CHAPTER -1

INDUSTRY OVERVIEW

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A BRIEF HISTORY OF STOCK EXCHANGES:
Do you know that the world's foremost market place “New York Stock Exchange”
(NYSE), started its trading under a tree (now known as 68 Wall Street) over 200
years ago? Similarly, India's premier stock exchange Bombay Stock Exchange
(BSE) can also trace back its origin to as far as 125 years when it started as a
voluntary non-profit making association.

You hear about it any time it reaches a new high or a new low, and you also hear
about it daily in statements like 'The BSE Sensitive Index rose 5% today'.
Obviously, stocks and stock markets are important. Stocks of public limited
companies are bought and sold at a stock exchange. But what really are stock
exchanges?

Known also as News on the stock market appears in different media every day.
The stock market or bourse, a stock exchange is an organized market place for
securities (like stocks, bonds, options) featured by the centralization of supply and
demand for the transaction of orders by member brokers, for institutional and
individual investors.

BSE -you can contact a broker, who does business with the BSE, and he or she will
buy or sell your stock on your behalf. All stock exchanges perform similar
functions with respect to the listing, trading, and clearing of securities, differing
only in their administrative machinery for handling these functions. Most stock
exchanges are auction markets, in which prices are determined by competitive
bidding. Trading may occur on a continuous auction basis, may involve brokers
buying from and selling to dealers. In certain types of stock or it may be conducted
through specialists dealing in a particular stock.

But where did it all start? The need for stock exchanges developed out of early
trading activities in agricultural and other commodities. During the middle Ages,
traders found it easier to use credit that required supporting documentation of
drafts, notes and bills of exchange. The history of the earliest stock exchange, the
French stock exchange, may be traced back to 12th century when transactions
occurred in commercial bills of exchange.

The first stock exchange in India, Bombay Stock Exchange was established in
1875 as 'The Native Share and Stockbrokers Association' and has evolved over the

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years into its present status as the premier stock exchange in the country. It may be
noted that BSE is the oldest stock exchange in Asia, even older than the Tokyo
Stock Exchange, which was founded in 1878. The country's second stock exchange
was established in Ahmadabad in 1894, followed by the Calcutta Stock Exchange
(CSE). CSE can also trace its origin back to 19th century. From a get together
under a 'Neem Tree' way back in the 1830s, the CSE was formally established in
May 1908.

India's other major stock exchange National Stock Exchange (NSE), promoted by
leading financial institutions, was established in April 1993. Over the years,
several stock exchanges have been established in the major cities of India. There
are now 23 recognized stock exchanges — Mumbai (BSE, NSE and
OTC),Calcutta, Delhi, Chennai, Ahmedabad, Bangalore, Bhubaneswar,
Coimbatore, Guwahati, Hyderabad, Jaipur, Kochi, Kanpur, Ludhiana, Mangalore,
Patna, Pune, Rajkot, Vadodara, Indore and Meerut. Today, most of the global stock
exchanges have become highly efficient, computerized organizations.

Computerized networks also made it possible to connect to each other and have
fostered the growth of an open, global securities market.

Realizing there is untapped market of investors who want to be able to execute

their own trades when it suits them, brokers have taken their trading rooms to the
Internet. Known as online brokers, they allow you to buy and sell shares via
Internet.

Online Trading is a service offered on the Internet for purchase and sale of shares.
In the real world, you place orders on your stockbroker either verbally (personally
or telephonically) or in a written form (fax). In Online Trading, you will access a
stockbroker's website through your internet-enabled PC and place orders through
the broker's internet-based trading engine.

These orders are routed to the Stock Exchange without manual intervention and
executed thereon in a matter of a few seconds. There are 2 types of online trading
service: discount brokers and full service online broker.

Discount online brokers allow you to trade via Internet at reduced rates. Some
provide quality research, other don’t. Full service online brokerage is linked to
existing brokerages. These brokers allow their clients to place online orders with
the option of talking/ chatting to brokers if advice is needed. Brokerage rates here
are higher.

