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INTRODUCTION
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, 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 products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
DERIVATIVES DEFINED
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the "underlying". In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines "derivative" to include1. 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. 2. A contract which derives its value from the prices, or index of prices, of underlying securities. Derivatives are securities under the SC(R)A and hence the trading of derivatives is governed by the regulatory framework under the SC(R)A.
RESEARCH METHODOLOGY
The data collection methods include both the primary and secondary collection methods. PRIMARY DATA Primary data has been collected through personal interaction with the employees of the company. SECONDARY DATA Data collected from newspaper & magazines. Data obtained from the internet. Data collected from companys financial records. Data obtained from company journals.
SAMPLE SIZE
PERIOD OF STUDY :
LIMITATIONS
THE MAJOR DRAWBACKS/LIMITATIONS OF THE PROJECT IS:
The data collected was basically confined to secondary sources, with very little amount of
primary data associated with the project.
There was a constraint, with regard to time allocated for the research study. Detailed study of the topic was not possible due to the limited size of the project.
The availability of information in the form of annual reports & price fluctuations of the
companies was a big constraint to the study.
IT IS THROUGH FINANCIAL MARKETS AND INSTITUTIONS THAT THE FINANCIAL SYSTEM OF AN FINANCIAL
MARKETS REFER TO THE INSTITUTIONAL ARRANGEMENTS FOR DEALING IN
FINANCIAL ASSETS AND CREDIT INSTRUMENTS OF DIFFERENT TYPES SUCH AS CURRENCY, CHEQUES, BANK DEPOSITS, BILLS, BONDS, EQUITIES, ETC.
FINANCIAL
MARKET IS A BROAD TERM DESCRIBING ANY MARKETPLACE WHERE BUYERS AND SELLERS PARTICIPATE IN THE TRADE OF
THEY
BASIC REGULATIONS ON TRADING, COSTS AND FEES AND MARKET FORCES DETERMINING THE PRICES OF SECURITIES THAT TRADE.
GENERALLY,
WHEREVER
FINANCIAL TRANSACTION TAKES PLACE, IT IS DEEMED TO HAVE TAKEN PLACE IN THE FINANCIAL MARKET.
HENCE
FINANCIAL MARKETS ARE PERVASIVE IN NATURE SINCE FINANCIAL TRANSACTIONS ARE THEMSELVES VERY PERVASIVE THROUGHOUT THE ECONOMIC SYSTEM.
BY TERM LENDING INSTITUTIONS, DEPOSIT OF MONEY INTO A BANK, PURCHASE OF DEBENTURES, SALE OF SHARES AND SO ON.
IN
A NUTSHELL, FINANCIAL MARKETS ARE THE CREDIT MARKETS CATERING TO THE VARIOUS NEEDS OF THE
INDIVIDUALS, FIRMS AND INSTITUTIONS BY FACILITATING BUYING AND SELLING OF FINANCIAL ASSETS, CLAIMS AND SERVICES.
Financial markets Organized markets Capital Markets Industrial Securities Market Primary Market Secondary market Government Securities Market Long-term loan market Money Markets Unorganized markets Money Lenders, Indigenuos Bankers
GENERALLY,
IN
THE
WIDEST SENSE, IT CONSISTS OF A SERIES OF CHANNELS THROUGH WHICH THE SAVINGS OF THE COMMUNITY ARE MADE AVAILABLE FOR INDUSTRIAL AND COMMERCIAL ENTERPRISES AND PUBLIC AUTHORITIES. CAPITAL MARKET FACILITATES RAISING OF CAPITAL.
AS
A WHOLE,
THE MAJOR FUNCTIONS PERFORMED BY A CAPITAL MARKET ARE: 1. MOBILIZATION OF FINANCIAL RESOURCES ON A NATION-WIDE SCALE. 2. SECURING THE FOREIGN CAPITAL AND KNOW-HOW TO FILL UP DEFICIT IN THE REQUIRED RESOURCES FOR
ECONOMIC GROWTH AT A FASTER RATE.
3. EFFECTIVE
PROJECTS YIELDING HIGHEST YIELD OR TO THE PROJECTS NEEDED TO PROMOTE BALANCED ECONOMIC DEVELOPMENT.
PRIMARY
HENCE
IT IS
ALSO CALLED AS
NEW ISSUE MARKET. IT BASICALLY DEALS WITH THOSE SECURITIES WHICH ARE ISSUED TO THE THE
MARKET, THEREFORE, MAKES AVAILABLE A NEW BLOCK OF SECURITIES FOR
IN OTHER WORDS, IT DEALS WITH RAISING OF FRESH CAPITAL BY COMPANIES EITHER FOR THE
BEST EXAMPLE COULD BE
(IPO) WHERE A FIRM OFFERS SHARES TO THE PUBLIC FOR THE FIRST TIME. SECONDARY
MARKET:
SECONDARY
IN
OTHER
WORDS, SECURITIES WHICH HAVE ALREADY PASSED THROUGH NEW ISSUE MARKET ARE TRADED IN THIS MARKET.
GENERALLY,
SUCH SECURITIES ARE QUOTED IN THE STOCK EXCHANGE AND IT PROVIDES A CONTINUOUS AND
REGULAR MARKET FOR BUYING AND SELLING OF SECURITIES. RECOGNIZED BY THE GOVERNMENT OF INDIA.
MONEY
MARKET
SECURITIES ARE GENERALLY VERY SAFE INVESTMENTS WHICH RETURN RELATIVELY LOW INTEREST RATE THAT IS MOST APPROPRIATE FOR TEMPORARY CASH STORAGE OR SHORT TERM TIME NEEDS.
IT CONSISTS OF A NUMBER OF
SUB-MARKETS WHICH COLLECTIVELY CONSTITUTE THE MONEY MARKET NAMELY CALL MONEY MARKET, COMMERCIAL BILLS MARKET, ACCEPTANCE MARKET, AND
DERIVATIVE IS A SECURITY
WHOSE PRICE IS DEPENDENT UPON OR DERIVED FROM ONE OR MORE UNDERLYING ASSETS. ITSELF IS MERELY A CONTRACT UNDERLYING BETWEEN ASSET. TWO OR MORE PARTIES.
THE
DERIVATIVE
IS
FLUCTUATIONS IN
THE
THE
MOST
COMMON
UNDERLYING
ASSETS
BONDS, COMMODITIES, CURRENCIES, INTEREST RATES AND MARKET INDEXES. DERIVATIVES ARE THE FOLLOWING:
IMPORTANT FINANCIAL
FORWARDS: FORWARDS ARE THE OLDEST OF ALL THE DERIVATIVES. A FORWARD CONTRACT REFERS TO
AN AGREEMENT BETWEEN TWO PARTIES TO EXCHANGE AN AGREED QUANTITY OF AN ASSET FOR CASH AT A CERTAIN DATE IN FUTURE AT A PREDETERMINED PRICE SPECIFIED IN THAT AGREEMENT. ASSET MAY BE CURRENCY, COMMODITY, INSTRUMENT ETC.
THE PROMISED
FUTURES: FUTURE CONTRACT IS VERY SIMILAR TO A FORWARD CONTRACT IN ALL RESPECTS EXCEPTING
THE FACT THAT IT IS COMPLETELY A STANDARDIZED ONE. IT IS NOTHING BUT A STANDARDIZED FORWARD CONTRACT WHICH IS LEGALLY ENFORCEABLE AND ALWAYS TRADED ON AN ORGANIZED EXCHANGE.
OPTIONS: A
(OPTION
(OPTION (CALL)
HOLDER). OR SELL
THE (PUT)
CONTRACT OFFERS THE BUYER THE RIGHT, BUT A SECURITY OR OTHER FINANCIAL ASSET AT AN
(THE
(EXERCISE
DATE).
CALL
OPTIONS GIVE THE OPTION TO BUY AT CERTAIN PRICE, SO THE BUYER WOULD
PUT
SWAPS: IT
INFACT,
IT IS THE COMBINATION OF
IT
CURRENCIES.
FOREIGN
BANKS, INVESTMENT MANAGEMENT FIRMS, HEDGE FUNDS, AND RETAIL FOREX BROKERS AND INVESTORS. FOREX MARKET IS CONSIDERED TO BE THE LARGEST FINANCIAL MARKET IN THE WORLD.
THE
IT
IS A WORLDWIDE
BECAUSE
THE
CURRENCY MARKETS ARE LARGE AND LIQUID, THEY ARE BELIEVED TO BE THE MOST EFFICIENT FINANCIAL MARKETS. IT IS IMPORTANT TO REALIZE THAT THE FOREIGN EXCHANGE MARKET IS NOT A SINGLE EXCHANGE, BUT IS CONSTRUCTED OF A GLOBAL NETWORK OF COMPUTERS THAT CONNECTS PARTICIPANTS FROM ALL PARTS OF THE WORLD.
COMMODITIES MARKET IT
IS A PHYSICAL OR VIRTUAL MARKETPLACE FOR BUYING, SELLING AND TRADING RAW OR PRIMARY
PRODUCTS.
FOR
50
WORLDWIDE THAT FACILITATE INVESTMENT TRADE IN NEARLY SPLIT INTO TWO TYPES: HARD AND SOFT COMMODITIES.
100
PRIMARY COMMODITIES.
