A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance money

“MARKET VOLATILITY-THE WAY TO RECOVER THE DIFFERENCE IN
EQUITY PRICES DUE TO MARKET CRASH”. AT

CONTENTS

CHAPTER – 1
EXECUTIVE SUMMORY
INTRODUCTION TO STUDY
OBJECTIVES OF STUDY
LIMITATION OF STUDY

2 CHAPTER – 2
Industry profile
NSE
BSE
Capital market

3 CHAPTER – 3
INTRODUCTION TO DERIVATIVES
FORWARD
FUTURE
OPTION
INDIAN DERIVATIVE MARKET
4 CHAPTER – 4
COMPANY PROFILE
METHODOLOGY

5 CHAPTER – 5
ANALYSIS AND INTERPRETAION OF SERVEY DATA

6 CHAPTER – 6
FIDINGS
SUGGESTIONS AND RECOMMENDATION
CONCLUSION
QUESTIO

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Executive Summary

The in economy was booming till last year, but it has never looked as bad as
it is now. Due to the recession in the world economy, India is also facing decline in growth as
other countries.

Investor’s confidence is of great importance for the stability of capital
market in particular and Indian economy in general. But due to the declining growth and
uncertain inflation, investor’s tend to loose confidence in capital market.

The two primary exchanges in India are the Bombay Stock Exchange (BSE)
and the National Stock Exchange of India Ltd (NSE). In addition, there are 24 Regional
Stock Exchanges. However, the BSE and NSE have emerged as the two leading exchanges
and account for about 80 percent of the equity volume traded in India.

Reliance Money is a fall service securities firm providing the entire gamut of
financial services. The firm founded in 2006 today has a pan India presence through offices
in entire India. Reliance Money provides a breadth of financial and advisory services include
wealth management, investment banking, corporate advisory, brokerage and distribution of
equities, commodities, mutual fund and insurance all of which are supported by powerful
research teams. The firm’s philosophy is entirely client centric, with a clear focus on
providing long term value addition to client, while maintaining the highest standards of
excellence, ethics and professionalism. The entire firm activities are divided across distinct
client groups, individuals, privet clients, corporate and institutions. Financial market’s main
function is to facilitate transfer of funds from surplus sectors to deficit sectors. A financial
market consists of investors or buyers, sellers, dealers and does not refer to physical location.
Indian financial system consists of two markets, viz. money and capital market. The core of
money market is the inter-bank call money. It has two components-organized and



unorganized. Capital market provides the framework in which saving and investments take
place. On one hand it enables companies to raise resources from the investing community and
on other, it facilitate households to invest their savings in industrial or commercial activities.
The capital market consists of primary and secondary segments. In primary market it deals
with the issue of new investments by the corporate sector such as equity shares, preference
share, and debentures. Capital market plays a major role in Indian financial system. Although
India had a vibrant capital market, which is more then a century old, the paper-based
settlements of trades causes substantial problems like bad delayed transfer of title till
recently. The enactment of depositories act in august 1996 paved the way for establishment
of national securities depository limited (NSDL) and central depository securities (India)
limited (CSDL). NSDL was the first depository in India; it is promoted by institutions stature
responsible for economic development of the country. CSDL was promoted by the Bombay
stock exchange

Topic:

“Market Volatility-The way to recover the difference in equity prices due to market
crash”.

Name of the organization:-Reliance Money, Hubli.

Need for the study:-
Financial derivatives are quite new to the Indian Financial Market, but the
derivatives market has shown an immense potential which is visible by the growth it has
achieved in recent past, in the present changing financial environment and an increased
exposure towards financial risk, it is of immense importance to have a good working
knowledge of derivatives.
The derivatives market in Hubli is still in a budding stage, it is necessary to
study the derivatives and derivative products and understand the derivative trading in India
and try to gather information regarding the derivative products so that the present decline in
the share prices can be recovered keeping in view the present value of money.



Objectives of the study:-
• To study the investment pattern of individuals.
• To know the pattern of individuals regarding various hedging instruments.
• To study the option as a profit making strategy.
• To know the use of different strategy.
• To study whether individual are willing to invest other than equities.
• To study what are the areas of interest of individuals.

Limitations
• The study covers only Hubli city.
• Sample size was 100so, findings are based on these sample size.
• There is possibility of result not being accurate due to the sample size of the sample.

Research design is a plan for collection and analysis of data in a manner that
aims at maximum relevance of the study undertaken. This study is both exploratory as well as
descriptive. Exploratory because it aims as well as exploring the ways how people’s
investment pattern changes when the bear is bull. Descriptive because it studies in detail the
investors behavior.

Methods of data collection
Primary data.
Questionnaire survey and interaction with clients in the area of Hubli to
know their investment pattern to recover equity difference.

Secondary Data
Collecting to books & websites etc



Sampling size: The sample selected from the population was limited to 100 investors who
have invested their Money in stock market.

Practical Approach
Through my in plant project, I have learn some of the practical aspects in the organization.
a) Handling the terminal.
b) Handling client’s query & client relations.
c) Most of the respondents invest in futures and options

d) Respondents invest in derivative for profit making only

Findings

 No particular age group is highlighting

 The respondents may have answered in a hurry without giving accurate consideration
especially due to lack of time.
 Most of the accounts trading other than equities are traded by the sub-broker.
 They purely rely on sub-brokers.
 The time constraint was a limiting factor as more in-depth analysis as well as the
responses could not be carried out.
 Some of the responses may be biased as the investors were very careful in choosing
their responses

Suggestions:
 Brokers should not motivate investors to invest large amount in derivative products as they
are hedging instruments.

Recommendations given by respondents:
 Never play intraday when the market is volatile

 Never use hedging instruments as a profit making tool



 Never invest blindly

 Take market sentiments into considerations

 Take global affairs into considerations

Since the investors expect better services from RELIANCE MONEY, it
should provide more value added services to its



Industry profile

Earliest records of securities trading India are available from the end of
eighteenth century. Before 1850 there was business conducted in Mumbai in the share of
bank and the securities of east India Company, which were consider as securities for buying,
selling and exchange. The prominent shares Traded. The business was conducted under a
sprawling banyan tree in front of the town hall, which is known as horniman Circle Park.

In 1850, the companies act was passed and that heralded the commencement
of join stock companies in India. It was the America civil war that helped the commencement
of join stock companies in India.

In 1874 the dalal street became the prominent place for meeting of the brokers
to conduct business. The broker organized an association on 9 th July 1875 known as native
share and stock broker association to protect the character, status of the native brokers. That
was the foundation of the stock exchange, Mumbai. The exchange was established with 318
members. The stock exchange, Mumbai did not have to look as it started raiding high ladder
of growth.

The stock exchange is a market place, link any other centralize market where
buyers and sellers can transact business in securities at giving point of a time in a convenient
and competitive manner at the fairest possible prizes.

In Jan 1899, Mr. James M Mac Len, MP inaugurated the brokers hall. After
the First World War the stock exchange was housed properly at an old building near the town
hall in 1928, the present premises where acquired surrounded by dalal street, Mumbai
samachar marg and Hamam Street. A new building present location was constructed and was
occupied on 1st dec 1930.



In 1950 the regulation of business in securities and stock exchange became an
exclusively central Government sub following adaptation of constitution of India. In 1956,
the security contract act was passed by the parliament of India, to regulate the securities
market, SEBI was initial established on Oct 12 1988 as an interim board under control of
ministry of finance, Government of India in 1992, SEBI act was passed through which the
SEBI came into existence, Hence SEBI acquired statutory status on 30th Jan 1992 by passing
an ordinance, which was subsequently converted into an act passed by the parliament on
April 4th 1992. The main objective of SEBI is to protect the interest of investors, regulate and
promote the capital market by creating an environment, which would facilitate mobilization
of resources through efficient allocation and to generate confidents among the investor. As
such SEBI is responsible for regulating stock exchanges and other intermediaries who may be
association with capital market and the process of the public companies rising capital by
issuing instrument that will be traded on capital market. SEBI has been empowered by the
central government to develop and regulate capital markets in India and there by protect the
interest of investors.

