RESEARCH PROJECT REPORT

ON

STUDY OF DERIVATIVES MARKET IN INDIA

WITH RESPECT TO FUTURE & OPTION

A PROJECT SUBMITTED IN PARTIAL FULFILMENT

OF THE REQUIREMENT FOR DEGREE OF MBA

BY

ROHIT SHARMA

ROLL NO.1711470028

2017-2019

UNDER THE SUPERVISION OF

DR. RUCHI SHARMA

INSTITUTE OF PROFESSIONAL EXCELLENCE AND

MANAGEMENT

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 A Study of Derivative Market in India

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 ACKNOWLEDGEMENT
My research project report “Study of Derivatives Market in India with Respect to
Future & Option”, has become successful because of the helping hand by the courteous
people mentioned below, without their inspiration, help, continuous guidance and co-
operation; I could not have succeeded in this project.

With deep sense of gratitude I acknowledge the encouragement and guidance received
by guide DR. RUCHI SHARMA.

I convey my heart full affection to all those people who helped.

Rohit Sharma

Roll No. 1711470028

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 Abstract
Since 1991, due to liberalization of economic policy, the Indian economy has entered
an era in which Indian companies cannot ignore global markets. Before the nineties,
prices of many commodities, metals and other assets were controlled. Others, which
were not controlled, were largely based on regulated prices of inputs. As such there was
limited uncertainty, and hence, limited volatility of prices. But after 1991, starting the
process of deregulation, prices of most commodities are decontrolled. It has also
resulted in partly deregulating the exchange rates, removing the trade cont rols,
reducing the interest rates, making major changes for the capital market entry of foreign
institutional investors, introducing market based pricing of government securities, etc.
All these measures have increased the volatility of prices of various goods and services
in India to producers and consumers alike. Further, market determined exchange rates
and interest rates also created volatility and instability in portfolio values and securities
prices. Hence, hedging activities through various derivatives emerged to different risks.
This paper will study the capital market in India with reference to Derivatives.

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 Tables of Contents

Sr. No. Content Page No.

1. Introduction of Capital Market 7

2. About NSE 8-11

3. About BSE 12-14

4. About Derivatives 15

5. Derivatives in India 16-18

6. Diff. B/W Futures & Forward Contract 19

7. Diff. B/W Futures & Option Contract 20

8. Option Trading Strategies 21-31

9. Evolution Of Derivatives In India 32-34

10. Disadvantages of Derivatives Market in India 35

11. An Overview of Foreign Exchange Derivatives 36

12. Purpose of the Foreign Exchange Market 37-38

13. Derivatives Analysis and Training: Technical 39-41

Analysis

14. Key Words 42

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15. Factors Contributing To The Growth Of 43
Derivatives

16. Globalization of Markets 44

17. Technological Advances 45

18. Data Analysis and Interpretation 46-59

19. Summary 60

20. Suggestions 61-62

21. Conclusion 63

22. Bibliography 64

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 Introduction of Capital Market

Capital Market is the market for long term finance with the maturity period more than
one year. The Capital Market deals with the stock markets which provide financing
through the issuance of shares or common stock in the primary market, and enable the
subsequent trading in the secondary market. Capital Markets also deals with Bond
Market which provide financing through issuance of Bonds in the primary market and
subsequent trading thereof in the secondary market.

Financial system is a complex set up for any county, which includes financial
institutions like banks, NBFCs (Non Banking Financial Companies), regulators,
products etc. Broadly the Indian Financial System can be classified in to two heads, viz,
the institutions and regulators in the filed of banking and allied services and the
institution and regulators in the filed of financial market. Banking sector institutions
include Reserve Bank of India, Pubic Sector Banks, Private Sector Banks, Co -
operative Banks, and Foreign Banks. NBFCs and organizations like LIC, GIC etc also
play a major role in the financial system.

The past decade has witnessed the multiple growths in the volume of international trade
and business due to the wave of globalization and liberalization all over the world. As
a result, the demand for the international money and financial instruments increased
significantly at the global level. I n this respect, changes in the interest rates, exchange
rates and stock market prices at the different financial markets have increased the
financial risks to the corporate world. Adverse changes have even threatened the very
survival of the business world . It is, therefore, to manage such risks; the new financial
instruments have been developed in the financial markets, which are also popularly

known as financial derivatives. The basic purpose of these instruments is to provide

commitments to prices for future dates for giving protection against adverse movements
in future prices, in order to reduce the extent of financial risks. Not only this, they also
provide opportunities to earn profit for those persons who are ready to go for higher
risks. In other words, these instruments, indeed, facilitate to transfer the risk from those
who wish to avoid it to those who are willing to accept the same.

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 About NSE
The National Stock Exchange of India Ltd. (NSE) is the leading stock
exchange in India and the second largest in the world by nos. of trades in
equity shares from January to June 2018, according to World Federation of
Exchanges (WFE) report.
NSE launched electronic screen-based trading in 1994, derivatives trading
(in the form of index futures) and internet trading in 2000, which were each
the first of its kind in India.
NSE has a fully-integrated business model comprising our exchange listings,
trading services, clearing and settlement services, indices, market data feeds,
technology solutions and financial education offerings. NSE also oversees
compliance by trading and clearing members and listed companies with the
rules and regulations of the exchange.
NSE is a pioneer in technology and ensures the reliability and performance
of its systems through a culture of innovation and investment in technology.
NSE believes that the scale and breadth of its products and services,
sustained leadership positions across multiple asset classes in India and
globally enable it to be highly reactive to market demands and changes and
deliver innovation in both trading and non-trading businesses to provide
high-quality data and services to market participants and clients.
Mr. Vikram Limaye is the Managing Director and CEO of NSE.

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Purpose, Vision & Values

Purpose
Committed to improve the financial well-being of people.

Vision
To continue to be a leader, establish global presence, facilitate the financial well-
being of people.

Values
NSE is committed to the following core values:

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Milestones
2018
NSE signs Post-Trade Technology and Strategic Partnership Agreement with Nasdaq

NSE announces launch of Tri-Party Repo on Corporate Debt Securities

NSE becomes the first Indian stock exchange to be part 30 exempted by Commodity
Futures Trading Commission (CFTC), enables access for US clients.

NSE launches e-Gsec Platform for retail

Introduction of Cross Currency Derivatives contracts on EUR-USD, GBP-USD and

USD-JPY

2017
Launch of Trading on Soverign Gold Bond (SGB)

Launch of an international exchange in Gujarat International Finance Tech City -

International Financial Service Centre. NSE IFSC Exchange

2016
Launched NIFTY 50 index futures trading on TAIFEX

Launched platform for sovereign gold bond issuances

Launched electronic book-building platform for private placement of debt securities

2015
Entered into a memorandum of understanding to enhance the level of cooperation
with the London Stock Exchange Group.

Renamed CNX NIFTY to NIFTY 50

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 Our Products:
Equity & Equity Linked Products

 Cash Market (Equities)

 Indices
 Mutual Funds
 Exchange Traded Funds
 Initial Public Offerings
 Offer for Sale
 Institutional Placement Program
 Security Lending and Borrowing Scheme
 Sovereign Gold Bonds Scheme
Derivatives
 Equity Derivatives
 Currency Derivatives
 NSE Bond Futures
Debt
 Debt Market
 Corporate Bonds
 Electronic Debt Bidding Platform (NSE-EBP).

