A Study On Financial Derivatives (Futures & Options)

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A STUDY ON FINANCIAL DERIVATIVES

(FUTURES & OPTIONS)
Under the Esteemed guidance of
Lecturer of Business Management

Project Report submitted in partial fulfillment for the award of Degree of
Master of Business Administration
DECLARATION
I hereby declare that this project titled A STUDY ON FINANCIAL

DERIVATIVES (FUTURES & OPTIONS) submitted by me to the
department of Business Management, XXXX, is a bonafide work undertaken
by me and it is not submitted to any other university or institution for the
award of any degree /certificate or published any time before.
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ABSTRACT
The emergence of the market for derivatives products, most notably
forwards, futures and options, can be tracked back to the willingness of riskaverse economic agents to guard themselves against uncertainties arising out
of fluctuations in asset prices. Derivatives are risk management instruments,
which derive their value from an underlying asset. The following are three
broad categories of participants in the derivatives market Hedgers,
Speculators and Arbitragers. Prices in an organized derivatives market
reflect the perception of market participants about the future and lead the
price of underlying to the perceived future level. In recent times the
Derivative markets have gained importance in terms of their vital role in the
economy. The increasing investments in stocks (domestic as well as
overseas) have attracted my interest in this area. Numerous studies on the
effects of futures and options listing on the underlying cash market volatility
have been done in the developed markets. The derivative market is newly
started in India and it is not known by every investor, so SEBI has to take
steps to create awareness among the investors about the derivative segment.
In cash market the profit/loss of the investor depends on the market price of
the underlying asset. The investor may incur huge profit or he may incur
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huge loss. But in derivatives segment the investor enjoys huge profits with
limited downside. Derivatives are mostly used for hedging purpose. In order
to increase the derivatives market in India, SEBI should revise some of their
regulations like contract size, participation of FII in the derivatives market.
In a nutshell the study throws a light on the derivatives market.
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ACKNOWLEDGEMENT
With the deep sense of gratitude, I wish to acknowledge the support and help
extended by all the people, in successful completion of this project work.
I express my gratitude to our Principal XXX for his consistent support, Head
of the Department XXX for his encouragement.
I would like to thank all
the faculty members who have been a strong source of inspiration through
out the project directly or indirectly.
XXXX
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TABLE OF CONTENTS
CONTENTS
PAGE NUMBERS
List of tables
List of charts and figures
I
II
Chapter 1:
Introduction
Need of the study
Objectives
Scope & Limitations
Research methodology
1
2
3
4
5
Chapter 2:
Literature review
Chapter 3:
Derivatives
12
Chapter 4:
Data analysis & Interpretations
49
Chapter 5:
Recommendations and suggestions
Conclusions
77
79
Chapter 6:
Bibliography
81
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LIST OF GRAPHS
GRAPH
NO.
Graph.1
CONTENTS
Graph showing the price movements of

ICICI
Futures
Graph.2
Graph showing the price movements of ICICI
Spot & Futures
Graph.3
Graph showing the price movements of SBI
Futures
Graph.4
Graph showing the price movements of SBI
Spot & Futures
Graph 5
Graph showing the price movements of YES
BANK Futures
Graph 6
Graph the price movements of YES BANK
Spot & Futures
PAGE
NUMBERS
60
66
68
74
76
83
LIST OF TABLES
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TABLE NUMBER
CONTENT
Table-1
Table showing the market and

future prices of ICICI bank
Table showing the call prices
of ICICI bank
Table showing the put prices of
ICICI bank
future prices of SBI
of
SBI
SBI
future prices of YES bank
of YES bank
YES bank
Table-2
Table-3
Table -4
Table- 5
Table- 6
Table -7
Table- 8
Table -9
PAGE
NUMBER
59
62
63
64
70
72
75
78
81
II
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INTRODUCTION:-
The emergence of the market for derivatives products, most notably

forwards, futures and options, can be tracked 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
in the underlying asset prices. However, by locking-in asset prices, derivative
product minimizes the impact of fluctuations in asset prices on the profitability and
cash flow situation of risk-averse investors.
Derivatives are risk management instruments, which derive their value
from an underlying asset. The underlying asset can be bullion, index, share, bonds,
currency, interest, etc.. Banks, Securities firms, companies and investors to hedge
risks, to gain access to cheaper money and to make profit, use derivatives.
Derivatives are likely to grow even at a faster rate in future.
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NEED FOR STUDY:

In recent times the Derivative markets have gained importance in terms of
their vital role in the economy. The increasing investments in derivatives
(domestic as well as overseas) have attracted my interest in this area.
Through the use of derivative products, it is possible to partially or fully
transfer price risks by locking-in asset prices. As the volume of trading is
tremendously increasing in derivatives market, this analysis will be of
immense help to the investors.
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OBJECTIVES OF THE STUDY:
To analyze the operations of futures and options.
To find the profit/loss position of futures buyer and seller and also the
option writer and option holder.
To study about risk management with the help of derivatives.
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SCOPE OF THE STUDY:

The study is limited to Derivatives with special reference to futures and
option in the Indian context and the Inter-Connected Stock Exchange has been
taken as a representative sample for the study. The study cant be said as totally
perfect. Any alteration may come. The study has only made a humble attempt at
evaluation derivatives market only in India context. The study is not based on the
international perspective of derivatives markets, which exists in NASDAQ, CBOT
etc.
LIMITATIONS OF THE STUDY:

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The following are the limitation of this study.
The scrip chosen for analysis is ICICI BANK, SBI & YES BANK
and the contract taken is January 2008 ending one month contract.
The data collected is completely restricted to ICICI BANK, SBI &

YES BANK of January 2008; hence this analysis cannot be taken universal.
RESEARCH METHODOLOGY:
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Data has been collected in two ways. These are:

Secondary Method:
Various portals,
www.nseindia.com
Financial news papers, Economics times.
BOOKS :-
Derivatives Dealers Module Work Book - NCFM

(October 2005)
Gordon and Natarajan, (2006) Financial Markets and
Services (third edition) Himalaya publishers
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LITERATURE REVIEW
Behaviour of Stock Market Volatility after Derivatives
Golaka C Nath , Research Paper (NSE)
Financial market liberalization since early 1990s has brought about major
changes in the
financial markets in India. The creation and empowerment of Securities and
Exchange
Board of India (SEBI) has helped in providing higher level accountability in
the market.
New institutions like National Stock Exchange of India (NSEIL), National
Securities
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Clearing Corporation (NSCCL), National Securities Depository (NSDL)

have been the
change agents and helped cleaning the system and provided safety to
investing public at
large. With modern technology in hand, these institutions did set
benchmarks and standards for others to follow. Microstructure changes
brought about reduction in transaction cost that helped investors to lock in a
deal faster and cheaper.
One decade of reforms saw implementation of policies that have improved
transparency in the system, provided for cheaper mode of information
dissemination without much time delay, better corporate governance, etc.
The capital market witnessed a major transformation and structural change
during the period. The reforms process have helped to improve efficiency in
information dissemination, enhancing transparency, prohibiting unfair trade
practices like insider trading and price rigging. Introduction of derivatives in
Indian capital market was initiated by the Government through L C Gupta
Committee report. The L.C. Gupta Committee on Derivatives had
recommended in December 1997 the introduction of stock index futures in
the first place to be followed by other products once the market matures. The
preparation of regulatory framework for the operations of the index futures
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contracts took some more time and finally futures on benchmark indices
were introduced in June 2000 followed by options on indices in June 2001
followed by options on individual stocks in July 2001 and finally followed
by futures on individual stocks in November 2001.
Do Futures and Options trading increase stock market volatility?

