A PROJECT REPORT ON
“A Study on Financial Derivatives(Futures)” IN PARTIAL FULFILLMENT OF POST GRADUATE DIPLOMA IN MANAGEMENT (PGDM)
AT
Prepared by Name: CHUKKAPALLI DHRUVA TEJA Roll no: 161456 Batch: 24th (2016-2018) Under the guidance of SIP Mentor- Dr. SUSHMA KAZA Professor, VJIM. And SIP Guide- T.RAJANIKANTH, Corporate sales Manager, Karvy Stock Broking Ltd
VIGNANA JYOTHI INSTITUTE OF MANAGEMENT HYDERABAD 1
General Description of The Internship
Title of the SIP project: A Study on Financial Derivatives(Futures)
Name of the student: Chukkapalli Dhruva Teja
Name of the company: KARVY Stock Broking Ltd
Company mentor details:
Name: T. Rajanikanth
Designation: Corporate Sales Manager
Contact details: +91-7674929133
Email Id:
[email protected]
Company address:Karvy Stock Broking Ltd,karvy millinieum,Plot No. 31/part & 32 Survey No. 115 /22 115/24 & 115/25 Nanakramguda Village, Financial District, Gachibowli, Hyderabad Website: www.Karvyonline.com
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DECLARATION
I hereby declare that this Project Report titled A Study on Financial Derivatives(Futures) submitted by me is a bonafide work undertaken by me and it is not submitted to any other Institution or university for the award of any degree/diploma certificate or published any time before.
Name of the Student
Signature of the Student
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ACKNOWLEDGEMENT It is my privilege to have accomplished this study under the guidance of Dr. Sushma kaza my faculty and guide, for taking keen interest full involvement, dynamic motivation and valuable guidance extended to me throughout the project.
I express my sincerest gratitude and thanks to honorable Mr. Rajanikanth for whose kindness I had the precious opportunity of attaining Training at Karvy stock Broking, under this brilliant untiring guidance I could complete the Project being undertaken on “A Study on Financial Derivatives(Futures)” successfully in time. His meticulous attention and valuable suggestions have helped me in simplifying the problem in the work.
I would also like to thank the overwhelming support of all the people who gave me an opportunity to learn and gain knowledge about the various aspects of the industry.
I am indebted to all staff members of Karvy stock broking for their valuable support and cooperation during the entire tenure of this project.
Not to forget, the faculty members of Vignana Jyothi Institute of Management, Hyderabad who have kept my spirits
surging and helped me in delivering my
best and made me reach up to this platform.
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CONTENTS
PAGE NUMBERS
List of tables
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List of charts and figures
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Chapter 1: Introduction
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Need of the study
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Objectives
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Scope & Limitations
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Research methodology
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Chapter 2: A Profile on stock Market
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Chapter 3: Karvy Stock Broking
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Chapter 4: Derivatives
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Chapter 5: Conclusion
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Findings & Suggetions
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Chapter 6: Bibliography
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List of Tables Table no
TITLE Table showing underlying value and future price of 1 WIPRO
PAGE NO 40
2 Table showing mark to market profit /loss of WIPRO
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Table showing underlying value and future price of 3 TCS
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4 Table showing mark to market profit /loss of TCS
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Table showing underlying value and future price of 5 INFOSYS
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Table showing mark to market profit /loss of 6 INFOSYS
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LIST OF GRAPHS
SLNO TITLE 1 Graph showing price movement of WIPRO
PAGE NO 41
2 Graph showing mark to market profit/loss for WIPRO 42 Graph showing the price movement of spot and futures 3 WIPRO
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4 Graph showing price movement of TCS
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5 Graph showing mark to market profit/loss for TCS
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Graph showing the price movement of spot and futures 6 TCS
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7 Graph showing price movement of INFOSYS 49 8 9
Graph showing mark to market profit/loss for INFOSYS Graph showing the price movement of spot and futures INFOSYS
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EXECUTIVE SUMMARY
The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices.
Derivatives are risk management instruments, which derive their value from an underlying asset. The following are three broad categories of participants in the derivatives market Hedgers, Speculators and Arbitragers. Prices in an organized derivatives market reflect the perception of market participants about the future and lead the price of underlying to the perceived future level.
In recent times, the Derivative markets have gained importance in terms of their vital role in the economy. The increasing investments in stocks (domestic as well as overseas) have attracted my interest in this area. Numerous studies on the effects of futures and options listing on the underlying cash market volatility have been done in the developed markets. The derivative market is newly started in India and it is not known by every investor, so SEBI has to take steps to create awareness among the investors about the derivative segment.
In cash market, the profit/loss of the investor depends on the market price of the underlying asset. The investor may incur huge profit or he may incur huge loss. But in derivatives segment the investor enjoys huge profits with limited downside. Derivatives are mostly used for hedging purpose. In order to increase the derivatives market in India, SEBI should revise some of their regulations like contract size, participation of FII in the derivatives market. In a nutshell, the study throws a light on the derivatives market.
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Chapter-1 1.1 Introduction The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
Stock futures are derivative contracts that give you the power to buy or sell a set of stocks at a fixed price by a certain date. Once you buy the contract, you are obligated to uphold the terms of the agreement. •
It allows hedgers to shift risks to speculators.
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It gives traders an efficient idea of what the futures price of a stock or value of an index is likely to be.
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Based on the current future price, it helps in determining the future demand and supply of the shares.
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Since it is based on margin trading, it allows small speculators to participate and trade in the futures market by paying a small margin instead of the entire value of physical holdings.
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1.2 Importance of Study In recent times, the Derivative markets have gained importance in terms of their vital role in the economy. The increasing investments in derivatives (domestic as well as overseas) have attracted my interest in this area. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As the volume of trading is tremendously increasing in derivatives market, this analysis will be of immense help to the investors.
1.3 Scope of study & Time Period The study is limited to “Derivatives” with special reference to futures in the Indian context and the Inter-Connected Stock Exchange has been taken as a representative sample for the study. The study can’t be said as totally perfect. Any alteration may come. The study has only made a humble attempt at evaluation derivatives market only in India context. The study is not based on the international perspective of derivatives markets, which exists in NASDAQ, CBOT etc. This study is limited to the Period of 8 weeks
1.4 Objectives • To analyse the operations of futures. •
To find the profit/loss position of futures buyer and seller
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To study about risk management with the help of derivatives.
1.5 Methodology & Sources of Data Research Methodology is a systematic procedure of collecting information in order to analyse and verify a phenomenon. the collection of information is done in two principle sources. They are as follows
Secondary Data: Various portals, •
www.nseindia.com
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Financial newspapers, Economics times.
