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Summer Training Project Report
On
INVESTORS PERCEPTION TOWARDS DERIVATIVES MARKET
AT
INDIA INFOLINE PVT. LTD., NOIDA
Submitted
To
Dr. A.P.J. Abdul Kalam Technical University, U.P., Lucknow
for the partial fulfillment of
MASTER OF BUSINESS ADMINISTRATION
2014-16
Submitted to Submitted By
Dr. SWATI AGARWAL MAQBOOL AHMAD Assistant Professor Roll No:- 1482070045
AJAY KUMAR GARG INSTITUTE OF MANAGEMENT27th K.M Stone, NH—24, Delhi Hapur Bypass Road, Adhyatmik Nagar, Ghaziabad- 201009
DECLARATION
1
I, Maqbool Ahmad hereby declare that the following project report titled” INVESTORS
PERCEPTION TOWARDS DERIVATIVES MARKET IN INDIA is an authentic
work done by me. The information and findings presented in this report are genuine,
comprehensive and reliable, based on the data collected by me. The project was
undertaken as a part of the course curriculum of MBA(Master Of Business
Administration) full time program of Ajay Kumar Garg Institute Of Management,
Ghaziabad, for the fulfillment of the degree. The matter presented in this report will not
be used for any other purpose and will be strictly confidential.
MAQBOOL AHMAD
Roll No.-1482070045
2
ACKNOWLEDGEMENT
I express my sincere gratitude to my company guide Mr. ASIF PERWEZ Assistant
Vice-President Manager of IIFL (NOIDA), Extension for their able guidance, continuous
support and cooperation throughout my project, without which the present work would
not have been possible. Also, I am thankful to my faculty guide prof. Dr.Swati Agarwal
mam of my institute, for her continued guidance and invaluable encouragement. Without
her help and valuable guidance my report would not have been a success. I would also
like to thank my parents for their encouragement and moral support. I would also like to
thank all the Respondents who gave their honest responses to the questionnaire of my
survey. Finally I would like to thank all the Employees of IIFL who have been kind to me
and have directly or indirectly been a part of my project and my summer internship.
(MAQBOOL AHMAD)
Roll No:-1482070045
PREFACE
3
Technical study is incomplete without the practical knowledge. No doubt theory provides
the fundamental stone for the guidance of practice but practice examines the element of
truth lying in the theory. Therefore a stand co-ordination of theory and practice is very
essential to wake an MBA perfect. As a student of Business Management, I was required
to undergo 6-8 weeks practical training in any organization of repute connected with
Industry. I completed this practical training at “INDIA INFOLINE PVT. LTD.,
NOIDA”. This project report of the work consists of general study of the company and
the research conducted on “INVESTORS PERCEPTION TOWARDS
DERIVATIVES MARKET IN INDIA” INDIA INFOLINE LIMITED, NOIDA. Full
care has been taken to make this report error free yet the responses collected through
respondent cannot be 100% error free and I hope I shall be excused for that. Last but not
the least I hope this research work will prove to be of some help and it would applicable
to India Info line Limited.
TABLE OF CONTENTS
S.no. Title Page no.
4
Part-1
1 COMPANY PROFILE 8-20
Part-2
2 INTRODUCTION OF TOPIC 22-50
3 LITERATURE REVIEW 51-55
4 OBJECTIVES OF STUDY 55-56
5 RESEARCH METHODOLOGY 56-61
6 DATA ANALYSIS & INTERPRETATION 62-74
7 CONCLUSION 75-76
8 SUGGGESTIONS 76-77
9 LIMITATIONS OF THE STUDY 77-78
10 BIBLIOGRAPGHY 79-80
11 APPENDICES 81-83
LIST OF GRAPHS & CHATS:-S.no. Title Page no.
5
1 Gender 62
2 Age 63
3 Education 64
4 Occupation 65
5 Annual income 66
6 Participation in Derivative Market 67
7 Strategy Using in Derivative Market 68
8 Investor’s Expected Rate of Return 69
9 Satisfaction Levels in Derivative Market 70
10 Investor Prefer in derivative Market 71
11 Experience in Derivative Market 72
12 Investors Training in NSE, BSE for Derivative 73
13 Investor Investing in Derivative Market 74
6
PART 1Company Profile
INDIA INFOLINE PVT.LTD., NOIDA
COMPANY PROFILE:-
THE INDIA INFOLINE LIMITED
IIFL Holdings Limited (NSE: IIFL, BSE: IIFL) is the apex holding company of the entire
IIFL Group, promoted by first generation entrepreneurs. Our evolution from an
entrepreneurial start-up in 1995 to a leading financial services group in India is a story of
7
steady growth by adapting to the dynamic business environment, without losing focus on
our core domain of financial services.
IIFL Holdings Ltd, formerly known as India Infoline Limited, offers a gamut of services
including financing, wealth and asset management, broking, financial product
distribution, investment banking, institutional equities, realty and property advisory
services through its various subsidiaries.
IIFL Holdings with a consolidated net-worth of Rs.25,577 million as of financial year
ended March 31, 2015, has global presence with offices in London, New York, Houston,
Geneva, Hong Kong, Dubai, Singapore and Mauritius. Our well-entrenched network of
close to 2,500 business locations spread over 850+ towns and cities has given us the
ability to expand and reach out to different segments of the society. IIFL group has more
than 2.9 million satisfied customers across various business segments and is continuously
building on its strengths to deliver excellent service to its expanding customer base
Vision
To become the most respected company in the financial services space in India
8
Values
Values are IIFL are summarised in one acronym: GIFTS
Growth with focused team of dynamic professionals
Integrity in all aspects of business – no compromise in any situation
Transparency in what we do – and in how and why we do it
Service orientation is our core value, imbibed by all sales as well as support teams
Fairness in all our dealings – employees, customers, vendors and shareholders.
Business strategy
Steady growth by adapting to the changing environment, without losing the focus
on our core domain of financial services
De-risked business through multiple products and diversified revenue stream
Knowledge is the key to power superior financial decisions
Keep costs low and continuously strive for innovation
Customer strategy
Remain largely a retail focused organisation, driving stickiness through
knowledge and quality service
Cater to untapped areas in semi-urban and rural areas, which is relatively safe
from cut-throat competition
Target the micro, small and medium enterprises mushrooming across the country
through a cluster approach for lending business
Use wide multi-modal network serving as one-stop shop to customers
People strategy
9
Attract the best talent and driven people
Ensure conducive merit environment
Liberal ownership-sharing
OUR JOURNEY
A small group of professionals formed an Information Services Company
The company was formed in October 1995 with a vision to produce high
quality, unbiased, independent research on the Indian economy, business,
industries and corporates.
The company was originally incorporated as Probity Research and Services
Pvt.Ltd. The name of the company was later changed to India Infoline Ltd
In today’s world, brand is considered as the most valuable asset of an organisation. It
serves as the medium that connects product as well as service offerings to customers and
is an intangible voice that speaks volumes about the company.
10
At IIFL, we believe that a brand is the face of a company’s work culture. Think of it as a
something that introduces us to our customers and to the world. Our brand is our identity;
it narrates our story of success and serves as a sign of trust.
POSITIONING
The IIFL brand is associated with trust, knowledge and quality service. But more
importantly, the brand stands for timely assistance provided to the country’s under-
banked customers.
When we pioneered online trading in India with the launch of our brand 5 paisa, the tag
line was “It’s all about money, honey”. We then realigned our positioning from
“Knowledge is the Edge” to “When it’s about Money”
THE SIGNIFICANCE OF IIFL LOGO
IIFL logo
The IIFL Logo comprises of the nine triangles which form the Sri Yantra. In Hindu
Mythology, the nine interlocked triangles that surround and radiate from the centre
(bindu) symbolize the highest, the invisible and elusive centre from which the entire
cosmos expands.
11
Our brand represents a cosmos in itself, where two worlds meet. One, where we together
strive to grow and expand and the other, where we strive to make possibilities infinite for
our customers. It is the confluence of these two thoughts, represented by the age old
symbol of converging powers that stands as the face of our brand.
MANAGERIAL DEPTH
Our promoters individually are first-generation Indian entrepreneurs with meritorious
Academic backgrounds and impeccable professional careers.
Nirmal Jain, Chairman, is a rank holder Chartered Accountant, Cost Accountant and an
MBA from IIM Ahmedabad and Mr. R. Venkataraman, Managing Director, is an
Electronics Engineer from IIT Kharagpur and an MBA from IIM Bangalore.
