Copy of Anil Derivatives Projets

F I NAL PROJECT  JECT 

“USE OF FUTURE & OPTIONS IN BEARISH MARKET ”

Under the guidance of  Mr. Prasish Barua

BY-

(Technical Analyst)

ANIL CHAHAR

Central Institute of Business Management Research and  Development, Nagpur 

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PROJECT REPORT ON

“Use of Futur es & O ptions in Bear ish Mar k  ke  t” IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE DEGREE OF  MASTER OF BUSINESS ADMINISTRATION 

BY Mr. ANIL KAPOOR CHAHAR 

UNDER THE GUIDANCE OF  Mr. PRASHANT BARUA

Central Institute of Business Management Research Development  Nagpur  2008-2010 

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CERTIFICATE 

This is to certify that Mr. ANIL KAPOOR CHAHAR is a bonafide student of central Institute Of  Business Management Research & Development Nagpur. And studying in MBA part IV and has completed his final project at Motilal at  Motilal Securities Pvt. Ltd. And Submitted Report on topic “Use of  Future & Options In Bearish Market” under my complete guidance and supervision.

This project report is submitted to RTM Nagpur University in partial fulfillment of academic requirement for the Degree of Master of Business Administration during the academic year  2009-2010. I find the work comprehensive, complete and of sufficiently high standard to warrant its  presentation.  presentation.

Guide

Director 

Mr. ANUP SUCHAK

Prof. SHYAM SUKLA

Date: Place: Nagpur 

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DECLARATION 

 I ANIL KAPOOR CHAHAR a student of M.B.A. Part IV of CIBMRD, Nagpur her declare that, the project entitled “U   se o f  F  F ut ur e s & O pt ion s in B Bear i s  sh M  M ar k  ke  t ” or Part there of has not been  previously submitted by me for any other Degree or diploma of any University or Scientific Organization. The Project is the result of my bon afide work and source of literature used and all  assistance received during the course of investigation have duly acknowledged.

 Date:  Place: Nagpur Nagpur

ANIL KAPOOR KAPOOR CHAHAR CHAHAR

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 ACKNOWLEDGEMENT 

 I take this opportunity to convey my gratitude to those who provided me help during the course of my study.

 It is indeed a great pleasure p leasure to express my sincere thanks and great sense of gratitude to Mr.  ANUP SUCHAK for his invaluable

guidance,

timely help and suggestion and constant 

encouragement during my project work.

 I take opportunity to express sincere thanks to teaching and non teaching staff of central   Institute Of Business Management Research &Development Nagpur.  Also I’m thankful to the branch head Mr.Prashant Pimplwar, my ment or Mr. Prashish Bharne, and Mr.harish at motilal oswal securities ltd. Nagpur Branch.

 Lastly I’m thankful to my Parents and Friends for keeping my spirit alive through the course of my project.

 Date: Place: - Nagpur

Anil Kapoor Chahar 

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Introduction 

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1.0 1.0 I ntr oducti oducti on to de der i vati vati ves 

The emergence of the market ma rket for derivative products, most notably forwards, futures and options, can be traced back to the willingness of risk-averse economic agents to guard gua rd themselves against uncertainties arising out of fluctuations zin asset prices. By their very nature, the financial markets are marked by a very high degree of volatility

The following factors have been driving the growth of financial derivatives:

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Increased volatility in asset prices in financial markets,

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Increased integration of national financial markets with the international markets,

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Marked improvement in communication facilities and sharp decline in their costs,

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Development of more sophisticated risk management tools, providing economic agents a wider choice of risk management strategies, and

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

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1.2 Type T ypes s of der der i vative vati ves  s 

The most commonly used derivatives contracts are forwards, futures and options which we shall discuss in detail later. Here we take a brief look at various derivatives contracts that have come to be used.

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Forwards: A forward contract is a customized contract between two entities, where

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

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

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

Options : Options are of two types - calls and puts. Calls give the buyer the right but not

the obligation to buy a given quantity of the underlying asset, at a given price on or   before a given future date. Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying asset at a given price on or before a given date. 

Swaps: Swaps are private agreements between two parties to exchange cash flows in the

future according to a prearranged formula. The y can be regarded as portfolios of forward contracts.

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M yths about about der der i vati vati ves  ves 

In less than three decades of their coming into vogue, derivatives markets have become the most important markets in the world. Financial derivatives came into the spotlight along with the rise in uncertainty of post-1970, when US announced an end to the Bretton Woods System of fixed exchange rates leading to introduction of currency derivatives followed by other innovations including stock index futures. Today, derivatives have become part and parcel of the day-to-day life for ordinary people in major parts of the world. While this is true for many countries, there are still apprehensions about the introduction of derivatives. There are many myths about derivatives but the realities that are different especially for Exchange traded derivatives, which are well regulated with all the safety mechanisms in p lace.

What are these myths behind derivatives?

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Derivatives increase speculation and do not serve any economic purpose

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Indian Market is not ready for derivative trading

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Disasters prove that derivatives are very risky and highly leveraged instruments

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Derivatives are complex and exotic instruments that Indian investors will find difficulty in understanding

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existing capital market safer than Derivatives?

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F u tur es and opti options  ons  Futures and options represent two of the most common form of "Derivatives". Derivatives are financial instruments that derive their value from an 'underlying'. The underlying can be a stock  issued by a company, a currency, Gold etc., The derivative instrument can be traded independently of the underlying asset. The value of the derivative instrument changes according to the changes in the value of the underlying.

Derivatives are of two types -- exchange traded and over the counter.

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Exchange traded derivatives, as the name signifies are traded through organized exchanges around the world. These instruments can be bought and sold through these exchanges, just like the stock market. Some of the common exchange traded derivative instruments are futures and options.

Over the counter (popularly known as OTC) derivatives de rivatives are not traded through the exchanges. They are not standardized and have varied features. Some of the popular OTC instruments are forwards, swaps, swaptions etc.