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Karvyvalue.com
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1.6 Limitations The following are the limitation of this study. ➢ This study is only limited to futures in the Derivative market ➢ The scrip chosen for analysis is WIPRO, TCS, INFOSYS and the contract taken is May 2017 ending one –month contract. ➢ The data collected is completely restricted to WIPRO, TCS, INFOSYS of May 2017; hence this analysis cannot be taken universal.
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Chapter-2 2.1 A Profile of Indian Stock Market
Structure of Indian Securities Market
Primary Market The primary market is where securities are created. It's in this market that firms sell (float) new stocks and bonds to the public for the first time. For our purposes, you can think of the primary market as the market where an initial public offering (IPO) takes place. Simply put, an IPO occurs when a private company sells stocks to the public for the first time. The primary market is also the market where governments or public sector institutions raise money through bond offerings.
Secondary Market Secondary market is an equity trading avenue in which already existing/pre- issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.
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Functions of Stock Exchange 1. Providing a ready market The organization of stock exchange provides a ready market to speculators and investors in industrial enterprises. It thus, enables the public to buy and sell securities already in issue. 2. Providing a quoting market prices It makes possible the determination of supply and demand on price. The very sensitive pricing mechanism and the constant quoting of market price allows investors to always be aware of values. This enables the production of various indexes which indicate trends etc. 3. Providing facilities for working It provides opportunities to Jobbers and other members to perform their activities with all their resources in the stock exchange. 4. Safeguarding activities for investors The stock exchange renders safeguarding activities for investors which enables them to make a fair judgment of a securities. Therefore, directors have to disclose all material facts to their respective shareholders. Thus, innocent investors may be safeguard from the clever brokers. 5. Operating a compensation fund It also operate a compensation fund which is always available to investors suffering loss due due the speculating dealings in the stock exchange. 6. Creating the discipline Its members controlled under rigid set of rules designed to protect the general public and its members. Thus, this tendency creates the discipline among its members in social life also. 7. Checking functions New securities checked before being approved and admitted to listing. Thus, stock exchange exercises rigid control over the activities of its members. 8. Adjustment of equilibrium The investors in the stock exchange promote the adjustment of equilibrium of demand and supply of a particular stock and thus prevent the tendency of fluctuation in the prices of shares.
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9. Maintenance of liquidity The bank and insurance companies purchase large number of securities from the stock exchange. These securities are marketable and can be turned into cash at any time. Therefore banks prefer to keep securities instead of cash in their reserve. This it facilities the banking system to maintain liquidity by procuring the marketable securities. 10. Promotion of the habit of saving Stock exchange provide a place for saving to public. Thus, it creates the habit of thrift and investment among the public. This habit leads to investment of funds incorporate or government securities. The funds placed at the disposal of companies are used by them for productive purposes. 11. Refining and advancing the industry Stock exchange advances the trade, commerce and industry in the country. it provides opportunity to capital to flow into the most productive channels. Thus, the flow of capital from unproductive field to productive field helps to refine the large-scale enterprises.
12. Promotion of capital formation It plays an important part in capital formation in the country. its publicity regarding various industrial securities makes even disinterested people feel interested in investment. 13. Increasing Govt. Funds The govt. can undertake projects of national importance and social value by raising funds through sale of its securities on stock exchange. According to MARSHAL "Stock exchange are not merely the chief theaters of business transaction, they are also barometers which indicate the general conditions of the atmosphere of business."
Role of Stock Exchanges Stock exchanges have multiple roles in the economy. This may include the following: Raising capital for businesses A stock exchange provides companies with the facility to raise capital for expansion through selling shares to the investing public. 14
Mobilizing savings for investment When people draw their savings and invest in shares (through an IPO or the issuance of new company shares of an already listed company), it usually leads to rational allocation of resources because funds, which could have been consumed, or kept in idle deposits with banks, are mobilized and redirected to help companies' management boards finance their organizations. This may promote business activity with benefits for several economic sectors such as agriculture, commerce and industry, resulting in stronger economic growth and higher productivity levels of firms. Facilitating company growth Companies view acquisitions as an opportunity to expand product lines, increase distribution channels, hedge against volatility, increase their market share, or acquire other necessary business assets. A takeover bid or a merger agreement through the stock market is one of the simplest and most common ways for a company to grow by acquisition or fusion. Profit sharing Both casual and professional stock investors, as large as institutional investors or as small as an ordinary middle-class family, through dividends and stock price increases that may result in capital gains, share in the wealth of profitable businesses. Unprofitable and troubled businesses may result in capital losses for shareholders. Corporate governance By having a wide and varied scope of owners, companies generally tend to improve management standards and efficiency to satisfy the demands of these shareholders and the more stringent rules for public corporations imposed by public stock exchanges and the government. Consequently, it is alleged that public companies (companies that are owned by shareholders who are members of the general public and trade shares on public exchanges) tend to have better management records than privately held companies (those companies where shares are not publicly traded, often owned by the company founders, their families and heirs, or otherwise by a small group of investors). Despite this claim, some welldocumented cases are known where it is alleged that there has been considerable slippage in corporate governance on the part of some public companies. The dot-com bubble in the late 1990s, and the subprime mortgage crisis in 2007–08, are classical examples of corporate mismanagement.
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Creating investment opportunities for small investors As opposed to other businesses that require huge capital outlay, investing in shares is open to both the large and small stock investors because a person buys the number of shares they can afford. Therefore, the Stock Exchange provides the opportunity for small investors to own shares of the same companies as large investors. Government capital-raising for development projects Governments at various levels may decide to borrow money to finance infrastructure projects such as sewage and water treatment works or housing estates by selling another category of securities known as bonds. These bonds can be raised through the stock exchange whereby members of the public buy them, thus loaning money to the government. The issuance of such bonds can obviate, in the short term, direct taxation of citizens to finance development—though by securing such bonds with the full faith and credit of the government instead of with collateral, the government must eventually tax citizens or otherwise raise additional funds to make any regular coupon payments and refund the principal when the bonds mature. Barometer of the economy At the stock exchange, share prices rise and fall depending, largely, on economic forces. Share prices tend to rise or remain stable when companies and the economy in general show signs of stability and growth. An economic recession, depression, or financial crisis could eventually lead to a stock market crash. Therefore, the movement of share prices and in general of the stock indexes can be an indicator of the general trend in the economy.
