they had originally agreed to, led to bursting of the bulb bubble during the winter of 1637.A number of speculators were wiped out in the process.In India, options on stocks of companies were illegal until 25th January 1995 according to sec. 20 of Securities Contracts (Regulation) Act, 1956. When Securities Laws (Amendment) Act, 1956 deleted sec. 20, thus making the introduction of options as legal act. An options contract is an agreement between a buyer and a seller. Such a contract confers on the buyer a right but not an obligation to buy or sell a specified quantity of the underlying asset at a fixed price on or up to a fixed day in the future on a payment of a premium to the seller. The premium paid by the buyer to the seller is the price of an option contract Options on a futures contract have added a new dimension to future trading like futures options provide price protection against adverse price move. Present day options trading on the floor of an exchange began in April 1973. When the Chicago Board of trade created the Chicago Board Options Exchange (CBOE) for the sole purpose of trading Options on a limited number of NEW YORK STOCK EXCHAGE listed equities.

B) FORWARDS:

A forward is an agreement between two parties to exchange an agreed quantity of asset at a specified future date at a predetermined price specified in the agreements. The parties concerned agree the settlement date and price in advance. The promised asset may be currency, commodity, instrument etc. It is the oldest type of all the derivatives. The party who promises to buy but he specified asset at an agreed price at a fixed future date is said to be in the .Long position . and the party who promises to sell at an agreed price at a future date is said to be in . short position..

C) FUTURES:

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 assets / currency or commodity at a certain future date at an agreed price. The trader who promises to buy is said to be in . long position . and the party who promises to sell said be in .short position..Futures 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

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obligation to sell to the buyer a specified quantity 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.To eliminate counter party risk and guarantee traders, futures markets use a clearing house which employs initial margin, daily market to market margin, exposures limits etc. to ensure contract compliance and guarantee settlement standardized futures contracts generate liquidity. In addition, due to these instruments being traded on recognized exchange.s results in grater transparency, fairness and efficiency. Due to these inherent advantages, futures markets have been enormously successful in comparison with forward markets all over the worldThe difference between forward contract and future is that future is a standardized contract in terms of quantity, date and delivery. It is traded on organized exchanges. So it has secondary markets. Future contract is always settled daily, irrespective of the maturity date, which is called marking to the market.

D) SWAP:

Swap is an agreement between two parties to exchange one set of financial obligations with other. It is widely used throughout the world but is recent in India. Swap may be interest swap or currency swaps. Swaps give companies extra flexibility to exploit their comparative advantage intheir respective borrowing markets. Swaps allow companies to focus on their comparative advantage in borrowing in a single currency in the short end of the maturity spectrum vs. the long-end of the maturity spectrum. Swaps allow companies to exploit advantages across a matrix of currencies and maturities.

DERIVATIVES MARKET IN INDIA

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Prior to liberalization, in India financial markets, there were only a few financial products and the stringent regulatory products and the stringent regulation environment also eluded any possibility of development of a derivatives market in country. All Indian corporate were mainly relying on term lending institution for meeting their project financing or any other financing requirements and on commercial banks for meeting working capital finance requirement. Commercial banks are on their assets and liabilities. The only derivative product they were aware of is the foreign exchange forward contract. But this scenario changed in the post liberalization period. Conservative Indian business practitioners began to take a different view of various aspects of their operations to remain competitive. Financial risks were given adequate attention and .treasury function. has assumed a significance role in all major corporate since then. Initially, banks were allowed to pass on gains arising out of cancellation of forward.s contracts to the customers and customers were permitted to cancel and re-book the forward contracts. This remarkable change was followed by the introduction of cross currency forward contacts. But the major milestone in developing forex derivatives market in India was the introduction of cross currency options. The RBI.s objective of introducing cross currency options was to provide a complicated hedging strategy for the corporate in their risk management activities. The concept of .derivatives. is of course not new to the Indian market. Though derivatives in the financial markets have nothing to talk about home, in the commodity markets they have a long history of over hundred years. In 1875, the first commodity futures exchange was set up in Mumbai under the guidance of Bombay Cotton Traders Association. A clearinghouse for clearing and settlement of these traders was set up in 1918. Over a period of twenty years during 1900-1920, other futures markets were set up in various places. Futures market in raw jute in Kolkata (1912), wheat futures market in Hapur (1913), and bullion futures market in Mumbai (1920). When it comes to financial markets, derivatives in equities claim a long existence. The official history of Bombay Stock Exchange (then known as Native Share and Stock Brokers Association) reveals that the concept of options existed since 1898 as is reflectedfrom a quote given by one of the MPs-.India being the original home of options, a native broker would give a few points to the brokers of the other nations in the manipulation of puts and calls..However, such an early expertise gained by Indian traders in derivatives trading has come to an end with the Government of India.s ban on forward contract during the 1960.s on the ground of their intrinsic undesirability. But ironically, the same were reintroduced by the government in the 1980.s as essential instruments for eliminating wide fluctuations in prices and more so because of the World Bank . UNCTAD report, which strongly urged the Indian government to start futures trading in major cash crops, especially in view of India.s entry to WTO. With the world embracing the derivative trading on large scale, the Indian market obviously cannot remain aloof, especially after liberalization has been set in motion. Now we are in the threshold of introducing trading in derivatives, beginning with the stock index futures to be well set for the introduction of derivative trading. With L.C. Gupta committee having recently submitted its report on the subject, SEBI is engaged in the process of assessing the feasibility and desirability of introducing such trading.

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The NSE and BSE are two exchanges on which financial derivatives are traded. The combined notional value of the daily volumes on both the bourses stand at around RS. 150000 cr. In developed markets trading in the derivatives segment are thrice as large as in the cash markets. In India, the figure is hardly 20% of cash markets. Quite clearly our derivative markets have a long way to go. According to the Executive Director of Association of NSE Member of India(Amni), Vinod Jain, . Volumes in derivatives segment are stagnating due to klack of growth in the number of markets participants. Besides these products are still to catch up with the masses who are keeping away from this segment due to lack of understanding of the products and high contract price.

a) COMMODITIES DERIVATIVES MARKETSIn order to give more thrust on agricultural sector, the National Agricultural Policy, 2000 has envisaged and domestic market reforms and dismantling of all controls and regulations in agricultural commodity markets. It has also proposed to extend the coverage of futures markets to minimize the wide fluctuations in commodity market prices and for hedging the risk from price fluctuations. As a result of these recommendations, there are presently, 15 exchanges carrying out futures trading in as many as 30 commodity items. Out to these, two exchanges viz.IPSTA, Cochin and the Bombay Commodity Exchange (BCE) Ltd.; have been upgraded to international exchanged to deal international contracts in peeper and castor oil respectively. Moreover, permission has been given to two more exchange viz. the First Commodities Exchange of India Ltd., Kochi (for copra/coconut, its oil and oilcake), and Keshave Commodity Exchange Ltd., Delhi (for potato), where futures trading started very recently.

The government has also permitted four exchange viz., EICA, Mumbai. The Central Gujarat Cotton Dealers Association, Vadodara; The South India cotton Association Coimbattore; and the Ahmedabad Cotton Merchants Association, Ahmedabad, for conducting forward (non-transferable specific delivery) contracts in cotton. Lately as part of further liberalization of trade in agriculture and dismantling of ECA, 1955 futures trade in sugar has been permitted and three new exchanges viz., ECommodities Limited, Mumbai; NCS InfoTech Ltd., Hyderabad; and E-Sugar India.com, Mumbai have been given approval for conducting sugar futures (Ministry of Food and Consumer Affairs, 1999). In the recent past, the GOI has set up a committee to explore and appraise matters important to the establishment and financing of the proposed national commodity exchange for the nationwide trading of commodity futures contracts. The usage ofwarehouse receipts as a means for delivery of commodities under the contracts is also being explored. The warehouse receipts system has been operationalized in COFEI (coffee futures exchange of India) with effect from 1998. The Government of India is on the move to establish a system of warehouse receipts in other commodity stock exchanges at various places of the country.Besides these domestic developments, during 1998, Reserve Bank of India permitted the Indian Corporate Sector to access the exchanges subject to certain conditions with a view to enable

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domestic metal manufacturers to compete with global players. The de-regulation of oil-imports being on the cards, government should create the right atmosphere for oil sector to participate in the international oil-derivatives Markets.

Despite these developments, there are still many impediments that hold back the farming community from entering the futures market and reap full benefits. A brief description of commodity exchanges are those which trade in particular commodities, neglecting the trade of securities, stock index futures and options etc. In the middle of 19th century in the United States, businessmen began organizing market forums to make the buying and selling of commodities easier. These central marketplaces provided a place for buyers and sellers to meet, set quality and quantity standards, and establish rules of business.

Agricultural commodities were mostly traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products.

In 1933, during the Great Depression, the Commodity Exchange, Inc. was established in New York through the merger of four small exchanges . the National Metal Exchange, the Rubber Exchange of New York, the National Raw Silk Exchange, and the New York Hide Exchange.The major commodity markets are in the United Kingdom and in the USA. In India there are 25 recognized future exchanges, of which there are three national level multicommodity exchanges. After a gap of almost three decades, Government of India has allowed forward transactions in commodities through Online Commodity Exchanges, a modification of traditional business known as Adhat and Vayda Vyapar to facilitate better risk coverage and delivery of commodities. The three exchanges are:

National Commodity & Derivatives Exchange Limited (NCDEX) Multi Commodity Exchange of India Limited (MCX) National Multi-Commodity Exchange of India Limited (NMCEIL)

All the exchanges have been set up under overall control of Forward Market Commission (FMC) of Government of India.

National Commodity & Derivatives Exchange Limited (NCDEX)National Commodity & Derivatives Exchange Limited (NCDEX) located in Mumbai is a public limited company incorporated on April 23, 2003 under the Companies Act, 1956 and had commenced its operations on December 15, 2003.This is the only commodity exchange in the country promoted by national level institutions. It is promoted by ICICI Bank Limited, Life

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Insurance Corporation of India (LIC), National Bank for Agriculture and Rural Development (NABARD) and National Stock Exchange of India Limited (NSE). It is a professionally managed online multi commodity exchange. NCDEX is regulated by Forward Market Commission and is subjected to various laws of the land like the Companies Act, Stamp Act, Contracts Act, Forward Commission (Regulation) Act and various other legislations.

Multi Commodity Exchange of India Limited (MCX)Headquartered in Mumbai Multi Commodity Exchange of India Limited (MCX), is an independent and de-mutulised exchange with a permanent recognition from Government of India. Key shareholders of MCX are Financial Technologies (India) Ltd., State Bank of India, Union Bank of India, Corporation Bank, Bank of India and Canara Bank. MCXfacilitates online trading, clearing and settlement operations for commodity futures markets across the country.

MCX started offering trade in November 2003 and has built strategic alliances with Bombay Bullion Association, Bombay Metal Exchange, Solvent Extractors. Association of India, Pulses Importers Association and Shetkari Sanghatana.

National Multi-Commodity Exchange of India Limited (NMCEIL)National Multi Commodity Exchange of India Limited (NMCEIL) is the first demutualized, Electronic Multi-Commodity Exchange in India. On 25th July, 2001, it was granted approval by the Government to organise trading in the edible oil complex. It has operationalised from November 26, 2002. Central Warehousing Corporation Ltd., Gujarat State Agricultural Marketing Board and Neptune Overseas Limited are supporting it. It got its recognition in October 2002.

Commodity exchange in India plays an important role where the prices of any commodity are not fixed, in an organised way. Earlier only the buyer of produce and its seller in the market judged upon the prices. Others never had a say. Today, commodity exchanges are purely speculative in nature. Before discovering the price, they reach to the producers, end-users, and even the retail investors, at a grassroots level. It brings a price transparency and risk management in the vital market.

A big difference between a typical auction, where a single auctioneer announces the bids and the Exchange is that people are not only competing to buy but also to sell. By Exchange rules and by law, no one can bid under a higher bid, and no one can offer to sell higher than someone else lower offer. That keeps the market as efficient as possible, and keeps the traders on their toes to make sure no one gets the purchase or sale before they do. A brief description of commodity exchanges are those which trade in particular commodities, neglecting the trade of securities, stock index futures and options etc.

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In the middle of 19th century in the United States, businessmen began organizing market forums to make the buying and selling of commodities easier. These central marketplaces provided a place for buyers and sellers to meet, set quality and quantity standards, and establish rules of business.

Agricultural commodities were mostly traded but as long as there are buyers and sellers, any commodity can be traded. In 1872, a group of Manhattan dairy merchants got together to bring chaotic condition in New York market to a system in terms of storage, pricing, and transfer of agricultural products.

b) CURRENCY DERIVATIVESForeign exchange derivatives market is one of the oldest derivatives markets in India. Presently, India has got a well-established dollar-rupee forward market with contrast traded for one month, two months and three months expiration. Currency derivatives markets have begun to evolve with the allowing of banks to pass on the gains upon cancellation of a forward to the customer and permitting customer to cancel and rebook forward contracts.