Dr. Premalata Shenbagaraman, Research Paper (NSE)
Numerous studies on the effects of futures and options listing on the underlying
cash market volatility have been done in the developed markets. The empirical
evidence is mixed and most suggest that the introduction of derivatives do not
destabilize the underlying market. The studies also show that the introduction of
derivative contracts improves liquidity and reduces informational asymmetries in
the market. In the late nineties, many emerging and transition economies have
introduced derivative contracts, raising interesting issues unique to these markets.
Emerging stock markets operate in very different economic, political,
technological andsocial environments than markets in developed countries like
the USA or the UK. This paper explores the impact of the introduction of
derivative trading on cash market volatility using data on stock index futures and
options contracts traded on the S & P CNX Nifty (India). The results suggest that
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futures and options trading have not led to a change in the volatility of the
underlying stock index, but the nature of volatility seems to have changed postfutures. We also examine whether greater futures trading activity (volume and
open interest) is associated with greater spot market volatility. We find no
evidence of any link between trading activity variables in the futures market and
spot market volatility. The results of this study are especially important to stock
exchange officials and regulators in designing trading mechanisms and contract
specifications for derivative contracts, thereby enhancing their value as risk
management tools
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DERIVATIVES
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DERIVATIVES:The emergence of the market for derivatives products, most notably forwards,
futures and options, can be tracked 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 in the
underlying asset prices. However, by locking-in asset prices, derivative product
minimizes the impact of fluctuations in asset prices on the profitability and cash
flow situation of risk-averse investors.
Derivatives are risk management instruments, which derive their value
from an underlying asset. The underlying asset can be bullion, index, share, bonds,
currency, interest, etc.. Banks, Securities firms, companies and investors to hedge
risks, to gain access to cheaper money and to make profit, use derivatives.
Derivatives are likely to grow even at a faster rate in future.
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DEFINITION
Derivative is a product whose value is derived from the value of an underlying
asset in a contractual manner. The underlying asset can be equity, forex,
commodity or any other asset.
1)
Securities Contracts (Regulation)Act, 1956 (SCR Act) defines

derivative to secured or unsecured, risk instrument or contract for differences or
any other form of security.
2)
A contract which derives its value from the prices, or index of

prices, of underlying securities.
Emergence of financial derivative products
Derivative products initially emerged as hedging devices against
fluctuations in commodity prices, and commodity-linked derivatives remained the

sole form of such products for almost three hundred years. Financial derivatives came
into spotlight in the post-1970 period due to growing instability in the financial
markets. However, since their emergence, these products have become very popular
and by 1990s, they accounted for about two-thirds of total transactions in derivative
products. In recent years, the market for financial derivatives has grown tremendously
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in terms of variety of instruments available, their complexity and also turnover. In the
class of equity derivatives the world over, futures and options on stock indices have
gained more popularity than on individual stocks, especially among institutional
investors, who are major users of index-linked derivatives. Even small investors find
these useful due to high correlation of the popular indexes with various portfolios and
ease of use. The lower costs associated with index derivatives visavis derivative
products based on individual securities is another reason for their growing use.
PARTICIPANTS:
The following three broad categories of participants in the derivatives market.
HEDGERS:
Hedgers face risk associated with the price of an asset. They use futures or
options markets to reduce or eliminate this risk.
SPECULATORS:
Speculators wish to bet on future movements in the price of an asset. Futures
and options contracts can give them an extra leverage; that is, they can increase
both the potential gains and potential losses in a speculative venture.
ARBITRAGERS:
Arbitrageurs are in business to take of a discrepancy between prices in two
different markets, if, for, example, they see the futures price of an asset getting out
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of line with the cash price, they will take offsetting position in the two markets to
lock in a profit.
FUNCTION OF DERIVATIVES MARKETS:

The following are the various functions that are performed by the derivatives
markets. They are:
Prices in an organized derivatives market reflect the perception
of market participants about the future and lead the price of underlying to the
perceived future level.
Derivatives market helps to transfer risks from those who have
them but may not like them to those who have an appetite for them.
Derivatives trading acts as a catalyst for new entrepreneurial
activity.
Derivatives markets help increase saving and investment in long
run.
TYPES OF DERIVATIVES:
The following are the various types of derivatives. They are:
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FORWARDS:
A forward contract is a customized contract between two entities, where settlement
takes place on a specific date in the future at todays pre-agreed price.
FUTURES:
A futures contract is an agreement between two parties to buy or sell an asset in a
certain time at a certain price, they are standardized and traded on exchange.
OPTIONS:
Options are of 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:
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.
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LEAPS:
The acronym LEAPS means long-term Equity Anticipation securities. These are
options having a maturity of up to three years.
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 floes in the
future according to a prearranged formula. They can be regarded as portfolios of
forward contracts. The two commonly used Swaps are:
a) Interest rate Swaps:
These entail swapping only the related cash flows between the parties in the
same currency.
b) Currency Swaps:
These entail swapping both principal and interest between the parties, with the
cash flows in on direction being in a different currency than those in the opposite
direction.
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SWAPTION:
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.
RATIONALE BEHIND THE DELOPMENT OF DERIVATIVES:

Holding portfolios 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 factors, which affect the returns:
1.
Price or dividend (interest)
2.
Some are internal to the firm like-
Industrial policy
Management capabilities
Consumers preference
Labour 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 by having a wellwww.mbaprojectfree.blogspot.com
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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 yet other of influence which are external to the firm, cannot be
controlled and affect large number of securities. They are termed as systematic
risk. They are:
1.Economic
2.Political
3.Sociological changes are sources of systematic risk.
For instance, inflation, interest rate, etc. their effect is to cause prices of nearly allindividual stocks to move together in the same manner. We therefore quite often
find stock prices falling from time to time in spite of companys earning rising and
vice versa.
Rational Behind the development of derivatives market is to manage this
systematic risk, liquidity in the sense of being able to buy and sell relatively large
amounts quickly without substantial price concession.
In debt market, a large position 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. Those factors favour for the
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purpose of both portfolio hedging and speculation, the introduction of a derivatives

securities that is on some broader market rather than an individual security.
REGULATORY FRAMEWORK:
The trading of derivatives is governed by the provisions contained in the SC R A,
the SEBI Act, and the regulations framed there under the rules and byelaws of
stock exchanges.
Regulation for Derivative Trading:
SEBI set up a 24 member committed under Chairmanship of Dr. L. C. Gupta
develop the appropriate regulatory framework for derivative trading in India. The
committee submitted its report in March 1998. On May 11, 1998 SEBI accepted
the recommendations of the committee and approved the phased introduction of
derivatives trading in India beginning with stock index Futures. SEBI also
approved he suggestive bye-laws recommended by the committee for regulation
and control of trading and settlement of Derivative contract.
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The provision in the SCR Act governs the trading in the securities. The
amendment of the SCR Act to include DERIVATIVES within the ambit of
securities in the SCR Act made trading in Derivatives possible with in the
framework of the Act.
1.
Eligibility criteria as prescribed in the L. C. Gupta

committee report may apply to SEBI for grant of recognition under section 4 of the
SCR Act, 1956 to start Derivatives Trading. The derivative exchange/segment
should have a separate governing council and representation of trading/clearing
member shall be limited to maximum 40% of the total members of the governing
council. The exchange shall regulate the sales practices of its members and will
obtain approval of SEBI before start of Trading in any derivative contract.
2.
The exchange shall have minimum 50 members.
3.
The members of an existing segment of the exchange

will not automatically become the members of the derivatives segment. The
members of the derivatives segment need to fulfill the eligibility conditions as lay
down by the L. C. Gupta committee.
4.
The clearing and settlement of derivatives trades shall

be
through
SEBI
approved
clearingcorporation/clearinghouse.ClearingCorporation/Clearing House complying
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with the eligibility conditions as lay down By the committee have to apply to SEBI
for grant of approval.
5.
Derivatives broker/dealers and Clearing members are

required to seek registration from SEBI.
6.
The Minimum contract value shall not be less than