Main Stock exchanges in India Bombay Stock Exchange The Bombay Stock Exchange (BSE) is an Indian stock exchange located at Dalal Street, Mumbai (formerly Bombay), Maharashtra, India. Established in 1875, the BSE is Asia’s first stock exchange, It claims to be the world's fastest stock exchange, with a median trade speed of 6 microseconds, The BSE is the world's 11th largest stock exchange with an overall market capitalization of $1.83 Trillion as of March, 2017. More than 5500 companies are publicly listed on the BSE
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National Stock Exchanges The National Stock Exchange of India Limited (NSE) is the leading stock exchange of India, located in Mumbai. NSE was established in 1992 as the first demutualized electronic exchange in the country. NSE was the first exchange in the country to provide a modern, fully automated screen-based electronic trading system which offered easy trading facility to the investors spread across the length and breadth of the country. National Stock Exchange has a total market capitalization of more than US$1.41 trillion, making it the world’s 12th-largest stock exchange as of March 2016. NSE's flagship index, the NIFTY 50, the 51 stock index (50 companies with 51 securities inclusive of DVR), is used extensively by investors in India and around the world as a barometer of the Indian capital markets. However, only about 4% of the Indian economy / GDP is derived from the stock exchanges in India.
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Chapter-3 3.1 Karvy stock Broking Company: ABOUT THE COMPANY KARVY was established as “KARVY & Company” by 5 chartered accountants during the year1979-80. At that time, it was confined only to audit and taxation. Later on it diversified into financial and accounting services during the year 1981-82 with a capital of Rs.1, 50,000. KARVY became a known name during the year 1985-86 when it forayed into capital market as registrar.
Vision of Karvy: To achieve & sustain market leadership, Karvy shall aim for complete customer satisfaction, by combining its human and technological resources, to provide world class quality services. In the process Karvy shall strive to meet and exceed customer's satisfaction and set industry standards.
About the company The Karvy Group is today a well-diversified conglomerate. Its businesses straddle the entire financial services spectrum as well as data processing and managing segments. Since most of its financial services were retail focused, the need to build scale and skill in the transaction processing domain became imperative. Also during stressed environment in the financial services segment, the non-financial businesses bring in a lot of stability to the group’s businesses.
Karvy’s financial services business is ranked among the top-5 in the country across its business segments. The Group services over 70 million individual investors in various capacities, and provides investor services to over 600 corporate houses, comprising the best of Corporate India. The Group offers stock broking, depository participant, distribution of financial products (including mutual funds, bonds and fixed deposits), commodities broking, personal finance advisory services, merchant banking & corporate finance, wealth management, NBFC (loans to individuals, micro and small businesses), Data management, Forex & currencies, Registrar Transfer agents, Data Analytics, Market Research among others. Karvy is also authorized to provide Aadhar Card enrollment, updating and Aadhar PVC services
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Karvy prides itself on remaining customer centric as all times through a combination of leading edge technology, Professional management and a wide network of offices across India. Karvy is committed to its quest as an Equal Opportunity Employer and believes in the rights for differently-abled persons.
Group of Companies •
Karvy Stock Broking LTD
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Karvy Comtrade LTD
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Karvy Capital LTD
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Karvy Investment Advisory Services LTD
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Karvy Holdings LTD
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Karvy Middle East LLC
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Karvy Realty (India) LTD
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Karvy Financial Services LTD
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Karvy Insurance Repository LTD
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Karvy Forex & Currencies Private LTD
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Karvy Consultants LTD
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Karvy Computershare Private LTD
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Karvy Computershare W.L.L
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Karvy Data Management Services LTD
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Karvy Investor Services LTD
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Karvy Insights LTD
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Karvy Analytics LTD
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Karvy Solar Power LTD
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Karvy Global Services LTD
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Karvy Global Services Inc, USA
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Karvy Inc, USA
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Awards and Accolades •
Market Excellence Award, Commodities - Metal”
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from India’s premier stock exchange BSE - the SKOCH – BSE Order of Merit award and the SKOCH – BSE Aspiring Nation award - in recognition of its efforts to educate, empower and help create an enlightened corps of financial market
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NSDL Star Performer Award 2014” for Highest Asset Value
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Broker with Best Corporate Desk for Commodity Broking’ award
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Largest E-Broking House in India’ award
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Chapter-4 4.1 Derivatives The emergence of the market for derivatives products, most notably forwards, futures and options, can be tracked back to the willingness of risk-averse economic agents to guard themselves against uncertainties arising out of fluctuations in asset prices. By their very nature, the financial markets are marked by a very high degree of volatility. Through the use of derivative products, it is possible to partially or fully transfer price risks by locking-in asset prices. As instruments of risk management, these generally do not influence the fluctuations in the underlying asset prices. However, by locking-in asset prices, derivative product minimizes the impact of fluctuations in asset prices on the profitability and cash flow situation of riskaverse investors. Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest, etc.. Banks, Securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future.
DEFINITION Derivative is a product whose value is derived from the value of an underlying asset in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. Securities Contracts (Regulation)Act, 1956 (SCR Act) defines “derivative” to secured or unsecured, risk instrument or contract for differences or any other form of security. A contract which derives its value from the prices, or index of prices, of underlying securities. Emergence of Financial Derivative Products Derivative products initially emerged as hedging devices against fluctuations in commodity prices, and commodity-linked derivatives remained the sole form of such products for almost three hundred years. Financial derivatives came into spotlight in the post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two-thirds of total transactions in derivative products. In recent years, the market for financial derivatives has grown tremendously in terms of variety of instruments available, their complexity and also turnover. In the class of equity derivatives the world over, futures and options on stock indices 21
have gained more popularity than on individual stocks, especially among institutional investors, who are major users of index-linked derivatives. Even small investors find these useful due to high correlation of the popular indexes with various portfolios and ease of use. The lower costs associated with index derivatives vis–a– vis derivative products based on individual securities is another reason for their growing use. Derivatives Market – History & Evolution History of Derivatives may be mapped back to the several centuries. Some of the specific milestones in evolution of Derivatives Market Worldwide are given below: •
12th Century‐ In European trade fairs, sellers signed contracts promising future delivery of the items they sold.
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13th Century‐ There are many examples of contracts entered into by English Cistercian Monasteries, who frequently sold their wool up to 20 years in advance, to foreign merchants.
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1634‐1637 ‐ Tulip Mania in Holland: Fortunes were lost in after a speculative boom in tulip futures burst.
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Late 17th Century ‐ In Japan at Dojima, near Osaka, a futures market in rice was developed to protect rice producers from bad weather or warfare.
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In 1848, The Chicago Board of Trade (CBOT) facilitated trading of forward contracts on various commodities.
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In 1865, the CBOT went a step further and listed the first ‘exchange traded” derivative contract in the US. These contracts were called ‘futures contracts”.