COMMODITIES
ARE
HARD
RESOURCES THAT MUST BE MINED OR EXTRACTED (GOLD, RUBBER, OIL, ETC.), WHEREAS SOFT COMMODITIES ARE AGRICULTURAL PRODUCTS OR LIVESTOCK (CORN, WHEAT, COFFEE, SUGAR, SOYBEANS, PORK, ETC.)
10
INDIA FINANCIAL
GROWING
MARKET IS ONE OF THE OLDEST IN THE WORLD AND IS CONSIDERED TO BE THE FASTEST AND BEST AMONG ALL THE MARKETS OF THE EMERGING ECONOMIES.
THE
HISTORY OF
INDIAN
200
18TH 250
CENTURY WHEN
INDIA
DEVELOPMENT OF
INDIA
CONCENTRATED AROUND
200
TO
THE
FINANCIAL MARKET IN
INDIA
ORGANIZED LONG BEFORE WITH THE SECURITIES EXCHANGES OF WERE ESTABLISHED AS EARLY AS THE
BY
THE EARLY
1960S
KOLKATA 21
APART FROM
THERE ARE
IN ADDITION TO THE
OTCEI (OVER
COUNTER EXCHANGE
HOWEVER THE STOCK MARKETS IN INDIA REMAINED STAGNANT DUE TO STRINGENT CONTROLS ON THE MARKET
ECONOMY THAT ALLOWED ONLY A HANDFUL OF MONOPOLIES TO DOMINATE THEIR RESPECTIVE SECTORS.
THE
CORPORATE SECTOR WASN'T ALLOWED INTO MANY INDUSTRY SEGMENTS, WHICH WERE DOMINATED BY THE STATE CONTROLLED PUBLIC SECTOR RESULTING IN STAGNATION OF THE ECONOMY RIGHT UP TO THE EARLY
1990S.
THEREAFTER WHEN THE INDIAN ECONOMY BEGAN LIBERALIZING AND THE CONTROLS BEGAN TO BE DISMANTLED
OR EASED OUT; THE SECURITIES MARKETS WITNESSED A FLURRY OF
RESULTED IN MANY NEW COMPANIES ACROSS DIFFERENT INDUSTRY SEGMENTS TO COME UP WITH NEWER PRODUCTS AND SERVICES.
A REMARKABLE FEATURE OF THE GROWTH OF THE INDIAN ECONOMY IN RECENT YEARS HAS BEEN THE ROLE
PLAYED BY ITS SECURITIES MARKETS IN ASSISTING AND FUELLING THAT GROWTH WITH MONEY ROSE WITHIN THE ECONOMY.
THIS WAS IN MARKED CONTRAST TO THE INITIAL PHASE OF GROWTH IN MANY OF THE FAST GROWING EAST ASIA THAT WITNESSED HUGE DOSES OF FDI (FOREIGN DIRECT INVESTMENT) SPURRING DURING THIS PHASE IN INDIA MUCH OF THE
ECONOMIES OF
11
ORGANIZED SECTOR HAS BEEN AFFECTED BY HIGH GROWTH AS THE FINANCIAL MARKETS PLAYED AN ALLINCLUSIVE ROLE IN SUSTAINING FINANCIAL RESOURCE MOBILIZATION.
UNDERTAKINGS) THAT DECIDED TO OFFLOAD PART OF THEIR EQUITY WERE ALSO HELPED BY THE WELLORGANIZED SECURITIES MARKET IN INDIA.
THE LAUNCH OF THE NSE (NATIONAL STOCK EXCHANGE) AND THE OTCEI (OVER THE COUNTER EXCHANGE OF INDIA) DURING THE MID 1990S BY THE GOVERNMENT OF INDIA WAS MEANT TO USHER IN AN
EASIER AND MORE TRANSPARENT FORM OF TRADING IN SECURITIES.
FOR TRADING IN THE SECURITIES OF COMPANIES FROM THE LARGE-SCALE SECTOR AND THE FROM THE SMALL-SCALE SECTOR.
WHILE THE NSE HAS NOT JUST DONE WELL TO GROW AND EVOLVE INTO THE OTCEI STRUGGLED AND IS YET TO SHOW ANY SIGN OF IT INDUSTRY. THIS HAS PUSHED UP THE
OPERATIONAL EFFICIENCY OF THE INDIAN STOCK MARKET TO GLOBAL STANDARDS AND AS A RESULT THE COUNTRY HAS BEEN ABLE TO CAPITALIZE ON ITS HIGH GROWTH AND ATTRACT FOREIGN CAPITAL LIKE NEVER BEFORE.
THE REGULATING AUTHORITY FOR CAPITAL MARKETS IN INDIA IS THE SEBI (SECURITIES AND EXCHANGE BOARD OF INDIA). SEBI CAME INTO PROMINENCE IN THE 1990S AFTER THE CAPITAL MARKETS EXPERIENCED
SOME TURBULENCE. IT HAD TO TAKE DRASTIC MEASURES TO PLUG MANY LOOPHOLES THAT WERE EXPLOITED BY CERTAIN MARKET FORCES TO ADVANCE THEIR VESTED INTERESTS.
SEBI HAS GROWN IN STRENGTH AS THE REGULATOR OF INDIAS CAPITAL MARKETS AND AS ONE OF THE
COUNTRYS MOST IMPORTANT INSTITUTIONS.
12
THE
THESE RULES ENABLE THE CAPITAL MARKET TO FUNCTION MORE EFFICIENTLY AND IMPARTIALLY.
WELL REGULATED MARKET HAS THE POTENTIAL TO ENCOURAGE ADDITIONAL INVESTORS TO PARTAKE, AND
THE
SEBI
INDIA IT WAS
GOVERNMENT
BY
OF
INDIA IN 1992
IS
COMPLEX IN
AND HAS
NORTHERN, EASTERN, SOUTHERN AND WESTERN REGIONAL OFFICES IN NEW DELHI, KOLKATA, CHENNAI AND AHMEDABAD. IN
PLACE OF
GOVERNMENT CONTROL,
WITH DEFINED RESPONSIBILITIES, TO COVER BOTH DEVELOPMENT INDEPENDENT POWERS HAS BEEN SET UP.
&
SECURITIES MARKET;
SINCE
SEBI
FULFILLMENT OF ITS OBJECTIVES WITH COMMENDABLE ZEAL AND DEXTERITY. SECURITIES MARKETS LIKE CAPITALIZATION REQUIREMENTS, MARGINING,
THE
ESTABLISHMENT
CORPORATIONS ETC. REDUCED THE RISK OF CREDIT AND ALSO REDUCED THE MARKET.
13
SEBI
LIKE,
HAS INTRODUCED THE COMPREHENSIVE REGULATORY MEASURES, PRESCRIBED REGISTRATION NORMS, THE
ELIGIBILITY CRITERIA, THE CODE OF OBLIGATIONS AND THE CODE OF CONDUCT FOR DIFFERENT INTERMEDIARIES BANKERS TO ISSUE, MERCHANT BANKERS, BROKERS AND SUB-BROKERS, REGISTRARS, PORTFOLIO
MANAGERS, CREDIT RATING AGENCIES, UNDERWRITERS AND OTHERS. IDENTIFICATION AND RISK MANAGEMENT SYSTEMS FOR
IT
CLEARING HOUSES OF STOCK EXCHANGES, SURVEILLANCE (LIKE S&P CNX NIFTY &
SYSTEM ETC. WHICH HAS MADE DEALING IN SECURITIES BOTH SAFE AND TRANSPARENT TO THE END INVESTOR.
ANOTHER SENSEX)
REASONS:
IN
2000. A
MARKET
INDEX
IT ACTS AS A BAROMETER FOR MARKET BEHAVIOR; IT IS USED TO BENCHMARK PORTFOLIO PERFORMANCE; IT IS USED IN DERIVATIVE INSTRUMENTS LIKE INDEX FUTURES AND INDEX OPTIONS; IT
CAN BE USED FOR PASSIVE FUND MANAGEMENT AS IN CASE OF
INDEX FUNDS.
TWO
BROAD APPROACHES OF
SEBI
LEVEL, AND ALSO TO DIVERSIFY THE TRADING PRODUCTS, SO THAT THERE IS AN INCREASE IN NUMBER OF TRADERS INCLUDING BANKS, FINANCIAL INSTITUTIONS, INSURANCE COMPANIES, MUTUAL FUNDS, PRIMARY DEALERS ETC. TO TRANSACT THROUGH THE DERIVATIVES TRADING THROUGH REAL LANDMARK.
EXCHANGES. IN
PERMITTED BY
SEBI
IN
2000 AD
IS A
SEBI
HAS
ENJOYED SUCCESS AS
A REGULATOR BY PUSHING
SYSTEMIC
SUCCESSIVELY
(E.G.
THE QUICK MOVEMENT TOWARDS MAKING THE MARKETS ELECTRONIC AND PAPERLESS
T+2 BASES). SEBI HAS BEEN ACTIVE IN SETTING UP THE REGULATIONS AS REQUIRED
14
WHERE MEMBERS OF THE ORGANIZATION GATHER TO TRADE COMPANY STOCKS OR OTHER SECURITIES.
THE
MEMBERS MAY ACT EITHER AS AGENTS FOR THEIR CUSTOMERS, OR AS PRINCIPALS FOR THEIR OWN ACCOUNTS.