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 CHAPTER-2

COMPANY PROFILE

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INTRODUCTION AND HISTORY:

Founded by Shri Tarun Jain by corporatizing his individual membership in the year
1997, who has a commendable knowledge of primary and secondary equity/capital
market. We have expertise in Secondary Market Operations. Mainly focused on
business of arbitrage as well as broking for retial clients and high net worth
individuals. Our main aim is to develop clientele business and give equity advice
to them. Major clients serviced are Enam Investment Services Ltd., Talma
Chemical Ind. Ltd., RNA Builders, Palak Investment, Bhansali Securities and other
high net worth-individuals.

The company is in process of acquiring membership of derivatives segment. The

company was promoted by Shri Tarun Jain, who is also the director of the
company. Other directors of the company are Shri Kamal Jain, Smt. Rajni Jain and
Shri Jitendra J. Mehta.

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PRODUCTS OF TJ STOCK BROKING SERVICES
1. Online Trading

2. Commodities

3. DP Services

4. PMS (Portfolio Management Services)

5. Insurance

6. IPO Advisory

7. Mutual Fund

8. Personal loans

9. Quality assurance

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 CHAPTER 3

FINANCIAL MARKETS IN INDIA

What does the India Financial market comprise of? It talks about the primary
market, FDIs, alternative investment options, banking and insurance and the
pension sectors, asset management segment as well. With all these elements in the
India Financial market, it happens to be one of the oldest across the globe and is
definitely the fastest growing and best among all the financial markets of the
emerging economies. The history of Indian capital markets spans back 200 years,
around the end of the 18th century. It was at this time that India was under the rule
of the East India Company. The capital market of India initially developed around
Mumbai; with around 200 to 250 securities brokers participating in active trade
during the second half of the 19th century.

The financial market in India at present is more advanced than many other sectors
as it became organized as early as the 19th century with the securities exchanges in
Mumbai, Ahmedabad and Kolkata. In the early 1960s, the number of securities
exchanges in India became eight - including Mumbai, Ahmedabad and Kolkata.
Apart from these three exchanges, there was the Madras, Kanpur, Delhi, Bangalore
and Pune exchanges as well. Today there are 23 regional securities exchanges in
India.

The Indian stock markets till date have remained stagnant due to the rigid
economic controls. It was only in 1991, after the liberalization process that the
India securities market witnessed a flurry of IPOs serially.

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the
Counter Exchange of India) in the mid 1990s helped in regulating a smooth and
transparent form of securities trading.

The regulatory body for the Indian capital markets was the SEBI (Securities and
Exchange Board of India). The capital markets in India experienced turbulence

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after which the SEBI came into prominence. The market loopholes had to be
bridged by taking drastic measures.

POTENTIAL OF INDIAN FINANCIAL MARKET

India Financial Market helps in promoting the savings of the economy - helping to
adopt an effective channel to transmit various financial policies. The Indian
financial sector is well-developed, competitive, efficient and integrated to face all
shocks. In the India financial market there are various types of financial products
whose prices are determined by the numerous buyers and sellers in the market. The
other determinant factor of the prices of the financial products is the market forces
of demand and supply. The various other types of Indian markets help in the
functioning of the wide India financial sector.

FEATURES OF FINANCIAL MARKET IN INDIA

India Financial Indices - BSE 30 Index, various sector indexes, stock quotes,
Sensex charts, bond prices, foreign exchange, Rupee & Dollar Chart

Indian Financial market news

Stock News - Bombay Stock Exchange, BSE Sensex 30 index, S&P CNX-Nifty,
company information, issues on market capitalization, corporate earning
statements

Fixed Income - Corporate Bond Prices, Corporate Debt details, Debt trading
activities, Interest Rates, Money Market, Government Securities, Public Sector
Debt, External Debt Service

Foreign Investment - Foreign Debt Database composed by BIS, IMF, OECD,&

World Bank, Investments in India & Abroad

Global Equity Indexes - Dow Jones Global indexes, Morgan Stanley Equity
Indexes

Currency Indexes - FX & Gold Chart Plotter, J. P. Morgan Currency Indexes

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 National and Global Market Relations

 Mutual Funds

 Insurance

 Loans

 Forex and Bullion

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 CHAPTER 4

INTRODUCTION TO DERIVATIVES

The word “DERIVATIVES” is derived from the word itself derived of an

underlying asset. It is a future image or copy of an underlying asset which may be
shares, stocks, commodities, stock index, etc.