The Promoters have built the business from scratch, without pedigree of a large family
business or inherited wealth and steered it towards a market leading position by dint of
hard work and enterprise.
IIFL Group has consistently attracted the best of the talent from across the financial
sector – private sector banks, foreign banks, public sector banks and established NBFCs.
The senior management team have years of experience and backgrounds similar to
promoters and leads competent teams. IIFL has uninterrupted history of profits and
dividends since listing. Shareholders’ wealth has grown at over 32% per annum since
listing in 2005 till March 31, 2015
PROFILE OF IIFL INVESTMENT SOLUTIONS
12
India Infoline has been founded with the aim of providing world class investing
experience to hitherto underserved investor community. India Infoline is currently
providing broking services on the NSE, BSE, derivative market and commodity
exchange. India Infoline allows individual investors too conveniently, comfortably and
cost-efficiently place trades online and offline. While offering the service they also give
the added assurance of 92 branch offices. The company, created to provide premium
service with reasonable commissions, currently maintains more than 25000 individual
accounts.
What company Do:-
Financing
Our NBFC is a diversified financing company, offering loans secured against collaterals
of home, property, gold, medical equipment, commercial vehicles, shares and other
securities
Wealth Management
One of the largest and fastest growing Wealth Management companies in India
with assets under advice, management and distribution of over Rs. 700 billion.
Asset Management
13
Our AMC is wholly owned subsidiary of IIFL Wealth and is the Investment manager of
IIFL Mutual Fund and rapidly growing Alternative Investment Funds.
Financial Products Distribution
IIFL is one of the largest distributors of financial products such as Life Insurance, Mutual
Funds, NCDs, Tax-free bonds, IPOs etc. through our wide distribution network and
business associates. Emerged as one of the largest broker for life insurance in the country.
Financial Advisory & Broking
One of the leading broking house with extensive presence all over the country providing
financial planning and broking services in equity, commodities and currency trading.
Institutional Equities & Investment Banking
Premier broker for FIIs, DIIs, financial institution, private equity funds and banks.
Investment Banking division leverages its distribution reach in capital markets with
strong institutional placement capabilities and a wide reach across investor segments
Housing Finance
The company is focussed on home loans and loans for residential project.
Realty & Property Advisory Services
Real estate services provider advising clients in transaction of commercial and residential
properties across the country. IIFL also provides advisory and funding services to real estate
developers.
14
CORPORATE GOVERNANCE
BOARD OF THE DIRECTORS:-
Mr. Nirmal Jain
Chairman, IIFL Holdings Limited
Mr. Nirmal Jain is the founder and Chairman of IIFL Holdings Limited. He is a PGDM
(Post Graduate Diploma in Management) from IIM (Indian Institute of Management)
Ahmedabad, a Chartered Accountant and a rank-holder Cost Accountant. His
professional track record is equally outstanding. He started his career in 1989 with
Hindustan Lever Limited, the Indian arm of Unilever. During his stint with Hindustan
Lever, he handled a variety of responsibilities, including export and trading in agro-
commodities. He contributed immensely towards the rapid and profitable growth of
Hindustan Lever's commodity export business, which was then the nation's as well as the
Company’s top priority.
He founded Probity Research and Services Pvt. Ltd. (later re-christened India Infoline) in
1995; perhaps the first independent equity research Company in India. His work set new
standards for equity research in India. Mr. Jain was one of the first entrepreneurs in India
to seize the internet opportunity, with the launch of www.indiainfoline.com in 1999.
Under his leadership, IIFL Holdings not only steered through the dotcom bust and one of
the worst stock market downtrends but also grew from strength to strength.
15
Mr.R.Venkataraman
Managing Director, IIFL Holdings Limited
Mr. R Venkataraman, Co-Promoter and Managing Director of IIFL Holdings Limited, is
a B.Tech (electronics and electrical communications engineering, IIT Kharagpur) and an
MBA (IIM Bangalore). He joined the IIFL Holdings Limited Board in July 1999. He
previously held senior managerial positions in ICICI Limited, including ICICI Securities
Limited, their investment banking joint venture with J P Morgan of US, BZW and Taib
Capital Corporation Limited. He was also the Assistant Vice President with G E Capital
Services India Limited in their private equity division, possessing a varied experience of
more than 19 years in the financial services sector
Mr.Arun Kumar Purwar
Independent Director of IIFL Holdings Limited since March 2008
Mr. Purwar was the Chairman of State Bank of India, the largest bank in the country from
November 2002 to May 2006 and held several important and critical positions like
Managing Director of State Bank of Patiala, Chief Executive Officer of the Tokyo
branch, covering almost the entire range of commercial banking operations in his
illustrious career at the bank from 1968 to 2006. He is currently the Chairman of
IndiaVenture Advisors Private Limited, the equity fund sponsored by the Piramal Group
and independent director in many listed companies in India including Engineers India
Limited, Reliance Communications Limited, among others.
Ms Geeta Mathur
Independent Director of IIFL Holdings Limited since September 2014
16
Geeta Mathur, a Chartered Accountant, specializes in the area of project, corporate and
structured finance, treasury, investor relations and strategic planning.
She started her career with ICICI, where she worked for over 10 years in the field of
project, corporate and structured finance as well represented ICICI on the Board of
reputed companies such as Eicher Motors, Siel Limited etc. She then worked in various
capacities in large organizations such as IBM and Emaar MGF across areas of Corporate
Finance, Treasury, Risk Management and Investor relations.
She is currently CFO of Helpage India, one of the largest and oldest NPO in India
working for the cause of the elderly.
Mr.ChandranRatnaswami
Non Executive Director of IIFL Holdings Limited since May 2012
Mr. Chandran Ratnaswami is a Managing Director of Hamblin Watsa Investment
Counsel Limited, a wholly-owned investment management company of Fairfax Financial
Holdings Limited, Canada. Mr. Ratnaswami serves on the Boards of ICICI Lombard
General Insurance Company Limited and Fairbridge Capital in India, Ridley Inc. in the
United States and Zoomermedia Limited in Toronto, Canada. He is also the Chairman of
the Board of Trustees of Lansing United Church in Toronto, Canada.
Products and services:
India Infoline customers have the advantage of trading in all the market segments
together in the same window, as they understand the need of transactions to be executed
with high speed and reduced time. At the same time, they have the advantage of having
all kind of insurance and investment advisory services for life insurance, general
17
insurance, mutual funds, and IPO’s also.
Key product offerings are as follows:-
Equity trading
Commodity trading NRI services
Mutual fund Life insurance
General insurance Depository services Portfolio tracker
Back office.
Mode of Operation in Commodities at IIFL:-
On line trading through the existing mode of connectivity available in the branch or
can be arranged immediately at client’s location after the MOU. To restore the
connectivity an alternative arrangement is always provided to ensure ongoing
uninterrupted trading.
All open contracts not intended for delivery and in non-deliverable positions are
automatically settled by the exchange on expiry.
All contracts materializing in to deliveries would be settled in the electronic mode in a
period of 2 to 7 days after the expiry or the exact settlement day/date as specified by the
exchange. Price quoted for the futures contracts would be ex-warehouse and exclusive of
sales tax.
Margin as specified by the concerned exchange for each traded commodity is required to
be paid as per day-to-day outstanding position of the contract to facilitate the trading.
Metals:-
Aluminum
Ingot,
18
Electrolytic Copper Cathode,
Gold,
Mild Steel Ingots,
Nickel Cathode,
Silver,
Sponge Iron
Zinc Ingot.
19
PART-2
20
INTRODUCTION OF DERIVATIVES A derivative security is a security whose value depends on the value of together more
basic underlying variable. These are also known as contingent claims. Derivatives
securities have been very successful in innovation in capital markets. The emergence of
the market for derivative products most notably 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. By their very nature,
financial markets are markets by a very high degree of volatility. Through the use of
derivative products, it is possible to partially or fully transfer price risks by locking – in
asset prices. As instruments of risk management these generally don’t influence the
fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative
products minimize the impact of fluctuations in asset prices on the profitability and cash-
flow situation of risk-averse investor. Derivatives are risk management instruments
which derives their value from an underlying asset. Underlying asset can be Bullion,
Index, Share, Currency, Bonds, Interest, etc.