Rs.2 Lakh. Exchange should also submit details of the futures contract they
purpose to introduce.
7.
The trading members are required to have qualified

approved user and sales persons who have passed a certification programme
approved by SEBI
Introduction to futures and options

In recent years, derivatives have become increasingly important in the field
of finance. While futures and options are now actively traded on many
exchanges, forward contracts are popular on the OTC market. In this chapter
we shall study in detail these three derivative contracts.
Forward contracts
A forward contract is an agreement to buy or sell an asset on a specified
future date for a specified price. One of the parties to the contract assumes a
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long position and agrees to buy the underlying asset on a certain specified
future date for a certain specified price. The other party assumes a short
position and agrees to sell the asset on the same date for the same price.
Other contract details like delivery date, price and quantity are negotiated
bilaterally by the parties to the contract. The forward contracts are normally
traded outside the exchanges. The salient features of forward contracts are:
They are bilateral contracts and hence exposed to counterparty risk.
Each contract is custom designed, and hence is unique in terms of contract
size, expiration date and the asset type and quality.
The contract price is generally not available in public domain.
On the expiration date, the contract has to be settled by delivery of the asset.
If the party wishes to reverse the contract, it has to compulsorily go to the
same counterparty, which often results in high prices being charged.
However forward contracts in certain markets have become very
standardized, as in the case of foreign exchange, thereby reducing
transaction costs and increasing transactions volume. This process of
standardization reaches its limit in the organized futures market.
Forward contracts are very useful in hedging and speculation. The classic
hedging application would be that of an exporter who expects to receive
payment in dollars three months later. He is exposed to the risk of exchange
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rate fluctuations. By using the currency forward market to sell dollars

forward, he can lock on to a rate today and reduce his uncertainty. Similarly
an importer who is required to make a payment in dollars two months hence
can reduce his exposure to exchange rate fluctuations by buying dollars
forward.
If a speculator has information or analysis, which forecasts an upturn in a
price, then he can go long on the forward market instead of the cash market.
The speculator would go long on the forward, wait for the price to rise, and
then take a reversing transaction to book profits. Speculators may well be
required to deposit a margin upfront. However, this is generally a relatively
small proportion of the value of the assets underlying the forward contract.
The use of forward markets here supplies leverage to the speculator.
Limitations of forward markets

Forward markets world-wide are afflicted by several problems:
Lack of centralization of trading,
Illiquidity, and
Counterparty risk
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In the first two of these, the basic problem is that of too much flexibility and
generality. The forward market is like a real estate market in that any two
consenting adults can form contracts against each other. This often makes
them design terms of the deal which are very convenient in that specific
situation, but makes the contracts non-tradable.
Counterparty risk arises from the possibility of default by any one party to the
transaction. When one of the two sides to the transaction declares bankruptcy, the
other suffers. Even when forward markets trade standardized contracts, and hence
avoid the problem of illiquidity, still the counterparty risk remains a very serious
Introduction to futures
Futures markets were designed to solve the problems that exist in forward
markets. 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. But unlike
forward contracts, the futures contracts are standardized and exchange
traded. To facilitate liquidity in the futures contracts, the exchange specifies
certain standard features of the contract. It is a standardized contract with
standard underlying instrument, a standard quantity and quality of the
underlying instrument that can be delivered, (or which can be used for
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reference purposes in settlement) and a standard timing of such settlement. A

futures contract may be offset prior to maturity by entering into an equal and
opposite transaction. More than 99% of futures transactions are offset this
way.
Distinction between futures and forwards
Forward contracts are often confused with futures contracts. The confusion is
primarily because both serve essentially the same economic functions of allocating
risk in the presence of future price uncertainty. However futures are a significant
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improvement over the forward contracts as they eliminate counterparty risk and
offer more liquidity as they are exchange traded. Above table lists the distinction
between the two
INTRODUCTION TO FUTURES
DEFINITION: A Futures contract is an agreement between two parties to buy or

sell an asset a certain time in the future at a certain price. To facilitate liquidity in
the futures contract, the exchange specifies certain standard features of the
contract. The standardized items on a futures contract are:
Quantity of the underlying
Quality of the underlying

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The date and the month of delivery
The units of price quotations and minimum price change
Location of settlement
FEATURES OF FUTURES:
Futures are highly standardized.
The contracting parties need to pay only margin money.
Hedging of price risks.
They have secondary markets to.
TYPES OF FUTURES:
On the basis of the underlying asset they derive, the financial futures are divided
into two types:
Stock futures:
Index futures:
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Parties in the futures contract:

There are two parties in a future contract, the buyer and the seller. The buyer of
the futures contract is one who is LONG on the futures contract and the seller of
the futures contract is who is SHORT on the futures contract.
The pay off for the buyer and the seller of the futures of the contracts are as
follows:
PAY-OFF FOR A BUYER OF FUTURES:
profit
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FP
F
0
S2
S1
FL
loss
CASE 1:-The buyer bought the futures contract at (F); if the future price
goes to S1 then the buyer gets the profit of (FP).
CASE 2:-The buyer gets loss when the future price goes less then (F), if the future
price goes to
S2 then the buyer gets the loss of (FL).
PAY-OFF FOR A SELLER OF FUTURES:
profit
FL
S2
S1
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FP
loss
F FUTURES PRICE
S1, S2 SETTLEMENT PRICE
CASE 1:- The seller sold the future contract at (F); if the future goes to S1
then the seller gets the profit of (FP).
CASE 2:- The seller gets loss when the future price goes greater than (F), if the
future price goes to S2 then the seller gets the loss of (FL).
MARGINS:
Margins are the deposits which reduce counter party risk,arise in a futures contract.
These margins are collected in order to eliminate the counter party risk. There are
three types of margins:
Initial Margins:
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Whenever a futures contract is signed, both buyer and seller are required to post
initial margins. Both buyer and seller are required to make security deposits that
are intended to guarantee that they will infact be able to fulfill their obligation.
These deposits are initial margins.
Marking to market margins:
The process of adjusting the equity in an investors account in order to reflect the
change in the settlement price of futures contract is known as MTM margin.
Maintenance margin:
The investor must keep the futures account equity equal to or greater than certain
percentage of the amount deposited as initial margin. If the equity goes less than
that percentage of initial margin, then the investor receives a call for an additional
deposit of cash known as maintenance margin to bring the equity upto the initial
margin.
PRICING THE FUTURES:

The Fair value of the futures contract is derived from a model knows as the cost of
carry model. This model gives the fair value of the contract.
Cost of Carry:
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F=S (1+r-q) t
Where
F- Futures price
S- Spot price of the underlying
r- Cost of financing
q- Expected Dividend yield
t - Holding Period.
FUTURES TERMINOLOGY:
Spot price:
The price at which an asset trades in the spot market.
Futures price:
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The price at which the futures contract trades in the futures market.
Contract cycle:
The period over which contract trades. The index futures contracts on the NSE
have one- month, two month and three-month expiry cycle which expire on the
last Thursday of the month. Thus a January expiration contract expires on the last
Thursday of January and a February expiration contract ceases trading on the last
Thursday of February. On the Friday following the last Thursday, a new contract
having a three-month expiry is introduced for trading.
Expiry date:
It is the date specifies 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, the
contract size on NSEs futures market is 100 nifties.
Basis:
In the context of financial futures, basis can be defined as the futures price minus
the spot price. The will be a different basis for each delivery month for each
contract, In a normal market, basis will be positive. This reflects that futures prices
normally exceed spot prices.
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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.
Open Interest:
Total outstanding long or short position in the market at any specific time. As total
long positions in the market would be equal to short positions, for calculation of
open interest, only one side of the contract is counter.
INTRODUCTION TO OPTIONS:
DEFINITION Option is a type of contract between two persons where one grants
the other the right to buy a specific asset at a specific price within a specific time
period. Alternatively the contract may grant the other person the right to sell a
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specific asset at a specific price within a specific time period. In order to have this
right. The option buyer has to pay the seller of the option premium
The assets on which option can be derived are stocks, commodities, indexes etc. If
the underlying asset is the financial asset, then the option are financial option like
stock options, currency options, index options etc, and if options like commodity
option.
PROPERTIES OF OPTION:
Options have several unique properties that set them apart from other securities.
The following are the properties of option:
Limited Loss
High leverages potential
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Limited Life
PARTIES IN AN OPTION CONTRACT:

1.
Buyer of the option:

The buyer of an option is one who by paying option premium buys the right but
not the obligation to exercise his option on seller/writer.
2. Writer/seller of the option:

The writer of the call /put options is the one who receives the option premium and
is their by obligated to sell/buy the asset if the buyer exercises the option on him
TYPES OF OPTIONS:
The options are classified into various types on the basis of various variables. The
following are the various types of options.
1. On the basis of the underlying asset:
On the basis of the underlying asset the option are divided in to two types :
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INDEX OPTIONS
The index options have the underlying asset as the index.
STOCK OPTIONS:
A stock option gives the buyer of the option the right to buy/sell stock at a
specified price. Stock option are options on the individual stocks, there are
currently more than 150 stocks, there are currently more than 150 stocks are
trading in the segment.
II. On the basis of the market movements:
On the basis of the market movements the option are divided into two types. They
are:
CALL OPTION:
A call option is bought by an investor when he seems that the stock price moves
upwards. A call option gives the holder of the option the right but not the
obligation to buy an asset by a certain date for a certain price.
PUT OPTION:
A put option is bought by an investor when he seems that the stock price moves
downwards.
A put options gives the holder of the option right but not the
obligation to sell an asset by a certain date for a certain price.

Page 46
III.
On the basis of exercise of option:

On the basis of the exercising of the option, the options are classified into two
categories.
AMERICAN OPTION:
American options are options that can be exercised at any time up to the expiration
date, all stock options at NSE are American.
EUOROPEAN OPTION:
European options are options that can be exercised only on the expiration date
itself. European options are easier to analyze than American options.all index
options at NSE are European.
PAY-OFF PROFILE FOR BUYER OF A CALL OPTION:

The pay-off of a buyer options depends on a spot price of a underlying asset. The
following graph shows the pay-off of buyer of a call option.
Page 47
Profit
ITM
SR
0
E2
SP
S
OTM
E1
ATM
loss
- Strike price
SP -
Premium/ Loss
E1 - Spot price 1
E2-
OTM
- Out of the money
ATM
- At the money
ITM
In the money
Spot price 2
SR- profit at spot price E1

CASE 1: (Spot price > Strike price)
As the spot price (E1) of the underlying asset is more than strike price (S). the
buyer gets profit of (SR), if price increases more than E1 then profit also increase
more than SR.
Page 48
CASE 2: (Spot price < Strike price)

As a spot price (E2) of the underlying asset is less than strike price (s)
The buyer gets loss of (SP), if price goes down less than E2 then also his loss is
limited to his premium (SP)
PAY-OFF PROFILE FOR SELLER OF A CALL OPTION:

The pay-off of seller of the call option depends on the spot price of the underlying
asset. The following graph shows the pay-off of seller of a call option:
Page 49
profit
SR
OTM
S
E1
ITM ATM
E2
SP
loss
S
- Strike price
ITM
SP - Premium /profit
ATM
E1 - Spot price 1
OTM
In the money
At the money
Out of the money
E2 - Spot price 2
SR -
Loss at spot price E2

As the spot price (E1) of the underlying is less than strike price (S). the seller gets
the profit of (SP), if the price decreases less than E1 then also profit of the seller
does not exceed (SP).
Page 50

As the spot price (E2) of the underlying asset is more than strike price (S) the seller
gets loss of (SR), if price goes more than E2 then the loss of the seller also increase
more than (SR).
PAY-OFF PROFILE FOR BUYER OF A PUT OPTION:

The pay-off of the buyer of the option depends on the spot price of the underlying
asset. The following graph shows the pay-off of the buyer of a call option.
Page 51
Profit
Profit
SP
E1
ITM SR
OTM
E2
ATM
loss
S
Strike price
ITM
In the money
SP -
Premium /profit
OTM
Out of the money
E1 -
Spot price 1
ATM -
E2 -
Spot price 2
SR -
Profit at spot price E1
At the money

As the spot price (E1) of the underlying asset is less than strike price (S). the buyer
gets the profit (SR), if price decreases less than E1 then profit also increases more
than (SR).
Page 52
As the spot price (E2) of the underlying asset is more than strike price (s), the
buyer gets loss of (SP), if price goes more than E2 than the loss of the buyer is
limited to his premium (SP)
PAY-OFF PROFILE FOR SELLER OF A PUT OPTION:

The pay-off of a seller of the option depends on the spot price of the underlying
asset. The following graph shows the pay-off of seller of a put option:
Page 53
profit
SP
E1
S
OTM
ITM
E2
ATM
SR
Loss
Strike price
ITM
In the money
SP -
Premium/ profit
ATM -
At the money
E1 -
Spot price 1
OTM -
E2 -
Spot price 2
SR -
Loss at spot price E1
Out of the money