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In 1919, Chicago Butter and Egg Board, a spin‐off of CBOT, was reorganised to allow futures trading. Later its name was changed to Chicago Mercantile Exchange (CME).
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In 1972, Chicago Mercantile Exchange introduced International Monetary Market (IMM), which allowed trading in currency futures.
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In 1973, Chicago Board Options Exchange (CBOE) became the first marketplace for trading listed options.
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In 1975, CBOT introduced Treasury bill futures contract. It was the first successful pure interest rate futures.
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In 1977, CBOT introduced T‐bond futures contract.
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In 1982, CME introduced Eurodollar futures contract.
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In 1982, Kansas City Board of Trade launched the first stock index futures. 22
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In 1983, Chicago Board Options Exchange (CBOE) introduced option on stock indexes with the S&P 100® (OEX) and S&P 500® (SPXSM) Indexes.
Factors influencing the growth of derivative market globally Over the last four decades, derivatives market has seen a phenomenal growth. Many derivative contracts were launched at exchanges across the world. Some of the factors driving the growth of financial derivatives are: •
Increased fluctuations in underlying asset prices in financial markets.
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Integration of financial markets globally.
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Use of latest technology in communications has helped in reduction of transaction costs.
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Enhanced understanding of market participants on sophisticated risk management tools to manage risk.
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Frequent innovations in derivatives market and newer applications of products
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Indian Derivatives Market
As the initial step towards introduction of derivatives trading in India, SEBI set up a 24– member committee under the Chairmanship of Dr. L. C. Gupta on November 18, 1996 to develop appropriate regulatory framework for derivatives trading in India. The committee submitted its report on March 17, 1998 recommending that derivatives should be declared as ‘securities’ so that regulatory framework applicable to trading of ‘securities’ could also govern trading of derivatives.
Subsequently, SEBI set up a group in June 1998 under the Chairmanship of Prof. J. R. Verma, to recommend measures for risk containment in derivatives market in India. The committee submitted its report in October 1998. It worked out the operational details of margining system, methodology for charging initial margins, membership details and net‐worth criterion, deposit requirements and real time monitoring of positions requirements. In 1999, The Securities Contract Regulation Act (SCRA) was amended to include “derivatives” within the domain of ‘securities’ and regulatory framework was developed for governing derivatives trading. In March 2000, government repealed a three‐decade‐ old notification, which prohibited forward trading in securities. 23
The exchange traded derivatives started in India in June 2000 with SEBI permitting BSE and NSE to introduce equity derivative segment. To begin with, SEBI approved trading in index futures contracts based on CNX Nifty and BSE Sensex, which commenced trading in June 2000. Later, trading in Index options commenced in June 2001 and trading in options on individual stocks commenced in July 2001. Futures contracts on individual stocks started in November 2001. MCX‐ SX (renamed as MSEI) started trading in all these products (Futures and options on index SX40 and individual stocks) in February 2013.
PRODUCTS IN DERIVATIVE MARKET Forwards It is a contractual agreement between two parties to buy/sell an underlying asset at a certain future date for a particular price that is pre‐decided on the date of contract. Both the contracting parties are committed and are obliged to honour the transaction irrespective of price of the underlying asset at the time of delivery. Since forwards are negotiated between two parties, the terms and conditions of contracts are customized. These are Over‐the‐counter (OTC) contracts.
Futures A futures contract is similar to a forward, except that the deal is made through an organized and regulated exchange rather than being negotiated directly between two parties. Indeed, we may say futures are exchange traded forward contracts.
Options An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying on or before a stated date and at a stated price. While buyer of option pays the premium and buys the right, writer/seller of option receives the premium with obligation to sell/ buy the underlying asset, if the buyer exercises his right.
Swaps A swap is an agreement made between two parties to exchange cash flows in the future according to a prearranged formula. Swaps are, broadly speaking, series of forward contracts. Swaps help market participants manage risk associated with volatile interest rates, currency exchange rates and commodity prices.
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Market Participants: There are broadly three types of participants in the derivatives market ‐ hedgers, traders (also called speculators) and arbitrageurs. An individual may play different roles in different market circumstances. Hedgers: They face risk associated with the prices of underlying assets and use derivatives to reduce their risk. Corporations, investing institutions and banks all use derivative products to hedge or reduce their exposures to market variables such as interest rates, share values, bond prices, currency exchange rates and commodity prices. Speculators/Traders: They try to predict the future movements in prices of underlying assets and based on the view, take positions in derivative contracts. Derivatives are preferred over underlying asset for trading purpose, as they offer leverage, are less expensive (cost of transaction is generally lower than that of the underlying) and are faster to execute in size (high volumes market). Arbitrageurs: Arbitrage is a deal that produces profit by exploiting a price difference in a product in two different markets. Arbitrage originates when a trader purchases an asset cheaply in one location and simultaneously arranges to sell it at a higher price in another location. Such opportunities are unlikely to persist for very long, since arbitrageurs would rush in to these transactions, thus closing the price gap at different locations.
Types of Derivatives Market: In the modern world, there is a huge variety of derivative products available. They are either traded on organised exchanges (called exchange traded derivatives) or agreed directly between the contracting counterparties over the telephone or through electronic media (called Over‐the‐ counter (OTC) derivatives). Few complex products are constructed on simple building blocks like forwards, futures, options and swaps to cater to the specific requirements of customers.
Over‐the‐counter market is not a physical marketplace but a collection of broker‐dealers scattered across the country. Main idea of the market is more a way of doing business than a place. Buying and selling of contracts is matched through negotiated bidding process over a network of telephone or electronic media that link thousands of intermediaries. OTC derivative markets have witnessed a substantial growth over the past few years, very much contributed by the recent developments in information technology. The OTC derivative markets have 25
banks, financial institutions and sophisticated market participants like hedge funds, corporations and high net‐worth individuals. OTC derivative market is less regulated market because these transactions occur in private among qualified counterparties, who are supposed to be capable enough to take care of themselves. The OTC derivatives markets – transactions among the dealing counterparties, have following features compared to exchange traded derivatives: •
Contracts are tailor made to fit in the specific requirements of dealing counterparties.
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The management of counter‐party (credit) risk is decentralized and located within individual institutions.
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There are no formal centralized limits on individual positions, leverage, or margining.
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There are no formal rules or mechanisms for risk management to ensure market stability and integrity, and for safeguarding the collective interest of market participants.
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Transactions are private with little or no disclosure to the entire market.
On the contrary, exchange‐traded contracts are standardized, traded on organized exchanges with prices determined by the interaction of buyers and sellers through anonymous auction platform. A clearing house/ clearing corporation, guarantees contract performance (settlement of transactions).
