`

Jaypee Business School

A constituent of Jaypee Institute of Information Technology University
A-10, Sector 62, Noida (UP) India 201 307
www.jbs.ac.in

Hedging Strategy Through Futures And Options

Internship Report submitted as a partial requirement for the award of the two year
Master of Business Administration Programme
MBA 2009-11

Name: Aditya Ahuja

Telephone: 9540322377
E-mail: adityahuja@gmail.com

Corporate Internship Supervisor

Name: Mr. Jitendra Rai Singhania
Designation: Regional Business Head (Karvy Fortune)
Contact details: 9212386311
Mailing Address: jitendra.r@karvy.com

JBS-Faculty Supervisor: Dr. Hima Gupta

Start Date for Internship: 19th April

End Date for Internship: 16th June
 Report Date: 5th of July

Self Certification by the Intern

I hereby certify that I, Mr.Aditya Ahuja have successfully completed my internship with
“Karvy Stock Broking Limited” in the month of June-2010 from (19th of April to 16th of
June). This is also to certify that this report is an original product and no unfair means
like copying etc have been used for its completion.

Name: Aditya Ahuja

Signature:

Date: 23rd June 2010

Page 2
Certificate from the Corporate Internship Providing Organization

This is to certify that Mr Aditya Ahuja has successfully completed his internship with us
in the month of June-2010 from (19th of April to 16th of June). We wish him all the best
for all his future endeavors.

Name of the Supervisor: Mr.Jitendra RaiSinghania

Signature:
Date: 23rd June 2010

Page 3
Acknowledgement

Sometimes words fall short to show gratitude, the same happened with me during this
project. The immense help and support received from Karvy stock broking limited
overwhelmed me during the project.

My sincere gratitude to Mr. Jitendra Rai Singhania (Regional Business Head-Karvy

Fortune) for providing me with an opportunity to work with Karvy stock broking limited.

I am highly indebted to Mr. Jitendra Rai Singhania, Regional Business Head-Karvy

Fortune and company project guide, who has provided me with the necessary information
and his valuable suggestion and comments on bringing out this report in the best possible
way.

I am grateful to Mr. Jitendra Rai Singhania and all of the Associate members of New
Delhi branch, who have helped me in the successful completion of this project,

Page 4
TABLE OF CONTENTS

Self certification By the Intern………………………………………………………… 2

Certificate from the Organization……………………………………………………… 3
Acknowledgement…………………………………………..................………………. 4
Table of Contents……………………………………………………………................ 5
Executive Summary………………………………………………………………......... 6
Objective of the Study (Research Methodology)………………………………………. 7-8
College Profile………………………………………………………………………….. 9-12
Company’s Profile………………………………………………………………………..13-28
About Stock Market………………………………………………………………………28-
29
Stock Index……………………………………………………………………………….29-34
Indian Brokerage Industry………………………………………………………………..34-40
Introduction on Derivative………………………………………………………………..41-
45
Futures and Trading In Futures Segment….......................................................................45-52
What are Options………………………………………………………………………...52-54
Option Strategies………………………………………………………………………….55-
56
Hedging…………………………………………………………………………………..57-58
What is Hedge Fund……………………………………………………………………...58-59
Analysis and Interpretation………………………………………………………………60-67
Findings….... …………..………………………………………………………………...68-69
Suggestions and Conclusion……………………………………………………………..69-70
References………………………………………………………………………………70-71

Page 5
Executive Summary

This project has been a great learning experience for me; at the same time it gave me
enough scope to implement my analytical ability. This project as a whole can be divided
into two parts:

• The project gives an insight about derivatives and its various aspects. It is purely
based on whatever I learned at karvy. One can have brief knowledge about
derivatives and its hedging strategies using Futures and Options and all its basics
through the project.

 All the topics have been covered in a very systematic way. The language
has been kept simple so that even a layman could understand.

Hedging is nothing but to control or eliminate the risk to a certain extent. Derivatives are
an important tool to hedge the risk or position by dint 0f Future & option market.
My entire project report revolves around Derivatives as a tool of Hedging. This project
has been conducted at Karvy, Delhi to the best of my effort and determination.

Page 6
RESEARCH METHODOLOGY

Objective

Primary:

1) To understand about derivative market

2) To study how does a derivative has the risk or position
3) To know why the derivatives is considered safer then the cash market

Secondary:

1. To understand scope of derivatives in capital market

Research Approach:

Data collection:

1) Primary Data: - Formal and Informal Discussion with the company

guide and clients of the company.
2) Secondary Data: - Internet, Books, Newspapers, TV channels, News
Channels.

Page 7
Research Problem:

There are very few ways for hedging price risk or price volatility in equity markets and
derivatives is one of them. My study is to see how derivatives are used for hedging price
risk in equity market.

Limitation:

1) As research required detail information of portfolios of clients, which is very

confidential for the company, a huge difficulty was faced in getting the data.

2) As the company guide was very busy in his exhausting work schedule very
less guidance was available.

Scope of study:

1) As derivatives are very vast subject the scope of research is limited to the
financial derivatives viz. future & options.

2) Forwards has been kept out of the scope of this research.

3) Since options are widely used for hedging, only the options cases have been taken
into the consideration in my research.

Page 8
About Jaypee Business school

Jaypee Business School is the latest manifestation of the vision of our Revered Founder,
Hon’ble Shri Jaiprakash Gaur ji. The Jaypee Business School (JBS), a constituent of
Jaypee Institute of Information Technology (Deemed University) was started in the year
2007. It has made good progress in a short span of less than 3 years. The mission of JBS
is ‘to prepare and produce competent, passionate and market centric professionals who
can manage human resources, business operations and ensure world class quality
practices.’

JBS has state of the art infrastructure and highly competent and dedicated faculty for the
MBA programme. The programme aims to develop a competent cadre of business
executives to meet the country’s growing requirements for trained personnel’s in the field
of management.

MBA Programme At JBS

The JBS MBA programme, a six trimester general management programme, aims at
providing a comprehensive coverage incorporating all the important areas and disciplines
in management and inculcates a professional approach to business amongst the potential
managers. The syllabi for MBA compare favorably with the syllabi of some of the
world’s best Business Schools. The ability to put in sustained and disciplined hard work

Page 9
over a sufficient length of time is one of the key factors to success in professional life. A
typical trimester is designed to be intensive with an emphasis on regular and continuous
work. The Evaluation System is accordingly designed to encourage this concept.

Future Prospects of JBS

Future Programme includes the following:

• Three-year Part Time MBA Programme.

• Short Term Training Programmes, Consulting and Research etc.

MBA Programme At JBS

The JBS MBA programme, a six trimester general management programme, aims at
providing a comprehensive coverage incorporating all the important areas and disciplines
in management and inculcates a professional approach to business amongst the potential
managers. The syllabi for MBA compare favorably with the syllabi of some of the
world’s best Business Schools. The ability to put in sustained and disciplined hard work
over a sufficient length of time is one of the key factors to success in professional life. A
typical trimester is designed to be intensive with an emphasis on regular and continuous
work. The Evaluation System is accordingly designed to encourage this concept.

Corporate Profile of Jaypee Group

The Jaypee Group, with an annual turnover of over 6500 Crores (US$ 1.5b), is an
infrastructure conglomerate with a strong belief in the country’s huge potential. The

Page 10
Group’s business interests are in Engineering & Construction, Power, Cement,
Expressways, Real Estate, Hospitality and Education (not for profit). The group
companies have been well entrenched in infrastructure projects for over four decades.
Group’s indomitable spirit and uncompromising execution capability has made it
complete some of the largest projects in India as on date. Empowered with self belief &
determination to excel and make the organization contribute in Nation building through
entrepreneurial daring, it focuses on all round growth.
The group’s commitment is to grow with a human face.

Engineering and Construction

The Engineering & Construction wing of the group is an acknowledged leader in the
construction of multi-purpose river valley and hydropower projects and has the unique
distinction of completing various projects in different capacities in the 10th five year plan
to provide 7880 MW of hydropower to the nation.

Power

The Group, being an integrated power player in the country, after having established a
strong presence in the Hydro-Power Sector, has initiated its entry into Thermal Power
Generation, Power Transmission and also forayed into Wind Power. With 700 MW of
hydropower generating capacity, it is the largest private sector hydropower producer and
poised to be 13470 MW power entities by 2018.

Cement

Jaypee Cement, the third largest cement player in the country with an aggregate capacity
of 14.70 MTPA is poised to be a 30 MTPA cement producer by 2011 with Captive
Thermal Power plants totaling 342 MW, through expansion in the Northern, Southern,
Central, Eastern, and Western regions of the country.

Expressways

Page 11
The Group is poised to complete by December 2010, 165 Km long 6/8 lane super
expressway between Greater Noida and Agra (Yamuna Expressway Project) to usher
growth and development across rural India. Ribbon development shall take place along
Yamuna Expressway at 5 locations with integrated townships to be constructed on 2500
hectares (6250 acres) of land

Real Estate

A premium 452 lifestyle real estate destinations, Jaypee Greens, Greater Noida offers
luxury villas and apartments with an 18-hole Greg Norman Signature golf course,
landscaped parks and lakes along with an integrated sports club.

Jaypee Greens has launched ‘Wish Town’ in Noida, a historic residential township stated
to be India’s largest township development on over 1162 acres. The Group will also
construct state-of-the-art Formula-I racing tracks in Greater Noida.

Hospitality

The hospitality division owns and operates four 5-star hotels, two in the national capital,
New Delhi and one each in Agra and Mussoorie. The Group is also constructing a
boutique spa cum resort at Greater Noida. The hotels have a total capacity of 644 rooms.