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Futures 

A 'Future' is a contract to buy bu y or sell the underlying asset for a specific price at a pre-determined time. If you buy a futures contract, it means that you promise to pay the price of the asset at a specified time. If you sell a future, you effectively make ma ke a promise to transfer the asset to the  buyer of the future at a specified price at a particular time. Every futures contract has the the following features:

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Buyer  Seller  Price Expiry

Some of the most popular assets on which futures contracts are available are equity equit y stocks, indices, commodities and currency. The difference between the price of o f the underlying asset in the spot market and the futures market is called 'Basis'. (As 'spot market' is a market for immediate delivery) The basis is usually negative, which means that the price of o f the asset in the futures market is more than the price in the spot market. This is because of the interest cost, storage cost, insurance premium etc., That is, if you buy the asset in the spot market, you will be incurring all these expenses, ex penses, which are not needed if you buy bu y a futures contract. This condition of basis being negative ne gative is called as 'Contango'.

Sometimes it is more profitable to hold the asset in ph ysical form than in the form of futures. For  e.g.: if you hold equity shares in your account you will receive dividends, whereas if you hold equity futures you will not be eligible for any an y dividend.

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When these benefits overshadow the expenses exp enses associated with the holding of the asset, the basis  becomes positive (i.e., the price of the asset in the spot market is more than in the futures market). This condition is called 'Backwardation'. Backwardation g enerally happens if the price of the asset is expected to fall.

It is common that, as the futures contract approaches approach es maturity, the futures price and the spot  price tend to close in the gap between them i.e., the basis slowly becomes zero.

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Options 

Options contracts are instruments that give the holder of the instrument the right to buy or sell the underlying asset at a predetermined price. An option can be a 'call' option or a 'put' option. A call option gives the buyer, bu yer, the right to buy the asset at a given price. This 'given price' is called 'strike price'. It should be noted that tha t while the holder of the call option has a right to demand sale of asset from the seller, the seller has only the obligation and not the right. For eg: if  the buyer wants to buy the th e asset, the seller has to sell it. He does not have a similarly a 'put' option gives the buyer a right to sell the asset at the 'strike price' to the bu yer. Here the buyer has the right to sell and the seller has the obligation to buy. So in any options contract, the right to exercise the option is vested with the buyer of the contract. The seller of the contract has only o nly the obligation and no right. As the seller of the contract bears the obligation, he is paid p aid a price called as 'premium'. Therefore Th erefore the price that is  paid for buying an option contract is called as premium.

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OBJECTI VES OF  USE USE OF F UTURE & OPTI ONS I N BEARI SH M ARKET  ARKET 

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To understand the concept and benefits of Hedging.

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Hedging principles used in Futures and Options market.

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To plan different strategies used in Futures and Options to minimize the losses of clients.

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To show that losses can be avoided even if the market is falling.

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METHODOLOGY  To achieve the object of studying the stock market data ha been collect Research methodology carried for this study can be two types

1. Primary

2. Secondary

PRIMARY

The data, which is being collected for the time and it is the original data is this Project the primary data has been taken from BSE, Motilal Oswal and guide of the project.

SECONDARY

The secondary information is mostly from   

Websites  books, Journals, etc.

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M ethodo th odoll ogy ogy of of the th e proj pr oje ect star starts ts with wi th:  : 

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The first phase we are trained and they teach us different things about futures and options market.

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After that I have gone through the data related to Futures and Options market to understand the main problem that people were facing during recession and due to that were not able to cope up with their losses.

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I‟ve understood that people were in losses because they were looking Futures as an

investment segment but not as a hedging hed ging tool and they were not aware of options market. 

Then after that we have applied, different hedging strategies on the data of recession  period related to Futures and Options segment that could be used there to minimize the losses.

The next part knows the pattern of the Futures and Options market. How they move with the correspondence to the market movement and also the economy.

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Get the knowledge of technical as a s well as fundamental methods.

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Observe the patterns of the Futures and Options market used individually and mutually.

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LIMITATIONS 

The various Limitations are:--

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Lack of awareness about Futures and Options segment : - Since the area is not known before it takes lot of time in convincing people to start investing in Futures and Options market for hedging purpose.

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Mostly people comfortable with traditional brokers: -- As people are doing trading from their respective brokers, they are quite comfortable to trade v ia phone.

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Lack of Techno Savvy people and poor internet penetration : -- Since most of the people are quite experienced and also they are not techno savvy. Also internet  penetration is poor in India.

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Some respondents are unwilling to talk : - Some respondents either do not have time or willing does not respond as they are quite annoyed with the adverse market conditions they faced so far.

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Misleading concepts: - Some people think that Derivatives are too risky and just another name of gamble but they the y don‟t know it‟s not at all that risky for long investors.

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Company  Profile 

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Comp Compa any Profi Pr ofi l e 

The story of Motilal Oswal Securities Ltd goes back man y years, when Mr. Motilal Oswal and Mr. Raamdeo Agrawal met each other as students in a Mumbai suburban hostel in the early eighties. Both the young chartered accountants a ccountants hailing from a rural & an unpretentious  background had a common dream viz 'to build a professional organization with strong value systems, to provide reliable & honest investment advice to investors'. Thus was born their first enterprise called "Prudential Portfolio Services" in 1987.

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Motilal Oswal Securities Ltd. was founded in 1987 as a small sub-broking unit, with just two  people running the show. Focus on customer-first-attitude, ethical and transparent business  practices, respect for professionalism, research-based research-based value investing and implementation of  cutting-edge technology has enabled us to blossom into an almost 2000 member team.

SUCCESS UCCESS M AN TRA F OR M OSL OSL : 

The success story of MOSL is driven by b y 8 success sutras adopted by it namely: namel y: Trust, Integrity, Dedication, Commitment, Enterprise, Hard work and Team play, Learning and Innovation, Empathy and Humility. These are the values that bind success with MOSL.