For example, wheat farmers may wish to sell their harvest at a future date to
eliminate the risk of a change in prices by that date. Such a transaction is an
example of a derivative. The price of this derivative is driven by the spot price of
wheat which is the "underlying".

Derivatives have become very important in the field finance. They are very
important financial instruments for risk management as they allow risks to be
separated and traded. Derivatives are used to shift risk and act as a form of
insurance. This shift of risk means that each party involved in the contract should
be able to identify all the risks involved before the contract is agreed.

It is also important to remember that derivatives are derived from an underlying

asset. This means that risks in trading derivatives may change depending on what
happens to the underlying asset. The underlying asset can be equity, forex,
commodity or any other asset.

For example, if the settlement price of a derivative is based on the stock price of a
stock for e.g. Infosys, which frequently changes on a daily basis, then the
derivative risks are also changing on a daily basis. This means that derivative risks
and positions must be monitored constantly

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HISTORY OF DERIVATIVES

Derivative products initially emerged as hedging devices against fluctuations in

commodity prices, stock prices and commodity-linked derivatives remained the
sole form of such products for almost three hundred years. Financial derivatives
came into spotlight in the post-1970 period due to growing instability in the
financial markets.

However, since their emergence, these products have become very popular and by
1990s, they accounted for about two-thirds of total transactions in derivative
products. In recent years, the market for financial derivatives has grown
tremendously in terms of variety of instruments available, their complexity and
also turnover.

In the class of equity derivatives the world over, futures and options on stock
indices have gained more popularity than on individual stocks, especially among
institutional investors, who are major users of index-linked derivatives. Even small
investors find these useful due to high correlation of the popular indexes with
various portfolios and ease of use.

The Chicago Board of Trade (CBOT), the largest derivative exchange in the world,
was established in 1848 where forward contracts on various commodities were
standardized around 1865. From then on, futures contracts have remained more or
less in the same form, as we know them today.

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AIMS AND OBJECTIVES OF DERIVATIVE

 To explore the derivative market in India.

 To know what derivatives are available in India.

 To know derivatives trading mechanism of exchanges.

 To become aware of what strategies are followed by Indian Investors.

 To know how derivatives are used in covering risk

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NEED FOR DERIVATIVE MARKET

 They help in transferring risks from risk averse people to risk oriented
people.

 They help in the discovery of future as well as current prices.

 They catalyze entrepreneurial activity.

 They increase the volume traded in markets because of participation of risk

adverse people in greater numbers.

 They increase savings and investment in the long run

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PURPOSE AND BENEFITS OF DERIVATIVE MARKET

1. Today’s sophisticated international markets have helped foster the rapid growth
in derivative instruments. In the hands of knowledgeable investors, derivatives can
derive profit from:

 Changes in interest rates and equity markets around the world.

 Changes in price of assets.

2. Help of hedge against inflation and deflation, and generate returns that are not
correlated with more traditional investments. The two most widely recognized
benefits attributed to derivative instruments are price discovery and risk
management and others.

3. Price discovery: -The kind of information and the way people absorb it
constantly changes the price of a commodity. This process is known as price
discovery. The price of all future contracts serve as prices that can be accepted by
those who trade the contracts in lieu of facing the risk of uncertain future prices.

4. Risk management: - This could be the most important purpose of the

derivatives market. Risk management is the process of identifying the desired level
of risk, identifying the actual level of risk and altering the latter to equal the
former. This process can fall into the categories of hedging and speculation.

5. Derivatives help in transferring risks from risk-averse people to risk-oriented

people.