Education

It is the belief of the Founder Chairman that imparting quality education is the best
service that an organization can provide to the society’. The group supports various
educational initiatives at all levels of the learning curve through Jaiprakash Sewa
Sansthan (JSS) - a not-for-profit trust.

Today with 17 schools, 3 ITIs, 2 Polytechnics, and 3 Universities (JIIT, JUIT and JIET),
THE Jaypee Education System is touching the lives of over 25,000 students. The System
plans to take the vision of service to society through quality education to another plane

Page 12
by expanding its infrastructure to provide education to approximately 100,000 students
over the next 5-year period.

Organization overview

Introduction:

“Success is a journey, not a destination.” If we look for example to prove this

quote then we can find many but there is none like that of Karvy. Back in the year
1981, five people created history by establishing the Karvy and co. which is today
known as Karvy, the largest financial service provider of India.

Success sutras of Karvy:

The success sutra of karvy is driven by 8 success sutras adopted by it namely trust,
integrity, dedication, commitment, enterprise, hard work and tem play, learning and
innovation, empathy and humility. These are the values that bind success with karvy.

Vision of Karvy:

To achieve and sustain market 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.

Page 13
Mission Statement:

“Our mission is to be a leading and preferred service provider to our customers, and
we aim to achieve this leadership position by building an innovative, enterprising,
and technology driven organization which will set the highest standards of service
and business ethics.”

Company overview:

Karvy was established as Karvy and company by five Chartered Accountants during the
year 1979-80, and then its work was confined to audit and taxation only. Later on it
diversified into financial and accounting services during the year 1981-82 with a capital
of Rs.150000. it achieved its first milestone after its first investment in technology.
Karvy became a known name during the year 1985-86 when it forayed into capital
market as registrar.

Evolution of KARVY:

It is well said that success is a journey not a destination and we can see it being proved
by Karvy. Under this section we will see that how this “Karvy And Company” of 1980
became “Karvy” of 2010. Karvy blossomed with the setting up of its first branch at
Mumbai during the year 1987-88. The turning point came in the year 1989 when it
decided to enter into one of the not only emerging rather potential field too i.e.; stock
broking. It added the feather of stock broking into its cap. At the same time it became the
member of Hyderabad Stock Exchange through associate firm Karvy Securities Ltd and
then Karvy never looked back. It went on adding services one after another; it entered
into retail stock broking in the year 1990. Karvy investor service centers were set up in
the year 1992. Karvy which already enjoyed a wide network through its investor service
centers, entered into financial product distribution services in the year 1993. One year

Page 14
more and Karvy was now dealing into mutual fund services too in the year 1994 but it
didn’t stopped there, it stepped into corporate finance and investment banking in the year
1995.

Karvy’s strategy has always been being the first entrant in the market. Karvy again hit
the limelight by becoming the first registrar in the country to be awarded ISO 9002 in the
year 1997. Then it stepped into the other most happening sector i.e.; IT enabled services
by establishing its own BPO units and at a gap of just 1 year it took the path of E-
Business through its website www.karvy.com . Then it entered into insurance services in
the year 2001 with the launch of its retail arm “karvy- the finapolis: your personal
finance advisor”. Then in the year 2002 it launched its PCG (Private Client Group)
which looks after its High Net worth Individuals .and maintain their portfolio and
provides them with other financial services. In the year 2003, it commenced secondary
debt and WDM trading.
It was a decade which saw many Indian companies going global…..so why the largest
financial service provider of India should lag behind? Hence, Karvy launched “Karvy
Global Services Limited” after entering into a joint venture with Computer share,
Australia in the year 2004.the year 2004 also saw Karvy entering into commodities
marketing through Karvy Comtrade.
Year 2005 saw Karvy establishing a separate branch for its insurance services under the
head “Karvy Insurance Broking Ltd” and in the same year, after being impressed with
the rapid growth of Karvy Stock Broking Limited, PCG group of Hong Kong acquired
25% stake at KSBL. In the year 2006, karvy entered into one of the hottest sector of
present time i.e. real estate through Karvy realty& services (India) ltd. hence, we can
see now karvy being established as the largest financial service provider of the country.

Now Karvy group consists of 8 highly renowned entities which are as follow:

1. : The first securities registry to receive ISO 9002 certification in

India. Registered with SEBI as Category I Registrar, is Number 1 Registrar in the

Page 15
Country. The award of being ‘Most Admired’ Registrar is one among many of the
acknowledgements we received for our customer friendly and competent services.

2. : Karvy Stock Broking Ltd. consists of five units namely stock

broking servics, depository participant, advisory services, distribution of financial
products, advisory services and private client goups.

3. : It is registered with SEBI as a category 1 merchant banker. Its

clientele includesinclude leading corporate, State Governments, foreign institutional
investors, public and private sector companies and banks, in Indian and global markets.

4. : Karvy insurance broking ltd is also a part of karvy stock broking

ltd. At Karvy Insurance Broking Limited both life and non-life insurance products are
provided to retail individuals, high net-worth clients and corporates.

5. : The company provides investment, advisory and brokerage

services in Indian Commodities Markets. And most importantly, it offer a wide reach
through our branch network of over 225 branches located across 180 cities.

6. : Karvy Global is a leading business and knowledge process

outsourcing Services Company offering creative business solutions to clients globally. It
operates in banking and financial services, inurance, healthcare and pharmaceuticals,
media , telecom and technology. It has its sales and business development office in New
York, USA and the offshore global delivery center in Hyderabad, India

7. : Karvy Realty (India) Limited is engaged in the business of real

estate and property services offering:

Page 16
 • Buying/ selling/ renting of properties
• Identifying valuable investments opportunities in the real estate sector
• Facilitating financial support for real estate and investments in properties
• Real estate portfolio advisory services

8. : It is a joint venture between Computershare, Australia and Karvy

Consultants Limited, India in the registry management services industry.

Organization structure of Karvy:

Talking about the organization structure of karvy, we have the board of directors as the
supreme governing body , the chairman being Mr. C. Parthasarthy, Mr. M. Yugandhar as
the managing director, Mr M.S. Ramakrishna and Mr. Prasad V. Potluri as directors.

The board of directors head the karvy group, karvy computershares limited, karvy
investors services ltd., karvy comtrade, karvy stock broking ltd., and karvy global
services ltd.

Karvy group being the flagship company looks after the functional departments such as
corporate affairs, group human resources, finance & accounting, training & development,
technology services and corporate quality.

Karvy computershare private limited facilitates mutual fund services, share registry and
issue registry whereas merchant banking is looked after by karvy investor services ltd.
Karvy stock broking ltd heads its another branch too ie. Karvy insurance broking ltd. The
services offered by KSBL are: stock broking, depository, research, distribution, personal
client group and institutional desk. And finally the BPO services are managed by karvy
global services ltd. Summarizing it in a diagram, it can be presented as:

Page 17
Spectrum of services offered by Karvy:

Karvy being the top registrar and transfer agent, functions as registrar in most of the
issues in the country. Talking about the mutual fund services offered by karvy, we can
get the products of 33 AMCs over here. it deals in both closed ended funds as well as
open ended too. Now one must be thinking why to get the mutual funds from karvy
instead of getting it directly from AMCs???we have great reasons for it: the first one
being ; if we avail the services of karvy then we can get the information about all the
AMCs and their products at a single place along with expert recommendations whereas at
an AMC we can get information about the products of that specific AMC only. And the
second being wide network of karvy….nowadays we can find karvy offices at remote
areas too.

Page 18
Along with these, karvy is very well handling the role of depository participant. Being
registered with both the depositories i.e.; NSDL (national securities depository ltd) and
CDSL (central depository services ltd), karvy can have access to both. Its wide network
also facilitates it in distribution of retail financial products.

Karvy believes in being updated always. So it is always ready to use latest technologies
so that its clients always be in touch with the latest happenings along with karvy. It offers
e-business through internet through its website: karvy.com. Other than it, it also provides
its various services through SMSes.

Karvy’s services are not limited to its investors only rather its offerings are for its
corporate clients and distributors too. it is very well aware of the fact that in this era of
neck to neck competition, we cant ignore any of the aspects of our business….so there’s
a offering for everybody…everyone’s welcome at Karvy.

Why should investors choose for Karvy?

Excellence is next to nothing .and here at karvy everybody tries their best to offer
excellent services to its clientele through its offerings maintaining the karvy culture
which includes:

1. Controlled and low cost service culture: Karvy is there to serve its client at the
minimum possible cost. It controls cost by its various cost- cutting techniques and
minimization of avoidable costs.

2. Large volume processing capability: Being the largest financial service provider in
the country, it has the unique distinction of operating its activities on a large scale which
benefits all the parties cordially.
3. Adherence to strict time schedule: Karvy knows that time is money and tries it best
to finish the task within the stipulated time schedule.

Page 19
4. Expertise in coordinating multi-location responses: Karvy has got a wide network
and hence one can find its branches at most of the places in India. Thus it enjoys its
presence everywhere and coordinates among itself in solving the queries and in
responding to any situation.

5.Expertise in managing independent entities such as banks, post-office etc.: The

work culture of karvy and the ethics followed inside karvy makes its workforce
compatible with everybody, so the karvy people establishes good coordination with
independent entities too.

6. Pooling of group resources: Karvy group consists of eight subsidiaries, so it can

easily pool up its resources for accomplishment of its goals, whenever needed. The
groups can help each other whenever there are peaks and lows, and even in the case when
they have huge targets just as we saw few years back, Tata group pooling its resources to
acquire Corus.

How karvy achieved it?