AS
PER THE
ORGANIZATION OR BODY OF INDIVIDUALS WHETHER INCORPORATED OR NOT, ESTABLISHED FOR THE PURPOSE OF ASSISTING, REGULATING AND CONTROLLING BUSINESS IN BUYING, SELLING AND DEALING IN SECURITIES.
STOCK
EXCHANGES FACILITATE FOR THE ISSUE AND REDEMPTION OF SECURITIES AND OTHER FINANCIAL
THE
TRADE IS LINKED TO SUCH PHYSICAL PLACE BECAUSE MODERN MARKETS ARE COMPUTERIZED. EXCHANGE IS ONLY BY MEMBERS AND STOCK BROKER DO HAVE A SEAT ON THE EXCHANGE.
THE TRADE ON AN
LIST OF STOCK EXCHANGES IN INDIA BOMBAY STOCK EXCHANGE NATIONAL STOCK EXCHANGE OTC EXCHANGE 1. 2. 3. 4. 5. 6. 7. 8. HYDERABAD
OF
10. INDIA AHMEDABAD BANGALORE BHUBANESWAR CALCUTTA COCHIN COIMBATORE DELHI GUWAHATI 9. 18. 19. 11. 12. 13. 14. 15. 16. 17. UTTAR
JAIPUR
REGIONAL STOCK EXCHANGES LUDHIANA MADHYA PRADESH MADRAS MAGADH MANGALORE MEERUT PUNE SAURASHTRA KUTCH PRADESH
15
20. VADODARA
16
BSE,
STANDS FOR
BOMBAY
STOCK EXCHANGE. IT IS THE OLDEST MARKET NOT ONLY IN THE COUNTRY, BUT ALSO IN ASIA. IN
THE EARLY DAYS,
BSE
WAS
KNOWN
AS
ASSOCIATION." IT
EXCHANGE IN THE COUNTRY TO BE RECOGNIZED BY THE GOVERNMENT. A PERMANENT RECOGNITION FROM THE
IN 1956, BSE
UNDER THE
OBTAINED
GOVERNMENT
OF
INDIA ACT,
SECURITIES 1956.
CONTRACTS
(REGULATION)
IN THE PAST AND EVEN NOW, IT PLAYS A PIVOTAL ROLE IN THE DEVELOPMENT OF THE COUNTRY'S
CAPITAL MARKET. WORLDWIDE.
EARLIER
ASSOCIATION
OF
PERSONS (AOP),
BUT NOW IT IS A
PURSUANT TO THE
BSE (CORPORATISATION
AND
DEMUTUALIZATION)
SCHEME, 2005 NOTIFIED BY THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI). BSE VISION THE VISION OF THE BOMBAY STOCK EXCHANGE
IS TO
BOARD
OF
DIRECTORS. IT
AND THE
TRADING MEMBERS
THE BOARD EXERCISES COMPLETE CONTROL AND FORMULATES LARGER POLICY ISSUES. THE DAYTO-DAY OPERATIONS OF
BSE
MANAGING DIRECTOR
417
THE
FRAMEWORK OF IT HAS BEEN DESIGNED TO SAFEGUARD MARKET INTEGRITY AND TO OPERATE WITH
IT
17
ITS
BOLT, IS
BS 7799-2-2002
CERTIFIED.
THE BOLT
NETWORK WAS
BSE FACTS BSE AS A BRAND IS SYNONYMOUS WITH CAPITAL MARKETS IN INDIA. THE BSE SENSEX IS THE
BENCHMARK EQUITY INDEX THAT REFLECTS THE ROBUSTNESS OF THE ECONOMY AND FINANCE. WAS THE
IT
FIRST IN INDIA TO INTRODUCE EQUITY DERIVATIVES FIRST IN INDIA TO LAUNCH A FREE FLOAT INDEX FIRST IN INDIA TO LAUNCH US$ VERSION OF BSE SENSEX FIRST IN INDIA TO LAUNCH EXCHANGE ENABLED INTERNET TRADING PLATFORM FIRST
IN
INDIA
TO OBTAIN
ISO
CERTIFICATION FOR
BS7799-2:2002. FIRST TO HAVE AN EXCLUSIVE FACILITY FOR FINANCIAL TRAINING MOVED FROM OPEN OUTCRY TO ELECTRONIC TRADING WITHIN JUST 50 DAYS
BSE WITH ITS LONG HISTORY OF CAPITAL MARKET DEVELOPMENT IS FULLY GEARED TO CONTINUE
ITS CONTRIBUTIONS TO FURTHER THE GROWTH OF THE SECURITIES MARKETS OF THE COUNTRY, THUS HELPING MARKETS.
INDIA
18
NATIONAL
STOCK
EXCHANGE
OF
INDIA
LIMITED
THE NATIONAL STOCK EXCHANGE OF INDIA LIMITED HAS GENESIS IN THE REPORT OF THE HIGH POWERED STUDY GROUP (FIS)
ON
ESTABLISHMENT
OF
WHICH
RECOMMENDED PROMOTION OF A
BY FINANCIAL INSTITUTIONS
FOOTING.
BASED
ON THE RECOMMENDATIONS,
FINANCIAL
INSTITUTIONS
GOVERNMENT
INDIA
NOVEMBER 1992 AS A TAX-PAYING COMPANY UNLIKE OTHER STOCK EXCHANGE IN THE COUNTRY. ON ITS RECOGNITION AS A STOCK EXCHANGE (WDM)
UNDER THE
ACT, 1956 IN APRIL 1993, NSE COMMENCED OPERATIONS IN THE WHOLESALE DEBT MARKET
SEGMENT IN
SEGMENT COMMENCED
OPERATIONS IN
AUGUST 1995
AND
APRIL 1996. IT
CLEARING AND SETTLEMENT OF SECURITIES, TO PROMOTE AND MAINTAIN THE SHORT AND CONSISTENT SETTLEMENT CYCLES, TO PROVIDE A COUNTER-PARTY RISK GUARANTEE AND TO OPERATE A TIGHT RISK CONTAINMENT SYSTEM.
NSE.IT LTD. IT IS ALSO A WHOLLY OWNED SUBSIDIARY OF NSE AND IS ITS IT ARM. THIS ARM OF THE NSE IS
UNIQUELY POSITIONED TO PROVIDE PRODUCTS, SERVICES AND SOLUTIONS FOR THE SECURITIES INDUSTRY.
NSE.IT
BACK-OFFICE, CLEARING AND SETTLEMENT, WEB-BASED, INSURANCE, ETC. ALSO PROVIDES CONSULTANCY AND IMPLEMENTATION SERVICES IN
ALONG
WITH THIS, IT
DATA WAREHOUSING,
BUSINESS CONTINUITY PLANS, SITE MAINTENANCE INDIA INDEX SERVICES & PRODUCTS LTD. (IISL)
AND
19
IT
NSE
AND
CRISIL LTD.
POOR'S (S&P),
EQUITY INDICES.
IDBI
AND
UTI
IT
COMMENCED OPERATIONS IN
NOVEMBER 1996.
NSE FACTS IT
USES SATELLITE COMMUNICATION TECHNOLOGY TO ENERGIZE PARTICIPATION FROM
AROUND
VSAT
WORLD.
THE NSE-
INDIA
AND THE
FIRST EXTENDED
PRESENTLY
MORE THAN
NSE
APPLICATION.
TODAY, NSE IS ONE OF THE LARGEST EXCHANGES IN THE WORLD AND STILL FORGING AHEAD. AT NSE,
WE ARE CONSTANTLY WORKING TOWARDS CREATING A MORE TRANSPARENT, VIBRANT AND INNOVATIVE CAPITAL MARKET.
1990
AS A SECTION
25
ACT
OF THE SECURITIES
PROMOTES IN RAISING FINANCE FOR NEW PROJECTS IN A COST EFFECTIVE MANNER AND TO PROVIDE INVESTORS WITH A TRANSPARENT AND EFFICIENT MODE OF TRADING OF THE
MODELED
NASDAQ
MARKET OF
USA, OTCEI
INDIAN
AS
20
EFFORTS, THE
EXCHANGE TODAY HAS 115 LISTINGS AND HAS ASSISTED IN PROVIDING CAPITAL FOR VIP
ENTERPRISES THAT HAVE GONE ON TO BUILD SUCCESSFUL BRANDS FOR THEMSELVES LIKE
ADVANTA, SONORA TILES & BRILLIANT MINERAL WATER, ETC. NEED FOR OTCEI: STUDIES
BY
NASSCOM,
INDIA,
IT
TASKS AND
FORCE,
IT,
PHARMACEUTICAL, BIOTECHNOLOGY
MEDIA
NEED FOR A NATIONAL STOCK MARKET FOR INNOVATION AND HIGH GROWTH COMPANIES.
INNOVATIVE
INDIA,
WHICH IS
WITH
EMPLOYMENT OPPORTUNITIES AND CONTRIBUTE TO THE ECONOMY, IT IS ESSENTIAL THAT THESE COMPANIES NOT ONLY EXPAND EXISTING OPERATIONS BUT ALSO SET UP NEW UNITS.
FOR THESE COMPANIES IS RAISING TIMELY, COST EFFECTIVE AND LONG TERM CAPITAL TO SUSTAIN THEIR OPERATIONS AND ENHANCE GROWTH.