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6. By allowing transfer of unwanted risks, derivatives can promote more efficient
allocation of capital across the economy and thus, increasing productivity in the
economy.

7. Derivatives increase the volume traded in markets because of participation of

risk-averse people in greater numbers.

Factors driving the growth of derivatives:-

 Over the last three decades, the derivatives market has seen a phenomenal
growth. A large variety of derivative contracts have been launched at
exchanges across the world. Some of the factors driving the growth of
financial derivatives are:

 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, and

 Innovations in the derivatives markets, which optimally combine the risks

and returns over a large number of financial assets leading to higher returns,

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 reduced risk as well as transactions costs as compared to individual financial
assets.

Derivative market is divided in two markets:-

1- OVER THE COUNTER

2- EXCHANGE TRADED DERIVATIVES

Over the counter:-

Over the counter derivatives are contracts that are traded (and privately negotiated)
directly between two parties, without going through an exchange or other
intermediary. Products such as swaps and forward rate agreements are almost
always traded in this way. The OTC derivative market is the largest market for
derivatives, and is largely unregulated with respect to disclosure of information
between the parties, since the OTC market is made up of banks and other highly
sophisticated parties.

Because OTC derivatives are not traded on an exchange, there is no central

counterparty. Therefore, they are subject to counterparty risk, like an ordinary
contract, since each counter party relies on the other to perform.

Features of over the counter derivatives:-

 The management of counter-party (credit) risk is decentralized and located

within individual institutions.

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  There are no formal centralized limits on individual positions, leverage, or
margining.

 There are no formal rules for risk and burden-sharing.

 There are no formal rules or mechanisms for ensuring market stability and
integrity, and

 for safeguarding the collective interests of market participants, and

 The OTC contracts are generally not regulated by a regulatory authority and
the exchange's self-regulatory organization.

 When asset prices change rapidly, the size and configuration of counter-
party exposures can become unsustainably large and provoke a rapid
unwinding of positions.

Exchange traded derivatives:-

They are standardized ones where the exchange sets the standards for trading by
providing the contract specifications and the clearing corporation provides the
trade guarantee and the settlement activities. Futures and Options are the
derivatives. Products like futures and options are traded in this way.

In the exchange traded derivatives is the largest market for derivatives. In this type
of derivatives a highly regulated exchange is involved which is Security Exchange
Board of India (SEBI).

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Features of Exchange Traded Derivatives:-

 The management of counter party risk is centralized and located with high
Institutions.

 There are formal centralized limits on individual positions, leverage, or

margining

 There are formal rules for risk and burden-sharing.

 There are formal rules or mechanisms for ensuring market stability and
integrity, and for safeguarding the collective interests of market participants,
and

 The exchange traded contracts are generally regulated by a regulatory

authority.

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 CHAPTER-5

TYPES OF DERIVATIVES

Derivative contracts have several types. The most common variants are forwards,
futures, options and swaps.

Forwards:

A forward contract is a customized contract between two entities, where settlement

takes place on a specific date in the future at today's pre-agreed price.

Futures:

A futures contract is an agreement between two parties to buy or sell an asset at a

certain time in the future at a certain price. Futures contracts are special types of
forward contracts in the sense that the former are standardized exchange-traded
contracts.

Options:

Options are of two types - calls and puts. Calls give the buyer the right but not the
obligation to buy a given quantity of the underlying asset, at a given price on or
before a given future date. Puts give the buyer the right, but not the obligation to
sell a given quantity of the underlying asset at a given price on or before a given
date.

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Warrants:

Options generally have lives of up to one year; the majority of options traded on
options exchanges having a maximum maturity of nine months. Longer-dated
options are called warrants and are generally traded over-the-counter.

Leaps:

The acronym LEAPS means Long-Term Equity Anticipation Securities.

These are options having a maturity of up to three years.

Baskets:

Basket options are options on portfolios of underlying assets. The underlying asset
is usually a moving average of a basket of assets. Equity index options are a form
of basket options.