M i ssi on Statement:  tatement: 

“To be a well-respected and preferred global financial services organization enabling wealth creation for all our customers.” Today MOSL is a well diversified financial services firm offering a range o f financial products and services such as

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Wealth Management   Broking & Distribution Commodity Broking   Portfolio Management Services  Institutional Equities  Private Equity  Investment Banking Services and   Principal Strategies

MOSL has a diversified client base that includes retail customers (including High N et worth Individuals), mutual funds, foreign institutional investors, financial institutions an d corporate clients. MOSL are headquartered in Mumbai and as of March 31st, 2009, had a network spread over 548 over 548 cities and towns comprising 1,289 Business Locations operated by our Business Partners and us. As at March 31st, 2009, 200 9, we had 541372 5413 72 registered customers. In 2006, the Company placed pl aced 9.48% of its equity with two leading private equity investors based out of the US – New Vernon Private Equity Limited and Bessemer Venture Partners.

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The company got listed on BSE and NSE on September 9, 2007. The issue which was priced at Rs.825 per share (face value Rs.5 per share) got overwhelming response and was subscribed 27.18 times in turbulent market conditions. The issue gave a return of 21% on the date of listing. As of end of financial year 2008, the group net worth was Rs.7 bn. and market capitalization as of March 31, 2008 was Rs.19 bn. For year ended March 2008, the company showed a strong top line growth of 91% to Rs.7 bn. As Compared to Rs.3.68 bn. last year. New businesses like investment banking, asset management and fund based activities have contributed to this growth. Credit rating agency Crisil has assigned the highest rating of P1+ to the Company‟s short-term debt program.

Share Shar ehol din g Patter Patter n at on 31st 31st December December 08 

As of Dece December mber 31st, 31st, 2008; th e total total shar ehol ding of the Promoter an d Promoter Gr oup stood  stood  at 70.37%. 70.37%. The shar shar ehol din g of in stit uti ons stood stood at 10.07% 10.07% and non-i nstituti ons at at 19.56%. 19.56%. Th eir B usin ess Streams 

Our businesses and primary products and services are:

Wealt Wealt h M anageme anagement  nt 

Financial planning for individual, family and business wealth creation and management needs. These are provided to customers cu stomers through our Wealth Management service called „Purple‟

Br oking & Di stri bution se services  rvices        

Equ i ty (cash (cash an d der der ivati ves ves)  Commod Commodity ity Br oking  Portf oli o M anageme anagement nt Ser vices  vices  Di stri bution of fin ancial products  products  Financing  Deposi Deposi tor y Services  I PO distri distri bution 

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We offer these services through our branches, Business Partner locations, the internet and mobile channels. We also have strategic tie-ups with State Bank of India and IDBI Bank to offer o ffer our  online trading platform to its customers.

Commod Commodity ity Br oking 

Through Motilal Oswal Commodities Broker (P) Ltd our fully owned subsidiary; we provide commodity trading facilities and related products and services on MCX and NCDEX. Besides access to the best of research in the form of Daily Fundamentals & Technical Reports on highly traded commodities, our clients also get access to our exclusive Customized Trading Advice on  both the trading platforms. We offer these services through our branches, Business Partner  locations, the internet and mobile channels

Portf oli o M anageme anagement nt Ser vices  vices 

Motilal Oswal Portfolio Management Services offer a range of investments solutions through discretionary services. We at Motilal Oswal have helped create wealth for our customers through our Portfolio Management Services. Our knowledge of o f the markets together with our  understanding of our customers and their risk profiles has helped us design a range of portfolio offerings for our clients. These include the Value Strategy, Bulls Eye Strategy, Trillion Dollar  Opportunity Strategy and Focused Strategy Series I. As of March 31st, 2009, the Assets Under  Management of our various portfolio schemes stood at Rs.4.77 bn. Motilal Oswal group has applied to the regulatory bodies for a license to operate as a Domestic Asset Management Company (Mutual Fund) and we expect to begin operations soon.

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I nstitutiona nstitutionall Equities  Equities 

We offer equity broking services in the cash and derivative segments to institutional clients in India and overseas. These clients include companies, mutual funds, banks, financial institutions, insurance companies, and FIIs. As at March 31st, 2009, we were empanelled with over 300 institutional clients including 200 FIIs. We service these clients through dedicated sales teams across different time zones.

I nves nvestment tment B anki ng  We offer financial advisory services relating to mergers and acquisitions (domestic and cross border), divestitures, restructurings restructurings and spin-offs through Motilal Oswal Investment Advisors Private Ltd. (MOIAPL) We also offer capital raising and other investment banking services such as the management of   public offerings, private placements (including qualified institutional placements), rights rights issues, share buybacks, open offers/delisting and syndication of debt and equity. MOIAPL has closed 23 transactions in 2007-08 worth US$ 1.8 billion and had 18 mandates in hand as at March 31, 2008.

Pri vate vate Equi ty  In 2006, our private equity subsidiary, Motilal Oswal Private Equity Advisors Private Ltd (MOPEAPL) was appointed as the investment manager and advisor to a private equity equit y fund, India Business Excellence Fund, which was launched laun ched with a target of raising US$100 million. The fund is aimed at providing growth capital to small and medium enterprises in India, with investments typically in the range of US$3 million to US$7 million.

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Pr i nci pal Str Str ategies ategies Gr oup 

For effective management of treasury operations and to capitalize on market opportunities, the Group has set up a 30 member team which would be b e responsible for effective deployment of  funds into different trading and arbitrage strategies.