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 About BSE
Established in 1875, BSE (formerly known as Bombay Stock Exchange Ltd.), is Asia's
first & the Fastest Stock Exchange in world with the speed of 6 micro seconds and one
of India's leading exchange groups. Over the past 143 years, BSE has facilitated the
growth of the Indian corporate sector by providing it an efficient capital-raising
platform. Popularly known as BSE, the bourse was established as ‘The Native Share &
Stock Brokers' Association’ in 1875. In 2017 BSE become the 1st listed stock exchange
of India.
Today BSE provides an efficient and transparent market for trading in equity,
currencies, debt instruments, derivatives, mutual funds. BSE SME is India’s largest
SME platform which has listed over 250 companies and continues to grow at a steady
pace. BSE StAR MF is India’s largest online mutual fund platform which process over
27 lakh transactions per month and adds almost 2 lakh new SIPs ever month. BSE Bond,
the transparent and efficient electronic book mechanism process for private placement
of debt securities, is the market leader with more than Rs 2.09 lakh crore of fund raising
from 530 issuances. (F.Y. 2017-2018).
Keeping in line with the vision of Shri Narendra Modi, Hon’be Prime Minister of Inida,
BSE has launched India INX, India's 1st international exchange, located at GIFT CITY
IFSC in Ahmedabad.
Indian Clearing Corporation Limited, a wholly owned subsidiary of BSE, acts as the
central counterparty to all trades executed on the BSE trading platform and provides
full novation, guaranteeing the settlement of all bonafide trades executed.
BSE Institute Ltd, another fully owned subsidiary of BSE runs one of the most
respected capital market educational institutes in the country.
BSE has also launched BSE Sammaan, the CSR exchange, is a 1st of its kind initiative
which aims to connect corporate with verified NGOs
BSE's popular equity index - the S&P BSE SENSEX - is India's most widely tracked
stock market benchmark index. It is traded internationally on the EUREX as well as
leading exchanges of the BRCS nations (Brazil, Russia, China and South Africa).

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 Vision
"Emerge as the premier Indian stock exchange with best-in-class global practice in
technology, products innovation and customer service."

CSR (Corporate Social Responsibility)

Corporate Social Responsibility (CSR) in BSE is aligned with its tradition of creating
wealth in the community with a three pronged focus on Education, Health and the
Environment. Besides funding charitable causes for the elderly and the physically
challenged, BSE has been supporting the rehabilitation and restoration efforts in
earthquake-hit communities of Gujarat. BSE has been awarded the Golden Peacock
Global - CSR Award for its initiatives in Corporate Social Responsibility (CSR) by the
World Council of Corporate Governance.

History and Milestones

BSE Ltd, the first ever stock exchange in Asia established in 1875 and the first in the
country to be granted permanent recognition under the Securities Contract Regulation
Act, 1956, has had an interesting rise to prominence over the past 143 years.
The journey of BSE Ltd. is as eventful and interesting as the history of India's securities
market.

Awards and Recognitions

As a pioneering financial institution in the Indian capital market, BSE has won several
awards and recognitions that acknowledge the work done and progress made.

 ‘IT Genius Awards 2017’ in the category ‘Data Centre Excellence’ for setup of the
India INX Data Centre by CORE (Centre of Recognition & Excellence)
 Digital Innovation Award 2017 for the Social Media Analytics Project by Netmagic
 Business World Digital Leadership and CIO Award
 The Best Exchange of the year award for equity and currency derivatives in Tefla's
Commodity Economic Outlook Award 2017,
 Best Brand award 2017 by Economic Times
 CIO POWER LIST 2017

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 Best Corporate film encompassing Vision, History, Value and Spirit of Excellence
award, Best Corporate film on Employer Branding award and Most Influential HR
Leaders in India award at World HRD Congress 2017
 'Best Exchange of the year' award at 4th India Bullion & Jewellery awards 2017
 Red Hat Innovation Awards 2016 by Red Hat Solutions
 Best IT Implementation Award 2016 in the “Most Complex Project Category” by
PCQuest
 InfoSec Maestros Awards 2016 .
 Lions CSR Precious Awards 2016
 Golden Peacock Award 2015
 CIO Power List 2015
 SKOCH Rennaissance Award 2014 for Contribution to Economy
 SKOCH Rennaissance Award 2014 for Corporate Social Responsibility
 India Innovative Awards- Big Data Innovation 2014
 ET Now – CISCO Technology Awards 2014
 Unicom –India Top 50 companies with best software 2014
 HR was awarded with Asia's Best Employer Brand Awards at Singapore in two
categories in August 2014
 Asia's Best Employer Brand Award
 CHRO of the Year Award
 Lokmat HR Leadership Award at Mumbai in June-2014
 50 most talented global HR leaders in Asia at the World HRD congress at Mumbai in
February-2014
 FIICI-Frames Best Animation Film-International Category for the Investor Education
television commercial
 India Innovation Award for Big Data Implementation
 ICICI Lombard & ET Now Risk Manager Award in BFSI Category
 SKOCH Order of Merit for E-Boss for qualifying among India’s Best 2013
 Indian Merchant Chamber Award in the Large Enterprise Category for use of
Information Technology
 The Golden Peacock Global CSR Award for its initiatives in Corporate Social
Responsibility
 BSE has won NASSCOM - CNBC-TV18’s IT User Awards, 2010 in Financial
Services category
 BSE has won Skoch Virtual Corporation 2010 Award in the BSE StAR MF category
 Responsibility Award (CSR), by the World Council of Corporate Governance
 Annual Reports and Accounts of BSE have been awarded the ICAI awards for
excellence in financial reporting for four consecutive years from 2006 onwards
 Human Resource Management at BSE has won the Asia - Pacific HRM awards for its
efforts in employer branding through talent management at work, health management
at work and excellence in HR through technology.
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 About Derivatives

A derivative is a contract between two or more parties whose value is based on an

agreed-upon underlying financial asset (like a security) or set of assets (like an index).
Common underlying instruments include bonds, commodities, currencies, interest
rates, market indexes and stocks.

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 Derivatives in India
Derivatives are financial instruments whose value is derived from other underlying
assets. There are mainly four types of derivative contracts such as futures, forwards,
options & swaps. However, Swaps are complex instruments that are not traded in the
Indian stock market.

Four Types of Derivative contracts:-

 Futures
 Forward contract
 Options
 Swaps

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Futures & Forward contract

Futures are standardized contracts and they are traded on the exchange. On the other
hand, Forward contract is an agreement between two parties and it is traded over-the-
counter (OTC).

Futures contract does not carry any credit risk because the clearing house acts as
counter-party to both parties in the contract. To further reduce the credit exposure, all
positions are marked-to-market daily, with margins required to be maintained by all
participants all the time. On the other hand, forward contracts do not have such
mechanisms in place. This is because forward contracts are settled only at the time of
delivery. The credit exposure keeps on increasing since profit or loss is realized only at
the time of settlement.

In derivatives market, the lot size is predefined. Therefore, one cannot buy a contract
for a single share in futures. This does not hold true in forward markets as these
contracts are customized based on an individual’s requirement.

Lastly, future contracts are highly standardized contracts; they are traded in the
secondary markets. In the secondary market, participants in the futures can easily buy
or sell their contract to another party who is willing to buy it. In the contrast, forwards
are unregulated, so there is essentially no secondary market for them.

Options Contracts

Option is the most important part of derivatives contract. An Option contract gives the
right but not an obligation to buy/sell the underlying assets. The buyer of the options
pays the premium to buy the right from the seller, who receives the premium with an
obligation to sell the underlying assets if the buyer exercises his right. Options can be
traded in both OTC market and exchange traded markets. Options can be divided into
two types - call and put. We shall explain these types in detail in our next article on
Options.

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Swaps

A swap is a derivative contract made between two parties to exchange cash flows in the
future. Interest rate swaps and currency swaps are the most popular swap contracts,
which are traded over the counters between financial institutions. These contracts are
not traded on exchanges. Retail investors generally do not trade in swaps.
To summarize, in Derivative contracts, futures & options together are considered to be
the best hedging instrument and can be used to speculate the price movement and make
maximum profit out of it.

Swaps have been categorized into four parts:

 Interest rate swaps
 Currency swaps
 Commodity swaps
 Equity swaps
 One India Money

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 Difference between Futures & Forwards Contract

CHARACTERISTICS FUTURES CONTRACT FORWARDS CONTRACT

Meaning A futures contract is a A forward contract is an

standardized contract, traded on agreement between two parties
exchange, to buy or sell to buy or sell underlying assets
underlying instrument at certain at specified date, at agreed rate
date in future, at specified price. in future.

Structure Standardized contract Customized contract

Counterparty Risk Low High

Contract size Standardized/Fixed Customized/depends on the

contract term

Regulation Stock exchange Self regulated

Collateral Initial margin required Not required

Settlement On daily basis On maturity date

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 Difference Between Futures and Options

BASIS FOR
FUTURES OPTIONS
COMPARISON

Meaning Futures contract is a binding Options are the contract in

agreement, for buying and which the investor gets the right
selling of a financial to buy or sell the financial
instrument at a instrument at a set price, on or
predetermined price at a before a certain date, however
future specified date. the investor is not obligated to
do so.

Obligation of Yes, to execute the contract. No, there is no obligation.

buyer

Execution of On the agreed date. Anytime before the expiry of

contract the agreed date.

Risk High Limited

Advance payment No advance payment Paid in the form of premiums.

Degree of Unlimited Unlimited profit and limited

profit/loss loss.

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 Option Trading Strategies
Traders often jump into trading options with little understanding of options strategies.
There are many strategies available that limit risk and maximize return. With a little
effort, traders can learn how to take advantage of the flexibility and power options offer.
With this in mind, we've put together this primer, which should shorten the learning
curve and point you in the right direction.

1. Covered Call
With calls, one strategy is simply to buy a naked call option. You can also structure a
basic covered call or buy-write. This is a very popular strategy because it generates
income and reduces some risk of being long stock alone. The trade-off is that you must
be willing to sell your shares at a set price: the short strike price. To execute the strategy,
you purchase the underlying stock as you normally would, and simultaneously write
(or sell) a call option on those same shares. In this example we are using a call option
on a stock, which represents 100 shares of stock per call option. For every 100 shares
of stock you buy, you simultaneously sell 1 call option against it. It is referred to as a
covered call because in the event that a stock rockets higher in price, your short call is
covered by the long stock position. Investors might use this strategy when they have a
short-term position in the stock and a neutral opinion on its direction. They might be
looking to generate income (through the sale of the call premium), or protect against a
potential decline in the underlying stock’s value.

In the P&L graph above, notice how as the stock price increases, the negative P&L
from the call is offset by the long shares position. Because you receive premium from
selling the call, as the stock moves through the strike price to the upside, the premium
you received allows you to effectively sell your stock at a higher level than the strike

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price (strike + premium received). The covered call’s P&L graph looks a lot like a short
naked put’s P&L graph.

Check out my Options for Beginners course live trading example below. In this video,
I sell a call against my long stock position.

2. Married Put
In a married put strategy, an investor purchases an asset (in this example, shares of
stock), and simultaneously purchases put options for an equivalent number of shares.
The holder of a put option has the right to sell stock at the strike price. Each contract is
worth 100 shares. The reason an investor would use this strategy is simply to protect
their downside risk when holding a stock. This strategy functions just like an insurance
policy, and establishes a price floor should the stock's price fall sharply. (For more on
using this strategy, see Married Put.). An example of a married put would be if an
investor buys 100 shares of stock and buys 1 put option simultaneously. This strategy
is appealing because an investor is protected to the downside should a negative event
occur. At the same time, the investor would participate in all of the upside if the stock
gains in value. The only downside to this strategy occurs if the stock does not fall, in
which case the investor loses the premium paid for the put option.

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In the P&L graph above, the dashed line is the long stock position. With the long put
and long stock positions combined, you can see that as the stock price falls the losses
are limited. Yet, the stock participates in upside above the premium spent on the put.
The married put’s P&L graph looks similar to a long call’s P&L graph.

Check out my Options for Beginners course video, where I break down the use of a
protective put to insure my gains in a stock. It’s only married if established
simultaneously.

3. Bull Call Spread

In a bull call spread strategy, an investor will simultaneously buy calls at a
specific strike price and sell the same number of calls at a higher strike price. Both call
options will have the same expiration and underlying asset. This type of vertical
spread strategy is often used when an investor is bullish on the underlying and expects
a moderate rise in the price of the asset. The investor limits his/her upside on the trade,
but reduces the net premium spent compared to buying a naked call option outright. (To
learn more, read Vertical Bull and Bear Credit Spreads.).

In the P&L graph above, you can see that this is a bullish strategy, so the trader needs
the stock to increase in price in order to make a profit on the trade. The trade-off when
putting on a bull call spread is that your upside is limited, while your premium spent is

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reduced. If outright calls are expensive, one way to offset the higher premium is by
selling higher strike calls against them. This is how a bull call spread is constructed.

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4. Bear Put Spread
The bear put spread strategy is another form of vertical spread. In this strategy, the
investor will simultaneously purchase put options at a specific strike price and sell the
same number of puts at a lower strike price. Both options would be for the same
underlying asset and have the same expiration date. This strategy is used when the
trader is bearish and expects the underlying asset's price to decline. It offers both limited
losses and limited gains. (For more on this strategy, read Bear Put Spreads: An
Alternative To Short Selling.)

In the P&L graph above, you can see that this is a bearish strategy, so you need the
stock to fall in order to profit. The trade-off when employing a bear put spread is that
your upside is limited, but your premium spent is reduced. If outright puts are
expensive, one way to offset the high premium is by selling lower strike puts against
them. This is how a bear put spread is constructed.

5. Protective Collar
A protective collar strategy is performed by purchasing an out-of-the-money put option
and simultaneously writing an out-of-the-money call option for the same underlying
asset and expiration. This strategy is often used by investors after a long position in a
stock has experienced substantial gains. This options combination allows investors to
have downside protection (long puts to lock in profits), while having the trade-off of
potentially being obligated to sell shares at a higher price (selling higher = more profit
than at current stock levels). A simple example would be if an investor is long 100
shares of IBM at $50 and IBM has risen to $100 as of January 1 st. The investor could
construct a protective collar by selling one IBM March 15th 105 call and simultaneously
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buying one IBM March 95 put. The trader is protected below $95 until March 15th, with
the trade-off of potentially having the obligation to sell his/her shares at $105. (For
more on these types of strategies, see How a Protective Collar Works.)

In the P&L graph above, you can see that the protective collar is a mix of a covered call
and a long put. This is a neutral trade set-up, meaning that you are protected in the event
of falling stock, but with the trade-off of having the potential obligation to sell your
long stock at the short call strike. Again, though, the investor should be happy to do so,
as they have already experienced gains in the underlying shares.

In my Advanced Options Trading course, you can see me break down the protective
collar strategy in easy-to-understand language.

6. Long Straddle
A long straddle options strategy is when an investor simultaneously purchases a call
and put option on the same underlying asset, with the same strike price and expiration
date. An investor will often use this strategy when he or she believes the price of the
underlying asset will move significantly out of a range, but is unsure of which direction
the move will take. This strategy allows the investor to have the opportunity for
theoretically unlimited gains, while the maximum loss is limited only to the cost of both
options contracts combined. (For more, read Straddle Strategy: A Simple Approach to
Market Neutral.)

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 In the
P&L graph above, notice how there are two breakeven points. This strategy becomes
profitable when the stock makes a large move in one direction or the other. The investor
doesn’t care which direction the stock moves, only that it is a greater move than the
total premium the investor paid for the structure.

7. Long Strangle
In a long strangle options strategy, the investor purchases an out-of-the-money call
option and an out-of-the-money put option simultaneously on the same underlying asset
and expiration date. An investor who uses this strategy believes the underlying asset's
price will experience a very large movement, but is unsure of which direction the move
will take. This could, for example, be a wager on an earnings release for a company or
an FDA event for a health care stock. Losses are limited to the costs (or premium spent)
for both options. Strangles will almost always be less expensive than straddles because
the options purchased are out of the money. (For more, see Get A Strong Hold On Profit

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With Strangles.)

In the P&L graph above, notice how there are two breakeven points. This strategy
becomes profitable when the stock makes a very large move in one direction or the
other. Again, the investor doesn’t care which direction the stock moves, only that it is
a greater move than the total premium the investor paid for the structure.

8. Long Call Butterfly Spread

All of the strategies up to this point have required a combination of two different
positions or contracts. In a long butterfly spread using call options, an investor will
combine both a bull spread strategy and a bear spread strategy, and use three
different strike prices. All options are for the same underlying asset and expiration date.
For example, a long butterfly spread can be constructed by purchasing one in-the-
money call option at a lower strike price, while selling two at-the-money call options,
and buying one out-of-the-money call option. A balanced butterfly spread will have the
same wing widths. This example is called a “call fly” and results in a net debit. An
investor would enter into a long butterfly call spread when they think the stock will not
move much by expiration. (For more on this strategy, read Setting Profit Traps with

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Butterfly Spreads.)

In the P&L graph above, notice how the maximum gain is made when the stock remains
unchanged up until expiration (right at the ATM strike). The further away the stock
moves from the ATM strikes, the greater the negative change in P&L. Maximum loss
occurs when the stock settles at the lower strike or below, or if the stock settles at or
above the higher strike call. This strategy has both limited upside and limited downside.

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9. Iron Condor
An even more interesting strategy is the iron condor. In this strategy, the investor
simultaneously holds a bull put spread and a bear call spread. The iron condor is
constructed by selling 1 out-of-the-money put and buying 1 out-of-the-money put of a
lower strike (bull put spread), and selling 1 out-of-the-money call and buying 1 out-of-
the-money call of a higher strike (bear call spread). All options have the same expiration
date and are on the same underlying asset. Typically, the put and call sides have the
same spread width. This trading strategy earns a net premium on the structure and is
designed to take advantage of a stock experiencing low volatility. Many traders like
this trade for its perceived high probability of earning a small amount of premium. (We
recommend reading more about this strategy in Options Trading With The Iron
Condor and The Iron Condor.)

In the P&L graph above, notice how the maximum gain is made when the stock remains
in a relatively wide trading range, which would result in the investor earning the total
net credit received when constructing the trade. The further away the stock moves
through the short strikes (lower for the put, higher for the call), the greater the loss up
to the maximum loss. Maximum loss is usually significantly higher than the maximum
gain, which intuitively makes sense given that there is a higher probability of the
structure finishing with a small gain.

10. Iron Butterfly

The final options strategy we will demonstrate is the iron butterfly. In this strategy, an
investor will sell an at-the-money put and buy an out-of-the-money put, while also

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selling an at-the-money call and buying an out-of-the-money call. All options have the
same expiration date and are on the same underlying asset. Although similar to
a butterfly spread, this strategy differs because it uses both calls and puts, as opposed
to one or the other. This strategy essentially combines selling an at-the-money straddle
and buying protective “wings.” You can also think of the construction as two spreads.
It is common to have the same width for both spreads. The long out-of-the-money call
protects against unlimited downside. The long out-of-the-money put protects against
downside from the short put strike to zero. Profit and loss are both limited within a
specific range, depending on the strike prices of the options used. Investors like this
strategy for the income it generates and the higher probability of a small gain with a
non-volatile stock.

(To learn more, read What is an Iron Butterfly Option Strategy?)

In the P&L graph above, notice how the maximum gain is made when the stock remains
at the at-the-money strikes of the call and put sold. The maximum gain is the total net
premium received. Maximum loss occurs when the stock moves above the long call
strike or below the long put strike.

31 | P a g e
 EVOLUTION OF DERIVATIVES IN INDIA
May be tracked starting from a controlled economy, India has moved towards a world
where prices fluctuate every day. The introduction of risk management instruments in
India gained momentum in the last few years due to liberalization process and Reserve
Bank of India’s (RBI) efforts in creating currency forward market. Derivatives are an
integral part of liberalization process to manage risk. NSE gauging the market
requirements initiated the process of setting up derivative markets in India. In July
1999, derivatives trading commenced in India.

Evolution of Derivatives
14 December 1995 NSE asked SEBI for permission to trade index futures.
SEBI setup L. C. Gupta Committee to draft a policy framework
18 November 1996 for index futures.

11 May 1998 L. C. Gupta Committee submitted report.

RBI gave permission for OTC forward rate agreements (FRAs)

7 July 1999 and interest rate swaps.

SIMEX chose NIFTY for trading futures and options on an

24 May 2000
Indian index.

SEBI gave permission to NSE and BSE to do index futures

25 May 2000
trading.

9 June 2000 Trading of BSE Sensex futures commenced at BSE.

12 June 2000 Trading of Nifty futures commenced at NSE.

Trading of futures and options on Nifty to commence at

31 August 2000
SIMEX.

une 2001 Trading of Equity Index Options at NSE.

July 2001 Trading of Stock Options at NSE.

NSE November 9, 2002 Trading of Single Stock futures at BSE.

32 | P a g e
June 2003 Trading of Interest Rate Futures at NSE.

September 13, 2004 Weekly Options at BSE.

January 1, 2008 Trading of Chhota (Mini) Sensex at BSE.

January 1, 2008 Trading of Mini Index Futures & option at BSE.

NSE August 29,2008 Futures

Trading of Currency
at NSE

October 2,2008 Futures at

Trading of Currency
BSE

Commodities futures trading in India were initiated long back in 1950s; however, the
1960s marked a period of great decline in futures trading. Market after market was
closed usually because different commodities' prices increases were attributed to
speculation on these markets. Accordingly, the Central Government imposed the ban
on trading in derivatives in 1969 under a notification issue. The late 1990s shows this
signs of opposite trends-a large scale revival of futures markets in India28, and hence,
the Central Government revoked the ban on futures trading in October, 1999. The Civil
Supplies Ministry agreed, in principle for starting of futures trading in Basmati rice,
further, in 1996 the Government granted permission to the Indian Pepper and Spice
Trade Association to convert its Pepper Futures Exchange into an International Pepper
Exchange. As such, on November 17, 1997, India's first international futures. Exchange
at Kochi, known as the India Pepper and Spice Trade Association-International
Commodity Exchange (IPSTA-ICE) was established.
Similarly, the Cochin Oil Millers Association, in June 1996, demanded the introduction
of futures trading in coconut oils. The Central Minister for Agriculture announced in
June 1996 that he was in favor of introduction of futures trading both domestic and
international. Further, a new coffee futures exchange (The Co ffee Futures Exchange
of India) is being started at Bangalore. In August, 1997, the Central Government
proposed that Indian companies with commodity price exposures should be allowed to
use foreign futures and option markets. The trend is not confined to the commodity
markets alone, it has initiated in financial futures too.
The Reserve Bank of India set up the Sodhani Expert Group which recommended major
liberalization of the forward exchange market and had urged the setting up of rupee
based derivatives in financial instruments. The RBI accepted several of its
33 | P a g e
recommendations in August, 199629. A landmark step taken in this regard when the
Securities and Exchange Board of India (SEBI) appointed a Committee named the Dr.
LC. Gupta Committee (LCGC) by it s resolution, dated November 18, 1996 in order to
develop appropriate regulatory framework for derivatives trading in India. While the
Committee's focus was on equity derivatives but it had maintained a broad perspective
of derivatives in general.
The Board of SEBI, on May 11, 1998, accepted the recommendations of the Dr. L C.
Gupta Committee and approved introduction of derivatives trading in India in the
phased manner 3. The recommendation sequence is stock, index futures, index options
and options on stocks. The Board also approved the 'Suggestive Bye-Laws'
recommended by the Committee for regulation and control of trading and settlement of
derivatives‟ contracts in India. Subsequently, the SEBI appointed J.R.Verma
Committee to look into the operational aspects of derivatives markets. To remove the
road - block of non- recognition of derivatives as securities under Securities Contract
Regulation Act, the Securities Law (Amendment) Bill, 1999 was introduced to bring
about the much needed changes. Accordingly, in December, 1999, the new framework
has been approved and 'Derivatives' have been accorded the status of 'Securities',
however, due to certain completion of formalities, the launch of the Index Futures was
delayed by more than two years. In June, 2000, the National Stock Exchange and the
Bombay Stock Exchange started stock index based futures trading in India. Further, the
growth of this market did not take off as” anticipated. This is mainly attributed to the
low awareness about the product and mechanism among the market players and
investors.

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 Disadvantages of Derivatives Market in India

Despite the benefits that derivatives bring to the financial markets, the financial
instruments come with some significant drawbacks. The drawbacks resulted in
disastrous consequences during the financial crisis of 2007-2008. The rapid devaluation
of mortgage-backed securities and credit-default swaps led to the collapse of financial
institutions and securities around the world.

1. High risk
The high volatility of the derivatives exposes them to potentially huge losses. The
sophisticated design of the contracts makes the valuation extremely complicated or
even impossible. Thus, they bear a high inherent risk.

2. Speculative features
Derivatives are widely regarded as a tool of speculation. Due to the extremely risky
nature of derivatives and their unpredictable behavior, unreasonable speculation may
lead to huge losses.

3. Counter-party risk

Although derivatives traded on the exchanges generally go through a thorough due

diligence process, some of the contracts traded over-the-counter do not include a
benchmark for due diligence. Thus, there is a possibility of counter-party default.

35 | P a g e
 AN OVERVIEW OF FOREIGN EXCHANGE
DERIVATIVES

In international finance, derivative instruments imply contracts based on which you can
purchase or sell currency at a future date. The three major types of foreign exchange
(FX) derivatives: forward contracts, futures contracts, and options. They have
important differences, which changes their attractiveness to a specific FX market
participant.
FX derivatives are contracts to buy or sell foreign currencies at a future date. The table
summarizes the relevant characteristics of three types of FX derivatives: forward
contracts, futures contracts, and options. Because the types of FX derivatives closely
correspond to the identity of the FX market participant, the table is based on the
derivative type-market participant relationship.
CME Group: the leading derivative exchange formed by the (2007) merger of the
Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOT);
GLOBEX: an international, automated trading platform for futures and options at CME;
ISE: International Security Exchange, a subsidiary of EUREX, a European derivative
exchange; OTC: over-the-counter

36 | P a g e
 Purpose of the Foreign Exchange Market

Foreign exchange transactions are central to global commerce. The foreign exchange
market is the network of private citizens, corporations and government officials who
trade overseas currencies among each other. Beyond coordinating payments, foreign
exchange rates and markets function as leading economic indicators. Investors and
institutions analyze these foreign exchange market trends to create wealth and manage
risks.

Identification
Consumers acquire foreign exchange so they can purchase overseas goods.
Alternatively, businesses might receive foreign exchange and enter the market to
convert that money back into domestic currency. The foreign exchange market also
serves the purpose of attracting investors. Investors diversify and increase their asset
holdings with currency reserves.

Features
Foreign exchange rates describe the amount of another currency that one unit of a
certain currency can buy. Because of their association with specific nations, foreign
exchange rates gauge economic and political sentiment. Low exchange rates translate
into weak demand for a currency, as foreign investors liquidate that country’s stocks,
bonds and real estate. At that point, foreigners might fear recession, or politics that are
hostile to foreign investment. For example, high tax rates on foreign profits can cause
foreigners to withdraw from a particular country. Conversely, high exchange rates
define strong economies and effective political regimes. Investors are then
encouraged to trade for that currency and to purchase its home nation’s assets. The
increased demand for the currency supports elevated exchange rates.

37 | P a g e
Considerations
Government officials can manage their home economies through foreign exchange
transactions. Low exchange rates for the domestic currency improve the export
economy, because these goods become more affordable to foreign buyers. However,
domestic consumers prefer higher exchange rates, which grants them more purchasing
power for imported goods. Government leaders use foreign exchange reserves to
influence currency exchange rates. Nations can buy large amounts of foreign
exchange reserves to devalue the home currency. China owned $900 billion worth of
U.S. treasuries as of April 2010, the U.S. Treasury reported. These holdings lower
exchange rates for the Chinese yuan and support China’s export economy.

Warning
Foreign exchange markets do introduce distinct risks of financial losses and
contagion. Institutions that hold a particular currency lose purchasing power when its
exchange rates deteriorate. However, as a home currency strengthens, multinational
corporations suffer sales declines because their wares become more expensive
overseas. "Contagion" refers to the process of financial distress in one region
growing into a global crisis. For example, Mexico might default on its sovereign debt,
which causes the peso to collapse. From there, foreign businesspeople with exposure
to Mexico might be forced to sell off all assets to raise cash. The selling compounds,
and it causes markets to crash globally.

Strategy
Foreign exchange markets offer currency derivatives to hedge against risks. Currency
derivatives, such as futures, forwards and options establish predetermined exchange
rates over set periods of time. Futures and options trade on major exchanges, such as
the Chicago Mercantile Exchange. Forwards are private agreements between two
parties to negotiate exchange rates at later points in time.

38 | P a g e
 Derivatives Analysis and Training: Technical Analysis
Derivatives analysis can focus on two different types of analysis; fundamental analysis
and technical analysis. This article will outline both types with particular focus on
technical analysis.

Types of Derivatives Analysis

In making decisions about where and when to take a position, investors, traders and
analysts use two different approaches to derivatives analysis: fundamental
analysis and technical analysis.
Fundamental and Technical Derivatives Analysis

Fundamental Derivatives Analysis

Fundamental analysis is the appreciation of the economics and intrinsic
value underlying a particular trade. If you want to know where to invest and why, you
use the techniques of fundamental analysis.
For a foreign exchange trader, fundamental analysis is focused on the macroeconomics
of particular currencies, including the implications of the current account, the GDP
growth rate, domestic consumption, domestic production, and other political factors
that influence the currency’s relative value. As we move into more company-specific
investments such as individual equities, fundamental analysis becomes more
preoccupied with micro-economic questions related to the firm. Such an investigation
might look at price/earnings ratios, debt/equity ratios, cash flow forecasts and similar
data from financial statements, press releases, and competitors.

Technical Derivatives Analysis

Technical derivatives analysis is concerned with the when and the how of placing
money. It determines the optimal timing for a position and its conclusions about how
long to stay in a particular trade have significant importance for the kind of derivatives
structure one may use to take a position.

Technical analysis is an art which involves quasi-statistical techniques and formal

statistics that are used to determine the existence and strength of trends in financial time
series and to identify turning points in these trends. Technical analysis is important in

39 | P a g e
the structuring of derivative products because of the leverage involved and because of
the inclusion of such features as barriers and compound strikes.

Examples of Technical Analysis

There are two kinds of technical derivatives analysis.

First, there is the design and use of “indicators;” changes in which present implications
about the existence, strength, or change in the trend of the financial time series in
question. An indicator is a function of the time series and some parameters that the
analyst chooses.

Second, there is the use of more primitive hands-on techniques such as the drawing of
“support” and “resistance” lines on a chart, the violation of which is deemed to be a
significant technical event.. In its more complex manifestations, “patterns” are
interpolated from market behavior with conclusions for future price evolution based
upon the historical consequences of such patterns.

There is a growing voice in technical analysis that argues against this second school of
thought. The argument against interpolating lines and patterns comes from a basic
assumption about the psychology of money. In order for technical analysis to be
successful in forecasting future price movements, the analysis must be objective.
Otherwise, traders will see whatever results they want to see in order to justify their
position.

Presume then that derivatives traders who use technical analysis stick firmly to the first
school the use of indicators. Indicators are typically suited for a particular kind of
market, usually delineated by whether or not the market is trending or non-trending.

For example, an indicator might track the “Stochastics.” This is a crossover indicator
that is suitable for a non-trending market. Advances in computer technology have made
it easy to automate this analysis by programming what are called expert rules. This
obviates the problem of seeing what one wants to see and it allows the analyst to
customize the indicator to time series in question in order to get the most optimal
results.

40 | P a g e
Technical Analysis and Derivatives in Practice

In practice, there are quite a few indicators that we can look at and automate to produce
trading signals when the rules we specify are triggered. Some indicators are more suited
for trending markets while other indicators are oriented towards consolidating markets.

If we can have a set of indicators that produce a consistent trading signal, then we have
reduced the probability of being wrong about the trade. For example, if we have five
automated trending signals, all of which indicate that our stock is in an upward trend,
we have an interesting result. It is even more interesting if the technical derivatives
analysis confirms the picture our fundamental analysis paints. If the fundamental
analysis suggests that this company is seriously undervalued, we would feel even more
comfortable buying it.

If the technical indicators about the speed of the trend suggest an explosive move, we
could use a structure with a highly leveraged payout for an explosive move to the
upside. For example, we could use a very low delta call (i.e. a highly out-of-the-money
call) on the stock if we thought its price would explode to the upside out of a well-
defined range. Not only would we make money on the direction of the spot and
the convexity of the spot movement but we would also make money from the rise in
implied volatilities.
The corollary to this argument is that it is dangerous to put on such derivatives
structures without some combination of technical and fundamental analysis.
Derivatives have the potential for tremendous gains, but they require much more
homework because of the leverage of the structures, the possibly reduced liquidity and
the larger bid/offer spreads involved in transacting them.

41 | P a g e
 Key words
Derivatives are the financial instruments whose pay-off is derived from some other
underlying asset.
Forward contract is an agreement between two parties to exchange an asset for cash
at a predetermined future date for a price specified today.
Future contracts are forward contracts traded on organized exchanges in
standardized contract size.
Option is the right (not obligation) to buy or sell an asset on or before a pre-specified
date at a predetermined price.
Call option is the option to buy an asset.
Put option is the option to sell an asset. Exercise price is the price at which an option
can be exercised. It is also known as strike price.
European option can be exercised only on the expiration date of option.
American option can be exercised on or before the expiration date of option.
In-the-money: An option is called in-the-money if it benefits the investor when
exercised immediately.
Out-of-the money: An option is said to be out-of-the money if it is not advantageous
for the investor to exercise it.
At-the-money: When holder of an option neither gains nor looses when the exercises
the option.
Option premium is the price that the holder of an option has to pay for obtaining a
call or put option.

42 | P a g e
FACTORS CONTRIBUTING TO THE GROWTH OF
DERIVATIVES
Factors contributing to the explosive growth of derivatives are price volatility,
globalization of the markets, technological developments and advances in the
financial theories.
Price Volatility:
A price is what one pays to acquire or use something of value. The objects having value
maybe commodities, local currency or foreign currencies. The concept of price is clear
to almost everybody when we discuss commodities. There is a price to be paid for the
purchase of food grain, oil, petrol, metal, etc. the price one pays for use of a unit of
another persons money is called interest rate. And the price one pays in one‟s own
currency for a unit of another currency is called as an exchange rate.
Prices are generally determined by market forces. In a market, consumers have
„demand‟ and producers or suppliers have „supply‟, and the collective interaction of
demand and supply in the market determines the price. These factors are constantly
interacting in the market causing changes in the price over a short period of time. Such
changes in the price are known as „price volatility‟. This has three factors: the speed of
price changes, the frequency of price changes and the magnitude of price changes.
The changes in demand and supply influencing factors culminate in market adjustments
through price changes. These price changes expose individuals, producing firms and
governments to significant risks. The breakdown of the BRETTON WOODS
agreement brought and end to the stabilizing role of fixed exchange rates and the gold
convertibility y of the dollars. The globalization of the markets and rapid
industrialization of many underdeveloped countries brought a new scale and dimension
to the markets. Nations that were poor suddenly became a major source of supply of
goods. The Mexican crisis in the south east -Asian currency crisis of 1990‟s has also
brought the price volatility factor on the surface. The advent of telecommunication and
data processing bought information very quickly to the markets. Information which
would have taken months to impact the market earlier can now be obtained in matter of
moments. Even equity holders are exposed to price risk of corporate share fluctuates
rapidly. This price volatility risk pushed the use of derivatives like futures and options
increasingly as these instruments can be used as hedge to protect against adverse price
changes in commodity, foreign exchange, equity shares and bonds.

43 | P a g e
 Globalization of Markets

Earlier, managers had to deal with domestic economic concerns; what happened in
other part of the world was mostly irrelevant. Now globalization has increased the size
of markets and as greatly enhanced competition .it has benefited consumers who cannot
obtain better quality goods at a lower cost. It has also exposed the modern business to
significant risks and, in many cases, led to cut profit margins In Indian context, south
East Asian currencies crisis of 1997 had affected the competitiveness of our products
vis-à-vis depreciated currencies. Export of certain goods from India declined because
of this crisis. Steel industry in 1998 suffered its worst set back due to cheap import of
steel from south East Asian countries. Suddenly blue chip companies had turned in to
red. The fear of china devaluing its currency created instability in Indian exports. Thus,
it is evident that globalization of industrial and financial activities necessitates use of
derivatives to guard against future losses 5. This factor alone has contributed to the
growth of derivatives to a significant extent.

44 | P a g e
 Technological Advances

A significant growth of derivative instruments has been driven by technological

breakthrough. Advances in this area include the development of high speed processors,
network systems and enhanced method of data entry. Closely related to advances in
computer technology are advances in telecommunications. Improvement in
communications allow for instantaneous worldwide conferencing, Data transmission
by satellite. At the same time there were significant advances in software programmed
without which computer and telecommunication advances would be meaningless.
These facilitated the more rapid movement of information and consequently its
instantaneous impact on market price. Although price sensitivity to market forces is
beneficial to the economy as a whole resources are rapidly relocated to more productive
use and better rationed overtime the greater price volatility exposes producers and
consumers to greater price risk. The effect of this risk can easily destroy a business
which is otherwise well managed. Derivatives can help a firm manage the price risk
inherent in a market economy. To the extent the technological developments increase
volatility, derivatives and risk management products become that much more
important.
Advances in Financial Theories:
Advances in financial theories gave birth to derivatives. Initially forward contracts in
its traditional form, was the only hedging tool available. Option pricing models
developed by Black and Scholes in 1973 were used to determine prices of call and put
options. In late 1970‟s, work of Lewis Edington extended the early work of Johnson
and started the hedging of financial price risks with financial futures. The work of
economic theorists gave rise to new products for risk management which led to the
growth of derivatives in financial markets.

45 | P a g e
 DATA ANALYSIS AND
INTERPRETATION

ANALYSIS OF ICICI:

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 2019 contract of ICICI BANK. The
lot size of ICICI BANK is 175, the time period in which this analysis done is
from 27-12-2018 to 31.01.19.
Figure 1
DATE MARKET PRICE FUTURE PRICE
28-Dec-18 1226.7 1227.05
31-Dec-18 1238.7 1239.7
1-Jan-19 1228.75 1233.75
2-Jan-19 1267.25 1277
3-Jan-19 1228.95 1238.75
4-Jan-19 1286.3 1287.55
7-Jan-19 1362.55 1358.9
8-Jan-19 1339.95 1338.5
9-Jan-19 1307.95 1310.8
10-Jan-19 1356.15 1358.05
11-Jan-19 1435 1438.15
14-Jan-19 1410 1420.75
15-Jan-19 1352.2 1360.1
16-Jan-19 1368.3 1375.75
17-Jan-19 1322.1 1332.1
18-Jan-19 1248.85 1256.45
21-Jan-19 1173.2 1167.85
22-Jan-19 1124.95 1127.85
23-Jan-19 1151.45 1156.35
24-Jan-19 1131.85 1134.5
46 | P a g e
 25-Jan-19 1261.3 1265.6
28-Jan-19 1273.95 1277.3
29-Jan-19 1220.45 1223.85
30-Jan-19 1187.4 1187.4
31-Jan-19 1147 1145.9

Chart Title
3000

2500

2000

1500

1000

500

Market 2340

47 | P a g e
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, 2018 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, 2019 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.
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

48
 Call options: Figure 2 Strike Price

DATE MARKET PRICE 1200 1230 1260 1290 1320 1350

28-Dec-18 1226.7 67.85 53.05 39.65 32.25 24.2 18.85

31-Dec-18 1238.7 74.65 58.45 44.05 32.75 23.85 19.25

1-Jan-19 1228.75 62 56.85 39.2 30 22.9 18.8

2-Jan-19 1267.25 100.9 75.55 36.75 49.1 36.55 27.4

3-Jan-19 1228.95 75 60.1 45.85 34.5 26.4 22.5

4-Jan-19 1286.3 109.6 91.05 682.25 51.35 38.6 29.15

7-Jan-19 1362.55 170 143.3 120 100 79.4 62.35

8-Jan-19 1339.95 140 119.3 100 85 59.2 42.85

9-Jan-19 1307.95 140 5 74.35 62.05 46.65 33.15

10-Jan-19 1356.15 160.6 101 110 95.45 70.85 53.1

11-Jan-19 1435 250.7 131 188.89 164.71 30.9 104.55

14-Jan-19 1410 240 151.8 148 134.9 96 88.2

15-Jan-19 1352.2 155 213.5 107.5 134.9 66 52.65

16-Jan-19 1368.3 128.4 150.05 90 63 78.2 60.95

17-Jan-19 1322.1 128.4 140 95 67.5 50.2 39.15

18-Jan-19 1248.85 128.4 140 54 37.95 29.15 19.3

21-Jan-19 1173.2 52 60 26.3 24.45 14.55 9.95

22-Jan-19 1124.95 44.15 36.5 22.55 12.45 10.35 6.7

23-Jan-19 1151.45 50.25 31.05 23.25 17 8.6 12.1

24-Jan-19 1131.85 40.4 39.3 17.05 16.35 9.45 5.1

25-Jan-19 1261.3 80.5 22 40.85 24.55 16.15 9.75

28-Jan-19 1273.95 91.85 62 44.48 31.42 0.25 11.35

29-Jan-19 1220.45 46 61.65 17.45 10.5 4.05 2.95

30-Jan-19 1187.4 18.65 25.95 4.5 1.4 0.75 0.2

49
 31-Jan-19 1147 0.45 9.05 1 1.4 0.1 0.2

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
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 Option:
Table 3

Strike Price
Date Market Price 1200 1230 1260 1290 1320 1350

28-Dec-18 1226.7 39.05 181.05 178.8 197.15 190.85 191.8

31-Dec-18 1238.7 34.4 181.05 178.8 197.15 190.85 191.8

1-Jan-19 1228.75 32.1 181.05 178.8 197.15 190.85 191.8

2-Jan-19 1267.25 22.6 25.50 178.8 41.55 190.85 191.8

50
3-Jan-19 1228.95 32 38.00 178.8 82 190.85 191.8

4-Jan-19 1286.3 17.65 25.00 37.05 82 190.85 191.8

7-Jan-19 1362.55 12.4 12.60 20.15 34.85 43.95 191.8

8-Jan-19 1339.95 10.15 12.00 20.05 30 42 191.8

9-Jan-19 1307.95 11.9 15.00 26.5 36 51 191.8

10-Jan-19 1356.15 9 11.00 15 25.2 33.7 47.8

11-Jan-19 1435 3.75 11.00 10 8.9 12.75 18.35

14-Jan-19 1410 3.75 11.00 8.5 12 12.4 22.45

15-Jan-19 1352.2 6.45 7.00 10 17.45 23.1 38.3

16-Jan-19 1368.3 8 8.00 11.25 13.3 22.55 35.35

17-Jan-19 1322.1 7.3 8.00 17.8 25.45 38.25 56.4

18-Jan-19 1248.85 18.15 36.60 35 67.85 76.05 112.2

21-Jan-19 1173.2 103.5 70.00 69.65 135.05 151.35 223.4

22-Jan-19 1124.95 110 138.90 138.6 170.05 210 280

23-Jan-19 1151.45 71 138.90 135 150 210 200

24-Jan-19 1131.85 99 138.90 135 150 210 200

25-Jan-19 1261.3 15.9 26.35 33 50.05 210 200

28-Jan-19 1273.95 16.7 19.00 30 45 55 81.45

29-Jan-19 1220.45 18 38.00 50 45 100 145

30-Jan-19 1187.4 27.5 60.00 85.2 120 145.05 145

51
31-Jan-19 1147 50 60.00 85.2 120 145.05 145

OBSERVATIONS AND FINDINGS

PUT OPTION
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 1200.0

Spot Price 1147.00
53
Premium(-) 39.05
39.05 x175= 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, buyer’s 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.

52
 Chart Title
3000
2500
2000
1500
1000
500
0

08-Jan-19

23-Jan-19
28-Dec-18
31-Dec-18
01-Jan-19
02-Jan-19
03-Jan-19
04-Jan-19
07-Jan-19

09-Jan-19
10-Jan-19
11-Jan-19
14-Jan-19
15-Jan-19
16-Jan-19
17-Jan-19
18-Jan-19
21-Jan-19
22-Jan-19

24-Jan-19
25-Jan-19
28-Jan-19
29-Jan-19
30-Jan-19
Date

Series1 Series2 Series3 Series4 Series5 Series6 Series7

OBSERVATIONS AND FINDINGS

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 analysis considered the Jan 2018 contract of SBI.
The lot size of SBI is 132,the time period in which this analysis done is from 28-
12-2018 to 31.01.19.
Date Market Price Future price
28-Dec-18 2377.55 2413.7
31-Dec-18 2371.15 2409.2
1-Jan-19 2383.5 2413.45
2-Jan-19 2423.35 2448.45
3-Jan-19 2395.25 2416.35
4-Jan-19 2388.8 2412.5
7-Jan-19 2402.9 2419.15
8-Jan-19 2464.55 2478.55

53
9-Jan-19 2454.5 2473.1
10-Jan-19 2409.6 2411.15
11-Jan-19 2434.8 2454.4
14-Jan-19 2463.1 2468.4
15-Jan-19 2423.45 2421.85
16-Jan-19 2415.55 2432.3
17-Jan-19 2416.35 2423.05
18-Jan-19 2362.35 2370.35
21-Jan-19 2196.15 2192.3
22-Jan-19 2137.4 2135.2
23-Jan-19 2323.75 2316.95
24-Jan-19 2343.15 2335.35
25-Jan-19 2407.4 2408.9
28-Jan-19 2313.35 2305.5
29-Jan-19 2230.7 2230.5
30-Jan-19 2223.95 2217.25
31-Jan-19 2167.35 2169.9

Table 4

Chart Title
3000

2500

2000

1500

1000

500

Market 2340

54
OBSERVATIONS AND FINDINGS:
st
If a person buys 1 lot i.e. 350 futures of SBI on 28 th Dec, 2018 and sells on 31
Jan, 2019 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, 2018 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.

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;
2340, 2370, 2400, 2430, 2460 and 2490.