Swaps:

Swaps are private agreements between two parties to exchange cash flows in the
future according to a prearranged formula. They can be regarded as portfolios of
forward contracts. The two commonly used swaps are:

Interest rate swaps:

These entail swapping only the interest related cash flow between the parties in the
same currency.

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Currency swaps:

These entail swapping both principal and interest between the parties, with the cash
flows in one direction being in a different currency than those in the opposite
direction.

Swaptions:

Swaptions are options to buy or sell a swap that will become operative at the
expiry of the options. Thus a swaption is an option on a forward Swap. Rather than
have calls and puts, the swaptions market has receiver swaptions and payer
swaptions. A receiver swaption is an option to receive fixed and pay floating. A
payer swaption is an option to pay fixed and receive floating.

FORWARD CONTRACT:-
It is an agreement between two parties to buy or sell an asset on a specified date for
a specified price. A forward contract is a simple derivative. It is a type of market
where buyer and seller predict the future for the underlying asset which may be
stocks, currency, interest rate etc. One of the parties to the contract assumes a long
position which agrees to buy underlying asset for a certain specified price. The
other Party assumes a short position and agrees to sell at the same price. Forward
contract can be 30days, 90days and 180days .

The contract is usually between two financial institutions or between a financial

institution and its corporate client. A forward contract is not normally traded on an
exchange. It is traded on the OTC (over the counter) derivatives where the
intermediate or exchange has no role to play and contract is smoothly settled by the
parties or normally traded outside the exchanges.

At delivery, ownership of the good is transferred and payment is made. In other

words, whereas the forward contract is executed today, and the price is agreed
upon today, the actual transaction in which the underlying asset is traded does not

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take place until a later date. Typically, no money changes hands on the origination
date of a forward contract. Forward contracts are not standardized unlike futures
contracts. They are customized and each contract is unique in terms of contract
size, expiration date and the asset type and quality. Terms of Forward contracts are
negotiated between buyer and seller. As there is no exchange involved in it there is
chance of default of either party.

Forward contracts are very useful in hedging and speculation. Here the importer
and exporter can hedge their risk exposure with respect to exchange rate
fluctuations while entering into the currency forward market. The first formal
commodities exchange in the United States for spot and forward contracting was
formatted in 1848: the Chicago Board of Trade (CBOT).

FUTURE CONTRACT

A future contract is similar to a forward contract. It is a standardized forward

contract that can be easily traded. In future contract default risk is lower on futures
than on forwards for several reasons:-

 The counterparty to all futures trades is actually the clearing house of the
futures exchange, which guarantees that all payments will be made.

 Future contracts are marked to market daily settled which means that any
change in the value of the contract is realized as a profit or loss every day.

 Initial margin, which serves as a performance bond, is required when trading

futures.

In contrast, because they are not marked to market, forward contracts can build up
large unrealized profits for one party and equally large unrealized losses for the
other party. There is a multilateral contract between the buyer and seller for an

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underlying asset which may be financial instrument or physical commodities. But
unlike forward contracts the future contracts are standardized and exchange traded.

The primary purpose of futures market is to provide an efficient and effective

mechanism for management of inherent risks, without counter-party risk. As it is a
future contract the buyer and seller has to pay the margin to trade in the futures
market.

The standardized items in a futures contract are:

· Quantity of the underlying
· Quality of the underlying
· The date and the month of delivery
· The units of price quotation and minimum price change.
. Location of settlement.

FUTURES TERMINOLOGY:-
Spot price: The price at which an asset trades in the spot market.
Futures price: The price at which the futures contract trades in future market.

Expiry date: It is the date specified in the futures contract. This is the last day on
which the contract will be traded, at the end of which it will cease to exist.

Contract size: The amount of asset that has to be delivered under one contract.
Also called as lot size.

Basis: In the context of financial futures, basis can be defined as the futures price
minus the spot price. There will be a different basis for each delivery month for

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each contract. In a normal market, basis will be positive. This reflects that futures
prices normally exceed spot prices.