In 1992, OTCI (Over the counter exchange of India) came in to existent
where equities of small companies are listed.

In 1994, NSE (national stock exchange) came into existent which brought an
and to the open but cry system of trading securities which was in vogue for 150 years, and
introduced screen based trading system.

BSE (Bombay stock exchange) online trading system was launched on March
14th 1995. Online done who are authorized by the stock exchange.

In screen based trading, investor place there buy and sale orders with brokers
whose enter the orders in the automated trading system. When buy and sell order matches, a
trade is generated and trade details are given to respective brokers. After a trade has taken
place, the buyer as is to pay money and seller has to deliver the securities.



On the stock exchange hundred and thousands of trades take place every day.
Buyers and sellers are spread over a large geographical area. Due to these problems
completing a trade by paying cash to the seller and securities to buyer immediately on
execution of trades on an individually basis is virtually impossible. So the exchange allows
trading to take place for a specified cycle. Once the trading period is over, buyer broker pays
money and seller broker delivers the securities to the CCCH on a predefined day. This
process is called as pay in, after pay in securities are given to the buyers and seller brokers by
the CCCH, this process is called as pay out. This process of pay in and pay out is called
settlement.

Initially the trading cycle was of one fortnight or one week. The transactions
entered during this period, of a fortnight or one week, were used to be settled either by
payment for purchase or by delivery of shares certificate sold on notified days one fortnight
or week of expiry of the trading. The settlement schedules are made know to the members of
the exchange in advance.

The weekly settlement was period was reduced by daily settlement popularly
known as rolling settlement, in which each day is separate trading day. With effect from
December 2001. t+% rolling cycle was introduction for all equities where T is the trading
day and pay in and pay out from the settlement was done on the 5 th business day after the
trading day. For e.g. If T Was Monday, the pay-in and pay-out were done o next Monday as
Saturday and Sunday are not counted as business days. T+5 cycles were further shortened to
T+3 settlement cycle from April 1st 2002 and T+2 from April 2003.

NATIONAL STOCK EXCHANGE (NSE)

With the liberalization of the Indian economy, it was found inevitable to lift the
Indian stock market trading system on par with the international standards. On the basis of
the recommendations of high powered Pherwani Committee, the national stock exchange was
incorporated in 1992 by Industrial development bank of India, industrial finance Corporation
of India, all insurance corporations, selected commercial banks and others.



Trading at NSE can be classified under two border categories:
a. Wholesale debt market and
b. Capital market.

Wholesale debt market operations are similar to money market operations-
institutions and corporate bodies enter into high value transactions in financial instruments
such as government securities, treasury bills, public sector unit bonds, commercial paper,
certificate of deposit, etc.

There are two kinds of players in NSE:
o Trading members and
o Participants.

Recognized members of NSE are called trading members who trade on behalf of
themselves and their clients. Participants trading members and large players link banks who
take direct settlement responsibility.

Trading at NSE takes place through a fully automated screen-based trading
mechanism which adopts the principle of an order-driven market. Trading members can stay
at their offices and execute the trading, since they are linked through a communication
network. The prices at which the buyer and seller are willing to transact will appear on the
screen. When the prices match the transaction will be completed and a confirmation slip will
be printed at the office of the trading member.

NSE has several advantages over the traditional trading exchanges.
They are as follows

NSE brings an integrated stock market trading network across the nation.
Investors can trade at the same price from anywhere in the country since inter market
operations are streamlined coupled with the countrywide access to the securities.



Delays in communication, late payments and the malpractice’s prevailing in the
traditional trading mechanism can be done away with greater operational efficiency and
informational transparency in the stock market operations, with the support of total
computerized network. Unless stock markets provide professionalized service, small
investors and foreign investors will not be interested in capital market operations and capital
market being one of the major sources of long term finance for industrial projects, Indian
cannot afford to damage the damage the capital market path. In this regard NSE gains vital
importance in the Indian capital market system.

The Organization

The National Stock Exchange of India Limited has genesis in the High Powered
Study Group on Establishment of New Stock Exchanges, which recommended promotion of
a National Stock Exchange by financial institutions (FIs) to provide access to investors from
all across the country on an equal footing. Based on the recommendations, NSE was
promoted by leading financial institutions at the behest of the government of India and was
incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the
country.
On its recognition as a stock exchange under the securities contracts (regulation)
Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The capital market (Equities) segment commenced operations in
November 1994 and operations in derivatives segment commenced in June 2000.

NIFTY:
The Nifty is relatively a new comer in the Indian market. S&P CNX Nifty is a
50 stock index accounting for 23 sectors of the economy. It is used for purposes such as
benchmarking fund portfolios, index based derivatives and index funds.



The base period selected for Nifty is the close of prices on November 3, 1995,
which marked the completion of one-year of operations of NSE’s capital market segment.
The base value of index was set at 1000.

S&P CNX Nifty is owned and managed by India index services and products
Ltd. (IISL). Which is joint venture between NSE and CRISIL? IISL is a specialized company
focused upon the index as a core product. IISL have a consulting and licensing agreement
with standard and poor’s (S&P), who are world leaders in index services.

BSE (Bombay Stock Exchange)

The Bombay Stock Exchange, is the oldest stock exchange in Asia, was
established in 1875 as Native Share and Stock Brokers Association at Dalal Street in
Mumbai. A lot has changed since then when 318 persons became members upon paying Re1.

In 1956, the BSE obtained recognition from the Government of India- the first
stock exchange to do so –under the Securities Contact (Regulation) Act, 1956.

The Sensex, first compiled in 1986, is a ‘market Capitalization-Weighted’ Index
of 30 component stocks representing a sample of large and financially sound companies. The
BSE-Sensex is the bench mark index of the Indian capital markets.

The BSE Sensex comprises these 30 stocks: ACC, Bajaj Auto, Bharti Tele,
BHEL, Cipla, Dr Reddy’s, Gujarat Ambuja, Grasim, HDFC, HDFC Bank, Hero Honda,
Hindalco, HLL, ICICI Bank, Infosys, ITC, L&T, Maruti, NTPC, ONGC, Ranbaxy, Reliance,
Reliance Energy, Bharati Artile, SBI, Tata Motors, Tata Power, TCS and Wipro. Here’s a
timeline on the rise of the SENSEX through Indian stock market history.



SENSEX-THE BAROMETER OF INDIAN CAPITAL MARKETS
Introduction:

For the premier Stock Exchange that pioneered the stock broking activity in
India, 128 years of experience seems to be a proud milestone. A lot has changed since 1875
when 318 persons became members of what today is called “The Stock Exchange, Mumbai”
by paying a princely amount of Re1.

Since then, the country’s capital markets have passed through both good and bad
periods. The journey in the 20th century has not been an easy one. Till the decade of eighties,
there was no scale to measure the ups and downs in the Indian stock market. The +Stock
Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became the
barometer of the Indian stock market.

SENSEX is not only scientifically designed but also based on globally accepted
construction and review methodology. First complied in 1986, SENSEX is a basket of 30
constituent stocks representing a sample of large, liquid and representative companies. The
base year of SENSEX is 1978-79 and the base value is 100. The index is widely reported in
both domestic and international markets through print as well as electronic media.

The Index was initially calculated based on the “Full Market Capitalization”
methodology but was shifted to the free-float methodology with effect from September 1,
2003. The “Free-float Market Capitalization” methodology of index construction is regarded
as an industry best practice globally. All major index providers like MSCI, FISE, STOXX,
S&P and Dow Jones use the Free-float methodology.

Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to
be the pulse of the Indian stock market. As the oldest index in the country, it provided the
time series data over a fairly long period of time (from 1979 onwards). Small wonder, the
SENSEX has over the years become one of the most prominent brands in the economy.



The growth of equity markets in India has been phenomenal in the decade gone
by. Right from early nineties the stock market witnessed heightened activity in terms of
various bull and bear runs. The SENSEX captured all these events in the most judicial
manner. One can identify the booms and busts of the Indian stock market through SENSEX.

CAPITAL MARKET

Capital is required to bring a business into existence, to keep it alive and see it
growing. Achieving the goal of business requires the performance of such business functions
as production, distribution, marketing, research and development all of which involve
investment of capital. Further, companies require capital not only for meeting their long term
requirements of funds for new projects, modernization, expansion and diversification
programmers also for covering operational expenses.

 Categories of Capital:
• Long-term capital/fixed capital.
• Short-term capital/working capital.


• Export capital.
• Venture capital.
•
1) Long term capital/fixed capital:
It represents the amount of capital invested in fixed assets. It is a long-term
investment.

2) Short-term capital/working capital:
It represents the amount of capital invested in current assets. Current assets are
those assets, which can be converted into cash with in a year/an accounting period. Working
capital is required for meeting the operating cost of the concern.

3) Export capital:
The amount of capital required for making payment in international trade is
called export capital.

The methods of payment in international trade are:
 Cash with order.
 Open account.
 Bills of exchange.
 Banker’s documentary credits.

4) Venture capital:
Venture capital is the capital invested in highly risky ventures.

MEANING AND DEFINITION OF CAPITAL MARKET:

Generally speaking, capital market is the place where in funds are raised for
companies for meeting their long-term requirements. Capital market for long-term capital.



Capital market may be defined as the mechanism which co-ordinate the demand and supply
forces of long-term capital. The participants on demand and supply size of this market are
financial institutions, mutual funds, agents, brokers, borrowers and lenders.

COMPONENTS OF CAPITAL MARKET:
Broadly speaking, capital market is composed of two segments.
The new issues market or Primary market.
1. The secondary market.
2. The new issues market or primary market:

The primary market the existing companies or the new companies offer
shares/debentures to the public for subscription. The primary also includes the offer of
securities to the existing share holders of the companies on right and bonus basis. In the
primary market the companies acquire long term funds for meeting there requirements like
project financing, expansion, modernizations etc. primary market creates financial claims. In
this market the public can only buy the shares. Parties involved in the primary market are the
leaders and the borrowers. Merchant bankers, registrars, issue companies, under-writers,
bankers to the issue, public financial institutions, mutual funds etc, are the major players in
the new issue market.

The primary market:
It is made up two components:
 Initial Public Offering and
 Issue of shares

The Secondary market:

In the secondary market or stock market old issue are bought and sold. In this
market the public can buy and sell securities. This market does not create financial claims. In



this market fund does not flow between borrowers and lenders but funds flows between
lenders and others/buyers of security. The brokers, the investors, mutual funds and the
financial institution are the important constituent of secondary market.

Players in the capital market:
In players in the capital market are divided into three categories:

Companies issuing securities:-
As per the SEBI Guidelines, companies intending to issue securities are divided
into three categories, viz.
a) New companies.
b) Existing unlisted companies.
c) Existing listed companies.

A company is a new company if it satisfies all the following three conditions.
1. It has not completed 12 months of commercial operations.
2. Its audited operative results are not available
.3. It is set by entrepreneurs with or without track record.
A company is said to be an existing listed company if its shares are listed in the
any one of the recognized stock exchange. Existing closely held are private companies are
called existing unlisted companies.

1. Intermediaries:

Intermediaries are institutional or individual agencies who assist in the process
of transforming savings into investment.

The major intermediaries in the capital market are:
a) Merchant bankers
b) Under-writers
c) Registrars



d) Brokers
e) Depositories
f) Collecting agents
g) Adverting agencies
h) Agents
i) Stock brokers and sub brokers
j) Mutual Funds

2. Investors:

The investors comprise the financial and investment companies and a general
public. Companies are employing funds in the hope of receiving future benefits. All rational
investors prefer return, but most investors are risk averse, attempt to maximize capital gain.
Their preference for dividends is a capital gain depends on their economic status and the
effect of tax differential on dividends and capital gains. The institution and companies raising
capital from investors frame the schemes in such way that these are suitable to all type of
investors.

The main objectives of investments are as follows.
A. Safety: Safety of money is the first objective of investors.
B. Profitability: The investor makes investment for earning money. He would like to invest
in those securities where rate of return is higher.
C. Liquidity: The liquidity refers to the receipt back of investment when the investor wants
it.
D. Capital appreciation and
E. Minimum risk.

Structure of capital market in India:

The structure of Indian capital market has under ground a remarkable
transformation over the last four and half decades and now comprises an impressive network



of financial institutions and new financial instruments. The secondary market has become
more sophisticated in response to the varied needs of the investors. Provision of long term
credit is entrusted with specialized financial institutions. Of these IDBI, IFCI, LIC, UTI, GIC
etc. constitute the largest segment. The various constitutes of capital market are:
 Equity market
 Debt market
 Government securities market
 Mutual Fund schemes.

Factors influencing the growth of capital market:
The growth of the capital market is influenced by several factors, which are
listed below:
• The level of savings and investment of the household sector.
• Economic development
• Rapid industrialization
• Speed in acquiring processing and acting upon information
• Technological advances
• Corporate performance
• Political stability
• Globalization of finance
• Increased price volatility
• Financial innovation
• Advances in financial theory
• Regulatory change
• Foreign Institutional Investor’s (FII’s) participation in the capital market
• NRI’s investment
• Sophistication among investment managers
• Emergence of financial intermediaries like Mutual Funds
• Development of financial service sectors like merchant banking leasing venture capital
financing



• International agreement
• Liquidity factors
• Agency costs
• Tax asymmetries



INTRODUCTION TO DERIVATIVES

The emergence of market for derivate products is most notably forward, future
and option. These can be traced back to the willingness of risk-averse economics agent to
guard themselves against uncertainties arising out of fluctuation in asset price. 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 by looking-in asset
price. As instrument of risk management, these generally do not inflation and fluctuation in
the underlying asset price. However, by locking –in asset price, derivative product minimize
the impact of fluctuation in asset price on the profitability and cash flow situation of risk-
averse investors.

Derivatives definition:

The term derivative refers to an asset that has no independent value, but derives
its value from that of an underlying asset. The underlying asset could be securities,
commodities, bullion, currency, livestock or anything else. A very simple example of a
derivative is petrol, which is derived from oil. The price of petrol depends upon the price of
oil, which in turn depends upon the demand and supply of oil.

Derivative is a product whose value is derived from the value of one or more basic
variable, called bases (underlying asset, or reference rate), in a contractual manner. For
example, wheat framer may wish to sell their harvest at a future date to eliminate the risk of
change in price by that date. Such a transaction is an example of a derivative. The price of
this derivative is driven by the spot price of wheat which is the “underlying”.
In the Indian context the securities contract (regulation) Act, 1956 (SC(R) A)
defines “Derivatives” to include-
1) A security derived from a debt instrument, share, loan whether secured or unsecured, risk
instrument, or contract for difference or any other from of security.



2) A contract, which derives its value from the price, index of the price, of underlying
securities.
Derivatives and securities under the future (SC(R) A) and hence trading of
derivative is governed by the regulatory framework under the (SC(R) A).

BENEFITS OF TRADING IN DERIVATIVES
Trading in derivative offers 4 advantages:
1. It allows us to speculate.
If we have a view on where the market will move, we can cash in on this view by using
derivatives.