Introduction of cross currency options can be considered as another major step towards developing forex derivatives markets in India. Today, Indian corporate are permitted to purchase cross currency options to hedge exposures arising out of trade. Authorized dealers who offer these products have to necessarily cover their exposure in international markets i.e., they shall not carry the risk in their own books. Cross currency options are essentially meant for buying or selling any foreign currency in terms of US dollar. They are therefore, useful only to those traders who invoice their exports and imports in currencies other than US dollar or for corporate who borrow in currencies other than US dollar. As against this, majority of Indian trade is invoiced in the US dollars. Thus, they have almost no relevance in the Indian context.

Indian banks are allowed to use the foreign currency interest rate swaps, forward rate agreements/interest rate options/swaps, and forward rate agreements/interest rate option/swaption/caps/floors to hedge interest rate and currency mismatch in their balance sheets. Resident and the non-resident clients are also permitted to use the above products as hedges for liabilities on their balance sheets.

Here it is worth remembering that globally, foreign exchange traders are becoming as common as stock traders. But in India, forex dealers still play second fiddle to stock traders and merely meet the needs of the exporters deposits. This may be due to their risk averting behavior and perhaps lack of proper research. Such being the position of the forex market, it is too premature to expect that once, foreign currency-Indian rupee options are introduced, the market will pick up momentum.This is all the more essential in a market where exchange rates though stated to be market determined, are often found influenced by RBI.s intervention in the exchange market. As a

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result, exchange rate movements hardly obey the principle of interest rate differentials. The incongruence in the domestic money rates as derived from the USD/INR forwards yield curve supports this assertion. For example, the one-year domestic term money is around 6-6.25% whereas that of the one-year implied forward rate is around 5.40%. In such a scenario, it is difficult for a currency trader to take a firm view on the exchange rate movement.

c) STOCK MARKET DERIVATIVESToday trading on the .spot market. for equity in India has always been a futures market with weekly/fortnightly settlements. These markets features the risks and difficulties of futures market, But without the gains in price discovery and hedging services that come with separation the spot market from the futures market. India’s primary market is acquainted with two types of derivatives.

Convertible bonds Warrants

As these warrants are listed and traded, it could be said that options market of a limited sort already exist in our market. Besides, a wide range of interesting derivatives markets exists in the informal sector. Contracts such as .bhav-bhav. .teji-mandi. etc. are traded in these markets. These informal markets enjoy a very limited participation and have their presence outside the conventional institutions of India.s financial system.

The first step towards introduction of derivatives trading in India in its current format was the promulgation of the securities laws (Amendment) Ordinance, 1995 that withdrew the prohibition on options in securities. The real push to derivatives market in India was however given by the SEBI. The security market watchdog, in November 1996 by setting up a committee under the chairmanship of Dr L C Gupta to develop .appropriate regulatory framework for derivatives trading in India..

In 2000, SEBI permitted NSE and BSE to commence trading in index futures contracts based on S&P CNX Nifty and BSE 30(sensex) index. This was followed by approval for trading in options based on these two indexes and options on individual securities. Futures contracts on Individual stocks were launched on November 9,2001. Trading and settlement is done in accordance with the rules of the respective exchanges. But the trading volumes were initially quite modest.This could be due to -----

Initially, few members have been permitted by SEBI to trade on derivatives; FII.S, MFS have been allowed to have a very limited participation; Mandatory requirements for brokerage firms to have .SEBI approved-certificationtest-

passed. brokers for undertaking derivatives trading. And Lack of clarity on taxation and accounting aspects under derivatives trading.

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The current trading behavior in the derivatives segments reveals that single stock futures continues to account for sizeable proportion. A recent press report indicates that futures in Indian exchanges have reached global volumes. One possible reason for such skewed behavior of the traders could be that futures closely resemble the erstwhile badla system. Such distortions are not however in the interest of the market. SEBI has permitted trading in options and futures on individual stocks, but not on all the listed stocks. It was very selective, stocks that are said to be highly volatile with a low market capitalization are not allowed for option trading. This act of SEBI is strongly resented by a section of the market. Their argument is that equity options are indispensable to investors who need to protect their investment from volatility. The higher the volatility of a stock the more necessary it is to list options on that stock. They are highly vocal in arguing that SEBI should design an effective monitoring, surveillance and risk management system at the level of the exchanges and clearing house to avert and manage the default risks that are likely to arise owing to high volatility in low market capital stocks instead of simply banning trading in options on them. SEBI needs to examine these arguments. It may have to take a stand to nip in the bud all kinds of manipulations by handling out severe punishments to all such erring companies.

Today, mutual funds are permitted to use equity derivatives products for hedging and portfolio rebalancing.. However, such usage is not favored by fund managers as they strongly apprehend that the dividing line between hedging and speculation being thin, they may always get exposed to the questioning by the regulatory authorities.

d) CREDIT DERIVATIVES AND OTHERSA credit derivative is a financial transaction whose pay-off depends on whether or not a credit event occurs. A credit event can be:

Bankruptcy Default Upgrade Downgrade Interest rate movement Mortgage defaults Unforeseen pay-offs

A credit derivative, like any other derivative, derives it.s value from an case is the credit. In the event of the underlying asset failing to perform as expected, credit derivatives, ensures that someone other than the principal lender absorbs the resulting financial loss. Credit derivatives market in India though could be said as non-existent holds huge potential. Some of the important factors/situation such as opening up of the insurance sector to foreign private players, relief to investors, tax benefits to corporate, proxy hedgers etc., could provide the momentum to the credit derivatives market in India, boosting yields and bringing down risk for both the corporates and banks.

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Secondly, Indian banking system is saddled with huge NPA.s, which it is of course, eagerly trying to get rid off. The mounting pressure on profitability is making banks more credit-averse. In such a situation, if markets can offer .credit-insurance. In the form of derivatives, everyone would jump for it.

TYPES OF OPTIONS

CALL OPTION:

A contract that gives its owner the right but not the obligation to buy an underlying asset-stock or any financial asset, at a specified price on or before a specified date is known as a ‘Call option’. The owner makes a profit provided he sells at a higher current price and buys at a lower future price.

PUT OPTION:

A contract that gives its owner the right but not the obligation to sell an underlying asset-stock or any financial asset, at a specified price on or before a specified date is known as a ‘Put option’. The owner makes a profit provided he buys at a lower current price and sells at a higher future price. Hence, no option will be exercised if the future price does not increase.

Put and calls are almost always written on equities, although occasionally preference shares, bonds and warrants become the subject of options.

The price at which option is exercised is called an exercise price or a strike price. The asset on which the call or put option is created is referred to as the underlying asset. Depending on when an option can be exercised, it is classified as follows:

European Option: When an option is allowed to exercise only on the maturity date, it is called a European Option.

American Option: When an option can be exercised any time before its maturity is called an American Option.

Capped Option: When an option is allowed to exercise only during a specified period of time prior to its expiration unless the option reaches the cap value prior to expiration in which the option is automatically exercised. The holder of an option has to pay a price for obtaining a call or put option. The price will have to be paid whether the holder exercises his option and it is called option premium.

Factors Determining the Option Value:

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The precise location of the option value depends on five key factors:

Exercise price Expiration date Stock price Stock price variability Interest rate

Exercise Price: Other things being constant, higher the exercise price, the lower the value of call option. It should be remembered that the value of call option could never be negative; regardless of how high the exercise price is set.Expiration Date:Other things being constant, the longer the time to expiration date, the more valuable the call option. Consider two American calls with maturities of one year and two years. The two-year call obviously is more valuable than one-year call because it gives its holder one more year within which it can be exercised.Stock Price: The value of a call option, other things being constant, increases with the stock price.Stock Price Variability: A call option has value when there is possibility that the stock price exceeds the exercise price before the expiration date. Other things being equal, the higher the variability of the stock price, the greater the likelihood that stock price will exceed the exercise.

REASONS FOR USING OPTIONS

The reasons for using options on futures are reflected in the structure of an option contract.1) An option, when purchased gives the buyer the right, but not the obligation, to buy or sell a specific amount of a specific commodity at a specific price within a specific period of time.2) The decision to exercise the option is entirely that of the buyer.3) The purchaser of the options can lose no more than the initial amount of money invested (premium).4) An option buyer is never subject to margin calls. This enables the purchaser to maintain a market position, despite any adverse moves without putting up additional funds.

MOTIVES for BUYING and SELLING OPTIONS

One may be buyer or seller of call or put option for a variety of reasons. A call option buyer for e.g. is bullish that he is or she believes the price of the underlying futures contract will rise. If price do rise, the call option buyer has three course of action available.First is to exercise the option and acquires the underlying futures contract at the strike priceSecond is to offset the long call position with a sale and realize a profit.Third is to let the option expires worthless and forfeit the unrealized profit.

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The seller of the call option expects futures prices to remain relatively stable or to decline modestly. If prices remain stable, the receipt of the option premium enhances the rate of return on a covered position. If prices decline, selling the call against a long futures position enables the writer to use the premium as a cushion to provide protection to the extent of the premium received. For instance, if T-bond futures were purchased at 80.00 and call option with an 80.00 strike price were sold for 2.00, T-bond futures could decline to the 78.00 levels before there would be a net loss in the position. However, T-bond futures rise to 82.00 the call option seller forfeits the opportunity for profit because the buyer would likely exercise the call against him and acquire a future position at 80.00(strike price).

The perspective of the put buyer and put seller are completely different. The buyer of the put option believes for the underlying futures will decline for e.g.: - if a TBond put option with a strike price of 82.00 is purchased for 2.00 while T-Bond futures also are at 82.00, the put option will be profitable for the purchaser to exercise if T-Bond futures decline below 80.00

SWAPS

Swaps are transactions which obligates the two parties to the contract to exchange a series of cash flows at specified intervals known as payment or settlement dates. They can be regarded as portfolios of forward's contracts. A contract whereby two parties agree to exchange (swap) payments, based on some notional principle amount is called as a ‘SWAP’. In case of swap, only the payment flows are exchanged and not the principle amount. The two commonly used swaps are:

INTEREST RATE SWAPS:Interest rate swaps is an arrangement by which one party agrees to exchange his series of fixed rate interest payments to a party in exchange for his variable rate interest payments. The fixed rate payer takes a short position in the forward contract whereas the floating rate payer takes a long position in the forward contract.

CURRENCY SWAPS:Currency swaps is an arrangement in which both the principle amount and the interest on loan in one currency are swapped for the principle and the interest payments on loan in another currency. The parties to the swap contract of currency generally hail from two different countries. This arrangement allows the counter parties to borrow easily and cheaply in their home currencies. Under a currency swap, cash flows to be exchanged are determined at the spot rate at a time when swap is done. Such cash flows are supposed to remain unaffected by subsequent changes in the exchange rates.

FINANCIAL SWAP:

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Financial swaps constitute a funding technique which permit a borrower to access one market and then exchange the liability for another type of liability. It also allows the investors to exchange one type of asset for another type of asset with a preferred income stream.

OTHER KINDS OF DERIVATIVES

The other kind of derivatives, which are not, much popular are as follows:

BASKETS -Baskets options are option on portfolio of underlying asset. Equity Index Options are most popular form of baskets.

LEAPS -Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities.

WARRANTS -Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter.

SWAPTIONS -Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating.

Types of traders in a derivatives market

Hedgers, speculators and arbitrators are the types of traders in derivatives market.

Hedgers:Hedgers are those who protect themselves from the risk associated with the price of an asset by using derivatives. A person keeps a close watch upon the prices discovered in trading and when the comfortable price is reflected according to his wants, he sells futures contracts. In this way he gets an assured fixed price of his produce.

In general, hedgers use futures for protection against adverse future price movements in the underlying cash commodity. Hedgers are often businesses, or individuals, who at one point or another deal in the underlying cash commodity.

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Take an example: A Hedger pays more to the farmer or dealer of a produce if its prices go up. For protection against higher prices of the produce, he hedges the risk exposure by buying enough future contracts of the produce to cover the amount of produce he expects to buy. Since cash and futures prices do tend to move in tandem, the futures position will profit if the price of the produce rise enough to offset cash loss on the produce.

Speculators:Speculators are somewhat like a middleman. They are never interested in actual owing the commodity. They will just buy from one end and sell it to the other in anticipation of future price movements. They actually bet on the future movement in the price of an asset. They are the second major group of futures players. These participants include independent floor traders and investors. They handle trades for their personal clients or brokerage firms. Buying a futures contract in anticipation of price increases is known as .going long.. Selling a futures contract in anticipation of a price decrease is known as .going short.. Speculative participation in futures trading has increased with the availability of alternative methods of participation.