SUCH
BEEN IN OPERATION FOR A SHORT TIME, ARE UNABLE TO RAISE FUNDS THROUGH THE TRADITIONAL FINANCING METHODS, BECAUSE THEY HAVE NOT YET BEEN EVALUATED BY THE FINANCIAL WORLD.
SHAREKHAN SHAREKHAN IT
IS ONE OF
INDIA'S
IS AN ONLINE STOCK TRADING COMPANY OF SSKI GROUP WHICH HAS BEEN A PROVIDER OF
SECURITIES LIMITED)
INDIA-BASED
80 YEARS.
SSKI
DOMESTIC, INVESTING IN
INDIAN
EQUITIES.
IT
INVESTMENT IDEAS, SUPERIOR CLIENT SERVICING TRACK RECORD AND EXCEPTIONAL EXECUTION SKILLS.
21
YOU GET FREEDOM FROM PAPERWORK. THERE ARE INSTANT CREDIT AND MONEY TRANSFER FACILITIES. YOU CAN TRADE FROM ANY NET ENABLED PC. AFTER HOUR ORDERS FACILITIES. YOU CAN GO FOR ONLINE ORDERS OVER THE PHONE. TIMELY ADVICE AND RESEARCH REPORTS REAL-TIME PORTFOLIO TRACKING. INFORMATION AND PRICE ALERTS. SHAREKHAN
PROVIDES ASSISTANCE AND THE ADVICE LIKE NO ONE ELSE COULD.
IT
HAS
PROGRAM, BUILT SPECIFICALLY FOR NEW INVESTORS, IS TESTAMENT TO OF ITS COMMITMENT TO BEING YOUR GUIDE THROUGHOUT YOUR INVESTING LIFE CYCLE.
SHAREKHAN SERVICES: The tag line of Sharekhan says that it is your guide to the financial jungle. As per the tag line there are many amazing services that Sharekhan offers like technical research, fundamental research, share shops, portfolio management, dial-n-trade, commodities trade, online services, depository services, equity and derivatives trading (including currency trading). With Sharekhans online trading account, you can buy and sell shares at anytime and from anywhere you like.
22
With a physical presence in over 300 cities of India through more than 800 "Share Shops" with more than 3000 employees, and an online presence through Sharekhan.com, India's premier, it reaches out to more than 8, 00,000 trading customers. A Sharekhan outlet online destination offers the following services: Online BSE and NSE executions (through BOLT & NEAT terminals) Free access to investment advice from Sharekhan's Research team Sharekhan Value Line (a monthly publication with reviews of recommendations, stocks to watch out for etc) Daily research reports and market review (High Noon & Eagle Eye) Pre-market Report (Morning Cuppa) Daily trading calls based on Technical Analysis Cool trading products (Daring Derivatives and Market Strategy) Personalized Advice Live Market Information Depository Services: Demat & Remat Transactions Derivatives Trading (Futures and Options) Commodities Trading IPOs & Mutual Funds Distribution Internet-based Online Trading: Speed Trade
23
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24
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brings the power of the broker's terminal to your PC. It's the perfect trading platform for active day traders. Its features are:
A single platform for multiple exchange BSE & NSE (Cash & F&O), MCX, NCDEX, Mutual Funds, IPOs
Multiple Charts with Tick by Tick Intraday and End of Day Charting
powered with various Studies
Apply studies such as Vertical, Horizontal, Trend, Retracement & Free lines User can save his own defined screen as well as graph template, that is,
saving the layout for future use
25
Shortcut key for FAST access to order placements & reports Online fund transfer activated with 12 Banks
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Multi Commodity Exchange of India Ltd, Mumbai (MCX) and National Commodity and Derivative Exchange, Mumbai (NCDEX).
Commodity is to for trading in any commodity, initial margin of around 10% on any be maintained. Sharekhan has launched its own commodity derivatives micro-site. The site is available through the Sharekhan home page
www.sharekhan.com.
launched several commodity derivatives products (both research and trading) too. The products have been listed below:
Commodities Buzz: a daily view on precious metals and agro commodities. Commodities Beat: a summary of the days trading activity.
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Traders Corner: Under commodity trading calls, there are two types of trading calls:
Rapid Fire: (short-term calls for 1 day to 5 days updated daily) Medium-term Plays: (medium-term calls for 1 month to 3 months updated weekly or in between if needed)
Sharekhan Xclusive: the commodity research reports and analyses (periodical). Market Scan: the daily commodity market data and statistics (end of day).
All these products are both e-mailed as newsletters and published on the commodity derivatives site
PORTFOLIO MANAGEMENT SERVICES The two Portfolio Management Services provided are; 1) Pro Prime 2) Pro Tech
Pro Prime PMS: It is Ideal for investors looking at steady and superior returns with low to medium risk appetite. This portfolio consists of a blend of quality blue chip and growth stocks ensuring a balanced portfolio with relatively medium risk profile. The portfolio
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will mostly have large capitalization stocks based on sectors & themes that have medium to long term growth potential. Product Approach: Investments are based on 3 tenets: Consistent, steady and sustainable returns Margin of Safety Low Volatility
Product Characteristics: Bottom up stock selection In-depth, independent fundamental research High quality companies with relatively large capitalization. Disciplined valuation approach applying multiple valuation measures Medium to long term vision, resulting in low portfolio turnover
Product Details: Minimum Investment: Rs 10 lakhs Lock in period: 6 Months Reporting: Online access to portfolio holdings, quarterly reporting of portfolio holdings/transactions
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Charges: 2.5% per annum AMC charged every quarter, 0.5% brokerage 20% profit sharing after 15% hurdle is crossed-chargeable at the end of the fiscal year
Pro Tech PMS Pro tech uses the knowledge of technical analysis and the power of derivatives market to identify trading opportunities in the market. The Pro tech line of products is designed around various risk/reward/volatility profiles for different kinds of investment needs. Pro tech is based on: Long Short strategies Focus on absolute returns Timing the market
The Scheme Products are: Nifty Thrifty: Nifty futures are bought and sold on the basis of an automated trading system that generates calls to go long/short. The exposure never exceeds value of portfolio i.e. there is no leveraging; but being short in Nifty allows you to earn even in falling markets and there by generates linear
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Product Approach:
Superior performance can be achieved through sheer market timing, by picking Stocks/Nifty before the infection points in their trading cycles
Linear returns are possible from having sell market positions in downtrends and by using the options market to change the portfolio beta
Product Characteristics: Using swing based index -trading systems, stop and reverse, trend following and momentum trading techniques. Nifty based products for low impact cost and low product volatility. Both long and short strategies to earn returns even in falling markets. The use of options to enhance the risk reward profile of the product and therefore offers a higher Beta.
Product Details:
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AMC fees: 0% Reporting: Monthly reporting of transactions, brokerage 0.05% for derivatives, and 20% profit sharing on booked profits on quarterly basis.
ACHIEVEMENTS OF SHAREKHAN Sharekhan.com has been voted as the most preferred Stock Broker in India in Indias largest consumer study initiated by CNBI and conducted by AC Nielsen - org Marg.
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2. REVIEW OF LITERATURE
With over 25 million shareholders, India has the third largest investor base in the world after USA and Japan. Over 7500 companies are listed on the Indian stock exchanges (more than the number of companies listed in developed markets of Japan, UK, Germany, France, Australia, Switzerland, Canada and Hong Kong.). The Indian capital market is significant in terms of the degree of development, volume of trading, transparency and its tremendous growth potential. Indias market capitalization was the highest among the emerging markets. Total market capitalization of The Bombay Stock Exchange (BSE), which, as on July 31, 1997, was US$ 175 billion has grown by 37.5% percent every twelve months and was over US$ 834 billion as of January, 2007. Bombay Stock Exchanges (BSE), one of the oldest in the world, accounts for the largest number of listed companies transacting their shares on a nationwide online trading system. The two major exchanges namely the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked no. 3 & 5 in the world, calculated by the number of daily transactions done on the exchanges. The Total Turnover of Indian Financial Markets crossed US$ 2256 billion in 2006 An increase of 82% from US $ 1237 billion in 2004 in a short span of 2 years only. Turnover in the Spot and Derivatives segment both in NSE & BSE was higher by 45% into 2006 as compared to 2005. With daily average volume of US $ 9.4 billion, the Sensex has posted excellent returns in the recent years. Currently the market cap of the Sensex as on July 4th, 2009 was Rs 48.4 Lakh Crore with a P/E of more than 20. Derivatives trading in the stock market have been a subject of enthusiasm of research in the field of finance the most desired instruments that allow market participants to manage risk in the modern securities trading are known as derivatives. The derivatives are defined as the future contracts whose value depends upon the underlying assets. If derivatives are introduced in the stock market, the underlying asset may be anything as component of stock market like, stock prices or market indices, interest rates, etc. The main logic behind derivatives trading is that
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derivatives reduce the risk by providing an additional channel to invest with lower trading cost and it facilitates the investors to extend their settlement through the future contracts. It provides extra liquidity in the stock market. Derivatives are assets, which derive their values from an underlying asset. These underlying assets are of various categories like Commodities including grains, coffee beans, etc. Precious metals like gold and silver. Foreign exchange rate. Bonds of different types, including medium to long-term negotiable debt securities issued by governments, companies, etc. Short-term debt securities such as T-bills. Over-The-Counter (OTC) money market products such as loans or deposits. Equities For example, a dollar forward is a derivative contract, which gives the buyer a right & an obligation to buy dollars at some future date. The prices of the derivatives are driven by the spot prices of these underlying assets. However, the most important use of derivatives is in transferring market risk, called Hedging, which is a protection against losses resulting from unforeseen price or volatility changes. Thus, derivatives are a very important tool of risk management. There are various derivative products traded. They are: 1. Forwards 2. Futures 3. Options 4. Swaps
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, 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 products minimize the impact of fluctuations in asset prices on the profitability and cash flow situation of risk-averse investors.