F ocus on Rese Resear ch 

Research is the solid foundation on which Motilal Oswal Securities advice is based. Almost 10% of revenue is invested on equity research and we hire and train the best resources to become advisors. At present we have 22 equity eq uity analysts researching over 27 sectors. From a fundamental, technical and derivatives research perspective; Motilal Oswal's research reports have received wide coverage in the media (over a 1000 mentions last year). Our consistent efforts towards quality equity research has reflected in an increase in the ratings and rankings across various categories in the Asia Money Mone y Brokers Poll over the years Our unique Wealth Creation Study, authored by Mr. Raamdeo Agrawal, Managing Director, is now in its 13th year. Investors keenly keenl y await this annual study for the wealth of information it has on the companies that created wealth during the preceding five years.

Awar ds and A ccol ccol ades  ades 

Motilal Oswal Financial Services has received many accolades in the year gone by. Some of  them are: 

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Rated „Best Overall Country Research‟ for a Local Brokerage in the 2007 Asia Money Brokers poll Rated India‟s top broking house in terms of total numb er of trading terminals by the Dun & Bradstreet survey Rated „Outstanding Commodity Broking House-2007‟ by Global India

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Cor Cor por por ate off i ces ces & B r anche anches  s  BRANCH-HEAD OFFICE

 , Palm Spri Spri ng Centr Centr e  2nd Floor, Palm Court Complex,  New Link Road, Malad (West),  Mumbai 400 064,  Maharashtra, India.

LOCATI ON OF SI SI P COMPANY  COMPANY 

Motilal Oswal Securities Ltd. Pukhraj House (Super Franchisee), VIP Road, Dharampeth,  Nagpur.-440010, Maharashtra. Tel.:0712-2554495, 3291306, 3291304

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FUTURES  A N D  OPTIONS 

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F UTU RES AND OPTI OPTI ONS 

Futures & options are derivatives, which derive their values from equity as their underlying. Hence our Equity Advisory Group (EAG) equipped with all the required skills and understanding of Equity Derivatives, will act as your advisors in futures & options segment as well to help you take informed i nformed trading decisions.

Why F utu r es and Opti Opti ons 

Derivatives instruments are primarily hedging tools. Clients can be assisted in protecting the downside risk to their portfolio using appropriate combination of options. Our advisory is skilled to help you in maximizing max imizing your gains from your existing corpus using numerous strategies based on the direction and intensity of the views. Derivatives give an ability to leverage; given the risk appetite clients can extrapolate ex trapolate their gains with the timely assistance of our advisory. The Equity Advisor doesn‟t stop at just that, he goes a step further to ensure

that your trades are settled and traded with proper p roper margin in your account in a timely manner. This allows us to give you a convenient single window service and your advisor   becomes the single point contact for all your equity related matters.

You can avail of our services from all our Business our Business locations and through E broking across

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H i story of of F utu r es and Options  Options 

H istory istory of fu tur es  The origins of futures trading can be traced to Ancient Greek, in Aristotle's Aristotle's writings. He tells the story of  Thales, a poor philosopher from Miletus who developed a "financial device, which involves a principle of universal application." Thales used his skill in forecasting and predicted that the olive harvest would be exceptionally good the next autumn. Confident in his prediction, he made agreements with local olive-press owners to deposit his money with them to guarantee him exclusive use of their olive presses when the harvest was ready. Thales successfully negotiated low prices because the harvest was in the future and no one knew whether the harvest would be plentiful or pathetic and because the olive-press owners were willing to hedge against the possibility of a poor yield. When the harvest-time came, and a sharp increase in demand for  the use of the olive presses outstripped supply, he sold his future use contracts of the olive  presses at a rate of his choosing, and made a large quantity of money.

I ntroduction to F utur es: 

Futures markets were designed to solve the problems that exist in forward markets. A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. But unlike forward contracts, the futures contracts are standardized and exchange traded. To facilitate liquidity in the futures contracts, the exchange specifies certain standard 27 features of the contract. It is a standardized contract with standard underlying instrument, a standard quantity and quality of the underlying instrument that can be delivered, (or  which can be used for reference purposes in settlement) and a standard timing of such settlement. A futures contract may be offset prior to maturity by entering into an equal and opposite transaction. More than 99% of futures transactions are offset this way. The standardized items in a futures contract are: · Quantity of the underlying · Quality of the underlying · The date and the month of delivery · The units of price quotation and minimum price change · Location of settlement

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F utur es Ter Ter min ology  ology 

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Spot Spot pr ice: The price at which an asset trades in the spot market.

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F utur es pri ce  : The price at which the futures contract trades in the futures market.

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Contr act cycle:  cycle: The period over which a contract trades. The index futures contracts on

the NSE have one- month, two-months and three months expiry cycles which expire on the last Thursday of the month. Thus a January expiration contract expires on the last Thursday of January and a February expiration contract ceases trading on the last Thursday of February. On the Friday following the last Thursday, a new contract having a three- month expiry is introduced for trading. 

Expir y date  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 en d of which it will cease to exist. ex ist. 

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

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Basis  : In the context of financial futures, basis can be defined as the futures price minus

the spot price. There will be a different basis for each delivery month for each contract. In a normal market, basis will be positive. This reflects that futures prices normally exceed spot prices. 

Cost Cost of carr y: 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. 

I nitial margin  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.

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: In the futures market, at the end of each trading day, the margin Marking-to-market 

account is adjusted to reflect the investor's gain or loss depending upon the futures closing price. This is called marking-to-market. 

M aintenance aintenance margin 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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H i story of of Options  Options 

It is not known when the first option contract traded; however, similar  contracts can be traced  back as far as the Romans and the Phoenicians, who used them in shipping, and ancient Greece, where a mathematician and philosopher named Thales used them to secure a low price for olive  presses in advance of the harvest. They were also used in the tulip trading craze in Holland in the 1600s. Options appeared in America roughly the same time as stocks. At first they were not traded on an exchange; trades were done privately between buyers and sellers. Growth in options trading remained slow for the next few decades, mostly because trading by phone without being able to determine the real market for a contract made them illiquid and cumbersome to trade.

I ntr oduction oduction to Options  Options 

In this section, we look at the next derivative product to be traded on the NSE, namely options. Options are fundamentally different from forward and futures contracts. An option gives the Holder of the option the right to do d o 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 op tion requires an up-front payment.