Speculators have certain advantages over other investments they are as follows:

If the trader.s judgment is good, he can make more money in the futures market faster because prices tend, on average, to change more quickly than real estate or stock prices. Futures are highly leveraged investments. The trader puts up a small fraction of the value of the underlying contract as margin, yet he can ride on the full value of the contract as it moves up and down. The money he puts up is not a down payment on the underlying contract, but a performance bond. The actual value of the contract is only exchanged on those rare occasions when delivery takes place.

Arbitrators:According to dictionary definition, a person who has been officially chosen to make a decision between two people or groups who do not agree is known as Arbitrator. In commodity market Arbitrators are the person who takes the advantage of a discrepancy between prices in two different markets. If he finds future prices of a commodity edging out with the cash price, he will take offsetting positions in both the markets to lock in a profit. Moreover the commodity futures investor is not charged interest on the difference between margin and the full contract value.

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FUNDAMENTAL ANALYSIS

INTRODUCTION

Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast and profit from future price movements. At the company level, fundamental analysis may involve examination of financial data, management, business concept and competition. At the industry level, there might be an examination of supply and demand forces for the products offered. For the national economy, fundamental analysis might focus on economic data to assess the present and future growth of the economy. To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's current fair value and forecast future value. If fair value is not equal to the current stock price, fundamental analysis believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value. Fundamentalist do not heed the advice of the random walkers and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information, fundamental analyst look to capitalize on perceived price discrepancies.

Fundamental analysis involves examining the economic, financial and other qualitative and quantitative factors related to a security in order to determine its intrinsic value. While typically this method is used to evaluate the value of a company’s stock, its use can be extended for any kind of security, such as bonds or currency.

Fundamental analysis, which is also known as quantitative analysis, involves delving into a company’s financial statements (such as profit and loss account and balance sheet) in order to study various financial indicators (such as revenues, earnings, liabilities, expenses and assets). Such analysis is usually carried out by analysts, brokers and savvy investors.

DEFINITION

A method of security valuation which involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, and competition. Fundamental analysis takes into consideration only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data.

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GENERAL STEPS TO FUNDAMENTAL EVALUATION

Even though there is no one clear-cut method, a breakdown is presented below in the order an investor might proceed. This method employs a top-down approach that starts with the overall economy and then works down from industry groups to specific companies. As part of the analysis process, it is important to remember that all information is relative. Industry groups are compared against other industry groups and companies against other companies. Usually, companies are compared with others in the same group. For example, a telecom operator (Verizon) would be compared to another telecom operator (SBC Corp), not to an oil company (ChevronTexaco).

ECONOMIC FORECAST

First and foremost in a top-down approach would be an overall evaluation of the general economy. The economy is like the tide and the various industry groups and individual companies are like boats. When the economy expands, most industry groups and companies benefit and grow. When the economy declines, most sectors and companies usually suffer. Many economists link economic expansion and contraction to the level of interest rates. Interest rates are seen as a leading indicator for the stock market as well. Below is a chart of the S&P 500 and the yield on the 10-year note over the last 30 years. Although not exact, a correlation between stock prices and interest rates can be seen. Once a scenario for the overall economy has been developed, an investor can break down the economy into its various industry groups.

GROUP SELECTION

If the prognosis is for an expanding economy, then certain groups are likely to benefit more than others. An investor can narrow the field to those groups that are best suited to benefit from the current or future economic environment. If most companies are expected to benefit from an expansion, then risk in equities would be relatively low and an aggressive growth-oriented strategy might be advisable. A growth strategy might involve the purchase of technology, biotech, semiconductor and cyclical stocks. If the economy is forecast to contract, an investor may opt for a more conservative strategy and seek out stable income-oriented companies. A defensive strategy might involve the purchase of consumer staples, utilities and energy-related stocks.

To assess a industry group's potential, an investor would want to consider the overall growth rate, market size, and importance to the economy. While the individual company is still important, its industry group is likely to exert just as much, or more, influence on the stock price. When stocks move, they usually move as groups; there are very few lone guns out there. Many times it is more important to be in the right industry than in the right stock! The chart below shows that relative performance of 5 sectors over a 7-month time frame. As the chart illustrates, being in the right sector can make all the difference.

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NARROW WITHIN THE GROUP

Once the industry group is chosen, an investor would need to narrow the list of companies before proceeding to a more detailed analysis. Investors are usually interested in finding the leaders and the innovators within a group. The first task is to identify the current business and competitive environment within a group as well as the future trends. How do the companies rank according to market share, product position and competitive advantage? Who is the current leader and how will changes within the sector affect the current balance of power? What are the barriers to entry? Success depends on an edge, be it marketing, technology, market share or innovation. A comparative analysis of the competition within a sector will help identify those companies with an edge, and those most likely to keep it.

COMPANY ANALYSIS

With a shortlist of companies, an investor might analyze the resources and capabilities within each company to identify those companies that are capable of creating and maintaining a competitive advantage. The analysis could focus on selecting companies with a sensible business plan, solid management and sound financials.

BUSINESS PLAN

The business plan, model or concept forms the bedrock upon which all else is built. If the plan, model or concepts stink, there is little hope for the business. For a new business, the questions may be these: Does its business make sense? Is it feasible? Is there a market? Can a profit be made? For an established business, the questions may be: Is the company's direction clearly defined? Is the company a leader in the market? Can the company maintain leadership?

MANAGEMENT

In order to execute a business plan, a company requires top-quality management. Investors might look at management to assess their capabilities, strengths and weaknesses. Even the best-laid plans in the most dynamic industries can go to waste with bad management (AMD in semiconductors). Alternatively, even strong management can make for extraordinary success in a mature industry (Alcoa in aluminum). Some of the questions to ask might include: How talented is the management team? Do they have a track record? How long have they worked together? Can management deliver on its promises? If management is a problem, it is sometimes best to move on.

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STRENGTHS OF FUNDAMENTAL ANALYSIS

LONG-TERM TRENDS

Fundamental analysis is good for long-term investments based on long-term trends, very long-term. The ability to identify and predict long-term economic, demographic, technological or consumer trends can benefit patient investors who pick the right industry groups or companies.

VALUE SPOTTING

Sound Fundamental analysis will help identify companies that represent a good value. Some of the most legendary investors think long-term and value. Graham and Dodd, Warren Buffett and John Neff are seen as the champions of value investing. Fundamental analysis can help uncover companies with valuable assets, a strong balance sheet, stable earnings, and staying power.

BUSINESS ACUMEN

One of the most obvious, but less tangible, rewards of Fundamental analysis is the development of a thorough understanding of the business. After such painstaking research and analysis, an investor will be familiar with the key revenue and profit drivers behind a company. Earnings and earnings expectations can be potent drivers of equity prices. Even some technicians will agree to that. A good understanding can help investors avoid companies that are prone to shortfalls and identify those that continue to deliver. In addition to understanding the business, Fundamental analysis allows investors to develop an understanding of the key value drivers and companies within an industry. A stock's price is heavily influenced by its industry group. By studying these groups, investors can better position themselves to identify opportunities that are high-risk (tech), low-risk (utilities), growth oriented (computer), value driven (oil), non-cyclical (consumer staples), cyclical (transportation) or income-oriented (high yield).

KNOWING WHO'S WHO

Stocks move as a group. By understanding a company's business, investors can better position themselves to categorize stocks within their relevant industry group. Business can change rapidly and with it the revenue mix of a company. This happened to many of the pure Internet retailers, which were not really Internet companies, but plain retailers. Knowing a company's business and being able to place it in a group can make a huge difference in relative valuations.

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LIMITATION OF FUNDAMENTAL ANALYSIS

TIME CONSTRAINTS

Fundamental analysis may offer excellent insights, but it can be extraordinarily time-consuming. Time-consuming models often produce valuations that are contradictory to the current price prevailing on Wall Street. When this happens, the analyst basically claims that the whole street has got it wrong. This is not to say that there are not misunderstood companies out there, but it is quite brash to imply that the market price, and hence Wall Street, is wrong.

INDUSTRY/COMPANY SPECIFIC

Valuation techniques vary depending on the industry group and specifics of each company. For this reason, a different technique and model is required for different industries and different companies. This can get quite time-consuming, which can limit the amount of research that can be performed. A subscription-based model may work great for an Internet Service Provider (ISP), but is not likely to be the best model to value an oil company.

SUBJECTIVITY

Fair value is based on assumptions. Any changes to growth or multiplier assumptions can greatly alter the ultimate valuation. Fundamental analysis are generally aware of this and use sensitivity analysis to present a base-case valuation, an average-case valuation and a worst-case valuation. However, even on a worst-case valuation, most models are almost always bullish, the only question is how much so. The chart below shows how stubbornly bullish many Fundamental analysts can be.

ANALYST BIAS

The majority of the information that goes into the analysis comes from the company itself. Companies employ investor relations managers specifically to handle the analyst community and release information. As Mark Twain said, "there are lies, damn lies, and statistics." When it comes to massaging the data or spinning the announcement, CFOs and investor relations managers are professionals. Only buy-side analysts tend to venture past the company statistics. Buy-side analysts work for mutual funds and money managers. They read the reports written by the sell-side analysts who work for the big brokers (CIBC, Merrill Lynch, Robertson Stephens, CS First Boston, Paine Weber, DLJ to name a few). These brokers are also involved in underwriting and investment banking for the companies. Even though there are restrictions in place to prevent a conflict of interest, brokers have an ongoing relationship with the company under analysis. When reading these reports, it is important to take into consideration any biases a sell-side analyst may have. The buy-side analyst, on the other hand, is analyzing the company purely from an investment standpoint for a portfolio manager. If there is

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a relationship with the company, it is usually on different terms. In some cases this may be as a large shareholder.

DEFINITION OF FAIR VALUE

When market valuations extend beyond historical norms, there is pressure to adjust growth and multiplier assumptions to compensate. If Wall Street values a stock at 50 times earnings and the current assumption is 30 times, the analyst would be pressured to revise this assumption higher. There is an old Wall Street adage: the value of any asset (stock) is only what someone is willing to pay for it (current price).

It used to be that free cash flow or earnings were used with a multiplier to arrive at a fair value. In 1999, the S&P 500 typically sold for 28 times free cash flow. However, because so many companies were and are losing money, it has become popular to value a business as a multiple of its revenues. This would seem to be OK, except that the multiple was higher than the PE of many stocks! Some companies were considered bargains at 30 times revenues.

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COMPANY PROFILE

CIPLA

In 1935, he set up The Chemical, Industrial & Pharmaceutical Laboratories, which came to be popularly known as Cipla. He gave the company all his patent and proprietary formulas for several drugs and medicines, without charging any royalty. On August 17, 1935, Cipla was registered as a public limited company with an authorised capital of Rs 6 lakhs.

The search for suitable premises ended at 289, Bellasis Road (the present corporate office) where a small bungalow with a few rooms was taken on lease for 20 years for Rs 350 a month.

Cipla was officially opened on September 22, 1937 when the first products were ready for the market. The Sunday Standard wrote: "The birth of Cipla which was launched into the world by Dr K A Hamied will be a red letter day in the annals of Bombay Industries. The first city in India can now boast of a concern, which will supersede all existing firms in the magnitude of its operations. India has lagged behind in the march of science but she is now awakening from her lethargy. The new company has mapped out an ambitious programme and with intelligent direction and skillful production bids fair to establish a great reputation in the East.

July 4, 1939 was a red-letter day for Cipla, when the Father of the Nation, Mahatma Gandhi, honoured the factory with a visit. He was "delighted to visit this Indian enterprise", he noted later. From the time Cipla came to the aid of the nation gasping for essential medicines during the Second World War, the company has been among the leaders in the pharmaceutical industry in India.

On October 31, 1939, the books showed an alltime high loss of Rs 67,935. That was the last time the company ever recorded a deficit.

In 1942, Dr Hamied's blueprint for a technical industrial research institute was accepted by the government and led to the birth of the Council of Scientific and Industrial Research (CSIR), which is today the apex research body in the country.

In 1944, the company bought the premises at Bombay Central and decided to put up a "first class modern pharmaceutical works and laboratory." It was also decided to acquire land and buildings at Vikhroli. With severe import restrictions hampering production, the

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company decided to commence manufacturing the basic chemicals required for pharmaceuticals.

In 1946, Cipla's product for hypertension, Serpinoid , was exported to the American Roland Corporation, to the tune of Rs 8 lakhs. Five years later, the company entered into an agreement with a Swiss firm for manufacturing foromycene.

Dr Yusuf Hamied, the founder's son, returned with a doctorate in chemistry from Cambridge and joined Cipla as an officer in charge of research and development in 1960.

In 1961, the Vikhroli factory started manufacturing diosgenin. This heralded the manufacture of several steroids and hormones derived from diosgenin.

The whole of Cipla was plunged into gloom on June 23, 1972 when Dr K A Hamied passed away. The Free Press Journal mourned the death of a "true nationalist, scientist and great soul…. The best homage we can pay to him is to contribute our best in the cause of self-reliance and the prosperity of our country in our fields of endeavour."