DERIVATIVES DEFINED
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven by the spot price of wheat which is the "underlying". In the Indian context the Securities Contracts (Regulation) Act, 1956 (SC(R)A) defines "derivative" to include1. 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. 2. A contract which derives its value from the prices, or index of prices, of underlying securities. Derivatives are securities under the SC(R) A and hence the trading of derivatives is governed by the regulatory framework under the SC(R) A.
TYPES OF DERIVATIVES
Mainly derivatives classified into two types 1) Financial derivative.
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2) Commodity derivatives.
Financial derivatives are relating to treasury bills, stocks, bonds, foreign exchange stock index etc. so, for financial derivatives underlying assets are relating to financial securities. Commodity derivatives relating to consuming assets or consumer goods e.g. Wheat, rice, cotton, sugar, jute, turmeric, crude oil, natural gas, gold, etc, so for commodity derivatives underlying assets are consumable products.
DERIVATIVE PRODUCTS
Derivative contracts have several variants. The most common variants are forwards, futures, options and swaps. We take a brief look at various derivatives contracts that have come to be used.
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Forwards: A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today's pre-agreed price. 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. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts. Options: Options are of 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. Warrants: Options generally have lives of upto 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. LEAPS: The acronym LEAPS means Long-Term Equity Anticipation Securities. These are options having a maturity of upto three years. Baskets: Basket options are options on portfolios of underlying assets. The underlying asset is usually a moving average of a basket of assets. Equity index options are a form of basket options. Swaps: Swaps are private agreements between two parties to exchange cash flows in the future according to a prearranged formula. They can be regarded as portfolios of forward contracts. The two commonly used swaps are: Interest rate swaps: These entail swapping only the interest related cash flows between the parties in the same currency. Currency swaps: These entail swapping both principal and interest between the parties, with the cash flows in one direction being in a different currency than those in the opposite direction.
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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.
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1. Prices in an organized derivatives market reflect the perception of market participants about the future and lead the prices of underlying to the perceived future level. The prices of derivatives converge with the prices of the underlying at the expiration of the derivative contract. Thus derivatives help in discovery of future as well as current prices. 2. The derivatives market helps to transfer risks from those who have them but may not like them to those who have an appetite for them. 3. Derivatives, due to their inherent nature, are linked to the underlying cash markets. With the introduction of derivatives, the underlying market witnesses higher trading volumes because of participation by more players who would not otherwise participate for lack of an arrangement to transfer risk. 4. Speculative trades shift to a more controlled environment of derivatives market. In the absence of an organized derivatives market, speculators trade in the underlying cash markets. Margining, monitoring and surveillance of the activities of various participants become extremely difficult in these kind of mixed markets. 5. An important incidental benefit that flows from derivatives trading is that it acts as a catalyst for new entrepreneurial activity. The derivatives have a history of attracting many bright, creative, well-educated people with an entrepreneurial attitude. They often energize others to create new businesses, new products and new employment opportunities, the benefit of which are immense. In a nut shell, derivatives markets help increase savings and investment in the long run. Transfer of risk enables market participants to expand their volume of activity.
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for future delivery of specified amount of commodities at specified price. A primary motivation for pre-arranging a buyer or seller for a stock of commodities in early forward contracts was to lessen the possibility that large swings would inhibit marketing the commodity after a harvest. As the word suggests, derivatives that trade on an exchange are called exchange traded derivatives, whereas privately negotiated derivative contracts are called OTC contracts. The OTC derivatives markets have witnessed rather sharp growth over the last few years, which has accompanied the modernization of commercial and investment banking and globalisation of financial activities. The recent developments in information technology have contributed to a great extent to these developments. While both exchange-traded and OTC derivative contracts offer many benefits, the former have rigid structures compared to the latter. It has been widely discussed that the highly leveraged institutions and their OTC derivative positions were the main cause of turbulence in financial markets in 1998. These episodes of turbulence revealed the risks posed to market stability originating in features of OTC derivative instruments and markets.
The OTC derivatives markets have the following features compared to exchange traded derivatives:
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1. The management of counter-party (credit) risk is decentralized and located within individual institutions. 2. There are no formal centralized limits on individual positions, leverage, or margining.
3. THERE
ARE NO FORMAL RULES FOR RISK AND BURDEN-SHARING.
4. There are no formal rules or mechanisms for ensuring market stability and integrity, and for safeguarding the collective interests of market participants, and 5. The OTC contracts are generally not regulated by a regulatory authority and the exchange's self-regulatory organization, although they are affected indirectly by national legal systems, banking supervision and market surveillance.
Participants and functions NSE admits members on its derivatives segment in accordance with the rules and regulations of the exchange and the norms specified by SEBI. NSE follows 2-tier
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membership structure stipulated by SEBI to enable wider participation. Those interested in taking membership on F&O segment are required to take membership of CM and F&O segment or CM, WDM and F&O segment. Trading and clearing members are admitted separately. Essentially, a clearing member (CM) does clearing for all his trading members (TMs), undertakes risk management and performs actual settlement. There are three types of CMs: Self Clearing Member: A SCM clears and settles trades executed by him only either on his own account or on account of his clients. Trading Member Clearing Member: TM-CM is a CM who is also a TM. TM-CM may clear and settle his own proprietary trades and client's trades as well as clear and settle for other TMs. Professional Clearing Member: PCM is a CM who is not a TM. Typically, banks or custodians could become a PCM and clear and settle for TMs.
Trading mechanism
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The futures and options trading system of NSE, called NEAT-F&O trading system, provides a fully automated screen-based trading for Index futures & options and Stock futures & options on a nationwide basis and an online monitoring and surveillance mechanism. It supports an anonymous order driven market which provides complete transparency of trading operations and operates on strict price-time priority. It is similar to that of trading of equities in the Cash Market (CM) segment. The NEATF&O trading system is accessed by two types of users. The Trading Members (TM) have access to functions such as order entry, order matching, order and trade management. It provides tremendous flexibility to users in terms of kinds of orders that can be placed on the system. Various conditions like Immediate or Cancel, Limit/Market price, Stop loss, etc. can be built into an order. The Clearing Members (CM) use the trader workstation for the purpose of monitoring the trading member(s) for whom they clear the trades. Additionally, they can enter and set limits to positions, which a trading member can take. Turnover The trading volumes on NSE's derivatives market has seen a steady increase since the launch of the first derivatives contract, i.e. index futures in June 2000. Table 1.1 gives the value of contracts traded on the NSE. The average daily turnover at NSE now exceeds Rs. 35,000 crore. A total of 216,883,573 contracts with a total turnover of Rs.7,356,271 crore were traded during 2006-2007.
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To understand the use and functioning of the index derivatives markets, it is necessary to understand the underlying index. In the following section, we take a look at index related issues. Traditionally, indexes have been used as information sources. By looking at an index, we know how the market is faring. In recent years, indexes have come to the forefront owing to direct applications in finance in the form of index funds and index derivatives. Index derivatives allow people to cheaply alter their risk exposure to an index (hedging) and to implement forecasts about index movements (speculation). Hedging using index derivatives has become a central part of risk management in the modern economy.
2. AS A BENCHMARK PORTFOLIO PERFORMANCE, 3. AS AN UNDERLYING IN DERIVATIVE INSTRUMENTS LIKE INDEX FUTURES, AND 4. In passive fund management by index funds
How do we interpret index movements? What do these movements mean? They reflect the changing expectations of the stock market about future dividends of the corporate sector. The index goes up if the stock market thinks that the prospective dividends in the future will be better than previously thought. When the prospects of dividends in the future becomes pessimistic, the index drops. The ideal index gives us instant readings about how the stock market perceives the future of corporate sector. Every stock price moves for two possible reasons:
1. NEWS
ABOUT THE COMPANY (E.G. A PRODUCT LAUNCH, OR THE CLOSURE OF A FACTORY)
2. News about the country (e.g. budget announcements) The job of an index is to purely capture the second part, the movements of the stock market as a whole (i.e. news about the country). This is achieved by averaging. Each stock contains a mixture of two elements - stock news and index news. When we take an average of returns on many stocks, the individual stock news tends to cancel out and the only thing left is news that is common to all stocks. The news that is common to all stocks is news about the economy. That is what a good index captures. The correct method of averaging is that of taking a weighted average, giving each stock a weight proportional to its market capitalization. Example: Suppose an index contains two stocks, A and B. A has a market capitalization of Rs.1000 crore and B has a market capitalization of Rs.3000 crore. Then we attach a weight of 1/4 to movements in A and 3/4 to movements in B.
A good index is a trade-off between diversification and liquidity. A well diversified index is more representative of the market/economy. However there are diminishing returns to diversification. Going from 10 stocks to 20 stocks gives a sharp reduction in risk. Going from 50 stocks to 100 stocks gives very little reduction in risk. Going beyond 100 stocks gives almost zero reduction in risk. Hence, there is little to gain by diversifying beyond a point. The more serious problem lies in the stocks that we take into an index when it is broadened. If the stock is illiquid, the observed prices yield contaminated information and actually worsen an index.