2. It allows us to hedge.
Derivatives are very efficient risk management instruments. We can use derivatives to cap
our potential losses in the underlying asset.

3. It allows us to undertake arbitrage activities.
We can use derivatives to take advantage of the differences in prices of the derivative product
and the underlying asset.

4. It allows us to buy on margin
When we purchase a derivative product, we simply have to pay a fraction of the price of the
traded value. In other words, we don’t have to pay up the full value of the asset at the time of
the transaction.

FACTORS DRIVING THE GROWTH OF DERIVATIVES
Over the last three decades, the derivatives market has seen a phenomenal
Growth. A large variety of derivative contracts have been launched at exchanges across the
world. Some of the factors driving the growth of financial derivatives are:
1. Increased volatility in asset prices in financial markets,
2. Increased integration of national financial markets with the international markets,
3. Marked improvement in communication facilities and sharp decline in their costs,



4. Development of more sophisticated risk management tools, providing economic agents a
wider choice of risk management strategies, and
5. Innovations in the derivatives markets, which optimally combine the risks and returns over
a large number of financial assets leading to higher returns, reduced risk as well as
transactions costs as compared to individual financial assets.

Types of Derivatives:
1. Forward
2. Future
3. Option

Forward:
A Forward contract is a customized contract between two entities, where
settlement takes place on a specified date in the future at today’s pre-agreed price.

Future:
A Future contract is an agreement between two parties to buy or sell an asset at
a certain time in the future at a certain price. Future contract are special type of forward
contract in the sense that the former are standardize exchange-traded contract.

Options:
Options are two types-
• Call
• Put

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.



Leaps:
The acronym LEAPS means Long-Term Equity Anticipation Securities.
These are options having a maturity of upto three years.

Swaps;
Swaps are private agreements between two parties to exchange cash flow in the
future according to a prearranged formula they can be regarded as portfolios of forward
contract. The two types of commonly used swaps are:
• Interest Rate Swaps
These entail swapping only the interest related cash flow between the parties in
the same currency.

• Currency Swaps
These entail swapping both the principal and interest between the parties, with
the cash flow in one direction being in a different currency than those in the opposite
direction.

Participants in the derivatives markets.
The following three broad categories of participants - hedgers, speculators,
And arbitrageurs trade 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.

Arbitrageurs:



Arbitrageurs are in business to take advantage of a discrepancy between prices
in two different markets. If, for example, they see the futures price of an asset getting out of
line with the cash price, they will take offsetting positions in the two markets to lock in a
profit.

ECONOMIC FUNCTION OF THE DERIVATIVE
MARKET

In spite of the fear and criticism with which the derivative markets are
commonly looked at, these markets perform a number of economic functions.
1. Prices in an organized derivatives market reflect the perception of market participants
about the future and lead the prices of underlying to the perceived future level. The prices of
derivatives converge with the prices of the underlying at the expiration of the derivative
contract. Thus derivatives help in discovery of future as well as current prices.

2. The derivatives market helps to transfer risks from those who have them but may not like
them to those who have an appetite for them.

3. Derivatives, due to their inherent nature, are linked to the underlying cash markets. With
the introduction of derivatives, the underlying market witnesses higher trading volumes
because of participation by more players who would not otherwise participate for lack of an
arrangement to transfer risk.

4. Speculative trades shift to a more controlled environment of derivatives market. In the
absence of an organized derivatives market, speculators trade in the underlying cash markets.
Margining, monitoring and surveillance of the activities of various participants become
extremely difficult in these kinds of mixed markets.



5. An important incidental benefit that flows from derivatives trading is that it acts as a
catalyst for new entrepreneurial activity. The derivatives have a history of attracting many
bright, creative, well-educated people with an entrepreneurial attitude. They often energize
others to create new businesses, new products and new employment opportunities, the benefit
of which are immense.

In a nut shell, derivatives markets help increase savings and investment in the
long run. Transfer of risk enables market participants to expand their volume of activity.

Among these Forward, Future, & Options are most common & widely used derivatives.
Explanations of forward, Future & Options:

Introduction to forward contract:
A forward contract is an agreement to buy or sell an asset on a specified date for
a specified price. One of the prices to the contract assumes a 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 quality are negotiated bilaterally by the
parties to the contract. The forward contracts are normally traded out side the exchange.

The salient features of the forward contract are:
• They are bilateral contract and hence exposed to counter party risk.
• Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
• On the expiration date, the contract has to be settled by the delivery of the asset.
• If the party wishes to reverse the contract it has to be compulsorily go to the same counter
party, which often result in high changed.
• The counter price is not available in public domain.

However forward contracts in certain markets have become very standardized,
as in case of foreign exchange, there by reducing transaction costs and increasing transaction
volume. This process of standardization reaches its limits in the organized future market.



Forward contract are very useful in hedging and speculation. The classic
hedging applications would be that of the exporter who expects to receive payments in dollar
three months later. He is exposed to risk of exchange rate fluctuation. 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 fluctuation by buying dollars forward.

If a speculator has the information or analysis, which forecasts an upturn inn 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 rice, and then take a reversing transaction
to book profit. Speculators may well be required to deposit a margin front.

However, this is generally a relatively small portion of the value of the asset
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 such as:
• Lack of centralization of trading,
• Liquidity, &
• Counter party risk

Introduction to futures:

The future markets are designed to solve the problem that exists in the forward
markets. A future contract is an agreement between two parties two buy or sell an asset at a
certain time in the future at a certain price. But unlike forward contracts, the future contracts
are standardized and exchange traded. To facilitate liquidity in the future contract, the
exchange specifies certain standard features of the contract. It is standardized contract with
standard underlying instrument that can be delivered, (or which can be used for reference
purpose in settlement) and a standard timing of such settlement. A future contract can be



offset prior to maturity by entering into an equal & opposite transaction. More than 99% of
future transactions are offset this way.

The standardized items in a future contract are:
• Quality of underling
• Quantity of underlying
• The date & month of delivery
• The units of the price quotation & minimum price change
• Location of settlement

Distinction between future and forward:
FUTURE Forward

1. Trade on an organized exchange. 1. OTC in nature.
2. Standardized contract terms. 2. Standardized contract terms.
3. Hence more liquid. 3. Hence less liquid.
4. Requires margin payments. 4. No margin payments.

5. Follows daily settlement.

Futures terminology:
Spot price:
The price at which an asset trades in the spot market.

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

Contract cycle:
The period over which a contract trades. The index futures contracts on the NSE
have one- month, two-month and three months expiry cycles 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’s 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. Also called as
lot size.

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.

Initial margin:
The amount that must be deposited in the margin account at the time a futures
contract is first entered into is known as initial margin.

Marketing-to-market:
In the futures market, at the end of each trading day, the margin account is
adjusted to reflect the investor's gain or loss depending upon the futures closing price. This is
called marking-to-market.

Maintenance margin:
This is somewhat lower than the initial margin. This is set to ensure that the
balance in the margin account never becomes negative. If the balance in the margin account
falls below the maintenance margin, the investor receives a margin call and is expected to top
up the margin account to the initial margin level before trading commences on the next day.



Explanation of future with an example:
How to benefit from the stock futures:
The share of DLF lot size is 800 at a currently quoting at Rs.392 (313600) on 29/07/2009.
You believe in one month it will touch Rs.430.

Question: What do you do?

Answer: you buy DLF.

Effect: It touches Rs.430 as your predicted –you made a profit of Rs.38 on an Investment of
Rs. 392 i.e. a return of 10%in one month.

Wait: can it get any better?

Yes!!

Question: What should you do?

Answer: Buy DLF Futures instead.