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4.2 Futures 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. The futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or which can be used for reference purposes in settlement) and a standard timing of such settlement. The standardized items in a futures contract are: •
Quantity of the underlying
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Quality of the underlying
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The date and the month of delivery
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The units of price quotation and minimum price change
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Location of settlement
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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 interestbearing instruments like treasury bills and bonds and other innovations like futures contracts in stock indexes are relatively new developments.
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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
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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.
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Future Contract Suppose you decide to buy a certain quantity of goods. As the buyer, you enter into an agreement with the company to receive a specific quantity of goods at a certain price every month for the next year. This contract made with the company is similar to a futures contract, in that you have agreed to receive a product at a future date, with the price and terms for delivery already set. You have secured your price for now and the next year - even if the price of goods rises during that time. By entering into this agreement with the company, you have reduced your risk of higher prices. ➢
So, a futures contract is an agreement between two parties: a short position - the party who agrees to deliver a commodity - and a long position - the party who agrees to receive a commodity. In every futures contract, everything is specified: the quantity and quality of the commodity, the specific price per unit, and the date and method of delivery. The “price” of a futures contract is represented by the agreed-upon price of the underlying commodity or financial instrument that will be delivered in the future. Features of Futures Contracts: The principal features of the contract are as follows. ➢
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.
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Standardization: In the case of forward contracts the amount of commodities to bedelivered 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.
➢
Clearing House: The exchange acts a clearinghouse to all contracts struck on the tradingfloor. 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 anddeal, 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. The enforce the delivery for the delivery of contracts held for until maturity and protects itself from default risk by imposing margin 28
requirements on traders and enforcing this through a system called marking – to – market
➢
Actual delivery is rare: In most of the forward contracts, the commodity is delivered bythe 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.
➢
Margins: In order to avoid unhealthy competition among clearing members in reducingmargins to attract customers, a mandatory minimum margin are obtained by the members from the customers. Such a stop insures the market against serious liquidity crises arising out of possible defaults by the clearing members. The members collect margins from their clients has 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.
Future 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-months 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 is the date specified in the futures contract. This is the last day on which thecontract will be traded, at the end of which it will cease to exist.
29
Contract size: The amount of asset that has to be delivered under one contract. Also called as lot size. Basis: In the context of financial futures, basis can be defined as the futures price minus the spot price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. 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. MARGINS: Margins are the deposits which reduce counter party risk, arise in a futures contract. These margins are collected in order to eliminate the counter party risk. There are three types of margins: Initial Margins: Whenever a futures contract is signed, both buyer and seller are required to post initial margins. Both buyer and seller are required to make security deposits that are intended to guarantee that they will in fact be able to fulfil their obligation. These deposits are initial margins. Marking to market margins: The process of adjusting the equity in an investor’s account in order to reflect the change in the settlement price of futures contract is known as MTM margin. Maintenance margin: The investor must keep the futures account equity equal to or greater than certain percentage of the amount deposited as initial margin. If the equity goes less than that percentage of initial margin, then the investor receives a call for an additional deposit of cash known as maintenance margin to bring the equity up to the initial margin.
30
TYPES OF FUTURES On the basis of the underlying asset they derive, the futures are divided into two types: •
Stock Futures
•
Index Futures
PARTIES IN THE FUTURES CONTRACT There are two parties in a futures contract, the buyers and the seller. The buyer of the futures contract is one who is LONG on the futures contract and the seller of the futures contract is who is SHORT on the futures contract. The pay-off for the buyers and the seller of the futures of the contracts are as follows:
PAY-OFF FOR A BUYER OF FUTURES
P
PROFIT
E2
LOSS
F
E1
L
F = FUTURES PRICE
E1, E2 = SATTLEMENT PRICE
CASE 1: - The buyers bought the futures contract at (F); if the futures Price Goes to E1 then the buyer gets the profit of (FP).
31
CASE 2: - The buyers gets loss when the futures price less then (F); if The Futures price goes to E2 then the buyer the loss of (FL).
PAY-OFF FOR A SELLER OF FUTURES
P PROFIT E2 E1
F
LOSS
L
F = FUTURES PRICE
E1, E2 = SATTLEMENT PRICE
CASE 1: - The seller sold the future contract at (F); if the future goes to
E1 Then the seller gets the profit of (FP).
CASE 2: - The seller gets loss when the future price goes greater than (F); If the future price goes to E2 then the seller gets the loss of (FL).
32
HOW THE FUTURE MARKET WORKS The futures market is a centralized marketplace for buyers and sellers from around the world who meet and enter futures contracts. Pricing can be based on an open outcry system, or bids and offers can be matched electronically. The futures contract will state the price that will be paid and the date of delivery. Almost all futures contracts end without the actual physical delivery of the commodity. PRICING OF FUTURES The Fair value of the futures contract is derived from a model knows as the cost of carry model. This model gives the fair value of the contract. Cost of Carry: F = S (1+r-q) t Where, F- Futures price S- Spot price of the underlying r- Cost of financing q- Expected Dividend yield t - Holding Period. Suppose, we buy an index in cash market at 8000 level i.e. purchase of all the stocks constituting the index in the same proportion as they are in the index, cost of financing is 12% and the return on index is 4% per annum. Given these statistics, fair price of index three months down the line should be: =Spot price (1+cost of financing-holding period return) ^ (time to expiration/365) =8000 (1+0.12-0.04) ^ (90/365) =8,153.26 If index future is trading above 8,153, we can buy index stocks in cash market and simultaneously sell index futures to lock the gains equivalent to the difference between future price and future fair price (the cost of transaction, taxes, margins etc. are not considered while calculating the future fair value). The presence of arbitrageurs would force the price to equal the fair value of the asset. If the futures price is less than the fair value, one can profit by holding a long position in the 33
futures and a short position in the underlying. Alternatively, if the futures price is more than the fair value, there is ascope to make a profit by holding a short position in the futures and a long position in the underlying. The increase in demand/ supply of the futures (and spot) contracts will force the futures price to equal the fair value of the asset.