TYPES OF INDEXES
Most of the commonly followed stock market indexes are of the following two types: Market capitalization weighted index or price weighted index. In a market capitalization weighted index, each stock in the index affects the index value in proportion to the market value of all shares outstanding. A price weighted index is one that gives a weight to each stock that is proportional to its stock price. Indexes can also be equally weighted. Recently, major indices in the world like the S&P 500 and the FTSE-100 have shifted to a new method of index calculation called the "Free float" method. We take a look at a few methods of index calculation. In the example below we can see that each stock affects the index value in proportion to the market value of all the outstanding shares. In the present example, the base index = 1000 and the index value works out to be 1002.60
Company
Base Mkt
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capitalization
1. Price weighted index: In a price weighted index each stock is given a weight proportional to its stock price. 2. Market capitalization weighted index: In this type of index, the equity price is weighted by the market capitalization of the company (share price * number of outstanding shares). Hence each constituent stock in the index affects the index value in proportion to the market value of all the outstanding shares. This index forms the underlying for a lot of index based products like index funds and index futures. Table below gives an example of how market capitalization weighted index is calculated. In the market capitalization weighted method,
where: Current market capitalization = Sum of (current market price * outstanding shares) of all securities in the index. Base market capitalization = Sum of (market price * issue size) of all securities as on base date.
S&P CNX Nifty S&P CNX Nifty is a well diversified 50 stock index accounting for 24 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds. PRODUCTS
AND
LTD. (IISL), which is a joint venture between NSE and CRISIL. IISL is India's first specialised company focussed upon the index as a core product. IISL have a consulting and licensing agreement with Standard & Poor's (S&P), who are world leaders in index services.
The average total traded value for the last six months of all Nifty stocks is
approximately 58% of the traded value of all stocks on the NSE. Nifty stocks represent about 60% of the total market capitalisation as on on March 31, 2005.
Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.07%. S&P CNX Nifty is professionally maintained and is ideal for derivatives trading.
CNX Nifty Junior The next rung of liquid securities after S&P CNX NIFTY is the CNX Nifty Junior. It may be useful to think of the S&P CNX Nifty and the CNX Nifty Junior as making
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up
the
100
most
liquid
stocks
in
India.
As with the S&P CNX Nifty, stocks in the CNX Nifty Junior are filtered for liquidity, so they are the most liquid of the stocks excluded from the S&P CNX Nifty. The maintenance of the S&P CNX Nifty and the CNX Nifty Junior are synchronized so that the two indexes will always be disjoint sets; i.e. a stock will never appear in both indexes at the same time. Hence it is always meaningful to pool the S&P CNX Nifty and the CNX Nifty Junior into a composite 100 stock index or portfolio. CNX Nifty Junior represents about 10% of the total market capitalization as on March 31, 2005.
The average traded value for the last six months of all Junior Nifty stocks is
approximately 9% of the traded value of all stocks on the NSE.
Impact cost for CNX Nifty Junior for a portfolio size of Rs.2.50 million is
0.15%. CNX 100 CNX 100 is a diversified 100 stock index accounting for 35 sector of the economy. CNX 100 is owned and managed by India Index Services & Products Ltd. (IISL). Which is a joint venture between CRISIL & NSE. IISL is India's first specialized company focused upon the index as a core products. IISL has a licensing & marketing agreement with Standard & Poor's (S&P), who are leader's in index services. CNX 100 represents about 66.61 % of the total market capitalization as on April 10, 2007 The average traded value for the last six months of all CNX100 stocks is approximately 56.02 % of the traded value of all stocks on the NSE Impact cost for CNX 100 for a portfolio size of Rs. 8 million is 0.11% S&P CNX 500
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The S&P CNX 500 is Indias first broad-based benchmark of the Indian capital market for comparing portfolio returns vis-a-vis market returns. The S&P CNX 500 represents about 96% of total market capitalisation and about 93% of the total turnover on the NSE. The S&P CNX 500 companies are disaggregated into 72 industry indexes viz. S&P CNX Industry Indexes. Industry weightages in the index reflect the industry weightages in the market. For e.g. if the banking sector has a 5% weightage in the universe of stocks traded on NSE, banking stocks in the index would also have an approx. representation of 5% in the index.
CNX Midcap * The medium capitalized segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. The primary objective of the CNX Midcap Index is to capture the movement and be a benchmark of the midcap segment of the market.
METHOD OF COMPUTATION CNX Midcap is computed using market capitalization weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value.
BASE DATE AND VALUE The CNX Midcap Index has a base date of Jan 1, 2003 and a base value of 1000.
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CRITERIA FOR SELECTION OF CONSTITUENT STOCKS The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria : All the stocks, which constitute more than 5% market capitalization of the universe (after sorting the securities in descending order of market capitalization), shall be excluded in order to reduce the skewness in the weightages of the stocks in the universe. After step (a), the weightages of the remaining stocks in the universe is determined again. After step (b), the cumulative weightage is calculated. After step (c) companies which form part of the cumulative percentage in ascending order unto first 75 percent (i.e. upto to 74.99 percent) of the revised universe shall be ignored. After, step (d), all the constituents of S&P CNX Nifty shall be ignored. From the universe of companies remaining after step (e) i.e. 75th percent and above, first 100 companies in terms of highest market capitalization, shall constitute the CNX Midcap Index subject to fulfillment of the criteria mentioned below.
TRADING INTEREST All constituents of the CNX Midcap Index must have a minimum listing record of 6 months. In addition, all candidates for the Index are also evaluated for trading interest, in terms of volumes and trading frequency.
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FINANCIAL PERFORMANCE All companies in the CNX Midcap Index have a minimum track record of three years of operations with a positive net worth. OTHERS A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period. *CNX Midcap - Introduced from July 18, 2005
Nifty Midcap 50 The medium capitalized segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. The primary objective of the Nifty Midcap 50 Index is to capture the movement of the midcap segment of the market. It can also be used for index-based derivatives trading. METHOD OF COMPUTATION Nifty Midcap 50 is computed using market capitalisation weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value. BASE DATE AND VALUE The Nifty Midcap 50 Index has a base date of Jan 1, 2004 and a base value of 1000. CRITERIA FOR SELECTION OF CONSTITUENT STOCKS The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is, inter alia, based on the following criteria: Stocks with average market capitalization ranging from Rs.1000 Crore to Rs.5000 Crore at the time of selection. Stocks which are not part of the derivatives segment are excluded. Stocks which are forming part of the S&P CNX NIFTY index are excluded.
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OTHER STATISTICS: A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period. Nifty Midcap 50 stocks represent about 4.89 % of the total market capitalization as on August 31, 2007. The average traded volume for the last six months of all Nifty Midcap 50 stocks is approximately 15.21 % of the traded volume of all stocks on the NSE.
S&P CNX Defty Almost every institutional investor and off-shore fund enterprise with an equity exposure in India would like to have an instrument for measuring returns on their equity investment in dollar terms. To facilitate this, a new index the S&P CNX Defty-Dollar Denominated S&P CNX Nifty has been developed.
S&P CNX Defty is S&P CNX Nifty, measured in dollars. The S&P CNX Defty is calculated real-time. When there is currency volatility, the S&P CNX Defty is an ideal device for a foreign investor to know where he stands, even intraday Salient Features: Performance indicator to foreign institutional investors, off shore funds, etc. Provides an effective tool for hedging Indian equity exposure. Impact cost of the S&P CNX Nifty for a portfolio size of Rs.5 million is 0.20% Provides fund managers an instrument for measuring returns on their equity investment in dollar terms.
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Calculation of S&P CNX Defty: Computations are done using the S&P CNX NIFTY index calculated on the NEAT trading system of NSE and end of previous day Exchange Rate(US $-Re). S&P CNX Defty = S&P CNX Nifty at time t x Exchange rate as on base date. = Exchange rate at time t
Specifications of S&P CNX Defty: Base date: 03 November 1995 Base S&P CNX Defty Index Value: 1000 S&P CNX Nifty Value as on Base date: 1000 Exchange rate as on base date: 34.65 Adjustment factor as on Base date:1.00
CNX Midcap 200 ** The medium capitalised segment of the stock market is being increasingly perceived as an attractive investment segment with high growth potential. The primary objective of the CNX MidCap 200 Index is to capture the movement and be a benchmark of the midcap segment of the market. CNX Midcap 200 represents about 72% of the total market capitalization of the Mid-Cap Universe and about 70% of the total traded value of the MidCap Universe. (Mid-Cap Universe is defined as stocks having average six months market capitalization between Rs.75 crores and Rs.750 crores). Industry weightages in the index dynamically reflect industry weightages in the market Provide investors a broad based benchmark for comparing portfolio returns vis--vis market returns in the midcap segment. ** CNX Midcap 200 - Discontinued from July 18, 2005.