Effect: On buying 1 lot (800units) of DLF futures in derivatives market, but you pay a margin
amount not the entire amount. For the example, if the margin is 25%, you would pay only
RS.98 (78400). If DLF goes up to Rs430, you will still earn Rs.38 (30400) as profit. So you
will get 39% return in one month.

This is the advantage of ‘leverage’ which Stock Futures provide. By investing a small margin
(ranging from 20 to 30%), you can get into the same positions, as you would be able to in the
cash market. The returns therefore get accordingly multiplied.

Question: What are the risks?



Answer: the risks are that looses will be get leveraged or multiplied in the same manner as
profits do. For example, If DLF drops from Rs.392 (313600) to Rs.360 (288000); you would
make a loss of Rs.32 (25600). The Rs.32 loss would translate to an 8% loss in the cash
market and a 33% loss in the future market.

Question: how can I reduce such losses?

Answer: it is very is to reduce/minimize such losses if you keep a sharp eye on the market.
Suppose, you are bullish and you hence buy DLF futures. But DLF futures are moving down
after you have bought. You can square up your position at any point of time thereafter. You
can buy at 10:30 in the morning and sell off at 11:00 on same day. There is no restriction at
all. Thus, by squaring up early enough you could stem your possible losses.

Question: how long do futures last and when do they expire?

Answer: Futures expire on last Thursday of every month. For example, January Futures will
expire on 31st January (last Thursday).

Question: what is the implication of expiry?

Answer: suppose you have bought January Futures on DLF and have not squared up till the
end. On 31st January, your Futures will be compulsorily sold at the closing cash market price
of DLF and your Profit or Loss will be paid out or demanded from you as the case may be.

Question: Apart from leverage, how can I use futures?

Answer: A great advantage of futures (at the moment) is that they are not linked to ‘delivery’.
Which means, you can sell futures (Short sell) of DLF even if you do not have any shares of
DLF? Thus, you can benefit from a downturn as well as from an upturn.

If you predict an upturn, you should buy futures and if you predict a downturn, you can
always sell future – thus you can make money in a falling market as well as in a rising one –



an opportunity that till recently was available only to brokers / operators and easily to retail
investors.

Question: How can I take Arbitrage opportunity through futures?

Answer: When does it make sense to enter into this arbitrage? If your cost of borrowing
funds to buy the security is less than the arbitrage profit possible, it makes sense for you to
arbitrage. This is termed as cash-and-carry arbitrage. Remember however, that exploiting an
arbitrage opportunity involves trading on the spot and futures market. In the real world, one
has to build in the transactions costs into the arbitrage strategy.

In futures, such arbitrage opportunities arise constantly – thus futures can be understood as
‘arbitrage on tap’. You should look for opportunities where futures prices are higher than
cash prices. For example, if DLF is quoting at Rs.350 in the cash market and one-month DLF
futures are quoting at Rs.355 in the future market, you can earn Rs5 as difference. You will
then buy DLF in cash market and at the same time, sell DLF one-month futures.

On or around the expiry day (last Thursday of each month), you will square up both the
positions, i.e. you will sell DLF in the cash market and buy futures. The two prices will be the
same (or very nearly the same) as cash and futures prices will converge on expiry. It does not
matter to you what the price is. You will make your profit of Rs.5 anyway.

For example, if the price is Rs.370, you will make a profit of Rs.20 on selling your Cash
market DLF and a loss of Rs.15 on buying back DLF futures. The net profit is Rs.5. on the
other hand, if the price is Rs.325; you make a loss of Rs.25 on selling Cash market DLF and a
profit of Rs.30 on DLF futures. The net profit remains Rs.5.

Your investment in this transaction will be Rs.350 on cash market DLF plus a margin of say
25% on DLF futures (say Rs.88.75 approx). Thus an investment of Rs.438.75 has generated a
return of Rs.5 i.e. 1.14% per month or 13.67% per annum.



Now take a situation where only 15 days are left for expiry and you spot the same
opportunity as above. You will still generate Rs.5 which will translate into a return of 2.27%
per month or 27.35%per annum.

In this manner, you will generate returns whenever the future prices the are above cash
market price.

Question: What precautions should I take in such transactions and what risk am I exposed to?

Answer: You need to factor in brokerage costs and Demat changes for the above transactions.
The net returns should be considered for decision-making purposes.

There is an execution risk in the sense that you might not get exactly the same price in the
cash market and the futures market when you square up on or around the last day. For
example, if you sell your cash market DLF shares for RS.250 and buy back DLF futures at
Rs.250.50, there is a small difference of Rs.0.50 which will affect your net profit. The impact
might be favorable or adverse but is nevertheless possible. It is however quit likely that the
difference might be very small on or around the last day.

Question: do I need to wait till the last day?

Answer: No- you might find profitable exit opportunities much before the last day also. For
example, if the 1 lot (800) of DLF shares is Rs.280 (224000), after 3 days and DLF futures
are quoted at Rs.281 (224800), you could very exit both positions. You will make a loss off.



Introduction to option:

In this section we look at the next derivative product to be traded on the NSE,
namely options. Options are fundamentally different from forward and future contracts. An
option gives the holder of the option the right to-do something. The holder does not have to
exercise this right. In the contrast, in a forward or future contract, the two parties have
committed themselves to doing something. Whereas it costs nothing (expect margin
requirements) to enter in to a future contract, the purchase of an option requires an up-front
payment.



Distinction between future and options:

Futures. Options
1) Exchange traded, with novation. 1) Same as future

2) Price is zero, strick price moves 2)Strike price is fixed, price moves

3)Price is zero 3) Price is always positive.

4) Linear payoff. 4) Nonlinear payoff.

5) Exchange defines the product. 5) Same as futures.

6) Both long and short at risk only 6) Short at risk.

Option terminology:
Index option:
These options have the index as the underlying. Some options are European
while others are American. Like index futures contracts, index options contracts are also cash
settled.

Stock option:
Stock options are options on individual stocks. Options currently trade on over
500 stocks in the United States. A contract gives the holder the right to buy or sell shares at
the specified price.

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

Writer of an option:
The writer of a call/put option is the one who receives the option premium and is
thereby obliged to sell/buy the asset if the buyer exercises on him.



There are two basic types of options, call options and put options.
Call option:
A call option gives the holder the right but not the obligation to buy an asset by
a certain date for a certain price.

Put option:
A put option gives the holder the right but not the obligation to sell an asset by a
certain date for a certain price.

Option price/premium:
Option price is the price which the option buyer pays to the option seller. It is
also referred to as the option premium

Expiration date:
The date specified in the options contract is known as the expiration date, the
exercise date, the strike date or the maturity.

Strike price:
The price specified in the options contract is known as the strike price or the
exercise price.

American options:
American options are options that can be exercised at any time upto the
expiration date. Most exchange-traded options are American.

European options:
European options are options that can be exercised only on the expiration date
itself. European options are easier to analyze than 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 (ITM) option is an option that would lead to a positive
cashflow to the holder if it were exercised immediately. A call option on the index is said to
be in-the-money when the current index stands at a level higher than 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 ITM. In the case of a put, the put is ITM if the index is below the strike price.

At-the-money option:
An at-the-money (ATM) option is an option that would lead to zero cashflow if
it were 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
cashflow 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:
The option premium can be broken down into two components - intrinsic value
and time value. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If
the call 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. 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 option's time value, all else equal. At expiration, an option
should have no time value.

Futures and options:



An interesting question to ask at this stage is - when would one use options instead of
futures?

Options are different from futures in several interesting senses. At a practical level, the option
buyer faces an interesting situation. He pays for the option in full at the time it is purchased.
After this, he only has an upside. There is no possibility of the options position generating
any further losses to him (other than the funds already paid for the option). This is different
from futures, which is free to enter into, but can generate very large losses. This characteristic
makes options attractive to many occasional market participants, who cannot put in the time
to closely monitor their futures positions.