SCOPE OF THE STUDY:
Options in the Indian context and the IIFL have been taken as representative sample for
the study. The study cannot be said as totally perfect, any alteration may come. The study
has only made humble attempt at evaluating Derivatives markets only in Indian context.
The study is not based on the International perspective of the Derivatives markets.
DERIVATIVES:
The emergence of the market for derivative products, most notably forwards, futures and
21
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. By their very
nature, the financial markets are marked by a very high degree of volatility. Through the
use of derivative products, it is possible to partially or fully transfer price risks by locking
–in asset prices. As instruments of risk management, these generally do not influence the
fluctuations underlying prices. However, by locking –in asset prices, derivative products
minimizes the impact of fluctuations in asset prices on the profitability and cash flow
situation of risk–averse investors.
DEFINITION:-
Understanding the word itself, Derivatives is a key to mastery of the topic. The word
originates in mathematics and refers to a variable, which has been derived from another
variable. For example, a measure of weight in pound could be derived from a measure of
weight in kilograms by multiplying by two.
In financial sense, these are contracts that derive their value from some underlying asset.
Without the underlying product and market it would have no independent existence.
Underlying asset can be a Stock, Bond, Currency, Index or a Commodity. Someone may
take an interest in the derivative products without having an interest in the underlying
product market, but the two are always related and may therefore interact with each other.
The term Derivative has been defined in Securities Contracts (Regulation) Act 1956, as:
A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument or contract for differences or any other form of security.
A contract, which derives its value from the prices, or index of prices, of underlying
22
securities.
IMPORTANCE OF DERIVATIVES:
Derivatives are becoming increasingly important in world markets as a tool for risk
management. Derivatives instruments can be used to minimize risk. Derivatives are used
to separate risks and transfer them to parties willing to bear these risks. The kind of
hedging that can be obtained by using derivatives is cheaper and more convenient than
what could be obtained by using cash instruments. It is so because, when we use
derivatives for hedging, actual delivery of the underlying asset is not at all essential for
settlement purposes.
Moreover, derivatives would not create any risk. They simply manipulate the risks and
transfer to those who are willing to bear these risks.
For example,
Mr. A owns a bike If he does not take insurance, he runs a big risk. Suppose he buys
insurance [a derivative instrument on the bike] he reduces his risk. Thus, having an
insurance policy reduces the risk of owing a bike. Similarly, hedging through derivatives
reduces the risk of owing a specified asset, which may be a share and currency etc.
23
RATIONALE BEHIND THE DEVELOPMENT OF
DERIVATIVE MARKET:-
Holding portfolio of securities is associated with the risk of the possibility that the
investor may realize his returns, which would be much lesser than what he expected to
get. There are various influences, which affect the returns.
1. Price or dividend (interest).
2. Sum are internal to the firm
like: Industry policy
Management capabilities
Consumer’s preference
Labor strike, etc.
These forces are to a large extent controllable and are termed as “Non-systematic
Risks”. An investor can easily manage such non- systematic risks by having a well-
diversified portfolio spread across the companies, industries and groups so that a loss in
one may easily be compensated with a gain in other.
There are other types of influences, which are external to the firm, cannot be controlled,
and they are termed as “systematic risks”. Those are
• Economic
• Political
• Sociological changes are sources of Systematic Risk
24
Their effect is to cause the prices of nearly all individual stocks to move together in
the same manner. We therefore quite often find stock prices falling from time to time in
spite of company’s earnings rising and vice –versa.Rational behind the development of
derivatives market is to manage this systematic risk, liquidity. Liquidity means, being
able to buy & sell relatively large amounts quickly wi In debt market, a much larger
portion of the total risk of securities is systematic. Debt instruments are also finite life
securities with limited marketability due to their small size relative to many common
stocks. These factors favor for the purpose of both portfolio hedging and speculation.
India has vibrant securities market with strong retail participation that has evolved over
the years. It was until recently a cash market with facility to carry forward positions in
actively traded “A” group scripts from one settlement to another by paying the required
margins and borrowing money and securities in a separate carry forward sessions held
for this purpose. However, a need was felt to introduce financial products like other
financial markets in the world.
CHARACTERISTICS OF DERIVATIVES:-
1. Their value is derived from an underlying instrument such as stock index,
currency, etc.
2. They are vehicles for transferring risk.
3. They are leveraged instruments.
25
MAJOR PLAYERS IN DERIVATIVE MARKET:-
There are three major players in the derivatives trading.
1. Hedgers
2. Speculators
3. Arbitrageurs
Hedgers: The party, which manages the risk, is known as “Hedger”. Hedgers seek to
protect themselves against price changes in a commodity in which they have an
interest.
Speculators: They are traders with a view and objective of making profits. They are
willing to take risks and they bet upon whether the markets would go up or come down.
Arbitrageurs: Risk less profit making is the prime goal of arbitrageurs. They could be
making money even with out putting their own money in, and such opportunities often
come up in the market but last for very short time frames. They are specialized in
making purchases and sales in different markets at the same time and profits by the
difference in prices between the two centers
26
TYPES OF DERIVATIVES:-
Most commonly used derivative contracts are:-
Forwards: A forward contract is a customized contract between two entities where
settlement takes place on a specific date in the futures at today’s pre-agreed price.
Forward contracts offer tremendous flexibility to the party’s to design the contract in
terms of the price, quantity, quality, delivery, time and place. Liquidity and default risk
are very high.
Futures: A futures contract is an agreement between two parties to buy or sell an asset
at a certain time in the future at a certain price. Futures contracts are special types of
forward contracts in the sense, that the former are standardized exchange traded
contracts.
Options: Options are two types - Calls and Puts. Calls give the buyer the right but not
the obligation to buy a given quantity of the underlying asset at a given price on or
before a given future date. Puts give the buyer the right but not the obligation to sell a
given quantity of the underlying asset at a given price on or before a given date.
Warrants: Longer – dated options are called warrants and are generally traded over –
the – counter. Options generally have life up to one year, the majority of options traded
on options exchanges having a maximum maturity of nine months.
LEAPS: The acronym LEAPS means Long Term Equity Anticipation Securities. These
are options having a maturity of up to three years.
27
Baskets: Basket options are options on portfolios of underlying assets. The underlying
asset is usually a moving average of a basket of assets. Equity index options are a form
of basket options
Swaps: Swaps are private agreements between two parties to exchange cash flows in
the future according to a pre-arranged formula. They can be regarded as portfolios of
forward contracts. The two commonly used swaps are: -
Interest rare swaps: These entail swapping only the interest related cash flows
between the parties in the same currency.
Currency swaps: These entail swapping both the principal and interest between the
parties, with the cash flows in one direction being in a different currency than those in
opposite direction.
RISKS INVOLVED IN DERIVATIVES:-
Derivatives are used to separate risks from traditional instruments and transfer these
risks to parties willing to bear these risks. The fundamental risks involved in derivative
business include
A. Credit Risk: This is the risk of failure of a counterpart to perform its obligation
as per the contract. Also known as default or counterparty risk, it differs with
different instruments.
B. Market Risk: Market risk is a risk of financial loss as a result of adverse
movements of prices of the underlying asset/instrument.
C. Liquidity Risk: The inability of a firm to arrange a transaction at prevailing
market prices is termed as liquidity risk. A firm faces two types of liquidity
risks:
28
D. Legal Risk: Derivatives cut across judicial boundaries, therefore the legal
Aspects associated with the deal should be looked into carefully.
DERIVATIVES IN INDIA:-
Indian capital markets hope derivatives will boost the nation’s economic prospects.
Fifty years ago, around the time India became independent men in Mumbai gambled on
the price of cotton in New York. They bet on the last one or two digits of the closing
price on the New York cotton exchange. If they guessed the last number, they got
Rs.7/- for every Rupee layout. If they matched the last two digits they got Rs.72/-
Gamblers preferred using the New York cotton price because the cotton market at home
was less liquid and could easily be manipulated.
Now, India is about to acquire own market for risk. The country, emerging from a long
history of stock market and foreign exchange controls, is one of the vast major
economies in Asia, to refashion its capital market to attract western investment. A
hybrid over the counter, derivatives market is expected to develop along side. Over the
last couple of years the National Stock Exchange has pushed derivatives trading, by
using fully automated screen based exchange, which was established by India's leading
institutional investors in 1994 in the wake of numerous financial & stock market
scandals.