The core competency of karvy lies in the following points due to which it enjoys a
competitive edge over its competitors. The following culture adopted by karvy makes it
all time favorite among its clientele:

1. Professionally managed by qualified and trained manpower.

2. Uniquely structured in-house software and hardware department
3. Query handling within 48 hrs.
4. Strong secretarial, accounting and audit systems.
5. Unique work culture of working 7 days a week in 3 shifts.
6. Unmatched network spreading all over India.

Page 20
How Achievements sounds synonymous to Karvy:

The landmarks achieved by Karvy very well define its success story. In the previous
pages, we learnt how a company started by five chartered accountants, named as Karvy
and company turned into today’s Karvy Group, the largest financial intermediary of
India. But success didn’t came to Karvy at a flow, the hard work and dedication of its
workforce made it what it is today…gradually it achieved the following landmarks and
now it has became what we call the Karvy group, now it is:

1. Largest independent distributor for financial products.

2. Amongst the top 5 stock broker.
3. Among the top 3 depository participants.
4. Largest network of branches & business associates.
5. ISO 9002 certified operations by DNV.
6. Amongst top 10 investment bankers.
7. Adjudged as one of the top 50 IT users in India by MIS
south Asia.
8. Full- fledged IT driven operation.
9. India’s no.1 registrar & securities transfer agent.

Clientele of Karvy:

Karvy’s culture has helped karvy in achieving such a distinct position in the market
where it can boast of its huge client base. Be it a retail investor investing Rs. 500 in a SIP
in Reliance mutual fund or be it the largest corporate house of the country: Reliance
industries- everybody is heading towards karvy for their wealth maximization, let’s have
a look at the clientele of karvy:

According to the data published in year 2007, karvy stock broking ltd. Operates
through more than 12000 terminals, more than 290000 accounts are maintained and

Page 21
commands over 3.14% market share of NSE. The distribution services have access to
more than Rs.40 billion Assets under Management. Karvy being a depository participant
with both NSDL and CDSL manages more than 700000 accounts from more than 380
locations. Talking about the registry services, it manages over 750 public/ right issues at
the same time; it is managing over 16 million portfolios as registrar.

If we took a look at some of the top corporate houses availing the services of karvy then
we have: Reliance, IOC, IDBI,LIC, Hindustan Unilever, Principal Mutual Fund,
Duetsche Mutual Fund, Yogokawa, Marico Industries, Patni Computers, Morgan
Stanley, Glenmark, CRISIL, 3M, Kotak Mahindra Bank, Bharti Televenture, Infosys
Technologies, Wipro, Infotech, IPCL,TATA consultancy services, UTI mutual fund etc.
Thus in total karvy serves over 16 million investors and 300 corporates.

Since the project was carried on in Delhi, so there is a special reference to working
of Karvy at Northern Zone and stock market in particular.

KARVY at northern zone:

Karvy stock Broking Ltd at Arunachal Building, Barakhamba Road which is

established as the regional head office. Presently Mr. Jitendra Rai Singhania is heading
the northern zone. Talking about the zonal offices, Karvy has zonal offices at Lucknow,
Rajasthan, Chandigarh. Each zonal office has got its own zonal heads. Karvy is a
member of three stock exchanges of India: National Stock Exchange (NSE),
Bombay Stock Exchange (BSE) and Hyderabad Stock Exchange (HSE).

Page 22
Hierarchical Structure in diagram:

The above diagram shows the hierarchy of Karvy stock broking ltd. It can be easily
depicted from the diagram that the regional head (presently Mr. Jitendra Rai
Singhania) is the supreme in the northern region, under whom the various zonal heads
operate and under these zonal heads, the branch heads operate. Between each level of the
hierarchy, there exists a coordinator, who acts as the facilitator between the different
heads.

Karvy at New Delhi:

Now if we look at karvy’s branch offices at Delhi, then there exist eleven branches of
karvy at New Delhi, which are as follow:

1. Arunachal Building, Barakhaba Road

2. Ansal Chamber, Bhikajikama Place
3. Bahadurshah Zafar Marg, ITO
4. Suneja Tower I, Distt. Centre, Janakpuri
5. Shivaji Marg, Moti Nagar
6. Vishal Bhavan, Nehru Place
7. D.D.Market, Paschim Vihar
8. Savitri Sadan, Preet Vihar
9. Vikrant Tower, Rajendra Place
10. Nanda Devi Tower, Rohini

Page 23
 11. Sector-B, Vasant Kunj
Structure according to the Products offered by Karvy:

REGIONAL
HEADS

PRODUC
T
HEADS
HEA
Debt
divisi
Realty
on

Insura Depos Merch

Mutua comm Stock
nce itory ant &
l oditie brokin
brokin partici inv.ba PMS
funds s g
g pant nking

Page 24
Mutual fund Services

Investment is the stepping stone to achieving one's financial dreams. Mutual funds offer
an opportune way to long-term wealth creation. However, with more and more funds
flooding the market, the task of selecting the most suitable scheme gets even more
complicated. Mutual Fund Advisory Service at Karvy guides you through this maze and
ensures that your investments are backed by our quality research. We, at Karvy help you
to reach your goals by offering:

• Products of 33 AMCs
• Research reports (existing funds & NFOs; strategy reports etc.)
• Customized mutual fund portfolios
• Portfolio revision (depending on changing market outlook and evolving trends)

Depository Services
SERVICES
KARVY Stock Broking Limited provides depository services to investors as a
Depository Participant with the National Securities Depository Limited (NSDL) and
Central Depository Services (India) Limited (CDSL). The Depository system in India
links Issuers, National level Depositories, Depository Participants and Clearing Houses /
Clearing Corporation of Stock Exchanges. Our demat services are accessible through any
of our network of over 575 branches / investor service centers located in over 375 cities
and towns across the country.

Our demat services business has the distinction of having all its operations ISO 9001:
2000 certified with state-of-the-art technology and operations capabilities. Our demat
services has innovated over time and we provide online access to account statements and
transaction alerts through SMS to its clients.

Page 25
KARVY Demat services offer you a secure, convenient and paperless way to keep track
of your investments in shares and other security instruments over time, without the hassle
of handling paper based transcripts.

We provide the following services:

• Dematerialization of Shares
• Rematerialization of Shares
• Transfer of Shares
• Pledging of Shares
• Electronic Custodial Services
• Maintenance of Beneficial Holdings
• Electronic Credit Against Corporate Actions

Insurance Broking Services

At Karvy Insurance Broking (P) Ltd. we provide both life and non-life insurance
products to retail individuals, high net-worth clients and corporates. With the opening up
of the insurance sector and with a large number of private players in the business, we are
in a position to provide tailor made policies for different segments of customers. In our
journey to emerge as a personal finance advisor, we will be better positioned to leverage
our relationships with the product providers and place the requirements of our customers
appropriately with the product providers. With Indian markets seeing a sea change, both
in terms of investment pattern and attitude of investors, insurance is no more seen as only
a tax saving product but also as an investment product. By setting up a separate entity,
we would be positioned to provide the best of the products available in this business to
our customers.

Our wide national network, spanning the length and breadth of India, further supports
these advantages. Further, personalized service is provided here by a dedicated team
committed in giving hassle-free service to the clients.

Page 26
Portfolio Management Service

In today's intricate and volatile market your investment requires constant monitoring and
attention. The demand made on your time and energy by other business may not leave
you with capacity to attend to your personal portfolio with the degree of care you deem
appropriate. We at KARVY understand your situation and offer PMS services taking the
same level of care and attention you would devote to monitoring your portfolio.

GreenWallet is an endeavour specially designed by Karvy to enhance the wealth of a

niche segment of investors. This service primarily meant for HNIs (High Networth
Individuals) offers customers a wide range of schemes. These unique schemes seek to
achieve higher returns through broad based participation in equity markets. This is
achieved by creating a diversified equity portfolio of small, medium and large capitalized
companies.

WHAT IS PMS?

PMS gives investors access to an institutional process of money management it provides

a customized solution by matching the unique circumstances and objectives of each
investor.
Wealth creation based on disciplined investment process is the crux of PMS
Effective diversification helps reduce portfolio volatility and enhances risk-adjusted
returns over long term

PMS gives investor direct ownership of the individual securities in the portfolio

Research

With a full fledged research team comprising of qualified professionals, technical

analysts and fundamental specialists, Karvy offers qualitative insights into the market
scenario on various industry segments. With a proven track record of providing the best

Page 27
value for money, Karvy’s research aims at giving investors that extra edge to make
smarter investments.

Research Capability:

• Karvy research was rated in Asiamoney for its IT and Mid cap coverage
• Karvy has research experience of more than nine years
• The research department comprises of 20 research analysts
• The analysts experience ranges from 3 to 18 years

ALL ABOUT STOCK MARKET

The stock market system is an avenue of how to trade stock for listed corporations. As a
corporation is formed, its initial shareholders are able to acquire shares of stock from the
point of subscription when a company is created. When a company starts to be traded to
the public, the primary market comes in where those who subscribe to the initial public
offering (IPO) takes on the shares of stock sold from point of IPO. When those who
bought into a company at IPO point of view decides to sell their shares of stock to other
people, they can do so by going to the stock market.

The stock market is a secondary market for securities trading wherein original or
secondary holders of a company’s shares of stock can sell their stocks to other
individuals within the frame work of the stock market system.

The stock market has buyers of stocks or those who wants to own a part of the company
but wasn’t able to do so during the initial public offerings made by the company to the
public when it has decided to list itself as a publicly listed company. The secondary
market or the stock market allows other individuals to sell shares of the company when
the initial shareholders may have realized that they want to sell their shares after gaining
either significant profit or realized significant loss from point of acquiring a company
from its IPO price

Page 28
PRIMARY & SECONDARY MARKET

There are two ways for investors to get shares from the primary and secondary
markets. In primary markets, securities are bought by way of public issue directly
from the company. In Secondary market share are traded between two investors.