Buying put options is buying insurance. To buy a put option on Nifty is to buy insurance
which reimburses the full extent to which Nifty drops below the strike price of the put option.
This is attractive to many people, and to mutual funds creating "guaranteed return products".

The Nifty index fund industry will find it very useful to make a bundle of a Nifty index fund
and a Nifty put option to create a new kind of a Nifty index fund, which gives the investor
protection against extreme drops in Nifty. Selling put options is selling insurance, so anyone
who feels like earning revenues by selling insurance can set himself up to do so on the index
options market.

More generally, options offer "nonlinear payoffs" whereas futures only have "linear payoffs".
By combining futures and options, a wide variety of innovative and useful payoff structures
can be created.

Explanation of option with an example.
Option-the basic framework

Question: What are options?

Answer: Options are derivative products, which, if you buy, give you certain rights.



Question: What kind of right?

Answer: Call Options give a right to buy a share (at a certain specific price), while
Put Options give you a right to sell (again at a predefined price). For example, if you buy a
DLF 1 lot (200) at Rs.350 (70000) in call option, you are entitled to buy DLF share at a price
of Rs.350 (70000) per share. This specific price is called as the strick price or the exercise
price.

Question: What do I pay for obtaining such rights?

Answer: The cost you pay for obtaining such rights is the premium (also called price or
option value). In the above case, if you had Rs.14for the option, that would be premium.

Question: So do I actually get DLF shares?

Answer: Most of the time, you do not even intend to buy DLF shares. The option itself has a
value that keeps fluctuating with the price of DLF shares. For example the DLF shares price
may have been Rs.350 when you bought the Call Option.

You expect DLF price to rise. You accordingly bought the Call (instead of DLF itself). Now
if DLF rises to Rs.415 (in 10 days time), you will find that the call would also have risen in
price from Rs.14 to Rs.60. in that case, you would simply sell the Call for Rs.60. you would
have made a profit of Rs.46 on the Call itself without getting into DLF shares themselves.
You can get DLF shares (through the Call) if you want to, but that we will discuss later.

Question: So when should I buy a Call?

Answer: You should buy a Call when you are bullish.

Question: Why should I not buy the share itself?



Answer: Well, you can. But in Options you will earn more. Take the above case. If you buy
DLF shares at Rs.350 and sell DLF at Rs.415, you will make a profit of Rs.65, a 19% return.
Now if buy the Option at Rs.14 and sell at Rs.60, you have earned 329% return.

Your view is on both cases, for the same period of time and you earn for more in Options.

Question: What if my view is not correct?

Answer: Here again, Option are very useful. If your view wrong, you will find that your
Option value will decrease, as DLF share price decreases. For example, you will find that the
Option value is only Rs.4 if DLF drops to 325 in that days they will sell off the option at Rs.4
and bear the loss.

If you had bought DLF, you would have lost Rs.25 per share, while here you lose only Rs.4.
it is however higher in percentage terms.

If DLF drops all the way to Rs.300, you will find that your option carries virtually no value.
Here again, you would have lost Rs.50 per share in DLF. But in options, your maximum loss
will be Rs.14, i.e. the amount you paid for buying the option.

The biggest advantage of options is that your maximum loss is limited to the option price you
paid. Hence, you have limited losses but unlimited profits as a buyer of options.

The accompanying graph is very useful in understanding the profit / loss possibilities of an
option. The X-axis shows the price of DLF and the Y-axis indicates the profits or losses you
will make.

How can I enjoy such wonderful profile of limited losses and unlimited profits? I mean,
somebody must be paying for this, isn’t it?

Well, you are right. That somebody paying for this is the option seller (also called the option
writer).



Question: Why does he pay for unlimited losses?

Answer: The Option Writer is usually a skilled market player with an in-depth knowledge of
the market. He is willing to take unlimited risk in return for a limited profit. The premium
you pay is his limited income, but if his view is wrong, he will pay you for the unlimited
profits you might make.

In the above case, if DLF share price rises the Option seller will lose Rs.46 (he would have
sold you the Option at Rs.14 only to buy it back at Rs.60). if DLF rises further, the Option
value will also rise and his losses will be that much higher.

Question: When will the Option expire and what happens on expiry?

Answer: Option will (like futures) expire on the last Thursday of every month. On expiry,
your Call Option will be settled based on the closing price of DLF. For example, the lot size
(200) DLF share price was Rs.400 (80000) on the last Thursday, you will be paid Rs50, i.e.
the difference between Rs.400 and your strick Rs.350.

Your net profit will be Rs.26, i.e.Rs.50 that you receive on expiry less the Rs.24 premium
that you paid for purchasing option.

Question: Who will pay difference of Rs.50?

Answer: The Option seller/writer will pay the difference of Rs.50 to the exchange which will
pay your broker who will pay you.

This settlement is called automatic exercise of the Option.

Question: What if the price of DLF on the last Thursday is below Rs.350?



Answer: If DLF closes at say Rs.330, you will receive nothing. In that case, your loss will be
Rs.24 (your premium), which the Option seller would have earned as his income.

Question: Can I also exercise before the expiry date?
Answer: In case of stock Option (31 stocks currently), you can exercise your Option on any
trading day. You will receive the difference (if you are holding a Call Option) between the
closing price and your strick price. Such Options which can be exercised at any time are
called American style Options.

In case of index Options (2 indices currently), you can exercise only on the last day. These
are called European style Options.

Question: Are American style Options more useful/flexible?

Answer: Yes, But only partly. The advantage of anytime exercise is useful for Option buyers.
However, in practice, exercise is rare. You will find that it is more profitable to sell an Option
(having bought it earlier) rather than exercise.

You will often receive more by sale than by exercise. If you are waiting in the Ground Floor
of a building want to go the 21st floor, you have two Options – one - take a lift and-two-take
the stairs. Which will you prefer, obviously the lift. In a similar manner, having bought an
Option, you can exit in the two ways – one – sell the Option and - two exercise the Option.
More than 95% of buyers will sell the option.

Question: So when should I exercise?

Answer: You will take the stairs only when the lift is not working. In a similar manner, you
will exercise the Option only when the sale possibility is not working. If the market is illiquid
you find that there are no trades happening, you may try to exit through the exercise route.

Question: How to use covered call?



Answer: Establishing a covered call is extremely simple. All you have to do is to write (sell
to open) 1 contract of nearest out of the Money for every 100 shares you own.
You could also choose to execute the Covered Call with At the Money call options instead.
Doing so earns you a higher premium should the stock remain stagnant. The drawback of
doing so is that you will not benefit from any gain in the stock should the stock price rise.

There is another variant of the Covered Call using deep in the money options, known as the
Deep in the Money Covered Call.

You could also choose to execute the Covered Call with At the Money call options instead.
Doing so earns you a higher premium should the stock remain stagnant. The drawback of
doing so is that you will not benefit from any gain in the stock should the stock price rise.

There is another variant of the Covered Call using deep in the money options, known as the
Deep in the Money Covered Call

Such an ideal situation is, of course, rare. In most cases, the short call options will either be in
the money or out of the money at expiration.

When your stock is stagnant or slightly higher upon expiration of the short call options, you
will profit on the whole value of the call options that you wrote, with whatever profit from
the stock if it is up slightly.

When your stock has gained in price beyond the strike price of the short call options upon
expiration, your stocks will be called off (assigned) and you will profit from the value of the
call options that you wrote and the value of the stock appreciation up till the strike price of
the short call options. That is to say, you will not benefit from any rise in your stock beyond
the strike price of the short call options due to the short call options going in the money.