29
Contract Periods:-
At any point of time there will be always be available nearly 3months contract periods
in Indian Markets.
These were
1) Near Month
2) Next Month
3) Far Month
For example in the month of September 2007 one can enter into September
futures contract or October futures contract or November futures contract. The last
Thursday of the month specified in the contract shall be the final settlement date for the
contract at both NSE as well as BSE; it is also known as Expiry Date.
Settlement:-
The settlement of all derivative contracts is in cash mode. There is daily as well as final
settlement. Outstanding positions of a contract can remain open till the last Thursday of
that month. As long as the position is open, the same will be marked to market at the
daily settlement price, the difference will be credited or debited accordingly and the
position shall be brought forward to the next day at the daily settlement price. Any
position which remains open at the end of the final settlement day (i.e. last Thursday)
shall be closed out by the exchange at the final settlement price which will be the
closing spot value of the underlying asset.
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Margin
There are two types of margins collected on the open position, viz., initial margin
which is collected upfront which is named as “SPAN MARGIN” and mark to market
margin, which is to be paid on next day. As per SEBI guidelines it is mandatory
for clients to give margins, failing in which the outstanding positions are required to be
closed out.
Forwards
Forwards are the simplest and basic form of derivative contracts. These are instruments
are basically used by traders/investors in order to hedge their future risks. It is an
agreement to buy/sell an asset at certain in future for a certain price. They are private
agreements mainly between the financial institutions or between the financial
institutions and corporate clients.
One of the parties in a forward contract assumes a long position i.e. agrees to buy the
underlying asset on a specified future date at a specified future price. The other party
assumes short position i.e. agrees to sell the asset on the same date at the same price.
This specified price referred to as the delivery price. This delivery price is choosen so
that the value of the forward contract is equal to zero for both the parties. In other
words, it costs nothing to the either party to hold the long/short position.A forward
contract is settled at maturity. The holder of the short position delivers the asset to the
holder of the long position in return for cash at the agreed upon rate. Therefore, a key
determinate of the value of the contract is the market price of the underlying asset. A
forward contract can therefore, assume a positive/negative value depending on the
movements of the price of the asset. For example, if the price of the asset rises sharply
31
after the two parties entered into the contract, the party holding the long position stands
to benefit, that is the value of the contract is positive for him. Conversely the value of
the contract becomes negative for the party holding the short position.
The concept of forward price is also important. The forward price for a certain contract
MEANIG OF FORWARDS
is defined as that delivery price which would make the value of the contract zero. To
explain further, the forward price and the delivery price are equal on the day that the
contract is entered into. Over the duration of the contract, the forward price is liable to
change while the delivery price remains the same.
Essential features of Forward Contracts:
A forward contract is a Bi-party contract, to be performed in the future, with the
terms decided today
Forward contracts offer tremendous flexibility to the parties to design the contract
in terms of the price, quantity, quality, delivery time and place
Forward contracts suffer from poor liquidity and default risk
Contract price is generally not available in public domain
On the expiration date the contract will settle by delivery of the asset
If the party wishes to reverse the contract, it is compulsorily to go to the same
counter party, which often results high prices
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Forward Trading in Securities:
The Securities Contract (amendment) Act of 1999 has allowed the trading in derivative
products in India. As a further step to widen and deepen the securities market the
government has notified that with effect from March 1st 2000 the ban on forward
trading in shares and securities is lifted to facilitate trading in forwards and futures.
It may be recalled that the ban on forward trading in securities was imposed in 1986 to
curb certain unhealthy trade practices and trends in the securities market. During the
past few years, thanks to the economic and financial reforms, there have been many
healthy developments in the securities markets.
The lifting of ban on forward deals in securities will help to develop index futures and
other types of derivatives and futures on stocks. This is a step in the right direction to
promote the sophisticated market segments as in the western countries.
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Meaning of Futures
FUTURES
The future contract is an agreement between two parties to buy or sell an asset at a
certain specified time in future for certain specified price. In this, it is similar to a
forward contract. A futures contract is a more organized form of a forward contract;
these are traded on organized exchanges. However, there are a number of differences
between forwards and futures. These relate to the contractual futures, the way the
markets are organized, profiles of gains and losses, kind of participants in the markets
and the ways they use the two instruments.
Futures contracts in physical commodities such as wheat, cotton, gold, silver, cattle,
etc. have existed for a long time. Futures in financial assets, currencies, and interest
bearing instruments like treasury bills and bonds and other innovations like futures
contracts in stock indexes are relatively new developments.
The futures market described as continuous auction markets and exchanges providing
the latest information about supply and demand with respect to individual commodities,
financial instruments and currencies, etc. Futures exchanges are where buyers and
sellers of an expanding list of commodities; financial instruments and currencies come
together to trade. Trading has also been initiated in options on futures contracts. Thus,
option buyers participate in futures markets with different risk. The option buyer knows
the exact risk, which is unknown to the futures trader.
FEATURES OF FUTURES CONTRACTS:
The principal features of the contract are as follows.
Organized Exchanges: Unlike forward contracts which are traded in an over- the-
counter market, futures are traded on organized exchanges with a designated physical
location where trading takes place. This provides a ready, liquid market which futures
can be bought and sold at any time like in a stock market.
Standardization: In the case of forward contracts the amount of commodities to be
34
delivered and the maturity date are negotiated between the buyer and seller and can be
Tailor made to buyer’s requirement. In a futures contract both these are standardized by
the exchange on which the contract is traded.
Clearing House: The exchange acts a clearing house to all contracts struck on the
trading floor. For instance a contract is struck between capital A and B. Upon entering
into the records of the exchange, this is immediately replaced by two contracts, one
between A and the clearing house and another between B and the clearing house. In
other words the exchange interposes itself in every contract and deal, where it is a
buyer to seller, and seller to buyer. The advantage of this is that A and B do not have to
undertake any exercise to investigate each other’s credit worthiness. It also guarantees
financial integrity of the market. This enforces the delivery for the delivery of contracts
held for until maturity and protects itself from default risk by imposing margin
requirements on traders and enforcing this through a system called marking – to –
market.
Actual delivery is rare:
In most of the forward contracts, the commodity is actually delivered by the seller and
is accepted by the buyer. Forward contracts are entered into for acquiring or disposing
of a commodity in the future for a gain at a price known today. In contrast to this, in
most futures markets, actual delivery takes place in less than one percent of the
contracts traded. Futures are used as a device to hedge against price risk and as a way
of betting against price movements rather than a means of physical acquisition of the
underlying asset. To achieve this most of the contracts entered into are nullified by the
matching contract in the opposite direction before maturity of the first.
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Margins:
In order to avoid unhealthy competition among clearing members in reducing margins
to attract customers, a mandatory minimum margins are obtained by the members from
the customers. Such a stop insures the market against serious liquidity crisis arising out
of possible defaults by the clearing members. The members
Collect margins from their clients as may be stipulated by the stock exchanges from
time to time and pass the margins to the clearing house on the net basis i.e. at a
stipulated percentage of the net purchase and sale position.
The stock exchange imposes margins as follows:
Initial margins on both the buyer as well as the seller.
The accounts of buyer and seller are marked to the market daily.
The concept of margin here is same as that of any other trade, i.e. to introduce a
financial stake of the client, to ensure performance of the contract and to cover day to
day adverse fluctuations in the prices of the securities.
The margin for future contracts has two components:
Initial margin
Marking to market
Initial margin: In futures contract both the buyer and seller are required to perform
the contract. Accordingly, both the buyers and the sellers are required to put in the
initial margins. The initial margin is also known as the “performance margin” and
usually 5% to 15% of the purchase price of the contract. The margin is set by the stock
exchange keeping in view the volume of business and size of transactions as well as
36
Operative risks of the market in general.
The concept being used by NSE to compute initial margin on the futures transactions is
called “value- at –Risk” (VAR) where as the options market had SPAN based margin
system”.
Marking-to-Market: Marking to market means, debiting or crediting the client’s
equity accounts with the losses/profits of the day, based on which margins are sought.
It is important to note that through marking to market process, the clearinghouse
substitutes each existing futures contract with a new contract that has the settlement
price or the base price. Base price shall be the previous day’s closing Nifty value.
Settlement price is the purchase price in the new contract for the next trading day.
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FUTURES TERMINOLOGY:Spot price:
The price at which an asset is traded in spot market.
Futures price:
The price at which the futures contract is traded in the futures market.