As the spot price (E1) of the underlying asset is less than strike price (S), the seller
gets the loss of (SR), if price decreases less than E1 than the loss also increases
more than (SR).
Page 54
As the spot price (E2) of the underlying asset is more than strike price (S), the
seller gets profit of (SP), if price goes more than E2 than the profit of seller is
limited to his premium (SP).
Factors affecting the price of an option:
The following are the various factors that affect the price of an option they are:
Stock price: The pay off from a call option is a amount by which the stock price
exceeds the strike price. Call options therefore become more valuable as the stock
price increases and vice versa. The pay-off from a put option is the amount; by
which the strike price exceeds the stock price. Put options therefore become more
valuable as the stock price increases and vice versa.
Strike price: In case of a call, as a strike price increases, the stock price has to
make a larger upward move for the option to go in-the-money. Therefore, for a
call, as the strike price increases option becomes less valuable and as strike price
decreases, option become more valuable.
Time to expiration: Both put and call American options become more valuable as
a time to expiration increases.
Volatility: The volatility of a stock price is measured of uncertain about future
stock price movements. As volatility increases, the chance that the stock will do
very well or very poor increases. The value of both calls and puts therefore
increase as volatility increase.
Page 55
Risk-free interest rate: The put option prices decline as the risk-free rate
increases where as the prices of call always increase as the risk-free interest rate
increases.
Dividends: Dividends have the effect of reducing the stock price on the xdividend rate. This has an negative effect on the value of call options and a positive
effect on the value of put options.
PRICING OPTIONS
The black- scholes formula for the price of European calls and puts on a nondividend paying stock are :
CALL OPTION:
C = SN(D1)-Xe-r t N(D2)
PUT OPTION
P = Xe-r t N(-D2)-SN(-D2)
Where
C = VALUE OF CALL OPTION
S = SPOT PRICE OF STOCK
N= NORMAL DISTRIBUTION
Page 56
V= VOLATILITY
X = STRIKE PRICE
r = ANNUAL RISK FREE RETURN
t = CONTRACT CYCLE
d1 = Ln (S/X) + (r+ v2/2)t
d2 = d1- v\/
Options Terminology:
Strike price:
The price specified in the options contract is known as strike price or Exercise
price.
Options premium:
Option premium is the price paid by the option buyer to the option seller.
Expiration Date:
The date specified in the options contract is known as expiration date.
Page 57
In-the-money option:
An In the money option is an option that would lead to positive cash inflow to the
holder if it exercised immediately.
At-the-money option:
An at the money option is an option that would lead to zero cash flow if it is
exercised immediately.
Out-of-the-money option:
An out-of-the-money option is an option that would lead to negative cash flow if it
is exercised immediately.
Intrinsic value of money:
The intrinsic value of an option is ITM, If option is ITM. If the option is OTM, its
intrinsic value is zero.
Time value of an option:
The time value of an option is the difference between its premium and its intrinsic
value.
Page 58
DATA ANALYSIS AND

INTERPRETATION
Date
Market price
Future price
28-Dec-07
1226.7
31-Dec-07
1238.7
1-Jan-08
1228.75
2-Jan-08
1267.25
3-Jan-08
1228.95
4-Jan-08
1286.3
7-Jan-08
1362.55
8-Jan-08
1339.95
9-Jan-08
1307.95
10-Jan-08
1356.15
11-Jan-08
1435
14-Jan-08
1410
15-Jan-08
1352.2
16-Jan-08
1368.3
17-Jan-08
1322.1
18-Jan-08
1248.85
21-Jan-08
1173.2
22-Jan-08
1124.95
23-Jan-08
1151.45
24-Jan-08
1131.85
25-Jan-08
1261.3
28-Jan-08
1273.95
29-Jan-08
1220.45
30-Jan-08
1187.4
31-Jan-08
1147
1227.05
1239.7
1233.75
1277
1238.75
1287.55
1358.9
1338.5
1310.8
1358.05
1438.15
1420.75
1360.1
1375.75
1332.1
1256.45
1167.85
1127.85
1156.35
1134.5
1265.6
1277.3
1223.85
1187.4
1145.9
ANALYSIS OF
ICICI:
Page 59
The objective of this analysis is to evaluate the profit/loss position of futures

and options. This analysis is based on sample data taken of ICICI BANK
scrip. This analysis considered the Jan 2008 contract of ICICI BANK. The
lot size of ICICI BANK is 175, the time period in which this analysis done is
from 27-12-2007 to 31.01.08.
Page 60
Graph:1
OBSERVATIONS AND FINDINGS:
If a person buys 1 lot i.e. 175 futures of ICICI BANK on 28th Dec, 2007 and
sells on 31st Jan, 2008 then he will get a loss of 1145.9-1227.05 = -81.15 per
share. So he will get a loss of 14201.25 i.e. -81.15 * 175
If he sells on 14th Jan, 2007 then he will get a profit of 1420.75-1227.05 = 193.7
i.e. a profit of 193.7 per share. So his total profit is 33897.5 i.e. 193.7 * 175
The closing price of ICICI BANK at the end of the contract period is 1147
and this is considered as settlement price.
Page 61
The following table explains the market price and premiums of calls.
The first column explains trading date
Second column explains the SPOT market price in cash segment on that date.
The third column explains call premiums amounting at these strike prices;
1200, 1230, 1260, 1290, 1320 and 1350.
Page 62
Call options:
Date
28-Dec-07
31-Dec-07
1-Jan-08
2-Jan-08
3-Jan-08
4-Jan-08
7-Jan-08
8-Jan-08
9-Jan-08
10-Jan-08
11-Jan-08
14-Jan-08
15-Jan-08
16-Jan-08
17-Jan-08
18-Jan-08
21-Jan-08
22-Jan-08
23-Jan-08
24-Jan-08
25-Jan-08
28-Jan-08
Market price
1226.7
1238.7
1228.75
1267.25
1228.95
1286.3
1362.55
1339.95
1307.95
1356.15
1435
1410
1352.2
1368.3
1322.1
1248.85
1173.2
1124.95
1151.45
1131.85
1261.3
1273.95
1200
1230
1260
1290
1320
1350
67.85 53.05
74.65 58.45
62 56.85
100.9 75.55
75
60.1
109.6 91.05
170 143.3
140 119.35
140
101
160.6
131
250.7 151.8
240 213.5
155 150.05
128.4
140
128.4
140
128.4
60
52
36.5
44.15 31.05
50.25
39.3
40.4
22
80.5
62
91.85 61.65
39.65
44.05
39.2
63.75
45.85
68.25
120
100
74.35
110
188.9
148
107.5
90
95
54
26.3
22.55
23.25
17.05
40.85
44.8
32.25
32.75
30
49.1
34.5
51.35
100
85
62.05
95.45
164.7
134.9
134.9
63
67.5
37.95
24.45
12.45
17
12.1
24.55
31.4
24.2
23.85
22.9
36.55
26.4
38.6
79.4
59.2
46.65
70.85
130.9
96
66
78.2
50.2
29.15
14.55
10.35
16.35
9.45
16.15
20.25
18.5
19.25
18.8
27.4
22.5
29.15
62.35
42.85
33.15
53.1
104.55
88.2
52.65
60.95
39.15
19.3
9.95
6.7
8.6
5.1
9.75
11.35
Page 63
29-Jan-08
30-Jan-08
31-Jan-08
1220.45
1187.4
1147
46
18.65
0.45
25.95
9.05
0.5
17.45
4.5
1
10.5
1.4
1.4
4.05
0.75
0.1
2.95
0.2
0.2
Strike prices
Table:2
OBSERVATIONS AND FINDINGS
CALL OPTION
BUYERS PAY OFF:
Those who have purchase call option at a strike price of 1260, the
premium payable is 39.65
Page 64
On the expiry date the spot market price enclosed at 1147. As it is out
of the money for the buyer and in the money for the seller, hence the
buyer is in loss.
So the buyer will lose only premium i.e. 39.65 per share.
So the total loss will be 6938.75 i.e. 39.65*175
SELLERS PAY OFF:
As Seller is entitled only for premium if he is in profit.
So his profit is only premium i.e. 39.65 * 175 = 6938.75
Put options:
Strike prices
Date
28-Dec-07
31-Dec-07
1-Jan-08
2-Jan-08
Market
price
1226.7
1238.7
1228.75
1267.25
1200 1230
1260
1290
1320
1350
39.05
34.4
32.1
22.6
178.8
178.8
178.8
178.8
197.15
197.15
197.15
41.55
190.85
190.85
190.85
190.85
191.8
191.8
191.8
191.8
181.05
181.05
181.05
25.50
Page 65
3-Jan-08
4-Jan-08
7-Jan-08
8-Jan-08
9-Jan-08
10-Jan-08
11-Jan-08
14-Jan-08
15-Jan-08
16-Jan-08
17-Jan-08
18-Jan-08
21-Jan-08
22-Jan-08
23-Jan-08
24-Jan-08
25-Jan-08
28-Jan-08
29-Jan-08
30-Jan-08
31-Jan-08
1228.95
1286.3
1362.55
1339.95
1307.95
1356.15
1435
1410
1352.2
1368.3
1322.1
1248.85
1173.2
1124.95
1151.45
1131.85
1261.3
1273.95
1220.45
1187.4
1147
32
17.65
12.4
10.15
11.9
9
3.75
3.75
6.45
8
7.3
18.15
103.5
110
71
99
15.9
16.7
18
27.5
50
38.00
25.00
12.60
12.00
15.00
11.00
11.00
11.00
7.00
8.00
8.00
36.60
70.00
138.90
138.90
138.90
26.35
19.00
38.00
60.00
60.00
178.8
37.05
20.15
20.05
26.5
15
10
8.5
10
11.25
17.8
35
69.65
138.6
135
135
33
30
50
85.2
85.2
82
82
34.85
30
36
25.2
8.9
12
17.45
13.3
25.45
67.85
135.05
170.05
150
150
50.05
45
45
120
120
190.85
190.85
43.95
42
51
33.7
12.75
12.4
23.1
22.55
38.25
76.05
151.35
210
210
210
210
55
100
145.05
145.05
191.8
191.8
191.8
191.8
191.8
47.8
18.35
22.45
38.3
35.35
56.4
112.2
223.4
280
200
200
200
81.45
145
145
145
Table:3
PUT OPTION
Page 66
BUYERS PAY OFF:
As brought 1 lot of ICICI that is 175, those who buy for 1200 paid
39.05 premium per share.
Settlement price is 1147