RELATIONSHIP OF FUTURE PRICE WITH SPOT PRICE IF FUTURE PRICE HIGHER THAN THE CASH PRICE Here futures price exceeds the cash price which indicates that the cost of carry is negative and the market under such circumstances is termed as a backwardation market or inverted market. EXAMPLE Suppose the RELIANCE share is trading at Rs.400 in the spot market. While RELIANCE FUTURES are trading at Rs. 406.Thus in this circumstance the normal strategy followed by investors is buy the RELIANCE in the spot market and sell in the futures. On expiry, assuming RELIANCE closes at Rs 450, you make Rs.50 by selling the RELIANCE stock and lose Rs.44 by buying back the futures, which is Rs 6 overall profit in a month. Thus, Futures prices are generally higher than the cash prices, in an overbought market. IF CASH PRICE HIGHER THAN THE FUTURE PRICE Here cash price exceeds the futures price which indicates that the cost of carry is positive and this market is termed as oversold market. This may be due to the fact that the market is cash settled and not delivery settled, so the futures price is more a reflection of sentiment, rather than that of the financing cost. EXAMPLE Now let us assume that the RELIANCE share is trading at Rs.406 in the spot market. While RELIANCE FUTURES is trading at Rs. 400.Thus in this circumstance the normal strategy followed by investors is buy the RELIANCE FUTURES and sell the RELIANCE in the spot market. So at expiry if Reliance closes at Rs 450, the investor will buy back the stock at a loss of Rs 44 and make Rs 50 on the settlement of the futures position. This is applied when the cost of carry is high.
34
RISK MANAGING USING FUTURES-HEDGING: Uses of Index futures Equity derivatives instruments facilitate trading of a component of price risk, which is inherent to investment in securities. Price risk is nothing but change in the price movement of asset, held by a market participant, in an unfavourable direction. It is possible to manage only the systematic/market risk component of the price risk using index-based derivative products. Prior to looking at market risk management with the help of index futures. This risk broadly divided into two components ‐ specific risk or unsystematic risk and market risk or systematic risk. Unsystematic Risk Specific risk or unsystematic risk is the component of price risk that is unique to events of the company and/or industry. This risk is inseparable from investing in the securities. This risk could be reduced to a certain extent by diversifying the portfolio. Systematic Risk An investor can diversify his portfolio and eliminate major part of price risk i.e. the diversifiabl e/unsystematic risk but what is left is the non‐diversifiable portion or the market risk‐called systematic risk. Variability in a security’s total returns that are directly associated with overall movements in the general market or economy is called systematic risk. Thus, every portf olio is exposed to market risk. This risk is separable from investment and tradable in the market with the help of indexbased derivatives. When this particular risk is hedged perfectly with the he lp of index‐based derivatives, only specific risk of the portfolio remains. Now, let us get to management of systematic risk. Assume you are having a portfolio worth Rs.9,00,000 in cash market. You see the market may be volatile due to some reasons. You are not comfortable with the market movement in the short run. At this point of time, you have two options:
(1) sell the entire portfolio in the cash market and buy it again after the prices falls and
35
(2) As he is already protected against unsystematic risk as a result of diversification, now he can use index futures to protect the value of his portfolio from the expected fall in the market. As an investor, you are comfortable with the second option. If the prices fall, you make loss in cash market but make profits in futures market. If prices rise, you make profits in cash market but losses in futures market. Now, the question arises how many contracts you have to sell to make a perfect hedge? Perfect hedge means if you make Rs. 90,000 loss in cash market then you should make Rs. 90,000 profit in futures market. To find the number of contracts for perfect hedge ‘hedge ratio’ is used. Hedge ratio is calculated as: Number of contracts for perfect hedge = Vp * βp / Vi Vp – Value of the portfolio βp – Beta of the portfolio Vi – Value of index futures contract Let us assume, Beta of your portfolio is 1.3 and benchmark index level is 8000, then hedge ratio will be (9,00,000*1.3/8000) = 146.25 indices. Assume one Futures contract has a lot size of 75. You will have to hedge using 146.25/ 75 = 1.95 contracts. Since you cannot hedge 1.95 contracts, you will have to hedge by 2 futures contracts. You have to pay the broker initial margin in order to take a position in futures. Important terms in hedging Long hedge: Long hedge is the transaction when we hedge our position in cash market by going long in futures market. For example, we expect to receive some funds in future and want to invest the same amount in the securities market. We have not yet decided the specific company/companies, where investment is to be made. We expect the market to go up in near future and bear a risk of acquiring the securities at a higher price. We can hedge by going long index futures today. On receipt of money, we may invest in the cash market and simultaneously unwind corresponding index futures positions. Any loss due to acquisition of securities at higher price, resulting from the upward movement in the market over intermediate period, would be partially or fully compensated by the profit made on our position in index futures.
36
Short hedge: Short Hedge is a transaction when the hedge is accomplished by going short in futures market. For instance, assume, we have a portfolio and want to liquidate in near future but we expect the prices to go down in near future. This may go against our plan and may result in reduction in the portfolio value. To protect our portfolio’s value, today, we can short index futures of equivalent amount. The amount of loss made in cash market will be partly or fully compensated by the profits on our futures positions. Cross hedge: When futures contract on an asset is not available, market participants look forward to an asset that is closely associated with their underlying and trades in the futures market of that closely associated asset, for hedging purpose. They may trade in futures in this asset to protect the value of their asset in cash market. This is called cross hedge. For instance, if futures contracts on jet fuel are not available in the international markets then hedgers may use contracts available on other energy products like crude oil, heating oil or gasoline due to their close association with jet fuel for hedging purpose. This is an example of cross hedge. Arbitrage opportunities in futures market Arbitrage is simultaneous purchase and sale of an asset or replicating asset in the market in an attempt to profit from discrepancies in their prices. Arbitrage involves activity on one or several instruments/assets in one or different markets, simultaneously. Important point to understand is that in an efficient market, arbitrage opportunities may exist only for shorter period or none at all. The moment an arbitrager spots an arbitrage opportunity, he would initiate the arbitrage to eliminate the arbitrage opportunity. Arbitrage occupies a prominent position in the futures world as a mechanism that keeps the prices of futures contracts aligned properly with prices of the underlying assets. The objective of arbitragers is to make profits without taking risk, but the complexity of activity is such that it may result in losses as well. Well‐informed and experienced professional traders, equipped with powerful calculating and data processing tools, normally undertake arbitrage. Arbitrage in the futures market can typically be of three types: Cash and carry arbitrage: Cash and carry arbitrage refers to a long position in the cash orunderlying market and a short position in futures market.