Expiry Date:
It is the date specified in the futures contract. This is the last day on which the contract
will be traded, at the end of which it will cease to exist.
Contract Size:
The amount of asset that has to be delivered under one contract. For instance contract
size on NSE futures market is 100 Nifties.
Basis/Spread:
In the context of financial futures basis can be defined as the futures price minus the
spot price. There will be a different basis for each delivery month for each contract. In
formal market, basis will be positive. This reflects that futures prices normally exceed
spot prices.
Cost of Carry :
The relationship between futures prices and spot prices can be summarized in terms of
what is known as the cost of carry. This measures the storage cost plus the interest that
is paid to finance the asset less the income earned on the asset.
Multiplier:
It is a pre-determined value, used to arrive at the contract size. It is the price per index
point.
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Tick Size:
It is the minimum price difference between two quotes of similar nature.
Open Interest:
Total outstanding long/short positions in the market in any specific point of time. As
total long positions for market would be equal to total short positions for calculation of
open Interest, only one side of the contract is counted.
Long position:
Outstanding/Unsettled purchase position at any point of time.
Short position:
Out standing/unsettled sale position at any time point of time.
Index Futures:
Stock Index futures are most popular financial futures, which have been used to hedge
or manage systematic risk by the investors of the stock market. They are called hedgers,
who own portfolio of securities and are exposed to systematic risk. Stock index is the
apt hedging asset since, the rise or fall due to systematic risk is accurately shown in the
stock index. Stock index futures contract is an agreement to buy or sell a specified
amount of an underlying stock traded on a regulated futures exchange for a specified
price at a specified time in future.
Stock index futures will require lower capital adequacy and margin requirement as
compared to margins on carry forward of individual scrip’s. The brokerage cost on
index futures will be much lower. Savings in cost is possible through reduced bid-ask
spreads where stocks are traded in packaged forms. The impact cost will be much lower
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in case of stock index futures as opposed to dealing in individual scraps. The market is
conditioned to think in terms of the index and therefore, would refer trade in stock
index futures. Further, the chances of manipulation are much lesser.
The stock index futures are expected to be extremely liquid, given the speculative
nature of our markets and overwhelming retail participation expected to be fairly high.
In the near future stock index futures will definitely see incredible volumes in India. It
will be a blockbuster product and is pitched to become the most liquid contract in the
world in terms of contracts traded. The advantage to the equity or cash market is in the
fact that they would become less volatile as most of the speculative activity would shift
to stock index futures. The stock index futures market should
ideally have more depth, volumes and act as a stabilizing factor for the cash market.
However, it is too early to base any conclusions on the volume or to form any firm
trend. The difference between stock index futures and most other financial futures
contracts is that settlement is made at the value of the index at maturity of the contract
Stock Futures
With the purchase of futures on a security, the holder essentially makes a legally
binding promise or obligation to buy the underlying security at same point in the future
(the expiration date of the contract). Security futures do not represent ownership in a
corporation and the holder is therefore not regarded as a shareholder.
A futures contract represents a promise to transact at same point in the future. In this
light, a promise to sell security is just as easy to make as a promise to buy security.
Selling security futures without previously owing them simply obligates the trader to
sell a certain amount of the underlying security at same point in the future. It can be
done just as easily as buying futures, which obligates the trader to buy a certain amount
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of the underlying security at some point in future.
OPTIONS
An option is a derivative instrument since its value is derived from the underlying asset.
It is essentially a right, but not an obligation to buy or sell an asset. Options can be a
call option (right to buy) or a put option (right to sell). An option is valuable if and only
if the prices are varying.
An option by definition has a fixed period of life, usually three to six months. An
option is a wasting asset in the sense that the value of an option diminishes as the date
of maturity approaches and on the date of maturity it is equal to zero.
An investor in options has four choices before him. Firstly, he can buy a call option
meaning a right to buy an asset after a certain period of time. Secondly, he can buy a
put option meaning a right to sell an asset after a certain period of time. Thirdly, he can
write a call option meaning he can sell the right to buy an asset to another investor.
Lastly, he can write a put option meaning he can sell a right to sell to another investor.
Out of the above four cases in the first two cases the investor has to pay an option
premium while in the last two cases the investors receives an option premium.
DEFINITION:-
An option is a derivative i.e. its value is derived from something else. In the case of the
stock option its value is based on the underlying stock (equity). In the case of the index
option, its value is based on the underlying index.
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Options clearing corporation
The Options Clearing Corporation (OCC) is guarantor of all exchange-traded options
once an option transaction has been completed. Once a seller has written an option and
a buyer has purchased that option, the OCC takes over it. It is the responsibility of the
OCC who over sees the obligations to fulfill the exercises. If I want to exercise an ACC
November 100-call option, I notify my broker. My broker notifies the OCC, the OCC
then randomly selects a brokerage firm, which is short of
One ACC stock. That brokerage firm then notifies one of its customers who have
written one ACC November 100 call option and exercises it. The brokerage firm
customer can be chosen in two ways. He can be chosen at random or FIFO basis.
Because, OCC has a certain risk that the seller of the option can’t fulfill the contract,
strict margin requirement are imposed on sellers. This margin requirements acts as a
performance Bond. It assures that OCC will get its money.
European options:
European options are the options that can be exercised only on the expiration date itself.
European options are easier to analyze than the American options and properties of an
American option are frequently deduced from those of its European counterpart.
In-the-money option:
An in-the-money option (ITM) is an option that would lead to a positive cash flow to
the holder if it were exercised immediately. A call option in the index is said to be in
the money when the current index stands at higher level that the strike price (i.e. spot
price > strike price). If the index is much higher than the strike price the call is said to
be deep in the money. In the case of a put option, the put is in the money if the index is
below the strike price.
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At-the-money option:
An At-the-money option (ATM) is an option that would lead to zero cash flow if it
exercised immediately. An option on the index is at the money when the current index
equals the strike price (I.e. spot price = strike price).
Out-of-the-money option:
An out of the money (OTM) option is an option that would lead to a negative cash flow
if it were exercised immediately. A call option on the index is out of the money when
the current index stands at a level, which is less than the strike price (i.e. spot price <
strike price). If the index is much lower than the strike price the call is said to be deep
OTM. In the case of a put, the put is OTM if the index is above the strike price.
Intrinsic value of an option:
It is one of the components of option premium. The intrinsic value of a call is the
amount the option is in the money, if it is in the money. If the call is out of the money,
its intrinsic value is Zero. For example X, take that ABC November-call option. If ABC
is trading at 102 and the call option is priced at 2, the intrinsic value is 2. If ABC
November-100 put is trading at 97 the intrinsic value of the put option is 3. If ABC
stock was trading at 99 an ABC November call would have no intrinsic value and
conversely if ABC stock was trading at 101 an ABC November-100 put option would
have no intrinsic value. An option must be in the money to have intrinsic value.
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Time value of an option:
The value of an option is the difference between its premium and its intrinsic value.
Both calls and puts have time value. An option that is OTM or ATM has only time
value. Usually, the maximum time value exists when the option is ATM. The longer the
time to expiration, the greater is an options time value. At expiration an option should
have no time value.
CHARACTERISTICS OF OPTIONS:
The following are the main characteristics of options:
1. Options holders do not receive any dividend or interest.
2. Options holders receive only capital gains.
3. Options holder can enjoy a tax advantage.
4. Options are traded at O.T.C and in all recognized stock exchanges.
5. Options holders can control their rights on the underlying asset.
6. Options create the possibility of gaining a windfall profit.
7. Options holders can enjoy a much wider risk-return combinations.
8. Options can reduce the total portfolio transaction costs.
9. Options enable the investors to gain a better return with a limited amount of
investment.
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Call Option:
An option that grants the buyer the right to purchase a desired instrument is called a
call option. A call option is contract that gives its owner the right but not the obligation,
to buy a specified asset at specified prices on or before a specified date.
An American call option can be exercised on or before the specified date. But, a
European option can be exercised on the specified date only.
The writer of the call option may not own the shares for which the call is written. If he
owns the shares it is a ‘Covered Call’ and if he des not owns the shares it is a ‘Naked
call’.
Strategies:
The following are the strategies adopted by the parties of a call option. Assuming that
brokerage, commission, margins, premium, transaction costs and taxes are ignored.
A call option buyer’s profit/loss can be defined as follows:
• At all points where spot price < exercise price, there will be a loss.