Primary Market: Market for new issues of securities, as distinguished from the
Secondary Market, where previously issued securities are bought and sold.

Secondary Market: The market where securities are traded after they are initially
offered in the primary market. Most trading is done in the secondary market.

Stock Market Index

“It’s ironical that something as huge as a stock market which should be stable as it
represents the economy of a nation, is actually extremely volatile since it is driven more
by the sentiments of the people“ Stock Market is a place where the stocks of a listed
company are traded. A single figure that sums up the overall performance of the market
on a daily basis is the Stock Index. A good Stock Index captures the movement of the
well diversified and highly liquid stocks. For a lay man it is the pulse rate of the
economy. Index movements reflect the changing expectations of the stock market about
future dividends of the corporate sector. The index is calculated by finding the weighted
average of the prices of the most actively traded companies in the market, where the
weights are generally in proportion to the market capitalization of the company.

But when and where did it all start?

In India, the Stock Exchange, Mumbai, was established in 1875 as "The Native Share
and Stockbrokers Association" (a voluntary non-profit making association) and is now
popularly known as the Bombay Stock Exchange (BSE). The other major exchange is the
National Stock Exchange of India Limited (NSE) and was incorporated in November

Page 29
1992. Combined the two trading zones are responsible for 99.9% of the trading done in
India.

Types of Indexes available:-

 Broad-Market Index: This consists of all the large, liquid stocks of the
country and becomes the benchmark for the entire capital market of the country.
An example for this is the S&P CNX 500.
 Specialized Index: We can either have Industry or Sector specific Index for
any particular sector of the economy which then serves as the benchmark for that
particular industry or we can have an index for the highly liquid stocks. Taking
an example for an industry specific index we have the S&P Banking Index which
is a capitalization-weighted index of 26 domestic equities traded on the New
York Stock Exchange and NASDAQ, The stocks in the Index are high-
capitalization stocks representing a sector of the S&P 500. Similarly, The S&P
CNX Nifty is a relevant example for an index composed of highly liquid stocks

Determinants of a Stock Index

Following parameters should be taken into picture before one constructs a stock index:

 Liquidity – Liquidity of stocks as measured by the “impact cost” criterion which

determines the cost faced when actually trading the index. For example if the current
market price of a stock is Rs 200 and a trader purchases it at Rs 202 (due to involved
transaction costs) then the market impact cost is 1% and the stock is considered
highly liquid for lower impact cost.

 Diversification – Diversification, by putting stocks of various sectors that reflect

the economy, is used to cancel out stock noise which is essentially the individual
stock fluctuations and to reduce investor’s risks. An index must thus have a balanced
representation of all sectors.

Page 30
  Optimum size - More stocks lead to greater diversification but the limiting factor
is the size of the index. Increasing number of stocks in an index from 10 to say 30
gives a sharp reduction in risks but increasing the number beyond a point does very
little in risk reduction. Further it might lead to addition of illiquid stocks. For
example, the optimal size for BSE Sensex is 30.

 Market Capitalization: The index should include primarily the stocks of

companies that have significant market capitalization with respect to the index such
that any major change in the price of the stock is reflected in the index. For example
in BSE 30 Index, the scrip must have a minimum of 0.5% of the market capitalization
of the Index.

 Averaging - Every stock primarily moves for two reasons: The news about the
company and the news about the country. An ideal index is affected only by the
latter, that is the news of the economy and the effect of the former is knocked out by
proper averaging. The various methods of averaging employed are:

1. Price Weighted: The weights assigned are proportional to the stock

prices.
2. Market Capitalization Weighted: The equity price is weighted by the
market capitalization of the company. Hence each constituent stock in the
index affects the index value in proportion to the market value of all
outstanding shares.

(Current market capitalization)

Index = ---------------------------------------- x Base Value

(Base Market Capitalization)

Where:

CMS = Sum of (current market price * outstanding shares) of all securities in the index
Page 31
BMS = Sum of (market price * issue size) of all securities as on base date.

1. Equal Weighted: The weights are equal and assigned irrespective of both
markets Capitalization or price Index revision is done periodically taking into
consideration the factors mentioned above. The relevant index body makes clear,
researched and publicly documented rules for this purpose. These rules are applied
regularly, to obtain changes to the index set. However, it is ensured that the value of
the index does not change significantly after the revision of the index set.

2. Sensex (BSE 30): The index includes 30 companies which figure in top 100 in
terms of market capitalization and are also among the leaders in their industry groups.
Presently the following are the constituent companies: ACC, Infosys, ICICI Bank,
Dr. Reddy’s Lab, SBI, CIPLA, Zee Telefilms, Nestle India, RPL, RIL, HCL Tech.,
Bajaj Auto, BHEL, Castrol, BSES, Colgate Palmolive, Hindalco, Grasim, Glaxo,
Hero Honda, Gujrat Ambuja Cements, HLL, HPCL, ITC, L&T, MTNL, Ranbaxy,
TISCO, TELCO and Satyam.

Standard and Poor’s CRISIL NSE Exchange NIFTY

S&P CNX NIFTY is an S&P endorsed Stock Index owned by the India Index Services
Ltd. (IISL). It is a highly diversified index, accurately reflecting the overall market
conditions and is composed of 50 liquid stocks. It is backed by solid economic research
and three extremely respected organizations (NSE, CRISIL and S&P).

Signals from the Stock Index

The Index finds uses in various fields starting from economic research to helping
investors choose appropriate portfolio for investment. For example the index funds are
funds that passively invest in the market i.e. the portfolio returns of the index funds is
same as that of the Index. Since the Index is an indicator of the overall mood of the
investors in the secondary market, it helps a company answer questions like is it the right
time to take out an IPO, how to price the issue, etc.

Page 32
It acts as a signal to the government of the ‘feel good’ factor prevailing in the economy.
As much as the finance ministry may want to ignore it, the performance of the stock
market right after the introduction of the budget gives an immediate feedback to the
Finance Minister about the acceptability of the budget.

However, the market index is a double edged sword. Because the index is influenced by
expectations of the future performance of the stocks, it leads to a self fulfilling prophecy.
Suppose an investor thinks that the stock of the company is going to go down and this
feeling prevails across the market then everyone would want to get out of the company’s
stock. This will automatically lead to the stock prices crashing.

The Stock Index can often also act as a trigger to herd mentality. Any downturn in the
market would be reinforced by the collective action of the investors to hedge against any
losses and get out of the market. This would further depress the market. This herd
mentality is often used to the advantage of speculators. The speculator buys long thus
creating waves in the market that the stock he is investing in is ‘hot’. Thus everyone
would follow suit giving the speculator a good short term profit margin.

The stock index is often more a representation of investors’ perceptions (noise element)
rather than real news. The dot com bubble of 2000 is a case in point. There was a rush of
investment in anything even remotely connected with information-technology driving up
the stock prices way above what they should have been according to their P/E ratios.

Thus it can be seen that though the index is a popular investor’s guide, it is riddled with
imperfections which can often confuse rather than help. The index popularly used in
India is the NSE CNX Nifty. There are processes afoot to reduce the pure noise element
and speculative margin of the index. The basic problem arises due to imperfect
information reflected by the inclusion of illiquid stocks in the calculation of the index.
Illiquid stock is one which is not actively traded in the market or has been lying dormant
for a long time. Inclusion of such stocks leads to problems of stale prices, bid-ask bounce
and ease in manipulation.

Page 33
 Bid-ask bounce: Illiquid stocks have a wide bid-ask spread. Thus even when no
news is breaking, when a stock price is not changing, the `bid-ask bounce' is about
prices bouncing up and down between bid and ask. Such changes are spurious in
nature.
 Stale prices: A stock index is supposed to represent the state of the stock market at
the closing time (3:30 pm in NSE) on a particular day. However the last traded price
of an illiquid stock (if included in the index) may be even a week old thus distorting
the index.

Hence to make an index useful, there has to be continuous evaluation of the stocks listed
and any stock which remains inactive for a period of time should be de-listed or removed
from the index. A prudent investor is one who exercises caution while interpreting the
market index, taking into account all its inconsistencies.

Indian Equity Brokerage Industry Profile

While regulation and reforms have made major improvements in the quality of the equity
markets in India, its rapid growth and development are largely due to strong and efficient
market intermediation. The robustness of the Indian markets today is attributable to a
healthy blend of the quality of market structure and efficient intermediation. Even as
several countries are instituting procedures to commence equity derivative markets, India
ranks amongst the top five countries globally in this segment, in less than five years of its
introduction. This is an example of the proactive and progressive nature of the Indian
brokerage industry. In the last decade, the Indian brokerage industry has undergone a
dramatic transformation. From being made of close groups, the broking industry today is
one of the most transparent and compliance oriented businesses. Long settlement cycles
and large scale bad deliveries are a thing of the past with the advent of T+2 settlement
cycle and dematerialization. Large and fixed commissions have been replaced by wafer
thin margins, with competition driving down the brokerage fee, in some cases, to a few
basis points. There have also been major changes in the way business is conducted.
Technology has emerged as the key driver of business and investment advice has become
research based. At the same time, adherence to regulation and compliance has vastly

Page 34
increased. The scope of services have enhanced from being equity products to a wide
range of financial services. Investor protection has assumed significance, and so has
providing them with education and awareness. Greater need for capitalization has
induced several firms to access the capital market; foreign firms are showing increasing
interest in taking equity stakes in domestic broking firms.