Call Option:
Table: 5 Strike Price

Market
Date 2340 2370 2400 2430 2460 2490
Price
28-Dec-18 2377.55 145 92 104.35 108 79 68
31-Dec-18 2371.15 145 92 102.95 108 72 59
1-Jan-19 2383.5 134 92 101.95 108 69.85 59
2-Jan-19 2423.35 189.8 92 123.25 105.8 90.25 76.55
3-Jan-19 2395.25 189.8 92 98.45 93.6 76.6 60.05
4-Jan-19 2388.8 189.8 92 100.95 86 74.8 60.05
7-Jan-19 2402.9 189.8 92 95.55 88.15 76.15 61.1
8-Jan-19 2464.55 190 92 128.55 118.3 99.85 84.8
9-Jan-19 2454.5 170 92 126.75 121 92.15 77.45
10-Jan-19 2409.6 170 190 84 72.25 58.8 51.85
11-Jan-19 2434.8 160 190 108.85 94.95 74.65 64.85
14-Jan-19 2463.1 218.5 190 110.8 90.2 81.5 64.8
15-Jan-19 2423.45 218.5 190 87.85 75 62.65 55.3
16-Jan-19 2415.55 96 98 102.15 95.45 68.5 61.95
17-Jan-19 2416.35 96 190 91.85 80 66 55

55
18-Jan-19 2362.35 96 190 62.1 50.55 44 30
21-Jan-19 2196.15 22.25 190 25.3 15 11.7 29
22-Jan-19 2137.4 22.25 190 21.05 15 11.7 10
23-Jan-19 2323.75 22.25 190 47.05 15 32.65 29.3
24-Jan-19 2343.15 104 190 48.2 40 26.45 26.3
25-Jan-19 2407.4 113.7 190 61.65 48.75 39.8 27.65
28-Jan-19 2313.35 0 0 0 0 0 0
29-Jan-19 2230.7 13 15 9 0 0 0
30-Jan-19 2223.95 13 15 9 0 0 0
31-Jan-19 2167.35 13 15 9 0 0 0

OBSERVATIONS AND FINDINGS

CALL OPTION :
BUYERS PAY OFF:
 Those who have purchased call option at a strike price of 2400, the
premium payable is 104.35
 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.
 So the buyer will lose only premium i.e. 104.35 per share.
So the total loss will be 13774.2 i.e. 104.35*132

SELLERS PAY OFF:

 As Seller is entitled only for premium if he is in profit.
 So his profit is only premium i.e. 104.35 * 132 = 13774.2.

56
Put options:
Table:6 Strike Price

Market
Date 2340 2370 2400 2430 2460 2490
Price
28-Dec-18 2377.55 362.75 306.9 90 303 218.05 221.95
31-Dec-18 2371.15 362.75 306.9 90.6 303 218.05 221.95
1-Jan-19 2383.5 362.75 306.9 84.95 303 218.05 221.95
2-Jan-19 2423.35 60 40 73.55 303 218.05 221.95
3-Jan-19 2395.25 60 40 86 303 218.05 221.95
4-Jan-19 2388.8 60 40 87.35 303 218.05 221.95
7-Jan-19 2402.9 60 150 79 303 218.05 221.95
8-Jan-19 2464.55 60 150 50.7 303 100 221.95
9-Jan-19 2454.5 60 150 56.8 303 75.3 221.95
10-Jan-19 2409.6 60 150 74.25 303 112.8 100
11-Jan-19 2434.8 60 150 53.15 41 78.3 125
14-Jan-19 2463.1 60 150 44.25 59.95 71.35 100
15-Jan-19 2423.45 40 150 69.6 78 100 128
16-Jan-19 2415.55 75.9 150 65.05 78 135 150
17-Jan-19 2416.35 75.9 150 70.45 78 96.55 150
18-Jan-19 2362.35 75.9 70 95.05 118 96.55 150
21-Jan-19 2196.15 170 139.3 223.8 118 299 150
22-Jan-19 2137.4 170 139.3 300 118 299 150
23-Jan-19 2323.75 170 139.3 150 118 299 150
24-Jan-19 2343.15 170 139.3 117.7 118 120 150
25-Jan-19 2407.4 33.9 139.3 52.45 118 120 150
28-Jan-19 2313.35 0 0 0 0 0 0
29-Jan-19 2230.7 61.6 80.8 88 0 0 0
30-Jan-19 2223.95 61.6 80.8 88 0 0 0
31-Jan-19 2167.35 61.6 80.8 88 0 0 0

57
 OBSERVATIONS AND FINDINGS

PUT OPTION

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
Price 232,65

Premium (-) 90.00

142.65 x 132= 18829.8
Buyer Profit = Rs. 18829.8
Because it is positive it is in the money contract hence buyer will get more
profit, incase spot price increase buyer profit also 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. 18829.8.

Chart Title
3000
2500
2000
1500
1000
500
0
17-Jan-19
28-Dec-18
31-Dec-18
01-Jan-19
02-Jan-19
03-Jan-19
04-Jan-19
07-Jan-19
08-Jan-19
09-Jan-19
10-Jan-19
11-Jan-19
14-Jan-19
15-Jan-19
16-Jan-19

18-Jan-19
21-Jan-19
22-Jan-19
23-Jan-19
24-Jan-19
25-Jan-19
28-Jan-19
29-Jan-19
30-Jan-19
31-Jan-19
Date

Series1 Series2 Series3 Series4 Series5 Series6 Series7

58
 OBSERVATIONS AND FINDINGS

 The future price of SBI 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

59
 SUMMARY

 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.

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 SUGGESTIONS

 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.

 Since 1991, due to liberalization of economic policy, the Indian economy

has entered an era in which Indian companies cannot ignore global
markets. Before the nineties, prices of many commodities, metals and other
assets were controlled. Others, which were not controlled, were largely
based on regulated prices of inputs. As such there was limited uncertainty,
and hence, limited volatility of prices. But after 1991, starting the process
of deregulation, prices of most commodities are decontrolled. It has also
resulted in partly deregulating the exchange rates, removing the trade
controls, reducing the interest rates, making major changes for the capital
market entry of foreign institutional investors, introducing market based
pricing of government securities, etc. All these measures have increased
the volatility of prices of various goods and services in India to producers
and consumers alike. Further, market determined exchange rates and
interest rates also created volatility and instability in portfolio values and
securities prices. Hence, hedging activities through various derivatives
emerged to different risks.

61
 Futures trading offer a risk-reduction mechanism to the farmers, producers,
exporters, importers, investors, bankers, trader, etc. which are essential for
any country. In the words of Alan Greenspan, Chairman of the US Federal
Reserve Board, "The array of derivative products that has been developed
in recent years has enhanced economic efficiency. The economic function
of these contracts ,is to allow risks that formerly had been combined to be
unbundled and transferred to those most willing to assume and manage
each risk components." Development of futures markets in many countries
has contributed significantly in terms of invisible earnings in the balance
of payments, through the fees and other charges paid by the foreigners for
using the markets.

 Further, economic progress of any country, today, much depends upon the
service sector as on agriculture or industry. Services are now backbone of
the economy of the future. India has already crossed the roads of revolution
in industry and agriculture sector and has allowed the same now m services
like financial futures. India has all the infrastructure facilities and potential
exists for the whole spectrum of financial futures trading in like stock
market indices, treasury bills, gilt -edged securities, foreign currencies,
cost of living index, stock market index, etc. For all these reasons, there is
a major potential for the growth of financial derivatives markets in India.

62
 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.

 A derivative product, or simply 'derivative', is to be sharply distinguished

from the underlying cash asset. Cash asset is the asset which is bought or
sold in the cash market on normal delivery terms. Thus, the term
'derivative' indicates that it has no independent value. It means that its value
is entirely 'derived' from the value of the cash asset. The main point is that
derivatives are forward or futures contracts, i.e., contracts for delivery and
payment on a-specified future date. They are essentially to facilitate
hedging of price risk of the cash asset. In the market term, they are called
as 'Risk Management Tools'.7 Commodities futures trading in India were
initiated long back in 1950s; however, the 1960s marked a period of great
decline in futures trading. Market after market was closed usually because
different commodities' prices increases were attributed to speculation on
these markets. Accordingly, the Central Government imposed the ban on
trading in derivatives in 1969 under a notification issue. The late 1990s
shows this signs of opposite trends-a large scale revival of futures markets
in India28, and hence, the Central Government revoked the ban on futures
trading in October, 1999. The Civil Supplies Ministry agreed, in principle
for starting of futures trading in Basmati rice, further, in 1996 the
Government granted permission to the Indian Pepper and Spice Trade
Association to convert its Pepper Futures Exchange into an International
Pepper Exchange

63
 BIBLIOGRAPHY

 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

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