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Options Ter Ter minology  mi nology 

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I ndex ndex 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 option s  : Stock options are options on individual stoc ks. 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 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. seller/writer.

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Wri ter ter of an option  : The writer of a call/put option is the one who receives 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: 

Call option: A call option gives the holder the right but not the obligation to

Buy an asset by a certain c ertain date for a certain price. 

Put option  : A put option gives the holder the right but not the obligation to

Sell an asset by a certain date for a certain price. 

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. 

: The date specified in the options contract is known as the expiration Expi ration date  date 

date, the exercise date, the strike date or the maturity.

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: The price specified in the options contract is known as the strike price or  Stri ke pri pri ce 

the exercise price.

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Ameri can option option s: American options are options that can be exercised at any time up to

the expiration date. Most exchange-traded options are American.





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Eu ropean ropean options  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. I n-th e-money -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 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 e quals the strike price(i.e. spot price = strike price). Out-of -the-money -the-money option 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 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. 

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Ti me value of of an option : The time value of an option is the difference between its

 premium and its intrinsic value. v alue. 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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Hedging 

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What I s Hedg Hedging?  ing? 

The best way to understand hedging is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. ev ent. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it every day. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters. Portfolio managers, individual investors and corporations use hedging techniques to reduce their  exposure to various risks. In financial markets, however, hedging hed ging becomes more complicated than simply paying an insurance company a fee every year. Hedging against investment risk  means strategically using instruments in the market to offset the risk of an y adverse price movements. In other words, investors hedge one investment in vestment by making another. Technically, to hedge you would invest in two securities with negative correlations correlations.. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or  another. Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging can't help us escape escap e the hard reality of the risk-return tradeoff . A reduction in risk will always mean a reduction in potential profits. p rofits. So, hedging, for the most part, p art, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, mad e, and if the investment loses money, mone y, your hedge, if successful, will reduce that loss.

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H ow Do I nvestor nvestors s H edge?  dge? 

Hedging techniques generally involve the use of complicated financial instruments known as derivatives,, the two most common of which are options and futures derivatives futures.. We're not going to get into the nitty-gritty of describing how these instruments work, but for now just k eep in mind that with these instruments you can develop trading strategies where a loss in one investment is offset by a gain in a derivative difficult to achieve in practice.

What H edging M eans to You 

Th e Downside  Downside 

Every hedge has a cost, so before you decide to use hedging, you must ask yourself if the  benefits received from it justify the expense. Remember, the goal of hedging isn't to make money  but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost  profits from being on the wrong side of a futures contract - cannot be avoided. This is the price you have to pay to avoid uncertainty.

We've been comparing hedging versus insurance, but we should emphasize that insurance is far  more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isn't a perfect pe rfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, hed ge, it is The majority of investors will never trade a derivative contract in their life. In fact most buy-andmost buy-andhold investors ignore short-term fluctuation altogether. For these investors there is little point in engaging in hedging because becau se they let their investments grow with the overall market.

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So why learn about hedging? Even if you never hedge for your own portfolio you should understand how it works because many big companies and investment funds will hedge in some form. Oil companies, for example, ex ample, might hedge against the price of oil o il while an international mutual fund might hedge he dge against fluctuations in foreign exchange rates. An understanding und erstanding of hedging will help you to comprehend c omprehend and analyze these investments.

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DIFFERENT  STRATEGIES  USED 

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Options Opti ons str ategi ategie es: l ong call 

Purchasing calls has remained the most popular strategy with investors since listed options were first introduced. Before moving into more complex bullish and bearish strategies, an investor  should thoroughly understand the fundamentals about buying and holding call options. M arket arket Opinion? 

Bullish to Very Bullish Wh en to U se? 

This strategy appeals to an investor who is generally more interested in the dollar amount of his initial investment and the leveraged financial reward that long calls can offer. The primary motivation of this investor is to realize financial reward from an increase in price of the underlying security. Experience and precision are key to selecting the right option (expiration and/or strike price) for the most profitable result. In general, the more out-of-the-money the call is the more bullish the strategy, as bigger increases in the underlying stock price are required for  the option to reach the break-even point.

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Options Opti ons Str ategies ategies:: L ong 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. Before moving into more complex bearish strategies, an investor should thoroughly understand the fundamentals about buying and holding  put options. M arket arket Opinion? 

Bearish Wh en to U se? 

Purchasing puts without owning shares of the underlying stock is a purely directional strategy used for bearish speculation. The primary motivation of this investor is to realize financial reward from a decrease in price of the underlying security. This investor is generally more interested in the dollar amount of his initial investment and the leveraged financial reward that long puts can offer than in the number of contracts purchased. Experience and precision are key in selecting the right option (expiration and/or strike price) for  the most profitable result. In general, the more out-of-the-money the put purchased is the more  bearish the strategy, as bigger decreases in the underlying stock price is required for the option to reach the break-even point.

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Options Opti ons Str ategies ategies:: M arr ar r i ed Put  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.

M arket arket Opinion? 

Bullish to Very Bullish

Wh en to U se? 

The investor employing the married put strategy wants the benefits of stock ownership (dividends, voting rights, etc.), but has concerns about unknown, near-term, downside market risks. Purchasing puts with the purchase of shares of the underlying stock is a directional and  bullish strategy. The primary motivation of this investor is to protect his shares of the underlying security from a decrease in market price. He will generally purchase a number of put contracts equivalent to the number of shares held. h eld.

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Opti ons Str Str ategi ategie es: Pr otecti otective ve Put 

An investor who purchases a put option while holding shares of the underlying stock from a  previous purchase is employing a "protective put." M arket arket Opinion? 

Bullish on the Underlying Stock 

Wh en to U se? 