Major developments in equity brokerage industry in India:

1. Corporate memberships: There is a growing surge of corporate

memberships (92% in NSE and 75% in BSE), and the scope of functioning of the
brokerage firms has transformed from that of being a family run business to that of
professional organized function that lays greater emphasis on observance of market
principles and best practices. With proliferation of new markets and products,
corporate nature of the memberships is enabling broking firms to expand the realm of
their operations into other exchanges as also other product offerings. Memberships
range from cash market to derivatives to commodities and a few broking firms are
making forays into obtaining memberships in exchanges outside the country subject
to their availability and eligibility.

2. Wider product offerings: The product offerings of brokerage firms today go

much beyond the traditional trading of equities. A typical brokerage firm today offers
trading in equities and derivatives, most probably commodities futures, exchange
traded funds, distributes mutual funds and insurance and also offers personal loans
for housing, consumptions and other related loans, offers portfolio management
services, and some even go to the extent of creating niche services such as a
brokerage firm offering art advisory services. In the background of growing
opportunities for investors to invest in India as also abroad, the range of products and
services will widen further. In the offing will be interesting opportunities that might
arise in the exchange enabled corporate bond trading, soon after its commencement

Page 35
 and futures trading that might be introduced in the near future in the areas of interest
rates and Indian currency.

3. Greater reliance on research: Client advising in India has graduated from

personal insights, market tips to becoming extensively research oriented and
governed by fundamentals and technical factors. Vast progress has been made in
developing company research and refining methods in technical and fundamental
analysis. The research and advice are made online giving ready and real time access
to market research for investors and clients, thus making research important brand
equity for the brokerage firms.

4. Accessing equity capital markets: Access to reliable financial resources

has been one of the major constraints faced by the equity brokerage industry in India
since long. Since the banking system is not fully integrated with the securities
markets, brokerage firms face limitations in raising financial resources for business
and expansion. With buoyancy of the stock markets and the rising prospects of
several well organized broking firms, important opportunity to access capital markets
for resource mobilization has become available. The recent past witnessed several
leading brokerage firms accessing capital markets for financial resources with
success.

5. Foreign collaborations and joint ventures: The way the brokerage

industry is run and the manner in which several of them pursued growth and
development attracted foreign financial institutions and investment banks to buy
stakes in domestic brokerage firms, paving the way for stronger brokerage entities
and possible scope for consolidation in the future. Foreign firms picked up stake in
some of the leading brokerage firms, which might lead to creating of greater interest
in investing in brokerage firms by entities in India and abroad.

6. Specialized services/niche broking: While supermarkets approach are adopted in

general by broking firms, there are some which are creating niche services that attract

Page 36
 a particular client group such as day traders, arbitrage trading, investing in small cap
stocks etc, and providing complete range of research and other support to back up this
function.

7. Online broking: Several brokers are extending benefits of online trading through
creation of separate windows. Some others have dedicated online broking portals.
Emergence of online broking enabled reduction in transaction costs and costs of
trading. Keen competition has emerged in online broking services, with some of these
offering trading services at the cost of a few basis points or costs which are fixed in
nature irrespective of the volume of trading conducted. A wide range of incentives
are being created and offered by online brokerage firms to attract larger number of
clients.

8. Compliance oriented: With stringent regulatory norms in operation, broking

industry is giving greater emphasis on regulatory compliance and observance of
market principles and codes of conduct. Many brokerage firms are investing time,
money and resources to create efficient and effective compliance and reporting
systems that will help them in avoiding costly mistakes and possible market abuses.
Brokerage firms now have a compliance officer who is responsible for all compliance
related aspects and for interacting with clients and other stake holders on aspects of
regulation and compliance.

9. Focus on training and skill sets: Brokerage firms are giving importance and
significance to aspects such as training on skill sets that could prove to be beneficial
in the long run. With the nature of markets and products becoming more complex, it
becomes imperative for the broking firms to keep their staff continuously updated
with latest development in practices and procedures. Moreover, it is mandated for
certain types of dealers/brokers to seek specific certification and examinations that
will make them eligible to carry business or trade. Greater emphasis on aspects such
as research and analysis is giving scope for in-depth training and skills sets on topics

Page 37
 such as trading programs, valuations, economic and financial forecasting and
company research.

10. From owners to traders: A fundamental change that has taken place in the
equity brokerage industry, which is a global trend as well, is the transformation of
broking from owners of the stock exchange to traders of the stock market.
Demutualization and corporatization of stock exchanges bifurcated the ownership and
trading rights with brokers vested only with the later and ownership being widely
distributed. Demutualization is providing balanced welfare gains to both the stock
exchanges and the members with the former being able to run as corporations and the
latter being able to avoid conflict of interests that sometimes came as a major
deterrent for the long term growth of the industry.

11. Emerging challenges and outlook for the brokerage industry: Brokerage firms in
India made much progress in pursuing growth and building professionalism in
operations. Given the nature of the brokerage industry being very dynamic, changes
could be rapid and so as the challenges that emerge from time to time. A brief
description on some of the prospects and challenges of the brokerage firms are
discussed below.

12. Fragmentation: Indian brokerage industry is highly fragmented. Numerous small

firms operate in this space. Given the growing importance of technology in
operations and increasing emphasis on regulatory compliance, smaller firms might
find it constrained to make right type of investments that will help in business growth
and promotion of investor interests.

13. Capital Adequacy: Capital adequacy has emerged as an important determinant

that governs the scope of business in the financial sector. Current requirements
stipulation capital adequacy in regard to trading exposure, but in future more tighter
norms of capital adequacy might come into force as a part of the prudential norms in
the financial sector. In this background, it becomes imperative for the brokerage

Page 38
 firms to focus on raising capital resources that will enable to give continuous thrust
and focus on business growth.

14. Global Opportunities: Broking in the future will increasingly become

international in character with the stock markets being open for domestic and
international investors including institutions and individuals, as also opportunities for
investing abroad. Keeping abreast with developments in international markets as also
familiarization with global standards in broking operations and assimilating major
practices and procedures will become relevant for the domestic brokerage firms.

15. Opportunities from regional finance: Regional economic integration

such as that under the European Union and the ASEAN have greatly benefited
businesses in the individual countries with cross border opportunities that helped to
expand the scope and significance of the business. Initial measures to promote South
Asian economic integration is being made by governments in the region first at the
political level to be followed up in regard to financial markets. South Asian economic
integration will provide greater opportunities for broking firms in India to pursue
cross border business. In view of several of common features prevailing in the
markets, it would be easier to make progress in this regard.

16. Product Dynamics: As domestic finance matures and greater flow of cross
border flows continue, new market segments will come into force, which could
benefit the domestic brokerage firms, if they are well prepared. For instance, in the
last three to four years, brokerage firms had newer opportunities in the form of
commodities futures, distribution of insurance products, wealth management, mutual
funds etc, and as the market momentum continues, broking firms will have an
opportunity to introduce a wider number of products.

17. Competition from foreign firms: Surging markets and growing

opportunities will attract a number of international firms that will increase the pace of
competition. Global firms with higher levels of capital, expertise and market

Page 39
 experience will bring dramatic changes in the brokerage industry space which the
local firms should be able to absorb and compete. Domestic broking firms should
always give due focus to emerging trends in competition and prepare accordingly.

18. Investor Protection: Issues of investor interest and protection will assume
centre stage. Firms found not having suitable infrastructure and processes to ensure
investor safety and protection will encounter constraints from regulation as also class
action suits that investors might bring against erring firms. The nature of penalties
and punitive damages would become more severe. It is important for brokerage firms
to establish strong and streamlined systems and procedures for ensuring investor
safety and protection.

Derivative introduction:

A derivative is a product whose value is derived from the value of one or more basic
variables called bases (underlying assets index) in a contractual manner. The underlying
assets can be equity, forex, commodity, bullion or any other assets. The emergence of the
market for derivative products, most notably forwards, future & option can be traced
back to the willingness of risk adverse economic agent 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 derivatives
products, it is possible to partially or fully transfer price risks by locking in asset price.

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
derivative. The price of this derivative is driven by the spot price of wheat, which is the
“underlying”.

The financial derivatives came into spotlight in 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 third of total
Page 40
transactions in the derivatives products. In recent years, the market for financial
derivatives has grown tremendously both in terms of variety of instruments available, their
complexity and also turnover.

The factors generally attributed as the major driving force behind growth of
Financial derivatives are:

 Increased volatility in asset prices in financial markets.

 Increased integration of national financial markets with the international

markets.
 Marked improvement in communication facilities and sharp decline in their
costs.

 Development of more sophisticated risk management tools, providing

economic agents a wider choice of risk management strategies.

 Innovations in the derivatives markets, which optimally combine the risks and
returns over a large number of financial assets, leading to higher returns, reduced
risks as well as financial costs as compared to individual financial assets.

Participants: - The following three broad categories of participants hedgers,

Speculators and Arbitrageurs trade in the derivatives market.

Hedgers: - They face risk associated with the price of an asset. They use futures and
Options market to reduce or eliminate this risk.

Speculators –They wish to bet on future movements in the price of an asset. Future and
Option contracts can give them an extra leverage, that 19s they can increase both the
potential gains and potential losses in a speculative venture.

Arbitrageurs – They are in business to take advantage of a discrepancy between prices

Page 41
In two different markets. If, for instance they see the future price of an asset getting out
of line with the cash price, they will take offsetting positions in the two markets to lock
in a profit.

Types of derivatives:-

The most commonly used derivatives contracts are forwards, future and options. Here I
look a brief look at various derivatives contracts that have come to be used.

1) Forwards:- A forward contract is a customized contract between two entities,

where settlement takes place on a specified date in the future at today’s pre-agreed
price.

2) Futures: - A future contract is an agreement between two parties to buy or sell an

asset at a certain time in the future at a certain price. Future contracts are special
type’s forward contracts in the sense that the former are standardized exchange
traded contracts.

3) Options are of two types- Calls and Puts.