37
Reverse cash and carry arbitrage: Reverse cash and carry arbitrage refers to long position infutures market and short position in the underlying or cash market. Inter‐Exchange arbitrage: This arbitrage entails two positions on the same contract in twodifferent markets/ exchanges
38
Chapter-5
Data Analysis & Interpretation of Futures in I.T Sectors ANALYSIS OF WIPRO: The objective of this analysis is to evaluate the profit/loss position of futures. This analysis is based on sample data taken of WIPRO scrip. This analysis considered the May 2017 contract of WIPRO. The lot size of WIPROis 2400, the time period in which this analysis done is from 01-05-2017 to 25-05-2017. Table-1: Date
Underlying Value Futures Price
Open Int
No. of contracts
2-May-17
494.9
493.7
12457200
1609
3-May-17
496.45
495.85
12340800
1829
4-May-17
499.95
498.25
12213600
1246
5-May-17
499.3
497.85
12063600
1079
8-May-17
502.3
503.25
11768400
1715
9-May-17
508.9
511.05
11380800
2583
10-May-17
499.65
502
11205600
1772
11-May-17
504.65
506.55
11139600
1235
12-May-17
507.05
508.8
10832400
1451
15-May-17
506.3
507.45
10903200
1148
16-May-17
515.35
516.45
10708800
2130
17-May-17
510.55
509.75
11571600
2372
18-May-17
525.4
524
12213600
5794
19-May-17
519.75
520.55
12068400
2036
22-May-17
521.2
521.6
11644800
2428
23-May-17
526.4
526.45
8666400
6636
24-May-17
525
525.4
5139600
5393
25-May-17
536.45
536.45
3210000
3673
39
Graph-1: GRAPH SHOWING THE PRICE MOVEMENT OF WIPRO FUTURES 540 535 530 525 520 515 510 505 500 495 490 30-Apr-17
05-May-17
10-May-17
15-May-17
20-May-17
25-May-17
30-May-17
OBSERVATIONS AND FINDINGS: •
If a person buys 1 lot i.e. 2400 futures of WIPROon 1st May, 2017 and sells on 25th May, 2017 then he will get a Profit of Rs536.45 -Rs493.7 = Rs 42.75 per share. So, he will get a Profit of Rs.102600 i.e.,42.75*2400.
•
The trading week showed a high and low strike prices or exercising prices for the WIPRO futures.
•
There always exist an impact of price movements on open interest and contracts traded. The futures market is also influenced by cash market, NIFTY index future, and news related to the underlying assed or sector (industry), FII’S involvement, national and international affairs etc.
•
The closing price of WIPRO at the end of the contract period is Rs 536.45 and this is considered as settlement price.
40
Table showing Mark to Market Profit & loss of WIPRO futures: Table-2 Date
Mark to Market
Settlement Price
2-May-17
0
493.7
3-May-17
5160
495.85
4-May-17
5760
498.25
5-May-17
-960
497.85
8-May-17
12960
503.25
9-May-17
18720
511.05
10-May-17
-21720
502
11-May-17
10920
506.55
12-May-17
5400
508.8
15-May-17
-3240
507.45
16-May-17
21600
516.45
17-May-17
-16080
509.75
18-May-17
34200
524
19-May-17
-8280
520.55
22-May-17
2520
521.6
23-May-17
11640
526.45
24-May-17
-2520
525.4
25-May-17
26520
536.45
Graph-2 GRAPH SHOWING MARK TO MARKET PROFIT & LOSS FOR WIPRO FUTURES 40000 30000 20000 10000 0 30-Apr-17 -10000
05-May-17 10-May-17 15-May-17 20-May-17 25-May-17 30-May-17
-20000 -30000
41
Graph-3 GRAPH SHOWING THE PRICE MOVEMENT OF SPOT AND FUTURES OF WIPRO 540 530 520 510 500 490 30-Apr-17
05-May-17
10-May-17
15-May-17
Underlying Value
20-May-17
25-May-17
30-May-17
Futuress Price
OBSERVATIONS AND FINDINGS •
The future price of WIPRO is moving along with the market price.
•
If the buy price of the future is less than the settlement price, than the buyer of a future gets profit.
•
If the selling price of the future is less than the settlement price, than the seller incurs losses.
42
ANALYSIS OF TCS: The objective of this analysis is to evaluate the profit/loss position of futures. This analysis is based on sample data taken of TCS scrip. This analysis considered the May 2017 contract of TCS. The lot size of TCS is 250, the time period in which this analysis done is from 01-05-2017 to 25-05-2017. Table-3 Date
Underlying Value
Futures Price
Open Int
No. of contracts
2-May-17
2289.9
2282.25
5145500
4023
3-May-17
2337.3
2324.75
5035000
8269
4-May-17
2330.1
2315.9
4963000
7334
5-May-17
2320.5
2330.5
4820250
5492
8-May-17
2342.45
2355.45
4815000
4606
9-May-17
2352.55
2364.65
4776750
5417
10-May-17
2332.45
2336.75
4894000
3413
11-May-17
2349.45
2351.65
4888750
3406
12-May-17
2360.65
2366.1
4919750
4547
15-May-17
2365.1
2363.95
5004750
3582
16-May-17
2429.15
2425.75
5095750
9211
17-May-17
2455.35
2451.05
5362250
7118
18-May-17
2536.2
2526.3
5245250
16614
19-May-17
2507.15
2509.05
5016250
7280
22-May-17
2531.35
2527.5
4596000
8523
23-May-17
2521.7
2525.55
3271750
16991
24-May-17
2559.15
2558.65
2908250
13037
25-May-17
2624.6
2624.6
2189000
14638
43
Graph-4 GRAPH SHOWING THE PRICE MOVEMENT OF TCS FUTURES 2650 2600 2550 2500 2450 2400 2350 2300 2250 30-Apr-17
05-May-17
10-May-17
15-May-17
20-May-17
25-May-17
30-May-17
OBSERVATIONS AND FINDINGS: •
If a person buys 1 lot i.e. 250 futures of TCS on 1st May, 2107 and sells on 25th May, 2017 then he will get a profit of 2624.6 – 2282.25= Rs 342.35 per share. So, he will get a profit of Rs 85587 i.e., Rs 342.35*250.
•
The closing price of TCS at the end of the contract period is Rs 2624.6 and this is considered as settlement price.
44
Table showing Mark to Market Profit & loss of TCS futures: Table-4 Mark to Market
Date
Settlement Price
2-May-17
0
2282.25
3-May-17
10625
2324.75
4-May-17
-2212.5
2315.9
5-May-17
3650
2330.5
8-May-17
6237.5
2355.45
9-May-17
2300
2364.65
10-May-17
-6975
2336.75
11-May-17
3725
2351.65
12-May-17
3612.5
2366.1
15-May-17
-537.5
2363.95
16-May-17
15450
2425.75
17-May-17
6325
2451.05
18-May-17
18812.5
2526.3
19-May-17
-4312.5
2509.05
22-May-17
4612.5
2527.5
23-May-17
-487.5
2525.55
24-May-17
8275
2558.65
25-May-17
16487.5
2624.6
Graph-5 GRAPH SHOWING MARK TO MARKET PROFIT & LOSS FOR TCS FUTURES 25000 20000 15000 10000 5000 0 30-Apr-17 -5000
05-May-17 10-May-17 15-May-17 20-May-17 25-May-17 30-May-17
-10000
45
Graph-6 GRAPH SHOWING THE PRICE MOVEMENT OF SPOT AND FUTURES OF TCS 2650 2600 2550 2500 2450 2400 2350 2300 2250 30-Apr-17
05-May-17
10-May-17
15-May-17
Underlying Value
20-May-17
25-May-17
30-May-17
Futuress Price
OBSERVATIONS AND FINDINGS •
The future price of TCS is moving along with the market price.