• At all points where spot prices > exercise price, there will be a profit.
• Call Option buyer’s losses are limited and profits are unlimited.
Conversely, the call option writer’s profits/loss will be as follows:
• At all points where spot prices < exercise price, there will be a profit
• At all points where spot prices > exercise price, there will be a loss
• Call Option writer’s profits are limited and losses are unlimited.
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Following is the table, which explains In the-money, Out-of-the-money and At-the-
money position for a Call option.
Exercise call option Spot price>Exercise price In-The-Money
Do not exercise Spot price<Exercise price Out-of the-Money
Exercise/Do not exercise Spot price=Exercise price At-The-Money
Payoff for buyer of call option: Long call
The profit/loss that the buyer makes on the option depends on the spot price of the
underlying asset. If upon expiration, the spot price exceeds the strike price, he makes a
profit. Higher the spot price more is the profit he makes. If the spot price of the
underlying asset is less than the strike price, he lets his option un-exercise. His loss in
Payoff for writer of put option: Short put
The figure below shows the profit/losses for the seller/writer of a three-month put
option. As the spot Nifty falls, the put option is In-The-Money and the writer starts
making losses. If upon expiration, Nifty closes below the strike of 4850, the buyer
would exercise his option on writer who would suffer losses to the extent of the
difference between the strike price and Nifty-close.
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Meaning of swap:-
SWAPS
Financial swaps are a funding technique, which permit a borrower to access one market
and then exchange the liability for another type of liability. Global financial markets
present borrowers and investors with a variety of financing and investment vehicles in
terms of currency and type of coupon – fixed or floating. It must be noted that the
swaps by themselves are not a funding instrument: They are devices to obtain the
desired form of financing indirectly. The borrower might otherwise as found this too
expensive or even inaccessible.
A common explanation for the popularity of swaps concerns the concept of comparative
advantage. The basis principle is that some companies have a comparative advantage
when borrowing in fixed markets while other companies have a comparative advantage
in floating markets. Swaps are used to transform the fixed rate loan into a floating rate
loan.
Types of swaps:-
All Swaps involves exchange of a series of payments between two parties. A swap
transaction usually involves an intermediary who is a large international financial
Institution. The two payment streams estimated to have identical present values at the
outset when discounted at the respective cost of funds in the relevant markets.
The most widely prevalent swaps are
1. Interest rate swaps.
2. Currency swaps.
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Interest rate swaps
Interest rate swaps, as a name suggest involves an exchange of different payment
streams, which are fixed and floating in nature. Such an exchange is referred to as an
exchange of borrowings.
For example, ‘B’ to pay the other party ‘A’ cash flows equal to interest at a pre-
determined fixed rate on a notional principal for a number of years. At the same time,
party ‘A’ agrees to pay ‘B’ cash flows equal to
interest at a floating rate on the same notional principal for the same period of time. The
currencies of the two sets of interest cash flows are the same. The life of the swap can
range from two years to fifty years.
Usually two non-financial companies do not get in touch with each other to directly
arrange a swap. They each deal with a financial intermediary such as a bank.
At any given point of time, the swaps spreads are determined by supply and demand. If
no participants in the swaps market want to receive fixed rather than floating, Swap
spreads tend to fall. If the reverse is true, the swaps spread tend to rise. In real life, it is
difficult to envisage a situation where two companies contact a financial institution at a
exactly same with a proposal to take opposite positions in the same swap
Currency Swaps
Currency swaps involves exchanging principal and fixed interest payments on a loan in
one currency for principal and fixed interest payments on an approximately equivalent
loan in another currency.
Example:
Suppose that a company ‘A’ and company ‘B’ are offered the fixed five years rates of
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interest in US $ and Sterling. Also suppose that sterling rates are higher than the dollar
rates. Also, company ‘A’ a better credit worthiness then company ‘B’ as it is offered
Better rates on both dollar and sterling. What is important to the trader who structures
the swap deal is that the difference in the rates offered to the companies on both
currencies is not same. Therefore, though company ‘A’ has a better deal. In both the
currency markets, company ‘B’ does enjoy a comparative lower disadvantage in one of
the markets. This creates an ideal situation for a currency swap. The deal could be
structured such that the company ‘B’ borrows in the market in which it has a lower
disadvantage and company ‘A’ in which it has a higher advantage. They swap to
achieve the desired currency to the benefit of all concerned.
A point to note is that the principal must be specified at the outset for each of the
currencies. The principal amounts are usually exchanged at the beginning and the end
of the life of the swap. They are chosen such that they are equal at the exchange rate at
the beginning of the life of the swap.
Like interest swaps, currency swaps are frequently warehoused by financial institutions
that carefully monitor their exposure in various currencies so that they can hedge
currency risk.
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Literature Review
O.P Gupta(2004) study suggest that the overall volatility of the stock market has
declined after the introduction of the index futures for both Nifty and Sensex
indices, However there is no conclusive evidence.
Mayhew (2000) made a more focused, though quite detailed, review of theoretical
and empirical work on the effect of introduction of derivative on the underlying
cash market, including PD. He points out that a simple way to analyze PD is to look
at the led-lag relationship between spot and derivative market of an asset. Kawaller,
Koch, and Koch (1987) took one-minute-interval spot and futures data for S&P-500
index for 1984-85 and found that the futures leads the spot market 14 by 20-45
minutes, with longer lead in the more active nearer term contracts, but the spot
market leads only by a maximum of two minutes. Realizing that asynchronous
trading could be showing the spot-market as lagging, many authors try to overcome
the problem. Harris (1989) examined the S&P-500 spot and futures data in five-
minute-intervals ten days around the US stock-market crash of 1987 and concluded
that, though the extreme movements in the cashfutures basis was caused due to
infrequent-trading, even after correcting for that, the futures market still led the cash
(or spot) market. Also using five-minute-interval data from April 1982 to March
1987, Stoll and Whaley (1990) overcame the infrequent-trading problem by making
the spot return pas through an ARMA filter; they also found that the futures market
leads by 5-10 minutes and sometimes cash market also leads, but the incidence of
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the latter effect is diminishing over time. Chan (1992) looked at the 20-share MMI
index, which is less subject to infrequent trading, and both MMI and S&P-500
futures contracts. He also found strong support for futures leading spot and weak
support for the reverse. In fact, he also observed that the index-futures led even the
most-active component-stocks that are a part of the index. He also highlighted that
the lead-lag relationship is not affected whether good or bad news is received or
whether market activity is high or low. In an insightful paper, Wahab and Lashgari
(1993) pointed out that earlier empirical works were misspecified, because they
failed to recognize that the spot and derivative prices were cointegrated.
Kamara, Miller, and Siegel (1992) have found no increase in spot-market-
volatility due to introduction of S&P-500 futures, Antoniou and Holmes (1995)
have argued that the introduction of stock-index futures increased spot-market
volatility in the short run, but not in the long run. Frino, Walter, and West (2000)
used high-frequency data for Share-Price-Index futures contract 15 on Sydney
Futures Exchange from August 1995 to December 1996 and analyzed the effect of
release of macroeconomic and stock-specific information on the PD process in the
spot and futures market. They found that the lead of the futures market strengthens
significantly around the time of release of macroeconomic information, which is
consistent with a scenario where investors with superior information on the broad
market are more likely to trade in the index futures. There was also some evidence
that the lead of the future market weakens and that of the equity-market strengthens
around the release of information specific to individual stocks, consistent with a
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scenario where investors with stock-specific knowledge prefer to trade in
underlying shares.
Smidt (1971) argued that, in addition to what Demsez (1968) had modelled, the
market-maker, in her quest to constantly bring her inventory up or down to a
desired level, would influence price, thus making it depart, during the course of a
day or sometimes even over a longer period, from the true value. But, it is Garman
(1976) who formally modelled the relation between dealer’s quote (or bid-ask
spread) and the inventory level. One of the model’s implications is that a dealer
having a sizeable long position in inventory would not go for addition unless there
is a drastic price reduction. Models by Stoll (1978) and Amihud and Mendelson
(1980) reflect the intuition of the Garman model.