 Call gives the buyer the right but not the obligation to buy a given quantity
of the underlying assets, at a given price on or before a given future date.
 Put gives the buyer the right but not the obligation to sell a given quantity
of the underlying assets at a given price on or before a given date.

4) Warrants: - Option generally has lives of up to one year; the majority of options traded
on options exchanges having maximum maturity of nine months. Longer dated options are
called warrants and are generally traded over the counter.

5) Leaps: The acronyms LEAPS means long term equity anticipation securities. These
are options having a maturity of up to three years.

Page 42
6) Baskets: Baskets options are option on portfolios of underlying assets. The underlying
asset is usually a moving average or a basket of assets.

7) Swaps: - Swaps are private agreement 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;-

a) Interest Rate Swaps

b) Currency Swaps

Forwards

A Forward contract is an agreement to buy or sell an asset on a specified date for

a specified price. One of the parties to the contract assumes a long position and agrees to
buy the underlying asset on certain specified price. The other party assumes a short
position and agrees to sell the asset on the same date for the same price. Other contract
details like delivery date, price and quantity are negotiated bilaterally by the parties to the
contract. The forward contracts are normally traded outside the exchanges.
The salient features of forward contracts are: -

a) They are bilateral contracts and hence exposed to counter party risk.
b) Each contract is custom designed, and hence is unique in terms of contract size,
expiration date and the asset type and quality.
c) The contract price is generally not available in public domain.
d) On the expiration date, the contract has been settled by delivery of the assets
e) If the party wishers to reverse the contract, he has to compulsory go to the same
counterparty, which often results in high prices being charged.

Page 43
Forward contracts are very useful in hedging and speculating the classic hedging
application would be that of an exporter who expects to receive payment in dollar three
months later. He is exposed to the risk of exchange rate fluctuations. By using the
currency forward market to sell dollars forward, he can lock on to a rate today and reduce
his uncertainties. Similarly an importer who is required to make a payment in dollars two
months hence can reduce his exposure to exchange rate fluctuation by buying dollar
forward.

Despite it forward market world-wide are afflicted by several problems:

• Lack of centralization of trading

• Illiquidity, and

• Counterparty risk

Futures:

Definition : A future contract can be defined as a standardized agreement between the

buyer and seller in terms of which the seller is obligated to deliver the specified asset to
the buyer on a specified date and the buyer is obligated to pay the seller then prevailing
future price in exchange of the delivery of the asset.

Parties involved:

1. Buyer of the asset

2. Exchange

Page 44
 3. Seller of the asset.

The futures markets were designed to solve the problem that exists in forward markets.
A futures market 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 future contracts are
standardized and exchange traded. To facilitate liquidity in the futures contract the
exchange specified 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 and a standard timing of such settlement. A future
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.

Futures terminology:

1) Spot price: The price at which an asset trades in the spot market.

2) Futures price: The price at which the futures contract trades in the futures
market.

3) Contract cycle: The period over which contract trades. The index future contract
on the NSE have one month, two month and three month expire cycles Which
expires on the last Thursday of the month.

4) Expiry date: It is the date specified in the futures contract. Thus is the last date
on which the contract will be traded at the end or which it will cease to exist.

5) Contract size: The amount of asset that has to be delivered less than one contract.

6) Basis: In the context of financial futures, basis can be defined on the future price
minus the spot price. There is a different basis for each delivery month for each
contact. In a normal market basis is positive.
Page 45
 7) Cost of carry: the relationship between futures price and spot price can be
summarized in terms of what is known as the cost of carry.

8) Initial margin: the amount that must be deposited in the margin account at the
time of a futures contract is first entered into it is known as initial margin.

9) Marking to margin: in the futures market at the end of each trading day the
margin account in adjusted to reflect the investor’s gain or loss depending upon
the futures closing price.

10) 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.

Trading in the futures segment

It is traded basically on NSE. Unlike cash segment, a certain margin in paid is futures
segment. It operates in T+1 basis. Margins are pre-decided as per the lot size. This is
very useful for these investors, who do not have entire amount to invest. In future
contracts they pay only a certain margin and enter into trading.

For e.g.:’ Mr. X, who trades in cash market, wishes to buy 650 shares of Reliance @ Rs
350 per share. For this he will have to invest 650*350 = 227500. But he does not have
this much amount to invest.

Now in futures market he will buy one July lot 650 shares of Reliance by paying a
premium around only 15% of total amount. In this case the total cost of Mr. X for 1 lot of
Reliance will be only Rs 34125.

Page 46
The main drawback of this trading in that it acts in T+1 basis, means a trader has to settle
his position everyday, until he closes his trading in particular scrip.
Risk also can be hedged in futures market by imposing “stop loss”

Stop loss: This facility allows the investor to release an order into the system, after the
market price of the security reaches or crosses a threshold price, called trigger price.
E.g.: Mr. X bought 1 July lot of Cipla at Rs 320 per share by paying 15% margin.
However he does not want to take risk of downward movement, he imposed a stop loss at
Rs 310 per share.

In this case Mr. X made his limit by Rs 10 per share, however he can fetch unlimited
profit as price keeps going up.

Futures derivatives trading: Future trading can be done on stocks as well as on Indices
like IT index, Auto index, Pharma index etc.

Stock future trading: Let’s first understand what the meaning of futures trading is. In
simple language one future contract is group of stocks (one lot) which has to be bought
with certain expiry period and has to be sold (squared off) within that expiry period.
Suppose if you buy futures of Wipro of one month expiry then you have to sell it within
that one month period.
Important - Future contract get expires at every last Thursday of every month.

If you buy October month expiry future contract then you have to sell it within last
Thursday of October month. Likewise you can buy two months and three months expiry
period future contract.
You can buy maximum of three month expiry period.
For example - suppose this is month of October then you have to buy till maximum
month of December expiry and you have to sell it within last Thursday of December
month. You can sell anytime between these periods.

Page 47
Successful trading in futures

Future or derivative trading is the process of buying or selling stock future or index
future for a certain period of time and squaring off before the expiry date. Expiry period
can be of one month, two month and three month and not more then of three month. Its
not compulsion that you have to square off your positions on the expiry date or wait till
the expiry period but in fact you can square off at any time even, at the same day, or you
can hold as long as you want but remember to square off before expiry date.
Most of the times on 3rd month expiry future you may see very less trading volumes.
Generally most of the traders/investors trade or invest on current month future or second
month future contract and you may see very low volumes on last month means third
month expiry .

Lot size (group of stocks in one future contract) varies from future to future contract.
For example Reliance Industries future lot size has 150 quantities of shares while a Tata
Consultancy service has 250 shares. In the same manner all futures have different lot
sizes decided by SEBI (Securities Exchange Board of India). The margin (in other words
price of one lot size) varies on daily basis based on its stocks closing price.

You can also buy and sell or sell and buy future contract on the same day of any expiry
month. This is called as day trading or intraday in futures.
Selling future contract before buying is called short selling. Short selling is allowed in
futures trading.

Major Advantages of Futures Trading over Stock Trading

Page 48
Margin is available: In future trading you get margin to buy (but can hold only up to
maximum of 3 months), while in stock trading you must have that much of amount in
your account to buy.

For example - If you plan to buy stock XYZ at Rs. 100 and quantity 1000 shares then
you have to pay 1 lakh rupees (RS 100 x1000 qty). But if you plan to buy XYZ future
contract and that contract lot size has 1000 quantity of shares then instead of paying 1
lakh rupees you have to pay just 20% to 30% of whole amount which comes to 20
thousand to 30 thousand rupees.

In short in future trading you have to pay just 20% to 30% of the whole amount what you
pay if you buy stock of that price. But limitation for this is your expiry period. Means if
you bought future of one month expiry then you have to square off within that one month
likewise you can buy maximum of three months expiry.

Possible to do short selling :You can short sell futures- You can sell futures without
buying them which is called short selling and later buy within your expiry period, to
cover up your positions. This is not possible in stocks. You can’t sell stocks before
buying them in delivery (you can do in intraday). You can short sell futures and can
cover off within your expiry period.

For example - If expiry period of your future contract is of 1 month then you have time
frame of one month to cover off your order like wise if your future expiry period is of
two months then you have time frame of two months and this continues till three months
and not more then three months.

In short selling of futures also you get margin as you get in buying of futures.

Brokerages are low: Brokerages offered for future trading are less as compared to stock
delivery trading.

Page 49
Disadvantages of Future Trading over Stock Trading

Limitation on holding: If you buy or sell a future contract then you have limitation of
time frame to square off your position before expiry date.

For example - If you buy or sell future contract of one month expiry period then
you have to square off your position before your expiry date of that month, so in this
example you got one month period. So likewise if you go for two month expiry period
then you get 2 months and if you go for three month expiry then you will get 3 month
expiry period to square off your position.

Level of Risk: Due to margin facility in future trading you may earn huge profit by
investing fewer amounts but at the contrary side if your trade goes wrong then you may
have to suffer huge loss.

Limitation on stocks: You can’t do future trading on all stocks. You can only do on
listed stocks on Nifty and Jr. Nifty.

Important points to Remember while doing future trading

• First of all you have to decide whether you want to buy stock derivatives or
index derivative. After this you have to select the expiry period. Once you buy
certain expiry period then you have to sell (cover off) your order before that
period. Its no need to wait till the expiry period, you can even square off on the

Page 50
 same day (if you are getting profit) or anytime whenever you feel to book profit,
no compulsion to cover off your order on the last day of expiry.

• Check out for Futures current market price.

• Futures Lot Size (number of shares in that particular Lot).

• Futures Lot price (this is the amount you must have in your account to buy one
lot of future) also called as margin amount.

• Selection of expiry period - you want to trade on expiry of one month, two
month or last 3rd month.