The investor employing the protective put strategy owns shares of underlying stock from a  previous purchase, and generally has unrealized profits accrued from an increase in value of  those shares. He might have concerns about unknown, downside market risks in the near term and wants some protection for the gains in share value. Purchasing puts while holding shares of  underlying stock is a directional strategy, but a bullish one.

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Opti ons Str Str ategi ategie es: Cover Cover ed Cal l 

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 "buywrite." If the shares are already held from a previous purchase, it is commonly referred to an "overwrite." In either case, the stock is generally held in the same brokerage account from which the investor writes the call, and fully collateralizes, or "covers," the obligation conveyed by writing a call option contract. This strategy is the most basic and most widely used strategy combining the flexibility of listed options with stock ownership.

M arket arket Opinion? 

 Neutral to Bullish on the Underlying Stock 

Wh en to U se? 

Though the covered call can be utilized in any market condition, it is most often employed when the investor, while bullish on the underlying stock, feels that its market value will experience little range over the lifetime of the call contract. The investor desires to either generate additional income (over dividends) from shares of the underlying stock, and/or provide a limited amount of   protection against a decline in underlying stock value.

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Opti ons on s Str ategi ategie es: Cash Cash Secur Secur ed 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 exchange for the premium received from the put's sale. 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 (or equivalent) sufficient s ufficient to cover such a purchase.

M arket arket Opinion? 

 Neutral to Slightly Bullish

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Wh en to U se?  There are two key motivations for employing this strategy: either as an attempt to purchase underlying shares below current market price, or to collect and keep premium from the sale of   puts which expire out-of-the-money and with no value. An investor should write cash secured  put only when he would be comfortable owning underlying shares, because assignment is always  possible at any time before the put expires. In addition, he should be satisfied that the net cost for  the shares will be at a satisfactory entry point if he is assigned an exercise. The number of put contracts written should correspond to the number of shares the investor is comfortable and financially capable of purchasing. While assignment may not be the objective at times, it should not be a financial burden. This strategy can become speculative when more puts are written than the equivalent number of shares desired to own.

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Options Opti ons Str ategies ategies:: B ul l Call Spread  pread 

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. This spread is sometimes more broadly categorized as a "vertical spread": a family of spreads involving options of the same stock, same expiration month, but bu t different strike prices. They can be created with either all calls or all puts, and be bullish or bearish. The bull call spread, as any spread, can be executed as a"unit" in one single transaction, not as separate buy and sell transactions. For this bullish vertical spread, a bid and offer for the whole package can be requested through your brokerage firm from an exchange where the options are listed and traded.

M arket arket Opinion? 

Moderately Bullish to Bullish

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When to U se? 

M oderately oderately bul li sh 

An investor often employs the bull call spread in moderately bullish market environments, and wants to capitalize on a modest advance in price of the underlying stock. If the investor's opinion is very bullish on a stock it will generally prove more profitable to make a simple call purchase.

Ris Ri sk Reducti Reducti on 

An investor will also turn to this spread when there is discomfort with either the cost of   purchasing and holding the long call alone, or with the conviction of his bullish market opinion.

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Opti ons Str Str ategi ategie es: B ear Put Spre pr ead 

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. This spread is sometimes more broadly categorized as a "vertical spread": a family of spreads involving options of the same stock, same expiration month, but bu t different strike prices. They can be created with either all calls or all puts, and be bullish or bearish. The bear put spread, as any spread, can be executed as a "package" in one single transaction, not as separate buy and sell transactions. For this bearish vertical spread, a bid and offer for the whole package can be requested through your brokerage firm from an exchange where the options are listed and traded. M arket arket Opinion? 

Moderately Bearish to Bearish

Wh en to U se?  M oder oder ately beari beari sh 

An investor often employs the bear put spread in moderately bearish market environments, and wants to capitalize on a modest mod est decrease in price of the underlying unde rlying stock. If the investor's opinion is very bearish on a stock it will generally prove more profitable to make a simple s imple put purchase. Risk reduction 

An investor will also turn to this spread when there is discomfort with either the cost of   purchasing and holding the long put alone, or with the conviction of his bearish market opinion.

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Opti ons Str ategi ategie es: Col l ar 

A collar 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. Both the buy and the sell sides of this spread are opening transactions, and are always alwa ys the same number of contracts. In other words, on e collar  equals one long put and one written call along with owning 100 shares of the underlying stock. The primary concern in employing a collar is protection of profits accrued from underlying shares rather than increasing returns on the upside. M arket arket Opinion? 

 Neutral, following a period of appreciation

Wh en to U se?  An investor will employ this strategy after accruing unrealized profits from the underlying shares, and wants to protect these gains with the purchase of a protective put. At the same time, the investor is willing to sell his stock at a price higher than current market price so an out-ofthe-money call contract is written, covered in this case by the underlying stock.

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Options Opti ons Str Str ategies ategies:: L ong Str Str addl addl e 

The long straddle is simply the simultaneous purchase of a long call and a long put on the same underlying security with both options having the same expiration and same strike price. Because the position includes both a long call and a long put, the investor in a straddle should have a complete understanding of the risks and rewards associated with both long calls and long puts. **Since the straddle involves two trades, a commission charge is likely for the purchase (and any subsequent sale) of each position -- one commission for the call and one commission co mmission for the put.

M arket arket Opinion? 

Increasing volatility and large price swings in the underlying security. Potentially profit from a  big move, either up or down, in the underlying price during the life of the options.

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Wh en to U se? 

Purchasing only long calls or only long puts is primarily a directional strategy. The long straddle however, consisting of  both long calls and long puts is not a directional strategy, rather it is one where the investor feels large price swings are forthcoming but is unsure of the direction. This strategy may prove beneficial when the investor feels large price movement, either up or down, is imminent but is uncertain of the direction. An instance of when a straddle may be considered is when the investor believes there is news forthcoming. An example may be when one is anticipating news regarding a drug in trials from a  biotechnology company. The investor feels the news surrounding the drug will introduce large  price swings in the underlying but is unsure of whether wh ether this news will have a positive or negative ne gative impact on the price. If the news is positive, this may positively impact the price of the security. If  the news is disappointing, the stock could decline considerably. The risk is the stock remaining at the strike price of the straddle until expiration. ex piration.