CIPLA TODAY

Today we have 31 world-class manufacturing facilities spread across the country, with dedicated plants for Oncology products, Hormones, Inhalers, Carbapenems, and Cephlosporins, among others. They more than meet the stringent international standards, such as that of US FDA, MHRA–UK, TGA Australia, BFarm–Germany MCC–South Africa, WHO, TPD- Canada.

Our API manufacturing plants are today among the most sophisticated in the world, capable of complex multi-stage syntheses, and produce over 120 API’s from high potency actives in grams to those made in several tonnes.

Cipla produces one of the widest range of products and dosage forms in the world today, everything from metered-dose inhalers, pre-filled syringes, trans-dermal spray patches, lyophilized injections, nasal sprays, medical devices, and thermolabile foams. Whether it is constantly extending our product range or consistently introducing innovations, the mission is always to make the life of the patient better.

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Board of Directors

S.No Name Designation1 Dr. Y K Hamied Chairman and Managing director2 Mr. M K Hamied Joint Managing Director3 Mr. Amar Lulla Joint Managing Director4 Dr. H R Manchanda Non Executive Director5 Mr. Ramesh Shroff Non Executive Director6 Mr. S A A Pinto Non Executive Director7 Mr. V C Kotwal Non Executive Director8 Mr. M R Raghavan Non Executive Director9 Mr. Pankaj Patel Non Executive Director

Key Executives

S.No Name Designation1 Mr. Mital Sanghvi Co.Secretary & Compl. Officer

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CIPLA LTD. RATIO ANALYSIS

Industry: Pharmaceuticals Chairman and Managing director: Y K Hamied

ISIN No INE059A01026

52Week High

364 Book Value

67.61 Face Value

2.00

BSE Code

500087 52Week Low

240 EPS 13.47 P/E 25.77

NSE Code

CIPLA P/BV 5.13 Div Yield

0.00 Market Cap.

27865.39

You can view the most widely used ratios such as Per share, Profitability, Leverage, Liquidity, Coverage ratios etc. Besides the ratios can be viewed of Cipla Ltd. for a period of 5 years

Mar ' 09 Mar ' 08

Mar ' 07 Mar ' 06 Mar ' 05

PER SHARE RATIOS Adjusted E P S (Rs.) 12.95 8.12 8.15 17.79 11.72Adjusted Cash EPS (Rs.) 14.90 9.80 9.48 20.46 13.56Reported EPS (Rs.) 9.99 9.02 8.59 20.26 13.66Reported Cash EPS (Rs.) 11.95 10.71 9.92 22.94 15.50Dividend Per Share 2.00 2.00 2.00 2.00 3.50Operating Profit Per Share (Rs.) 16.02 10.96 10.57 23.14 16.85Book Value (Excl Rev Res) Per Share (Rs.)

55.86 48.20 41.52 65.83 51.47

Book Value (Incl Rev Res) Per Share (Rs.)

55.97 48.32 41.63 66.14 51.81

Net Operating Income Per Share (Rs.)

67.34 54.08 45.83 99.42 75.18

Free Reserves Per Share (Rs.) 53.86 46.20 39.52 63.82 49.47 PROFITABILITY RATIOS Operating Margin (%) 23.78 20.27 23.07 23.27 22.41

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Gross Profit Margin (%) 20.88 17.16 20.17 20.58 19.97Net Profit Margin (%) 14.58 16.43 18.41 20.12 18.02Adjusted Cash Margin (%) 21.75 17.85 20.30 20.32 17.89Adjusted Return On Net Worth (%) 23.17 16.85 19.61 27.02 22.77Reported Return On Net Worth (%) 17.89 18.72 20.69 30.78 26.53Return On long Term Funds (%) 26.79 18.24 23.45 27.24 27.57 LEVERAGE RATIOS Long Term Debt / Equity 0.01 0.15 0.03 0.21 0.10Total Debt/Equity 0.21 0.15 0.03 0.23 0.12Owners fund as % of total Source 82.19 86.58 96.31 80.80 88.78Fixed Assets Turnover Ratio 1.94 1.91 1.98 2.18 2.28 LIQUIDITY RATIOS Current Ratio 2.82 2.68 2.69 2.28 2.02Current Ratio (Inc. ST Loans) 1.81 2.62 2.65 2.07 1.85Quick Ratio 1.93 1.88 1.76 1.33 1.16Inventory Turnover Ratio 3.79 3.83 3.74 3.24 3.22 PAYOUT RATIOS Dividend payout Ratio (Net Profit) 23.41 25.92 27.22 29.17 29.27Dividend payout Ratio (Cash Profit) 19.58 21.85 23.57 25.77 25.80Earning Retention Ratio 81.93 71.20 71.28 66.77 65.90Cash Earnings Retention Ratio 84.30 76.14 75.31 71.12 70.52 COVERAGE RATIOS Adjusted Cash Flow Time Total Debt

0.81 0.76 0.16 0.76 0.47

Financial Charges Coverage Ratio 25.56 50.81 79.53 45.54 44.86Fin. Charges Cov.Ratio (Post Tax) 18.78 47.10 70.12 43.80 40.83 COMPONENT RATIOS Material Cost Component(% earnings)

48.01 51.44 49.26 52.46 53.21

Selling Cost Component 7.17 6.77 6.34 6.29 7.56Exports as percent of Total Sales 56.55 53.65 52.36 52.51 48.69Import Comp. in Raw Mat. 42.63 44.03 42.17 39.28 36.77

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ConsumedLong term assets / Total Assets 0.35 0.34 0.35 0.33 0.32Bonus Component In Equity Capital (%)

97.55 97.55 97.55 97.36 97.35

Rs in Cr)Balance Sheet of Cipla Ltd. for the last 5 years.

Mar ' 09 Mar ' 08 Mar ' 07

Mar ' 06 Mar ' 05

SOURCES OF FUNDS Owner's Fund Equity Share Capital 155.46 155.46 155.46 59.97 59.97Share Application Money 0.00 0.00 0.00 0.00 0.00Preference Share Capital 0.00 0.00 0.00 0.00 0.00Reserves & Surplus 4,186.32 3,591.39 3,071.84 1,913.98 1,483.60Loan Funds Secured Loans 2.79 16.98 7.25 51.27 40.37Unsecured Loans 937.45 563.55 116.31 417.64 154.67Total 5,282.02 4,327.38 3,350.86 2,442.86 1,738.61 USES OF FUNDS Fixed Assets Gross Block 2,693.29 2,201.79 1,799.71 1,366.67 986.67Less : Revaluation Reserve 8.97 8.97 8.97 9.32 10.06Less : Accumulated Depreciation 700.80 540.43 411.64 310.06 247.76Net Block 1,983.52 1,652.39 1,379.10 1,047.29 728.85Capital Work-in-progress 366.32 233.12 73.19 87.01 105.96 Investments 81.32 94.75 117.80 22.43 18.30 Net Current Assets Current Assets, Loans & Advances 4,419.57 3,743.98 2,834.68 2,292.28 1,752.89Less : Current Liabilities & Provisions

1,568.71 1,396.86 1,053.91 1,006.15 867.39

Total Net Current Assets 2,850.86 2,347.12 1,780.77 1,286.13 885.50Miscellaneous expenses not written 0.00 0.00 0.00 0.00 0.00Total 5,282.02 4,327.38 3,350.86 2,442.86 1,738.61

39


Note : Book Value of Unquoted Investments 81.32 94.75 117.80 22.43 18.30Market Value of Quoted Investments 0.00 0.00 0.00 0.00 0.00Contingent liabilities 730.75 1,664.58 1,586.64 1,600.75 503.88Number of Equity shares outstanding (in Lacs)

7,772.91 7,772.91 7,772.91 2,998.70 2,998.70

40


YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2PAT 179.07 235.11 247.74 306.69 409.61 607.64 668.03 701.43 776.81 CORELATION 1 0 1 1 1 0 0 1

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2PBIDT 255.85 334.59 345.34 448.19 581.32 806.09 922.51 972.13 1105.33 COREALTION 0 0 1 1 1 0 0 1 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2BOOK VALUE 119.06 146.69 176.72 209.08 51.48 65.83 41.52 48.2 55.86 COREALTION 0 0 1 0 1 1 0 1 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2EPS 29.4 39.2 40.03 49.22 13.16 19.54 8.25 8.68 9.65

41


COREALTION 0 0 1 0 1 1 0 1

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2CASH FLOW FROM OPERATIONs 67.91 68.06 67.75 251.25 200 277.16 334.42 380.2 373.27 COREALTION 0 1 1 0 1 0 0 0 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2ROG-Capital Employed (%) 26.32 23.78 26.38 26.84 18.46 40.82 37.17 27.95 23.2 COREALTION 1 0 1 0 1 1 1 0 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2ROG-Net Worth (%) 26.44 23.2 20.47 18.32 23.1 27.88 63.49 16.1 15.88 COREALTION 1 1 0 1 1 1 0 0 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

42


AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2ROG-Net Sales (%) 39.59 31.84 12.77 28.18 18.4 32.55 18.91 16.28 24.08 COREALTION 1 1 1 0 1 1 1 1 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2CURRENT RATIO 1.96 1.94 1.9 1.87 1.89 2.06 2.42 2.17 1.85 CORELATION 1 1 0 1 1 0 1 0 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2APATM 17.09 16.97 15.99 15.53 15.44 20.12 18.91 17.16 15.47 CORELATION 1 1 0 0 1 1 1 0 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2ROG-Capital Employed (%) 26.32 23.78 26.38 26.84 18.46 40.82 37.17 27.95 23.2 CORELATION 1 0 1 0 1 1 1 0 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2

43


ROG-Net Worth (%) 26.44 23.2 20.47 18.32 23.1 27.88 63.49 16.1 15.88 CORELATION 1 1 0 1 1 0 1 0 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2Creditors Velocity (Days) 26 27 29 33 31 34 43 37 47 CORELATION 0 0 1 0 1 0 1 1 YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE86.527

181.2895

355.8148

496.3338

1110.232

9242.296

3217.587

9213.733

6236.189

8331.853

2Debtors Velocity Days) 70 72 76 80 85 88 99 104 117 COREALTION 0 0 1 1 1 0 0 1

44


ITC

ITC was incorporated on August 24, 1910 under the name Imperial Tobacco Company of India Limited. As the Company's ownership progressively Indianised, the name of the Company was changed from Imperial Tobacco Company of India Limited to India Tobacco Company Limited in 1970 and then to I.T.C. Limited in 1974. In recognition of the Company's multi-business portfolio encompassing a wide range of businesses - Cigarettes & Tobacco, Hotels, Information Technology, Packaging, Paperboards & Specialty Papers, Agri-business, Foods, Lifestyle Retailing, Education & Stationery and Personal Care - the full stops in the Company's name were removed effective September 18, 2001. The Company now stands rechristened 'ITC Limited'.

The Company’s beginnings were humble. A leased office on Radha Bazar Lane, Kolkata, was the centre of the Company's existence. The Company celebrated its 16th birthday on August 24, 1926, by purchasing the plot of land situated at 37, Chowringhee, (now renamed J.L. Nehru Road) Kolkata, for the sum of Rs 310,000. This decision of the Company was historic in more ways than one. It was to mark the beginning of a long and eventful journey into India's future. The Company's headquarter building, 'Virginia House', which came up on that plot of land two years later, would go on to become one of Kolkata's most venerated landmarks.

Though the first six decades of the Company's existence were primarily devoted to the growth and consolidation of the Cigarettes and Leaf Tobacco businesses, the Seventies witnessed the beginnings of a corporate transformation that would usher in momentous changes in the life of the Company.

ITC's Packaging & Printing Business was set up in 1925 as a strategic backward integration for ITC's Cigarettes business. It is today India's most sophisticated packaging house.

In 1975 the Company launched its Hotels business with the acquisition of a hotel in Chennai which was rechristened 'ITC-Welcomgroup Hotel Chola'. The objective of ITC's entry into the hotels business was rooted in the concept of creating value for the nation. ITC chose the hotels business for its potential to earn high levels of foreign exchange, create tourism infrastructure and generate large scale direct and indirect employment. Since then ITC's Hotels business has grown to occupy a position of leadership, with over 100 owned and managed properties spread across India.

In 1979, ITC entered the Paperboards business by promoting ITC Bhadrachalam Paperboards Limited, which today has become the market leader in India. Bhadrachalam Paperboards amalgamated with the Company effective March 13, 2002 and became a Division of the Company, Bhadrachalam Paperboards Division. In November 2002, this division merged with the Company's Tribeni Tissues Division to form the Paperboards & Specialty Papers Division.

45


ITC's paperboards' technology, productivity, quality and manufacturing processes are comparable to the best in the world. It has also made an immense contribution to the development of Sarapaka, an economically backward area in the state of Andhra Pradesh. It is directly involved in education, environmental protection and community development. In 2004, ITC acquired the paperboard manufacturing facility of BILT Industrial Packaging Co. Ltd (BIPCO), near Coimbatore, Tamil Nadu. The Kovai Unit allows ITC to improve customer service with reduced lead time and a wider product range.