• No need to wait till expiry period can book profit wherever applicable.

Method of Short Selling

Short selling (selling before buying in future trading) In future trading you can do short
selling and buy (cover) later when price comes down from your selling price you can
short sell stock future as well as index future. But again same restriction will apply and
that is of expiry period.

Options

Definition: Option is a legal contract in which the writer of the option grants to the
buyer, the right to purchase from or sell to the writer a designated instrument or a scrip at
a specified price within a specified period of time.

Parties involved:

1) Buyer of the asset

Page 51
 2) Exchange

3) Seller of the asset

Options are fundamentally different from forwards and futures contracts. An option gives
the holder of the option the right to do something. The holder does not have to exercise
this right. In contrast, in a forward or futures contract, the two parties have committed
themselves to doing something.

There are two types of options:

1) call option

2) put option

 A call option gives the holder the right but nit the obligation to buy an asset by a
certain price. E.g.: X purchases a call option from Y of REL it means Y gives the
right to purchase REL at a fix strike price within a certain period.

 Where as a put option gives the holder the right but not the obligation to sell an
asset by a certain date for a certain price.

Options terminology;

 Index option: These options have the index as the underlying. Some options are
European, American. E.g. – index futures contracts, index options contracts are
also settled.
 Stock option: Stock options are options on individual stock. Options currently
trade on over 500 stocks in the US.

Page 52
 Buyer of an option: The buyer of an option is the one who by paying the option
premium buys the right but not the obligation to exercise his option on the
seller\writer.

 Writer of an option: The writer of a call\put is the one who receives the option
premium and is thereby obliged to sell \buy the asset if the buyer wishes to
exercise his option.

 Option price: It is the price which the option buyer pays to the option seller. It is
also referred as the option premium.

 Expiration date: The date specified in the options contract is known as

expiration date, the exercise date, the striker date or the maturity.

 Strike price: The price specified in the options contract.

 In the money option : A call option on the index is said to be in the money when
the current value of index at a level higher than the strike price(i.e. spot
price>strike price )

 At-the-money option: An at-the-money (ATM) option is an option that would

lead to zero cash flow if it were exercised immediately. An option on the index is
at-the-money when the value of current index equals the strike price (i.e. spot
price = strike price)

 Out-of-the-money option: An out-of-money (OTM) option is an option that

would lead to a negative cash flow it was exercised immediately. A call option on
the index is said to be out-of-the-money when the value of current index stands at
a level which is less than the strike price (i.e. spot price < strike price)

Page 53
 Since hedging is mostly done by means of option nowadays. There are certain
strategies which are considered before hedging the positions or risks by the investors:

Options strategies

1. Long Call: A long call can be an ideal tool for investors who wish to participate from
an upward price movement in the underlying stock.

2. Long Put: A long put can be an ideal tool for an investor who wishes to participate
profitably from a downward price move in the underlying stock.

3. Married Put: An investor purchasing a put while at the same time purchasing an
equivalent number of shares of the underlying stock is establishing a “married put”
position- a hedging strategy with a name from an old IRS ruling.

4. Protective Put: An investor who purchases a put option while holding shares of the
underlying stock from a previous purchase is employing a “protective put”.

5. Covered Call: The covered call is a strategy in which an investor writes a call option
contract while at the same time owning an equivalent number of shares of the
underlying stock. If this stock is purchased simultaneously with writing the call
contract the strategy is commonly referred to as a buy-write. If the shares are already
held from a previous purchase it is commonly referred to an overwrite.

6. Cash Secured Put: According to the terms of a put contract, a put writer is obligated
to purchase an equivalent number of underlying shares at the put’s strike price if
assigned an exercise notice on the written contract. Many investors write puts
because they are willing to be assigned and acquire shares of the underlying stock in

Page 54
 exchange for the premium received from the put’s sales. For this discussion, a put
writer’s position will be considered as “cash-secured” if he has on deposit with his
brokerage firm a cash amount sufficient to cover such a purchase of all option
contracts.

7. Bull Call Spread: Establishing a bull call spread involves the purchase of a call
option on a particular underlying stock, while simultaneously writing a call option on
the same underlying stock with the same expiration month, at a higher strike price.
Both the buy and the sell sides of this spread are opening transactions, and are always
the same number of contracts.

8. Bear Put Spread: Establishing a bear put spread involves the purchase of a put
option on a particular underlying stock, while simultaneously writing a put option on
the same underlying stock with the same expiration month, but with a lower strike
price. Both the buy and the sell sides of this spread are opening transactions, and are
always the same number of contracts.

9. Caller: A caller can be established by holding shares of an underlying stock,

purchasing a protective put and writing a covered call on that stock. The option
portions of this strategy are referred to as a combination. Generally, the put and the
call are both out-of- the-money when this combination is established, and have the
same expiration month.

Page 55
HEDGING

Page 56
How to determine the hedging strategies

To determine the strategy of choice when hedging we must first understand what is
hedging and hedge fund.

Hedging
Hedging is nothing but a mechanism to reduce or control risks involved in capital market.
Various risk involved in capital market:-
a) Price risk
b) Liquidity risk
c) Operational risk
Hedging plays an important role to combat these risks.
Hedging does not mean to maximize return. It so happens that sometime despite
imposing hedging inventers may fetch unlimited profit in that case hedging does not bear
fruit. Hedging shows its colors only case of losses by limiting it.
In a simple example, a miller may buy wheat that is to be converted into flour. At the
same time, the miller will contract to sell an equal amount of wheat, which the miller
does not presently own, to another trader. The miller agrees to deliver the second lot of
wheat at the time the flour is ready for market and at the price current at the time of the
agreement. If the price of wheat decline during the period between the miller’s purchase
of the grain and the flour’s entrance onto the market, there will also be a resulting drop in
the price of flour. That loss must be sustained by the miller. However, sine the miller has

Page 57
a contract to sell wheat at the older, higher price, the miller makes up for this loss on the
flour sale by the gain on the wheat sales.

Terms in Hedging

Long Hedge:
Long hedge is the transaction when we hedge our position in cash market by going long
in derivatives market.
For example, let us assume that we are going to receive funds in the near future
and we want to invest it into the capital market. Also we expect the market to go up in
the near future, which is not desirable for us as we would have to invest more money.
The risk can be hedged by making use of derivatives such as F & O.

Short Hedge:
Short hedge is the hedge accomplished by going short in the derivatives market.
For example, we have a portfolio which we want to liquidate in the near future.
Meanwhile prices of the scrip may go down, which is not favorable for us. Thus to
protect our portfolio value we can go short in the derivative market.

Cross hedge:
When derivatives of the underlying assets we have, are not available, we use
derivatives on any other related underlying, that are available. This is called as cross
hedge.
For example, derivatives on Jet fuel are not available in the market, for hedging
against prices of it we may use crude oil derivatives which are related with the Jet prices

Hedge Fund:

Definition: Hedge funds definition says these funds are meant to hedge the investment
through various techniques from the potential fluctuations in terms of losses in the

Page 58
 markets. The hedge funds returns do net get affected by the direction of the
underlying market. This type of hedge funds accounting is achieved by:

 Investing in the safer areas that are less likely to be affected by drop in markets
 Marketing through derivative methods as opposed to direct market exposure
 Holding defensive instruments like cash in times of market failure
 By taking short as well as long market positions and negating the market
exposure

Hedge Funds in India

Hedge Funds in India are among relatively new investment opportunities. The hedge
funds history actually dates back to 1949 with credit to Alfred Winslow Jones for
inventing hedge funds investing fund. These are a form of private investment funds at the
cost of a performance fee and open to only a limited investors group. Hedge funds in US
are open to only a few accredited investors. These hedge funds basics qualify them to be
exempted from direct regulations of the state.

The hedge fund strategies include a lot of assets and are thus defined clearly and with
utmost care. Hedge funds were demystified in the Indian markets only recently when the
market opened up to newer investment opportunities. The hedge funds database is
managed regularly to keep track of the investment patterns of the market.

Hedge funds explained the growth of short positions in the markets. The market failures
do not affect hedge fund investors and hedge fund managers due to the liquidity leverage
they bring. The hedge fund manager or administrator acts as an analyst keeping track of
the hedge funds news, bonus returns, quotes, valuations and returns. The hedge fund
statistics include a careful research on all these factors to avoid any kind of fraud in the
valuations.

Page 59
Hedge funds in also available in forms like hedge fund ETF and hedge funds real estate.
Hedge funds ETF is a form of mutual fund that offers more flexibility and for real estate
hedge funds, these offer investment opportunities in real estate markets with higher
liquidity. The hedge fun investor is determined on the basis of the NAV (Net Asset
Value) of the company or their businesses.

Being an extremely complicated investment solution, hedge fund employment is limited

with only the privileged ones having the optimum hedge fund education get the
opportunity to serve as hedge funds managers. The bonus and perks of the industry are
also innumerable. Since the hedge funds are basically a product for the richest of the rich
who wish to remain rich with no direct effects from the crash of the local market, the
hedge fund managers are amongst the most well paid in the industry.

Analysis and Interpretation

CASE I
Mr. Bhandari bought 675 shares of Tisco few days before the budget @ Rs. 350/- per
share, as general expectation from the budget was that it will be an infrastructure of
development focused budget. He was also on Tisco.
However Mr. Bhandari wanted to hedge against any downward movement of Tisco in the
Market.