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Options Opti ons Str ategies ategies:: L ong Str Str angle  angl e 

The long strangle is simply the simultaneous purchase of a long call and  a long put on the same underlying security with both options having the same expiration but where the put strike price is lower than the call strike price. Because the position includes both a long call and a long put, the investor using a long strangle should have a complete understanding of the risks and rewards associated with both long calls and long puts.

M arket arket Opinion? 

Increasing volatility and extremely large price swings in the underlying security. Potentially  profit from a large move, either up or down, in the underlying price during the life of the options.

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Wh en to U se? 

Purchasing only long calls or only long puts is primarily a directional strategy. The long strangle however, consisting of  both long calls and long puts is a not a directional strategy, rather one where the investor feels extremely large price swings are forthcoming but is unsure of the direction. This strategy may prove beneficial when the investor feels large price movement, either up or down, is about to happen but uncertain of the direction. An instance of when a strangle may be considered is when an earnings announcement is forthcoming. The investor feels the projected announcement annou ncement will introduce large price

swings in the underlying. If the earnings announcement and future outlook is positive, this may  positively impact the price of the security. If the t he earning announcement and a nd outlook is negative, or fails to impress investors, the stock could decline considerably. The risk is the stock remains stable or between the strike price of the call and strike price of the put until expiration. Another  risk is that the stock's move does not produce a corresponding option price increase that is enough to cover the two premiums paid for the position. Declining implied volatility will also negatively impact this strategy.

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Payoff 

& Pricing of 

Futures and Options Central Institute of Business Management Research & Development, Nagpur-25 55

Payoff for futures Futures contracts have linear payoffs. In simple words, it means that the losses as well as profits for the buyer and the seller of a futures contract are unlimited. These linear payoffs are fascinating as they can be combined with options and the underlying to generate various complex payoffs.

Payoff for buyer of futures: Long futures

The payoff for a person who buys a futures contract is similar to the payoff for a person who holds an asset. He has a potentially unlimited upside as well as a potentially unlimited downside. Take the case of a speculator who buys a two-month Nifty index futures contract when the Nifty stands at 1220. The underlying asset in this case is the Nifty portfolio. When the index moves up, the long futures position starts making profits, and when the index moves down it starts making losses. Figure 5.1 shows the payoff pa yoff diagram for the buyer of a futures contract.

Payoff for seller of futures: Short futures The payoff for a person who sells a futures contract is similar to the payoff for a person who shorts an asset. He has a potentially unlimited upside as well as a potentially p otentially unlimited downside. Take the case of a speculator who sells a two-month Nifty index futures contract when the Nifty stands at 1220. The underlying asset in this case is the Nifty portfolio. When the index moves down, the short futures position starts making profits, and when the index moves up, it starts making losses. Figure 5.2 shows the payoff pa yoff diagram for the seller of a future Contract

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Figure 5.1 Payoff for a buyer of Nifty futures

The figure shows the profits/losses for a long futures position. The investor bought futures when the index was at 1220. If the index goes up, his futures position starts making profit. If the index falls, his futures position starts showing losses.

Profit

1220 0  Nifty

Figure 5.2 Payoff for a seller of Nifty futures The figure shows the profits/losses for a short futures position. The investor sold futures when the index was at 1220. If the index goes down, his futures position starts making profit. If the index rises, his futures position starts showing losses.

Profit

1220 0

Nifty

Loss

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5.2 Options payoffs The optionality characteristic of options results in a non-linear payoff for options. In simple words, it means that the losses for the buyer of an option are limited, however the profits are  potentially unlimited. For a writer, the th e payoff is exactly the opposite. His profits are limited to the option premium; however his losses are potentially unlimited. These non-linear payoffs are fascinating as they lend themselves to be used to generate various  payoffs by using combinations of options and the underlying. We look here at the six basic  payoffs.

5.2.1 Payoff profile of buyer of asset: Long asset In this basic position, an investor buys the underlying asset, Nifty for instance, for 1220, and sells it at a future date at an unknown price,S4 it is purchased, the investor is said to be “long” the asset. Figure 5.3 shows the payoff for a long position on the Nifty. 1 12 20 Figure 5.3 Payoff for investor who went Long Nifty at 1220

The figure shows the profits/losses from a long position on the index. The investor bought the index at 1220. If the index goes up, he profits. If the index falls he looses.

Profit +60

0

1160

1220

1280 Loss

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5.2.2 Payoff profile for seller of asset: Short asset

In this basic position, an investor shorts the underlying asset, Nifty for instance, for 1220, and  buys it back at a future date at an unknown price S4 Once it is sold, the investor is said to be “short” the asset. Figure 5.4 shows the payoff p ayoff for a short position on the Nifty.

Figure 5.4 Payoff for investor who went Short Nifty at 1220

The figure shows the profits/losses from a short position on the index. The investor sold the index at 1220. If the index falls, he profits. If the index rises, he looses.