Cost of carry: The relationship between futures prices and spot prices can be
summarized in terms of what is known as the cost of carry. This measures the
storage cost plus the interest that is paid to finance the asset less the income earned
on the asset.

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

Marking-to-market: In the futures market, at the end of each trading day, the
margin account is adjusted to reflect the investor's gain or loss depending upon the
futures closing price. This is called marking-to-market.

Maintenance margin: This is somewhat lower than the initial margin. This is set
to ensure that the balance in the margin account never becomes negative. If the
balance in the margin account falls below the maintenance margin, the investor
receives a margin call and is expected to top up the margin account to the initial
margin level before trading commences on the next day.

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OPTION CONTRACT

It is an interesting tool for small retail investors. An option is a contract, which

gives the buyer (holder) the right, but not the obligation, to buy or sell specified
quantity of the underlying assets, at a specific (strike) price on or before a specified
time (expiration date). The underlying may be physical commodities like wheat/
rice/ cotton/ gold/ oil or financial instruments like equity stocks/ stock index/
bonds etc. Options are fundamentally different from forward 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. Whereas it costs nothing
(except margin requirements) to enter into a futures contract, the purchase of an
option requires an up-front payment. The options are also traded on stock exchange

Types of options:-

CALL OPTION

A call option gives the holder (buyer/ one who is long call), the right to buy
specified quantity of the underlying asset at the strike price on or before expiration
date. The seller (one who is short call) however, has the obligation to sell the
underlying asset if the buyer of the call option decides to exercise his option to
buy. To acquire this right the buyer pays a premium to the writer (seller) of the
contract.

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Thus call option indicates two positions as follows:

1) LONG POSITION

If the investor expects price to rise i.e. bullish in the market he takes a long
position by buying call option.

2) SHORT POSITION

If the investor expects price to fall i.e. bearish in the market he takes a short
position by selling call option.

PUT OPTION

A Put option gives the holder (buyer/ one who is long Put), the right to sell
specified quantity of the underlying asset at the strike price on or before an expiry
date. The seller of the put option (one who is short put) however, has the obligation
to buy the underlying asset at the strike price if the buyer decides to exercise his
option to sell.

Thus Put option also indicates two positions as follows:

LONG POSITION

If the investor expects price to fall i.e. bearish in the market he takes a long
position by buying Put option.

SHORT POSITION

If the investor expects price to rise i.e. bullish in

the market he takes a short position by selling Put option.

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Terminology in options

Index options

These options have the index as the underlying. Some options are European while
others are American. Like index futures contracts, index options contracts are also
cash settled.

Stock options:

Stock options are options on individual stocks. Options currently trade on over 500
stocks in the United States. A contract gives the holder the right to buy or sell
shares at the specified price.

Buyer of an option:

The buyer of an option is the one who by paying the option premium buys the right
but not the obligation to exercise his option on the seller/writer.

Writer of an option:

The writer of a call/put option is the one who receive the option premium and is
thereby obliged to sell/buy the asset if the buyer exercises on him. There are two
basic types of options, call options and put options.

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Option price/premium:

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

Expiration date:

The date specified in the options contract is known as the expiration date, the
exercise date, the strike date or the maturity.

Strike price:

The price specified in the options contract is known as the strike price or the
exercise price.

American options:

American options are options that can be exercised at any time up to the expiration
date. Most exchange-traded options are American.

European options:

European options are options that can be exercised only on the expiration date
itself. European options are easier to analyze than American options, and
properties of an American option are frequently deduced from those of its
European counterpart.

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In-the-money option:

An in-the-money (ITM) option is an option that would lead to a positive cash flow
to the holder if it were exercised immediately. A call option on the index is said to
be in-the-money when the current index stands at a level higher than the strike
price (i.e. spot price >strike price). If the index is much higher than the strike price,
the call is said to be deep ITM. In the case of a put, the put is ITM if the index is
below the strike price.

At-the-money option:

An at-the-money (ATM) option is an option that would lead to zero cash flow if it
were exercised immediately. An option on the index is at-the- money when the
current index equals the strike price (I.e. spot price = strike price).