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Hedging effectiveness Hedging effectiveness is a measure of the extent to which an index correlates With a portfolio, whatever the portfolio may be. Nifty correlates better with all kinds of portfolios in India as compared to other indexes. This holds good for all kinds of portfolios, not just those that contain index stocks. Similarly, the CNX IT and BANK Nifty contracts which NSE trades in, correlate well with information technology and banking sector portfolios. NIFTY, CNX IT, BANK NIFTY, CNX NIFTY JUNIOR, CNX 100, NIFTY MIDCAP 50 and Mini Nifty 50 indices are owned, computed and maintained by India Index Services & Products Limited (IISL), a company setup by NSE and CRISIL with technical assistance from Standard & Poor's Index derivatives Index derivatives are derivative contracts which have the index as the underlying. The most popular index derivatives contracts the world over are index futures and index options. NSE's market index, the S&P CNX Nifty was scientifically designed to enable the launch of index-based products like index derivatives and index funds. The first derivative contract to be traded on NSE's market was the index futures contract with the Nifty as the underlying. This was followed by Nifty options, derivative contracts on sectoral indexes like CNX IT and BANK Nifty contracts. Trading on index derivatives were further introduced on CNX Nifty Junior, CNX 100, Nifty Midcap 50 and Mini Nifty 50.
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LIMITATIONS OF FORWARD MARKETS Forward markets world-wide are afflicted by several problems: LACK OF CENTRALIZATION OF TRADING, ILLIQUIDITY, AND Counterparty risk In the first two of these, the basic problem is that of too much flexibility and generality. The forward market is like a real estate market in that any two consenting adults can form contracts against each other. This often makes them design terms of the deal which are very convenient in that specific situation, but makes the contracts nontradable. Counterparty risk arises from the possibility of default by any one party to the transaction. When one of the two sides to the transaction declares bankruptcy, the other suffers. Even when forward markets trade standardized contracts, and hence avoid the problem of illiquidity, still the counterparty risk remains a very serious issue.
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INTRODUCTION TO FUTURES
Futures markets were designed to solve the problems that exist in forward markets. 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. But unlike forward contracts, 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. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way. The standardized items in a futures contract are: QUANTITY OF THE UNDERLYING QUALITY OF THE UNDERLYING THE DATE AND THE MONTH OF DELIVERY THE UNITS OF PRICE QUOTATION AND MINIMUM PRICE CHANGE Location of settlement
Trade on an organized exchange Standardized contract terms hence more liquid Requires margin payments Follows daily settlement
OTC in nature Customised contract terms hence less liquid No margin payment Settlement happens at end of period
FUTURES TERMINOLOGY 60
Spot price: THE PRICE AT WHICH AN ASSET TRADES IN THE SPOT MARKET.
Futures price: The price at which the futures contract trades in the futures market. Contract cycle: The period over which a contract trades. The index futures contracts on the NSE have one-month, two-month and three months expiry cycles which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three-month expiry is initiated. 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. Initial margin: The amount that must be deposited in the margin account at the time a futures contract is first entered into is known as initial margin. Marking-to-market: In the futures market, at the end of each trading day, the margin account is adjusted to reflect the investor's gain or loss depending upon the futures closing price. This is called marking-to-market. Maintenance margin: This is somewhat lower than the initial margin. This is set to ensure that the balance in the margin account never becomes negative. If the balance in the margin account falls below the maintenance margin, the investor receives a margin call and is expected to top up the margin account to the initial margin level before trading commences on the next day.
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INDEX DERIVATIVES
Index derivatives are derivative contracts which derive their value from an Underlying Index. The two most popular index derivatives are index futures and index options. Index derivatives have become very popular worldwide. Index derivatives offer various advantages and hence have become very popular. Institutional and large equity-holders need portfolio-hedging facility. Indexderivatives are more suited to them and more cost-effective than derivatives based on individual stocks. Pension funds in the US are known to use stock index futures for risk hedging purposes. Index derivatives offer ease of use for hedging any portfolio irrespective of its composition. Stock index is difficult to manipulate as compared to individual stock prices, more so in India, and the possibility of cornering is reduced. This is partly because an individual stock has a limited supply, which can be cornered. Stock index, being an average, is much less volatile than individual stock prices. This implies much lower capital adequacy and margin requirements. Index derivatives are cash settled, and hence do not suffer from settlement delays and problems related to bad delivery, forged/fake certificates.
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FUTURES PAYOFFS
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. 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 a potentially unlimited downside. Take the case of a speculator who buys a two-month Nifty index futures contract when the Nifty stands at 2220. The underlying asset in this case is the Nifty portfolio. When the index moves up, the long futures position starts making profits, and when the index moves down it starts making losses.
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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 a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who sells a two-month Nifty index futures contract when the Nifty stands at 2220. The underlying asset in this case is the Nifty portfolio. When the index moves down, the short futures position starts making profits, and when the index moves up, it starts making losses.
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PRICING FUTURES
Pricing of futures contract is very simple. Using the cost-of-carry logic, we calculate the fair value of a futures contract. Everytime the observed price deviates from the fair value, arbitragers would enter into trades to capture the arbitrage profit. This in turn would push the futures price back to its fair value. The cost of carry model used for pricing futures is given below:
where: r = Cost of financing (using continuously compounded interest rate) T = Time till expiration in years. e = 2.71828
Example: Security XYZ Ltd trades in the spot market at Rs. 1150. Money can be invested at 11% p.a. The fair value of a one-month futures contract on XYZ is calculated as follows:
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ASSUME THAT THE SPOT PRICE OF XYZ IS RS.228. THUS, FUTURES PRICE F = 228e = Rs.231.90
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Client Broker Relationship in Derivative Segment A trading member must ensure compliance particularly with relation to the following while dealing with clients: 1. Filling of 'Know Your Client' form 2. Execution of Client Broker agreement 3. Bring risk factors to the knowledge of client by getting acknowledgement of client on risk disclosure document 4. Timely execution of orders as per the instruction of clients in respective client codes. 5. Collection of adequate margins from the client 6. Maintaining separate client bank account for the segregation of client money. 7. Timely issue of contract notes as per the prescribed format to the client 8. Ensuring timely pay-in and pay-out of funds to and from the clients 9. Resolving complaint of clients if any at the earliest. 10. Avoiding receipt and payment of cash and deal only through account payee cheques 11. Sending the periodical statement of accounts to clients 12. Not charging excess brokerage 13. Maintaining unique client code as per the regulations.
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Order types and conditions The system allows the trading members to enter orders with various conditions attached to them as per their requirements. These conditions are broadly divided into the following categories:
Time conditions
- Day order: A day order, as the name suggests is an order, which is valid for the day on which it is entered. If the order is not executed during the day, the system cancels the order automatically at the end of the day. - Immediate or Cancel (IOC): An IOC order allows the user to buy or sell a contract as soon as the order is released into the system, failing which the order is cancelled from the system. Partial match is possible for the order, and the unmatched portion of the order is cancelled immediately.
Price condition
- Stop-loss: This facility allows the user to release an order into the system, after the market price of the security reaches or crosses a threshold price e.g. if for stop-loss buy order, the trigger is 1027.00, the limit price is 1030.00 and the market (last traded) price is 1023.00, then this order is released into the system once the market price reaches or exceeds 1027.00. This order is added to the regular lot book with time of triggering as the time stamp, as a limit order of 1030.00. For the stop-loss sell order, the trigger price has to be greater than the limit price.
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Other conditions
- Market price: Market orders are orders for which no price is specified at the time the order is entered (i.e. price is market price). For such orders, the system determines the price. - Trigger price: Price at which an order gets triggered from the stop-loss book. - Limit price: Price of the orders after triggering from stop-loss book. - Pro: Pro means that the orders are entered on the trading member's own account. - Cli: Cli means that the trading member enters the orders on behalf of a client.
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Contract cycle
The figure shows the contract cycle for futures contracts on NSE's derivatives market. As can be seen, at any given point of time, three contracts are available for trading - a near-month, a middle-month and a far-month. As the January contract expires on the last Thursday of the month, a new three-month contract starts trading from the following day, once more making available three index futures contracts for trading.
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CHARGES
Trades affected in the contracts admitted to dealing on the F&O segment of NSE is fixed at 2.5% of the contract value in case of index futures and stock futures. In case of index options and stock options it is 2.5% of notional value of the contract [(Strike Price + Premium) * Quantity)], exclusive of statutory levies. The transaction charges payable to the exchange by the trading member for the trades executed by him on the F&O segment are fixed at the rate of Rs. 2 per lakh of turnover (0.002%) subject to a minimum of Rs. 1,00,000 per year. However for the transactions in the options subsegment the transaction charges are levied on the premium value at the rate of 0.05% (each side) instead of on the strike price as levied earlier. Further to this, trading members have been advised to charge brokerage from their clients on the Premium price (traded price) rather than Strike price. The trading members contribute to Investor Protection Fund of F&O segment at the rate of Re. 1/- per Rs. 100 crores of the traded value (each side).