Profit

+60

0

1160 1220 1280  Nifty

-60

Loss

5.2.3 Payoff profile for buyer of call options: Long call

A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. If upon expiration, the spot price exceeds the strike price, he makes a profit. Higher  the spot price, more is the profit he makes. If the spot price of the underlying is less than the strike price, he lets his option expire un-exercised. un -exercised. His loss in this case is the premium he paid

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for buying the option. Figure 5.5 gives the payoff for the buyer of a three month call option (often referred to as long call) with a strike of 1250 125 0 bought at a premium of 86.60. 5.2.4 Payoff profile for writer of call options: Short call

A call option gives the buyer the right to buy the underlying asset at the strike price specified in the option. For selling the option, the writer of the option charges a premium. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. Whatever is the  buyer‟s profit is the seller‟s loss. If upon expiration, the spot price exceeds the strike price, the

 buyer will exercise the option on the writer. Hence Hen ce as the spot price increases the writer of the option starts making losses. Higher the spot price, more is the loss he makes. If upon expiration the spot price of the underlying is less than the strike price, the buyer lets his option expire unexercised and the writer gets to keep the premium. Figure 5.6 gives the payoff for the writer of a three month call option (often referred to as short call) with a strike of 1250 sold at a premium of  86.60. Figure 5.5 Payoff for buyer of call option

The figure shows the profits/losses for the buyer of a three-month Nifty 1250 call option. As can  be seen, as the spot Nifty rises, the call option is in-the-money. in -the-money. If upon expiration, Nifty closes above the strike of 1250, the buyer would exercise his option and profit to the extent of the difference between the Nifty-close and the strike price. The profits possible on this option are  potentially unlimited. However if Nifty falls below the strike of 1250, 12 50, he lets the option expire. His losses are limited to the extent of the premium he paid for buying the option.

Profit

1250  Nifty Central Institute of Business Management Research & Development, Nagpur-25 60

0

Loss

Figure 5.6 Payoff for writer of call option

The figure shows the profits/losses for the seller of a three-month Nifty 1250 call option. As the spot Nifty rises, the call option is in-the-money and the writer starts making losses. If upon expiration, Nifty closes above the strike of 1250, the buyer would exercise his option on the writer who would suffer a loss to the extent of the difference between the Nifty-close and the strike price. The loss that can be incurred by the writer of the option is potentially unlimited, whereas the maximum profit is limited to the extent of the up-front option premium of Rs.86.60 charged by him.

Profit

86.60 1250 0 1

 Nifty Loss

5.2.5 Payoff profile for buyer of put options: Long put

A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. If upon expiration, the spot price is below the strike price, he makes a profit. Lower  the spot price, more is the profit he makes. If the spot price of the underlying is higher than the strike price, he lets his option expire un-exercised. His loss in this case is the premium he paid for buying the option. Figure 5.7 gives the payoff for the buyer of a three month put option (often referred to as long put) with a strike of 1250 1 250 bought at a premium of 61.70.

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Figure 5.7 Payoff for buyer of put option

The figure shows the profits/losses for the buyer of a three-month Nifty 1250 put option. As can  be seen, as the spot Nifty falls, the put option is in-the-money. If upon u pon expiration, Nifty closes  below the strike of 1250, the buyer would exercise his option and profit to the extent of the difference between the strike price and Nifty-close. The profits possible on this option can be as high as the strike price. However if Nifty rises above the strike of 1250, he lets the option expire. His losses are limited to the extent of the premium he paid for buying the option.

Profit

1250 0

Nifty

61.70 Loss

Payoff profile for writer of put options: Short put

A put option gives the buyer the right to sell the underlying asset at the strike price specified in the option. For selling the option, the writer of the option charges a premium. The profit/loss that the buyer makes on the option depends on the spot price of the underlying. Whatever is the  buyer‟s profit is the seller‟s loss. If upon expiration, the spot price happens to be below the strike

 price, the buyer will exercise the option on the writer. If upon expiration the spot price of the underlying is more than the strike price, the buyer lets his option expire un-exercised and the Central Institute of Business Management Research & Development, Nagpur-25 62

writer gets to keep the premium. Figure 5.8 gives the payoff for the writer of a three-month put option (often referred to as short put) with a strike of 1250 sold at a premium of o f 61.70.

Figure 5.8 Payoff for writer of put option

The figure shows the profits/losses for the seller of a three-month Nifty 1250 put option. As the spot Nifty falls, the put option is in-the-money and the writer starts making losses. If upon expiration, Nifty closes below the strike of 1250, the buyer would exercise his option on the writer who would suffer a loss to the extent of the difference between the strike price and Niftyclose. The loss that can be incurred by the writer of the option is a maximum extent of the strike  price(Since the worst that can happen is that the asset price can fall to zero) whereas the maximum profit is limited to the extent of the up-front option premium of Rs.61.70 charged by him.

Profit

61.70 1250 0

Nifty Loss

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SUMMARY:

Derivatives market is on innovation to cash market, marke t, approximately its daily turnover reaches to equal stage of cash market. In the cash market. The profit/ loss of the investor depend d epend on the market price p rice of the underlying asset. The investor may incur huge profit or he may incur huge loss but in derivative segment the investor enjoys huge profit with limited down side. In cash market the investor as to pay pa y the total money. But in derivatives the investor as to pay premium or margins which are some  percentage of total money.

Derivatives are mostly used for hedging purpose. In derivatives segment the profit/loss of the option holder/option writer is purely depended on the fluctuations of the under lying assets

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Conclusion 

 Derivatives are extremely important and have a big impact on other financial market and the economy. The project is designed to upgrade investor’s knowledge with the basics of how to make investment decisions in futures & options with reference to bear market. Analyze the  fundamental, technical and other factors for dealing in futures & options. Hedging is for  minimizing risk not for maximizing the profit. For many investors, options are useful as tools of  risk management.  In cash market the profit/loss of the investor may be limited, but in the Derivative market. The investor can enjoy unlimited profits and minimize the losses incurred.  In derivatives market the investors enjoys en joys the privilege of paying less amount in case of options.  Derivatives are mostly used for hedging purpose.

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Bibliography:- 

1)

 Derivatives Market (Basic) Module:--NCFM  Module:--NCFM 

2)

 Economic Times Times

3)

 Business Standard 

4)

www.Motilaloswal.com

5)

www.nseindia.com

6)

www.moneycontrol.com

7)

www.derivativesindia.com

8)

 A Beginner's Guide To Hedging 

Central Institute of Business Management Research & Development, Nagpur-25 66

Central Institute of Business Management Research & Development, Nagpur-25 67