For example: A lot size (200) DLF share price was Rs400 (80000) in cash market and
derivative market price Rs.420 (84000) call Rs.20 (4000) is premium then we paid the Money
Rs.20 (4000) in future market but already purchased in cash market and sold at future market.
If Rs.380 (76000) below will came the loss will start and Rs.420 (84000) above will came


then also loss will started so we firstly think and invest the Money. In derivative market
contract based we using the share trading.

Indian derivative market:

Traditionally, equity derivative also have had a long history in India in the OTC
market. The securities and contracts regulation act (SCRA) however banned all kind of
options in 1956 in India. The prohibition on options in SCRA was removed in 1995. The
securities laws (Amendment in SCRA) bill 1999 was introduced to bring about the much-
needed changes. In December 1999, the new framework was approved. Derivatives have
since then been status of accorded the ‘securities’. Also the notification of June 1969 under
section 16 of SCRA banging forward trading was revoked in March 2000. Foreign currency
options in currency pairs other than rupee. Were the first options permitted by reserve bank of
India (RBI). RBI permitted options, interest rate swaps, currency swaps and others risk
reduction OTC derivative products. Besides the forward market in currencies has been a
vibrant market in India for several decades. In addition the forward market has allowed the
setting up of future exchange. Today we have over 20 commodities exchanges most of which
trade futures. E.g. the Indian pepper and spice traders association (IPSTA) and the coffee
owner’s futures exchange of India (COFEI). Last two years of this market have observed
phased introduction of various derivative products including stock option and stock futures.

Derivative History:

The formal setup of derivative market is relatively new (since 1970s), the
general concept has existed around the world for years. Traders in Asian economic have
observed and used the derivative instrument (forward, future & options) for their benefit and
development processes. During the renaissance, Venetian spice traders waited for cargo on
the high seas for which they enter into future contract agreeing to price for future derivatives.
Also, for hundreds of years, the Japanese and Indian rice farmers have used the future value
of their production. Looking at not distant history, options of various kinds (called Tejl &
mandi & fatak) in un-organized markets were traded as early as 1990 in Mumbai. Insurance
products are one of the most prominent and widely use derivative instruments, although they



were never introduced in the form of “derivative”. Today trading procedure like future &
options have been a single name and bought under the umbrella of “derivatives”. Along with
the evolution of financial derivatives, there has been adoption of a formal setup and specific
rules, which did not, could not have existed before due to non-existence of systematized
financial markets.

Till 1985, future trading in its present from was obscure in India, where in even
bankers, financial journalist and academician would not understand the trade. Although, the
evaluation of derivative can be traced to forward trading that was done in ancient times. It is
not clearly established as to where and when the first forward market came into existence.
Recorded evidence dates back to 2000 BC. India has had forward trading for ages. The
followers around the same period were the Romans too practice this form of trading in the
12th century; Japan did its rice trade through forward contracts.

In Japan, this was basically centered on Dojima, a district of Osaka and the trade
was known as cho-ai-mai a kinai (race-trade-on-book). This trade in rice grew and flourished
to a stage where receipts for future delivery were traded with a high degree of
standardization. In 1730, the market received official recognitions from the tokugawa
shogunte (the ruling clan of shoguns or feudal lords). The Dojima rice market can thus be
regarded as the first future market in the sense of an organized exchange with standardized
trading terms. The market was its successors went through many phases including closures in
1869 & 1973. The first future markets in the western hemisphere were developed in the
United states, in Chicago. This market (in grain) had started as spot markets and gradually
evolved into future trading. This evaluation, however, was in stages. The first stage was the
starting of agreements to buy grain in the future at a pre-determined price with the intention
of actual delivery. Gradually these contracts became transferable and over a period of time,
particularly during the American civil war (1860-1865), it became commonplace to sell and
agreements themselves, instead of taking delivery of the physical produce. Traders found that
the agreements were easier to buy and sell if they were standardized in terms of quality of
grains, market lot and place of delivery. This is how modern future contrast first came into
being.



The Chicago board of trade (CBOT), which opened in 1848, is to this day the
largest future market in the world. The general rules framed by CBOT in 1865 became a
trend seller for many other markets in 1870; the New York cotton exchange was founded.
The London metal exchange was established in 1877. LME is lately the leading market in
metal trading (both spot & forward). There after many new future markets were started. The
first financial future market was the international monetary market, founded in 1972 by the
Chicago mercantile exchange. This was followed by the London international financial future
exchange in 1982.

Unfortunately, India has not had such a good tradition of record keeping for
such financial trades as the west. Also, India has been invaded time and again over ages in
the last 10 centuries, which had also contributed to reduction in records being reduced to the
minimum. Only the archeological findings and ancient literature, if any provide us with
reference. It is there fore very difficult to trace back evidence for forward/future trading in
our history.

The first organized forward market in India came into existence in the late 19 th
and early 20th century in Calcutta (for jute & jute goods) and Mumbai (for cotton). Several
new markets grew over the first half of the 20th century. Chronologically, India’s experience
in organized forward trading is almost as long as that of the United Kingdom, and certainly
longer than the most development nations. However the tidal wave of price controls,
nationalism and state intervention in market swept through all economics policy-making
specifically after independence. This led to a rapid decline in the number of such future and
forward markets (not known as derivative market then). Frequently markets were closed due
to the felling that they were responsible for sudden movements of price in the commodities;
the underlying presumption was that speculation on forward market was creating or
exacerbating price pressures. At present India have future commodity market only in few
goods like Hessian, turmeric, pepper, castor seed, gur (jiggery), potatoes and other. The
market is dynamic and is growing at a tremendous rate.

Options might have had existed in ancient GREECE AND Rome as early as 400
BC. Also there is evidence of options in wheat and other agriculturist commodities during the



middle Ages in England. In the 17th century Holland had presence of options on tulip bulbs.
Options trading in agricultural commodities and in share revolutionized and bought under the
purview of the term “derivatives” in the United States from mid 1860s. However these were
not standardized traded options then, but one-to-one deals between traders (over-the-counter).
Options trading remained peripheral and never grew as much as futures trading till the 1970s.
The first traded options market was started by CBOT on April 26, 1973. This brought about,
standard maturates, standard strick price and standard delivery arrangements. This also led to
the introduction of clearing house and a margin system, so that the risk of default could be
removed. Options on future contracts commenced in 1982. The introduction of traded options
opened the way for the evolution of more complex derivatives.

The first swap transaction, a currency swap, took place in 1981 between the
World Bank and International Business Machines (IBM). Other derivative like interest rate
swaps, forward rate agreements (FRAs), range forward, collars, etc, evolved since.

NSE's DERIVATIVES MARKET:

The derivatives trading on the NSE commenced with S&P CNX Nifty Index
futures on June 12, 2000. The trading in index options commenced on June 4, 2001 and
trading in options on individual securities commenced on July 2, 2001. Single stock futures
were launched on November 9, 2001. Today, both in terms of volume and turnover, NSE is
the largest derivatives exchange in India. Currently, the derivatives contracts have a
maximum of 3-month expiration cycles. Three contracts are available for trading, with 1
month, 2 months and 3 months expiry. A new contract is introduced on the next trading day
following the expiry of the near month contract.

Trading mechanism:

The futures and options trading system of NSE, called NEAT-F&O trading
system, provides a fully automated screen-based trading for Index futures & options and



Stock futures & options on a nationwide basis and an online monitoring and surveillance
mechanism. It supports an anonymous order driven market which provides complete
transparency of trading operations and operates on strict price-time priority. It is similar to
that of trading of equities in the Cash Market (CM) segment. The NEAT-F&O trading system
is 13 accessed by two types of users. The Trading Members (TM) have access to functions
such as order entry, order matching, and order and trade management. It provides tremendous
flexibility to users in terms of kinds of orders that can be placed on the system. Various
conditions like Immediate or Cancel, Limit/Market price, Stop loss, etc. can be built into an
order. The Clearing Members (CM) use the trader workstation for the purpose of monitoring
the trading member(s) for whom they clear the trades. Additionally, they can enter and set
limits to positions, which a trading member can take.