Out-of-the-money option:

An out-of-the-money (OTM) option is an option that would lead to a negative cash

flow if it were exercised immediately. A call option on the index is out-of-the-
money when the current index stands at a level which is less than the strike price
(i.e. spot price < strike price). If the index is much lower than the strike price, the
call is said to be deep OTM. In the case of a put, the put is OTM if the index is
above the strike price.

Time value of an option:

Both calls and puts have time value. An option that is OTM or ATM has only time
value. Usually, the maximum time value exists when the option is ATM. The
longer the time to expiration, the greater is an option's time value, all else equal. At
expiration, an option should have no time value.

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PLAYERS IN THE OPTION MARKET:-
 Developmental institutions
 Mutual Funds
 Domestic & Foreign Institutional Investors
 Brokers
 Retail Participants

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 CHAPTER-6

FUTURES V/S OPTIONS

RIGHT OR OBLIGATION:

Futures are agreements/contracts to buy or sell specified quantity of the underlying

assets at a price agreed upon by the buyer & seller, on or before a specified time.
Both the buyer and seller are obligated to buy/sell the underlying asset. In case of
options the buyer enjoys the right & not the Obligation, to buy or sell the
underlying asset.

RISK:

Futures Contracts have symmetric risk profile for both the buyer as well as the
seller. While options have asymmetric risk profile. In case of Options, for a buyer
(or holder of the option), the downside is limited to the premium (option price) he
has paid while the profits may be unlimited. For a seller or writer of an option,
however, the downside is unlimited while profits are limited to the premium he has
received from the buyer.

PRICES:

The Futures contracts prices are affected mainly by the prices of the underlying
asset. While the prices of options are however, affected by prices of the underlying
asset, time remaining for expiry of the contract & volatility of the underlying asset.

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COST:

It costs nothing to enter into a futures contract whereas there is a cost of entering
into an options contract, termed as Premium.

STRIKE PRICE:

In the Futures contract the strike price moves while in the option contract the strike
price remains constant.

LIQUIDITY

As Futures contract are more popular as compared to options. Also the premium
charged is high in the options. So there is a limited Liquidity in the options as
compared to Futures. There is no dedicated trading and investors in the options
contract.

PRICE BEHAVIOUR

The trading in future contract is one-dimensional as the price of future depends

upon the price of the underlying only. While trading in option is two-dimensional
as the price of the option depends upon the price and volatility of the underlying.

PAY OFF

As options contract are less active as compared to futures which results into non
linear pay off. While futures are more active has linear pay off.

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 RESEARCH METHODOLOGY

Tools & Techniques used: -

Two Tools were basically used for the compiling of this project work.

1. Primary Data

2. Secondary Data

Primary data has been collected through techniques like interviews, observations
and by discussing with the employees of the company.

Secondary data has been collected through notes and different books, internet sites
were the main source for gathering the information about the company

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 CONCLUSION

The World Financial Markets have undergone qualitative changes in the last 3
decades due to phenomenal growth of Derivatives. An increasingly; large number
of organizations now consider derivatives to play a significant role in
implementing their financial policies. Derivatives are used for a variety of
purposes, but perhaps, the most important is hedging.

Hedging involves transfer of market risk- the possibility of sustaining losses due to
unforeseen unfavorable price changes. A derivatives transaction allows a firm to
alter its market risk profile by transferring to counter party some type of risk for a
price. Hedging is prime reason for the advent of derivatives and continuous to be
significant factor driving financial managers to deal in derivatives. Markets in
India have developed a lot day by day these instruments are becoming the integral
part of Investments

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 BIBLIOGRAPHY

Internet sites
 www.google.com

 www.nseindia.com

 www.bseindia.com

 http://www.optionseducation.org/

 http://www.mirusfutures.com/emini_trading_education/futures

 www.investopedia.com

 http://snsvo3.seekandsource.com/tjstockservices/

Books

 Options and futures - an Indian perspective-

By- anshul bhargawa

 Futures and options- concept and application –

By- parmeshwaran

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