Strike price
1200.00
Spot price
1147.00
53.00
Premium (-)
39.05
13.95 x 175= 2441.25
Buyer Profit = Rs. 2441.25
Because it is positive it is in the money contract hence buyer will get more
profit, incase spot price decreases, buyers profit will increase.
SELLERS PAY OFF:
It is in the money for the buyer so it is in out of the money for the
seller, hence he is in loss.
The loss is equal to the profit of buyer i.e. 2441.25.
Page 67
Graph:2
The future price of ICICI is moving along with the market price.
If the buy price of the future is less than the settlement price, than the
buyer of a future gets profit.
If the selling price of the future is less than the settlement price, than
the seller incur losses.
ANALYSIS OF SBI:The objective of this analysis is to evaluate the profit/loss position of futures
and options. This analysis is based on sample data taken of SBI scrip. This
Page 68
analysis considered the Jan 2007 contract of SBI. The lot size of SBI is 132,
the time period in which this analysis done is from 28-12-2007 to 31.01.08.
Date
28-Dec-07
31-Dec-07
1-Jan-08
2-Jan-08
3-Jan-08
4-Jan-08
7-Jan-08
8-Jan-08
9-Jan-08
10-Jan-08
11-Jan-08
14-Jan-08
15-Jan-08
16-Jan-08
17-Jan-08
18-Jan-08
21-Jan-08
22-Jan-08
23-Jan-08
24-Jan-08
25-Jan-08
28-Jan-08
29-Jan-08
30-Jan-08
31-Jan-08
Market Price
2377.55
2371.15
2383.5
2423.35
2395.25
2388.8
2402.9
2464.55
2454.5
2409.6
2434.8
2463.1
2423.45
2415.55
2416.35
2362.35
2196.15
2137.4
2323.75
2343.15
2407.4
2313.35
2230.7
2223.95
2167.35
Future price
2413.7
2409.2
2413.45
2448.45
2416.35
2412.5
2419.15
2478.55
2473.1
2411.15
2454.4
2468.4
2421.85
2432.3
2423.05
2370.35
2192.3
2135.2
2316.95
2335.35
2408.9
2305.5
2230.5
2217.25
2169.9
Page 69
Table:4
Graph:3
If a person buys 1 lot i.e. 350 futures of SBI on 28 th Dec, 2007 and sells on 31st
Jan, 2008 then he will get a loss of 2169.9-2413.7 = 243.8 per share. So he will
get a profit of 32181.60 i.e. 243.8 * 132
If he sells on 15th Jan, 2008 then he will get a profit of 2468.4-2413.7 = 54.7 i.e.
a profit of 54.7 per share. So his total profit is 7220.40 i.e. 54.7 * 132
The closing price of SBI at the end of the contract period is 2167.35 and this is
considered as settlement price.
Page 70
The third column explains call premiums amounting
at these strike prices;
2340, 2370, 2400, 2430, 2460 and 2490.
Page 71
Call options:
Strike prices
Date
28-Dec-07
31-Dec-07
1-Jan-08
2-Jan-08
3-Jan-08
4-Jan-08
7-Jan-08
8-Jan-08
9-Jan-08
10-Jan-08
11-Jan-08
14-Jan-08
15-Jan-08
16-Jan-08
17-Jan-08
18-Jan-08
21-Jan-08
Market
Price
2377.55
2371.15
2383.5
2423.35
2395.25
2388.8
2402.9
2464.55
2454.5
2409.6
2434.8
2463.1
2423.45
2415.55
2416.35
2362.35
2196.15
2340
2370
2400
2430
2460
2490
145
145
134
189.8
189.8
189.8
189.8
190
170
170
160
218.5
218.5
96
96
96
22.25
92
92
92
92
92
92
92
92
92
190
190
190
190
98
190
190
190
104.35
102.95
101.95
123.25
98.45
100.95
95.55
128.55
126.75
84
108.85
110.8
87.85
102.15
91.85
62.1
25.3
108
108
108
105.8
93.6
86
88.15
118.3
121
72.25
94.95
90.2
75
95.45
80
50.55
15
79
72
69.85
90.25
76.6
74.8
76.15
99.85
92.15
58.8
74.65
81.5
62.65
68.5
66
44
11.7
68
59
59
76.55
60.05
60.05
61.1
84.8
77.45
51.85
64.85
64.8
55.3
61.95
55
30
29
Page 72
22-Jan-08
23-Jan-08
24-Jan-08
25-Jan-08
28-Jan-08
29-Jan-08
30-Jan-08
31-Jan-08
2137.4 22.25
2323.75 22.25
2343.15
104
2407.4 113.7
2313.35
0
2230.7
13
2223.95
13
2167.35
13
190
190
190
190
0
15
15
15
21.05
15
47.05
15
48.2
40
61.65 48.75
0
0
9
0
9
0
9
0
11.7
32.65
26.45
39.8
0
0
0
0
10
29.3
26.3
27.65
0
0
0
0
Table:5
CALL OPTION
BUYERS PAY OFF:
Those who have purchased call option at a strike price of 2400, the
On the expiry date the spot market price enclosed at 2167.65. As it is