Company profile

“…..When it’s a question of your money,
The answer is Reliance Money…..”

Reliance money is a part of Reliance Capital Limited, One of India’s Leading
& fastest growing private sector financial services companies, Ranks Among the top 3 private
sector financial services companies, in terms of net worth, With interests in Asset
Management and Mutual Funds, Life and General Insurance, Credit Cards and other activities
in financial services.

Reliance Money offers a single window platform for the financial transactions.
Offering an investment avenue for a wide range of asset classes like Equity, Equity &
Commodity Derivatives, Mutual Funds, IPO’s Life and General Insurance, Offshore
Investments, Money Transfer, Money Changing and Credit Card. Their endeavor is to change
the way India transacts in financial markets and avails financial services. One of their key
features is that the most cost-effective, convenient and secure way to transact in a wide range
of financial products and services. Reliance Money is targeting the low level of retail
penetration in Indian retail financial market. Retail participation in equities in India is



amongst the lowest in the world, with less than 5 per cent of household sector financial
savings invested in equity/equity-related assets.

The company has formally commenced operations in April 2007.
Highlights of Reliance Money

Cost- effective: The fee charged by the affiliates of Reliance Money, through Whom the
transactions can be placed, is among the lowest charged in the Present scenario & would
revolutionize the broking fee structure

Convenience: You have the flexibility to access Reliance Money Services in Multiple ways:
through the Internet, Transaction Kiosks, Call & Transact (phone) or seek assistance through
our Business Partners.

Security: Reliance Money provides secure access through an electronic Token that flashes a
unique security number every 32 seconds (and ensures that the Number used for the earlier
transaction is discarded). The number Works as a third level password that keeps your
account extra safe.

Single window for multiple products: Reliance Money, through its affiliates/partners,
facility in equity & commodity derivative offshore investments, mutual funds, IPO’s, life
insurance and general insurance products.

3 in 1 integrated access: Reliance Money offers integrated access to your banking, trading
and de-mat account. And transact without the hassle of writing cheques.

VISION STATEMENT OF RELIANCE MONEY

“To be world leader in the business by providing a convenient transparent and
Trustworthy online platform for effective wealth management”

MISSION STATEMENT



“To offer unparallel value by providing the customer transparent, convenient and Effective
anytime-anywhere integrated financial transaction capability”

Origin and development of the industry
The Parent Company

Reliance Capital Ltd

COMPANY OVERVIEW
Reliance Capital Limited (RCL) is a depository participant with National
Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL) under the
Securities and Exchange Board of India (Depositories and Participants) Regulations;



1996.The Company primarily focuses on funding projects in the Infrastructure sector and
supports the growth of its subsidiary companies.

The company primarily operates in India. It is headquartered in Navi Mumbai,
India and employs about 140 people. The company recorded revenues of INR6, 520 million
(approximately $146.6 million) during the fiscal year ended March 2006. As compared to
revenues of INR 2,956.9millions during 2005. The Operating profit of the company was
INR5, 506.1 million (approximately $123.8million) during fiscal year 2006, as compared to
an operating profit of INR 1112.1millions during 2005. The net profit was INR5, 376, 1
million (approximately $120.9 million) in fiscal year 2006, as compared to a net profit of
INR1, 058.1 million during 2005.

BUSINESS DESCRIPTION

Reliance Capital (RCL), a member of the Reliance Group, is a private sector
financial services company. Reliance Capital is engaged in asset management and mutual
funds, life and general insurance, private equity and proprietary investments, stock broking
and other financial services.

RCL primarily focuses on funding projects in the infrastructure sector and
supports the growth of its subsidiary companies, Reliance Capital Asset Management,
Reliance Capital Trustee; Reliance General Insurance of Reliance Life Insurance, Reliance
Capital Asset Management, and a wholly owned subsidiary of Reliance Capital manages
Reliance Mutual Fund schemes. Reliance Mutual Fund and Reliance money offers investors
a well-rounded portfolio of products to meet varying investor requirements. Reliance Mutual
fund is active in over 80 cities across India with an investor base of over 2 million and
manages assets over Rs 27,914 crore as on May 31, 2006.

Reliance Life Insurances is an associate company of RCL offering a range of
products catering for individual and corporate clients. The company has a total of 16 products
in its range, covering savings, protection and investment requirements. Reliance General



Insurance, a Subsidiary of RCL, is a non-life insurance company offering a range of
insurance products covering risks including property, marine, casualty and liability,

VISION OF THE COMPANY

“To aspire to the highest global standards of quality and efficiency, operational performance,
and customer care and to be the world leader in the Business world-class financial services
enterprise”

MISSION

 To attain global best practices and become a world-class financial Services enterprise –
guided by its purpose to move towards greater degree of sophistication and maturity.
 To work with vigor, dedication and innovation to achieve excellence in service, quality,
reliability, safety and customer care as the ultimate goal...
 To earn the trust and confidence of all stakeholders, exceeding their expectations and
make the Company a respected household name.
 To consistently achieve high growth with the highest levels of productivity.
 To be a technology driven, efficient and financially sound organization.
 To contribute towards community development and nation building.
 To be a responsible corporate citizen nurturing human values and concern for society, the
environment and above all, people.

KEY EMPLOYEES
Name Job Title Board
Anil Dhirubhai Ambani Chairman Executive Board
Sam Ghosh Vice Chairman No Executive Board
Rajendra Chitale Director No Executive Board
C P Jain Director No Executive Board



Udyan Bose Director No Executive Board
V R Mohan Company secretary and Senior Management
manager

Chairman’s profile

Regarded as one of the foremost corporate leaders of contemporary India,

Shri. Anil D Ambani, 48, is the chairman of all listed companies of the Reliance ADA
Group, namely, Reliance Communications, Reliance Capital, Reliance Energy and
Reliance Natural Resources limited.

He is also Chairman of the Board of Governors of Dhirubhai Ambani Institute of Information
and Communication Technology, Gandhi Nagar, Gujarat. Till recently, he also held the post
of Vice Chairman and Managing Director in Reliance Industries Limited (RIL), India’s
largest private sector enterprise. Anil D Ambani joined Reliance in 1983 as Co-Chief
Executive Officer, and was centrally involved in every aspect of the company’s management
over the next 22 years.
He is credited with having pioneered a number of path-breaking financial innovations
in the Indian capital markets. He spearheaded the country’s first forays into the
overseas capital markets with international public offerings of global depositary
receipts, convertibles and bonds. Starting in 1991, he directed Reliance Industries in its
efforts to rise over US$ 2 billion. He also steered the 100-year Yankee bond issue for the
company in January 1997.

MAJOR PRODUCTS AND SERVICES



Reliance Capital is a non-banking finance company. Its services include:
 Asset management
 Mutual funds
 Life insurance
 General insurance
 Offshore investments.
 Proprietary investments
 Stock broking

PRODUCTS OF RELIANCE MONEY:

EQUITY
Introduction-

Investing in equity, which offers returns that are higher than the inflation rate,
helps you build wealth and improve your standard of living. The risk involved with investing
in equity can be moderated by careful stock selection and close monitoring.

What is equity?
Acquiring equity shares of a company signifies ownership in that company to the extent of
shares that you have acquired.

Returns from equity
By investing in equity, you earn returns in two ways-
 Capital Appreciation:
Over the longer term, with growth of a company’s business, its share price
increases in value. This, in turn, increases the value of your holding in this company.

 Dividend Income:


A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance money

A project report on market volatility the way to recover the difference in equity prices due to market crash at reliance money

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