In 1985, ITC set up Surya Tobacco Co. in Nepal as an Indo-Nepal and British joint venture. Since inception, its shares have been held by ITC, British American Tobacco and various independent shareholders in Nepal. In August 2002, Surya Tobacco became a subsidiary of ITC Limited and its name was changed to Surya Nepal Private Limited (Surya Nepal).

In 1990, ITC acquired Tribeni Tissues Limited, a Specialty paper manufacturing company and a major supplier of tissue paper to the cigarette industry. The merged entity was named the Tribeni Tissues Division (TTD). To harness strategic and operational synergies, TTD was merged with the Bhadrachalam Paperboards Division to form the Paperboards & Specialty Papers Division in November 2002.

Also in 1990, leveraging its agri-sourcing competency, ITC set up the Agri Business Division for export of agri-commodities. The Division is today one of India's largest exporters. ITC's unique and now widely acknowledged e-Choupal initiative began in 2000 with soya farmers in Madhya Pradesh. Now it extends to 10 states covering over 4 million farmers. ITC's first rural mall, christened 'Choupal Saagar' was inaugurated in August 2004 at Sehore. On the rural retail front, 24 'Choupal Saagars' are now operatonal in the 3 states of Madhya Pradesh, Maharashtra and Uttar Pradesh.

In 2000, ITC forayed into the Greeting, Gifting and Stationery products business with the launch of Expressions range of greeting cards. A line of premium range of notebooks under brand “Paperkraft” was launched in 2002. To augment its offering and to reach a wider student population, the popular range of notebooks was launched under brand “Classmate”in 2003. “Classmate” over the years has grown to become India’s largest notebook brandand has also increased its portfolio to occupy a greater share of the school bag. Years 2007- 2009 saw the launch of Children Books, Slam Books, Geometry Boxes, Pens and Pencils under the “Classmate” brand. In 2008, ITC repositioned the business as the Education and Stationery Products Business and launched India's first environment friendly premium business paper under the “Paperkraft” Brand. “Paperkraft” offers a diverse portfolio in the premium executive stationery and office consumables segment. Paperkraft entered new categories in the office consumable segment with the launch of Textliners, Permanent Ink Markers and White Board Markers in 2009.

46


ITC also entered the Lifestyle Retailing business with the Wills Sport range of international quality relaxed wear for men and women in 2000. The Wills Lifestyle chain of exclusive stores later expanded its range to include Wills Classic formal wear (2002) andWills Clublife evening wear (2003). ITC also initiated a foray into the popular segment with its men's wear brand, John Players, in 2002. In 2006, Wills Lifestyle became title partner of the country's most premier fashion event - Wills Lifestyle India Fashion Week - that has gained recognition from buyers and retailers as the single largest B-2-B platform for the Fashion Design industry. To mark the occasion, ITC launched a special 'Celebration Series', taking the event forward to consumers.

In 2000, ITC spun off its information technology business into a wholly owned subsidiary,ITC Infotech India Limited, to more aggressively pursue emerging opportunities in this area. Today ITC Infotech is one of India’s fastest growing global IT and IT-enabled services companies and has established itself as a key player in offshore outsourcing, providing outsourced IT solutions and services to leading global customers across key focus verticals - Manufacturing, BFSI (Banking, Financial Services & Insurance), CPG&R (Consumer Packaged Goods & Retail), THT (Travel, Hospitality and Transportation) and Media & Entertainment.

ITC's foray into the Foods business is an outstanding example of successfully blending multiple internal competencies to create a new driver of business growth. It began in August 2001 with the introduction of 'Kitchens of India' ready-to-eat Indian gourmet dishes. In 2002, ITC entered the confectionery and staples segments with the launch of the brands mint-oand Candyman confectionery and Aashirvaad atta (wheat flour). 2003 witnessed the introduction of Sunfeast as the Company entered the biscuits segment. ITC's entered the fast growing branded snacks category with Bingo! in 2007. In eight years, the Foods business has grown to a significant size with over 200 differentiated products under six distinctive brands, with an enviable distribution reach, a rapidly growing market share and a solid market standing.

In 2002, ITC's philosophy of contributing to enhancing the competitiveness of the entire value chain found yet another expression in the Safety Matches initiative. ITC now markets popular safety matches brands like iKno, Mangaldeep, Aim, Aim Mega and Aim Metro.

ITC's foray into the marketing of Agarbattis (incense sticks) in 2003 marked the manifestation of its partnership with the cottage sector. ITC's popular agarbattis brands include Spriha and Mangaldeep across a range of fragrances like Rose, Jasmine, Bouquet, Sandalwood, Madhur, Sambrani and Nagchampa.

ITC introduced Essenza Di Wills, an exclusive range of fine fragrances and bath & body care products for men and women in July 2005. Inizio, the signature range under Essenza Di Wills provides a comprehensive grooming regimen with distinct lines for men (Inizio Homme)

47


and women (Inizio Femme). Continuing with its tradition of bringing world class products to Indian consumers the Company launched 'Fiama Di Wills', a premium range of Shampoos, Shower Gels and Soaps in September, October and December 2007 respectively. The Company also launched the 'Superia' range of Soaps and Shampoos in the mass-market segment at select markets in October 2007 and Vivel De Wills & Vivel range of soaps in February and Vivel range of shampoos in June 2008.

Balance Sheet of ITC Ltd. for the last 5 years.

ITC LTD. RATIO ANALYSIS

Industry: Cigarettes Chairman / Chair Person: Yogesh Chander Deveshwar

ISIN No INE154A01025 52Week High

308 Book Value

46.48 Face Value

1.00

BSE Code

500875 52Week Low

187 EPS 10.64 P/E 27.96

NSE Code

ITC P/BV 6.40 Div Yield

0.00 Market Cap.

113533.49

You can view the most widely used ratios such as Per share, Profitability, Leverage, Liquidity, Coverage ratios etc. Besides the ratios can be viewed of ITC Ltd. for a period of 5 years

Mar ' 09 Mar ' 08 Mar ' 07 Mar ' 06 Mar ' 05

PER SHARE RATIOS

Adjusted E P S (Rs.) 8.43 7.87 7.08 6.02 68.32

Adjusted Cash EPS (Rs.) 9.89 9.03 8.04 6.90 80.93

Reported EPS (Rs.) 8.65 8.28 7.18 5.95 88.28

Reported Cash EPS (Rs.) 10.10 9.44 8.14 6.84 100.89

Dividend Per Share 3.70 3.50 3.10 2.65 31.00

Operating Profit Per Share (Rs.) 13.04 11.76 10.64 8.97 111.55

Book Value (Excl Rev Res) Per Share (Rs.) 36.24 31.85 27.59 23.97 315.68

Book Value (Incl Rev Res) Per Share (Rs.) 36.39 32.00 27.74 24.13 318.09

Net Operating Income Per Share (Rs.) 39.70 37.23 32.73 26.09 306.40

Free Reserves Per Share (Rs.) 34.27 29.88 25.62 22.00 290.89

PROFITABILITY RATIOS

Operating Margin (%) 32.85 31.57 32.51 34.36 36.40

Gross Profit Margin (%) 29.18 28.44 29.56 30.97 32.29

Net Profit Margin (%) 21.18 21.50 21.40 22.19 28.00

48


Adjusted Cash Margin (%) 24.22 23.45 23.98 25.73 25.67

Adjusted Return On Net Worth (%) 23.27 24.71 25.64 25.09 21.64

Reported Return On Net Worth (%) 23.85 25.99 26.01 24.83 27.97

Return On long Term Funds (%) 34.76 36.88 37.51 36.36 33.80

LEVERAGE RATIOS

Long Term Debt / Equity 0.01 0.01 0.01 0.01 0.01

Total Debt/Equity 0.01 0.01 0.01 0.01 0.03

Owners fund as % of total Source 98.71 98.24 98.10 98.68 96.96

Fixed Assets Turnover Ratio 1.44 1.59 1.75 1.59 1.33

LIQUIDITY RATIOS

Current Ratio 1.44 1.39 1.37 1.27 1.04

Current Ratio (Inc. ST Loans) 1.42 1.36 1.33 1.25 0.96

Quick Ratio 0.60 0.56 0.58 0.57 0.42

Inventory Turnover Ratio 5.26 5.51 6.05 6.43 6.99

PAYOUT RATIOS

Dividend payout Ratio (Net Profit) 50.06 49.45 50.53 50.76 40.29

Dividend payout Ratio (Cash Profit) 42.84 43.36 44.54 44.19 35.25

Earning Retention Ratio 48.68 47.98 48.75 49.78 47.94

Cash Earnings Retention Ratio 56.24 54.68 54.90 56.22 56.05

COVERAGE RATIOS

Adjusted Cash Flow Time Total Debt 0.04 0.06 0.06 0.04 0.12

Financial Charges Coverage Ratio 112.19 199.51 268.33 172.52 58.80

Fin. Charges Cov.Ratio (Post Tax) 81.02 145.60 191.95 122.69 50.30

COMPONENT RATIOS

Material Cost Component(% earnings) 45.80 44.95 47.16 43.53 38.95

Selling Cost Component 6.83 7.44 6.52 6.39 7.00

Exports as percent of Total Sales 14.85 15.45 18.54 18.30 16.68

Import Comp. in Raw Mat. Consumed 12.98 12.78 16.92 16.35 18.66

Long term assets / Total Assets 0.56 0.57 0.58 0.60 0.67

Bonus Component In Equity Capital (%) 86.84 86.98 87.12 87.29 81.63

49


YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8

PAT 179.07 235.11 247.74 306.69409.6

1 607.64 668.03 701.43 776.81CORELATION 0 1 1 1 1 0 1 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8

PBIDT 255.85 334.59 345.34 448.19581.3

2 806.09 922.51 972.13 1105.33COREALTION 0 1 1 1 1 0 1 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8

BOOK VALUE 141.44 177.23 214.29 256.35315.6

3 23.97 27.59 31.85 36.24COREALTION 0 1 1 1 0 0 1 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8

50


EPS 39.98 48.48 53.48 61.75 83.92 5.58 6.65 7.68 8.02COREALTION 0 1 1 1 0 0 1 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8CASH FLOW FROM OPERATIONs 991.01 1769.54

1914.04 1893.27

1851.2 1929.68

2141.19 2722.96 3279.03

COREALTION 0 1 0 0 1 0 1 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8ROG-Capital Employed (%) 27.8 7.07 16.93 19.35 24.9 12.88 15.99 15.45 13.44COREALTION 1 1 1 1 0 0 0 1

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8ROG-Net Worth (%) 26.9 25.3 21.95 19.71 23.39 14.91 15.3 15.62 13.99COREALTION 1 0 0 1 0 0 1 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

51


AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8ROG-Net Sales (%) 9.18 19.68 16.99 9.05 18.53 28.85 23.58 15.11 6.9COREALTION 0 0 0 1 1 1 0 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8CURRENT RATIO 1.41 1.32 1.24 1.06 0.97 1.15 1.35 1.38 1.39CORELATION 1 0 0 0 1 0 1 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8APATM 11.59 12.09 12.44 13.48 13.76 13.78 13.99 14.61 14.1CORELATION 0 1 1 1 1 0 1 1

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8ROG-Capital Employed (%) 27.8 7.07 16.93 19.35 24.9 12.88 15.99 15.45 13.44CORELATION 1 1 1 1 0 0 0 1

52


YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8ROG-Net Worth (%) 26.9 25.3 21.95 19.71 23.39 14.91 15.3 15.62 13.99CORELATION 1 0 0 1 0 1 1 1

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8Creditors Velocity (Days) 74 76 83 90 105 88 91 97 98CORELATION 0 1 1 1 0 0 1 0

YEAR 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

AVG.PRICE53.1946

842.0473

446.022

964.3236

599.26

2183.598

4158.55

4210.818

9191.291

5265.475

8Debtors Velocity (Days) 6 6 7 7 7 10 10 10 11COREALTION 1 1 1 1 1 1 1 0

53


Technical Analysis: Introduction

The methods used to analyze and predict the performance of a company's stock fall into two broad categories: fundamental and technical analysis. Those who use technical analysis look for peaks, bottoms, trends, patterns and other factors affecting a stock's price movement and then make buy/sell decisions based on those factors. It is a technique many people attempt, but few are truly successful at it.

The world of technical analysis is huge today. There are literally hundreds of different patterns and indicators that investors claim to have success with. We have tried to keep this tutorial as short as possible. Our goal is to introduce you to the different types of stock charts and the various technical analysis tools available to investors.

Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value; instead they look at stock charts for patterns and indicators that will determine a stock's future performance.