Kenourgios (2004) analyzes the relative movements in Greece’s FTSE/ASE-20
index and the three-month futures on it and finds two-way causality. A survey by
Lien and Zhang (2008) argues that, while there is clear evidence for the PD role of
futures market in emerging markets, its price-stabilizing role cannot be established
unequivocally. Schlusche (2009) analyzes the German blue-chip index, DAX, and,
using Schwarz and Szakmary (1994) procedure, concludes that futures market is the
most significant contributor to the PD process; he also highlights that, instead of
liquidity, it is volatility that is the key for the PD leadership
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Tsetsekos and Varangis (2000) conducted a survey among almost all the
derivative exchanges that were in operation in 1996: 75 in all. They made some
important observations. As against the traditional approach of starting with
derivatives on agricultural commodities, emerging markets have begun their innings
with index-based and interest-rate-based derivatives. They also find that emerging
markets introduce index derivatives more quickly than do their industrial
counterparts. Most exchanges reported using the open-outcry system, though there
is a discernible shift towards electronic-trading, which is the choice for the more
recent entrants. Two-thirds of the exchanges had their own in-house clearing
facility, but a recent tendency has been towards a common clearing for a group of
exchanges; besides, most were self-regulating bodies owned by their members.
Using “changes in consumer prices, prime interest rates, government bond yields,
industrial production, growth in real gross national product (GNP), the level of
GNP, and the share of investments in GNP” as economic proxies and “stock -
market turnover and capitalization, the variance in stock -market capitalization, the
value of stocks traded, the volatility in value traded, and the number of listed
companies 17 in the stock exchange” as capital-market-condition proxies, they did
not find any statistically significant variable among these to make a country or
market ‘derivative-exchange-ready’.
Treviño (2005) analyzed 1999-2005 data for 83 derivative exchanges in 58
emerging-markets and, based on volume of contracts, inferred from the Hirschman-
Herfindahl Index that the smaller exchanges have increased their market-share from
9% to 37% during this period. They also observed that most of the new-born
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derivative exchanges have focused on financial derivatives with or without
commodity derivatives while the older one started with the latter type; this is partly
because financials attract higher liquidity than commodities. They also point out
that, in order to separate trading-rights from membership-rights, so s to allow
outside ownership of bourses, derivative exchanges have undergone
demutualization. They also discovered that interest-rate derivatives commanded the
highest dollar-volume in both exchanges and over the counter (OTC) market,
followed by equity-linked ones in the exchanges and foreign-exchange-based ones
in the OTC.
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OBJECTIVES OF THE STUDY
To understand the concept of the Financial Derivatives such as Forwards,
Futures, Options and Swaps
To know the participation of Investors in Financial Derivative
Markets
To know the Strategy used by Investors While Trading in
derivatives market
To know the Expected return by Investors in Financial Derivatives Market
To study the Investors Preference for selecting types of Derivatives for
Investment
To know the Investment Experience of Investors in Derivative Market
To know the Investors having any Training in Derivatives Market from
NSE, BSE or any Broking firm before trading
To know the Investors preference of interest in kinds of Derivatives for
Investment
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RESEARCH METHODOLOGY
Achieving accuracy in any research requires a deep study regarding the subject. The
prime objective of this research is to know the awareness regarding mutual fund
among earning people.
RSEARCH DESIGN:-
DESCRIPTIVE RESEARCH & CAUSAL RESEARCH DESIGN
Descriptive Research:-
Descriptive research is a study designed to depict the participants in an accurate
way. More simply put, descriptive research is all about describing people who take
part in the study.
There are three ways a researcher can go about doing a descriptive research
project, and they are:
Observational, defined as a method of viewing and recording the
participants
Case study, defined as an in-depth study of an individual or group of
individuals
Survey, defined as a brief interview or discussion with an individual about a
specific topic
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Causal Research Design:-
Causal research, as the name specifies, tried to determine the cause underlying a
given behaviour. It finds the cause and effect relationship between variables. It
seeks to determine how the dependent variable changes with variations in the
independent variable.
For example, a marketer may want to determine the cause of dip in sales. He would
test the sales against various parameters like selling price, competition, geography
etc.
The results obtained may not be very straight forward because, more often than not,
the variability will be a factor of more than one variable. Therefore , while varying
one variable, the other variables need to be held constant. This type of research can
take two forms:
Experimental – The research performs structured experiments to vary one variable
and find the effect on the behaviour/end result
Simulation based – This uses mathematical formulae to simulate real life
scenarios.
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SAMPLING: - Convenience sampling
Convenience sampling, as the name implies is a specific type of non-
probability sampling method that relies on data collection from
population members who are conveniently available to participate in
study.
Convenience sampling is a type of sampling where the first available
primary data source will be used for the research without additional
requirements. In other words, this sampling method involves getting
participants wherever you can find them and typically wherever is
convenient. In convenience sampling no inclusion criteria identified
prior to selection of subjects. All subjects are invited to participate
SAMPLE SIZE : - “50 UNIT”
Sample size is an important concept in statistics, and refers to the
number of individual pieces of data collected in a survey. A survey or
statistic's sample size is important in determining the accuracy and
reliability of a survey's findings.
In 50 Respondent are Investor in IIFL Clients in Noida
58
DATA COLLECTION METHOD
Primary data
Secondary data
PRIMARY DATA:-
Data used in research originally obtained through the direct efforts of the researcher
through surveys, interviews and direct observation.
SECONDARY DATA:-
Secondary data is the data that have been already collected by and readily available
from other sources. Such data are cheaper and more quickly obtainable than the
primary data and also may be available when primary data can not be obtained at
all.
59
TOOLS OF THE COLLECTION OF DATA
Primary data was collected through Questionnaire where
Respondent give there valuable suggestions and feedback
Secondary data was collected through internet website of IIFL
Company and other relevant websites.
Journals and Magazines of the Company which are issued
Weekly, Fortnight and Monthly.
60
DATA ANALYSIS & INTERPRETATION
Q.1) Gender
41
9
Gender
MaleFemale
INTERPRETATION
Above Pie Chart Shows that:-
82% Respondents are male
18% Respondents are female
61
Q.2) Age
20
15
10
5
Age
20-3030-4040-5050 above
INTERPRETATION
Above Pie Chart Shows that:-
40% Investors are 20-30 Age groups
30% Investors are 30-40 Age groups
20% Investors are 40-50 Age groups
10% Investors are 50 and above Age groups
62
Q.3 Education
6
22
22
EDUCATION
10th12thGraduationPG & Above
INTERPRETATION
Above Pie Chart Shows that:-
0% Investors are 10th Qualified
20% Investors are 12th Qualified
44% Investors are Graduates Qualified
44% Investors are PG & Above Qualified
63
Q.4 Occupation
7
1816
9
OCCUPATION
ServiceBusinessProfessionAny Other
INTERPRETATION
Above Pie Chart Shows that:-
7% Investors are belongs to service Sector.
36% Investors are belongs to Business Sector.
32% Investors are belongs to Profession Sector.
18% Investors are belongs to Any Other Sector.
64
Q.5 Annual Income.
15
17
11
7
Annual Income
Upto 3 lacs3-6 lacs6-8 lacs8 above
INTERPRETATION
Above Pie Chart Shows that:-
30% Investors Annual Income is Upto 3 Lakhs
34% Investors Annual Income is 3-6 Lakhs
22% Investors Annual Income is 6-8 Lakhs
14% Investors Annual Income is 8 & Above Lakhs
65
Q.6 Participation in Derivative market as:-
14
16
6
14
Participation in Derivative maket as
HedgerSpeculatorArbitrageurOthers
INTERPRETATION
Above Pie Chart Shows that:-
28% Investors are Participates as Hedger
32% Investors are Participates as Speculator
12% Investors are Participates as Arbitrageur
28% Investors are Participates as Other
66
Q.7 Using Strategy in Derivative market:-
2426
Using strategy in Derivative market
YesNo
INTERPRETATION
Above Pie Chart Shows that:-
48% Investors are using Strategy in Derivative Market
52% Investors are not using Strategy in Derivative Market
67
Q.8 Investor’s expected rate of return in derivative market:-
12
8
8
22
Expected Investor's rate of return in deriv-ative market
Don't tradeLess than 5%5-10% More than 10%
INTERPRETATION
Above Pie Chart Shows that:-
24% Investors are Don’t Trade
16% Investors are Expected rate of return less than 5%
16% Investors are Expected rate of return less than 5-10%
44%Investors are Expected rate of return more than 10%
68
Q.9 Satisfaction level in Derivative market:-
6
19
6
19
Satisfaction level in derivative market
Do not tradeAgreeDisagreeNeutral
INTERPRETATION
Above Pie Chart Shows that:-
12% Investors Don’t Satisfy in Derivative Market.