out of the money for the buyer and in the money for the seller, hence
the buyer is in loss.
Page 73
So the total loss will be 13774.2 i.e. 104.35*132
SELLERS PAY OFF:
So his profit is only premium i.e. 104.35 * 132 = 13774.2
Put options:
Date
28-Dec-07
31-Dec-07
1-Jan-08
2-Jan-08
3-Jan-08
Market
Price
2377.55
2371.15
2383.5
2423.35
2395.25
2340
2370
2400
2430
2460
2490
362.75 306.9
90
362.75 306.9 90.6
362.75 306.9 84.95
60
40 73.55
60
40
86
303
303
303
303
303
218.05
218.05
218.05
218.05
218.05
221.95
221.95
221.95
221.95
221.95
Page 74
4-Jan-08
7-Jan-08
8-Jan-08
9-Jan-08
10-Jan-08
11-Jan-08
14-Jan-08
15-Jan-08
16-Jan-08
17-Jan-08
18-Jan-08
21-Jan-08
22-Jan-08
23-Jan-08
24-Jan-08
25-Jan-08
28-Jan-08
29-Jan-08
30-Jan-08
31-Jan-08
2388.8
2402.9
2464.55
2454.5
2409.6
2434.8
2463.1
2423.45
2415.55
2416.35
2362.35
2196.15
2137.4
2323.75
2343.15
2407.4
2313.35
2230.7
2223.95
2167.35
60
60
60
60
60
60
60
40
75.9
75.9
75.9
170
170
170
170
33.9
0
61.6
61.6
61.6
40
150
150
150
150
150
150
150
150
150
70
139.3
139.3
139.3
139.3
139.3
0
80.8
80.8
80.8
87.35
303
79
303
50.7
303
56.8
303
74.25
303
53.15
41
44.25 59.95
69.6
78
65.05
78
70.45
78
95.05
118
223.8
118
300
118
150
118
117.7
118
52.45
118
0
0
88
0
88
0
88
0
218.05
218.05
100
75.3
112.8
78.3
71.35
100
135
96.55
96.55
299
299
299
120
120
0
0
0
0
221.95
221.95
221.95
221.95
100
125
100
128
150
150
150
150
150
150
150
150
0
0
0
Strike prices
Table:6
PUT OPTION
Page 75
BUYERS PAY OFF:
As brought 1 lot of SBI that is 132, those who buy for 2400 paid 90
premium per share.
Settlement price is 2167.35

Spot price
2400.00
Strike price
2167.35
232.65
Premium (-)
90.00
142.65 x 132= 18829.8
Buyer Profit = Rs. 18829.8
profit, incase spot price increase buyer profit also increase.
SELLERS PAY OFF:
The loss is equal to the profit of buyer i.e. 18829.8.
Page 76
Graph:4
The future price of SBI is moving along with the market price.
the seller incur losses
ANALYSIS OF YES BANK:The objective of this analysis is to evaluate the profit/loss position of futures
and options. This analysis is based on sample data taken of YES BANK
Page 77
scrip. This analysis considered the Jan 2008 contract of YES BANK. The lot
size of YES BANK is 1100, the time period in which this analysis done is
from 28-12-2007 to 31.01.08.
Date
Market price
28-Dec-07
249.85
31-Dec-07
249.3
1-Jan-08
258.35
2-Jan-08
265.75
3-Jan-08
260.7
4-Jan-08
260.05
7-Jan-08
263.4
8-Jan-08
260.2
9-Jan-08
260.1
10-Jan-08
259.4
11-Jan-08
258.45
14-Jan-08
257.7
15-Jan-08
258.25
16-Jan-08
250.75
17-Jan-08
252.3
18-Jan-08
248
21-Jan-08
227.3
22-Jan-08
209.95
23-Jan-08
223.15
24-Jan-08
220.65
25-Jan-08
232.6
28-Jan-08
243.7
29-Jan-08
244.45
30-Jan-08
244.45
31-Jan-08
251.45
future price
252.5
251.15
260.85
268.1
262.85
261.55
264.4
261.1
262.2
260.2
260.35
259.95
260.25
254
254.25
248.05
225.4
209.85
218.1
216.75
230.5
242.35
242.95
241.4
250.35
Page 78
Table:7
Graph:5
If a person buys 1 lot i.e. 1100 futures of YES BANK on 28 th Dec, 2007 and
sells on 31st Jan, 2008 then he will get a loss of 250.35-252.50 = -2.15 per share.
So he will get a loss of 2365.00 i.e. -2.15 * 1100
If he sells on 15th Jan, 2008 then he will get a profit of 260.25-252.50 = 7.75 i.e.
a profit of 16.15 per share. So his total loss is 8525.00 i.e. 7.75 * 1100
The closing price of YES BANK at the end of the contract period is 251.45 and
this is considered as settlement price.
Page 79
The third column explains call premiums amounting
at these strike prices;
230, 240, 250, 260, 270 and 280.
Page 80
Call options:
Date
28-Dec-07
31-Dec-07
1-Jan-08
2-Jan-08
3-Jan-08
4-Jan-08
7-Jan-08
8-Jan-08
9-Jan-08
10-Jan-08
11-Jan-08
14-Jan-08
15-Jan-08
16-Jan-08
17-Jan-08
Market price
230
240
250
260
270
280
249.85
249.3
258.35
265.75
260.7
260.05
263.4
260.2
260.1
259.4
258.45
257.7
258.25
250.75
252.3
17.05
16.45
22.15
31.45
31.45
31.45
31.45
31.45
31.45
31.45
31.45
31.45
31.45
31.45
31.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
13.1
12.45
16.3
24.9
21.5
21.5
21.5
21.5
21.5
21.5
21.5
21.5
21.5
21.5
21.5
9
9
11.6
16
13
12.2
12.2
9.95
10.95
17.5
10.75
9
14
5.7
7.5
18.55
18.55
18.55
14.5
5.1
5.15
9.25
7.45
6.45
8
5.05
5.05
8.25
4
5.5
15
15
15
15
3
3
3
3
3
8
8
8
8
8
2
Page 81
18-Jan-08
21-Jan-08
22-Jan-08
23-Jan-08
24-Jan-08
25-Jan-08
28-Jan-08
29-Jan-08
30-Jan-08
31-Jan-08
248
227.3
209.95
223.15
220.65
232.6
243.7
244.45
244.45
251.45
31.45
6
6
6
6
6
15.95
15.95
15.95
29.15
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
32.45
9.5
9.5
9.5
9.5
9.5
9.5
9.5
9.5
5
4.7
7.5
7.5
8
8
2.1
2.1
2.1
2.1
2.1
5
5.5
1.5
1.5
4.5
2.9
2.9
2.9
2.9
2.9
0.8
Strike prices
Table:8
CALL OPTION
BUYERS PAY OFF:
As brought 1 lot of YES BANK that is 1100, those who buy for 280
paid 17.05 premium per share.
Settlement price is 251.45
Page 82
2
2
4
4
4
4
4
4
4
0.5
Spot price
251.45
Strike price
230.00
21.45
Premium (-)
17.05
4.40 x 1100= 4840
Buyer Profit = Rs. 4840