Technical analysis has become increasingly popular over the past several years, as more and more people believe that the historical performance of a stock is a strong indication of future performance. The use of past performance should come as no surprise. People using fundamental analysis have always looked at the past performance of companies by comparing fiscal data from previous quarters and years to determine future growth. The difference lies in the technical analyst's belief that securities move according to very predictable trends and patterns. These trends continue until something happens to change the trend, and until this change occurs, price levels are predictable.

There are many instances of investors successfully trading a security using only their knowledge of the security's chart, without even understanding what the company does. However, although technical analysis is a terrific tool, most agree it is much more effective when used in combination with fundamental analysis.

54

http://www.investopedia.com/university/technical/





http://www.investopedia.com/terms/i/intrinsicvalue.asp

http://www.investopedia.com/terms/t/technicalanalysis.asp


http://www.investopedia.com/terms/i/indicator.asp

http://www.investopedia.com/terms/p/pattern.asp



http://www.investopedia.com/terms/f/fundamentalanalysis.asp



Indicator Interpretation

An indicator is a mathematical calculation that can be applied to a security's price and/or volume fields. The result is a value that is used to anticipate future changes in prices.

MetaStock for Java includes many of the most popular indicators used among technical analysts. All of the indicators are calculated using only one or two values, either the closing price, the volume,orboth.

A moving average fits this definition of an indicator: it is a calculation that can be performed on a security's price to yield a value that can be used to anticipate future changes in prices.

MetaStock for Java also allows you to draw support/resistance lines and trendlines. Support/resistance and trendline analysis lie at the heart of technical analysis, since they are based on basic laws of supply and demand.

55


BAR CHART

The bar chart is one of the most popular types of charts used in technical analysis. As illustrated on the left, the top of the vertical line indicates the highest price at which a security traded during the day, and the bottom represents the lowest price. The closing price is displayed on the right side of the bar and the opening price is shown on the left side of the bar. A single bar like the one to the left represents one day of trading.

The following is the bar chart of AT&T.

56



http://www.investopedia.com/terms/b/barchart.asp


CANDLESTICKS

Candlestick charts have been around for hundreds of years. They are often referred to as "Japanese candles" because the Japanese would use them to analyze the price of rice contracts.

Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low. The difference is the use of color to show if the stock went up or down over the day.

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Investors seem to have a "love/hate" relationship with candlestick charts. People either love them and use them frequently, or they are completely turned off by them. There are several patterns to look for with candlestick charts - here are a few of the popular ones and what they mean:

This is a bullish pattern - the stock opened at (or near) its low and closed near its high.

The opposite of the pattern above, this is a bearish pattern. It indicates that the stock opened at (or near) its high and dropped substantially to close near its low.

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Known as "the hammer", this is a bullish pattern only if it occurs after the stock price has dropped for several days. A hammer is identified by a small body along with a large range. The theory is that this pattern can indicate that a reversal in the downtrend is in the works.

Known as a "star", this pattern is used in other patterns such as the "doji star". For the most part, stars typically indicate a reversal and or indecision. There is a possibility that after seeing a star there will be a reversal or change in the current trend.

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LONG VS SHORT:

Long white candlesticks show strong buying pressures. The longer the candlestick the further the close is above the open. After extended declines, long white candles are a potential turning point or a support level. If buying gets too aggressive after a long advance, it can lead to excessive bullishness.

Long Black candlesticks show strong selling pressure. The longer the candlestick the further close is below the open. After extended advances, long black candlesticks are a potential resistance level. After a long decline, a long black candlestick can indicate panic or a bearish phase.

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POINT AND FIGURE CHART

The point & figure (P&F) chart is somewhat rare. In fact, most charting services do not even offer it. This chart plots day-to-day increases and declines in price: increases are represented by a rising stack of "X"s, while decreases are represented by a declining stack of "O"s. This type of chart was traditionally used for intraday charting (a stock chart for just one day), mainly because it can be long and tedious to create a P&F chart manually over a longer period of time.

The idea behind P&F charts is that they help you to filter out less significant price movements and to focus on the most important trends. Below is an example of a P&F chart for AT&T (T):

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MACD

OverviewThe MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts.

The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. (Appel specifies exponential moving averages as percentages as explained on page 170. Thus, he refers to these three moving averages as 7.5%, 15%, and 20% respectively.)

InterpretationThe MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD: crossovers, overbought/oversold, and divergences.

Crossovers.The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero.

Overbought/OversoldConditions.The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions exist vary from security to security.

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Divergences.A indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.

One of the easiest indicators to understand, the moving average, shows the average value of a security's price over a period of time. To find the 50-day moving average, you would add up the closing prices (but not always - we'll explain later) from the past 50 days and divide them by 50. Because prices are constantly changing, the moving average will move as well. It should also be noted that moving averages are most often used when compared or used in conjunction with other indicators such as moving average convergence divergence (MACD) and exponential moving average (EMA).

The most commonly used moving averages are of 20, 30, 50, 100 and 200 days. Each moving average provides a different interpretation on what the stock will do - there is not one right time frame. The longer the time span, the less sensitive the moving average will be to daily price changes. Moving averages are used to emphasize the direction of a trend and smooth out price and volume fluctuations (or "noise") that can confuse interpretation

Notice that back in September the stock price dropped well below its 50-day average (the green line). There has been a steady downward trend since then and no really strong divergence until the end of December when it rose above its 50-day average and continued to rise for several weeks.

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Moving Average

OverviewA Moving Average is an indicator that shows the average value of a security's price over a period of time. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes, its average price moves up or down.

There are several popular ways to calcuate a moving average. MetaStock for Java calculates a "simple" moving average--meaning that equal weight is given to each price over the calculation period.

InterpretationThe most popular method of interpreting a moving average is to compare the relationship between a moving average of the security's price with the security's price itself. A buy signal is generated when the security's price rises above its moving average and a sell signal is generated when the security's price falls below its moving average.

This type of moving average trading system is not intended to get you in at the exact bottom nor out at the exact top. Rather, it is designed to keep you in line with the security's price trend by buying shortly after the security's price bottoms and selling shortly after it tops.

The critical element in a moving average is the number of time periods used in calculating the average. When using hindsight, you can always find a moving average that would have been profitable. The key is to find a moving average that will be consistently profitable. The most popular moving average is the 39-week (or 200-day) moving average. This moving average has an excellent track record in timing the major (long-term) market cycles.

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Moving Average Crossover

OverviewA Moving Average is an indicator that shows the average value of a security's price over a period of time. When calculating a moving average, a mathematical analysis of the security's average value over a predetermined time period is made. As the security's price changes, its average price moves up or down. See the Moving Average page for more information on movingaverages.The Moving Average Crossover indicator prompts you for two parameters. A shorter moving average and a longer moving average.

InterpretationThe most popular method of interpreting a single moving average is to compare the relationship between a moving average of the security's price with the security's price itself. However, you can also compare the relationship between a shorter-term moving average and a longer-term moving average. For example, by entering 9 in the first box, and 39 in the second box, MetaStock for Java will plot both moving averages on the price chart. Look for possible buying opportunities when the shorter moving average crosses above the longer moving average. Conversely, look for possible selling opportunities when the shorter moving average crosses below the longer moving average.

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Relative Strength Index (RSI)

OverviewThe Relative Strength Index ("RSI") is a popular oscillator. It was first introduced by Welles Wilder in an article in Commodities (now known as Futures) Magazine in June, 1978.

The name "Relative Strength Index" is slightly misleading as the Relative Strength Index does not compare the relative strength of two securities, but rather the internal strength of a single security. A more appropriate name might be "Internal Strength Index."

InterpretationWhen Wilder introduced the Relative Strength Index, he recommended using a 14-day Relative Strength Index. Since then, the 9-day and 25-day Relative Strength Indexs have also gained popularity. The fewer days used to calculate the Relative Strength Index, the more volatile the indicator.

The Relative Strength Index is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the Relative Strength Index is to look for a divergence in which the security is making a new high, but the Relative Strength Index is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the Relative Strength Index then turns down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal.

In Mr. Wilder's book, he discusses five uses of the Relative Strength Index:

Tops and Bottoms. The Relative Strength Index usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart.Chart Formations. The Relative Strength Index often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart.Failure Swings (also known as support or resistance penetrations or breakouts). This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough).Support and Resistance. The Relative Strength Index shows, sometimes more clearly than price themselves, levels of support and resistance.Divergences. As discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in the direction of the Relative Strength Index.

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The RSI is a reasonably simple model that anyone can use. It is calculated using the following formula

RSI = 100 - [100/(1 + RS)]

where: RS = (Avg. of n-day up closes)/(Avg. of n-day down closes) n= days (most analysts use 9 - 15 day RSI)

The RSI ranges from 0 to 100. At around the 70 level, a stock is considered overbought and you should consider selling. But this number is not written in stone: in a bull market some believe that 80 is a better level to indicate an overbought stock since stocks often trade at higher valuations during bull markets. Likewise, if the RSI approaches 30, a stock is considered oversold and you should consider buying. Again, make the adjustment to 20 in a bear market.

The smaller the number of days used, the more volatile the RSI is and the more often it will hit extremes. A longer term RSI is more rolling, fluctuating a lot less. Different sectors and industries have varying threshold levels when it comes to the RSI. Stocks in some industries will go as high as 75-80 before dropping back, while others have a tough time breaking past 70. A good rule is to watch the RSI over the long term (one year or more) to determine at what level the historical RSI has traded and how the stock reacted when it reached those levels

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Above, we have an RSI chart for AT&T. The RSI is the green line, and its scale is the numbers on the right hand side that go from 0 to 100. Notice the RSI was approaching the 60-70 level in December and January, and then the stock (blue line) sold off. Also, notice that when the RSI dropped to 25 around October the stock climbed up nearly 30% in just a couple of weeks.

Using the moving averages, trendlines, divergence, support and resistance lines along with the RSI chart can be very useful. Rising bottoms on the RSI chart can produce the same positive trend results as they would on the stock chart. Should the general trend of the stock price tangent from the RSI, it might spark a warning that the stock is either over- or underbought.

The RSI is a great indicator that can help you make some serious money. Be aware that big surges and drops in stocks will dramatically affect the RSI, resulting in false buy or sell signals. Most investors agree that the RSI is most effective in "backing up" or increasing confidence before making an investment decision

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SUPPORT AND RESISTANCE

Support - A price level below the current market price, at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower.

Resistance - A price level above the current market price, at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher.

One of two things can happen when a stock price approaches a support/resistance level. On the one hand, it can act as a reversal point: in other words, when a stock price drops to a support level, it will go back up. On the other hand, S/R levels may reverse roles once they are penetrated. For example, when the market price falls below a support level, that former support level will then become a resistance level when the market later trades back up to that level.

The foundation of most technical analysis tools is rooted in the concept of supply and demand. There is nothing mysterious about support and resistance--it is classic supply and demand. Remembering "Econ 101" class, supply/demand lines show what the supply and demand will be at a given price.

Resistance is equivalent to a "supply" line. When prices increase, the quantity of sellers also increases as more investors are willing to sell at these higher prices. When too much selling occurs, however, prices retreat. When this happens repeatedly near a specific price level, resistance forms at that price level.

Support is equivalent to a "demand" line. When prices decrease, the quantity of buyers increases as more investors are willing to buy at lower prices. When too much buying occurs, however, prices rise. When this happens repeatedly near a specific price level, support forms at that price level.

Following the penetration of a support/resistance level, it is common for traders to question the new price levels. For example, after a breakout above a resistance level, buyers and sellers may both question the validity of the new price and may decide to sell. This creates a phenomena referred to as "traders' remorse" where prices return to a support/resistance level following a price breakout.The price action following this remorseful period is crucial. One of two things can happen. Either the consensus of expectations will be that the new price is not warranted and prices will move back to their previous level; or investors will accept the new price and prices will continue to move in the direction of the penetration.

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This chart shows an excellent example of support and resistance levels for General Electric (GE). Notice that once the stock price penetrated below the support level in December, it became the resistance level.

You also need to understand that S/R levels vary in strength, leading to certain price levels being designated as major or minor S/R levels. For example, a five-year high on a bar chart would be a much more significant and useful resistance level than a one-month resistance level.

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MONEY FLOW INDEX

The Money Flow Index (MFI) measures the strength of money flowing into and out of a stock. The difference between the RSI and the MFI is this: while the RSI looks only at prices, the MFI also takes volume into account.

The MFI is a bit more difficult to calculate than the RSI:

First we need the average price for the day:

Average Price =

Day High + Day Low + Close

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Now we need the Money Flow:

Money Flow = Average Price x Day's Volume

Now, to calculate the money flow ratio you need to separate the money flows for a period into positive and negative. If the price was up in a particular day, this is considered to be "positive money flow". If the price closed down, it is considered to be "negative money flow".

Money Flow Ratio =

Positive Money Flow

Negative Money Flow

It is the Money Flow Ratio that is used to calculate the Money Flow Index.

The money flow ranges from 0 to 100. Just as with the RSI, a stock is considered overbought in the 70- 80 range and oversold in the 20-30 range.