38% Investors Satisfaction level in Derivative Market as Agree.
12% Investors Satisfaction level in Derivative Market as
Disagree.
38% Investors Satisfaction level in Derivative Market as Neutral.
69
Q.10 Investors prefer investment in Derivative market
12
16
12
10
Investors prefer in Derivative
ForwardFutureOptionSwap
INTERPRETATION
Above Pie Chart Shows that:-
24% Investors prefers investment in Forwards.
32% Investors prefers investment in Futures.
24% Investors prefers investment in Option.
20% Investors prefers investment in Swap
70
Q.11 Experience in Derivative market
4
1812
6
Experience in Derivative maket
0 to 11 to 33 to 6More than 6
INTERPRETATION
Above Pie Chart Shows that:-
8% Investors have Experience in Derivative market approx 0-1
year.
36%% Investors have Experience in Derivative market approx 1-
3 years.
24%% Investors have Experience in Derivative market approx 3-
6 years.
12%% Investors have Experience in Derivative market approx
more than years.
71
Q.12 Training in NSE, BSE for Derivative Market:-
23
27
Training in NSE, BSE for Derivative Market
YesNo
INTERPRETATION
Above Pie Chart Shows that:-
46% Investors got Training in NSE, BSE for Derivative Market.
54% Investors got Training in NSE, BSE for Derivative Market.
72
Q.13 Investors investing in Derivative Market:-
316
7
6
Investor Investing in Derivative Market
EquityCurrencyCommodityAny Other
INTERPRETATION
Above Pie Chart Shows that:-
62% Investors in invest Equity Market in Derivative.
12% Investors invest in Currency Market in Derivative.
14% Investors invest in Commodity Market in Derivative.
12% Investors invest in Any Other Market in Derivative.
73
CONCLUSION
Derivatives have existed and evolved over a long time, with roots in
commodities market. In the recent years advances in financial markets and
the technology have made derivatives easy for the investors.
Derivatives market in India is growing rapidly unlike equity markets.
Trading in derivatives require more than average understanding of finance.
Being new to markets maximum number of investors have not yet
understood the full implications of the trading in derivatives. SEBI should
take actions to create awareness in investors about the derivative market.
Introduction of derivatives implies better risk management. These markets
can give greater depth, stability and liquidity to Indian capital markets.
Successful risk management with derivatives requires a thorough
understanding of principles that govern the pricing of financial derivatives.
In order to increase the derivatives market in India SEBI should revise some
of their regulation like contract size, participation of FII in the derivative
market. Contract size should be minimized because small investor cannot
afford this much of huge premiums.
In cash market the profit/loss is limited but where in F& O an investor can
enjoy unlimited profits/loss.
74
At present scenario the Derivatives market is increased to a great position.
Its daily turnover teaches to the equal stage of cash market.
The derivatives are mainly used for hedging purpose.
In cash market the investor has to pay the total money, but in derivatives the
investor has to pay premiums or margins, which are some percentage of
total one.
In derivative segment the profit/loss of the option holder/option writer is
purely depended on the fluctuations of the underlying asset.
75
RECOMMENDATIONS TO INVESTORS
The investors can minimize risk by investing in derivatives. The use of
derivative equips the investor to face the risk, which is uncertain. Though the
use of derivatives does not completely eliminate the risk, but it certainly lessens
the risk.
It is advisable to the investor to invest in the derivatives market because of the
greater amount of liquidity offered by the financial derivatives and the lower
transactions costs associated with the trading of financial derivatives.
The derivatives products give the investor an option or choice whether to
exercise the contract or not. Options give the choice to the investor to either
exercise his right or not. If on expiry date the investor finds that the underlying
asset in the option contract is traded at a less price in the stock market then, he
has the full liberty to get out of the option contract and go ahead and buy the
asset from the stock market. So in case of high uncertainty the investor can go
for options.
However, these instruments act as a powerful instrument for knowledgeable
traders to expose them to the properly calculated and well understood risks in
pursuit of reward i.e. profit.
76
LIMITATIONS:-
The study does not take any Nifty Index Futures and Options and International
Markets into the consideration.
This is a study conducted within a period of 45 days.
During this limited period of study, the study may not be a detailed, Full –
fledged and utilitarian one in all aspects.
The study contains some assumptions based on the demands of the analysis.
The study does not provide any predictions or forecast of the selected scripts.
The study was conducted in Noida only.
As the time was limited, study was confined to conceptual understanding of
Derivatives market in India
77
BIBLIOGRAPGHY:-
WEBSITES:-
www.indiaifoline.com
www.nseindia.org
www.moneycontrol.com
www.bseindia.com
www.unicon.com
www.sebi.gov.in
ARTICLES :-
Gupta, OP (2002): “Effect of Introduction of Index Futures on Stock Market
Volatility: The Indian Evidence”, Paper Presented at the Sixth Capital Market
Conference of UTI Institute of Capital Markets, Mumbai, India.
Kamara, A, T Miller, and A Siegel (1992), “The Effects of Futures Trading on the
Stability of the S&P 500 Returns”, Journal of Futures Markets, Vol. 12,
Kenourgios, Dimitris F (2004), “Price Discovery in the Athens Derivatives
Exchange: Evidence for the FTSE/ASE-20 Futures Market”, Economic and
Business Review, Vol. 6,
Mayhew, Stewart (2000): “The Impact of Derivatives on Cash Markets: What
Have We Learned?”, University of Georgia Working Paper, 27 October 1999,
Revised 3 February 2000
78
(http://media.terry.uga.edu/documents/finance/impact.pdf, Accessed 28 July
2013)
Smidt, S (1971): “Which Road to an Efficient Stock Market: Free Competition or
Regulated Monopoly?” Financial Analysts Journal, Vol 27-18-20
Treviño, Lourdes (2005): “Development and Volume Growth of Organized
Derivatives Trade in Emerging Markets”, Ensayos, Vol 24-2
Tsetsekos, George and Panos Varangis (2000): “Lessons in Structuring
Derivatives Exchanges”, World Bank Research Observer, Vol 15-1: 85-98.
79
APPENDICES :-
-: QUESTINNAIRE FOR STUDY ON DERIVATIVES:-
Dear Respondents,
This is study for investor’s preferences on Derivatives in IIFL.We request you to kindly
fill the information and the information provided by you will be used only for the study
purpose.
Name of the Investor. (Please enter your name)
1. Gender. Male ( ) Female ( )
2. Age (in years)
(i) 20-30 ( ) (ii) 30-40 ( ) (iii) 40-50 ( )
(iv)Above 50 ( )
3. Highest Education. s(Please √ appropriate box)
(i) 10th ( ) (ii) 12th ( ) (iii) Graduation ( )
(iv) PG & above ( )
4. Please enter the Occupation details.
(i)Service ( ) (ii) Business ( ) (iii) Professional ( )
(iv) Any Other ( )
5. What is your Income? (Per Annum)
(i)Up to 3 lakhs ( ) (ii) 3-6 lakhs ( ) (iii)6-8 lakhs ( )
(iv) Above 8 lakhs( )
80
6. You like to participate in Derivative market as.
(i) Hedger ( ) (ii) Speculator ( ) (iii) Arbitrageur ( )
(iv)Others ( )
7. Do you use any strategies while trading in Derivatives?
(i) Yes ( ) (ii) No ( )
8. What is the rate of return expected by you from derivative market?
(i) Don’t trade ( ) ii) Less than 5%( ) (iii) 5%-10% ( ) (iv) More than 10% ( )
9. What kind of Derivatives investment would you like in?
(i) Forwards ( ) (ii) Futures ( ) (iii) Options ( )
(iv) Swaps ( )
10. Experience in Derivatives Market (please select only one which is applicable)
(i) 0-1 Year ( ) (ii) 1-3 Years ( ) (iii) 3-6 Years ( )
(iv) Above 6 Years ( )
11. Have you undergone any training in derivatives from NSE, BSE or Broking
Firms before starting trading in Derivatives Market?
(i)Yes ( ) (ii) No ( )
12. Which Derivatives Markets you like to invest in? (Please tick all applicable
below)
(i) Equity ( ) (ii) Currency ( ) (iii) Commodity ( ) (iv) Any other ( )
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Any comments, suggestions and feedback with regard to derivatives segment in
India and for its improvement further.
82