•
If the buy price of the future is less than the settlement price, than the buyer of a future gets profit.
•
If the selling price of the future is less than the settlement price, than the seller incurs losses
46
ANALYSIS OF INFOSYS: The objective of this analysis is to evaluate the profit/loss position of futures. This analysis is based on sample data taken of INFOSYS scrip. This analysis considered the May 2017 contract of INFOSYS. The lot size of INFOSYS is 500, the time period in which this analysis done is from 01-05-2017 to 25-05-2017. Table-5 Date
Underlying Value
Futures Price
Open Int
No. of contracts
2-May-17
922.6
926.2
28925000
4202
3-May-17
934.3
939.9
28965500
9734
4-May-17
937.65
939.3
28580000
6181
5-May-17
931.5
936.15
28535000
6880
8-May-17
945.5
949.9
28362000
9112
9-May-17
946.65
951.7
28259500
10739
10-May-17
943.65
947.85
28352000
5911
11-May-17
944.1
948.35
28377500
4014
12-May-17
964.25
968.5
28611000
16551
15-May-17
951.55
955.1
28722000
5364
16-May-17
955
958.3
29029500
6319
17-May-17
952.8
955
29290000
6034
18-May-17
961.75
963.25
28730000
13662
19-May-17
957.95
961.35
28302000
7578
22-May-17
961.45
963.55
22502500
20647
23-May-17
957.3
959.05
13270000
28413
24-May-17
954.8
955.85
8199000
16423
25-May-17
983.3
983.3
5636500
15460
47
Graph-7 GRAPH SHOWING THE PRICE MOVEMENT OF INFOSYS FUTURES 990 980 970 960 950 940 930 920 30-Apr-17
05-May-17
10-May-17
15-May-17
20-May-17
25-May-17
30-May-17
OBSERVATIONS AND FINDINGS: •
If a person buys 1 lot i.e. 500 futures of INFOSYS on 1st May, 2107 and sells on 25th May, 2017 then he will get a profit of 983.3 – 926.2= Rs 57.1 per share. So, he will get a profit of Rs 28550 i.e., Rs 57.1*500.
•
The closing price of INFOSYS at the end of the contract period is Rs 983.3 and this is considered as settlement price.
48
Table showing Mark to Market Profit & loss of INFOSYS futures: Table-6 Date
Mark to Market
Settlement Price
2-May-17
0
926.2
3-May-17
6850
939.9
4-May-17
-300
939.3
5-May-17
-1575
936.15
8-May-17
6875
949.9
9-May-17
900
951.7
10-May-17
-1925
947.85
11-May-17
250
948.35
12-May-17
10075
968.5
15-May-17
-6700
955.1
16-May-17
1600
958.3
17-May-17
-1650
955
18-May-17
4125
963.25
19-May-17
-950
961.35
22-May-17
1100
963.55
23-May-17
-2250
959.05
24-May-17
-1600
955.85
25-May-17
13725
983.3
Graph-8 GRAPH SHOWING MARK TO MARKET PROFIT & LOSS FOR INFOSYS FUTURES 15000
10000
5000
0 30-Apr-17
05-May-17 10-May-17 15-May-17 20-May-17 25-May-17 30-May-17
-5000
-10000
49
Graph-9 GRAPH SHOWING THE PRICE MOVEMENT OF SPOT AND FUTURES
990 980 970 960 950 940 930 920 910 30-Apr-17
05-May-17
10-May-17
15-May-17
20-May-17
Underlying Value
25-May-17
30-May-17
Futures Price
OBSERVATIONS AND FINDINGS •
The future price of INFOSYS is moving along with the market price.
•
If the buy price of the future is less than the settlement price, than the buyer of a future gets profit.
•
If the selling price of the future is less than the settlement price, than the seller incurs losses
50
Chapter-6 6.1 Conclusion Stock futures are derivative contracts that give you the power to buy or sell a set of stocks at a fixed price by a certain date. Once you buy the contract, you are obligated to uphold the terms of the agreement. •
It allows hedgers to shift risks to speculators.
•
It gives traders an efficient idea of what the futures price of a stock or value of an index is likely to be.
•
Based on the current future price, it helps in determining the future demand and supply of the shares.
•
Since it is based on margin trading, it allows small speculators to participate and trade in the futures market by paying a small margin instead of the entire value of physical holdings.
In my Analysis all the future stock price are moving with the market value of underlying assets. from all companies I have chosen Wipro, TCS, Infosys •
Infosys Future Prices are mostly more than underlying asset value so the investors mostly makes profits
•
Where as compared to Wipro and Tcs the value of future prices and value of underlying assets are almost same the investors are making normal profits
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6.2 Findings ➢ Derivatives market is an innovation to cash market. Approximately its daily turnover reaches to the equal stage of cash market. The average daily turnover of the NSE derivative segments ➢ In cash market the profit/loss of the investor depends on the market price of the underlying asset. The investor may incur huge profits or he may incur Huge losses. But in derivatives segment the investor enjoys huge profits with limited downside. ➢ In cash market the investor has to pay the total money, but in derivatives the investor has to pay premiums or margins, which are some percentage of total contract. ➢ Derivatives are mostly used for hedging purpose. ➢ In derivative segment the profit/loss of the option writer purely depends on the fluctuations of the underlying asset.
6.3Recommendation ➢ The derivatives market is newly started in India and it is not known by every investor, so SEBI has to take steps to create awareness among the investors about the derivative segment. ➢ In order to increase the derivatives market in India, SEBI should revise some of their regulations like contract size, participation of FII in the derivatives market. ➢ Contract size should be minimized because small investors cannot afford this much of huge premiums. ➢ SEBI has to take further steps in the risk management mechanism. ➢ SEBI has to take measures to use effectively the derivatives segment as a tool of hedging.
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Bibliography 1. www.nseindia.com 2. www.bseindia.com 3. www.karvyonline.com 4. Economictimes.indiatimes.org 5. www.moneycontrol.com 6. Equity Derivatives Workbook (version Sep-2015) 7. Derivatives and Financial Innovations - By Manish Bansal and Navneeth Bansal
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