The smaller the number of days you use, the more volatile the money flow is. The chart below is for Home Depot (HD) and uses a 14-day average.

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The MFI is identified by the green line. Notice that each time the money flow dropped below 30, the stock began to rally. Furthermore, each time the money flow rose above 70, the stock started to sell off.

Like any indicator, the MFI is not correct 100% of the time. Back in early October when the stock price dropped from around $55 down to $37, the MFI didn't detect a thing. Just remember that money flow is useful to detect momentum, but it cannot predict unsystematic risk.

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Momentum

OverviewThe Momentum indicator measures the amount that a security's price has changed over a given timespan.

InterpretationThe interpretation of the Momentum indicator is identical to the interpretation of the Price ROC. Both indicators display the rate-of-change of a security's price. However, the Price ROC indicator displays the rate-of-change as a percentage whereas the Momentum indicator displays the rate-of-change as a ratio.

There are two ways to use the Momentum indicator:

You can use the Momentum indicator as a trend-following oscillator similar to the MACD (this is the method I prefer). Buy when the indicator bottoms and turns up and sell when the indicator peaks and turns down. You may want to plot a short-term (e.g., 9-period) moving average of the indicator to determine when it is bottoming or peaking.

If the Momentum indicator reaches extremely high or low values (relative to its historical values), you should assume a continuation of the current trend. For example, if the Momentum indicator reaches extremely high values and then turns down, you should assume prices will probably go still higher. In either case, only trade after prices confirm the signal generated by the indicator (e.g., if prices peak and turn down, wait for prices to begin to fall before selling).

You can also use the Momentum indicator as a leading indicator. This method assumes that market tops are typically identified by a rapid price increase (when everyone expects prices to go higher) and that market bottoms typically end with rapid price declines (when everyone wants to get out). This is often the case, but it is also a broad generalization.

As a market peaks, the Momentum indicator will climb sharply and then fall off--diverging from the continued upward or sideways movement of the price. Similarly, at a market bottom, Momentum will drop sharply and then begin to climb well ahead of prices. Both of these situations result in divergences between the indicator and prices.

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Price Patterns

OverviewA basic principle of technical analysis is that security prices move in trends. We also know that trends do not last forever. They eventually change direction and when they do, they rarely do so on a dime. Instead, prices typically decelerate, pause, and then reverse. These phases occur as investors form new expectations and by doing so, shift the security's supply/demand lines.

The changing of expectations often causes price patterns to emerge. Although no two markets are identical, their price patterns are often very similar. Predictable price behavior often follows these price patterns.

Chart patterns can last from a few days to many months or even years. Generally speaking, the longer a pattern takes to form, the more dramatic the ensuing price move.

InterpretationThe following sections explain several of the more common price patterns. For more information on chart patterns, we suggest the book, Technical Analysis of Stock Trends by Robert Edwards and John Magee.

Head and ShouldersRounding Tops and BottomsTrianglesDouble Tops and Bottoms

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Head and Shoulders - This is a chart formation resembling an "M" in which a stock's price: - rises to a peak and then declines, then - rises above the former peak and again declines, and then - rises again but not to the second peak and again declines. The first and third peaks are shoulders, and the second peak forms the head. This pattern is considered a very bearish indicator.

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During a healthy up-trend, volume should increase during each rally. A sign that the trend is weakening occurs when the volume accompanying rallies is less than the volume accompanying the preceding rally. In a typical Head-and-Shoulders pattern, volume decreases on the head and is especially light on the right shoulder.Following the penetration of the neckline, it is very common for prices to return to the neckline in a last effort to continue the up-trend. If prices are then unable to rise above the neckline, they usually decline rapidly on increased volume.An inverse (or upside-down) Head-and-Shoulders pattern often coincides with market bottoms.

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As with a normal Head-and-Shoulders pattern, volume usually decreases as the pattern is formed and then increases as prices rise above the neckline.

Cup and Handle - This is a pattern on a bar chart that can be as short as seven weeks and as long as 65 weeks. The cup is in the shape of a "U". The handle has a slight downward drift. The right-hand side of the pattern has low trading volume. As the stock comes up to test the old highs, the stock will incur selling pressure by the people who bought at or near the old high. This selling pressure will make the stock price trade sideways with a tendency towards a downtrend for anywhere from four days to four weeks, then it will take off.

This pattern looks like a pot with a handle. It is one of the easier patterns to detect, and investors have made a lot of money using it.

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Rounding Tops and Bottoms

Rounding tops occur as expectations gradually shift from bullish to bearish. The gradual, yet steady shift forms a rounded top. Rounding bottoms occur as expectations gradually shift from bearish to bullish.

Volume during both rounding tops and rounding bottoms often mirrors the bowl-like shape of prices during a rounding bottom. Volume, which was high during the previous trend, decreases as expectations shift and traders become indecisive. Volume then increases as the new trend is established.

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Triangles

A triangle occurs as the range between peaks and troughs narrows. Triangles typically occur as prices encounter a support or resistance level which constricts the prices.

A "symmetrical triangle" occurs when prices are making both lower-highs and higher-lows.

An "ascending triangle" occurs when there are higher-lows (as with a symmetrical triangle), but the highs are occurring at the same price level due to resistance. The odds favor an upside breakout from an ascending triangle.

A "descending triangle" occurs when there are lower-highs (as with a symmetrical triangle), but the lows are occurring at the same price level due to support. The odds favor a downside breakout from a descending triangle.

Just as pressure increases when water is forced through a narrow opening, the "pressure" of prices increases as the triangle pattern forms. Prices will usually breakout rapidly from a triangle. Breakouts are confirmed when they are accompanied by an increase in volume.

The most reliable breakouts occur somewhere between half and three-quarters of the distance between the beginning and end (apex) of the triangle. There are seldom many clues as to the

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direction prices will break out of a symmetrical triangle. If prices move all the way through the triangle to the apex, a breakout is unlikely.

Double Tops and Bottoms

A double top occurs when prices rise to a resistance level on significant volume, retreat, and subsequently return to the resistance level on decreased volume. Prices then decline marking the beginning of a new down-trend.

A double bottom has the same characteristics as a double top except it is upside-down.

This pattern resembles a "W" and occurs when a stock price drops to a similar price level twice within a few weeks or months. You should buy when the price passes the highest point in the handle. In a perfect double bottom, the second decline should normally go slightly lower than the first decline to create a shakeout of jittery investors. The middle point of the "W" should not go into new high ground. This is a very bullish indicator. The belief is that, after two drops in the stock price, the jittery investors will be out and the long-term investors will still be holding on.

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Trendlines

In the preceding section, we saw how support and resistance levels can be penetrated by a change in investor expectations (which results in shifts of the supply/demand lines). This type of a change is often abrupt and "news based."

In this section, we'll review "trends." A trend represents a consistent change in prices (i.e., a change in investor expectations). Trends differ from support/resistance levels in that trends represent change, whereas support/resistance levels represent barriers to change.

As shown in the following chart, a rising trend is defined by successively higher low-prices. A rising trend can be thought of as a rising support level--the bulls are in control and are pushing prices higher.

As shown in the next chart, a falling trend is defined by successively lower high-prices. A falling trend can be thought of as a falling resistance level--the bears are in control and are pushing prices lower.

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Volume

OverviewVolume is simply the number of shares (or contracts) traded during a specified time frame (e.g., hour, day, week, month, etc). If volume is reported for the security, MetaStock for Java automatically plots it along the bottom of the chart as a histogram. The analysis of volume is a basic yet very important element of technical analysis. Volume provides clues as to the intensity of a given price move.

InterpretationLow volume levels are characteristic of the indecisive expectations that typically occur during consolidation periods (i.e., periods where prices move sideways in a trading range). Low volume also often occurs during the indecisive period during market bottoms.

High volume levels are characteristic of market tops when there is a strong consensus that prices will move higher. High volume levels are also very common at the beginning of new trends (i.e., when prices break out of a trading range). Just before market bottoms, volume will often increase due to panic-driven selling.

Volume can help determine the health of an existing trend. A healthy up-trend should have higher volume on the upward legs of the trend, and lower volume on the downward (corrective) legs. A healthy downtrend usually has higher volume on the downward legs of the trend and lower volume on the upward (corrective) legs.

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Volume Oscillator

OverviewThe Volume Oscillator displays the difference between two moving averages of a security's volume. The difference between the moving averages can be expressed in either points or percentages.

InterpretationYou can use the difference between two moving averages of volume to determine if the overall volume trend is increasing or decreasing. When the Volume Oscillator rises above zero, it signifies that the shorter-term volume moving average has risen above the longer-term volume moving average, and thus, that the short-term volume trend is higher (i.e., more volume) than the longer-term volume trend.

There are many ways to interpret changes in volume trends. One common belief is that rising prices coupled with increased volume, and falling prices coupled with decreased volume, is bullish. Conversely, if volume increases when prices fall, and volume decreases when prices rise, the market is showing signs of underlying weakness.

The theory behind this is straight forward. Rising prices coupled with increased volume signifies increased upside participation (more buyers) that should lead to a continued move. Conversely, falling prices coupled with increased volume (more sellers) signifies decreased upside participation.

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Accumulation/Distribution

OverviewThe Accumulation/Distribution is a momentum indicator that associates changes in price and volume. The indicator is based on the premise that the more volume that accompanies a price move, the more significant the price move.

InterpretationThe Accumulation/Distribution is really a variation of the more popular On Balance Volume indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume associated with prices.

When the Accumulation/Distribution moves up, it shows that the security is being accumulated as most of the volume is associated with upward price movement. When the indicator moves down, it shows that the security is being distributed as most of the volume is associated with downward price movement.

Divergences between the Accumulation/Distribution and the security's price imply a change is imminent. When a divergence does occur, prices usually change to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's price is going down, prices will probably reverse.

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Different derivatives strategies

Straddles strategy

An options strategy with which the investor holds a position in both a call and put with the same strike price and expiration date.

Straddles are a good strategy to pursue if an investor believes that a stock's price will move significantly, but is unsure as to which direction. The stock price must move significantly if the investor is to make a profit. As shown in the diagram above, should only a small movement in price occur in either direction, the investor will experience a loss. As a result, a straddle is extremely risky to perform. Additionally, on stocks that are expected to jump, the market tends to price options at a higher premium, which ultimately reduces the expected payoff should the stock move significantly.

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Long straddle strategy

A long straddle is when a trader buys a call and a put on the same stock hoping the market moves enough in either direction to cover the premiums spent for the strategy. A long straddle will lose money if the market fails to move enough where at least one of the option contracts is profitable.

Example:

Buy 1 LPO Jun 80 Call for $300 Buy 1 LPO Jun 80 Put for $200

The strategy here is that the options investor expects movement on LPO stock up or down enough to cover the total premiums spent, which is $500. The person is neither bullish nor bearish. If the market price on LPO drops 15 points, the investor will be as happy as if the stock rose 15 points. Long Straddles are all about movement and volatility.

The maximum loss for the trader is $500. That will occur if both contracts expire worthless. The gain can be made in both directions. If the stock rises, the gain could be unlimited. The investor

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would just let the put expire if that happened. Once the marekt rises above 85 (strike price plus combined premiums spent), the gain has no limit.

The gain potential for the put on this long straddle is $7500. That is based on the stock dropping to zero (not likely), and the put allowing the options trader to sell the stock at the strike price of 80, minus the $500 premiums spent.

Long straddles are attractive to investors who anticipate fluctuation in the market or on their stock. During times of uncertainty and unexpected earnings news, can be good times to engage in a long straddle strategy.

Short straddle strategyAn options strategy carried out by holding a short position in both a call and a put that have the same strike price and expiration date. The maximum profit is the amount of premium collected by writing the options.

Calculations for Short Straddles are:

Upper Break Even = Strike Price + Net Credit

Lower Break Even =

Strike Price - Net Credit

Probability Sum = (Prob. Above Upper Break Even) + (Prob. Below Lower Break Even) (Reflects Probability that the spread will fail. Look for a lower Probability Sum)

Max Profit = Net Credit = Premium received.

Where...

Net Credit = Premium of Sold Call + Premium of Sold Put

% Return = Net Credit ÷ (Option Strike Price + Highest Option Bid) - Net Credit

Example: Stock XYZ at $48.35 per share.

Sell the FEB 50 Call for $1.20

Sell the FEB 50 Put for $2.70

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Max. Profit = Net Credit = $1.20 + $2.70 = $3.90

Upper Break Even = Strike + Net Credit = $50.00 + $3.90 = $53.90

Lower Break Even =

Strike - Net Credit = $50.00 - $3.90 = $46.10

% Return = Net Credit ÷ (Option Strike Price + Highest Option Bid) - Net Credit

% Return = $3.90 ÷ (50 + $2.70) - $3.90 = 8%

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Advantages of this strategy:

If the stock remains at the original stock price, both of the options will expire worthless and the investor will keep both premiums (maximum profit)

If the stock price remains below the strike price but above the lower break even point the investor will still realize a profit.