profit, incase spot price increase buyer profit also increase.
SELLERS PAY OFF:
The loss is equal to the profit of buyer i.e. 4840.
Page 83
Put options:
Strike prices
Page 84
Date
28-Dec-07
31-Dec-07
1-Jan-08
2-Jan-08
3-Jan-08
4-Jan-08
7-Jan-08
8-Jan-08
9-Jan-08
10-Jan-08
11-Jan-08
14-Jan-08
15-Jan-08
16-Jan-08
17-Jan-08
18-Jan-08
21-Jan-08
22-Jan-08
23-Jan-08
24-Jan-08
25-Jan-08
28-Jan-08
29-Jan-08
30-Jan-08
31-Jan-08
Market price
230
240
250
260
270
280
249.85
249.3
258.35
265.75
260.7
260.05
263.4
260.2
260.1
259.4
258.45
257.7
258.25
250.75
252.3
248
227.3
209.95
223.15
220.65
232.6
243.7
244.45
244.45
251.45
6.95
6.2
4.3
3
3.45
3.15
2.1
2.2
1.85
1.65
1.5
1.1
0.8
1.6
1.15
1.5
9.75
22.15
13
13.8
7
1.6
0.75
0.15
0
10.55
9.75
7.05
5.1
5.9
5.5
3.95
4.25
3.8
3.5
3.3
2.7
2.2
3.85
3.05
3.95
16.2
30.8
20
21.3
12.6
4.6
3.05
1.65
0
15.15
14.35
10.75
8.1
9.3
8.9
6.85
7.4
6.85
6.55
6.3
5.6
4.95
7.8
6.65
8.3
24.1
40.1
28.25
30
19.85
10
8.3
6.95
0
20.75
20
15.5
12.1
13.75
13.4
10.9
11.75
11.2
10.95
10.8
10.15
9.35
13.6
12.15
14.7
33
49.8
37.25
39.4
28.3
17.55
16.2
15.65
0
27.25
26.6
21.25
17.1
19.3
19
16.15
17.45
16.9
16.75
16.8
16.35
15.55
20.95
19.4
22.75
42.5
59.65
46.8
49.1
37.6
26.6
25.6
25.5
0
34.5
34.1
27.9
23.1
25.8
25.65
22.55
24.25
23.8
23.8
24.05
23.95
23.2
29.55
27.95
31.8
52.25
69.6
56.55
59
47.25
36.25
35.45
35.5
0
Table:9
Page 85
PUT OPTION
BUYERS PAY OFF:
Those who have purchase put option at a strike price of 250, the
On the expiry date the spot market price enclosed at 251.45. As it is

out of the money for the buyer and in the money for the seller, hence
the buyer is in loss.
So the total loss will be 16665 i.e. 15.15*1100
SELLERS PAY OFF:
So his profit is only premium i.e. 15.15 * 1100 = 16665
Page 86
Graph:6

The future price of YES BANK is moving along with the market
price.
Page 87
the seller incur losses.
SUMMARY
Page 88
Derivatives market is an innovation to cash market. Approximately

its daily turnover reaches to the equal stage of cash market. The
average daily turnover of the NSE derivative segments
In cash market the profit/loss of the investor depends on the market

price of the underlying asset. The investor may incur huge profits or
he may incur Huge losses. But in derivatives segment the investor
enjoys huge profits with limited downside.
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 contract.
Derivatives are mostly used for hedging purpose.
In derivative segment the profit/loss of the option writer purely

depends on the fluctuations of the underlying asset.
SUGESSTIONS
Page 89
The derivatives market is newly started in India and it is not

known by every investor, so SEBI has to take steps to create
awareness among the investors about the derivative segment.
In order to increase the derivatives market in India, SEBI should

revise some of their regulations like contract size, participation of
FII in the derivatives market.
Contract size should be minimized because small investors cannot

afford this much of huge premiums.
SEBI has to take further steps in the risk management mechanism.
SEBI has to take measures to use effectively the derivatives

segment as a tool of hedging.
Page 90
CONCLUSION
In bullish market the call option writer incurs more losses so the
investor is suggested to go for a call option to hold, where as the put
option holder suffers in a bullish market, so he is suggested to write a
put option.
In bearish market the call option holder will incur more losses so the
investor is suggested to go for a call option to write, where as the put
option writer will get more losses, so he is suggested to hold a put
option.
In the above analysis the market price of YES bank is having low
volatility, so the call option writer enjoys more profits to holders.
Page 91
BIBILOGRAPHY
BOOKS :-
Derivatives Dealers Module Work Book - NCFM

(October 2005)
Gordon and Natarajan, (2006) Financial Markets and
Services (third edition) Himalaya publishers
WEBSITES :-
http://www.nseindia/content/fo/fo_historicaldata.htm
http://www.nseindia/content/equities/eq_historicaldata.ht
m
http://www.derivativesindia/scripts/glossary/indexobasic.a
sp
http://www.bseindia/about/derivati.asp#typesofprod.htm
Page 92
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A STUDY ON FINANCIAL DERIVATIVES

Under the Esteemed guidance of

Lecturer of Business Management

I hereby declare that this project titled A STUDY ON FINANCIAL

I would like to thank all

Graph showing the price movements of

Table showing the market and

The emergence of the market for derivatives products, most notably

NEED FOR STUDY:

OBJECTIVES OF THE STUDY:

To analyze the operations of futures and options.

To study about risk management with the help of derivatives.

SCOPE OF THE STUDY:

LIMITATIONS OF THE STUDY:

The following are the limitation of this study.

The data collected is completely restricted to ICICI BANK, SBI &

Data has been collected in two ways. These are:

Derivatives Dealers Module Work Book - NCFM

Clearing Corporation (NSCCL), National Securities Depository (NSDL)

Do Futures and Options trading increase stock market volatility?

Securities Contracts (Regulation)Act, 1956 (SCR Act) defines

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

fluctuations in commodity prices, and commodity-linked derivatives remained the

FUNCTION OF DERIVATIVES MARKETS:

Derivatives markets help increase saving and investment in long

RATIONALE BEHIND THE DELOPMENT OF DERIVATIVES:

Price or dividend (interest)

Some are internal to the firm like-

Labour strike, etc.

purpose of both portfolio hedging and speculation, the introduction of a derivatives

Eligibility criteria as prescribed in the L. C. Gupta

The exchange shall have minimum 50 members.

The members of an existing segment of the exchange

The clearing and settlement of derivatives trades shall

clearingcorporation/clearinghouse.ClearingCorporation/Clearing House complying

Derivatives broker/dealers and Clearing members are

The Minimum contract value shall not be less than

The trading members are required to have qualified

Introduction to futures and options

rate fluctuations. By using the currency forward market to sell dollars

Limitations of forward markets

reference purposes in settlement) and a standard timing of such settlement. A

Distinction between futures and forwards

DEFINITION: A Futures contract is an agreement between two parties to buy or

Quantity of the underlying

Quality of the underlying

The date and the month of delivery

The units of price quotations and minimum price change

Futures are highly standardized.

The contracting parties need to pay only margin money.

Hedging of price risks.

They have secondary markets to.

Parties in the futures contract:

S2 then the buyer gets the loss of (FL).

PAY-OFF FOR A SELLER OF FUTURES:

S1, S2 SETTLEMENT PRICE

PRICING THE FUTURES: