EXECUTIVE SUMMARY:- The Summer Implant Project at “SEVENHILL SECURITY LTD” has given an exposure into the investment scenario in India. The project while working at “SEVENHILL SECURITY LTD” includes advisory services i.e. educating the existing and potential investors about stock market as an alternative source to investment. This involves catering to the queries of the investors about the concept of stock market, the various options that an investor can invest his money into, funds management of investors. Analyzing the investors’ behavior includes understanding the concerns a person has towards Stock Market, his stages in life and wealth cycle, the effect of the investments made by the peer groups, effect of the profession he is in, education qualification, importance of tax benefits, the most preferred saving tool etc. and this all is analyzed with the help of a schedule prepared. Understanding the significance of Derivatives market, types of instruments present in the Indian Stock Market such as Futures, Options and Forwards. The various techniques used to identify the trend of the market and analyzing the scrip before investing. Through the systematic investment plan invest a specific amount for a continuous period, at regular intervals. By doing this, the investor get the advantage of rupee cost averaging which means that by investing the same amount at regular intervals, the average cost per unit remains lower than the average market price. 2
2.1. Introduction to the derivative market:- 2.1.1.DERIVATIVE:-
A derivative security is a security whose value depends on the value of together more basic underlying variable. These are also known as contingent claims. Derivatives securities have been very successful in innovation in capital markets. The emergence of the market for derivative products most notably forwards, futures and options can be traced back to the willingness of risk -averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, financial markets are markets by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking – in asset prices. As instruments of risk management these generally don’t influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative products minimize the impact of fluctuations in asset prices on the profitability and cash-flow situation of risk-averse investor. 4
Derivatives are risk management instruments which derives their value from an underlying asset. Underlying asset can be Bullion, Index, Share, Currency, Bonds, Interest,etc. 2.1.2 DEFINITION: Understanding the word itself, Derivatives is a key to mastery of the topic. The word originates in mathematics and refers to a variable, which has been derived from another variable. For example, a measure of weight in pound could be derived from a measure of weight in kilograms by multiplying by two. In financial sense, these are contracts that derive their value from some underlying asset. Without the underlying product and market it would have no independent existence. Underlying asset can be a Stock, Bond, Currency, Index or a Commodity. Someone may take an interest in the derivative products without having an interest in the underlying product market, but the two are always related and may therefore interact with each other. The term Derivative has been defined in Securities Contracts (Regulation) Act 1956, as: A. A security derived from a debt instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security. B. A contract, which derives its value from the prices, or index of prices, of underlying securities. 2.1.3 IMPORTANCE OF DERIVATIVES: Derivatives are becoming increasingly important in world markets as a tool for risk management. Derivatives instruments can be used to minimize risk. Derivatives are used to separate risks and transfer them to parties willing to bear these risks. The kind of hedging that can be obtained by using derivatives is cheaper and more convenient than what could be obtained by using cash instruments. It is so because, when we use derivatives for hedging, actual delivery of the underlying asset is not at all essential for settlement purposes. Moreover, derivatives would not create any risk. They simply manipulate the risks and transfer to those who are willing to bear these risks. For example, Mr. A owns a bike If he does not take insurance, he runs a big risk. Suppose he buys insurance [a derivative instrument on the bike] he reduces his risk. Thus, having an insurance 5
policy reduces the risk of owing a bike. Similarly, hedging through derivatives reduces the risk of owing a specified asset, which may be a share, currency, etc. 2.1.4 R ATIONALE BEHIND T HE D EVELOPMENT OF DERIVATIVES: Holding portfolio of securities is associated with the risk of the possibility that the investor may realize his returns, which would be much lesser than what he expected to get. There are various influences, which affect the returns. 1. Price or dividend (interest). 2. Sum are internal to the firm like: Industry policy Management capabilities Consumer’s preference Labour strike, etc. These forces are to a large extent controllable and are termed as “Non-systematic Risks”. An investor can easily manage such non- systematic risks by having a well diversified portfolio spread across the companies, industries and groups so that a loss in one may easily be compensated with a gain in other. There are other types of influences, which are external to the firm, cannot be controlled, and they are termed as “systematic risks”. Those are • Economic • Political • Sociological changes are sources of Systematic Risk Their effect is to cause the prices of nearly all individual stocks to move together in the same manner. We therefore quite often find stock prices falling from time to time in spite of company’s earnings rising and vice –versa. Rational behind the development of derivatives market is to manage this systematic risk, liquidity. Liquidity means, being able to buy & sell relatively large amounts quickly without substantial price concessions. 6
In debt market, a much larger portion of the total risk of securities is systematic. Debt instruments are also finite life securities with limited marketability due to their small size relative to many common stocks. These factors favor for the purpose of both portfolio hedging and speculation. India has vibrant securities market with strong retail participation that has evolved over the years. It was until recently a cash market with facility to carry forward positions in actively traded “A” group scripts from one settlement to another by paying the required margins and borrowing money and securities in a separate carry forward sessions held for this purpose. However, a need was felt to introduce financial products like other financial markets in the world. 2.1.5 CHARACTERISTICS OF DERIVATIVES: 1. Their value is derived from an underlying instrument such as stock index, currency, etc. 2. They are vehicles for transferring risk. 3. They are leveraged instruments. 2.1.6 MAJOR PLAYERS IN DERIVATIVE MARKET: There are three major players in the derivatives trading. 1. Hedgers 2. Speculators 3. Arbitrageurs 1. Hedgers: The party, which manages the risk, is known as “Hedger”. Hedgers seek to protect themselves against price changes in a commodity in which they have an interest. 2. Speculators: They are traders with a view and objective of making profits. They are willing to take risks and they bet upon whether the markets would go up or come down. 3. Arbitrageurs: Risk less profit making is the prime goal of arbitrageurs. They could be making money even without putting their own money in, and such opportunities often come up in the market but last for very short time frames. They are specialized in making purchases and sales in different markets at the same time and profits by the difference in prices between the two centers. 7
2.1.7 TYPES OF DERIVATIVES: Most commonly used derivative contracts are:
A. FORWARD:- A forward contract is a customized contract between two entities where settlement takes place on a specific date in the futures at today’s pre-agreed price. Forward contracts offer tremendous flexibility to the party’s to design the contract in terms of the price, quantity, quality, delivery, time and place. Liquidity and default risk are very high. Forwards are the simplest and basic form of derivative contracts. These are instruments are basically used by traders/investors in order to hedge their future risks. It is an agreement to buy/sell an asset at certain in future for a certain price. They are private 8
agreements mainly between the financial institutions or between the financial institutions and corporate clients. One of the parties in a forward contract assumes a long position i.e. agrees to buy the underlying asset on a specified future date at a specified future price. The other party assumes short position i.e. agrees to sell the asset on the same date at the same price. This specified price referred to as the delivery price. This delivery price is chosen so that the value of the forward contract is equal to zero for both the parties. In other words, it costs nothing to the either party to hold the long/short position. A forward contract is settled at maturity. The holder of the short position delivers the asset to the holder of the long position in return for cash at the agreed upon rate. Therefore, a key determinate of the value of the contract is the market price of the underlying asset. A forward contract can therefore, assume a positive/negative value depending on the movements of the price of the asset. For example, if the price of the asset rises sharply after the two parties entered into the contract, the party holding the long position stands to benefit, that is the value of the contract is positive for him. Conversely the value of the contract becomes negative for the party holding the short position. The concept of forward price is also important. The forward price for a certain contract is defined as that delivery price which would make the value of the contract zero. To explain further, the forward price and the delivery price are equal on the day that the contract is entered into. Over the duration of the contract, the forward price is liable to change while the delivery price remains the same. Essential features of Forward Contracts: • A forward contract is a Bi-party contract, to be performed in the future, with the terms decided today • Forward contracts offer tremendous flexibility to the parties to design the contract in terms of the price, quantity, quality, delivery time and place • Forward contracts suffer from poor liquidity and default risk 9
• Contract price is generally not available in public domain • On the expiration date the contract will settle by delivery of the asset • If the party wishes to reverse the contract, it is compulsorily to go to the same counter party, which often results high prices Forward Trading in Securities: The Securities Contract (amendment) Act of 1999 has allowed the trading in derivative products in India. As a further step to widen and deepen the securities market the government has notified that with effect from March 1st 2000 the ban on forward trading in shares and securities is lifted to facilitate trading in forwards and futures. It may be recalled that the ban on forward trading in securities was imposed in 1986 to curb certain unhealthy trade practices and trends in the securities market. During the past few years, thanks to the economic and financial reforms, there have been many healthy developments in the securities markets. The lifting of ban on forward deals in securities will help to develop index futures and other types of derivatives and futures on stocks. This is a step in the right direction to promote the sophisticated market segments as in the western countries. B. FUTURE: - A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense, that the former are standardized exchange traded contracts. The future contract is an agreement between two parties to buy or sell an asset at a certain specified time in future for certain specified price. In this, it is similar to a forward contract. A futures contract is a more organized form of a forward contract; these are traded on 10
organized exchanges. However, there are a number of differences between forwards and futures. These relate to the contractual futures, the way the markets are organized, profiles of gains and losses, kind of participants in the markets and the ways they use the two instruments. Futures contracts in physical commodities such as wheat, cotton, gold, silver, cattle, etc. have existed for a long time. Futures in financial assets, currencies, and interest bearing instruments like treasury bills and bonds and other innovations like futures contracts in stock indexes are relatively new developments. The futures market described as continuous auction markets and exchanges providing the latest information about supply and demand with respect to individual commodities, financial instruments and currencies, etc. Futures exchanges are where buyers and sellers of an expanding list of commodities; financial instruments and currencies come together to trade. Trading has also been initiated in options on futures contracts. Thus, option buyers participate in futures markets with different risk. The option buyer knows the exact risk, which is unknown to the futures trader. 1. FEATURES OF FUTURES CONTRACTS: The principal features of the contract are as follows. O S C A M r t lc a g a e t r a n u g n d r a i ia ln z r n s e d g d i e z H l E a o i x t u v c is e h o e r a n y n
g i e s s
r a r e a) Organized Exchanges: Unlike forward contracts which are traded in an over- the- counter market, futures are traded on organized exchanges with a designated physical location where trading takes place. This provides a ready, liquid market which futures can be bought and sold at any time like in a stock market. 11
b) Standardization: In the case of forward contracts the amount of commodities to be delivered and the maturity date are negotiated between the buyer and seller and can be Tailor made to buyer’s requirement. In a futures contract both these are standardized by the exchange on which the contract is traded. c) Clearing House: The exchange acts a clearing house to all contracts struck on the trading floor. For instance a contract is struck between capital A and B. Upon entering into the records of the exchange, this is immediately replaced by two contracts, one between A and the clearing house and another between B and the clearing house. In other words the exchange interposes itself in every contract and deal, where it is a buyer to seller, and seller to buyer. The advantage of this is that A and B do not have to undertake any exercise to investigate each other’s credit worthiness. It also guarantees financial integrity of the market. This enforces the delivery for the delivery of contracts held for until maturity and protects itself from default risk by imposing margin requirements on traders and enforcing this through a system called marking – to – market. d) Actual delivery is rare: In most of the forward contracts, the commodity is actually delivered by the seller and is accepted by the buyer. Forward contracts are entered into for acquiring or disposing of a commodity in the future for a gain at a price known today. In contrast to this, in most futures markets, actual delivery takes place in less than one percent of the contracts traded. Futures are used as a device to hedge against price risk and as a way of betting against price movements rather than a means of physical acquisition of the underlying asset. To achieve this most of the contracts entered into are nullified by the matching contract in the opposite direction before maturity of the first. e) Margins: In order to avoid unhealthy competition among clearing members in reducing margins to attract customers, a mandatory minimum margins are obtained by the members from the customers. Such a stop insures the market against serious liquidity crisis arising out of possible defaults by the clearing members. The members collect margins from their clients as may be stipulated by the stock exchanges from time to time and pass the margins to the clearing house on the net basis i.e. at a stipulated percentage of the net purchase and sale position. The stock exchange imposes margins as follows: 1. Initial margins on both the buyer as well as the seller. 2. The accounts of buyer and seller are marked to the market daily. The concept of margin here is same as that of any other trade, i.e. to introduce a financial stake of the client, to ensure performance of the contract and to cover day to day adverse fluctuations in the prices of the securities. The margin for future contracts has two components: • Initial margin • Marking to market 12
Initial margin: In futures contract both the buyer and seller are required to perform the contract. Accordingly, both the buyers and the sellers are required to put in the initial margins. The initial margin is also known as the “performance margin” and usually 5% to 15% of the purchase price of the contract. The margin is set by the stock exchange keeping in view the volume of business and size of transactions as well as operative risks of the market in general.
The concept being used by NSE to compute initial margin on the futures transactions is called “value- at –Risk” (VAR) where as the options market had SPAN based margin system”. Marking-to-Market: Marking to market means, debiting or crediting the client’s equity accounts with the losses/profits of the day, based on which margins are sought. It is important to note that through marking to market process, the clearinghouse substitutes each existing futures contract with a new contract that has the settlement price or the base price. Base price shall be the previous day’s closing Nifty value. Settlement price is the purchase price in the new contract for the next trading day. 2. FUTURES TERMINOLOGY:
a) Contract Size:- The value of the contract at a specific level of Index. It is Index level * Multiplier. b) Multiplier:- It is a pre-determined value, used to arrive at the contract size. It is the price per index point. c) Tick Size:- It is the minimum price difference between two quotes of similar nature. d) Contract Month :- The month in which the contract will expire. e) Expiry Day:- The last day on which the contract is available for trading. f) Open interest:- 13
Total outstanding long or short positions in the market at any specific point in time. As total long positions for market would be equal to total short positions, for calculation of open Interest, only one side of the contracts is counted. g) Volume :- No. Of contracts traded during a specific period of time. During a day, during a week or during a month. h) Long position:- Outstanding/unsettled purchase position at any point of time. i) Short position:- Outstanding/ unsettled sales position at any point of time. j) Open position:- Outstanding/unsettled long or short position at any point of time. k) Physical delivery:- Open position at the expiry of the contract is settled through delivery of the underlying. In futures market, delivery is low. l) Cash settlement:- Open position at the expiry of the contract is settled in cash. These contracts Alternative Delivery Procedure (ADP) - Open position at the expiry of the contract is settled by two parties - one buyer and one seller, at the terms other than defined by the exchange. Worldwide a significant portion of the energy and energy related contracts (crude oil, heating and gasoline oil) are settled through Alternative Delivery Procedure. m) Index Futures:- Stock Index futures are most popular financial futures, which have been used to hedge or manage systematic risk by the investors of the stock market. They are called hedgers, who own portfolio of securities and are exposed to systematic risk. Stock index is the apt hedging asset since, the rise or fall due to systematic risk is accurately shown in the stock index. Stock index futures contract is an agreement to buy or sell a specified amount of an underlying stock traded on a regulated futures exchange for a specified price at a specified time in future. Stock index futures will require lower capital adequacy and margin requirement as compared to margins on carry forward of individual scrip’s. The brokerage cost on index futures 14
will be much lower. Savings in cost is possible through reduced bid-ask spreads where stocks are traded in packaged forms. The impact cost will be much lower in case of stock index futures as opposed to dealing in individual scrip’s. The market is conditioned to think in terms of the index and therefore, would refer trade in stock index futures. Further, the chances of manipulation are much lesser. The stock index futures are expected to be extremely liquid, given the speculative nature of our markets and overwhelming retail participation expected to be fairly high. In the near future stock index futures will definitely see incredible volumes in India. It will be a blockbuster product and is pitched to become the most liquid contract in the world in terms of contracts traded. The advantage to the equity or cash market is in the fact that they would become less volatile as most of the speculative activity would shift to stock index futures. The stock index futures market should ideally have more depth, volumes and act as a stabilizing factor for the cash market. However, it is too early to base any conclusions on the volume or to form any firm trend. The difference between stock index futures and most other financial futures contracts is that settlement is made at the value of the index at maturity of the contract. Example: If NSE NIFTY is at 7900 and each point in the index equals to Rs.50, a contract struck at this level could work Rs.395000 (7900x50). If at the expiration of the contract, the NSE NIFTY is at 8000, a cash settlement of Rs.5000 is required (8000-7900) x50). n) Stock Futures:- With the purchase of futures on a security, the holder essentially makes a legally binding promise or obligation to buy the underlying security at same point in the future (the expiration date of the contract). Security futures do not represent ownership in a corporation and the holder is therefore not regarded as a shareholder. A futures contract represents a promise to transact at same point in the future. In this light, a promise to sell security is just as easy to make as a promise to buy security. Selling security futures without previously owing them simply obligates the trader to sell a certain amount of the underlying security at same point in the future. It can be done just as easily as buying futures, which obligates the trader to buy a certain amount of the underlying security at some point in future. Example: If the current price of the GMRINFRA share is Rs.13 per share. We believe that in one month it will touch Rs.16 and we buy GMRINFRA shares. If the price really increases to Rs.16, we made a profit of Rs.3 i.e. a return of 19%. If we buy GMRINFRA futures instead, we get the same position as ACC in the cash market, but we have to pay the margin not the entire amount. In the above example if the margin is 20%, we 15
would pay only Rs.34 per share initially to enter into the futures contract. If GMRINFRA share goes up to Rs.16 as expected, we still earn Rs.3 as profit. 3. PAYOFF FOR FUTURES CONTRACTS: Futures contracts have linear payoffs. In simple words, it means that the losses as well as profits for the buyer and the seller of a futures contract are unlimited. These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs. Payoff for buyer of futures: Long futures The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an asset. He has a potentially unlimited upside as well as potentially unlimited downside. Take the case of a speculator who buys a two-month Nifty index futures contract when Nifty stands at 7900. The underlying asset in this case is Nifty portfolio. When the index moves up, the long futures position starts making profits, and when index moves down it starts making losses. Payoff for a buyer of Nifty futures PROFIT 7900 NIFTY 0 LOSS Payoff for seller of futures: Short futures The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. He has potentially unlimited upside as well as potentially unlimited downside. 16
Payoff for a seller of Nifty futures PROFIT
7900 0 NIFTY LOSS Take the case of a speculator who sells a two-month Nifty index futures contract when the Nifty stands at 7900. The underlying asset in this case is the Nifty portfolio. When the index moves down, the short futures position starts making profits, and when index moves up, it starts making losses. 4. PRICING FUTURES a) Cost of Carry Model: We use fair value calculation of futures to decide the no arbitrage limits on the price of the futures contract. This is the basis for the cost-of-carry model where the price of the contract is defined as follows. F = S + C Where F - Futures S - Spot price C - Holding cost or Carry cost This can also be expressed as F = S (1+r) T Where r - Cost of financing T - Time till expiration 1) Pricing index futures given expected dividend amount: The pricing of index futures is also based on the cost of carry model where the carrying cost is the cost of financing the purchase of the portfolio underlying the index, minus the present value of the dividends obtained from the stocks in the index portfolio. 17
Example Nifty futures trade on NSE as one, two and three month contracts. Money can be borrowed at a rate of 15% per annum. What will be the price of a new two-month futures contract on Nifty? 1. Let us assume that ACC will be declaring a dividend of Rs.10/- per share after 15 days of purchasing of contract. 2. Current value of Nifty is 7900 and Nifty trade with a multiplier of 200. 3. Since Nifty is traded in multiples of 200 value of the contract is 200x7900=1580000. 4. If ACC has weight of 7% in Nifty, its value in Nifty is Rs.110600 i.e. (1580000x0.07). 5. If the market price of ACC is Rs.1370, then a traded unit of Nifty involves 81 shares of ACC i.e. (110600/1370). 6. To calculate the futures price we need to reduce the cost of carry to the extent of dividend received is Rs.7900 i.e. (81x10). The dividend is received 15 days later and hence compounded only for the remainder of 45 days. To calculate the futures price we need to compute the amount of dividend received for unit of Nifty. Hence, we divided the compounded figure by 200. 7. Thus futures price F = 7900(1.15) 60/365 – (81x10(1.15) 45/365)/200 = Rs.8079.47. 2) Pricing index futures given expected dividend yield If the dividend flow throughout the year is generally uniform, i.e. if there are few historical cases of clustering of dividends in any particular month, it is useful to calculate the annual dividend yield. F = S (1+ r-q) T Where F- Futures price S - Spot index value r - Cost of financing q - Expected dividend yield T - Holding period Example: 18
A two-month futures contract trades on the NSE. The cost of financing is 15% and the dividend yield on Nifty is 2% annualized. The spot value of Nifty is 7900. What would be the future value of the futures contract? Fair value = 7900(1+0.15-0.02) 60/365 = Rs.8106.54 b) Pricing stock futures A futures contract on a stock gives its owner the right and the obligation to buy or sell the stocks. Like, index futures, stock futures are also cash settled: There is no delivery of the underlying stock. 1) Pricing stock futures when no dividend is expected The pricing of stock futures is also based on the cost of carry model, where the carrying cost is the cost of financing the purchase of the stock, minus the present value of the dividends obtained from the stock. If no dividends are expected during the life of the contract, pricing futures on that stock is very simple. It simply involves the multiplying the spot price by the cost of carry. Example: SBI futures trade on NSE as one, two and three month contracts. Money can be borrowed at 15% per annum. What will be the price of a unit of new two-month futures contract on SBI if no dividends are expected during the period? 1. Assume that the spot price of SBI is Rs.242. 2. Thus, futures price F = 242(1.15) 60/365 = Rs.247.62. 2) Pricing stock futures when dividends are expected When dividends are expected during the life of futures contract, pricing involves reducing the cost of carrying to the extent of the dividends. The net carrying cost is the cost of financing the purchase of the stock, minus the present value of the dividends obtained from the stock. Example: ACC futures trade on NSE as one, two and three month contracts. What will be the price of a unit of new two-month futures contract on ACC if dividends are expected during the period? 1. Let us assume that ACC will be declaring a dividend of Rs.10/- per share after 15 days pf purchasing contract. 2. Assume that the market price of ACC is Rs.1370/- 19
3. To calculate the futures price, we need to reduce the cost of carrying to the extent of dividend received. The amount of dividend received is Rs.10/-. The dividend is received 15 days later and hence, compounded only for the remaining 45 days. 4. Thus, the futures price F = 1370 (1.15) 60/365 – 10(1.15) 45/365 = Rs.1391.66. C. OPTION:- Options are two types - Calls and Puts. Calls give the buyer the right but not the obligation to buy a given quantity of the underlying asset at a given price on or before a given future date. Puts give the buyer the right but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. An option is a derivative instrument since its value is derived from the underlying asset. It is essentially a right, but not an obligation to buy or sell an asset. Options can be a call option (right to buy) or a put option (right to sell). An option is valuable if and only if the prices are varying.
An option by definition has a fixed period of life, usually three to six months. An option is a wasting asset in the sense that the value of an option diminishes as the date of maturity approaches and on the date of maturity it is equal to zero. An investor in options has four choices before him. Firstly, he can buy a call option meaning a right to buy an asset after a certain period of time. Secondly, he can buy a put option meaning a right to sell an asset after a certain period of time. Thirdly, he can write a call option meaning he can sell the right to buy an asset to another investor. Lastly, he can write a put option meaning he can sell a right to sell to another investor. Out of the above four cases in the first two cases 20
the investor has to pay an option premium while in the last two cases the investors receives an option premium. 1. DEFINITION: “An option is a derivative i.e. its value is derived from something else. In the case of the stock option its value is based on the underlying stock (equity). In the case of the index option, its value is based on the underlying index”. Options clearing corporation The Options Clearing Corporation (OCC) is guarantor of all exchange-traded options once an option transaction has been completed. Once a seller has written an option and a buyer has purchased that option, the OCC takes over it. It is the responsibility of the OCC who over sees the obligations to fulfill the exercises. If I want to exercise an ACC November 100-call option, I notify my broker. My broker notifies the OCC, the OCC then randomly selects a brokerage firm, which is short of one ACC stock. That brokerage firm then notifies one of its customers who have written one ACC November 100 call option and exercises it. The brokerage firm customer can be chosen in two ways. He can be chosen at random or FIFO basis. Because, OCC has a certain risk that the seller of the option can’t fulfill the contract, strict margin requirement are imposed on sellers. This margin requirements acts as a performance Bond. It assures that OCC will get its money. 2. OPTIONS TERMINOLOGY: a) 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. b) Put option: A put option gives the holder the right but the not the obligation to sell an asset by a certain date for a certain price. c) Option price: Option price is the price, which the option buyer pays to the option seller. It is also referred to as the option premium. 21
d) Expiration date: The date specified in the option contract is known as the expiration date, the exercise date, the straight date or the maturity date. e) Strike Price: The price specified in the option contract is known as the strike price or the exercise price. f) American options: American options are the options that the can be exercised at any time up to the expiration date. Most exchange-traded options are American. g) European options: European options are the options that can be exercised only on the expiration date itself. European options are easier to analyze than the American options and properties of an American option are frequently deduced from those of its European counterpart. h) In-the-money option: An in-the-money option (ITM) is an option that would lead to a positive cash flow to the holder if it were exercised immediately. A call option in the index is said to be in the money when the current index stands at higher level that the strike price (i.e. spot price > strike price). If the index is much higher than the strike price the call is said to be deep in the money. In the case of a put option, the put is in the money if the index is below the strike price. i) At-the-money option: An At-the-money option (ATM) is an option that would lead to zero cash flow if it exercised immediately. An option on the index is at the money when the current index equals the strike price (I.e. spot price = strike price). j) Out-of-the-money option: An out of the money (OTM) option is an option that would lead to a negative cash flow if it were exercised immediately. A call option on the index is out of the money when the current index stands at a level, which is less than the strike price (i.e. spot price < strike price). If the index is much lower than the strike price the call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price. k) Intrinsic value of an option: It is one of the components of option premium. The intrinsic value of a call is the amount the option is in the money, if it is in the money. If the call is out of the money, its intrinsic value is 22
Zero. For example X, take that ABC November-call option. If ABC is trading at 102 and the call option is priced at 2, the intrinsic value is 2. If ABC November-100 put is trading at 97 the intrinsic value of the put option is 3. If ABC stock was trading at 99 an ABC November call would have no intrinsic value and conversely if ABC stock was trading at 101 an ABC November-100 put option would have no intrinsic value. An option must be in the money to have intrinsic value. l) Time value of an option: The value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually, the maximum time value exists when the option is ATM. The longer the time to expiration, the greater is an options time value. At expiration an option should have no time value. 3. CHARACTERISTICS OF OPTIONS: The following are the main characteristics of options: 1. Options holders do not receive any dividend or interest. 2. Options holders receive only capital gains. 3. Options holder can enjoy a tax advantage. 4. Options are traded at O.T.C and in all recognized stock exchanges. 5. Options holders can control their rights on the underlying asset. 6. Options create the possibility of gaining a windfall profit. 7. Options holders can enjoy a much wider risk-return combinations. 8. Options can reduce the total portfolio transaction costs. 9. Options enable the investors to gain a better return with a limited amount of investment. 4. Call Option: An option that grants the buyer the right to purchase a desired instrument is called a call option. A call option is contract that gives its owner the right but not the obligation, to buy a specified asset at specified prices on or before a specified date. An American call option can be exercised on or before the specified date. But, a European option can be exercised on the specified date only. The writer of the call option may not own the shares for which the call is written. If he owns the shares it is a ‘Covered Call’ and if he does not owns the shares it is a ‘Naked call’. 23
Strategies: The following are the strategies adopted by the parties of a call option. Assuming that brokerage, commission, margins, premium, transaction costs and taxes are ignored. A call option buyer’s profit/loss can be defined as follows: • At all points where spot price < strike price, there will be a loss. • At all points where spot prices > strike price, there will be a profit. • Call Option buyer’s losses are limited and profits are unlimited. • Conversely, the call option writer’s profits/loss will be as follows: • At all points where spot prices < strike price, there will be a profit • At all points where spot prices > strike price, there will be a loss • Call Option writer’s profits are limited and losses are unlimited. Following is the table, which explains In the-money, Out-of-the-money and At-the money position for a Call option. Exercise call option Spot price> strike price In-The-Money Do not exercise Spot price< strike price Out-of the-Money Exercise/Do not exercise Spot price= strike price At-The-Money Example: The current price of NTPC share is Rs.130. Holder expect that price in a three month period will go up to Rs.170 but, holder do fear that the price may fall down below Rs.130. To reduce the chance of holder risk and at the same time, to have an opportunity of making profit, instead of buying the share, the holder can buy a three-month call option on NTPC share at an agreed exercise price of Rs.120. If the price of the share is Rs.170. then holder will exercise the option since he get a share worth Rs.170. by paying a exercise price of Rs.120. holder will gain Rs.50. Holder’s call option is In-The-Money at maturity. If the price of the share is Rs.90. then holder will not exercise the option. 24
Holder will gain nothing. It is Out-of-the-Money at maturity. a) Payoff for buyer of call option: Long call The profit/loss that the buyer makes on the option depends on the spot price of the underlying asset. If upon expiration, the spot price exceeds the strike price, he makes a profit. Higher the spot price more is the profit he makes. If the spot price of the underlying asset is less than the strike price, he lets his option un-exercise. His loss in this case is the premium he paid for buying the option.
Payoff for buyer of call option PROFIT 7950 0 NIFTY 86.60
LOSS The figure shows the profit. The profits/losses for the buyer of the three-month Nifty 7950(underlying) call option are shown above. As can be seen, as the spot nifty rises, the call option is In-The-money. If upon expiration Nifty closes above the strike of 7950, the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and strike price. However, if Nifty falls below the strike of 7950, he lets the option expire and his losses are limited to the premium he paid i.e. 86.60. b) Payoff for writer of call option: Short call For selling the option, the writer of the option charges premium. Whatever is the buyer’s profit is the seller’s loss. If upon expiration, the spot price exceeds the strike price, the buyer will exercise the option on the writer. Hence as the spot price increases the writer of the option starts making losses. Higher the spot price more is the loss he makes. If upon expiration the spot price is less than the strike price, the buyer lets his option un-exercised and the writer gets to keep the premium. Payoff for writer of call option
0 7950 NIFTY
LOSS The figure shows the profits/losses for the seller of a three-month Nifty 7950 call option. If upon expiration Nifty closes above the strike of 7950, the buyer would exercise his option on the writer would suffer a loss to the extent of the difference between the Nifty-close and the strike price. This loss that can be incurred by the writer of the option is potentially unlimited. The maximum profit is limited to the extent of up-front option premium Rs.86.60. 5. Put option: An option that gives the seller the right to sell a designated instrument is called put option. A put option is a contract that gives the owner the right, but not the obligation to sell a specified number of shares at a specified price on or before a specified date. An American put option can be exercised on or before the specified date. But, a European put option can be exercised on the specified date only. The following are the strategies adopted by the parties of a put option. • A put option buyer’s profit/loss can be defined as follows: At all points where spot price< strike price, there will be a gain. At all points where spot price> strike price, there will be a loss. • Conversely, the put option writer’s profit/loss will be as follows: At all points where spot price< strike price, there will be a loss. At all points where spot price> strike price, there will be a profit. Following is the table, which explains In-the-money, Out-of-the Money and At-the money positions for a Put option. Exercise put option Spot price< strike price In-The-Money 26
Do not Exercise Spot price> strike price Out-of-The-Money Exercise/Do not Exercise Spot price= strike price At-The-Money Example: The current price of RPL share is Rs.130. Holder by a three month put option at exercise price of Rs.140. (Holder will Exercise his option only if the market price/ spot price is less than the exercise price). If the market/Spot price of the NTPC share is Rs.125. then the holder will exercise the option. Means put option holder will buy the share for Rs.125. In the market and deliver it to the option writer for Rs.140. the holder will gain Rs.15 from the contract. a) Payoff for buyer of put option: Long put. A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. If upon the expiration, the spot price is below the strike price, he makes a profit. Lower the spot price more is the profit he makes. If the spot price of the underlying asset is higher than the strike price, he lets his option expire un-exercised. Payoff for buyer of put option PROFIT 7950 0 NIFTY 61.70 LOSS The figure shows the profits/losses for the buyer of a three-month Nifty 7950 put option. As can be seen, as the spot Nifty falls, the put option is In-The-Money. If upon expiration, Nifty closes below the strike of 7950, the buyer would exercise his option and make a profit to the extent of the difference between the strike price and Nifty-close. The profits possible on this option can be as high as the strike price. However, if Nifty rises above the strike of 1250, he lets the option expire. His losses are limited to the extent of the premium he paid. b) Payoff for writer of put option: Short put 27
The figure below shows the profit/losses for the seller/writer of a three-month put option. As the spot Nifty falls, the put option is In-The-Money and the writer starts making losses. If upon expiration, Nifty closes below the strike of 7950, the buyer would exercise his option on writer who would suffer losses to the extent of the difference between the strike price and Nifty-close. Payoff for writer of put option PROFIT
61.70 7950 NIFTY 0 LOSS The loss that can be incurred by the writer of the option is to a maximum extent of strike price. Maximum profit is limited to premium charged by him. 6. Pricing Options:- Factors determining options value: Exercise price and Share price: If the share price is more than the exercise price then the holder of the call option will get more net payoff, means the value of the call option is more. If the share price is less than the exercise price then the holder of the put option will get more net pay-off. Interest Rate: The present value of the exercise price will depend on the interest rate. The value of the call option will increase with the rise in interest rates. Since, the present value of the exercise price 28
will fall; the effect is reversed in the case of a put option. The buyer of a put option receives exercise price and therefore as the interest increases, the value of the put option will decrease. Time to Expiration: The present value of the exercise price also depends on the time to expiration of the option. The present value of the exercise price will be less if the time to expiration is longer and consequently value of the option will be higher. Longer the time to expiration higher is the possibility of the option to be more in the money. Volatility: The volatility part of the pricing model is used to measure fluctuations expected in the value of the underlying security or period of time. The more volatile the underlying security, the greater is the price of the option. There are two different kinds of volatility. They are Historical Volatility and Implied Volatility. Historical volatility estimates volatility based on past prices. Implied volatility starts with the option price as a given, and works backward to ascertain the theoretical value of volatility which is equal to the market price minus any intrinsic value. B lack Scholes pricing models: The principle that options can completely eliminate market risk from a stock portfolio is the basis of Black Scholes pricing model in 1973. Interestingly, before Black and Scholes came up with their option pricing model, there was a wide spread belief that the expected growth of the underlying asset ought to effect the option price. Black and Scholes demonstrate that this is not true. The beauty of black and schools model is that like any good model, it tells us what is important and what is not. It doesn’t promise to produce the exact prices that show up in the market, but certainly does a remarkable job of pricing options within the framework of assumptions of the model. The following are the assumptions; 1. There are no transaction costs and taxes. 2. The risk from interest rate is constant. 3. The markets are always open and trading is continuous. 4. The stock pays no dividend. During the option period the firm should not pay any dividend. 5. The option must be European option. 6. There are no short selling constraints and investors get full use of short sale proceeds. The options price for a call computed as per the following Black Scholes formula: 29
VC =PS N (d1) - PX/ (e (RF) (T)) N (d2) The value of Put option as per Black schools formula: VP=PX/(e (RF)(T)) N (-d2 )-PS N (-d1) Where d1= In [PS/PX] +T [RF+ (S.D) 2 / 2] / S.D (sqrt (T)) d2= d1-S.D (sqrt (T)) VC= value of call option VP= value of put option PS= current price of the share PX= exercise price of the share RF= Risk free rate of return T= time period remaining to expiration N (d1) = after calculation of d1, value normal distribution area is to be identified. N (d2) = after calculation of d2, value normal distribution area is to be identified. S.D= risk rate of the share In = Natural log value of ratio of PS and PX Pricing Index Option: Under the assumptions of Black Scholes options pricing model, index options should be valued in the way as ordinary options on common stock. The assumption is that the investors can purchase the underlying stocks in the exact amount necessary to replicate the index: i.e. stocks are infinitely divisible and that the index follows a diffusion process such that the continuously compounded returns distribution of the index is normally distributed. To use the black scholes formula for index options, we must however, make adjustments for the dividend payments received on the index stocks. If the dividend payment is sufficiently smooth, this merely involves the replacing the current index value S in the model with S/eqT where q is the annual dividend and T is the time of expiration in years. Pricing Stock Options: The Black Scholes options pricing formula that we used to price European calls and puts, with some adjustments can be used to price American calls and puts & stocks. Pricing American options becomes a little difficult because, unlike European options, American options can be exercised any time prior to expiration. When no dividends are expected during the life of options the options can be valued simply by substituting the values of the stock price, strike price, stock volatility, risk free rate and time to expiration in the black scholes formula. However, when dividends are expected during the life of the options, it is some times optimal to exercise the option just before the underlying stock goes ex-dividend. Hence, when valuing options on dividend paying stocks we should consider exercised possibilities in two situations. One-just before the underlying stock goes Ex-dividend, two – at expiration of the options contract. Therefore, owing an option on a dividend paying stock today is like owing to options 30
one in long maturity option with a time to maturity from today till the expiration date, and other is a short maturity with a time to maturity from today till just before the stock goes Ex-dividend. 7. Difference between the Futures and Options Futures Options 1. Both the parties are obligated to perform. 1. Only the seller (writer) is obligated to 2. In futures either parties pay premium. perform. 3. The parties to the futures contract must 2. In options the buyer pays the seller a perform at the settlement date only. They premium. are obligated to Perform on the maturity date. 3. The buyer of an options contract can exercise the option at any time prior to 4. The holder of the contract is expiration date.
exposed to the entire spectrum of 4. The buyer limits the downside risk downside risk and had the potential to the option premium but retain for all the upside return. the upside potential. 5. In futures margins are to be paid. 5. In options premium are to be paid. They are approximately 15% to But they are less as compare to 20% on the current stock price. margin in futures. 31
D. Swaps: Financial swaps are a funding technique, which permit a borrower to access one market and then exchange the liability for another type of liability. Global financial markets present borrowers and investors with a variety of financing and investment vehicles in terms of currency and type of coupon – fixed or floating. It must be noted that the swaps by themselves are not a funding instrument: They are devices to obtain the desired form of financing indirectly. The borrower might otherwise as found this too expensive or even inaccessible.
A common explanation for the popularity of swaps concerns the concept of comparative advantage. The basic principle is that some companies have a comparative advantage when borrowing in fixed markets while other companies have a comparative advantage in floating markets. Swaps are used to transform the fixed rate loan into a floating rate loan. 32
1. Types of swaps: All Swaps involves exchange of a series of payments between two parties. A swap transaction usually involves an intermediary who is a large international financial institution. The two payment streams estimated to have identical present values at the outset when discounted at the respective cost of funds in the relevant markets. The most widely prevalent swaps are i Interest rate swaps. ii Currency rate swaps. i. Interest rate swaps Interest rate swaps, as a name suggest involves an exchange of different payment streams, which are fixed and floating in nature. Such an exchange is referred to as an exchange of borrowings. For example, ‘B’ to pay the other party ‘A’ cash flows equal to interest at a pre- determined fixed rate on a notional principal for a number of years. At the same time, party ‘A’ agrees to pay ‘B’ cash flows equal to interest at a floating rate on the same notional principal for the same period of time. The currencies of the two sets of interest cash flows are the same. The life of the swap can range from two years to fifty years. Usually two non-financial companies do not get in touch with each other to directly arrange a swap. They each deal with a financial intermediary such as a bank. At any given point of time, the swaps spreads are determined by supply and demand. If no participants in the swaps market want to receive fixed rather than floating, Swap spreads tend to fall. If the reverse is true, the swaps spread tend to rise. In real life, it is difficult to envisage a situation where two companies contact a financial institution at a exactly same with a proposal to take opposite positions in the same swap. ii. Currency rate Swaps Currency swaps involves exchanging principal and fixed interest payments on a loan in one currency for principal and fixed interest payments on an approximately equivalent loan in another currency. Example: Suppose that a company ‘A’ and company ‘B’ are offered the fixed five years rates of interest in US $ and Sterling. Also suppose that sterling rates are higher than the dollar rates. Also, company ‘A’ a better credit worthiness then company ‘B’ as it is offered better rates on both dollar and sterling. What is important to the trader who structures the swap deal is that the difference in the rates offered to the companies on both currencies is not same. Therefore, though company ‘A’ has a better deal. In both the currency markets, company ‘B’ does enjoy a comparative lower disadvantage in one of the markets. This creates an ideal situation for a currency swap. The deal could be structured such that the company ‘B’ borrows in the market in 33
which it has a lower disadvantage and company ‘A’ in which it has a higher advantage. They swap to achieve the desired currency to the benefit of all concerned. A point to note is that the principal must be specified at the outset for each of the currencies. The principal amounts are usually exchanged at the beginning and the end of the life of the swap. They are chosen such that they are equal at the exchange rate at the beginning of the life of the swap. Like interest swaps, currency swaps are frequently warehoused by financial institutions that carefully monitor their exposure in various currencies so that they can hedge currency risk. OTHER KINDS OF DERIVATIVES The other kind of derivatives, which are not, much popular are as follows: BASKETS:- Baskets options are option on portfolio of underlying asset. Equity Index Options are most popular form of baskets. LEAPS:- Normally option contracts are for a period of 1 to 12 months. However, exchange may introduce option contracts with a maturity period of 2-3 years. These long-term option contracts are popularly known as Leaps or Long term Equity Anticipation Securities. WARRANTS :- Options generally have lives of up to one year, the majority of options traded on options exchanges having a maximum maturity of nine months. Longer-dated options are called warrants and are generally traded over-the-counter. SWAPTIONS:- Swaptions are options to buy or sell a swap that will become operative at the expiry of the options. Thus a swaption is an option on a forward swap. Rather than have calls and puts, the swaptions market has receiver swaptions and payer swaptions. A receiver swaption is an option to receive fixed and pay floating. A payer swaption is an option to pay fixed and receive floating. 34
2.1.8 RISKS INVOLVED IN DERIVATIVES: Derivatives are used to separate risks from traditional instruments and transfer these risks to parties willing to bear these risks. The fundamental risks involved in derivative business includes
A. Credit Risk: This is the risk of failure of a counterpart to perform its obligation as per the contract. Also known as default or counterparty risk, it differs with different instruments. B. Market Risk: Market risk is a risk of financial loss as a result of adverse movements of prices of the underlying asset/instrument. C. Liquidity Risk: The inability of a firm to arrange a transaction at prevailing market prices is termed as liquidity risk. A firm faces two types of liquidity risks: i Related to liquidity of separate products. ii Related to the funding of activities of the firm including derivatives. D. Legal Risk: Derivatives cut across judicial boundaries; therefore the legal aspects associated with the deal should be looked into carefully. 35
2.1.9 BENEFITS OF DERIVATIVES:- Derivative markets help investors in many different ways: 1.] RISK MANAGEMENT Futures and options contract can be used for altering the risk of investing in spot market. For instance, consider an investor who owns an asset. He will always be worried that the price may fall before he can sell the asset. He can protect himself by selling a futures contract, or by buying a Put option. If the spot price falls, the short hedgers will gain in the futures market, as you will see later. This will help offset their losses in the spot market. Similarly, if the spot price falls below the exercise price, the put option can always be exercised. 2.] PRICE DISCOVERY Price discovery refers to the markets ability to determine true equilibrium prices. Futures prices are believed to contain information about future spot prices and help in disseminating such information. As we have seen, futures markets provide a low cost trading mechanism. Thus information pertaining to supply and demand easily percolates into such markets. Accurate prices are essential for ensuring the correct allocation of resources in a free market economy. Options markets provide information about the volatility or risk of the underlying asset. 3.] OPERATIONAL ADVANTAGES As opposed to spot markets, derivatives markets involve lower transaction costs. Secondly, they offer greater liquidity. Large spot transactions can often lead to significant price changes. However, futures markets tend to be more liquid than spot markets, because herein you can take large positions by depositing relatively small margins. Consequently, a large position in derivatives markets is relatively easier to take and has less of a price impact as opposed to a transaction of the same magnitude in the spot market. Finally, it is easier to take a short position in derivatives markets than it is to sell short in spot markets. 4.] MARKET EFFICIENCY The availability of derivatives makes markets more efficient; spot, futures and options markets are inextricably linked. Since it is easier and cheaper to trade in derivatives, it is possible to exploit arbitrage opportunities quickly and to keep prices in alignment. Hence these markets help to ensure that prices reflect true values. 36
5.] EASE OF SPECULATION Derivative markets provide speculators with a cheaper alternative to engaging in spot transactions. Also, the amount of capital required to take a comparable position is less in this case. This is important because facilitation of speculation is critical for ensuring free and fair markets. Speculators always take calculated risks. A speculator will accept a level of risk only if he is convinced that the associated expected return is commensurate with the risk that he is taking. 2.1.10 OVERVIWE: Indian capital markets hope derivatives will boost the nation’s economic prospects. Fifty years ago, around the time India became independent men in Mumbai gambled on the price of cotton in New York. They bet on the last one or two digits of the closing price on the New York cotton exchange. If they guessed the last number, they got Rs.7/- for every Rupee layout. If they matched the last two digits they got Rs.72/- Gamblers preferred using the New York cotton price because the cotton market at home was less liquid and could easily be manipulated. Now, India is about to acquire own market for risk. The country, emerging from a long history of stock market and foreign exchange controls, is one of the vast major economies in Asia, to refashion its capital market to attract western investment. A hybrid over the counter, derivatives market is expected to develop along side. Over the last couple of years the National Stock Exchange has pushed derivatives trading, by using fully automated screen based exchange, which was established by India's leading institutional investors in 1994 in the wake of numerous financial & stock market scandals. Starting from a controlled economy, India has moved towards a world where prices fluctuate every day. The introduction of risk management instruments in India gained momentum in the last few years due to liberalisation process and Reserve Bank of India’s (RBI) efforts in creating currency forward market. Derivatives are an integral part of liberalisation process to manage risk. NSE gauging the market requirements initiated the process of setting up derivative markets in India. In July 1999, derivatives trading commenced in India 1991 Liberalisation process initiated 14th December 1995 NSE asked SEBI for permission to trade index futures. 18th November 1996 SEBI setup L.C.Gupta Committee to draft a policy framework for index futures. 11th May 1998 L.C.Gupta Committee submitted report. 7th July 1999 RBI gave permission for OTC forward rate agreements (FRAs) and interest rate swaps. 24th May 2000 SIMEX chose Nifty for trading futures and options on an Indian 37
index. 25th May 2000 SEBI gave permission to NSE and BSE to do index futures trading. 9th June 2000 Trading of BSE Sensex futures commenced at BSE. 12th June 2000 Trading of Nifty futures commenced at NSE. 25th September 2000 Nifty futures trading commenced at SGX. 2nd June 2001 Individual Stock Options & Derivatives The NSE introduced trading on index options based on the S&P 4th June 2001 CNX Nifty. Trading on stock options commences on NSE 2nd July 2001 Trading on stock futures commences on NSE 9th November 2001 Currency derivatives trading commences on the NSE 29th August 2008 Interest rate derivatives commences on NSE 31st August 2009 Launch of currency futures on additional currency pairs February 2010 Introduction of European style Stock Options 28th October 2010 Introduction of Currency Options 29th October 2010 38
2.2 INTRODUCTION TO BROKERAGE INDUSTRY:- Indian Stock Markets are one of the oldest in Asia. Its history dates back to nearly 200 years ago. In 1887, they formally established in Bombay, the "Native Share and Stock Brokers' Association" (which is alternatively known as "The Stock Exchange"). In 1895, the Stock Exchange acquired a premise in the same street and it was inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated. Thus in the same way, gradually with the passage of time number of exchanges were increased and at currently it reached to the figure of 24 stock exchanges. This was followed by the formation of associations /exchanges in Ahmadabad (1894), Calcutta (1908), and Madras (1937). In order to check such aberrations and promote a more orderly development of the stock market, the central government introduced a legislation called the Securities Contracts (Regulation) Act, 1956. Under this legislation, it is mandatory on the part of stock exchanges to seek government recognition. As of January 2002 there were 23 stock exchanges recognized by the central Government. They are located at Ahmadabad, Bangalore, Baroda, Bhubaneswar, Calcutta, Chennai,(the Madras stock Exchanges ), Cochin, Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kanpur, Ludhiana, Mangalore, Mumbai(the National Stock Exchange or NSE), Mumbai (The Stock Exchange), popularly called the Bombay Stock Exchange, Mumbai 39
(OTCExchange of India), Mumbai (The Inter-connected Stock Exchange of India), Patna, Pune, and Rajkot. Of course, the principle bourses are the National Stock Exchange and The Bombay Stock Exchange, accounting for the bulk of the business done on the Indian stock market.
BSE (BOMBAY STOCK EXCHANGE) The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association". It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Govt. of India under the Securities Contracts (Regulation) Act, 1956. 40
NSE(NATIONAL STOCK EXCHANGE) NSE was incorporated in 1992 and was given recognition as a stock exchange in April 1993. It started operations in June 1994, with trading on the Wholesale Debt Market Segment. Subsequently it launched the Capital Market Segment in November 1994 as a trading platform for equities and the Futures and Options Segment in June 2000 for various derivative instruments. 43
MCX (MULTI COMMODITY EXCHANGE) ‘MULTI COMMODITY EXCHANGE’ of India limited is a new order exchange with a mandate for setting up a nationwide, online multi-commodity market place, offering unlimited growth opportunities to 45
commodities market participants. As a true neutral market, MCX has taken several initiatives for users in a new generation commodities futures market in the process, become the country’s premier exchange. MCX, an independent and a de-mutualised exchange since inception, is all set up to introduce a state of the art, online digital exchange for commodities futures trading in the country and has accordingly initiated several steps to translate this vision into reality.
NCDEX started working on 15th December, 2003. This exchange provides facilities to their trading and clearing member at different 130 centres for contract. In commodity market the main participants are speculators, hedgers and arbitrageurs. 46
Facilities Provided By NCDEX NCDEX has developed facility for checking of commodity and also provides a ware house facility By collaborating with industrial partners, industrial companies, news agencies, banks and developers of kiosk network NCDEX is able to provide current rates and contracts rate. To prepare guidelines related to special products of securitization NCDEX works with bank. To avail farmers from risk of fluctuation in prices NCDEX provides special services for agricultural. NCDEX is working with tax officer to make clear different types of sales and service taxes. NCDEX is providing attractive products like “weather derivatives”
STOCK BROKERS IN INDIA. There are a number of broking houses all over India. Many of them have International presence too. Following are some of the leading Stock Broking firms in India.
India bulls 47
Angel Broking Investors have to check the broker’s terms and conditions and decide about opening atrading account. Only Govt. tax rates like, security transaction tax, stamp duty and service tax are uniform other charges like brokerage for delivery trades, intraday trades, minimum transaction charge, statement charges, DP charges, annual maintenance charges etc., may vary from one broker to another.
2.3 INTRODUCTION TO THE SEVENHILL SECURITIES LTD:-
Sevenhill Securities Ltd is a Public Company incorporated on 18 April 1994. It is classified as Indian Non-Government Company and is registered at Registrar of Companies, Mumbai. Its authorized share capital is Rs. 15,000,000 and its paid up capital is Rs. 14,249,000.It is inolved in other financial intermediation. [This group includes financial intermediation other than that conducted by monetary institutions.] Sevenhill Securities Ltd's Annual General Meeting (AGM) was last held on 29 September 2012 and as per records from Ministry of Corporate Affairs (MCA), its balance sheet was last filed on 31 March 2012. 48
Company Information-: Corporate Identification Number U65990MH1994PLC077771 Company Name SEVENHILL SECURITIES LTD Active director Suresh Satyanarayan Kabra, Gireesh Satyanarayan Kabbra, And Dilip Kabra. RoC RoC-Mumbai Registration Number 77771 Activity Other financial intermediation. Company Category Company limited by shares Company Sub Category Indian Non-Government Company Class of Company Public Company Authorised Capital (in Rs.) 15,000,000 Paid up capital (in Rs.) 14,249,000 Number of Members (Applicable only in case of company 0 without Share Capital) Date of Incorporation 18 April 1994 Email ID firstname.lastname@example.org Address 1 MAKER BHAVAN NO.1, 2ND FLOOR,NEW MARINE LINES, City MUMBAI State Maharashtra 49
Product and services:- Country INDIA 1. Equity Trading The best way to amass wealth is by investing in the stock market. However, it PIN 400020 can be a risky proposition considering the high risk-return trade off prevalent in the stock Wh ma eth rket e . r l T is he te re d or fore not before investing, the clients shoul U d know nli ho ste w td o go about it. By opening an account with FairWealth, an investor can avail additional benefits like access to various Date of Last AGM 29 September 2012 intraday and fundamental calls. Date o 2. Co f Bal mm anc odi et she y B ertoking 31 March 2012 Investment in commodities is advisable in the portfolio, as it is generally C c om ons p i an de y re S d tat as u des (fo fens r i e ve Fil bein cag) use stocks and bonds witnesse A s c a tive dverse performance during times of inflation. We offer our advisory services with enhanced research and knowledge aims to capitalize the immense potential of the commodities market 3. Derivatives Trading We, at FairWealth Securities, have endeavoured to make trading in derivatives simpler. We strive to educate new entrants in the derivatives trading market so that they are more equipped with knowledge and techniques.
4.Portfolio Management Services Our Portfolio Management Service is well suited for high-net worth customers who want to invest in Indian Equities and desire to create wealth over longer period After understanding varied risk appetites and financial goals of individuals FairWealth has created an Investment Strategy called Wealth- MAX Strategy 5.Research FairWealth carries out extensive research in equity and commodity Equity Research: We have a dedicated research team which is engaged in analyzing the Indian economy and corporate sectors to identify multi-bagger stocks. We provide Weekly Techno Funda Calls based on the weekly outlook. The team also provides positional and medium term calls. Our technical team provides various intraday, BTST and Weekly Calls based on their analysis. It also comes out with a report called ‘Market Pulse’ on a daily basis. Daily Market Outlook which is a daily newsletter is well-known among the industry. Besides this, we are also into Derivative research which covers Call-Put Strategy and Covered Call strategy. 50 Commodity Research: The commodity research team enables the investors to tap appropriate opportunities in the commodity market.