Solution
There are following Alternatives for Mr. Bhandari to hedge his position
i) Long put strategy
ii) Protection put strategy
iii) Bear put spread strategy

Since Mr. Bhandari has to protect his 675 shares of Tisco so in this case, to hedge against
any downward movement of Tisco, Mr. Bhandari will opt protective put strategy. So he
should buy 1 lot of put option of Rs. 350/- strike price @ Rs. 10/- premium at the same
time.
Now the total cost of Bhandari is:-

Page 60
Bought Tisco @ Rs. 350/- share = 2, 36,250/-
Cost of 1 lot of Tisco put option @ Rs. 10/- = 6,750/-

2, 43,000/-

Analysis

Page 61
Interpretation:
1) The stock value arrived at as (stock value x 675shares).
2) If the stock price is below Rs.350/- in the spot market, the put option will be
executed. Thus put value is arrived at as (Strike price – stock price) x 675
3) If the stock price goes below from Rs.360/- loss is limit to the extent of its
premium amount (Rs.10/-), or Rs.6750/-.
4) If the stock price goes up from Rs.360/- it can fetch unlimited profit as stock price
keeps going up.

Case II
Mr. Bhalgat was mildly bullish on Bank of India. He already got 1900 shares of Bank of
India @ rs.110/- Shares few days back. Though Mr. Bhalgat, bullish on Bank of India,
wanted to hedge against any downside movement of Bank of India due to budget related
volatility.
Solution
That time Bank of India was trading around Rs.120 – 130 range.
There are following Alternatives for Mr. Bhalgat to hedge his position
iv) Long put strategy

Page 62
 v) Protection Put strategy
vi) Bear call spread strategy
Since Mr. Bhalgat is mildly bullish on BOI, he will opt call spread strategy as
the best strategy, following things might be suggested –
a) Buy a July call option of Bank of India for 1 lot of strike price Rs. 120/- shares, at
a premium of Rs. 12/- share.
b) Sell a July call option for one lot of Bank of India Rs. 140/- strike price at a
premium of Rs. 2/- share.

Costs
Buying 1 lot of call option of BOI
(1900 x 12) = 22,800/-
( - ) selling 1 lot of call option of BOI = 3,800/-

19,000/-

Analysis
S.No Stock Stock Bought Sold Cost of Return
Price Value Call Call Premium
Value Value
1 90 1,71,000 0 0 19,000 (19,000)
2 100 1,90,000 0 0 19,000 (19,000)
3 110 2,09,000 0 0 19,000 (19,000)
4 120 2,28,000 0 0 19,000 Nil
5 130 2,47,000 19,000 0 19,000 19,000
6 140 2,66,000 38,000 0 19,000 38,000
7 150 2,85,000 57,000 19,000 19,000 38,000
8 160 3,04,000 76,000 38,000 19,000 38,000

Page 63
Interpretation
1) Stock price is arrived at as (stock price x 1900)
2) At any price above Rs. 120/- shares bought call value is arrived at as
{(stock price – 120) x 1900}.
3) At any price above Rs. 140/- share, sold call value is arrived at as
{(stock price – 140) x 1900}.
Return is maximum loss Rs. 19,000 and maximum profit Rs. 38,000.

Case III
Mr. Sonagra is a regular mid to long term investor. In the beginning of the month of the
July he had not enough money in hand to invest in shares. He was supposed to get money
at the end of the month.
However he was bearish on Titan. He want to buy Titan but not after few days as it could
lead to a loss of thousands.
Solution
Since Mr. Sonagra has not sufficient amount to invest in shares, he will adopt only
Long call strategy to hedge his position.
In such circumstance Mr.Sonagra will buy one lot (800 shares) of call option at a
premium of Rs.10/- per share the strike price of which is Rs.510/-.
Cost for 1 lot of Titan in call option will be
800 x 10 = Rs. 8,000/-

Page 64
Analysis

Interpretation

i) Though Mr.Sonagra bought a call option of a strike price of Rs.150/-, he

expects that stock price will go up.
ii) No matter how much stock price goes up stock price goes up more he can
fetch profit more, became he can purchase at a fix stock price of Rs.510/-.
Page 65
 iii) If the stock price goes down, call option will not be executed, because
purchasing a lot in Rs.510/- in downward movement does not sound
reasonable.
iv) In downward movement his loss will be limit to the extent of premium
amount (Rs.8,000).
v) While in upward movement his profit will be unlimited as the price goes up
deducting (premium + strike price).

Case IV
Mr.Pandit was holding 550 shares of Reliance Energy Ltd. (REL), which he had
purchased @ Rs.620. Due to market sentiments and his personal study he was bearish on
REL. In the fear of losing he wanted to hedge against downfall in the prices of REL. (Lot
size = 550)
Solution
There are following Alternatives for Mr.Pandit to hedge his position
vii) Long put strategy
viii) Protection put strategy.
ix) Bear put spread strategy
Since Mr. Pandit has to protect its 550 shares of REL, in such circumstance Mr. Pandit
will prefer to buy 1 lot of put option at a premium of lets assume Rs. 10/- per share,
strike price which is Rs. 620.
Now the total cost of Mr. Pandit will be:-
Buying of 550 shares of REL @ Rs. 620/-
(550 x 620) = 3,41,000/-
( + ) buying of 1 lot of put option @ Rs. 10/- share
( 10 x 550 ) = 5,500/-
3,46,500/-

Analysis

Page 66
S.No Stock Stock Bought Cost of Return
Price Value Put Premium
Value
1 590 3,24,500 16,500 5,500 (5,500)
2 600 3,30,000 11,000 5,500 (5,500)
3 610 3,35,500 5,500 5,500 (5,500)
4 620 3,41,000 0 5,500 (5,500)
5 630 3,46,500 0 5,500 Nil
6 640 3,52,000 0 5,500 5,500
7 650 3,57,500 0 5,500 11,000
8 660 3,63,000 0 5,500 16,500
9 670 3,68,500 0 5,500 22,000

Interpretation
i) Stock Value is arrived at as (stock price x 550 shares )
ii) If the stock price goes below from Rs.620/- put option is executed. The put
value is arrived at as
( strike price – stock price ) x 550
iii) If the stock price goes below from Rs.630/- (cost price) the loss is limit to the
extent of its premium means Rs.5,500/-.
iv) If the stock price goes up from Rs.630/- of can fetch unlimited profit an stock
price keeps going up and put option will not be executed.

Page 67
FINDING
Findings
CASE I
i) As the stock price goes down value of put option increases.
ii) Break Even point (B.E.P) for Mr. Bhandari in Rs. 360/- share or Rs. 2, 43,000/-
iii) Loss in limit to the extent of its premium.
iv) As the stock price goes up value of put option loses its significance.
v) If the put option is not executed till its expiration period it will automatically
repudiate.

CASE II
i) As the value of stock price goes up from strike price the bought call value and sold call
value increases.
ii) Rs.120/- share or Rs.2,28,000/- is the Break Even point (B.E.P.) for Mr.Bhalgat.
iii) Mr.Bhalgat made limit his profit and loss by buying and selling 1 lot of call option
simultaneously.
iv) As the stock price goes down from its strike price the value of call option loses its
significance.

CASE III
i) Mr.Sonagra should be quite sure that the value of stock price will increase in coming
future.
ii) He will fetch profit when market will be at bullish by purchasing the shares @
Rs.510/- share and selling it in more that Rs.520/- in spot market.

Page 68
iii) Mr.Sonagra has been given right but not obligation to buy shares @ Rs.510/- in lieu
of Rs.10/- per share as premium whatever market condition may be.
iv) The value of call option become insignificant if stock price goes below from
Rs.510/-.

Case IV
i) As the stock price decreases the value of bought put option increases.
ii) Rs.630/- share or Rs.3,46,500/- is the Break Even point for Mr.Pandit.
iii) As the stock price goes up form its strike price put option become insignificant.
iv) Here loss is limit to the extent of its premium amount.
v) If the put option is not executed till its expiration period it in automatically
repudiated.

SUGGESTION & CONCLUSION

Suggestion
Case I
i) Mr. Bhandari should be very conscious about premium rate and expiration
period before opting put option.
ii) If the stock price starts to decline he should not execute his put option
immediately because in any low cases he will lose Rs.6, 750/- while he may
fetch profit in going up of stock price after downward movement.

Case II
ii) Mr.Bhalgat should adopt this strategy only in that case, when he is quite sure that
profit is not possible after a certain extent.

Case III
ii) Mr.Sonagra should buy September call option instead of July call option, because
during this gap stock price must go up.
iii) When stock price reaches up to its highest level he should execute his call option.
Page 69
Case IV
i) Mr. Pandit should be very conscious about premium rate and expiration period of
option.
ii) If the stock price starts to decline, he should not execute his put option immediately,
because in any low cases he will lose Rs. 5,500/- while he may fetch profit in going up of
stock price after downward movement.

General Suggestion
It is humbly suggested to all the clients of Motilal Oswal Securities Ahmednagar that
they develop their knowledge in future & option market because it is only the way by
dint of which risk or position and they should always consider the rolling settlement of
period.

Conclusion
i) Derivatives are the best tool for hedging the position or risk.
ii) Hedging is basically done in option market.
iii) Purchaser of a call option always hopes that the stock prices will go up.
iv) Purchaser of the put option always hopes that stock prices will go down.
v) Stick price and Expiration period plays important role in hedging.
vi) Fund managers use basically use index option to hedge their position.
vii) Individuals use generally stock option to hedge risks.
viii) Individuals use option in speculative manner.
ix) There is wide scope of derivatives markets.

References
http://www.the-finapolis.com/
http://www.karvy.com

Page 70
http://www.mutualfundsindia.com/
http://www.valuresearchonline.com/
http://www.moneycontrol.com/
http://www.morningstar.com/
http://finance.yahoo.com/
http://economictimes.indiatimes.com/
http://money.rediff.com/
http://www.bseindia.com/
http://www.nseindia.com/
http://www.investopedia.com/

Page 71