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CLEARING ENTITIES
Clearing and settlement activities in the F&O segment are undertaken by NSCCL with the help of the following entities: Clearing members In the F&O segment, some members, called self clearing members, clear and settle their trades executed by them only either on their own account or on account of their clients. Some others, called trading member-cum-clearing member, clear and settle their own trades as well as trades of other trading members (TMs). Besides, there is a special category of members, called professional clearing members (PCM) who clear and settle trades executed by TMs. The members clearing their own trades and trades of others, and the PCMs are required to bring in additional security deposits in respect of every TM whose trades they undertake to clear and settle. Clearing banks Funds settlement takes place through clearing banks. For the purpose of settlement all clearing members are required to open a separate bank account with NSCCL designated clearing bank for F&O segment. The Clearing and Settlement process comprises of the following three main activities: 1) Clearing 2) Settlement 3) Risk Management
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CLEARING MECHANISM
The clearing mechanism essentially involves working out open positions and Obligations of clearing (self-clearing/trading-cum-clearing/professional clearing) members. This position is considered for exposure and daily margin purposes. The open positions of CMs are arrived at by aggregating the open positions of all the TMs and all custodial participants clearing through him, in contracts in which they have traded. A TM's open position is arrived at as the summation of his proprietary open position and clients' open positions, in the contracts in which he has traded. While entering orders on the trading system, TMs are required to identify the orders, whether proprietary (if they are their own trades) or client (if entered on behalf of clients) through 'Pro/ Cli' indicator provided in the order entry screen. Proprietary positions are calculated on net basis (buy - sell) for each contract. Clients' positions are arrived at by summing together net (buy sell) positions of each individual client. A TM's open position is the sum of proprietary open position, client open long position and client open short position.
SETTLEMENT MECHANISM
All futures and options contracts are cash settled, i.e. through exchange of cash. The underlying for index futures/options of the Nifty index cannot be delivered. These contracts, therefore, have to be settled in cash. Futures and options on individual securities can be delivered as in the spot market. However, it has been currently mandated that stock options and futures would also be cash settled. The settlement amount for a CM is netted across all their TMs/clients, with respect to their obligations on MTM, premium and exercise settlement.
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REGULATORY FRAMEWORK
The trading of derivatives is governed by the provisions contained in the SC(R)A, the SEBI Act, the rules and regulations framed thereunder and the rules and byelaws of stock exchanges.
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PROMOTING AND REGULATING SELF-REGULATORY ORGANIZATIONS. PROHIBITING FRAUDULENT AND UNFAIR TRADE PRACTICES.
Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds and other persons associated with the securities market and intermediaries and selfregulatory organizations in the securities market. performing such functions and exercising according to Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central Government.
Requirements to become F&O segment member The eligibility criteria for membership on the F&O segment is as given in Table 7.1. Table 7.2 gives the requirements for professional clearing membership. Anybody interested in taking membership of F&O segment is required to take membership of CM and F&O segment or CM, WDM and F&O segment. An existing member of CM segment can also take membership of F&O segment. A trading member can also be a clearing member by meeting additional requirements. There can also be only clearing members.
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1: No additional networth is required for self clearing members. However, a networth of Rs. 300 Lakh is required for TM-CM and PCM. 2 & 3: Additional Rs. 25 Lakh is required for clearing memberships (SCM, TM-CM). In addition, the clearing member is required to bring in IFSD of Rs. 2 Lakh and CSD of Rs. 8 Lakh per trading member he undertakes to clear and settle.
MEMBERS OF
MEMBERS OF
NETWORTH INTEREST FREE SECURITY DEPOSIT (IFSD) COLLATERAL SECURITY DEPOSIT ANNUAL SUBSCRIPTION
300 25 25 NIL
300 34 50 2.5
Note: The PCM is required to bring in IFSD of Rs. 2 Lakh and CSD of Rs. 8 Lakh per trading member whose trades he undertakes to clear and settle in the F&O segment.
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Requirements to become authorized / approved user Trading members and participants are entitled to appoint, with the approval of the F&O segment of the exchange authorized persons and approved users to operate the trading workstation(s). These authorized users can be individuals, registered partnership firms or corporate bodies. Authorized persons cannot collect any commission or any amount directly from the clients he introduces to the trading member who appointed him. However he can receive a commission or any such amount from the trading member who appointed him as provided under regulation. Approved users on the F&O segment have to pass a certification program which has been approved by SEBI. Each approved user is given a unique identification number through which he will have access to the NEAT system. The approved user can access the NEAT system through a password and can change such password from time to time.
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Securities transaction tax on derivatives transactions As per Chapter VII of the Finance (No. 2) Act, 2004, Securities Transaction Tax (STT) is levied on all transactions of sale and/or purchase of equity shares and units of equity oriented fund and sale of derivatives entered into in a recognized stock exchange. As per Finance Act 2008, the following STT rates are applicable w.e.f. 1st June,
t
2008 in relation to sale of a derivative, where the transaction of such sale in entered into in a recognized stock exchange.
Sr. No. by Taxable securities transaction Rate Payable
Sale of an option in securities Sale of an option in securities, where option is exercised Sale of a futures in securities
Consider an example. Mr. A. sells a futures contract of M/s. XYZ Ltd. (Lot Size: 1000) expiring on 29-Sep-2005 for Rs. 300. The spot price of the share is Rs. 290. The securities transaction tax thereon would be calculated as follows: 1. Total futures contract value = 1000 x 300 = Rs. 3,00,000 2. Securities transaction tax payable thereon 0.017% = 3,00,000 x 0.017% = Rs. 51 Note: No tax on such a transaction is payable by the buyer of the futures contract.
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Explanation of terms in the table: Date Date as on which contract is traded. Expiry Expiry date of the Contract. Open Day open price of the contract. High Day high price of the contract. Low Day low price of the contract. Close Closing price of the contract. LTP Last Traded Price. Settlement price The price at which MTM is calculated. No. of contracts Contracts traded during the day. Turnover in Lakhs Traded value for the trade. Open Interest Unclosed contracts or open positions. Change in Open Interest Variation of contracts from the trade OI Underlying value Underlying asset or Spot value.
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INTERPRETATION:
From the above table we can understand that, at any point of time, Near month, Next month and Far month contracts are available i.e. near month is DEC., next month is JAN., & Far month is FEB. contracts.
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Expiry of the contract is informed in the contract itself i.e. 31st Dec., 2009 resembles that it is the contract expiry date. So after this date, the contract will not be in existence. So on 31st Dec., this contract expires and new contract emerges i.e. March contract; as existing next month contract becomes near month contract and far month becomes next month and new contract is the far month contract.
Every Months last Thursday is the contract expiry date. If holiday comes on Thursday, the previous trading day is expiry date. After the expiry of the contract, new contract comes into existence. Generally Near month contracts are having the huge liquidity and the buyer & seller price spread is minimum, because of huge participation from all market participants. We can understand from the above graph the OI (Open Interest) contracts are very high.
Open Interest is the Unclosed Contracts or the people who have taken position, but not squared off or closed. In Derivatives market Open interest plays a very crucial role. If Open interest is increasing day by day with the increase in price , it resemble peoples anticipation is very high and expecting a further rise in the price. So that we can understand that Long Positions are increasing in the market. Change in the OI will be +ve. ( positive )
If Open Interest comes down with the price, resemble market participants booked profit or exiting positions from the market .This bring the change in the Open Interest to ve. ( negative ) No. of contracts reduced from the previous day close.
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If Open interest increase with the price fall, it shows that short positions are building in the market and they are expecting further fall.
Generally Futures contracts price reflects with premium or discount which show the market participants interest. Premium means quoting higher price with the underlying spot i.e. if Nifty is 5300. Futures price quoting with 5310. Resembling 10 points premium. Discount means quoting lower price with the underlying spot i.e. if Nifty is 5300. Futures price quoting with 5290 Resembling 10 points discount. When demand for the underlying asset is more it shows with premium, when lack of demand and expecting fall it shows in terms of discount. In derivative markets Rollovers will happen every month i.e. Market participants rollover their contracts to the next month, by closing the near month contract, when the expiry is near by. This is just like renewal of the existing contract.
Conclusions:
1. Derivatives market is an innovation to cash market.
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6. Index futures having huge liquidity as the participation from all segments such
as FIIs (Foreign Institutional Investors), DIIs (Domestic Institutional Investors), HNIs
(High Net worth Individuals) and retail sector while comparing with individual
stock futures.
7. Derivatives allow risk about the price of the underlying asset to be transferred from one party to another.
8. Derivatives facilitate the buying and selling of risk and many people consider
this to have a positive impact on the ECONOMIC SYSTEM.
9. Although someone loses money, while someone else gains with a derivative.
Under normal circumstances, trading in derivatives should not adversely affect the economic system because it is ZERO SUM in UTILITY.
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Derivatives are the financial instruments created for minimizing risk by way of hedging, but due to speculation investors are loosing money heavily by not following the Risk Management. Investors trading in derivative segment need to analyze the risk and return relationship and need to follow the stop loss rules strictly.
Due to the standardization of lot sizes, small investors cannot afford this much of huge premiums. Derivatives market should be developed in order to keep it at par with other derivative markets in the world. Risk awareness to be developed among the investors, about the derivative instruments. Derivative instruments are to be designed in such a way where every one can understand and utilize in minimizing their risk. SEBI and Exchanges should conduct seminars regarding the use of derivatives to educate investors.
After study it is clear that Derivative markets influence on our Indian Economy
is increasing to a significant level and impacting the whole market with its high OPEN INTEREST (Unclosed or Open contracts). So, SEBI should take necessary steps for regularizing and controlling the operators of Derivative Market. Derivatives instruments can be used efficiently in minimizing the risk by using various strategies.
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BIBLIOGRAPHY
BOOKS REFERRED
Gordan & Natarajan (2007), Financial Markets & Services (4th edition),
Himalaya Publishing House.
MAGAZINES :
WEBSITES :-
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