If the stock price remains above the strike price but below the upper break even point the investor will still realize a profit.

An initial credit is received on the transaction so the investor does not have to put up any money to enter into the position.

No stock is actually owned. (uncovered position).

Cautions with this strategy:

The investor can take a loss if the stock swings quickly in one direction or the other due to unforseen events.

The risk/max loss is infinite because of the obligation to buy or sell shares of stock that are not owned.

Because of this risk, the margin requirements for this strategy are fairly high. Your broker may require you to cover both options as if they were two Naked Options, or they may require a cash value of the Option Strike Price plus the highest bid of the call or the put.

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Strangle strategy

An options strategy where the investor holds a position in both a call and put with different strike prices but with the same maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset.

This is a good strategy if you think there will be a large price movement in the near future but are unsure of which way that price movement will be.

The strategy involves buying an out-of-the-money call and an out-of-the-money put option. A strangle is generally less expensive than a straddle as the contracts are purchased out of the money.

For example, imagine a stock currently trading at $50 a share. To employ the strangle option strategy a trader enters into two option positions, one call and one put. Say the call is for $55 and costs $300 ($3.00 per option x 100 shares) and the put is for $45 and costs $285 ($2.85 per option x 100 shares). If the price of the stock stays between $45 and $55 over the life of the option the loss to the trader will be $585 (total cost of the two option contracts). The trader will make money if the price of the stock starts to move outside of the range. Say that the price of the stock ends up at $35. The call option will expire worthless and the loss will be $300 to the trader. The put option however has gained considerable value, it is worth $715 ($1,000 less the initial option value of $285). So the total gain the trader has made is $415.

Long Strangle

The long strangle is simply the simultaneous purchase of a long call and a long put on the same underlying security with both options having the same expiration but where the put strike price is lower than the call strike price. Because the position includes both a long call and a long put, the investor using a long strangle should have a complete understanding of the risks and rewards associated with both long calls and long puts.

**Since the strangle involves two trades, a commission charge is likely for the purchase (and any subsequent sale) of each position; one commission for the call and one commission for the put and commission charges may significantly impact the breakeven and the potential profit/loss of the strategy.

Calculations for Long Strangles are:

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Upper Break Even = Call Strike Price + Net Debit

Lower Break Even = Put Strike Price - Net Debit

Probability Sum = (Prob. Above Upper Break Even) + (Prob. Below Lower Break Even)

Max Risk = Net Debit = Cost of Position

Where...

Net Debit = Premium of Bought Call + Premium of Bought Put


Buy the OCT 50 Call for $0.95

Buy the OCT 45 Put for $1.00

Max. Loss = Net Debit = $1.00 + $0.95 = $1.95

Upper Break Even = Call Strike + Net Debit = $50.00 + $1.95 = $51.95

Lower Break Even = Put Strike - Net Debit = $45.00 - $1.95 = $43.05

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An investor can profit from this position if the stock moves in either direction.

The potential profits on the upside are unlimited.

The potential profits on the downside can be very high as well.

The max loss is limited to the original cost of the position, i.e. Net Debit

Lower net debit than the Long Straddle strategy.

Since both options are OTM, price decay on the options is not as rapid as they are with the Long Straddle.



If the stock expires between the two option strike prices you will sustain the maximum loss (Net Debit).

If the stock rises above the call strike price but remains below the upper break even you will still incur a loss on the position.

Likewise, if the stock falls below the put strike price but remains above the lower break even you will still incur a loss on the position.

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Short Strangle

The Short Strangle strategy is similar to the Short Straddle strategy, except you sell the call option(s) and the put option(s) at different strike prices. When entering a Short Strangle position an investor will sell (short) a certain number of out-of-the-money (OTM) call contracts while simultaneously selling (shorting) the same number of out-of-the-money put contracts for the same target month. Like the Short Straddle position the Short Strangle position has a set maximum profit and potentially unlimited risk if the stock goes against you.

Since the investor is selling options there is a net credit achieved when the position is opened. The maximum profit for the position is equal to the net credit. The maximum profit is realized if the stock remains stagnant and the stock price remains between the two sold strike prices at expiration. By selling both a call and a put there is both an upper and lower-break even. Profit can be realized if the stock price is above the lower break even or below the upper break even at expiration. Since the stock can go infinitely up or fall towards $0 value, there is a potentially unlimited risk as the option(s) may need to be bought back to avoid assignment.

The Short Strangle is a neutral position. The investor will profit from the position if the stock stays stagnant and expires within the profitable range.

Sell (short) out-of-the-money (OTM) call(s) in a selected target month.

Sell (short) the same number of out-of-the-money (OTM) put(s) for the same month.

The maximum profit is the net credit (total premiums received).

The maximum risk is infinite in either direction (infinite to 0 on the put side/decline).

The position has both an upper break even and a lower break even.

Profit is realized if the stock price remains between the upper and lower break even points.

Calculations for Short Strangles are:

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Upper Break Even = Call Strike Price + Net Credit

Lower Break Even = Put Strike Price - Net Credit

Probability Sum = (Prob. Above Upper Break Even) + (Prob. Below Lower Break Even) (Reflects Probability that the spread will fail. Look for a lower Probability Sum)

Max Profit = Net Credit = Total Premium Received

Where...

Net Credit = Premium of Sold Call + Premium of Sold Put

% Return = Net Credit ÷ (Call Strike Price + Put Premium) - Net Credit


Sell the NOV 95 Call for $2.40

Sell the NOV 80 Put for $1.70

Max. Profit = Net Credit = $2.40 + $1.70 = $4.10

Upper Break Even = Call Strike + Net Credit = $95.00 + $4.10 = $99.10

Lower Break Even = Put Strike - Net Credit = $80.00 - $4.10 = $75.90

% Return = Net Credit ÷ (Call Strike Price + Put Premium) - Net Credit

% Return = $4.10 ÷ (95 + $1.70) - $4.10 = 4.4%

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If the stock remains between both strike prices at expiration, both of the options will expire worthless and the investor will keep the entire Net Credit (maximum profit)

If the stock remains below the put strike price but above the lower break even the investor will still realize a profit.

If the stock remains above the call strike price but below the upper break even the investor will still realize a profit.

An initial net credit is received on the transaction so the investor does not have to put up any money to enter the position.

Since the investor is using two different OTM strike prices, the stock can move in a wider range than in the Short Straddle position and still be profitable.



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The investor can take a loss if the stock swings quickly in one direction or the other due to unforeseen events.

The risk/max loss can be almost infinite because of the obligation to buy or sell shares that are not owned.

Because of this risk, the margin requirements for this strategy are fairly high. Your broker may require you to cover both options as if they were two Naked Options, or they may require a cash value of the Option Strike Price plus the highest bid of the call or the put.

Because the investor is selling two OTM options, there is a lower net credit than with aShort Straddle position, but the stock has more space to move before the position is a loss.

Action must be taken if either option expires ITM.

Butterfly

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http://www.poweropt.com/shortstraddlehelp.asp


A call option is the right to buy a given asset at a fixed price on or before a specific date. A put option is the right to sell a given asset at a fixed price on or before a specific date. Calls increase in value when the price of the underlying asset goes up; puts increase in value when the price of the underlying asset goes down. A butterfly strategy is an options strategy using multiple puts and/or calls to make a bet on future volatility without having to guess in which direction the market will move.

A long butterfly strategy is constructed from three sets of either puts or calls having the same expiration date but different exercise prices (strikes). For example, with the underlying asset trading at 100, a long butterfly strategy can be built by buying puts (or calls) at 95 and 105, and selling (shorting) twice as many puts (or calls) at 100.

If the underlying does not change price by expiry, the puts at 95 and 100 will expire worthless, and the puts at 105 will be worth 5 (from 105-100). If the underlying is greater than 105 at expiration, all the puts expire worthless, and the initial cost of the butterfly is the amount of the loss. If the underlying is less than 95 at expiration, the gain from the purchased put at 105 will offset the losses from the shorted puts at 100, and the loss is again limited to the initial cost of initiating the butterfly strategy. In essence, this is a limited-risk, limited-gain approach to shorting the volatility of the underlying, as the maximum profit comes when the underlying has no volatility at all.

A short butterfly strategy is the converse; a limited-risk, limited-gain approach to being long (betting on an increase in) the volatility of the underlying. By buying the inside strike and selling the outside strikes, the position has its greatest loss when the underlying does not move, and its greatest gain when it moves beyond either of the outside exercise prices. A short butterfly strategy profits as equally from a large move up as it does from a large move down.

A regular butterfly strategy uses either all calls or all puts. A long iron butterfly sells a put and a call at the inside strike, and buys a put at the lowest strike and a call at the highest strike. A short iron butterfly buys a put and a call at the inside strike, and sells a put at the lowest strike and a call at the highest strike. In terms of profit and loss potentials, iron butterflies look very much like regular butterfly built from either all puts or all calls.

In general, the only time there is an advantage to choosing one type of butterfly strategy over another is if there is a pricing disparity in puts and calls making one of them cheaper to purchase or more profitable to sell.

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http://www.wisegeek.com/what-is-a-fixed-price.htm


Covered Call

The covered call is a strategy in which an investor writes a call option contract while at the same time owning an equivalent number of shares of the underlying stock. If this stock is purchased simultaneously with writing the call contract, the strategy is commonly referred to as a "buy-write." If the shares are already held from a previous purchase, it is commonly referred to an "overwrite." In either case, the stock is generally held in the same brokerage account from which the investor writes the call, and fully collateralizes, or "covers," the obligation conveyed by writing a call option contract. This strategy is the most basic and most widely used strategy combining the flexibility of listed options with stock ownership.

Benefit

While this strategy can offer limited protection from a decline in price of the underlying stock and limited profit participation with an increase in stock price, it generates income because the investor keeps the premium received from writing the call. At the same time, the investor can appreciate all benefits of underlying stock ownership, such as dividends and voting rights, unless he is assigned an exercise notice on the written call and is obligated to sell his shares. The covered call is widely regarded as a conservative strategy because it decreases the risk of stock ownership.

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Ratio Spreads

Trading ratio spreads is a neutral strategy with a medium risk level and high potential profits. The strategy can be used with calls or puts and works best with a stock that has shown stability.

Put ratio spreads

How it works: A trader would buy a put at a higher strike price and sell a greater number of puts at a lower strike price, preferably with little debit or a small credit. If the stock jumps the puts will expire worthless. Our desired result is for the stock price to stay at the strike price where you are short options.

The drawback: If the stock plummets you have unlimited risk, since you sold more options than you bought.

Call ratio spreads

How it works: A trader would buy a call at a lower strike price and sell a greater number of calls at a higher strike price, preferably with little debit or a small credit. If the stock jumps the puts will expire worthless. Our desired result is for the stock price to stay at the strike price where you are short options.

The drawback: If the stock soars upward you have unlimited risk, since you sold more options than you bought.

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FINDINGS

The following findings are made on the basis of data analysis from the previousChapter.

1. The study reveals the effectiveness of risk reduction using hedging strategies. It has found out that risk cannot be avoided. But can only be minimized.

2. Through the study. it has found out that, the hedging provides a safe position on an underlying security. The loss gets shifted to a counter party. Thus the hedging covers the loss and risk. Sometimes, the market performs against the expectation. This will trigger losses. so the hedger should be a strategic and positive thinker.

3. The anticipation of the hedger regarding the trend of the movement in the prices of the underlying security plays a key role in the result of the strategy applied.

4. It has been found that, all the strategies applied on historical data of the period of the study were able to reduce the loss that rose from price risk substantially.

5. If the trader is not sure about the direction of the movement of the profits of the current position, he can counter position in the future contract and reduces the level of risks.

6. The trader can effectively use the strategy for return enhancement provided he has the correct market anticipation. 7. In general, the anticipation of the strategies purely for return enhancement is a risky affair, because, if the anticipation about the performance of the market and the underlying goes wrong, the position taker would end up in higher losses.

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SUGGEESTIONS

· If an investor wants to hedge with portfolios, it must consist of scrips from different industries, since they are convenient and represent true nature of the securities market as a whole.

· The hedging tool to reduce the losses that may arise from the market risk. Its primary objective is loss minimization, not profit maximization .The profit from futures or shares will be offset from the losses from futures or shares, as the case may be. as a result, a hedger will earn a lower return compared to that of an unhedger. But the unhedger faces a high risk than a hedger.

· The hedger will have to be a strategic thinker and also one who think positively. He should be able to comprehend market trends and fluctuations. Otherwise, the strategies adopted by him earn him earn losses.

· The hedging tool is suitable in the short term period. They can be specifically adopted by the investor, who are facing high risks and has sufficient liquid cash with them. Long term investor should beware from the market, because of the volatile nature of the market.

· A lot more awareness needed about the stock market and investment pattern, both in spot and future market. The working of BSE Training Institute and NSE Institutes are apprehensible in this regard.

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