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

Babasabpatilfreepptmba.com Page 1

CHAPTER – 1EXECUTIVE SUMMORYINTRODUCTION TO STUDYOBJECTIVES OF STUDYLIMITATION OF STUDY

2 CHAPTER – 2Industry profileNSEBSECapital market

3 CHAPTER – 3INTRODUCTION TO DERIVATIVESFORWARDFUTUREOPTIONINDIAN DERIVATIVE MARKET

4 CHAPTER – 4COMPANY PROFILEMETHODOLOGY

5 CHAPTER – 5ANALYSIS AND INTERPRETAION OF SERVEY DATA

6 CHAPTER – 6FIDINGSSUGGESTIONS AND RECOMMENDATIONCONCLUSIONQUESTIO



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 9th 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 CC\CH 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 CC\CH, 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. 5. Settlement happens at the end of Period.

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

manager

Senior Management

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 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.


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.



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:




The profits made by a company in a given financial year are sometimes partly

distributed to its shareholders. This pay out is termed as dividend. The quantum of dividend

that you are entitled to, will depend on the number of shares that you hold.

Investing process in equity

There are two kinds of companies- one, whose shares are listed and traded on

the stock exchange and another, whose shares are privately held by the promoters and their

friends and associates. You can buy shares of the listed company from the stock exchange

(through a broker) or you can apply for the shares of the privately held company when it

decides to offer its shares to the public through its Initial Public Offering (IPO). Buying

stocks from the stock exchange is termed as buying from the ‘secondary market’ and making

an application for allotment of shares in a company’s IPO is called buying in the ‘primary

market’.

DEMAT ACCOUNT AND INDIA

There are quite a few institutions that are directly and/or indirectly connected

with dematerialized operations of securities. Understanding the Inter-linkages and functional

responsibilities of these institutions will help us to have correct and holistic perspective above

functioning of dematerialization.

The institutions connected with Demat operations include;

a)Depositories, b) Stock Exchanges (SEs), c) Clearing Corporations (CCs) or Clearing

Houses (CHs), d) Depository Participants (DPs), e) Registrars and Transfer Agents (RTAs).

Major Players In Demat Process in India:

SHCIL (Stock Holding Corporation of

India Ltd )

ICICI Securities Ltd.

Karvy Securities RELIANCE CAPITAL / SECURITIES




Kotak Securities Ltd. HDFC Securities.

Indiabulls Financial Services Ltd Reliance Securities.

Motilal Oswal securities India Info line

Expenses, costs and risk

Trading activates are not free. They have a considerably high level of risk,

Uncertainty and complexity, especially for unwise and inexperienced stock Traders/investors

seeking for an easy way to make money quickly. In addition, stock traders/investors face

several costs such as commissions, Taxes and fees to be paid for the brokerage and other

services, like the buying/selling orders placed at the stock exchange. According to each

National or State legislation, a large array of fiscal obligations must be respected, and taxes

are charged by the State over the transactions and Earning. Beyond these costs, the

opportunity costs of money and time, the currency risk, the financial risk, and all the Internet

Service Provider, data and News agency services and electricity consumption must be added.

COMMODITIES

Commodities have occupied a large space in our life without us ever noticing

them. We have always brought commodities either for our survival or to make our life

comfortable. But now, we can trade in commodities. It’s just like buying and selling shares of

company, here we buy and sell commodities. And it can be done without owning an iota of

the commodity you trade in.

The commodities being traded are

1. Agriculture – based commodities such as rice, wheat, sugar, etc.

2. Mineral – based commodities such as gold, platinum, aluminum, copper, zinc, etc.

3. Energy – crude oil etc.




1. Commodity exchanges

Commodities are traded on different exchanges throughout the world. In India,

three of the most prominent commodity exchanges are

1. The Multi Commodity Exchange of India [MCE].

2. The National Commodity and Derivative Exchange [NCDEX].

3. The National Multi Commodity Exchange of India [MNCE].

All three exchanges are national exchanges where trading can be undertaken

from any part of the country.

How commodity trading takes places:

1. Main commodities permitted and traded on the exchanges.

Gold, silver, guar gum, chana, jeera, chilly, menthe oil, crude oil, steel, Soya oil

and sugar.

Trading timings

Monday to Friday: 10 am – 5 pm for agro based commodities.

Monday to Friday : 10 am – 11.30 pm for precious/base metals and energy

Saturday: 10 am – 2 pm for all commodities.

2. Spot trading in commodities

In spot markets for commodities, trading, clearing and settlement is carried out

on spot. Spot trading is almost carried out in regional mandis and unorganized markets. These

markets are fragmented and isolated. There are over 7000 mandis in India, trading in 140

crops. The traders in mandis are farmers, licensed traders, brokers and wholesale dealers.

Mandis inspectors issue type and quantity certificates. Mandi fees include transaction fee and

taxes varies from 4% to 12%.

MUTUAL FUNDS

Worldwide, the mutual fund or unit trust as it is called in some parts of the

world, has a long and successful history. In developed financial markets, like the United

States, mutual funds have almost overtaken bank deposits and total assets of insurance funds.




In India the mutual fund industry started with setting up of unit trust of India in 1964. Public

sector banks and financial institutions began to establish mutual funds in 1987. The private

sector and foreign institutions were allowed to setup mutual fund in 1993. Today, there are 36

mutual funds and over 200 schemes with total assets of approximately Rs. 81000 Crores. This

fast growing industry is regulated by Securities and Exchange Board of India. (SEBI).

Reliance Mutual Fund (RMF)

Reliance Mutual Fund (RMF), a part of the Reliance - Anil Dhirubhai Ambani

Group, is India's leading Mutual Fund, with Assets Under Management of Rs. 77,765 Crores

(AUM as on 30th November 2007), and an investor base of over 4.2 million. Reliance Mutual

Fund is one of the fastest growing mutual funds in the country.

Reliance Mutual Fund offers investors a well rounded portfolio of products to meet varying

investor requirements. Reliance Mutual Fund has a presence in 300 cities across the country

and constantly endeavors to launch innovative products and customer service initiatives to

increase value to investors. Reliance Mutual Fund schemes are managed by Reliance Capital

Asset Management Ltd., a wholly owned subsidiary of Reliance Capital Ltd

IPO [INITIAL PUBLIC OFFER]

IPO’s which means initial public offer which is the offering of shares or others

to the public. The public can subscribe shares offered by the company. A company that is

planning an IPO appoints lead managers (SEBI-registered merchant bankers who are

responsible for helping the company execute the IPO) to help it decide on an appropriate

price at which the shares should be issued. There are two ways in which the price of an IPO

can be determined – either the company, with the help of its lead managers, fixes a price or

the price is arrived at through the process of book building.

There are two ways in which the price of an IPO can be determined

Fixed IPO’s

In this case, the company, together with the lead managers, decides at what price

they would like to issue the shares. To arrive at a suitable price, the company’s past




performance is assessed using financial ratios. The share prices of competitor companies’

equities and others in the same league are also taken into consideration when the IPO price is

fixed.

Book-built IPO’s

In the book building approach to price setting, the price of an IPO is demand

driven. The issuing company sets a floor or base price and a band within which an investor is

allowed to bid for shares. The spread between the floor and the cap of the price band cannot

be more than 20 per cent of the floor price. Then the company, through its lead managers,

invites price bids from investors along with the quantum of securities that they would be

willing to purchase at that price.

INSURANCE

Reliance Life Insurance

Reliance Life Insurance, a part of the Reliance - Anil Dhirubhai Ambani Group is

India’s fastest growing life insurance company and among the top 5 private sector life

insurers. Reliance Life Insurance has a pan India presence and a range of products catering to

individual as well as corporate needs. Reliance Life Insurance has over 700 branches and 1,

50,000 agents. It offers 23 products covering savings, protection & investment requirements.

Reliance Life Insurance will endeavor to attain a leadership position in the market over the

next few years, by further expanding and strengthening its distribution network and offering a

diverse array of products to suit the varied and specific needs of individual customers.

Reliance General Insurance

Reliance General Insurance, a part of the Reliance - Anil Dhirubhai Ambani

Group and a Subsidiary of Reliance Capital, is one of the first non-life companies to get the

license from the IRDA. Reliance General Insurance is India’s fastest growing general




insurance company and the top 3 private sector insurers. Reliance General Insurance has 200

branches across 171 cities and over 25,000 intermediaries.

Reliance General Insurance offers an exhaustive range of insurance products that covers most

risks including Auto, Health, Property, Marine, Casualty and Liability.

FOREIGN EXCHANGE

Introduction to Forex

Forex, or Foreign Exchange, is the simultaneous exchange of one country's

currency for that of another. Traders in the FOREX market wish to purchase or sell one

currency for another with the hope of making a profit when the value of the currencies

changes in favor of the investor, whether from market news or events that takes place in the

world. The foreign exchange (FX or FOREX) market is the market where exchange rates are

determined. Exchange rates are the mechanisms by which world currencies are tied together

in the global marketplace, providing the price of one currency in terms of another.

The Forex Market

The foreign exchange market is the generic term for the worldwide institutions that exist to

exchange or trade the currencies of different countries. It is loosely organized in two tiers: 1)

The retail tier and 2) The wholesale tier.

GOLD

Gold has always been an important element of Indian tradition. Even today, it is

an important financial investment. India is the largest consumer of gold in the world and we

feel that it is important to add this to our portfolio of existing products and services. India is a

biggest market for gold. The country imports over 800 tonnes of gold a year. Jaipur, May 3

(IANS) Reliance Money, part of the Anil Dhirubhai Ambani Group, Thursday announced its

foray into retailing of gold coin after it tied up with Swiss precious metal refining major

Valcambi. With this, the company will sell 24 carat 999.9 pure gold coins in denominations

of 5gm and 8gm at its select Reliance Money and Reliance World outlets of Reliance

Communications. The launch comes within a month of Reliance Money’s foray into

distribution of a range of financial products and services in the country.




PRESENT STATUS OF THE ORGANIZATION

Reliance Capital for the last financial year made a profit of over Rs1000crs.

Today the Group has some 37,000 employees both full time and on contract.

The businesses Reliance Capital has focused on has been are as follows:

Consumer Finance –

Like Reliance Money, In it’s first year of Operations, Consumer Finance has

become the third largest consumer finance portfolio in the country with a book size of

approximately Rs.7000Crores Other businesses - include investments and proprietary trading

The company has begun this financial year with an agenda to accelerate growth in all the

businesses mentioned above and also started some new business initiatives as described

below.

Asset Reconstruction–

We have received all necessary regulatory clearances and hope to kick start operations

at the earliest.

In-house Distribution Company - to distribute Reliance financial services products to its

employees; customers and shareholders

Institutional Broking – to serve the Trading needs of Corporate & Financial Institutions.

Future growth drivers

The future growth of the company will be propelled by the quality of human

capital, the use of cutting-edge technology, and our extensive distribution reach. Technology,

together with human and intellectual capital, will be the key differentiators for the company

going forward. The company shall use those strategic tools to reduce the cost of delivery,

improve the speed of execution and enhance customer experience at every point of interface.

RELIANCE MONEY Power trade:

This is the terminal which the RELIANCE MONEY and known as

POWERTRADE. Only RELIANCE MONEY has license to use this software. In this

franchisee linked customers account will be held by the business associates. This makes the




clients to make their trading mechanism easy. And the service provider charges Rs 15/- per

trade on flat, i.e. the trader doesn’t have any restriction on his trading amount. Even the

service provider gets the notes on latest trend in market and also the movement of the markets

by the RELIANCE news team, popularly known as REUTERS. This team is only linked with

RELIANCE MONEY.

Student’s contribution to Organization

1) Helping the promotional activities & Creating good will for the. The respective clients




2) Generating leads to the organization

3) Increasing the client base for the respective branch.

4) Also contributing to the company in the form of getting the MUTUAL FUND investments.

5) Attend the problems of the clients during trading as well as during non market hours with

Personal care.

6) Completed assigned work by the guide such as data entry of LIFE INSURANCE, SIP, ULIP, etc.

.




METHDOLOGY

The term methodology refers to process, principles and procedures by which the

problems are approached and answers are seeked. The methods chosen by an individual are

greatly influenced by his/her assumptions, interest and goals. One methodology differs from

another in this respect and hence the conclusions arrived may also vary. Methodology aims to

present a clear idea of the research procedure used in this study. Since the value of systematic

and scientific research lies in the methodology the goals should be researched with accuracy

using at least among time. Precise planning prevents the study from derivation from the aims

and objectives, the scope set forth. A clear understanding of the situation analysis and tools of

data collection is necessary as they lead credibility and will act as catalysts inputting the

concept into practice.

Hence, these concepts have to be understood first in order to approach the

different aspects of the study.

Methodology explain the methods used in collecting information to carry out of the project.

The steps taken are as follows:

Research design:

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:

To fulfill the objective of the study, I have taken into consider Primary &

Secondary Data.

Primary data.

Questionnaire survey and interaction with clients in the area of Hubli to know

their investment pattern to recover equity difference.

Secondary Data

Secondary data are collected following the source.

a) Reliance Money manual & internet.

b) www.nseindia.com

c) www.bseindia.com

d) www.moneycontrol.com

e) www.optiontrading.com

Sampling scheme:

Sampling techniques:

Population: the population of investors is drawn from Hubli city who are inviting through

different brokerage houses.

Extent: This study was limited only to the Hubli investors

Time: This study was conducted only for a period of two months from 15 th june to 15th

august.


http://www.optiontrading.com/

http://www.moneycontrol.com/

http://www.bseindia.com/



Elements: Individuals.

Unit: Investors in securities market.

Sampling frame: the sampling frame used was the list of investors obtained from the different

brokerage houses.

Sampling size: The sample selected from the population was limited to 100 investors who

have invested their Money in stock market.

Field work: the data collection field work was about undertaken for about 25 days during

which all the 100 investors were conducted personally and interviewed individually using the

questionnaires.

Utility of the study: The study conducted is helpful to the organization in terms of the

research, and also to adopt further modification as per the recommendations put forth by the

study. It can also be useful to the others by serving as a reference for information. Persons

who are planning for career in the field of investment will find the study to be much use. This

work is an academic reference for the students studying into the same.

Practical Approach

Through my in plant project, I have learn some of the practical aspects in the organization.

e) Handling the terminal.

f) Handling client’s query & client relations.







Analysis and Interpretation

ANALYSIS AND DATA INTERPRETATION OF SERVEY DATA:

This analysis is made on the basis of investors response collected through questionnaire

Table 1: shows age of respondents Age

Frequency Percent Valid Percent Cumulative Percent Valid Below 25 15 15.0 15.0 15.0

25-35 59 59.0 59.0 74.0 35-45 20 20.0 20.0 94.0 above 45 6 6.0 6.0 100.0 Total 100 100.0 100.0




Interpretation: As we see in the diagram, almost all age groups are more or less equal. It is

a positive sign that every age group is contributing to the capital market and economic

growth.

Table-2: shows occupation of respondent.

Occupation

Frequency Percent Valid Percent

Cumulative Percent

Valid Businessman 29 29.0 29.0 29.0 Professionals 33 33.0 33.0 62.0 Employee 17 17.0 17.0 79.0 Student 17 17.0 17.0 96.0 Others 4 4.0 4.0 100.0 Total 100 100.0 100.0




Interpretation: As we can see that 33% of the respondents are Professionals people and 29%

Business people whereas employees and students are 17% which is a good sign

Table-3 shows annual income of respondents

Annual income

Frequency Percent Valid

Percent

Cumulative Percent

Valid 50000-100000 20 20.0 20.0 20.0

100000-150000 39 39.0 39.0 59.0




150000-200000 27 27.0 27.0 86.0

above 200000 14 14.0 14.0 100.0

Total 100 100.0 100.0

Interpretation: About 39% of the respondents are in the range of 100000-150000lakh

income. 20% of the respondents are in the range of 50000-100000. More investors are

needed in the range of above 200000 and between 50000-100000lakh so that no group

occupies a major portion.

Table-4: Shows investment pattern of respondents

Investment


Cumulative Percent

Valid Bank 2 2.0 2.0 2.0 Post office 11 11.0 11.0 13.0 Mutual funds 9 9.0 9.0 22.0 Insurance 1 1.0 1.0 23.0




Stock market 77 77.0 77.0 100.0 Total 100 100.0 100.0

Interpretation: A part from stock market, most of the respondents invests their savings in

mutual funds and post office. Much less of the respondents invest in insurance may be due to

their non-attractive packages.

Table-5: Where have you invested in stock market

Stock Market


Cumulative Percent

Valid Equity 18 18.0 18.0 18.0 Derivatives 38 38.0 38.0 56.0




Equity &

Derivatives44 44.0 44.0 100.0

Total 100 100.0 100.0

Interpretation: Almost everyone invest their savings in Derivatives. Only 18 percent

respondents invest in equity without investing in derivatives. In the rest of 44 percent invest

in derivatives as well.

Table 6- Shows how much respondents have invested in equity

Invested in equity


Cumulative Percent

Valid 0-50000 19 19.0 19.0 19.0

50000-100000 44 44.0 44.0 63.0




100000-200000 20 20.0 20.0 83.0 above 200000 17 17.0 17.0 100.0

Total 100 100.0 100.0

Interpretation: About 44% of the respondents have invested 50000-100000 in equity and

175 have invested about above 2 lakh range. As we can see that a major portion of the

respondents are either in the lower range or higher range.

Table 7- Shows whether respondents have benefitted by investing in equity

Have you benefited by doing so




Interpretation: This diagram shows whether respondents have benefitted by investing in

equity and 34% shows that they are not benefitted by doing so. It does not been that no one

benefits; the interpretation is based on the respondents that I have chosen.



Cumulative Percent

Valid Yes 66 66.0 66.0 66.0 No 34 34.0 34.0 100.0 Total 100 100.0 100.0



Table 8- shows respondents decline in their equity value.

Decline in Equity value


Cumulative Percent

Valid 0-10% 30 30.0 30.0 30.0 10-20% 55 55.0 55.0 85.0 20-30% 9 9.0 9.0 94.0 30-40% 3 3.0 3.0 97.0 BEYOUND

50%3 3.0 3.0 100.0

Total 100 100.0 100.0

Interpretation: Most of the respondent’s values have been declined around 10-20%. This

is all because of the volatile market.




Table 9- shows respondents doing averaging.

Averaging

Interpretation: 48% of the respondents do not do averaging where as 52% do average to

cover up the difference. The respondents, who do not average, wait till their prices come and

then take a decision.


Frequency Percent Valid Percent Cumulative Percent

Valid Yes 52 52.0 52.0 52.0No 48 48.0 48.0 100.0

Total 100 100.0 100.0



Table 10- shows how much respondents have invested in averaging

Invested in averaging


Valid 0-50000 46 46.0 46.0 46.0 50000-100000 42 42.0 42.0 88.0 100000-200000 5 5.0 5.0 93.0 above 200000 7 7.0 7.0 100.0 Total 100 100.0 100.0




Interpretation: Most of the respondents who are doing averaging to cover up the

difference have invested 0-500000, between 100000 to 200000/-. Some respondents have

even invested 5% and even more than50000-100000.

Table 11- Shows whether respondents are satisfied with their decision.

Decision (averaging)






Interpretation: If we see the table then we can analyze that out of the respondents

investing for averaging most of them are satisfied.

Table 12- Shows how many respondents know about derivatives

Derivatives






Interpretation: According the survey, analysis shows that three-fourth of the respondents

knows about derivatives. Though derivatives have been existing much after the equity, it had

gain popularity in the last two decades.

Table 13- Shows how many respondents are interested in knowing about derivatives

Derivatives


Valid Yes 59 59.0 59.0 59.0No 41 41.0 41.0 100.0

Total 100 100.0 100.0




Interpretation: Every one who does not know about derivatives is interested in knowing

about derivatives. It means every one is in the process of learning and that will make

difference in near future and that is the reason for growing popularity of derivatives.

Tabel14- Shows how many have invested in derivatives

Derivatives


Valid Yes 70 70.0 70.0 70.0No 30 30.0 30.0 100.0

Total 100 100.0 100.0




Interpretation: Every one who knows about derivatives has invested in derivatives. It is a

good sign because every one learns new things but doesn’t implement those things.

Table 15- Shows where respondents have invested in derivatives

Invested in derivatives


Cumulative Percent

Valid Future 21 21.0 21.0 21.0 Option 36 36.0 36.0 57.0




Future Option 37 37.0 37.0 94.0 Commodities 4 4.0 4.0 98.0 Others 2 2.0 2.0 100.0 Total 100 100.0 100.0

Interpretation: Most of the respondents invest in both options as well as futures. There

are some respondents who invest in options alone. Only 4 percent of the respondents invest in

commodities which have to improve. There are even other derivative products, but no one

invest in those products may due to non-availability or ignorance about those products.

Table 16- shows why respondents invest in derivatives

Invest in DerivativeFrequency Percent Valid Percent Cumulative

Percent Valid For hedging 25 25.0 25.0 25.0




For Profit

making51 51.0 51.0 76.0

due to speculations

11 11.0 11.0 87.0

to take advantages for

arbitragers

13 13.0 13.0 100.0

Total 100 100.0 100.0

Interpretation: Respondents who are investing in derivatives are for the purpose of profit

making only. Respondents are using hedging products for profit making, may be that is the

reason some respondents make loss.

Table 17- Shows how much respondents have invested in derivatives

Invested in derivativesFrequency Percent Valid Percent Cumulative




Percent

Valid 50000 29 29.0 29.0 29.0 50000-100000 40 40.0 40.0 69.0 100000-200000 16 16.0 16.0 85.0 Above 200000 15 15.0 15.0 100.0 Total 100 100.0 100.0

how much have you invested in derivatives

how much have you invested in derivatives

200000-2lakh&above

100000-200000

50000-100000

0-50000

Fre

qu

en

cy

30

20

10

0

Interpretation: Almost equal numbers of respondents have invested in every range. No

particular range is been highlighted.

Table 18- Shows whether respondents take advice while investing in derivative.

Investing in derivative




Frequency Percent Valid Percent Cumulative

Percent

Valid Yes 72 72.0 72.0 72.0

No 28 28.0 28.0 100.0

Total 100 100.0 100.0

Interpretation: Most of the respondents investing in derivatives seek advice while

investing in derivatives

Table 19- Shows from where respondents seek advice while investing in derivatives




Investing in derivatives


Valid Friends 19 19.0 19.0 19.0

Stock broker/sub

broker

58 58.0 58.0 77.0

Family 14 14.0 14.0 91.0

Others 9 9.0 9.0 100.0

Total 100 100.0 100.0

Interpretation: About 58 percent the respondents take advice from their broker’s i.e. stock

broker or sub broker.




Table 20- Shows whether respondents are making profit or not

Making profits or not



Interpretation: Out of 65 rpondents investing in derivatives 65 respondents are able to

make profit, while the rest of the respondents are making losses.







Findings

No particular age group is highlighting

Most of the respondents are business men and employees

Most of the respondents income level is 100000-150000lakhs.

Majority of the respondents invest in stock market

All most all of them have invested in equity

Most of the respondents have invested 50000-100000lakhs

Most of the respondents have not benefitted by investing in equity

Most of the respondents equity value have been declined around 10-29%

Only one-third of the respondents have done averaging and are satisfied

Three-fourth of the respondents know about derivatives and have invested in them

and the remaining are interested in knowing them

Most of the respondents invest in futures and options

Respondents invest in derivative for profit making only

Most of the respondents seek advice while investing in derivatives.

Majority of the respondents seek advice from stock broker or from sub broker

About 3/4th of the respondents investing in derivative products are making profit




Suggestions

Brokers need to concentrate more on the commodity market

Brokers can conduct seminars, workshops, investors meets to educate the investors

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 invest in derivative products 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 good.




Conclusions

Discussion, survey, and meet to the clients then I will come to know investors

not ready to invest the money in long term period.

According my study during the period of a resin or market volatility the

investors should come forward to invest usually the investors are not come forward to invest

at the time recession or market volatility. If they come forward to invest the market volatility

scenario means defiantly they will earn more in future.

According my study I conclude that, market volatility is very good for

investment purpose only thing is that investment should understand the market volatility

scenario and try to invest for longer terms rather than short terms means defiantly they will

get profit.

So finally t come market volatility is sure way to recover the difference in equity

price due to recent market crash.




Questionnaire

Dear Investors,

As a part of our curriculum I have undertaken project to determine “Market Volatility-The

ways to recover the difference in equity prices due to recent market crash” in Reliance

Money, Hubli. I assure you that the valuable information provided by you will be of great

help to me and will be strictly used for academic purpose only.

Name:

Age:

Occupation:

Annual income:

50000-100000 100000-150000

150000-200000 Above 200000

1. Where do you invest your savings?

Bank post office mutual funds

Insurance stock market

2 If you have invested in stock market, then where have you invested?

Equity derivatives

3 how much have you invested in equity?




0- 50,000/- 50,000-1lakh

1lakh-2lak h 2lakh & above

4. Have you benefited by doing so?

Yes No

5 If no, then by how much value has they been declined around?

0-10% 10-20%

20-30% 30-40%

Beyond 50%

6. Have you been averaging for covering up the difference?

Yes No

7 .If yes, then how much have you invested?

0- 50,000/- 50,000-1lakh

1lakh-2lakh 2lakh & above

8. Are you satisfied with your decision (averaging)?

Yes No

9. Do you know anything about derivatives?

Yes No

10. If no, then are you interested in knowing derivatives?

Yes No

11. Did you invested in derivatives?

Yes No

12. If yes, then where did you invest?

Futures options




Commodities others

13. Why do you invest in derivatives?

For hedging due to speculations

For profit making to take advantage of arbitragers

14. How much have you invested in derivatives?

50,000/- 50,000-1lakh

1lakh-2lakh 2lakh & above

15. Do you take advice while investing in derivatives?

Yes No

16. From whom do you take advice?

Friends stock broker/ sub-broker

Family others

17. Are you making profits in derivatives?

Yes No

18. Any suggestions?

Note: Only those respondents are chosen who know about stock market

Thank you for spending your precious time




BIBLOGRAPHY

WEB SITES

www.nseindia.com

www.bseindia.com

www.reliancemoney.com

www.moneycontrol.com

www.optiontradingpedia.com


http://www.optiontradingpedia.com/

http://www.moneycontrol.com/

http://www.reliancemoney.com/

http://www.bseindia.com/

http://www.nseindia.com/













Economy & Finance

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